FAQs About Stimulus Checks and Taxes

an example of a stimulus check

Your taxes determine whether you get a stimulus check or not, even if you do not file at all. Below are some commonly asked questions about stimulus checks and how they may or may not affect your tax return.

 

What do I need to qualify for a stimulus (or economic income payment) check?

You need to have a valid SSN (Social security Number) and not be a dependent of somebody else. It is also paramount that you meet the following income eligibility requirements to receive 100% payment:

  • Joint tax filers (income up to $150,000).
  • Head of households (income up to $112,500).
  • Individual tax filers (income up to $75,000)

If the AGI (adjusted gross income) exceeds the applicable threshold, the total payment amount is reduced by 5%.

 

Who is NOT eligible for the stimulus checks?

Joint filers with no offspring and income more than $198,000, and single filers earning over $99,000.

 

How much money will I get from a stimulus check?

The first stimulus check was $1200, and the second was $600. Also, taxpayers that have filed their 2019 tax returns will get up to $1,200 (married couples) and up to $600 for every eligible child or up to $600 (individual filers) automatically.

 

Will I need to submit an application to receive the stimulus check?

No, this is not required. The process is automated for those that qualify. The IRS will calculate your payment after using your tax return information. You will then receive the payment on the same bank account from the tax return. In any other case, the IRS will send you an Economic Income Payment (EIP) card, which is a type of debit card, using the most recent mailing address filed with them.

 

The bank account on my 2019 tax return is closed/inactive. Where will I receive the payment?

You will need to file your 2020 tax returns electronically. Then, claim the Recovery Rebate Credit on your tax return.

 

I have not received my payment. What should I do?

You can claim the Recovery Rebate Credit when filing your 2020 income taxes. Then, you will get a voucher for your 2020 tax return as a credit, saying that your stimulus is part of your tax return refund money.

 

How are vouchers different from checks?

The voucher makes the stimulus money part of your refund, whereas checks go to everybody even if they owed the IRS money. This also means that the IRS can keep the voucher if you owe them tax money, as it (the voucher) is part of the return.

 

What if I have received the wrong amount?

Again, initiate the procedure to get the Recovery Rebate Credit when filing your 2020 income taxes.

 

I don’t have a bank account. How will I receive the payment?

You can expect your payment to be made by check or a prepaid debit card. The IRS will use the mail address on your file (the most recent tax return) to send you the payment. For more information about your EIP card or report a stolen/missing EIP card, you can visit this link.

 

I am not required to file a tax return. Will I get any money?

Yes. Those not required to file a tax return will receive payments generated by the IRS, provided they have used the RRB-1099 or the SSA-1099 form before November 2020. Otherwise, the Recovery Rebate Credit can be claimed on your 2020 tax return (line 30).

 

When are stimulus payments made?

Stimulus payments started in late December 2020. Those that have direct deposit details on file will be paid first. Mailed payments (debit card and checks) are the next in line. You may use this link to check the status of your payment. If you have NOT provided the IRS with your banking information, visit this online portal so you can do whatever necessary to receive immediate payments rather than checks in the mail.

 

I have missed the deadline to file a claim for the 1st stimulus check? Now what?

Non-filers that have missed the November 21st deadline to provide their personal details to claim the 1st stimulus check can claim the additional sum after filing their 2020 tax return.

 

Is my stimulus payment taxable?

According to the IRS, taxpayers are not required to owe tax on their stimulus payments, as they (the payments) are not regarded as income. This also means that your refund will NOT be reduced or otherwise affected by the payment. Plus, the stimulus payments will NOT raise the due sum when you file your 2020 tax return (or your 2021 tax return). Finally, stimulus payments will NOT have any impact on your income for purposes of determining your eligibility for benefit programs or federal government assistance programs.

 

Is a stimulus payment a tax credit?

Technically, yes. However, it is not your average tax credit as it won’t reduce your future tax refund or generate a larger tax bill when you file your tax return the following year. Here is some more explaining. In the tax world, a tax credit lowers your tax bill. So, if you owe $1,700 in federal income taxes and receive a $900 tax credit, your total due amount drops to $800 ($1,700-$900). Now, a refundable tax credit can turn your tax bill into a tax refund. Therefore, if you owe $1,500 in taxes and have a refundable tax credit of $1,900, you will receive a $400 tax refund.

Given that you do not wait to receive money from the credit in 2022 (when you file your 2021 tax return) but are getting sums to a refundable tax credit now in the form of a stimulus payment (the 3rd one) instead, you are actually receiving an advanced refundable tax credit.

 

The stimulus payment was more than I was allowed. What happens now?

Any adjustments to your 2020 tax returns rebate are in your favor. If, for instance, the IRS has calculated your stimulus payment based on your 2019 tax return (you had a lower income then), but  your income is higher this year, then you won’t need to pay the credit back.

 

I owe federal taxes. Will the IRS use my stimulus check money to cover them?

If you have past-due child support, the IRS will NOT use your stimulus payment to cover it. This also means that your stimulus payment can NOT be garnished by debt collectors. This applies to the second check, though.

Nevertheless, if you are claiming your missing stimulus check on your tax returns, you are no longer protected from the Consolidated Appropriations Act. In other words, the IRS can, in this case, garnish your stimulus check for unpaid taxes.

So, all in all, if you have qualified for EIP and have not received your full payment (and have outstanding debts), the IRS will withhold some or all of your unpaid stimulus payment to offset those debts.

 

I have unemployment income. Do I pay taxes on it?

According to the new guidelines, up to $10,200 is tax-exempt. So, if you collected unemployment in 2020, you could be exempt from paying taxes on it if you meet the criteria of the economic impact/stimulus. For married individuals filing jointly, the adjusted gross income is set at $150K while for singles, it is $75K.

 

How much money will I get from the 3rd stimulus, based on my 2020 taxes? Will they affect the amount I will receive?

If your situation has changed dramatically between 2019 and 2020, you may receive the full amount of the third stimulus check, which is based on your 2020 or 2019 taxes (depending on what the IRS has on file when it determines the amount you will receive). However, tax season could affect your 3rd check, as you may need to be patient until next year (2022) to claim the difference in the taxes. Truth be told, things are quite complicated with the third stimulus at the moment, considering that the tax season merges with the timeline for sending the check.

 

What if I file for an extension or wait until the April 15 tax due date?

Having to pay owed taxes will NOT be postponed if you file for an extension. Doing this will delay your stimulus payment. In general, it is advised to file your taxes sooner than the due date for your 2020 tax returns as it could speed up the delivery of any tax refund you might be eligible for. On top of that, you will help boost the process of getting any missing stimulus money by weeks or even months.

 

I have already filed my 2020 tax return. How will the government rectify my tax bills?

Unfortunately, the current landscape is blurry in regards to this particular situation. It is still unclear how the IRS will address this issue, at least at the moment of this writing.

 

I have received a stimulus payment on behalf of a family member that has deceased.  What do I do?

If you filed jointly with your spouse, and they have passed away before January 1, 2020, then the IRS will not issue a payment for the deceased spouse. This means that you won’t get the $600 payment for them. However, you will continue to receive up to $600 for you and an additional $600 for any qualifying offspring (provided you meet all the other eligibility criteria).

Do You Pay Taxes On… ?

woman cashing her stimulus check at the bank

Here, you will find the most commonly asked questions about paying taxes.

Do You Pay Taxes on Unemployment?

In the years before the Covid-19 pandemic, almost all types of unemployment compensation were taxable. In general, the IRS considers unemployment compensation as income, so it taxes it accordingly.

Passed in March 2021, the ARP (American Rescue Plan) now has a provision according to which unemployment compensation is tax-free up to $10,200 (in 2020). If you have already filed your 2021 tax return will have to file an amended return so that you recover (1) the extra $300-$600 a week you got under the CARES Act or (2) any taxes paid on your state unemployment payments. The hows and whens of this action are yet to be announced by the IRS. Also, the $300 weekly federal supplement is extended through September 2021.

At this point, though, do note that the unemployment benefits you will receive in 2021 remain taxable with next year’s return, unless a new measure is enacted in the future, providing tax relief. This is why we advise to withhold tax upfront, just to stay on the safe side. You may also use this IRS tool to help determine whether your unemployment compensation is taxable based on the income you have received.

Your 3 Options:

  1. You have the right to have federal income tax withheld from your unemployment compensation benefits, although you can’t decide on the amount you wish to be withheld. To do so, use the Voluntary Withholding Request (Form W-4V). Note that there is a flat rate of 10% for withholding federal income tax from unemployment benefits.
  2. If you do not elect to have taxes withheld from your unemployment benefits, you might be required to make quarterly estimated tax payments directly to the IRS. So, instead of having 10% withheld from your monthly unemployment checks, you pay once every three months while receiving unemployment benefits.
  3. Or you could have both – withholding from your unemployment benefits and making quarterly payments. This is a good choice if your refundable tax credits you are eligible for and the withheld taxes will be 100% of the total taxes you paid last year or below 90% of what you will owe. It is also a recommended option if you owe more than $1,000 after accounting for all the taxes withheld from your income sources.

As you can understand, this is a complicated situation that could easily get you facing government penalties if a mistake is made. For that reason, it is best to consult with a tax professional.

 

Do You Pay Taxes on Stimulus Checks?

According to the tax code, any income is taxable, irrespective of where you got it from, unless it is specifically excluded or exempted. When it comes to stimulus checks, one would expect them to be taxable, since there is no specific exclusion or exemption for them. However, the current law does not consider stimulus checks as income. Hence, you don’t need to pay taxes on the stimulus check money. In fact, the law views a stimulus payment as an advance payment of a tax credit (so, non-taxable income).

Here are some details. When you file Form 10400 (your 2020 federal income tax return), you will come across the Recovery Rebate Credit line (check the 2nd page). Make sure you do not disregard this line, especially if you had a dramatic change of circumstances in 2020. Some examples are as follows:

  • You are a recent college graduate.
  • You had a baby in 2020.
  • You experienced a major reduction in your income in 2020.
  • You are married and either you or your spouse does not have an SSN (Social Security Number).
  • You did not file a 2019 or 2018 tax return.
  • You did not receive any (or full) 1st or 2nd-round stimulus check.

If you meet the qualifying criteria of the stimulus check, you could save quite a lot of money with this credit.

Now, when it comes to calculating the credit amount and your stimulus check, the procedure is the same. Nevertheless, stimulus round 1 and 2 used the information from your 2019 or 2018 tax return while the tax credit is based on your 2020 tax return details. So, a change in your circumstances from 2019 to 2020 or failure to file a 2019 or 2018 return may as well lead to a difference between the sum of the credit amount and your stimulus checks. All in all, if your stimulus payments were higher than the credit allowed, you don’t need to pay anything (you keep the difference), whereas if the credit is higher than the total sum of your stimulus payments, you may receive a refund since your tax bill will be lower (in 2020).

 

Do You Pay Taxes on Stocks?

Briefly answered, if you made money, you pay taxes, based on what you paid for the stocks (the cost basis) and what you profited or made. Of course, you will need to report any income you earned from selling stocks, bonds, or other investments in 2020 on Schedule D of your tax return. This also includes interest or dividends you have earned (if any). In this case, you need to use a 1099-INT or 1099-DIV form. If you made a loss from selling stocks, you could get a write off up to $3,000 of these losses. You can ask your broker for a 1099-B form so you can fill in Schedule D on your tax return. Things change, though, if you have bought securities and kept them to yourself throughout 2020 as you won’t be called to pay any taxes.

To estimate how much you will owe in taxes on your stock gains, you will have to determine the tax bracket you are in. For the majority of investors, the rate is quite low and most of them are in the 22% bracket.

Don’t forget the 3.8% surtax on net investment income (i.e., royalties, annuities, passive rents, gains, dividends, taxable interest, etc.) that applies to:

  • Joint filers with more than $250,000 (modified adjusted gross incomes).
  • Single filers with over $200,000 (modified adjusted gross income).

Finally, short-term capital gains are taxes like your paycheck (as ordinary income) while long-term ones have a lower tax rate. For example, a married couple filing jointly with taxable income below $80,000 that has sold stock they owned for at least 12 months will not be asked to pay anything in long-term capital gains. If their income is between $80,000 – $496,000, they will pay 15% and 20% if it is higher.

 

Do You Pay Taxes on Social Security?

Yes, Social Security Income is taxable, in most cases at least (on a federal level), especially if you have a 401(K) or other sources of retirement income. However, your income level determines whether or not you will need to pay taxes on your Social Security benefits. If you go by solely with your Social Security checks, then chances are you won’t pay any taxes on the benefits you receive. Nevertheless, it is paramount to consult with a tax professional or financial advisor because state laws vary when it comes to taxing Social Security.

How to know if your Social Security Income is taxable? Check if your combined income (50% of your Social Security benefits + non-taxable interest + adjusted gross income) is above or below a certain threshold the IRS calls the base amount. The limit for a qualifying widower or widow with a dependent offspring, head of household, or single filer is $25,000. For joint filers, it is $32,000. So, if your combined income is over that limit, you will pay some tax. Married individuals filing separately will most likely pay taxes on their Social Security benefits.

According to the Social Security Administration, the following applies when calculating Social Security Income taxes in 2020:

  • Single filers whose combined income is between $25,000- $34,000 need to pay up to 50% of their Social Security benefits in income taxes.
  • Single filers whose combined income is over $34,000 will pay up to 85% of their Social Security benefits in taxes.
  • Married couples filing jointly with combined income between $32,000 – $44,000 will have to pay taxes on up to 50% of their Social Security income.
  • Married couples filing jointly with combined income over $44,000 will pay up to 85% of their Social Security benefits in taxes.
  • Individual taxpayers with a total income below $24,000 pay no taxes on their Social Security benefits.

You may use this IRS worksheet to calculate your Social Security tax liability. And, don’t forget that some states also require that you pay state income taxes, with 13 of them collecting taxes on Social Security income (at least some of it). Others, offer exemptions or deductions based on your income or age. Nevertheless, in 37 states, you won’t pay any taxes on your Social Security.

 

Do You Pay Taxes on an Inheritance?

In general, beneficiaries do not need to pay income tax on inheritance, be it property or money. It doesn’t matter if you are a designated beneficiary or receive the inheritance under the terms of a trust or will. It is not considered taxable income. Things change if the money is withdrawn from a 401(K) or IRA plan, which are regarded as tax-deferred until money is withdrawn from them. So, if you withdraw money from such an (inherited) account, you have to report it as ordinary income and the due tax will be determined by your state and federal annual income tax returns.

That being said, you can withdraw from an inherited retirement account over several years if you change it into an “inherited IRA” account. If you are a surviving spouse that inherits a retirement account, you can change it into a retirement account of your own to defer the tax.

Roth retirement plans are usually non taxable income as they are treated like any other inherited property. In general, you won’t need to pay income tax on money you take from an inherited Roth account if the account was opened and funded at least five years earlier. Also, if the deceased created and contributed to the particular Roth account you have inherited.

As for inherited property, you will pay taxes on any income produced by it.

For inherited bank accounts, you also pay no taxes on the money in the account, unless they start generating interest for you. Your taxable income, in this case, is the interest payments.

Finally, life insurance policy proceeds and appreciated inherited property may also be taxable income if you pay in installments over several years (in the first case) or the property you have inherited appreciated in value (in the second case).

Take into account that six states apply inheritance tax on an inherited property (Pennsylvania, New Jersey, Nebraska, Maryland, Kentucky, and Iowa) on top of your income tax. The exact sum depends on how closely related you were with the deceased one.

 

Do You Pay Taxes on Life Insurance?

In most cases, life insurance on non-taxable income. There are exceptions to the rule, though, which are illustrated right below (each case has a taxable and non-taxable side, if certain conditions are met):

  • Your beneficiary gets a lump sum payout.
  • Your beneficiary receives a gain in cash value (applies to cash value life insurances).
  • You make a partial withdrawal from the cash value (applies to permanent insurance).
  • You receive annual cash dividends.
  • You turn in your permanent life insurance policy for a most cost-effective term life insurance policy.
  • You accelerate your death benefit because you become terminally or chronically ill.

Life insurance is usually taxable when three individuals are involved (the owner buys life insurance for another family member and then names another member as the beneficiary). Also, when your estate exceeds the threshold of the relevant estate tax, you sell a life insurance policy, or profit from turning in your cash value policy.

As for life insurance premiums, they are considered personal expenses so they are NOT deducted when calculating your taxable income.

IRS Notices–What They Mean & What You Should Do

couple receives IRS notice

If you have received a notice from the IRS, don’t panic. Yes, it can derail your plans and throw you off balance both in your personal and business life. However, in most cases, there are solutions to help make the IRS offer you a reasonable way out of the unwanted situation you have found yourself in and a good deal. This means, of course, that you will have to settle. Here are some details about the four most common notices the IRS sends, as well as ways to tackle them so you can heave a sigh of relief.

 

What Are IRS Notices?

They are letters the IRS sends you when they think you owe them taxes. There is a specific sequence followed when it comes to the types of letters you receive. Each one proposes interest, penalties, and taxes the Internal Revenue Service says you owe per tax period and each has its own significance.

 

Notice of Deficiency – What is it?

Also referred to as ticket-to-Tax Court, 90-day letter, letter 531, SNOD, CP3219A or Statutory Notice of Deficiency, the Notice of Deficiency is sent due to under-reporting income and the underpayment of tax. You usually receive it about 6 months after filing via certified mail from the IRS. Nevertheless, it may take up to 3 years after filing before you get one.

This first notice gives you significant appeal rights. If you disagree with the IRS, you have 90 days to petition to the U.S. Tax Court (after getting the Notice of Deficiency). This, automatically, gives you extra appeal rights as your case goes to the IRS Office of Appeals. Then, you might be able to skip going to Tax Court and work something out with the IRS.

Or, you could contact your local Taxpayer Advocate Service office and let them assist you in case you have received a Notice of Deficiency in error or feel that your taxpayer rights have been violated. This is also a good option if your financial situation has worsened, causing you financial hardship after getting the Notice of Deficiency or if you have tried to speak with the IRS repeatedly and have not received a response from them. However, this is where getting help from professional tax experts could make a big difference in the outcome.

What You Should Do

First of all, act quickly because you only have 90 days to do whatever needs to be done. After the 90-day deadline has passed, you won’t be getting any extensions. Remember that during this 90-day period, the IRS can NOT collect your taxes. Now, if you must appeal an IRS decision, do consider filing a petition with the Tax Court. Otherwise, the IRS will send you a bill and charge you the taxes.

Truth be told, it is quite likely for taxpayers receiving a Notice of Deficiency to miss the 90-day window or fail to make any kind of arrangements with the IRS. This always results in the IRS initiating their collection procedure through tax levies, tax liens, and other tools. For that reason, we firmly recommend contacting Innovative Tax Relief and requesting a free tax consultation for help, advice, and protection. You may even have options to reduce Notice of Deficiency-related penalties or even remove them in their entirety.

 

Notice of Intent – What is it?

The IRS will send you a Notice of Intent when you have not paid a balance. This type of letter informs you that the IRS will start the process to collect to satisfy your tax debt. This letter may also represent the IRS’s intent to seize your property (levy) if you don’t pay or set up a payment arrangement. Most of the time, a Notice of Intent is sent when you have missed at least three payments in a row or failed to file on time. This is why it is critical that you stay current with filling your taxes. In the opposite case, you are regarded as in default even if you have paid all of the arranged payments. Then, the IRS considers you as an agreement breaker and sends you into Collections. This means that they will garnish your wages. Whether they continue accepting your payments or not is up to them, though

When taxpayers receive a Notice of Intent, they usually panic. However, in reality, a Notice of Intent is just a heads up from the IRS that they are about to start the process to collect if you do not try to set up a payment arrangement or pay. Nevertheless, don’t take it lightly because you are heading down the path to a levy. So, it is best to take some sort of action pronto before it is too late.

Beware, though, at this point, as there are two different types of Notices, the (1) Notice of Intent to Levy and the (2) Final Notice of Intent to Levy. The second one is the last notice the IRS will send you before they seize your assets, and gives the Service the legal right to do so. This means that you have very little time before the Internal Revenue Services can levy your bank account. On some rare occasions, the IRS will only issue a Final Notice of Intent to Levy. If you find yourself in this situation, seek professional assistance immediately because a levy is about to happen.

What You Should Do

First of all, know your rights. The IRS is obliged by law to give taxpayers proper written notice before they do anything with your bank account (i.e., levy the account), per the Internal Revenue Code Section 6330. That notice should definitely include details about your right to appeal the imminent collection action within a month’s time (30 days). In the majority of cases, the Notice of Intent and the Final Notice of Intent are around 4-5 months apart, which means you have more than 4 months to prepare for the Final Notice of Intent.

Nevertheless, if you receive any of these letters, please have a tax professional handle your case. We have seen too many taxpayers disclosing information that hurt them (or not disclosing the right details). So, their attempt to manage their own case actually backfired.

 

Notice of Default – What is it?

A Notice of Default (aka Notice of Demand or CP523) is sent when you have been in an agreement with the IRS and has defaulted. It informs you that you have missed several payments to a creditor or lender (normally more than three in a row). You may also receive a Notice of Default if you did not file on time from that point forward when you set up the payment agreement.

When you have reached the point of defaulting payments and receiving a Notice of Default, the IRS stops accepting your payments. Even worse, they continue accepting your payment and, at the same time, send you into Collections AND garnish your wages because you broke the agreement. It should also be noted that the IRS may terminate your installment agreement without letting you know first if the Secretary (or an authorized representative) considers the collection of the due tax is in jeopardy.

What You Should Do

Respond to it within 90 days of receiving the notice so the IRS does not file a federal tax lien (or a levy) that will enable them to seize your assets. So, ensure you (or your tax professional) contact the IRS to reinstate your payment plan. It is also paramount that you make a payment before the payment deadline or termination date listed on the Notice of Default – you might be able to get your installment plan back in good standing again. You may need to provide some information about your assets, though, in this case or even be asked to fill out a new Installment Agreement (Form 433-D).

You should also contact the IRS if you believe that they have terminated your payment agreement by mistake or if you disagree with the due amount. You will find all contact details in the letter.

 

Notice of Garnishment – What is it?

The IRS is free to garnish your wages if you have tax debt and may even do so without getting a judgment first. It should be noted that the IRS is the only creditor that has this kind of power – all other types of creditors need a court ruling first. Plus, the sum any other regular collector takes is a fraction of what the IRS can take. Fortunately, the IRS provides several different options for you to repay your tax debt and skip the unwanted wage garnishment process.

When it comes to the max sum creditors (judgment creditors and others) can take from your wages, these are defined by federal and state laws. However, the tax code enables the IRS to take as much as it can and leave you with the necessary amount you need (per the tax code) to pay for your basic living essentials. As for the sum you can keep (protected wage), it is directly related to the number of exemptions you claim for tax purposes. For instance, a married individual filing jointly (paid monthly) that claims two exemptions can keep $1,625. A single individual claiming five exemptions (gets paid weekly) is allowed to keep slightly less than $480. the IRS garnishes anything above these sums.

What Should You Do

Since the IRS sends out several notices before garnishing your wages, once garnishment begins your options are limited. You can either pay off the tax debt, prove to the IRS that the garnishment is creating a financial hardship for you and attempt to get it reduced, or file an Offer in Compromise.

And, if you are wondering whether you could plead with your employer to get your wages back, the answer is no. Since there is a court order to garnish your salary, they won’t risk facing a penalty of law for not abiding by it. It is not up to them, and it is not their choice – just something they are obliged to do.

Also, don’t think that quitting your current job and getting a new one will save you from having your wage garnished. The court order follows you wherever you go, including your new position. Finally, disputing the Notice of Garnishment won’t get you anywhere if you truly owe the tax debt. You will only waste money and time that you could spend elsewhere (i.e., to reduce or get rid of your debt).

 

If You’ve Received a Notice From the IRS, We Can Help

No matter the situation you are facing, know that there are ways out and solutions to consider. Just contact the tax relief experts at Innovative Tax Relief and ask for a free consultation. Let’s find the best way out of these stressful circumstances, always with your best financial interest in mind.

What Is The PPP, How To Apply & Other PPP FAQs

screenshot of the SBA's PPP home page

Last December, Congress passed a stimulus bill that provides small business relief, including Paycheck Protection Program (PPP) loans. The forgiveness applications to cover the new loans are expected to be released soon, with the SBA and Treasury already having released the new PPH Forgiveness Application, which you can use to apply for the forgiveness of your PPP loan. 

Read on to find out important details about PPP loans, including how and when to apply, among others. 

 

What Is the PPP?

In a nutshell, the Paycheck Protection Program is an SBA loan program created by the CARES Act that became law last March. One month later, the President signed the PPP Flexibility Act, and then the Treasury released the new PPP Forgiveness Application and instructions. The goal is to help businesses keep their workforce during the COVID-19 pandemic by providing them with loans. 

The basic PPP premise is that business owners (self-employed or not) can apply for a loan of 2 ½ times their average monthly payroll. As soon as the companies receive the loan, they need to spend the money shortly after getting it on payroll and other approved expenses. Doing so will enable them to apply to receive the full forgiven amount. 

Download the Paycheck Protection Program First Draw Borrower Application Form here. 

 

What’s the Difference Between the First Round (Draw) and Second Round of Funding? 

Here are some key differences between the two rounds (also called draws) of PPP funding:

  • Some businesses can receive a 2nd PPP loan – The most significant change to the second round of PPP is that some businesses that have already received a loan can get a second one as the program distinguishes between 1st and 2nd draws. 
  • Qualifications – The qualifications on a 2nd draw are more stringent than those of the 1st round. This is because the 2nd round targets the small businesses (public traded companies do not qualify) that have been most harmed financially from the COVID-19 pandemic. So, second round loans require that small businesses demonstrate a revenue reduction of 25% or more in one or more of their quarters. Plus, they have to employ no more than 300 employees. For the first round, it is paramount that the business is founded before February 15, 2020, and not be in a prohibited industry. Seasonal businesses that operated between February 15, 2020, and February 15, 2020 for at least 12 weeks are also eligible, provided they all have less than 500 employees. 
  • Funding sums – For the first round, the maximum sum you can borrow is 2 ½ times your monthly payroll, up to $10 million. The second round has the same formula for the amount you can borrow, with the difference that the loan is capped at $2 million. Also, businesses in the foodservice or accommodation industries can borrow up to 3 ½ times their average monthly payroll up to $2 million (you can use NAICS 72 to confirm). 
  • Loan forgiveness – To get full loan forgiveness, the small business needs to spend 60% of their PPP loan on payroll expenditures while also retaining its staff. Nevertheless, they are now able to spend the remaining 40% of their loan on more qualified expenses, such as rent, utilities, software expenditures, fixing property damage from protests, necessary supplier costs, and others. The best news is that they can do so without risking loan forgiveness. Also, Congress has already approved the simplified loan forgiveness form for businesses applying for a loan below $150,000. For 2nd round funding businesses, it is critical to prove they have lost 25% or more of their annual revenue, irrespective of using the simplified form or not. 
  • Tax regulations – Businesses that had received an EIDL Advance grant and a PPP loan had to deduct the sum they received in the grant from their PPP loan sum that could be forgiven. The second round of PPP funding does away with this. 
  • Small business priority – To address an issue that arose from very small business owners who complained about PPP favoring bigger businesses, the second PPP round has set aside funding targeting businesses with less than 10 employees, as well as loans made by community leaders and businesses owned by minority or women. 

Download the Paycheck Protection Program Second Draw Borrower Application Form

 

How to Apply For the PPP Program

The procedure is supposed to work in the following way:

  1. You receive a Paycheck Protection Program loan.
  2. You spend the loan within the specified period on specific items (mainly payroll).
  3. You apply for forgiveness, providing the necessary details and documentation. You will need to work with a lender for this one. 
  4. The lender will respond to your forgiveness request within 60 days. If they agree, you will get the balance forgiven. 
  5. Any not-forgiven balance becomes a loan at 1% for up to 48 months or 60 months if the loan was made after June 5, 2020. 

When it comes to completing your PPP loan application, the process is slightly different, depending on which source you use to apply through. For example, for users that have submitted a PPP loan request via SBA.com’s partner, applying for a PPP loan involves the following steps:

    1. You access your PPP application with an SBA partner – Once you complete the application with the partner and provide all needed documentation and information, it will be finalized and submitted to an approved lender for approval. 
    2. Add business details (or confirm) – These include the business address, business type, business tax ID, loan amount requested, and employee count. 
    3. Add more new business information – This section needs you to fill out your business start date and industry. 
  • Confirm (or enter) ownership.
  1. Confirm (or enter) additional owner information – This applies to businesses with additional owners only (anyone owning 20% or more share in the business). 
  2. Upload documents (or confirm) – You will be asked to provide documentation such as your driver’s license, documents that prove your payroll expenses, and business account bank statements. Self-employed or 1099 Independent Contractors also need to upload (1) income and expense reports for 2019, (2) 1099s, and (3) IRS 1040 Schedule C. Business owners must provide (1) 12 months most recent bank statements, (2) payroll register for the past 12 months, (3) 944 annual tax filings (2019), and (4) 941 quarterly tax filings (2019, 2020 Q1). 

Note: If the lender accepts your application, you will receive a confirmation email with must-read details/requirements. Note that once a lender accepts your application and gets an email with your PPP number, you are instantly entering the US Small Business Administration’s loan system. This means that the only source that can make you a PPP loan is the lender that has accepted your application. 


How and When to Apply For PPP Loan Forgiveness

Now, when it comes to filling out your PPP forgiveness application, things can get quite complicated. It depends on whether you have employees or not. Businesses can use Form 35008EZ. It applies to businesses that have not reduced wages or employee headcount, as well as self-employed with no employees. Or the simplified application form released last October if your business has received no more than $50,000 in PPP funds. Then, you submit the application to your lender and wait for them to process it. This may take up to 60 days.

As already mentioned, to apply for loan forgiveness, you need to fill out a 3508S PPP Loan Forgiveness Application form (if you have borrowed less than $50,000) or the PPP EZ Loan Forgiveness Application form

Filling out the payroll sections is admittedly the most complicated part of filling out the forgiveness application. For that reason, you will probably need the services of a tax professional or accountant. Also, note that you must find a lender that takes forgiveness applications first. Here is a list of lenders you could consider (as of January 2021):

Remember that this is just a reference list. More lenders are being added with each passing week while many are already in line for more information. 

If you are trying to decide when is the best time to apply for a PPP Loan Forgiveness, patience is a virtue. You can submit a loan forgiveness application within 2-5 years from loan origination. So, you have plenty of time to think about your options. And, if you are eligible for a Round 2 PPP loan, you can apply to any lender that accepts Round 2 PPP loan applications, such as Lendio, Fundera, Credibly, and BlueVine. Note, though, that if you have already done business with a lender in the first round, chances are the particular lender will not participate in the second one. Also, take into account that a PPP Round 3 is already out there, so it is worth waiting a bit before you decide when to apply for a PPP loan forgiveness. 

Note that the forgiveness application will need quite a few calculations. You may download or print out the SBA PPH Loan Forgiveness Application before you go through this guide to check it out. Or you could ask your lender to provide the online version of the form. You might also have to reference the Form 3508 Instructions. If you are uncomfortable with the process, you can always seek assistance from an experienced financial advisor or accountant.  

Can the IRS Send Me to Jail?

main in jail

Cheating on your taxes is a crime. No doubt about that. However, a mere 0.002% of all taxpayers are convicted of tax crimes, even though roughly 16% of Americans are found not complying with the tax laws every year, in one way or another. 

As for the number of convictions for tax crimes, it has stayed relatively stable over the most recent 5-year period (less than 1% increase). This means that a person is rarely sent to jail for tax fraud. 

However, there is some fine print you do need to read, as not all cases end up being punished with penalties and fines. Some may as well put you behind bars. This is a topic that we get asked about a lot so we wrote this article to answer some commonly-asked questions.

 

Can You Go to Jail For Lying to The IRS?

The majority of cheating cases comes from tax evasion, which is the deliberate underreporting of income (willful or actual). This is the type of tax crime that is charged the most often. Truth be told, it can be tempting for some taxpayers to fudge the numbers to improve their tax refund. Nevertheless, misrepresenting yourself on your tax return can get you into trouble as it is considered tax fraud. So, you could be (1) audited, (2) fined considerable amounts, or (3) put to jail.

Remember that the IRS knows whether you report all of your income or not as it gets all of the 1099s and W-2s you receive. Your financial activity may also raise some red flags with the IRS (in case you are thinking of hiding income in the form of cash payments). All these may trigger a tax audit, which is an in-depth review of your financial records and taxes to make sure everything has been reported accurately. 

Although there is less than a 1% chance of being audited, most of the time, at least, undergoing an audit is simply not worth the risk as it involves a costly and time-consuming procedure, where you are called to present years of documentation. You may even be called in for multiple in-person interviews. 

Now, whether you go to jail for an IRS audit or not, it all depends on how the IRS finds you – guilty of tax fraud or evasion (so charged with an offense that carries jail time) or not. In general, an incorrect tax return case (i.e., under-reporting your income) comes with late payment penalties, while you may also be charged interest on the underpayment but you will not go to jail for it.

And, don’t fool yourself into thinking that tax fraud or evasion affects high earners only. Everybody should be careful, even those with low income. This is because the IRS does NOT differentiate its cases based on how much you underpaid your taxes or between income amounts. Falsifying any information on a tax return can end up with you being fined up to $250,000. 

 

Can the IRS Put You In Jail?

In a nutshell, no. The IRS cannot send you to jail. However, the court can. When an IRS auditor audits your tax returns and detects possible fraud, they can initiate a criminal investigation. It should be noted that around 3,000 taxpayers are convicted of tax fraud every year. So, lying on your taxes is, indeed, a big deal for the IRS. Overall, though, the IRS rarely charges taxpayers with fraud. Therefore, even if you are investigated, you will probably not face a criminal charge.

That being said, though, lying on a tax return carries potentially severe consequences that are just not worth the risk; you may end up having to pay way more than the sum you are attempting to hide. 

 

How Much Taxes Do You Have to Owe To Be Sent to Jail?

As already mentioned, the chances of facing criminal fraud penalties are very slim. In the overwhelming majority of cases (at least 98%), the IRS punishes this type of fraud with CIVIL penalties. This simply means that you will be called to pay a 75% fine that will be added to the tax due, plus interest on both the fraud penalty and the tax. So, if you owe $10,000 from tax fraud, you will have to pay an extra $7,500 as a penalty. 

Things change dramatically, though, when the IRS suspects that you have gone too far. In this case, it may call the CID (Criminal Investigation Department) to investigate your situation. The CID then has two options: (1) recommend that the Justice Department prosecute you or (2) drop it forever, depending on its findings. The good news is that the CID does not usually recommend prosecution except in very rare cases. 

Of course, the larger the sum you tried to hide, the more likely CID agents will recommend prosecution. In criminal cases, the typical amount of taxes owed is at least $70,000 and usually refers to tax cheating activities over a three-year time span (or more). 

To sum up, the IRS itself can NOT prosecute you, but the CID can recommend prosecution. If  it does, and you get convicted by the Justice Department, you may be fined, put on probation, imprisoned, or all three. The bad news is that if you are brought to court, there is more than an 80% chance of getting convicted and a high chance of going to prison even if you have a spotless criminal record. 

 

Tax Crimes That CAN Put You In Jail

Individuals that are recommended prosecution by a CID agent are typically charged with one of the following three crimes: (1) failing to file a tax return, (2) filing a false return, or (3) tax evasion. Here are some details about each:

Failing to file a tax return. This is the least serious tax crime of the three and is defined as not filing a return intentionally. So, if you must file tax returns and you do not, the maximum prison time you can get is 12 months and/or a $25,000 fine for each year you have not filed. However, most non-filers only get civil penalties and are rarely prosecuted criminally.

Filing a false return. This is the case where you file a tax return that contains a material misstatement. This is less serious than tax evasion and can get you behind bars for up to 36 months. Also, according to the Internal Revenue Code §7206 (1), you will be fined a maximum of $100,000. 

Tax evasion or fraud. This is the most serious thing you can be charged with as it is considered a felony rather than a misdemeanor, which is the case with the two situations mentioned above. Tax fraud or evasion is when you try to defeat the income tax laws intentionally, and carries a maximum prison sentence of five years. The fine you will also be called to pay per the Internal Revenue Code §7201 is up to $100,000. 

Important Note: The CID can also recommend prosecution for filing false claims against the IRS and for money laundering. Although these are not tax crimes in a technical sense, they tend to be charged in the same case as a tax crime against the same taxpayer (entity or individual). 

 

When Can the IRS Send You to Jail?

The truth is that failing to pay your taxes can eventually initiate a process to send you to prison. But, the IRS does not have the power to put you behind bars or file criminal charges against you if you have not paid your taxes, as already explained. Nevertheless, some exceptions apply. 

It all depends on the reason for not paying the due amount. If you can’t because you do not have the money, you are in the clear. But, if you intentionally try to deceive the IRS or lie on your tax return, this is regarded as tax fraud, and you could end up serving jail time. 

Let’s take things from the beginning, though. Bear in mind that most tax crimes are NOT criminal cases; they are considered civil cases. This is because the IRS understands that taxes can be confusing, and you could fill out your return incorrectly due to the complexity revolving around filing tax returns. So, if you get confused or forget to include an important document on your tax return, the IRS will most likely send you a letter asking you to address your mistakes and amend them. 

If you made a more serious error, the IRS will probably audit you and place a civil judgment against you. Again, this will NOT put you in jail as it is NOT a criminal act. It is simply a notice that you need to change your tax return and pay back your unpaid taxes. 

This is not the case when you intentionally change your taxes or file fraudulent taxes or fail to file. If the IRS thinks that you are failing to file your return altogether or intentionally fill out your tax return incorrectly (which is tax evasion in any case), you may face jail time. 

 

Should You Be Concerned That the IRS Is Going to Send You to Jail?

Generally speaking, it is extremely rare for the IRS to charge a person with a tax crime and attempt to send them to jail.  So for the most part, you don’t have to worry about the IRS sending you to jail.

But with that said, not filing your tax return or trying to hide income from the IRS is not worth it in the long run, as you will probably end up paying much more than the taxes you want to evade. And, if you are in a tight financial situation where you cannot meet your tax obligations, there are several tax relief strategies to help you get out of it. Feel free to contact us and we’ll help you find the best solution to your problem. 

Do I Have To File Taxes?

older couple filing taxes

Filing taxes can be burdensome, especially considering the complexity of filing a tax return. With tax laws changing almost overnight sometimes, it goes without saying that taxpayers often find themselves midst a tax storm that they do not know how to handle. 

Questions like ‘Do I need to file taxes if I collect Social Security?” “What about the case when I get Disability benefits?” “Do I file a tax return if I am retired?” are very common. Hopefully, this guide will help you figure some basics out and answer commonly asked questions about filing taxes. 

 

Do I Have To File Taxes If I Collect Social Security?

In general, individuals must file taxes if (1) they are unmarried, (2) their gross income is at least $14,050 or (3) are below 65 years of age. However, those that live exclusively on Social Security benefits have no gross income, which means that they do not have to file a federal income tax return. Also, you do not need to include your Social Security benefits in your gross income if your only source of income is your Social Security benefits. 

Things change if you earn additional, not tax-exempt income. In this case, you need to determine whether your annual gross income exceeds the $14,050 threshold. Beginning in 2018, tax exemptions are no longer considered part of your taxable income. So, you must use only your standard deduction. For the 2020 tax year, your Social Security benefits are regarded as gross income if:

  • You are married and file a separate tax return with your spouse. In this case, 85% of your Social Security benefits are regarded as gross income, which means that you may need to file a tax return. 
  • You are married filing jointly, and the sum of 50% of your Social Security plus any tax-exempt interest and other income is higher than $32,000. 
  • Half your Social Security plus other income is higher than $25,000, irrespective of your filing status. 

Note: For senior citizens (over 65 years of age) collecting Social Security benefits, the law is more gentle and flexible as it enables them to reduce the tax amount they must pay on their taxable income. As long as their income is not high (not including Social Security funds), they can lower their tax bill on a dollar-for-dollar basis using a special tax credit called Credit for the elderly or disabled (aka Schedule R).

 

Do I Have To File Taxes If I Did Not Work? 

In general, unemployment checks from the state are taxable. So, it depends on the collected unemployment. The current tax law wants individuals collecting or earning at least $8,000 to file taxes. Another important aspect to consider before answering this question is whether tax was withheld on the unemployment check payment or not. 

It should be noted that unemployment benefits are not free money. In fact, you need to take proper measures today to avoid unwanted surprises in the future when you receive your tax bills the following year. This is because unemployment money is taxable income. So, although you don’t need to pay Medicare or Social Security taxes, you will need to pay state and federal taxes in some jurisdictions while receiving unemployment benefits. 

Of course, some states, such as Virginia, Pennsylvania, Oregon, New Jersey, Montana, or California, waive this particular type of income. This means that if you live in any of these states, your unemployment benefits are tax-free. On the other hand, seven states (so far) do not impose any state income taxes. These include Washington, Texas, South Dakota, Nevada, Florida, and Alaska. 

Tip: The best course of action is to have taxes withheld from your unemployment benefits check, especially if you have earned income this year. The same applies to when you expect to be employed or hired again shortly, which will put you in a higher tax bracket. This, in turn, may make you ineligible for as many credits to offset your earnings. 

How to request the withholding:

  • Fill out form W-4V either online or via the benefits portal (depends on your state).  The Labor Department mentions that you can withhold a flat federal tax rate of 10% of the paid benefits from every payment. 
  • Request a W-4V from your state’s unemployment office if you are already collecting unemployment and then change your withholding. 
  • Take the money out of your checking account, and put it in a little envelope, or put it in a savings account. 

A key factor to bear in mind is your earned income tax credit (EITC) if you are currently unemployed and are worried about how this kind of money will affect your taxes. Depending on your income and whether you have any dependents (and how many), the EITC can provide you  between $538 and $6,660 in tax credits. Those eligible for it can use the tax credit to offset the amount they owe on their tax bill. The 2020 EITC income limit is $15,820 for single individuals or married couples with no children and $21,710 for married couples that file jointly. 

 

Do I Have To File Taxes If I’m Retired?

In short, yes. Your retirement taxes are determined by how much retirement income you draw every year and the sources of your retirement income. And, the kind of money you need to live on is directly related to your taxes. This may sound a paradox, but, in reality, the government never collects taxes on your Social Security money during your working years. The logic is that it simply holds onto it for you. Let’s look into an example to make things a bit clearer:

Suppose you get paid $5,000 every month as an employee. Your employer withholds the 6.2% Social Security tax rate (so, around $310) from your pay every month while contributing that 6.2% on your behalf to the federal government. They pay no tax on that sum, though. Then, when you turn 62 or older, the government gives back the money that went toward Social Security when you file a Social Security retirement benefits claim. Until that moment, nobody has paid taxes for that money.

So, will you owe taxes on your Social Security benefits in the end, and how much? According to the Social Security Administration, one in every four retirees will be called to pay income taxes on their Social Security benefits. For more details, check out the table below: 

Combined* Income Individual Return Married, Separate Return Married, Joint Return
$0-$24,999 No tax
$25,000-$34,000 Up to 50% of Social Security may be taxable
> $34,000 Up to 85% of Social Security may be taxable
$0-$31,999 No tax
$32,000-$44,000 Up to 50% of Social Security may be taxable
> $44,000 Up to 85% of Social Security may be taxable
$0+ Up to 85% of Social Security may be taxable

 

* This refers to half of your Social Security benefits, your nontaxable income, and your adjusted gross interest income, which is your total income minus income adjustments. Adjustments to gross income can be contributions to self-employment retirement plans, alimony paid, student loan interest deduction, and more.

Tip: To avoid paying taxes when you are a retiree, take note of the income you receive. If it is low enough, you won’t get taxed for it. Check the tax bracket into which your taxable income falls after calculating your earned and unearned taxable income. This will help determine whether you will need to pay income taxes or not. Your retirement tax bracket determines the exact way your taxable income is determined when you are in your working/productive years. As soon as you add up your taxable income sources, subtract your itemized or standard deduction, and apply any tax credits you may qualify for. Then form 1040SR or 1040

Below is a table showing the standard deduction for taxpayers over 65 years of age for the 2020 tax year. 

Filing Status Standard Deduction Senior Bonus Total Deduction
Head of household $18,650 $1,650 $20,300
Married filing jointly  $24,800 $1,300 per senior spouse $26,100 
Married filing separately $12,400 $1,300 $13,700
Single $12,400 $1,650 $14,050

 

 

Do I Have To File Taxes If I Collect Disability? 

Again, it depends on the income you receive and whether your spouse also gets an income (or not). If you are single and your Social Security Disability benefits are your sole income source, you don’t need to file taxes. For total incomes that exceed $25,000, it is paramount (and required by law) to file a federal tax return as an individual. The same applies to joint filers if their total combined income is more than $32,000. 

However, note that you will NOT be asked to pay taxes on the entire sum you receive from Social Security Disability if you fall within any of the brackets mentioned above. You usually need to file a federal tax return in the following situations:

    • You earn between $25,000-$34,000 as an individual – You might pay income tax on 50% of the sum you received from the Social Security Administration. 
    • You earn >$34,000 as an individual – You will probably need to pay taxes up to 85% of your SSD (Social Security Disability) benefits. 
    • You file jointly with your spouse and have a combined income between $32,000-$44,000 – You might have to pay taxes on 50% of your SSD benefits. The sum goes up to 85% of your SSD benefits if your income is over $44,000 (always referring to your combined sum). 
  • You also have a pension.
  • You collect short-term disability that is being provided by your employer. 

In general, though, if you have paid for your own disability policy, you won’t need to file a tax return. 

 

Do I Have To File Taxes On A Summer Job?

The majority of taxpayers are allowed to earn a specific amount of income every year without having to file a federal tax return or pay taxes. But, if you are obliged by law to file a tax return, it is critical that you have your earned income reported by your summer employer on a W-2

Full-time students may not need to file a return if they work for just a couple of months in the summertime. Nevertheless, if you qualify for a tax refund for taxes withheld from your paychecks, it is advised to file a return so you can claim that refund. Take note that if you show as a dependent on your parents’ tax return, though, you will have to file a tax return if you received more than $1,100 of unearned income (i.e., dividends and other non-employment income), irrespective of other earnings you may have. The same applies if your total earnings are higher than the standard deduction set for dependents.

 

Do I Have To File Taxes If I’m Married But Don’t Work?

You can choose to file separately or jointly on your income tax returns, with the first option being the most beneficial for you, most of the time, at least. This is because the IRS provides larger standard deductions to joint filers every year, which enables them to deduct more money from their income than those filing separately. For example, married couples filing jointly receive a $24,800 deduction while those filing separately only receive a standard deduction of $12,400. 

Plus, you are eligible for more tax credits, such as the Earned Income Tax Credit and the Child and Dependent Care Tax Credit. On top of that, joint filers earn a larger amount of income due to the higher income threshold for specific deductions and taxes while they may also qualify for certain tax breaks. 

There are, of course, some rare cases when filing separately is more preferred than filing jointly. You can contact us and give us the details of your case. Our tax relief professionals will then suggest the filing status that gives you the biggest tax savings

How a 1099-C Affects Your Taxes

form 1099-C Cancellation of Debt

If your debt has become too overwhelming for you to repay, you could contact your lender and negotiate debt forgiveness. Unfortunately, you will probably be called to deal with a huge tax bill if the lender eventually decides to delete your debt and send you a Form 1099-C. This is because you are required by law to report the sum to the IRS by filling out the 1099-C form as taxable income.

We will give you all the details you need to know about a 1099-C Cancellation of Debt so you have an idea of what is involved and how to deal with any tax issues that may come along. 

 

What Is a 1099-C?

If you can no longer afford to pay off a loan or another debt and you have, somehow, managed to get your lender to cancel or write off your debt, the IRS will consider it income for you. Cancellations for more than $600 should be reported on a Form 1099-C Cancellation of Debt. Of course, some exceptions apply, usually in cases of foreclosed homes and bankruptcy (we will also talk about these in a subsequent section). 

Yes, it probably sounds unfair that a debt you have successfully negotiated away or canceled to return as taxable income, haunting your days. Sadly, it is, indeed, classified as income because the IRS sees it as you receiving a benefit without paying for it. This is because when you first borrowed money from the lender, you were bound by a contract to repay it. Therefore, you were not obliged to pay tax on the sum you got. Now that you got yourself a debt cancellation, the contract is no longer in effect, which means that you can do whatever you want with the money you borrowed. So, it looks like you have received money for free – money that you must pay back. This makes it taxable income. 

You can receive a Form 1099-C from a lender that discharged, forgave, or canceled your debt for the:

  • Modification of a loan on your principal residence.
  • Abandonment of property.
  • Return of property to a lender.
  • Foreclosure 
  • Repossession

 

What Is the 1099-C Tax Rate?

The amount of federal tax you will be asked to pay depends on several factors, such as your tax bracket. Taxpayers whose income is less than $35,000 are probably in the 15% tax bracket, which means that you pay 15% of every extra dollar of income on your return. This sum climbs to around $70,000 for married individuals filing jointly. However, your adjusted gross income affects things like phase-out ranges, deductions, and credits you might have. 

You may use the IRS Withholding Calculator to estimate the right amount of tax withheld and the best way to fill out your Form W-4. Or, you can ask an accountant for assistance. Note that any tax liability occurs when the loan obligation is released and not when 1099-C is issued. Failing to report this liability can lead you to be penalized for it (25% underreporting penalty). At the same time, your audit period increases from three to six years. That being said, though, the IRS will not impose penalties for underpayment of tax. The only exception is if you owe more than $1,000 when your return is filed. 

 

Where Does a 1099-C Go On a Tax Return?

You must enter the total sum of your 1099-C on Line 21 of Form 1040. This applies to 1099-C issued for a personal debt (Form 1040 is the Individual Income Tax Return form). If this is about a farm or business debt, you need to use either Schedule F or Schedule C (profit or loss from farming or business). Given that the original 1099-C has gone to the IRS, you do not need to send a copy of it with your return. Just don’t forget to include any interest you may qualify to deduct. 

Now, if you do not file a return that includes canceled debt as income on a 1099-C form, you must be able to prove that the sum is not taxable. This can be done by:

  • Attaching a statement of liabilities & assets or bankruptcy discharge forms to support your claim (in case of bankruptcy). 
  • Complete a Form 982.
  • Attach a letter to your return explaining your situation in detail (i.e., insolvency or bankruptcy). 

 

What’s the Difference Between a 1099-A and 1099-C?

Selling real estate comes with various tax forms that need to be filed, including 1099-A and 1099-C, which create a lot of confusion for everybody involved. Let’s help untangle this knot. 

When real estate property is either transferred or sold, you must notify the IRS using Form 1099-S (Proceeds From Real Estate Transactions). The seller receives this form to report the sale and help show whether there is a loss or gain on the property sale. The seller also receives this form in a deed of lieu of foreclosure and short sale. Nevertheless, when dealing with a foreclosure, the sale is involuntary, which is why no 1099-S is issued to determine whether there is loss or gain on the property sale. Instead, you (the seller) must report the property transfer via a 1099-A (Acquisition or Abandonment of Secured Property), which reports things like the:

  • Balance of principal outstanding on the transfer date.
  • Fair market value on the transfer date. 
  • Date of the transfer. 

Note that selling a property in a foreclosure auction is NOT always tied to zero capital gain. In certain situations, adjustments to cost basis may lead to a capital gain on such property sales, which may result in added tax liability that you might be unable to pay. 

Now, if a lender cancels or forgives a debt, be it a foreclosure, deed in lieu of foreclosure, or a short sale, it may involve the issuance of a 1099-C to report the cancellation of debt. Beware as the tax consequences are exactly the same for the cancellation of debt income, irrespective of where it is generated from (I.e., a foreclosure, deed in lieu of foreclosure, or short sale), as long as the forgiven debt is $600 or more. Certain exclusions apply that can eliminate or reduce the 1099-C sum from taxable income, such as:

  • Relief pursuant to the Mortgage Forgiveness Debt Relief Act – if the seller qualifies for it. 
  • Insolvency of the seller before having their debt canceled or forgiven.
  • Discharge of the debt in bankruptcy.

Do not hesitate to use our expertise and experienced tax professionals to help report these transactions on your tax return correctly. 

 

You May Be Able to Avoid Paying Tax on Canceled Debt

You may qualify for one of the many exclusions that enable you to reduce your taxable income from debts that have been forgiven or canceled. Here are some of the most sweeping ones:

  • Debts canceled when you were broke (IRS refers to this as being insolvent). It applies to the sum by which you are insolvent. 
  • Discharged debts in bankruptcy if you filed for bankruptcy protection.
  • Forgiven student loans after having worked for a period of time.
  • Canceled interest that would have been otherwise deductible (i.e., on business debt). 
  • The debt was canceled as a gift (usually from friends or family members).
  • Farm and business real estate-related debt that was canceled when you owned more than how much your property was worth at that time.   

It is paramount to let an experienced tax preparer handle this type of activity for you. If any of these exclusions apply to your case, you will probably need to file a Form 982 on top of the 1099-C. 

 

The Mortgage Forgiveness Debt Relief Act

The Mortgage Forgiveness Debt Relief Act (MFDRA) was passed in 2007 in an attempt to tackle the huge collapse of the real estate market that began in 2007. Congress decided that you may exclude up to $2 million for calendar years 2007 through 2020. This applies exclusively to forgiven mortgage debt, of course. The sum mentioned above relates to married individuals filing jointly. For other filing statuses, the amount that can be excluded is no more than $1 million. 

Note that you may benefit from the MFDRA for debt that was discharged in 2021. The only prerequisite is that you enter into a written agreement in 2020. This exclusion also covers mortgage debt that has been canceled in connection with a foreclosure or via a mortgage restructuring. 

 

Avoiding Tax Debt After Insolvency and Bankruptcy 

You might still be able to avoid taxation in case you have had your debt canceled, even if you receive a Form 1099-C if your debt was discharged in a Chapter 13, Chapter 7, or another Title 11 bankruptcy proceeding. This means that if your case falls under this category, you won’t have to pay taxes for your forgiven debt. 

Similarly, you can avoid taxes on canceled debt if you can show the IRS that you were broke (insolvent) when your debt was forgiven. 

Are you eligible for tax debt relief? Can you reduce or even eliminate your tax obligations after a 1099-C is issued to you? Give us a call or contact us for a free tax consultation and let’s discuss your options so that you can finally be relieved of your tax problems.  

Truck Driver Tax Deductions

truck driver owner-operator

Understanding how you and your trucking business are taxed is one of the biggest challenges for any owner-operator and truck driver. Using good planning and record-keeping all year round, though, can help you avoid any headaches in April. This guide will shed some light on truck driver taxes, deductions, and more.

 

How Much Tax Does a Truck Driver Pay?

Being an owner-operator means that you need to pay taxes yourself. This can be a major hurdle for those that were company employees before as they are now called to calculate and pay taxes that were once automatically withdrawn from their paycheck and then pay them to Federal and State agencies themselves. This involves making quarterly estimated tax payments that often range between 20-30% of their net income (the one earned per quarter). Doing so enables you to minimize any tax bill surprises while also avoiding tax penalties before Tax Day (usually in mid-April). In a nutshell, truck drivers need to pay three major types of taxes:

The first two are calculated on your tax return. If you are an employee, these taxes are being withheld from your check. Owner-operators will have to estimate and pay these taxes themselves. You can refer to >Tax-brackets.org to check cross-state tax brackets.

Now, when it comes to estimated tax payments, you will need to make quarterly payments if you owe more than $1,000 in taxes. This sum is, of course, the final amount you get after subtracting withholding and credits.

Note that owner-operators can show deductions or even file a tax return at the end of the year. So, estimating your business profit will show you (1) the required estimated tax payments you need to make, and (2) the due taxes when you file Form 1040. Your net profit is calculated with this equation:

Net profit = Gross pay (what’s on your 1099-MISC) minus allowable business-related expenses.

If you don’t file a tax return or show deductions, the IRS will determine what you owe in taxes without taking into account any potential deductions. This instantly means that the required tax amount will be significantly higher than if you had shown deductions or filed a tax return.

Are you a truck driver or owner-operator with tax debt?

We’ve helped many individuals just like you. Visit our Truck Driver Tax Help page to see how we can help you resolve your tax debt once and for all.

 

What Expenses Can a Truck Driver Write Off?

Let’s begin with Per Diem expenses, which refers to the assumed tax-deductible sum you spend on beverages, meals, and tips when on an overnight (always business-related) trip away from home. This one is deductible on IRS Schedule C for owner-operators and lowers your income and self-employment taxes owed on the return directly. Per Diem expenses are used by the majority of over-the-road truckers that are away from their home base most of the time as it saves them more money than gathering meal receipts. The only prerequisite is that you spend the night away from home.

Note, though, that you won’t be able to deduct your total Per Diem dollar for dollar. So, ensure you are familiar with the IRS regulations, though, as the laws and amounts change almost annually. According to the current rules, you can take 80% of the Per Diem expenses as a tax deduction.

Other accepted deductions are those referred to as ordinary and necessary business expenses. In general, these include:

  • Truck maintenance and supplies – You might be able to deduct these costs if you pay for them out of your own pocket (i.e., cleaning supplies, washer fluids, new tires, and oil changes). Note that if your employer reimburses you, you won’t be able to double-dip (hence, deduct these expenses).
  • Sleeper berth – Many truck drivers are not aware that they can deduct items from using a sleeper berth. These include first aid supplies, mini refrigerator, alarm clock, cab curtains, and bedding.
  • Electronic devices – You can deduct costs related to your cell phone from your tax return if you use it exclusively for work. CB radios and GPS units are also deductible costs.
  • Travel expenses – Besides overnight stay-associated expenses (including per diem and hotel rooms), you may also consider the standard meal allowance. This may vary per location, but the amount is higher for truckers due to the Hours of Service regulations. For the current amounts, check out IRS Publication 1542.
  • Professional association or union fees – Feel free to deduct fees you pay at a trucking industry organization or union from your taxable income.
  • Uniforms – If you need to wear a uniform and it is not paid for by your employer, then you can deduct the related costs. These include goggles, protective gloves, boots, and other specialized work gear. Also, when away from home, you may deduct cleaning expenses for your clothing.
  • Office supplies – These are deductible only if you use office supplies to keep track of your day or route and include from staples and maps to writing supplies, clipboards, and logbooks.
  • Depreciation – You can deduct specific property as expense (i.e., your truck(s)) if you use that property in service, per Section 179. Always consult a tax professional before determining how to deduct these expenses if you are an owner-operator, though. Deciding how to use the leveraged deduction when filing your taxes can be challenging. The standard (aka straight-line) depreciation for a new Class 8 truck either uses the accelerated depreciation or the multi-year formula.
  • Truck lease – The entire leasing amount of your monthly payments can be deducted. Note that you will probably see a higher deduction in the first 48 months due to depreciation. After three years or so, the truck purchaser will have little depreciation, which means that you will be able to see the reduced tax benefit. For the owner-operator who buys the truck, the tax delay is the net effect. In this case, the tax is not eliminated by depreciation – it is paid in the following years.
  • Other costs – These include expenses such as DOT physical exams, drug testing fees, driver license renewal fees, and sleep apnea costs.

 

Other Truck Driver Tax Write-Offs That You May Qualify For:

  • Lifetime Learning and American Opportunity tax credits – If you, your child, or spouse are attending college, you may qualify for partial reimbursement of the fees and tuition you pay for college provided that you have not received any scholarship or grant.
  • Child tax credit You may claim up to $1,000 for every offspring that is below 17 as long as the child lives with you (at least most of the time), and you cover at least 50% of their living expenses.
  • Child & dependent care – You may receive compensation for some of the costs tied to dependent or child care if you have children below 13 years of age. In the case of disabled spouses and offspring, though, the age limit does not apply (eligible regardless of age).
  • Earned income tax credit – This is a refundable credit that is based on your income and covers low- and middle-income individuals and families. You could get $6,000 or more in reduced tax credit with this one.

 

What Tax Forms Should Truck Drivers Use?

Filing a Form 1099-MISC (Miscellaneous Income) is the responsibility of self-employed truck drivers. You need to report that income, along with any expenses, on the IRS Schedule C (Profit and Loss from Business). You will also have to report your self-employment taxes and report them on your form 1040 if your net earnings are at least $400.

You should have received a Form W-2 for your job if you are a truck driver/employee and none of your job-related costs are deductible. In detail, the forms you will need to file your taxes are as follows:

  • Schedule C form – For statutory and self-employed drivers. It determines your business profit and loss.
  • W2 – For agents or commission drivers. Your Statutory Driver box in your W2 may have been checked. This form is also received by company truck drivers with a report of income and wages of the driver.
  • Form 1099 – To report miscellaneous income and applies to truck drivers working as independent contractors for a company.
  • Form 1040 or 1040A – This reports your individual income tax return. It is the standard federal income tax form.
  • Other forms for reporting your income if you are owner-operator – It depends on your records.

 

Tips for Filing Truck Driver Taxes

Here are some more details and tips for filing your taxes:

  • Don’t throw away your receipts. Hold on to them for at least five years.
  • Know the specifics related to your truck driver-associated deductions. Ask a tax professional to review your accounts if you need extra help, so you don’t over-claim or miss out on these deductions.
  • Be diligent about record-keeping to avoid penalties.
  • You can visit the IRS Publication 583 page for information about record keeping and kinds of records that you may not have been aware of that you need to keep.
  • You may also find useful information at the >IRS Trucking Tax Center.
  • Try to minimize your taxes contributing to a SEP, IRA, or 401(k) frequently, tracking personal vehicle miles, and benefiting from the available credits and deductions. Of course, getting assistance from a tax professional with experience helping truck drivers will help relieve some of the headaches and burdens.

 

Having a Tax Home – A Key Requirement for Truck Drivers

Before you can claim a tax deduction, the IRS requires that you have a general area or city in which you work. This is referred to as a Tax Home and has nothing to do with where you reside. It is just the address you list on your tax returns and usually where all your mail goes to. This could be your personal residence, your business’ headquarters, or a dispatch center. The only prerequisite is that you contribute towards the selected tax home regularly while on the road, especially if you are an owner-operator using a residence as your tax home. 

Why do you need a tax home? To be able to deduct travel and business expenses. In other words, without a tax home, the IRS won’t allow you to claim certain long-haul expenses. Note that failing to have a tax home or contributing financially to the registered tax home can end up with you facing substantial penalties for underpaid taxes.

  

Tax Moves to Make to Reduce the Due Sum of your Tax Return

Here are some things you could do to help minimize the amount you will owe after filing your tax return. 

  1. Take advantage of the new depreciation rules

Purchasing assets for your business (i.e., a new piece of equipment or new truck) could enable you to benefit from the new depreciation rules and eventually reduce your tax liability. According to the tax law, any qualified property bought between September 27, 2017, and December 31, 2022, can be fully depreciated of the property cost. Just ensure you place in service the purchased asset within that time frame to take the first-year deduction on the purchased asset immediately. If things remain as they are today, then the depreciation bonus goes down by an extra 205 annually, starting in 2023 (so, 80% depreciation in 2023, 60% in 2024, and so on). Your taxable income will drop considering that the cost of the depreciated asset will be recognized as an expense. 

Important notice: Making big purchases should NOT be your first course of action to help get a deduction, especially if you are planning on buying assets that won’t bring you additional income. Also, remember that the higher the deduction today, the lower the deduction in the future (most likely). If your business slips into a higher tax bracket, this could be a problem. So, only make big purchases if you really need the asset to be bought. 

 

  1. Keep a Per Diem Calendar

The IRS allows truck drivers to prove necessary and ordinary business expenses incurred when traveling away from the home base. This deduction is called Per Diem and involves incidental costs and your meals for the days you were on the road. This applies to travels that require you to rest or sleep away from home to deliver on your job duties. Although this particular deduction is no longer an option for company drivers (employees), the TCJA (Tax Cuts and Jobs Act) left it open for owner-operators (aka self-employed individuals). 

The Per Diem rate is set at $66 for every day you are away from home for business and $49.50 per partial day (effective since October 2020). Take note, though, that the IRS only enables you to deduct 80% of the Per Diem rate. This means that you get a deduction of $39.60 for a partial day and $52.80 for a full day. 

So, to claim your Per Diem deduction, you must know how many days you have spent on the road. This is why it is critical that you keep track of these days (i.e., you can keep a calendar and mark “/” for partial days and “X” for full days). 

Important: Ensure you provide DOT ELD logs with locations, dates, and times to substantiate your per diem. 

 

  1. Set up your business as an LLC

Being an LLC and getting taxed as an S-corporation by filing form 2553 is something worth considering, provided you net more than $70,000 annually. You see, for a sole proprietorship, all income is subject to self-employment tax (approx. 15% of all earnings), both distributed and undistributed. This is not the case with an S-Corporation, where you can withdraw additional funds as distributions and pay yourself a reasonable salary to minimize your self-employment tax. The key term here, though, is reasonable. In any other case (you give yourself a huge salary), you may send the IRS a red flag and trigger an audit.

Here is an example to make this a bit clearer for you: 

Let’s assume that your annual net income is $55,000 and pay yourself a salary of $35,000. The self-employment tax rate is 15%. So, 15% of $35,000 is $5,250. This means that instead of $8,250 self-employment tax (15% of $55,000), you are now paying $5,250.

 

  1. Catch up with your tax payments

If you have fallen behind your quarterly estimated tax payments, it is a good idea to try to catch up before the end of the year. A great way to do that is by making a larger than normal quarter tax payment to help pay any due tax liability when you file your tax return. Remember that not paying enough taxes throughout the year will get you penalized. In general, taxpayers owing no more than $1,000 avoid a penalty for underpayment of the annual tax. The same applies to those that have paid more than 90% of the tax due for the current year. Nevertheless, we can’t stress enough the significance of paying your taxes every single quarter to skip additional penalties that could be quite high. 

Tip: You could consider setting aside 25% of your net income (the weekly) for your quarterly estimated tax payments. 

 

Key Steps to File Taxes Successfully and Save on Taxes

Staying organized is crucial if you want to give yourself a considerable payoff in your taxes. In doing so, make sure you keep a careful record of any job-related expenses you have because the money you spend while on the road for work can increase the sum you can get back from your taxes. That aside, here are three important steps every truck driver should take to get taxes done.

Step #1: Select the (Right) Form You Need to File

Company drivers must have already received a W-2 form, which reports their annual wages and income. The majority of truckers will need to use the details from the W-2 form to fill out either a 1040A or 1040 form for taxes. 

You could also consider form 1040EZ, which is a simplified version of the 1040 form, provided you meet certain conditions. For example, you need to choose NOT to itemize deductions and make no more than $100,000 annually. Also, you must have a tax status of married filing jointly or single. Before opting for the 1040EZ solution, though, take into account the trucking deductions that could help you save money. 

Owner-operators, on the other hand, may find it easier to report their income via a 1099 form that reports miscellaneous earned income. The 1099 form enables you to itemize work-related expenses and deduct them from your taxes. 

Step #2: Claim Work-Associated Tax Deductions

Truck driver tax deductions can save you some serious money (you pay less in taxes) as they allow you to reduce your adjusted gross income. We have already provided you with a long list of truck driver deductions you could be eligible for. You only need to calculate your adjusted gross income  and report it on your tax forms, which will be the only type of income that will be taxed. The lower your adjusted gross income, the less in taxes you pay. 

Step #3: File Your Taxes on Time 

That would be not after April 15. You can file your taxes either by traditional mail or electronically. So, by now, you must have finished all the required paperwork (more or less), added costs, and know whether you will be getting a refund or you need to send a check. Just make sure all this is done before the deadline. 

Extra Tips for Filing Taxes for Truck Drivers:

  • Mileage cannot be claimed at standard rates, though you can claim it as a deduction. 
  • Any expenses your employer reimburses are NOT considered tax deductions you could claim. 
  • Make sure you keep a properly updated record of your actual expenses. 
  • Know all the regulations related to filing taxes. Also, what deductions you can take. There are certain rules that apply to truck drivers who wish to claim deductions. 
  • Never over-claim deductions. 
  • Using tax software can help you file your taxes in a decent way. However, it can never match the job done by a tax professional.
  • Have a tax professional review your accounts to stay on the safe side and avoid penalties, especially if your income tax bracket has gone up recently. 

 

Understanding the IRS Statute of Limitations

You have probably been bombarded with tips from your tax professional to hang onto copies of your tax returns and any relevant receipts and forms after you file every single year. The question that arises is, “Just how long do you need to save these copies and receipts?”. With a statute of limitations, you can now have a definite answer.

In a nutshell, this means that the IRS cannot look at your old tax returns after a certain number of years have passed. Hence, you cannot be audited after that time frame has passed. Unfortunately, the statute of limitations is largely dependent on whether you have indeed filed the return and whether you have included fraudulent information on it.

To help you better understand the details of the IRS Statute of Limitations, we have prepared this guide. Note, though, that this is basic information. For an in-depth assessment of your case, please contact our tax experts.

 

What Is A Statute of Limitations?

In tax law, a statute of limitations is one of the most critical deadlines for the assessment of tax. It gives the IRS an X-year window to assess your tax files and attempt to collect your unpaid taxes. Just how many years back can the IRS go to assess these files depends on several factors. The truth is, though, that once the given time period is up, the IRS is obliged to stop its collection efforts.

Nevertheless, there are several exceptions to the general rule (see below for details) according to varying federal laws. This means that, under certain circumstances, like, for example, failure to file a tax return, the assessing period is extended. In some cases, it never starts to run and remains “open” perpetually.

It is, therefore, crucial that you familiarize yourself with the current exceptions, so you know what to expect and what your rights and obligations as a taxpayer, in each case, are.

 

How Long Is the IRS Statute of Limitations?

The general rule dictates that the IRS has the right to go through your tax files up to 10 years from the time of debt assessment which is the date your tax return is processed (not filed or received). In other words, the IRS can legally try to collect unpaid tax debt for up to 10 years from when your tax return was assessed. After the end of this ten-year period, the IRS must cease its collection attempts.

Now, here comes the confusion. The IRC (Internal Revenue Code) that governs federal tax laws in the USA was also published under the U.S. Code Title 26. So, don’t be surprised if you often see IRC statutes being referred to as statutes of limitations (i.e., the IRC § 6501 and 26 U.S. Code § 6501 share, more or less, the same details).

Irrespective of the format, the regulations established by both sets of code affect millions of taxpayers, including recording the taxpayer’s tax liability, the deadline for assessing tax, and other statutes of limitations.

26 U.S. Code § 6501(a), in particular, mentions that the IRS shall assess a taxpayer that owes taxes within three years after the filing of the return, regardless of when the return was filed (on or after the prescribed date). The exceptions referenced in this code are set forth under 26 U.S. Code § 6501(c), and give the Internal Revenue Service extra time to assess taxes in the following cases:

  • Up to 6 years – If there has been a significant omission of items, like, for example, an omission of a sum over $5,000. Also, if a taxpayer does not share specific details regarding their personal holding company return.
  • Unlimited amount of time – In case of tax evasion (a willful or deliberate attempt on behalf of the taxpayer to evade taxes). Acting with a lack of due care and negligence are two cases when this time extension does not apply. The rule also applies when the taxpayer files inaccurate or false tax returns (intentionally to evade taxes) or when they fail to file a tax return.

It becomes apparent that the federal law gives the IRS all the time they need to assess tax (even decades) when a taxpayer engages in fraudulent or intentional acts (i.e., reporting untruthful information on their income tax return). For that reason, it is crucial that you understand that, say, lying to an IRS civil auditor or even worse, an IRS Criminal Investigation agent about the prior tax fraud or tax evasion (in cases where tax evasion or fraud is suspected) gives the IRS and IRS Criminal Investigation Division unlimited time to prosecute you, especially when the last affirmative act of tax evasion took place in the 5- 6-year criminal statute.

Important Note: Depending on the specific criminal tax statute, the IRS can criminally prosecute income tax evasion in the following 5-6 years after the tax evasion attempt has occurred. This is a major consideration as the IRS won’t be simply civilly assessing additional tax that has no statute of limitations after tax fraud has been identified.

 

When Does the IRS Statute of Limitations Begin and End?

The clock of the statute of limitations begins to tick on the date your tax return is assessed (NOT when it’s sent or received) or of your account’s last activity, which is usually the date you last used your account or the date you last made a payment. Nevertheless, it may also include the date you entered a payment agreement, made a promise to pay, or acknowledged debt liability.

However, take note that you may hear from a debt collector even after the expiration of the statute of limitations. According to law, they can file a lawsuit against you at any given time. In case you are being sued for old tax debt, your tax attorney can try to avoid a judgment being entered against you by using the expired statute of limitations as your defense mechanism.

So, if you have an old debt, knowing whether the statute of limitations has expired or not will help you decide whether to leave that old debt alone or pay it off. This involves being aware of when your tax debt was assessed/processed (NOT when you sent your tax return or when it was received) – you will need to have your tax transcripts pulled to know these details.

 

Tolling Events — Events That Pause the Clock on the Statute of Limitations

Under certain circumstances, the statute of limitations can be tolled. This means that the running of the time period stops until a law-specific event occurs. When that happens, the taxpayer gets a time extension since the period of time set forth by the statute of limitations is either being delayed or paused/suspended.

However, it’s important to note that the length of time the statute of limitations was paused for the tolling event will extend the statute of limitations expiration date. So tolling events simply pause the statute of limitations but don’t actually shorten it.

Examples of tolling events are:

Filing for Bankruptcy

According to Chapter 3, the taxpayer gets a 3-month pause while Chapter 13 gives them 3 to 5 years.

Requesting an Offer in Compromise

This one adds about 12 months. However, the extra time is added to the original statute of limitations expiration date.

Lack of Legal Capacity

It applies when one of the parties involved is under a legal disability (i.e., mental illness) that does not allow them to initiate a legal action on their own behalf at the time the cause of action accrues. Once the disability is removed, the statute of limitations will begin to run again and will not be affected by subsequent disability unless the statute specifies otherwise.

Unconditional Promise to Pay

Either a debt acknowledgment or an unconditional promise to pay the due debt may toll the statute of limitations for obligation or debt. You will have to wait until the payment established by the acknowledgment or promise to pay has arrived before the suspension of the lawsuit that enforces payment of the debt. The period of limitations will begin again upon that due date.

Cause of Action Has Been Concealed (Fraudulently)

In this case, the statute is suspended until the action is discovered via the exercise of due diligence.

Note: Mere ignorance, failure, or silence to disclose the existence of a cause of action does not generally toll the statute of limitations. This is particularly true in cases when the facts could have been earned by diligence or inquiry. The statute of limitations is also NOT tolled (unless otherwise provided by the statute) if the taxpayer is absent from the jurisdiction.

 

How to Use the Statute of Limitations To Your Advantage

Sometimes the best way to take advantage of the statute of limitations is to simply let it run its course. We’ll use an example to illustrate.

Let’s say you’re a truck driver and back in 2006 you received a 1099 for the amount of $200,000 but only netted $50,000 because of the high costs associated with driving a truck. You avoided filing your taxes for that year and so the IRS eventually sends you a tax bill based on the entire $200,000. In reality, you should only have to pay tax on $50,000. But because the IRS filed for you with NO tax deductions and due to added penalties and fees, your tax debt is now $70k–more than you even made that year!

So you do what most people do–you go to a local tax filing company and they file an amended tax return and get your tax debt reduced to a certain extent. But you also still have IRS penalties and fees to deal with. However, if you had simply allowed the statute of limitations to run its course, you would have ended up owing the IRS nothing.

The key, of course, is to know exactly when the statute of limitations began. You or a tax expert would need to pull your tax transcripts to know that information.

You could also file for what’s called “Currently Non-Collectible Status” or get set up on a Partial Payment Installment Agreement (PPIA) based on a hardship status and make, for example, $25-$50 a month payments to the IRS until the statute of limitations expires. However, we should tell you that it’s very very difficult for an individual to get set up on a PPIA dealing directly with the IRS; it’s something that you will need the help of a tax expert to do.

Irrespective of your particular case, it is strongly advised to be represented by knowledgeable IRS tax experts with experience in statute of limitations cases and ways to make the most of them. So if you are facing IRS tax debt and collection, contact us and we will be happy to provide you with a free initial consultation, answer any questions that have been troubling you, and help you get out of this undesirable circumstance you have found yourself in.

Tax Planning for the Self-Employed

old tax returns and tax debt

Being self-employed gives you a unique opportunity to be your own boss. However, this level of freedom comes with great responsibility. For starters, you are called to take charge of your own retirement plan and, of course, pay your own FICA taxes (Social Security and Medicare). This means that you must understand and comply with your federal tax responsibilities.  This guide will help you get a pretty good idea of what tax planning should look like for you. We will also share valuable insights and tips to help you minimize your tax obligations. 

 

What is the Self-Employment Tax?

In a nutshell, it is the way the federal government funds Medicare and Social Security benefits. The only case you are not obliged to pay this tax is when you have a minimal amount of self-employment income. The way your self-employment income is calculated varies depending on your business structure. For instance, if you are a sole proprietor, statutory employee, or independent contractor and file Schedule C, your self-employed tax is the net profit listed on your Schedule C (or C-EZ). This must be included on your Schedule SE. 

 

Minimizing your Tax Obligations

1. Choose the Best Business Structure

As it has already become apparent, identifying what business structure best suits your needs is important for the self-employed. This decision will not only determine how much you pay in taxes, but also affect (1) the personal liability you face, (2) the amount of paperwork required, and (3) your ability to raise money. Your individual circumstances will pinpoint the structure that makes the most sense, though. You can choose among the following business entities:

  • Partnership – You share the losses and profits of a business with two or more people. This means that you don’t bear the benefit of losses-profits or the tax burden of profits all by yourself. During tax time, each business partner files a Schedule K-1 form that indicates their share of income from the business, tax credits, and deductions. As for the losses, these are passed through to the partners, who report them on their individual tax reruns. On the flip side, each partner is personally liable for the business’ financial obligations. Plus, partnerships require more extensive accounting and legal services than sole proprietorships. Hence, they are costlier to establish. 
  • Sole Proprietorship – The most common business structure. It offers the owner complete managerial control and is very easy to form. Nevertheless, the owner is held responsible for all their business financial obligations. Tax-wise, a sole proprietorship business owner includes income and expenses from the business on form 1040 (their personal income tax return). The losses and profits are recorded on Schedule C (a tax form) that is then filed along with their 1040. Finally, the Schedule C “bottom-line amount” is transferred to their personal tax return. Worth noting is the fact that your business earnings are taxed once
  • LLC (Limited Liability Company) –  It is a hybrid form of partnership that enables business owners to benefit from the advantages of both the Partnership and Corporation forms of business (i.e., owners bear no personal liability, losses and profits are passed through to owners without taxation of the business). LLCs are great entities for tax purposes as they enable owners to enjoy liability protection skipping the double taxation of corporations. They also offer more attractions to business owners than S-Corps (i.e., no shareholder limitations. However, they usually dissolve after 30-40 years.
  • C-Corporation (or C-Corp) – It is a legal entity that is separate from the individuals that found the business. A corporation is taxed and held liable for its actions pretty much like a person (liability protection for the owners). This is perhaps the biggest advantage of going for a Corporation business structure – the owner does not have any personal liability. The extensive record-keeping required, alongside the cost to form a corporation, though, are the primary disadvantages. Plus, corporation owners pay a double tax on the earnings of the business. 
  • S-Corporation (or S-Corp) – You may choose the S-Corp (aka Subchapter corporation) structure that enables losses and income to be passed on individual tax returns (single-level federal tax to be paid). Usually, an S-Corp structure is offered to companies with no more than 75 shareholder returns and provides business owners with the liability protection of a corporation. 

The type of business format that best suits your requirements will primarily depend on the following three factors

(1) Record-keeping – How much paperwork is required? Are you up to it? Can you bear the cost of paperwork and record-keeping, along with the costs related to incorporation? Remember that administrative requirements like that can eat up your time, which can, consequently, create costs for the company. But, if you are benefiting from protection from liability and tax implications, a corporation is a good option. In any other case, you would be better off with a sole proprietorship, especially if you own 100% of the business. 

(2) Taxation – There are much fewer tax options available to partnership and proprietorship than to corporations. For example, a self-employed that receives a 1099 pays an additional self-employment tax. Those that do not make much is best to choose a sole proprietor business entity. As for those making at least $50,000 and are 1099’d, it would be better to create a corporation business structure, depending on the number of employees, business owners, and the size of the business. 

(3) Liability – To what extent do you need to be held legally liable for potential losses related to your business? Can you afford the risk of the potential liability? If not, then a partnership or sole proprietorship may best be avoided. 

2. Make Your Estimated Tax Payments on Time

This is a major consideration as it will help you avoid penalties. Ensure you (1) set up estimated tax payments and (2) make the required quarterly estimated tax payments (using Form 1040-ES) to cover both your self-employment tax and income tax liability. Note that you may also need to make estimated tax payments to avoid getting penalties and receiving a big tax bill at the end of the fiscal year. And, don’t forget your periodic tax responsibilities if you have employees (see IRS Publication 15 for more information). The IRS has an automated payment system called EFTPS that you can use for your payments. We strongly advise you to opt for monthly payments as it is easier to stay current than with quarterly payments. This also helps prevent the IRS from penalizing you for not paying your due (quarterly) tax on time. 

Tip: You can save taxes by employing family members (not minors), which allows you to shift income to your relative. That way, the business takes a deduction for employee compensation (ensure it is a reasonable amount), which reduces the business taxable income that flows to you. 

3. Establish an Employer-Sponsored Retirement Plan 

This will not only allow you to take care of your own retirement needs but also provide you with several tax benefits by enabling your business to be eligible for an immediate federal income tax deduction (expenses to fund the plan). Such employer-sponsored retirement plans worth considering are SIMPLE IRA, SEP, SIMPLE 401(K), Keogh plan, and Solo (or one participant or individual) 401(k). Note that until you withdraw earnings and contributed funds, you will not need to pay any federal income tax. IRS Publication 560 has more details about these schemes. You may, however, call us and let us guide you appropriately. 

4. Take Advantage of Business Deductions

Your business is entitled to deductions that reduce your taxable income. Make sure you use every single one of the offered deductions to deduct business expenses, including equipment costs, utilities, office expenses, and rent. Just ensure your business expenses are considered necessary, common, and accepted in your business or trade. Also, using the cash method of accounting allows self-employed taxpayers for greater maneuverability at the end of the year. 

Tip: You may also deduct self-employed healthcare-related expenses (up to 100% of the health insurance cost you provide for yourself, your dependents, and your spouse). Note that your contributions to HSA (health savings account) are also deductible. 

 

Two Effective Ways to Sidestep the 13.25% Self-Employment Tax

1. Become  a Partnership. 

The first would be to become a partner and make K1 distributions (aka guaranteed payments) to yourself.

2. Become an S-Corp.

The second option is to become an S-Corp. Whichever business structure you choose will enable you to sidestep the self-employment tax.

Here’s a savings example to get an idea of what we are proposing here:

Let’s assume that you make $100K and write $50K for business expenses. According to the current federal tax laws, you will be called to pay around 20% tax PLUS the 13.25% self-employment tax. As an S-Corp, though, you will NOT have to pay the 13.25% tax – the profit would be a K1 distribution. 

Important notes:

  • You must file an 1120-S. 
  • Ownership pulls must be consistent (for example, $5K every month).
  • The IRS wants to see one or more W2, which could be yourself. 

 

Make Sure You Do Your Bookkeeping

You may either want to outsource bookkeeping or use platforms like QuickBooks. When it comes to calculating estimated payments and paying the right tax amount on time, bookkeeping with the help of a software or by trusting a reliable and experienced tax accountant makes things far easier. 

As you can see, there are legitimate (aka legal) ways to save money on your taxes while being self-employed.  It’s simply a matter of planning well, staying on top of things and taking advantage of all possible tax savings strategies.