How to Know You Are at Risk for a Major Tax Penalty
If you are a taxpayer, more than likely you are worried about whether or not you will receive a tax penalty once you file your tax return. Therefore, today we are discussing how you can know you are at risk for a major tax penalty.
You Did Not Take Out Distributions
The IRS will hit you with a large tax penalty if you fail to take distributions from your various retirement accounts when you turn 70 ½ or when you go into retirement, whichever occurs later. In the event that you do not do so, the IRS is taxing you at a 50% rate on all of the money that you should have withdrawn. Think of this as one of the largest tax penalties that you will ever encounter.
How Long Do You Have to Take These Distributions to Avoid Penalties
It is suggested that at the latest you do it the week before Christmas. This is because you cannot wait until the last day of the year since the markets close early and once Christmas Eve comes in there is going to be so much going on.
Bottom Line
The major tax penalty that taxpayers will experience this tax season is the penalty they are hit with for not taking out distributions. Filing late and not paying estimated taxes are other penalties yet they have nothing on this one. Therefore, if it is time for you to take out your distributions make sure you do so soon.
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How to Estimate How Much Your Tax Refund Will Be
It is not uncommon for taxpayers to want to know how much their tax refund is going to be before they file their taxes. Today, we are going to discuss how to estimate how much your tax refund will be.
Use a Tax Refund Calculator
One of the easiest and quickest ways for you to estimate how much your tax refund is going to be is to use one of the free tax refund calculators available throughout the web. You will have to enter various information to receive and estimation but it will give you an approximate number to keep in mind.
Compare Your Tax Situation from the Previous Year
If your tax situation has not changed much from the previous year, you can expect to receive a return amount that is in close proximity to the amount that you received previously. However, if you have had changes to your tax situation it may be best to use a tax refund calculator so you can have an idea of how much money you can expect.
Read our article, “Myths About Income Tax Deductions”
Bottom Line
Keep in mind that when you are given an estimation of your tax refund that it is an estimation and not a set in stone amount. Therefore, you should never spend money based on an estimation that was provided to you or you could find yourself in a financial crisis if the estimation was not accurate and you end up receiving less money than what you originally expected. The only for sure way to know how much your tax refund is going to be is to file your taxes.
If you liked this blog post, be sure to take a look at our Shoreline CPA blog post: “Three Tax Changes That You Need to Be Aware of for 2015″
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Disadvantages of the Fair Tax Act
This is the third article on the Fair Tax Act. This week we discuss the disadvantages of the bill.
You can read the previous two articles here and here.
Enjoy this week’s blog post from Bellevue CPAs!
Critics of the system contend that those who earn no income and draw on their savings and other assets for living expenses will experience little or no benefit. The initial generation of those in this position will end up taking it from both sides as they paid income tax during their working years and now would pay sales tax during their retirements. Furthermore, since at least the majority of states would in all likelihood follow suit and change their tax systems as well, the effective tax rate could climb as high as 45%. And if certain items such as food or healthcare were excluded from the tax, the rate on remaining goods and services could conceivably rise another 20%!
There would, of course, also be the small matter of establishing another governmental agency to oversee this system. There is still some question of how exactly it could be implemented and enforced, and many doubt the ability of any agency to be able to adequately accomplish this. Advocates tout that even criminals would have to pay their share of taxes through their purchases of retail goods, but this element of society will obviously not be reporting the dealings they have amongst themselves.
Perhaps the biggest strike against the Fair Tax comes from academic research that suggests that 9 out of 10 taxpayers would pay more taxes under the Fair Tax system than they do now. Although it will affect the different economic layers of society somewhat differently, it would seem that the wealthy would end up paying less tax while the upper middle class would be hit the hardest. And, of course, all of the professionals who have spent years learning our current tax laws will have to find a new way to make a living.
Ultimately, we would simply have to enact the Fair Tax in order to see just how it would really play out. There are several variables here that are basically impossible to predict, and the risk that comes with uncertainty may be enough to prevent its creation. If you decide to vote for this proposition, be sure that you have as clear an understanding as possible of how it will affect you.
Benefits of the Fair Tax Act
This week’s post expands on the Americans for Fair Taxation post from last week with a discussion of a few of the benefits of the Fair Tax Act.
This tax system differs from many of the other flat-tax concepts that have been presented because it completely replaces our current system, while other options will retain at least a portion of our present structure. It is also designed to draw only the same amount of money out of the economy as what is due to the government without retaining any in and of itself.
One of the main benefits that Fair Tax proponents claim their system will provide is massive economic growth. Because the tax will only apply to consumer goods and services, wealthy investors and institutions will be motivated to invest in tax-free havens such as light and heavy industries, production facilities, charitable organizations and other avenues of commercial development that would create millions of jobs and develop our infrastructure. The tax system will be vastly simplified because we will not have to file any more income tax returns, which will lead to further savings because there will no longer be a need to fund the IRS.
Foreigners and other visitors from outside the country will also help to fund us with their retail purchases and could even provide financial equalization from illegal immigrants, since they would not be eligible to receive prebate checks. The system also promises to replenish the Social Security trust fund and provide citizens with greater freedom to choose how much tax they through their personal selection of goods and services.
Advocates of the Fair Tax have been quick to point out that Florida and Texas-two of the richest states in our country-use a state tax system that resembles their idea in several respects. England also experienced one of its most prosperous eras when it used a sales-based tax after the defeat of Napoleon.
Americans for Fair Taxation and The Fair Tax Act
The latest spate of scandals and cover-ups within the IRS has rekindled the cry by many for its replacement. Our current tax code is also hopelessly riddled with contradictions, loopholes and inconsistencies. One of the loudest voices calling for replacement and reform is the Americans for Fair Taxation, a group that advocates replacing the IRS with a consumption-based tax system that would assess a flat tax for citizens who purchase goods and services. This fledgling movement is known as the Fair Tax Movement, which has grown from grass-roots advocacy in 2003 to become a major lobby group that has also gained support at the state level.
If it is enacted, the Fair Tax will effectively sweep away our entire current tax system and bring an end to the IRS. The Fair Tax will completely replace all income, gift, estate, trust, corporate, inheritance and partnership taxes with a single sales tax at a uniform 23% rate that will be assessed on the purchase of goods and services which will be collected by retail merchants in the same manner as state sales taxes and administered by a new governmental agency. However, the tax does not apply to all types of goods and services; used goods and anything that is used to produce other goods will be exempt. Goods that are imported from outside the U.S. are also excluded from this levy. And while the rate of tax is uniform for all payers, the systems aids those who live at or below the poverty level by giving each household a “prebate” check each month that is equivalent to a twelfth of the amount that the government determines a family or person at that income level spends each month. This money is designed to reimburse the poor for what they will pay in taxes on the goods and services that they must buy in order to survive.
This is the first part of our look at this particular tax issue. Check back next week for more about Americans for Fair Taxation and The Fair Tax Act. We’ll be discussing a few of the pros and cons of this once upon a time grassroots movement. Remember Huddleston Tax CPAs are Bellevue CPAs. Get in touch with us!
Things to Remember When Filing Your Taxes
Things to Remember When Filing Your Taxes
Tax season is no one’s favorite time of year. Filing taxes can be stressful and difficult for those who are unprepared. This tax season make sure you are prepared by keeping these key tips to remember when filing your taxes is mind.
Ask Questions
Regardless of whether it is your first time filing taxes or your tenth, if you have questions about anything, you need to ask a tax professional. Each year tax laws change and if you are not up to date on them, it is possible that you could make an honest mistake that could result in a penalty or an audit.
Know the Tax Terms and Forms
Before filing your taxes, you have to be aware of the various tax terms and tax forms. Tax terms such as AGI, deductions, and credits are important to know as well as forms such as 1099, EZ forms, and W-2. Having knowledge of the tax terms and forms insures that you are preparing your tax forms correctly and are not overpaying in taxes.
Take Deductions and Credits
Deductions and credits are important to be aware of because they decide how much money you will pay to the IRS or how much you will get back. Not claiming tax deductions and credits, results in you not getting the most of your hard-earned money back or over paying in taxes. If you have a professional file your taxes for you, they should be up to date with the credits and deductions that you are eligible to receive.
Meet the Filing Deadline
April 15 is always the deadline to get your taxes filed. Therefore, since this date never changes you should always be prepared to have your taxes filed before this date. If you do not file your taxes by this date, you will be penalized. Even if you owe money and do not have it available to pay, you are still responsible for filing your taxes. After filing, the IRS will be happy to set you up on a payment plan so you can avoid having your income garnished.
Bottom Line
Filing taxes is something that has to be taken seriously. If you follow the tips that we have provided you with today in this article you will find filing your taxes to be easier.
Myths About Income Tax Deductions
With something as sensitive as your taxes, certain pieces of information naturally begin to spread like an urban legend over time. If you’re new to the world of freelancing and talk with a friend who has been freelancing for years, you may here something like “Don’t take a specific deduction because it’ll definitely get you audited” or something of that nature. By understanding more about these myths about income tax deductions you can begin to separate fact from fiction and will become much more comfortable with the concept of deductions in general.
The Home Office
One of the biggest myths about income tax deductions is that writing off your home office is a sure fire way to get audited. That may have been true in the past, but studies have shown that more people are working from home than ever before. The IRS no longer singles out people taking home office deductions for audits, if they ever did in the first place. What can get you audited with regards to this deduction, however, is failing to follow directions or not providing every last bit of relevant data. So long as you qualify for the deduction, you’ll be fine.
Losses
It’s common knowledge that if you operate a business and the profit from that business is outweighed by your expenses throughout the year, you’re entitled to write off a certain percentage of those losses as a deduction. The total amount changes depending on the type of business and how much money you make. One of the most prevalent myths about income tax deductions, however, is that you’re allowed to do this indefinitely.
In reality, the IRS is very strict about how long you can claim losses for a business on your income taxes before something has to change. If your business experiences losses for longer than five consecutive years, the IRS will definitely begin to take a closer look at your income taxes moving forward. At the same time, if your business is losing a huge amount of money each year for five years and it looks to continue to do so for the foreseeable future, it may be time to give something else a try anyway.
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