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 In the event that you do not do so, the IRS is taxing you at a 50% rate on all of the money that you should have withdrawn.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.

We are a Bellevue CPA firm with meeting locations in Bellevue! Call us at (425) 483-6600 for a tax consultation!

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” 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″

Remember we’re a Seattle and Bellevue CPA firm! Take a look at our Seattle CPA profiles!

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

fairtaxThe 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

remember payroll taxesThings 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

Tax-DeductionsWith 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.

Thanks for reading our blog post! We’re a greater Seattle/ Bellevue CPA firm.

7 Tax Tips for the Self-Employed (Small Business Webcast)

If you read our blog post on what to consider as a freelancer, a great follow up you’re going to need to watch is this video from Small Business Webcast.

We’re discussing “7 Tax Tips for the Self-Employed.” It will take you through entity selection to highlight and explain some of the best deductions available to people who run their own businesses–from hiring your children to writing off meal and entertainment expenses.

Take a look:

 

Be sure to check out Small Business Webcast for our regularly updated webcasts on tax, accounting and small business topics including our database of recorded webcasts.

If you’re looking for the a highly skilled and knowledgeable team of Bellevue CPAs, you’ve come to the right place … Be sure to take a look at the services we offer our clients!

Calculating Estimated Payments Is Easier Than You Think

businessman thinkingOne tax-related issue that a large number of people deal with when they’re first starting out as freelance employees or 1099 independent contractors is the concept of estimated payments. For those unfamiliar, in a normal work environment your employer is taking taxes out of your check every week to send to the federal government. The employer usually takes a significantly larger amount of money than you actually owe out of each check, which is why some people get large refunds when income tax season rolls around. When you’re a freelance employee or independent contractor, no employer is taking taxes out of your check because you are your own boss. Instead of paying every time you receive income, the IRS only requires that you pay four times per year. These are called quarterly income tax payments.

The problem that many people run into has to do with accurately figuring out how much they owe at any one time. The income of a freelance employee can fluctuate wildly – some months will certainly be better than others. Many people get overwhelmed when trying to calculate these totals, especially since you can incur severe penalties if you don’t send 90% of the total balance due by your January payment. In reality, the process of calculating how much you owe is surprisingly simple.

Watch this video on all the different applications of a 1099 misc tax form:

If you’ve been freelancing for a few years, all you need to do is send one quarter of the amount of money in tax that you owed the previous year with each quarterly payment. If you owed $10,000 in taxes in 2013, for example, you can divide that number by four and send $2,500 with each quarterly income tax payment.

If you’ve only been freelancing for a year, the process of calculating how much money you’ll owe is still simple. Figure out the average amount of money that you make per week and multiply that number by 52. The number you arrive at will be the total amount of money that you expect to make during that calendar year. Don’t worry if your income continues to fluctuate throughout the year – even if you’re off by several hundred or even several thousand dollars, you’ll still come close to the 90% requirement by the time you make your fourth and final estimated tax payment in January.

  • If you need advice on how to hire a 1099 contract employee, take a look at our Landlord’s Tax Guide, and we’ll show you how.

Next, go online and look at the income tax bracket breakdowns for the year in question. Based on your income, you’ll be able to use those numbers to find out the total amount of money you’ll need to send when all four payments are combined. Once you have that total, divide that number by four to arrive at the total amount of money you’re supposed to pay with each quarterly payment.

If your income fluctuates wildly, you can also calculate each payment as it happens. Figure out the total amount of money that you made since your last payment using payment receipts or invoices. Using your tax bracket as a guide, multiply that number by the percentage of your income that you are required to pay for taxes. The number you arrive at is the total amount of money you’re supposed to pay for that single payment. Repeat that process every few months during the year as additional payments become due.

Thanks for reading our informative article on calculating estimated payments!

Remember Huddleston Tax CPAs is a greater Seattle area and Bellevue CPA firm give us a call at 425-483-6600!

Private Use of Rental Property

The guidelines associated with the personal and leasing utilization of premises are included in this article in the Landlord’s Tax Guide. This may be either because you are leasing out a space in the same property which you are living in, or you have got a vacation residence that you might privately employ a few weeks out of the calendar year and rent the remainder of the time. This information will not apply to you at all if you never use your rental property for personal use. However, if you do, you will want to keep reading.

Property rented for less than fifteen days. Any time you leased your property for less than fifteen days total in the past year, you don’t have to file any of your rental revenue. If this is the scenario, then the real estate property is going to be considered personal for taxation considerations, and on Schedule A of Form 1040, it is possible to deduct any of the property associated expenditures as personal.

Employing Your Holiday Home as a Part Time Rental

Personal use test. It’s important to work with some type of numeric formula to determine the total number of days during which the rental property was used for personal use. That is the personal use test. How you deduct your rental expenses is going to largely be determined by whether or not the personal use test is satisfied. Finding out the actual quantity of days in the past year in which the real estate property was leased out at fair market value is the initial step in calculating the personal use test. The next step is to multiply that number of days by ten percent. We will label the outcome the “total days rented” or “TDR” for short. The next stage will be to figure out how many days the rental property was employed for private use. We can label this “personal use days” or “PUD” abbreviated. Look at the table below for a vision of the personal use test.

NOTE: “Personal use” consists of use by you, any other owners of the home and property, plus the families of all individuals who own the property, unless of course your family member is paying out rent at fair market value.

If TDR is…

and PUD is…

then the personal use test is…

over 14

less than TDR

not satisfied

under 14

less than 14

not satisfied

over 14

more than TDR

satisfied

under 14

more than 14

satisfied

 

If test is satisfied. If the personal use test is satisfied, you will deduct your rental expenses only to the extent of the rental income. A net rental loss will not be attainable, but when there are any additional expenditures you do not write off this year, they can be moved forward to later years, provided that there is an adequate sum of rental earnings in the tax year in which you claim them.

If test is not satisfied. Your own leasing costs will never be restricted by the rental income if the personal use test is not satisfied. You could deduct your rental costs and also have a net rental loss. There could be a few passive activity rules, however, which may still restrict the rental loss tax deduction.

Computing all of your rental expenditures. A number of expenses should be allocated between leasing and personal application. These include expenditures that will have already been charged no matter the use, such as real estate taxes and mortgage interest. Find out the whole number of personal use days. Then, you will need to determine the total quantity of TDR. After that, divide rental days by the sum of PUD and rental days. The end result is the rental percentage. Finally, you have to multiply the total cost of your expenses by the leasing percentage that you have established, and then the result will be the rental deductible part.

Leasing a Section of Your House

You need to expressly allot all your costs in between private usage and leasing use if you rent out a part of your own personal home. The IRS allows a little versatility with the method you employ; just make sure it’s consistent from year to year. Some people choose the option of taking the number of rooms within their residence along with the number of rooms within the home, and divide them. Dividing the rented sq . ft . by the residence’s total sq . ft . is another option that lots of people go for. You’ll end up with rental costs and personal costs. Those allotted to the leasing income can be deducted as such, and you can use Schedule A of Form 1040 to deduct what’s left.


Bellevue CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. Since 2002, he has been the owner of his own small business, Huddleston Tax CPAs. He is a graduate of Washington State University and the University of Washington School of Law.

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  • Huddleston Tax CPAs – Bellevue, WA
    Certified Public Accountants Focused on Small Business
    40 Lake Bellevue, Suite 100 Bellevue WA 98005
    (425) 273-6512

    Huddleston Tax CPAs & accountants provide tax preparation, tax planning, business coaching,
    QuickBooks consulting, bookkeeping, payroll, and business valuation services for small business.

    We serve: Sammamish, Kirkland, Mercer Island, Seattle, Redmond, Issaquah, and areas throughout WA.
    We have a few meeting locations. Call to meet John C. Huddleston, J.D., LL.M., CPA, Lance Hulbert, CPA, Grace Lee-Choi, CPA, Jennifer Zhou, CPA, or Jessica Chisholm, CPA. Member WSCPA.