The federal income tax is one of the most complicated innovations in human history. But, we’re going to try and simplify the whole enchilada with this handy federal income tax guide.
Use it as a reference to help you prepare your tax return. It’s a “high altitude look” at dozens of tax issues, just to keep you on track.
You’ll need to do a deep dive to get more information if anything about your tax situation is the least bit unusual.
2019 Tax Guide
- Do You Need to File a Tax Return?
- How to Determine Your Tax Filing Status
- Tax Preparation Tips
- Tax Rates for 2018
- Tax Law Changes for 2018
- Tax Law Changes for 2019
- Tax Deductions and Credits
- Tax Gift and Inheritance Rules
- Tax Considerations for Your Children
- Tips to Pay Your Taxes
- How to Lower Your Tax Bill
This is the updated Federal Income Tax Guide 2019 for 2018 tax preparation.
As you probably know, the tax code was largely rewritten for 2018 and subsequent years due to the Tax Cuts and Jobs Act passed in December 2017.
As that legislation is so recent, tax changes are still being worked out and tweaked, but we’ll get as close to the most recent updates as we can.
Do You Need to File a Tax Return?
If you don’t know if you’re required to file an income tax return, you can use the IRS Do I Need to File a Return tool.
But, here are the general requirements:
You are required to file if your income exceeds the following limits for 2018:
- Single, under 65 – $12,000
- Single, 65 or older – $13,600
- Married filing jointly, both spouses under 65 – $24,000
- Married filing jointly, one spouse 65 or older – $25,300
- Married filing jointly, both spouses 65 or older – $26,600
- Married filing separately, any age – $12,000
- Head of household, under 65 – $18,000
- Head of household, 65 or older – $19,600
- Qualifying widow(er) with dependent child, under 65 – $24,000
- Qualifying widow(er) with dependent child, 65 or older – $25,300
You will still need to file a tax return if any of the following apply:
- You had at least $400 in self-employment income. This will also extend to freelancers, people with side businesses, and anyone who engages in gig work.
- You owe household employment taxes.
- Social Security and Medicare taxes owed on unreported tip income.
- You received a distribution from a medical savings account (MSA) or a health savings account (HSA).
- You received an advance payment on the Premium Tax Credit.
- Expect to qualify for the earned income tax credit (EIC).
- You’re claiming education credits and must file to be refunded under the American Opportunity Credit.
- You want to claim a refundable Health Coverage Tax Credit.
- You adopt a child and want to claim the Adoption Tax Credit.
- You had wages of $108.28 or more from a church or qualified church-controlled organization exempt from employer Social Security and Medicare tax.
How to Determine Your Tax Filing Status
There are five basic tax filing statuses:
- Married filing jointly (MFJ): This is generally the most beneficial filing status, since it offers lower tax brackets and a higher standard deduction. You’re eligible if you’re married as of December 31 of the tax year.
- Married filing separately (MFS): This will usually result in higher tax liability. But, there are times when it makes sense. This can happen when one partner is self-employed and makes much less money than the other. It can also make sense if one partner has a much higher level of deductible itemized expenses. You may also want to file separately if you lived apart during the year.
- Head of household (HOH): You can claim this status when you are a single taxpayer, legally separated, or when your spouse didn’t live with you during the second half of the tax year. But, here is the determining factor: you must have a qualifying child or dependent for which you paid at least half of their support. You don’t qualify for this status if you are otherwise married, or your spouse spent even one night in the same residence as you. You may need to provide specific documentation to prove the status (separation agreement, evidence of separate residences, documentation that you provided more than half of the dependence support).
- Single: This is your tax status if you are not married – or legally separated – as of December 31 of the tax year.
- Qualifying Widow(er): You must have a qualifying dependent to be eligible for the status. It enables you to have the same tax benefits as if you are married filing jointly. You are only eligible for this status in the year in which your spouse died, and the following year.
Tax Preparation Considerations
DIY Tax Preparation
Millions of people are now preparing and filing their own tax returns.
This is easier to do than ever, since there are so many affordable tax preparation software packages.
Even if you don’t know much (or anything) about preparing taxes, most are incredibly user-friendly.
All you need to do is gather your information and put the required numbers in the boxes.
If you decide to DIY your taxes this year, you’ll have no shortage of tax software options.
The key is finding the best price and features for your needs.
We’ve compiled our list of the best tax software, and these programs top the list:
- TurboTax: Learn more in our review, or sign up for TurboTax here.
- H&R Block: Learn more in our review, or sign up for H&R Block here.
- TaxAct: Learn more in our review, or sign up for TaxAct here.
CPA vs. Enrolled Agent (EA)
If you still don’t feel comfortable preparing your own taxes, or if you’re tax situation is incredibly complicated, you can use a tax professional.
The two most reliable preparers are certified public accountants (CPA) and enrolled agents (EA).
A CPA is a professionally licensed accountant who works in public accounting and usually prepares income taxes.
To get the license, you have to pass a rigorous multi-day examination, and meet certain state-issued education and experience levels.
CPAs are best used by people who have the most complicated tax returns.
EAs aren’t accountants (or CPAs), but they are licensed to prepare taxes, as well as represent their clients before the IRS.
They generally charge lower preparation fees then CPAs.
A Checklist to be Ready to File
No matter how you decide to prepare your taxes, you’ll need to assemble all the documents needed.
Having them available will make the entire preparation process much easier.
The most basic information you need to have available includes:
- Social Security numbers for each member of your household
- Complete copies of the prior year’s income tax returns (you’ll need these to provide any carryforward information)
- Income information for your dependent children
- Home office information (if you plan to take the deduction) – square footage of your office, and of your home
- Your ex-spouse’s Social Security number if you receive or pay alimony or child support
- Marketplace exemption certificate, if you received an exemption from your state’s health insurance exchange
- W2s from any employment sources
- 1099-MISC for additional income for which income taxes were not withheld (like contract income)
- 1099s reporting Social Security income, interest, and dividends; pension, IRA or annuity income; state income tax refund or unemployment insurance; or reporting the sale of stock or other securities
- K-1’s reporting partnership or S-Corporation income
- W-2G reporting gambling winnings (you should also have records proving gambling expenses)
- Documentation of alimony received, including the Social Security number of the payee
- If you’re self-employed, a complete accounting of all your business income
- Evidence of rental income received if you own investment property
Documents for Reporting Expenses
Potentially tax-deductible expenses are reported on the following documents:
- 1098 reporting mortgage interest and property taxes paid, educational expenses, and student loan interest paid
- Statements from charities reporting contributions
- 1095-A, 1095-B, or 1095-C, reporting health insurance premiums paid, and to whom
- Various forms 5498 reporting IRA, HSA or ESA payments made during the year
There are a lot of situations involving tax-deductible expenses that are not neatly reported on a government form from third-party sources.
You may also need documentation for the expenses in the following section.
Expenses That May Require Additional Documentation
- Documentation of all self-employment expenses
- Expenses for rental property
- Documentation for the purchase of depreciable assets for business or investment activity
- Property taxes paid but not reported on Form 1098 by a lender
- Federal and state-estimated tax payments made for the tax year
- Cost basis of investments sold (if the information is not provided by a broker)
- Indirect expenses related to investment activity
- Documentation of alimony paid
- Receipts from the purchase of energy efficient equipment installed in your home
- Charitable contributions made but not reported by the receiving organization
- Mileage driven for business, employment, medical or charitable activities, as well as records of payment for tolls, parking, and ad valorem taxes
- Evidence of payment of health insurance, out-of-pocket medical, dental and vision expenses, medical mileage, and long-term care insurance
- Childcare expenses paid, if not supplied by the provider (including the provider’s tax ID number)
- Wages paid to a domestic care provider, including that provider’s tax ID number
- An itemized list of higher education expenses paid out-of-pocket, with documentation
- Moving or job hunting expenses
- Cost of preparation of last year’s income tax returns
- Sales tax paid on major purchases
Federal Income Tax Rates for 2018
Tax Bracket / Filing Status
Married Filing Jointly or Qualifying Widow
Married Filing Separately
Head of Household
$0 to $9,525
$0 to $19,050
$0 to $9,525
$0 to $13,600
$9,525 to $38,700
$19,050 to $77,400
$9,525 to $38,700
$13,600 to $51,800
$38,700 to $82,500
$77,400 to $165,000
$38,700 to $82,500
$51,800 to $82,500
$82,500 to $157,500
$165,000 to $315,000
$82,500 to $157,500
$82,500 to $157,500
$157,500 to $200,000
$315,000 to $400,000
$157,500 to $200,000
$157,500 to $200,000
$200,000 to $500,000
$400,000 to $600,000
$200,000 to $300,000
$200,000 to $500,000
2017 Tax Law Changes for 2018
Lower tax rates.The tax rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37% shown above replace the previous rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% on the same income brackets.
Standard deduction has increased. The 2017 standard deductions were $6,350 for singles, and $12,700 for married filing jointly. Under the reform bill, they’ve increased to $12,000 for singles and $24,000 for married filing jointly.
Form 1040 only. For 2018 and beyond, 1040A and 1040EZ have been eliminated.
Miscellaneous deductions eliminated completely. Deductibility of moving expenses, mortgage insurance premiums, job-related expenses, and other miscellaneous deductions have been eliminated for 2018 and subsequent years.
Changes for Families
Personal exemptions are gone. For 2017 you could claim $4,050 per eligible dependent. That included yourself, your spouse, and any dependents you have. That’s gone under the new law. The personal exemption has been eliminated for 2018 and beyond.
Increase in the child tax credit.The credit increases to $2,000 for 2018, from $1,400 in 2017. It’s subject to being phased out, beginning with a modified adjusted gross income of $200,000, or $400,000 if married filing jointly.
“Kiddie Tax” changes. Through 2017, if a child had more than $2,100 in unearned income, his or her income would be added to the parent’s taxable income, to be subject to their generally higher tax rates. But, for 2018 and after, the tax treatment has been simplified.
- The first $1,050 in unearned income by the minor is tax-free.
- Above $1,050 is taxed at the child’s rate, not the parent’s rate. The child must be either under 19 years old or under 24 years old and a full-time student.
Changes for Small Businesses
Qualified business income deduction. Small businesses may be able to deduct up to 20% of their qualified business income, plus 20% of qualified real estate investment trust dividends, and qualified publicly traded partnership income.
The deduction phases out with incomes between $157,500 and $207,500 for singles, and between $315,000 and $415,000 for married filing jointly.
This one is a bit complicated, so if you’re self-employed you’ll need a good tax preparation software or the services of a tax professional.
Changes to Mortgages
Reduction in mortgage interest deduction. After December 15th, 2017, the interest deduction will be limited to loans up to $750,000, or $350,000 for married filing separately. (The old law allowed you to deduct interest paid on a home mortgage of up to $1 million.)
You can continue deducting mortgage interest on up to $1 million of indebtedness on loans taken before that date.
But, any new indebtedness will be subject to the new limits.
Changes to State Taxes
Deduction for state income, real estate, and sales tax limited. For 2018, your deduction is limited to $10,000 if you are married filing jointly, or $5,000 if you’re married filing separately.
The deduction limit applies to all state and local taxes paid, not to each tax type individually.
Under the previous tax law, there was no limit on how much you could deduct.
Changes to Mileage Allowances
Mileage allowances increased. The mileage allowances for 2018 are as follows:
- Business mileage – 54.5 cents per mile
- Charitable mileage – 14 cents per mile
- Medical and moving mileage – 18 cents per mile
Changes to be Aware of for 2019
There are several changes in the new tax law that won’t go into effect until 2019, but you need to be aware of them for 2018.
The elimination of the Affordable Care Act penalty. It’s widely believed the penalty for not having health insurance coverage under the ACA has been eliminated, but will not happen until the 2019 tax year. It still applies for 2018.
The elimination of alimony as a tax factor. It’s still deductible by the payor and taxable to the recipient under existing divorce decrees. But for divorce decrees issued after December 31, 2018, it will no longer be a tax consideration for either party.
Lower medical expense deduction threshold. If you itemize your deductions, you can still deduct unreimbursed medical expenses that exceed 7.5% of your adjusted gross income in 2018. But, that percentage rises to 10% of AGI in 2019.
Income Thresholds for the Alternative Minimum Tax (AMT) Increase
The AMT is a special tax provision designed to prevent high-income taxpayers from avoiding taxes through tax breaks. Those breaks can be either preferential income sources or excessive deductions.
It imposes a higher tax rate on your income with the preference items added back.
The income threshold has been increased for 2018, removing the AMT threat from many middle and upper-middle income taxpayers. The income thresholds are as follows:
- Married filing jointly and surviving spouse – $109,400 (exemption phase-out begins at an income of $1 million).
- Single – $70,300 (exemption phase-out begins at an income of $500,000).
- Married filing separately – $54,700 (exemption phase-out begins at an income of $500,000).
Net Investment Income Tax (NIIT)
The Net Investment Income Tax, or NIIT is another provision of the Affordable Care Act. Since 2010, the NIIT extends the Medicare tax at a rate of 3.8% to investment income for those with certain high-income levels.
For 2018, those income thresholds are as follows:
- Married filing jointly – $250,000
- Married filing separately – $125,000
- Single – $200,000
- Head of household – $200,000
- Qualifying widow(er) with dependent child – $250,000
If your adjusted gross income exceeds these levels, the tax will be applied to net income from rents, royalties, interest and dividend income, capital gains, and annuities.
The Net Investment Income Tax will also apply to any passive income from your trade or business, so be sure to factor those ventures in.
Tax Deductions and Credits
The standard deduction for 2018 is as follows:
- Married filing jointly and surviving spouses – $24,000
- Heads of household – $18,000
- Single, or married filing separately – $12,000
You can itemize your deductions if they exceed the limits above. Itemized deductions include medical expenses (in excess of 10% of your AGI). Taxes (state, local, real estate, and sales taxes) and mortgage interest are subject to the limitations discussed earlier, and charitable donations are still fully deductible.
New for 2018
The phase-out for itemized deductions that used to apply to high income taxpayers has been eliminated.
That means there is no longer a limit on how much you can deduct.
In addition to standard deductions and itemized deductions, the IRS has dozens of credits that directly reduce your tax liability.
Some of the more popular tax credits include:
Earned income tax credit (EIC). This credit is generally available for low income taxpayers.
It’s based on adjusted gross income, earned income, and investment income.
Education credit. For expenses related to higher education.
Child and Dependent Care credit. This credit applies to dependents under age 13. It’s also available for the care of a spouse or dependent of any age who is incapable of taking care of themselves. It provides a credit of up to 35% of the qualifying expenses, based on adjusted gross income.
Savers Tax credit. This credit applies if you make contributions to a retirement plan. The credit can be as high as $2,000 for single filers, and $4,000 if you’re married filing jointly. The income thresholds are fairly low, but it’s worth applying for if you make a retirement contribution and you have a moderate income.
Tax Deductions and Credits for Small Business Owners
Generally speaking, any expense that’s used in the production of self-employment income is tax-deductible.
The most typical self-employed business expense deductions include:
- The cost of inventory sold
- Expenses connected with the rent, ownership, and operating of business property
- Business use of your home, if any
- The costs and expenses for vehicles purchased by and for your business
- Costs and expenses of equipment purchased for your business (Note: you can deduct up to $1 million paid for business equipment under Section 179 depreciation in the year of purchase)
- Expenses related to the business use of a personal vehicle
- Sales, marketing, and advertising costs
- Legal and professional fees
- Business-related education costs
- Start-up costs (usually amortized or depreciated over several years)
- Business insurance premiums paid
- Interest on business-related loans
- Travel expenses for business purposes
- Meals and entertainment (subject to a 50% limit)
- Phones and Internet usage
- Postage and delivery costs
- Miscellaneous office and business expenses
- Contributions to self-employed retirement plans – IRA, Solo 401(k), SEP, or SIMPLE IRA
Keep accurate records of all business-related expenses throughout the year so that you can take advantage of any that apply to you.
Tax Deductible Medical Expenses
There are two ways that you can deduct medical expenses:
By itemized deduction. If you itemize your deductions, you can write off medical expenses.
But, there is a catch – they are only deductible to the extent that they exceed 7.5% of your adjusted gross income (AGI).
If your AGI is $100,000, then you will only be able to deduct medical expenses to the degree that they exceed $7,500.
Medical expenses can include:
- Premiums paid for health insurance (not as part of an employer-sponsored plan), including Medicare premiums (if you’re self-employed, you can deduct the full amount of health insurance premiums paid, without having to itemize deductions)
- Out-of-pocket costs for medical, dental, and vision
- Uncovered medical expenses
- Prescription drugs not covered by insurance
- Medically necessary travel expenses
- Medical mileage
- Deductibles and copayments
- Premiums paid for long-term care insurance
Paying through a Health Savings Account (HSA). You can set up an HSA either through your employer or on your own through a bank. By paying medical expenses (not including insurance premiums) through the account, you can deduct up to $3,450 if you’re single, and up to $6,900 if you’re married filing jointly. You don’t need to itemize your deductions to take advantage of this program.
Tax Deductions for Charitable Deductions, Including Clothing
You can deduct charitable contributions, but only if you itemize your deductions. Cash donations are easy enough to prove.
You’ll typically get a statement from the charity acknowledging how much you’ve contributed throughout the year.
If not, you can use copies of canceled checks or other written evidence of your contributions.
Less certain is donations of items, like clothing.
It’s common for people to give clothing donations to organizations like Goodwill and the American Kidney Association.
When you do, you can estimate the value of the items given, unless the organization provides you with some sort of written evidence.
You can list the items donated, and use different estimates of value. One of the most common is what is referred to as Thrift Shop Value.
You can do this on items totaling up to $500. If the value is higher than $500, you’ll need to file IRS Form 8283, Noncash Charitable Contributions.
Tax Gift and Inheritance Rules
IRS Gifting Rules
A major area of confusion with gift taxes is who pays it?
It would seem logical that the recipient of the gift pays the tax, but that’s not how it works. Under IRS regulations, it’s the giver of the gift who pays the tax.
Generally speaking, the gift tax comes into the picture only when you are transferring money to someone other than your spouse.
It often does apply when you’re transferring money to your children. Most people won’t be affected by the gift tax, which is also closely tied to the estate tax.
For example, for 2018, taxpayers have a lifetime exclusion of $5.6 million, or $11.2 million for married couples. The tax is only applicable on amounts that exceed that limit.
For 2018, you can gift up to $15,000 without incurring the gift tax. If you exceed that amount in any given year, you can apply the gift as a reduction of your lifetime exclusion.
This can be done by filing IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, which will apply the excess against your lifetime exclusion.
Understanding Estate/Inheritance Tax and Inherited IRA Rules
Estate tax – a.k.a., inheritance tax– is closely tied to gift taxes (gifts are essentially an advance on an inheritance).
Much like the gift tax, they don’t apply to money inherited by your spouse, but can apply to your children.
Once again, they are due only on estates with a value of more than $5.6 million (for 2018) or $11.2 million for married couples.
The estate tax – sometimes known as the death tax– can be as high as 40% of the estate transferred, beyond the lifetime exclusion.
But again, because of the exclusion, it won’t apply to most people.
Inherited IRAs. There are special rules for these accounts.
When a spouse inherits an IRA, it’s subject to required minimum distributions (RMD) after age 70 ½. But if an IRA is inherited by children or grandchildren, the rules are different.
You’ll have to begin taking IRA distributions in one of the following two ways:
- Taking distributions over five years, sufficient to empty the account, or taking annual distributions, determined by the beneficiary’s life expectancy.
- The second method will preserve the account for the beneficiary’s lifetime and enable continued accumulation of tax-deferred investment income.
Should You Do a Charitable Remainder Trust?
This is a type of trust that you set up to provide you with a reliable stream of income for the rest of your life.
It’s also an irrevocable trust, which means that once it’s established it cannot be revoked.
A charitable remainder trust (CRT) has certain tax advantages.
The income that it generates is not subject to income tax unless it has unrelated business income.
You can transfer appreciated assets into the trust where they can be liquidated.
No capital gains tax will apply. Funds will become taxable only when they are distributed to you in accordance with the payout plan set up for the trust.
A CRT can also be a benefit if you have a large estate that may be subject to estate tax.
The transferred funds reduce your estate, and thereby the tax that may apply upon your death.
CRTs are complex legal arrangements, that will require the services of an attorney.
Tax Considerations for Your Children
Custodial Accounts for Minors – UGMAs and UTMAs
Many parents want to create savings and investments for their children. But minors are not legally capable of owning accounts.
The workaround for this limitation is to set up an account under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA).
With one of these accounts, you act as custodian, then the account transfers to your child once they reach the age of majority.
You can set up one of these accounts in all types of financial institutions, including banks and brokerage firms.
There is no ceiling on how much you can contribute, but most parents limit contributions to $15,000 to avoid the gift tax.
The money in the account can be used for any purpose related to your child.
This eliminates the restriction that funds be used strictly for education, as is the case with 529 plans and education savings accounts (ESAs).
Income earned within a UGMA/UTMA account can be subject to the “kiddie tax”. It works like this:
The first $1,050 in unearned income by the minor is tax-free. Above $1,050 is taxed at the child’s rate, not the parent’s rate.
If the income is over $2,100, and the parents are in the 25% tax bracket, then that’s the tax rate that will apply.
If you have children, you’ll want to check out the 529 College Savings Plan.
There’s no immediate tax benefit to you as the contributor to the plan.
But the 529 Plan does allow for tax-deferred accumulation of investment earnings that will enable you to save for your childrens’ college educations.
You invest money primarily in mutual funds, and the funds can be withdrawn tax-free when taken for qualified education expenses.
In this way, you get an important tax break on the back end, when the funds are withdrawn. 529 plans are administered by each individual state.
Check and see the details of the plan available in your state.
Tips to Pay Your Taxes
Paying Taxes on Earned Income
If you’re paid by salary, taxes will be withheld and paid to the IRS for you. But if you’re self-employed, or a contractor, you’ll need to set up estimated tax payments.
To do that, you’ll first have to make a reasonable estimate of the income you expect to receive during the course of the year.
You will also have to make a good estimate of the expenses incurred to produce that income.
You will then have to calculate your income tax liability based on your net profit. You’ll also have to pay self-employment tax, which is the self-employed equivalent of the FICA tax.
It’s equal to 15.3% of your net profit. That’s in addition to federal income tax. Estimated taxes are due on four dates each year:
- April 15
- June 15
- September 15
- January 15 of the following year
You can make the payments either by completing form IRS 1040-ES, Estimated Tax and mailing it with a check to the United States Treasury or by making your payment online from your bank account through IRS Direct Pay.
Paying Federal Income Tax on Retirement or Bonus Income
What can you do if you receive a bonus, one large enough to impact your tax situation? Or how do you handle the tax liability on retirement income?
You can avoid the tax liability at filing time by making additional tax payments. There are three ways that you can do this:
If the bonus comes early in the year, contact your payroll department and have your withholding tax increased.
If it occurs later in the year, make estimated tax payment directly to the IRS.
Using IRS Direct Pay you can make a payment using a credit card or directly from your bank account.
Ask your retirement plan trustee to withhold income taxes on your distributions, similar to federal withholding on your payroll.
If you make an estimated tax payment, do it as soon as you receive your bonus or retirement income. That will ensure that you will have the money available to pay the tax.
Paying it immediately will also eliminate the possibility of interest and penalties.
How to Pay Your Taxes Online (with a Credit Card)
You can pay your taxes online directly to the IRS, using either a credit or debit card.
There is a small fee, of $2 to $2.59 if you pay by debit card, and just under 2% of the amount paid if you use a credit card
The fees may be a small price to pay if you need to make a quick payment. They will most likely be less than the penalties and interest that the IRS will impose on late payments.
You can use online payments to pay your remaining tax bill, your estimated taxes, or any other tax that’s due to the IRS.
How to Get Your Tax Refund As Soon As Possible
So if you’re in a hurry, e-file. To get the refund even quicker, set up direct deposit. You can do that on page 2 of your tax return.
It will enable the IRS to get your refund in your bank account, without the delay caused by mailing a check
You’ll probably want to avoid instant tax refund offers. This is where tax preparers offer to provide your refund upon the completion of your return. But it’s actually what’s known as a refund anticipation loan, not the actual receipt of your refund. You will pay interest and fees on the loan, which will reduce the size of your refund. Exactly how much depends on the tax preparer.
How to Avoid Income Tax Refund Fraud!
Tax refund fraud is one of the fastest-growing forms of identity theft. A thief steals your identity, then uses it to file a bogus tax return with the IRS. The return includes a very generous refund, which is paid to the thief.
The thief files the return early in the year before you have a chance to do so.
The refund is sent directly to the thief. Once the fraud occurs, you’re prevented from filing your tax return. You’re notified that it’s already been filed.
It’s a messy situation, but fortunately, it can be resolved cleanly. The IRS is aware of the problem and works with taxpayers to get it resolved.
You need to file IRS form 14039, Identity Theft Affidavit, and attach any necessary documentation. You may be asked to supply your state issued ID card or driver’s license.
The process can take up to six months, but once it’s completed, your tax situation will be corrected. That will include the proper tax refund or liability, based on your actual return.
What to Do with Unfiled Tax Returns and Back Taxes Owed
Let’s start with unfiled tax returns. You will need to gather any documents that you need, just as you would for preparing your current return.
Any documents you do not have – possibly due to the passage of time – you may be able to obtain from the IRS.
This can include W-2s and 1099s that have been provided to the IRS by employers and vendors.
You should prepare and file each return individually, assuming you need to file for more than one year.
It may turn out that you have a refund coming. But you may also owe taxes.
If you do, you should make payment as soon as possible.
The IRS will assess penalties and interest that will be billed at a later date. If you can’t pay the tax liability due, there are two ways to handle the situation:
Make an Offer in Compromise. The IRS may agree to accept a lower amount if you qualify for a hardship.
Set up an installment agreement. You can arrange to pay your tax liability over as long as 72 months. It won’t make the debt go away, but it will give you an extended time to pay, with an affordable monthly payment.
How to Avoid a Tax Audit – And What to Do if You Are Audited
Your chance of being audited is relatively small, especially if you have a relatively ordinary tax situation. But the likelihood increases if you are high income, self-employed, have unusual income sources, or take very large deductions.
In most audits, the IRS is looking for a specific piece of information.
For example, they may request that you document a certain expense category you have taken. This usually involves supplying information by mail.
You should cooperate fully, by providing all information requested in a timely fashion. The more detailed face-to-face audit occurs in one of two situations:
You’ve understated your income, and/or you’ve overstated your expenses. You can avoid the first problem by accurately reporting all income.
In the second case, make sure that your deductions are reasonable. Outsized expenses are one of the major triggers for audits.
For example, if you claim business travel equal to 60% of your income, you’re inviting an audit. If your business consistently loses money – or earns very little – that’s another red flag.
A large deduction for business use of the home is still another factor. Be sure that you document all expenses, and that they are reasonable in comparison to the income they are producing.
If your tax returns are prepared by a CPA or an enrolled agent, either can represent you before the IRS.
If you use a tax software preparation program, you can often purchase some form of audit defense to provide assistance in an audit.
How Does Consumer Debt Affect Your Taxes?
There’s a little-known wrinkle in the tax code when it comes to consumer debt.
No, it’s not that the interest on consumer debt is tax-deductible. It generally isn’t. This has to do with unpaid consumer debt.
If you fail to pay a debt, or you settle the debt for less than the full amount owed, the IRS considers that to the taxable income.
For example, if you fail to pay a $10,000 credit card debt, the full amount of the debt is considered taxable income.
If you pay only $4,000 of the debt, and default on the remainder, then $6,000 is considered taxable income to you.
The debtor can issue IRS Form 1099-C, Cancellation of Debt.
You will have to report the amount on your tax return, where it will be taxed as ordinary income.
If the canceled debt is $10,000, and you’re in a 15% tax bracket, you will owe $1,500 in additional income tax.
How to File a Tax Extension
You’ve just been busy, I know, me too.
Your hard drive crashed and you need to gather up your notes and all your stock transactions. Your aunt in New Jersey passed away, and suddenly April 14th is here, now that you’ve returned from the funeral.
I don’t care what your reason is for needing to file late (although I am sorry if you lost a relative or loved one) and truth be told, neither does the IRS.
They do, however, care about two things: first, that you tell them via Form 4868 (Application for Automatic Extension of Time to File U.S. Individual Income Tax Return), and that you pay most of your tax liability for the year. In this case, this probably means that if you owe the greater of 10% of your final tax liability or $1000, you will be hit with a penalty in addition to interest on the amount owed. So as long as you’ve paid this amount, you will only be charged interest.
You can always find the most current interest rate by going to News Releases and Fact Sheets and looking for the news release with Interest Rates in the title. If you owe an amount small enough to carry no penalty, this is a pretty reasonable rate, certainly better than charging the fee to your credit card.
Filing a Tax Extension Gives You Time
Keep in mind, the extension also gives you the extra six months to recharacterize money you converted from a Traditional IRA to a Roth. By changing some of it back, you might reduce your tax liability just enough to avoid the penalty. A bit of tinkering with your tax software, but worth the effort to save those dollars.
On this note, there is a Roth trick that savvy planners have been using to maximize their clients’ wealth. Say you wish to convert $5000 to a Roth account. Right now, chose two funds or stocks worth $5000 and convert to two separate Roth accounts. When your tax return is due, recharacterize the account that’s lower in value. This strategy can be done with any number of accounts, so long as you remember to recharacterize, or you’ll get a hefty unwanted tax bill.
If you simply don’t file your tax return, you can be penalized 5% of the amount owed up to 25% maximum. Ouch.
Tax Extensions for Business Owners
For a self-employed individual, there is an added benefit to requesting an extension – retirement accounts can be funded right up until the due date of the return, including the extension. This gives you until the October 15th date to raise the money to put into the plan. For those whose business is cyclic or simply going through a down year, this extra time is a perk to be aware of.
How to File an Amended Tax Return
Having a Homer Simpson “Doh!” like moment when it comes to filing your tax return is not the most comforting feeling. But mistakes do happen, even to the best of us. Realizing that a mistake was made on a tax return can cause one to get nervous about audits or delayed refunds – sweaty palms, anyone? However, it happens all the time, and the IRS even has a specific form just for filing amendments. When one files an amended tax return it voids the previously filed return and becomes the new tax return.
Reasons for Filing an Amendment
The reasons for filing a tax amendment can vary. Typically, the filing status was chosen incorrectly (for example, single instead of head of household), income amounts were reported wrong (perhaps a forgotten W-2 arrived in the mail after the return was filed), or deductions and credits were miscalculated. In some cases, the number of dependents is claimed incorrectly. This can often happen in the case of divorce, where both parents attempt to claim the children as dependents, or neither claims the children (assuming the other had).
The IRS says that common calculations errors that can be caught by the IRS computer system are not a reason to have to file an amended return.
Where to Begin the Amendment Process
Your first stop is to visit www.irs.gov or the local library for a copy of form 1040X, Amended U.S. Individual Income Tax Return. The form will need to be completed carefully and accurately. The only information that needs to be entered is the corrected information. It is helpful to have the original tax return on hand to view and to take note of the items needing to be corrected.
When Should an Amendment be Filed?
If an additional refund is owed, taxpayers must wait until the original refund is issued and may cash that refund check before filing an amended return. If additional tax is due, the tax must be paid by April 15th of the year that the amendment is filed. One should NOT file another original return with changes made after the first return is submitted, even if the original return looks to have not been received or processed by the IRS yet. This can cause confusion and a delay in any refunds.
Is There a Time Limit?
Typically amendments must be filed within 36 months of the date that the tax return needing corrections was filed. There are some exceptions to this rule, details of which can be found at the IRS website: www.irs.gov.
How to File
Each amended return must be filed by mail in a separate envelope with the year of the return written on the form. There is also an area on form 1040X to explain the reasons for the amendment which must be filled out. Additionally:
- Any additional schedules, W2’s, 1099’s, or other forms affecting the amendment must be included.
- Amended returns can not be filed electronically and must be sent by regular postal mail.
- It can take 8-12 weeks for the IRS to process an amended return.
If a taxpayer is amending a return in response to a letter from the IRS, the address of where to mail the amended return will be included. To find out where to mail an amended return in other situations, refer to the instruction booklet or the IRS website for the address for each state. As always, if you’re not comfortable doing it on your own, consult a tax professional to assist you.
How to Lower Your Tax Bill This Year
Nobody likes paying taxes. Not that they don’t pay for some things we definitely need. Roads, some kinds of healthcare, representation in the government, and lots of other things America needs to keep itself running. They are a necessary evil in a civilized society.
But still – we all hate paying them. Anybody with me? And if possible, I think everyone would like to pay less money into them. I’m here to tell you that it’s possible to reduce your taxes with a couple different tactics. Some of them may mean the money you’d spend is contributed anyway, but others allow you to keep the money in different ways.
Reduce Taxes Through Your 401k, 403b, or 457
One of the best possible ways to reduce your taxes is to contribute to a 401k or some kind of IRA (like a Roth, SIMPLE, or Education IRA). These retirement-oriented investments allow you to put money away into safe keeping to be withdrawn at a future date. If you leave the money in for the term agreed to by the individual IRA situation, you get to withdraw it completely tax-free. So, by investing your money into retirement funds before it is taxed, you completely avoid the tax on those dollars and you get to keep the money.
If you are not self-employed, employer sponsored plans are your largest resource to reduce your taxes while simultaneously saving for your retirement.
Don’t Forget the Match
Additionally, your employer may offer to match your contributions up to a certain percent. That’s an absolute no brainer. When an employer offers to match your contribution, you should almost always take advantage of that to its full extent. It’s like free money. My top recommendation to people looking to lower their taxes is to get involved with some kind of IRA or retirement planning.
Look For All Possible Deductions
Additionally, make sure that you look through the list of possible adjustments to your tax bill every year. You can deduct things like student loan interest paid, classroom related expenses, and other items. There are a number of pages in your tax documentation every year listing the possible adjustments you can take.
Deductions are the other major area to take advantage of when looking to reduce your taxes. There’s a standard deduction for most people, and there are additional deductions that some people may be able to itemize. Things like vehicle expenses, expenses involved with running your own business, interest paid on your mortgage, fees related to investments or tax preparations, or even donations to charity. All of these items give you some wiggle room in lowering your taxes.
Give Me Some Credit
Once you’ve found all the ways to save money on taxes, it’s a good idea to look at potential tax credits. One that most people can take advantage of is the Lifetime Learner tax credit. This tax credit allows you to write off the costs of college classes no matter what your level of education. There’s also no requirement that college classes be germane to your area of study or employment. If you work as a computer programmer but have an interest in the history of Presidents of the United States, classes on that topic would likely qualify you for the Lifetime Learner Credit.
Other credit you might apply for is if you make energy efficient changes to your home.
If you’re not sure what deductions or credits you may apply for, find a good accountant to help you out. Many people I talk to think it’s not worth hiring an accountant to do their taxes, but what if they introduce you to a few deductions or credits that you weren’t aware of? The tax preparation fee could be offset by them. It never hurts to ask, especially if it helps reduce your taxable income.
Strategies to Lower Your Bill
For the calendar year just past (2018), your options here are limited. There are two that you can make, however, as long as you act prior to April 15:
- Make an IRA contribution, if it will be tax-deductible. You’re eligible to make this contribution right up until the tax filing deadline.
- Make a contribution to a health savings account (HSA).
For the current tax year (2019) you have a lot more options.
- Increase your tax withholding, or your estimated tax payments.
- Pay any allowable deductible expenses before the current year end (expenses that could be paid in either December or January).
- Maximize contributions to retirement plans.
- Make an IRA contribution, if it is deductible under IRS income limits.
- Purchase energy efficient equipment for your home and get a tax credit.
- Sell losing investment positions just before year-end, to offset gains.
- Purchase a hybrid or electric car. You can get a tax credit of up to $7,500 (however this credit is due to begin phasing out in 2019 so you won’t get the full credit).
- Take advantage of any available education tax credits.
How Starting a Business Can Lower Next Year’s Tax Bill
Starting a business this year can lower your tax bill when you file next spring. It’s because businesses have certain tax advantages that are not available to salaried workers.
There are several ways this is possible:
You can deduct from your income any expenses incurred to produce that income. Self-employed retirement plans are more generous than those typically available for salaried workers.
- Net Operating Loss Carryforward. Most businesses sustain a loss in the first year of operation. But that loss can be carried forward to future tax years, reducing future tax liabilities.
- Tax-deductible health insurance premiums. If you’re self-employed, you can deduct the cost of health insurance without needing to itemize your deductions. You can also set up an HSA to pay for out-of-pocket medical costs, and also get a tax deduction.
- Depreciation and amortization. Business equipment purchased can be depreciated over several years. Organization costs can be amortized in the same way. This will give you “paper losses” for tax purposes for several years going forward.
This guide should cover all the basics of preparing your tax return, as well as introduce you to some of the more complex issues.
Use it as a guide to get started, then get as much information as you need wherever necessary.
If you’re using a paid preparer, or a tax preparation software package, most of this will be handled for you automatically.
But it will help to know everything that applies to your tax situation, that way you will be fully prepared with any information or documentation necessary.