by MEA Tax Advisors | May 22, 2021 | Tax Tips and News
The deadline for filing income taxes came and went on May 17, but that’s no reason to think the filing door is completely shut.
Taxpayers who owe tax due but didn’t request an extension should file now to keep their penalties and interest to a minimum. Even if taxpayers don’t owe tax due, it’s still in their best interests to file sooner rather than later.
No file, no refund …
Taxpayers don’t face a penalty for filing after the deadline if they’re due a refund. But they can’t get their refund if they don’t file. For those who missed the filing deadline, it’s best to file as soon after the deadline as possible.
E-filing through a trusted tax professional is a fast, efficient way to get it done.
If a taxpayer expects to owe tax due, another set of considerations come into play.
In a perfect world, taxpayers should file a tax return or ask for an extension, and pay any tax they owe by the deadline, avoiding penalties and interest.
Getting an extension to file, of course, has no bearing on any tax due; that’s still due by the tax deadline. In this case, it was May 17. So, penalties and interest now apply, and only get more expensive as more time goes by.
So, by filing now, those taxpayers will wind up paying less in penalties and interest. the IRS has helpful information for taxpayers who owe the IRS, but can’t afford to pay.
Time is money
The IRS ordinarily charges 5 percent of the tax owed for each month—or part of a month—that a tax return is late. This formula is used for filing up to five months after the due date. The total penalty, the IRS says, will be reduced by the amount of the failure-to-pay penalty for any month where failure-to-file and failure-to-pay penalties both apply.
Wait more than 60 days to file and pay, though, and things go from bad to worse. The minimum penalty is either $435 or 100 percent of the unpaid tax, whichever is less.
The penalties stack up quickly so it’s important to file and pay as much as possible—as soon as possible—even if the taxpayer can’t pay the entire tax bill at once.
The government’s penalty rate for failure to pay is generally 0.5percent of the unpaid tax that’s owed for each month or part of a month until the tax is fully paid or until the taxpayer has paid 25percent of the tax due.
Interest is charged on tax and penalties until the balance is paid in full.
The interest rate is updated regularly, so it’s subject to change.
IRS.gov/penalties has more information about how penalties are assessed.
A taxpayer’s history can make a difference when it comes to penalties. The IRS says those who have a history of filing and paying on time often qualify for penalty relief. Usually, taxpayers can qualify if they’ve filed and paid on time for the previous three years and met other requirements.
The first-time penalty abatement page on IRS.gov has more information on how to qualify.
Some still have time
The IRS also points that some taxpayers still have time to file, even if they didn’t file an extension:
Taxpayers who filed paper returns may have delays in seeing their returns processed, since the IRS processes paper returns in the order they are receive—and the agency says COVID-19 is still causing delays. That said, those who already filed a paper return should not file a second return or call the IRS to try to skip the line.
As for just how long it takes to get the refund, ninety percent are sent within 21 days. But returns that need “additional review” obviously take longer.
Pay as soon as possible to avoid penalties and interest
Taxpayers who owe tax due should consider paying what they can now. The fastest way to pay is through IRS Direct Pay, with a debit or credit card, or to apply online for an IRS payment plan (including an installment agreement).
Source: With the May 17 deadline in the past, file taxes now to get refund or cut penalties and interest
– Story provided by TaxingSubjects.com
by MEA Tax Advisors | May 15, 2021 | Tax Tips and News
With restaurants beginning to open more fully due to a break in the coronavirus pandemic, employees in the food and beverage industry are soon likely to have a lot more to report on their taxes: Tips.
That’s why the Internal Revenue Service is reminding taxpayers that that tips should be included in gross income when filing their tax return ahead of the May 17 deadline. The agency identifies three specific examples:
- Tips directly from customers.
- Tips added using credit cards.
- Tips from a tip-splitting arrangement with other employees.
Reporting, however, doesn’t stop there. Tips that are made with something other than cash—tickets or free passes for example—have value and, as such, must be included in income.
The Big 3 for tipped employees
If a worker regularly gets tips, there are three things the IRS expects them to do. All are aimed at keeping track and reporting tip income to the IRS.
Write it Down – The first thing employees should do is keep a daily record of their tips. One way to do that is to use Form 4070A, Employee’s Daily record of Tips, which is included in Publication 1244.
Besides the information on the Form 4070A, workers need to keep a record of any non-cash tips they get, including the date and value of the non-cash tip. Remember that a non-cash tip can be any item of value that’s offered as a tip.
While non-cash tips don’t have to be reported to the employer, they do have to be reported to the IRS.
Report Tips to the Employer – All cash tips a worker receives in any month have to be reported to the employer; they’re subject to Social Security and Medicare taxes. If the employee has less than $20 in tips for the month and a single employer, the tips don’t have to be reported and no taxes have to be withheld.
Employees have to notify their employer of their cash tips (which include those made on credit card statements) in writing. No particular form has to be used, but the report has to include some standard information:
- Employee signature,
- Employee’s name, address, and social security number,
- Employer’s name and address (establishment name if different),
- Month or period the report covers, and
- Total of tips received during the month or period.
The IRS says both directly tipped employees and those who are tipped indirectly must report tips to their employer.
To find out if tip income is taxable, visit the Interactive Tax Assistant on the IRS website.
Other resources include Tip Record-Keeping and Reporting; Publication 1244, Employee’s Daily Record of Tips and Report to Employer; and Publication 531, Reporting Tip Income.
Sources: Here’s what taxpayers need to know about reporting tip income on their tax return; Tip Recordkeeping & Reporting
– Story provided by TaxingSubjects.com
by MEA Tax Advisors | May 8, 2021 | Tax Tips and News
Public fascination with cryptocurrency tends to follow dramatic gains and losses in the market. While the latter results in pundits sounding the death knell for Bitcoin and its ilk, the most reliable predictor for the lifespan and legitimacy of crypto lies in the Internal Revenue Service—and some newly minted crypto-holding clients may have questions about the virtual currency checkbox on their tax year 2020 Form 1040.
Eagle eyed do-it-yourself filers will have noticed that checkbox moved from the 2019 Schedule 1 to directly above the standard deduction question on the 2020 Form 1040. Those who have been quietly holding onto cryptocurrency as a hedge against inflation—or hoping to become an overnight millionaire—may have felt a jolt of panic after realizing Uncle Sam is keeping tabs. Heck, you might have even received a few phone calls that earned you a new client.
For a better understanding of crypto tax liability, we’re going to walk through a few common questions.
What is cryptocurrency?
Cryptocurrency is virtual currency that is backed by an encryption algorithm designed to prevent coin-duplication counterfeiting. The current supply of any given coin is generated by “crypto mining:” Think the gold standard, but instead of a precious metal, crypto-miners use their computer—or warehouses full of them—to solve a complicated math problem in order to mine (create) a set number of coins that they can sell.
In addition to serving as a fiat currency alternative, some virtual currencies offer additional functionality, like “smart contracts” and Internet access. The value promised by projects like Ethereum and other Bitcoin alternatives has given rise to a wide “altcoin” market that is available to investors on a number of cryptocurrency exchanges.
Note: The terms “cryptocurrency,” “crypto,” and “virtual currency” will be used interchangeably throughout the rest of this blog.
How does the new virtual currency question on the Form 1040 affect cryptocurrency holders?
The inclusion of a yes-no virtual currency question that reads “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” seems self-explanatory. But to cover our bases, we spoke with Drake Software Federal Tax Product Manager Robin Miles, EA.
“We know that IRS is beginning to pay a lot of attention to the trading and use of virtual currencies, because they now require every taxpayer to affirm or deny their participation in the market,” Robin said. “At this time, it is just a ‘Yes’ or No’ question that must be answered on the main input screen.”
However, answering this question isn’t necessarily as straightforward as it may seem at first. According to Q5 in the 46-question virtual currency FAQ on IRS.gov, taxpayers do not have to answer “yes” if they only bought virtual currency with “real currency” (USD) last year. So, when do taxpayers need to answer “yes?” Seemingly, only when there is a cryptocurrency exchange with tax-related consequences.
When do taxpayers need to pay tax on their cryptocurrency?
The IRS treats cryptocurrency as property, so taxpayers generally need to report income in these situations:
- The receipt or transfer of virtual currency for free (without providing any consideration), including from an airdrop or following a hard fork
- An exchange of virtual currency for goods or services
- A sale of virtual currency
- An exchange of virtual currency for other property, including for another virtual currency (“Virtual Currency,” DrakeSoftware.com)
Now, let’s take a closer look at two items from that list: hard forks, and virtual currency sales.
Hard Fork: The software that any given cryptocurrency is based upon is not set in stone. Sometimes an update can be so significant that it results in the creation of a new, separate cryptocurrency that exists alongside the original. This is called a hard fork, and it can result in a taxpayer suddenly having this new crypto deposited in their account by what is often referred to as an “airdrop.” (Fun fact: Bitcoin Cash was created by a hard fork in Bitcoin.)
After being given the new cryptocurrency, recipients will owe income tax for the year they acquire it: “When you receive cryptocurrency from an airdrop following a hard fork, you will have ordinary income equal to the fair market value of the new cryptocurrency when it is received, which is when the transaction is recorded on the distributed ledger, provided you have dominion and control over the cryptocurrency so that you can transfer, sell, exchange, or otherwise dispose of the cryptocurrency” (Q23).
Important: If a taxpayer is not given any new cryptocurrency following a hard fork, they do not owe income tax (Q22).
Sale of Virtual Currency: Generally, investors buy and sell virtual currency on exchanges, like Binance.us and Coinbase. The purchase of cryptocurrency for the purpose of investment does not result in owing income tax, but selling virtual currency—whether for USD or another crypto—can be considered a taxable. The amount of tax owed is generally determined by how much it was worth at the time of purchase (the basis), its fair market value at the time of the sale, and how long it was held (short-term versus long-term capital gain).
If a taxpayer sells crypto for more than they paid to acquire it on the exchange, that’s a capital gain. Just like stocks, crypto that is held for less than a year is subject to short-term capital gain tax; crypto sold after a year is subject to long-term capital gain tax. The trick—especially for newer investors—can be record keeping.
US-based cryptocurrency exchanges report to the IRS, so users should receive relevant forms from their exchange to help determine tax owed, like Forms 1099-B, 1099-K, and 1099-INT. That said, it would be wise for investors to separately keep track of all information related to the purchase and sale of crypto, just in case they don’t receive one of these forms.
To learn more about specific cryptocurrency tax issues, be sure to check out the IRS FAQ in the link below.
Source: “Frequently Asked Questions on Virtual Currency Transactions,” IRS.gov
– Story provided by TaxingSubjects.com
by MEA Tax Advisors | May 6, 2021 | Tax Tips and News
Are you having trouble dealing with all your passwords?
Let’s face it, passwords are becoming a problem.
Following best practices for data security means creating unique passwords for all computers, networks, and online accounts. Unfortunately, the number of accounts you’re supposed to protect is growing exponentially:
- PC login
- Network login
- ISP account
- Personal email address
- Work email address
- Professional tax software login
- Online banking and credit card accounts
- Online retailers (Amazon, BestBuy, Target, Walmart)
- Mobile trading applications (Binance.us, Charles Schwab, Coinbase, E-Trade, TD Ameritrade, Webull)
- Social media (Facebook, Linkedin, Instagram, Snapchat, TikTok, Twitter)
- Online television account (cable/satellite)
- Mobile carrier account
- Streaming services (HBO Max, Hulu, Netflix, Paramount+, Peacock, Prime Video, Twitch, Youtube)
- Video game accounts (Battle.net, Epic Games, GOG.com, Nintendo Online, Origin, Playstation, Steam, Xbox)
Even if you don’t check every box in the list, there are probably a half-dozen unique passwords you still have to memorize—and some need to be changed every six months!
The sad reality is that we have to stay one step ahead of identity thieves. After all, if you use the same password for your email address and mobile banking app, identity thieves will have a much easier time stealing your money. Luckily, a password manager can help you deal with password bloat.
What is a password manager?
Password manager software is designed to securely store all of your passwords in one convenient location.
“Most people create weak passwords and reuse them for multiple accounts which drastically increases the chances of having multiple accounts hacked,” Drake Software Chief Compliance Officer Suzanne Vanderpool explains. “Using a password manager that automatically creates complex and secure passwords for each account greatly reduces this risk. But it is very important that you remember the one and only password you will need to access your password manager.”
While the primary benefit of a password manager is cutting the number of passwords you have to remember down to one, there are other benefits as well:
- Create secure passwords automatically
- Schedule automated password changes
- Autofill passwords during login
- Provide a user-friendly dashboard
Another thing to consider is the type of password manager you want to use, whether software that’s installed on your device, an online password manager, or a hardware-based solution. If you’ve never even heard of a password manager, it can be difficult to know where to start.
How do I choose a password manager?
Picking the right password manager means finding the set of features that best suits your situation. Do you want to install an app on each device, or would you prefer to login to an online service? Ultimately, it comes down to personal preference and ensuring that the platform features adequate encryption to protect all of your accounts.
“Whichever password manager you choose, be sure it has multi-factor authentication,” Suzanne recommends. “Remember, it houses all of your important passwords, so you want to keep it as safe as possible.”
– Story provided by TaxingSubjects.com
by MEA Tax Advisors | May 5, 2021 | Tax Tips and News
It was a wise man indeed who first warned us to “hope for the best, but prepare for the worst.”
The Internal Revenue Service is following in those footsteps by reminding taxpayers that spring begins a very active period for weather in the U.S. In light of that, May includes both National Hurricane Preparedness Week and National Wildfire Awareness Week.
It shouldn’t be a surprise that reviewing emergency preparedness plans makes a lot of sense right now.
For those who like to think “it can’t happen here,” the Federal Emergency Management Agency (FEMA) knows it can. In the past year, FEMA declared major disaster areas stemming from hurricanes, tropical storms, tornadoes, severe storms, flooding, wildfires, and an earthquake.
That’s why there’s no time like the present for individuals, organizations, and businesses to come up with an emergency plan or update the one they already have.
In case of natural disaster …
The key to getting through any natural disaster is the ability to think ahead—before there’s trouble. How would an individual taxpayer or business be able to recover after a disaster? What documents would they need if their files were missing, damaged, or destroyed by the weather event?
Recovery can depend on the individual or business taxpayer’s ability to produce documentation proving insurance claims, qualifying for disaster grants and other relief.
The IRS has some tips that can help taxpayers to recover quicker economically if they are hit by a natural disaster.
Secure key documents
The story of our lives is written in the vital documents we keep. That’s why taxpayers need to keep original documents such as tax returns, birth certificates, deeds, titles and insurance policies inside waterproof containers that are in turn kept in a secure space.
Duplicates of these documents should be kept in a separate location other than the taxpayer’s home or business. Another option is to scan them and copy the data onto electronic storage media such as a flash drive.
Reconstructing records after a major disaster might be required for tax purposes, to get federal assistance or to receive insurance reimbursement. Those who have suffered partial or total loss of their records should go online to the IRS’ Reconstructing Records webpage as a first step in the process.
Document your valuables and equipment
Once the weather event is over, home- or business-owners will need some way to back up their claims for insurance or tax breaks. The best way is to record all property beforehand, but especially any expensive or high-value items. Whether it’s a simple list, a spreadsheet, or a video record, the compilation should be kept with the important documents and a copy kept off-site as well.
Publication 584 has IRS disaster-loss workbooks that can help taxpayers and businesses assemble their lists of personal property or business equipment.
Fiduciary bonds for employers
Business owners have more to think about than just protecting their documents in the event of a natural disaster. If they use a payroll service, employers should follow the IRS’ advice and ask their payroll provider if it has a fiduciary bond in place.
The bond could offer the employer a layer of protection if the payroll service defaults.
The IRS urges all employers to choose their payroll service providers carefully.
How can the IRS help?
When FEMA declares a location to be a federal disaster area, the IRS can postpone specific tax filing and payment deadlines for those taxpayers who either live or have a business in the disaster area.
Such relief is automatic; there’s no need to call the IRS and request it. The agency can identify qualified taxpayers by their address of record and applies the stated relief when processing the return.
Anyone impacted by a disaster who has tax-related questions can call the IRS at 866-562-5227 to connect to an IRS specialist trained to handle disaster-related issues.
If a taxpayer suffered an impact from a disaster but didn’t live within the federally declared disaster area, they can call the same number, 866-562-5227, to see if they qualify for disaster tax relief or other options.
Complete disaster assistance and emergency relief details are available for both individuals and businesses on the IRS’ Around the Nation webpage on IRS.gov.
FEMA’s Prepare for Disasters webpage includes information to Build a Kit of emergency supplies.
Here are some other disaster preparedness sites that may prove useful:
Source: As hurricane season nears, IRS reminds people to prepare for natural disasters
– Story provided by TaxingSubjects.com
MEA Tax Advisors