Can I Claim My Spouse As A Dependent?

It’s not uncommon for us to get this question.  However, because people sometimes don’t know the nuances of how a tax return is actually filed, this one can get lost in translation.  In this post on our sister site we discuss the filing status options for those who are married.  In summary, if you are legally married then your options are Married Filing Joint (together) or Married Filing Separate.  So where does this whole claiming a spouse as a dependent thing come in?  Read on.

When you file a tax return, you are allowed to claim an exemption, which will reduce your taxable income.  There are two types of exemptions: personal exemptions and exemptions for dependents. For tax year 2015, the IRS recently announced that each exemption will be worth $4,000 on your 2015 tax return.  That means that if you file with your spouse and had no dependents, you would claim 2 exemptions.  If you had dependents, you would claim the 2 exemptions for you and your spouse and then 1 additional exemption for each dependent.  Clear right?  So now the question about your spouse being claimed as a dependent.

As we stated above, when you are married you only have two choices when it comes to filing status.  As such, your spouse is never considered your dependent.  Thus, on a joint return, you may claim one exemption for yourself and one for your spouse. If you’re filing a separate return, you would normally claim just the exemption for yourself.  However, if you’re filing a separate return, you may claim the exemption for your spouse only if the following three items apply:

  1. they had no gross income,
  2. are not filing a joint return,
  3. and were not the dependent of another taxpayer

We tell most taxpayers that it is usually advantageous for them to file together.  Why?  Because they will often pay less taxes by doing so due to the fact that the tax brackets for Married Filing Separate are much more narrow that even that of someone filing Single.  What we mean is that if you had taxable income of $160,000 and your spouse had $0, you would be in the 28% marginal tax bracket if you filed Married Filing Joint.  If you were single with the same income, you would also be in the same 28% bracket.  But if you filed Married Filing Separate, you get penalized and are thrown into the 33% tax bracket.  Makes sense to file with your spouse even if they have no income right?  That’s what we said!  However, there are certain instances when you wouldn’t want to file with your spouse.  Like when you are due a nice refund and they have a balance with the IRS from some time ago.  Then you will want to file separately do the IRS doesn’t take your refund and apply it to their balance due.

So in summary, you can never claim your spouse as a dependent.  However, if you are filing as Married Filing Separate, there are some instances when you can claim their personal exemption.

 

Is Unemployment Compensation Taxable?

smile!

The short answer is YES – now continue reading for some important details.

Whether you do (or don’t) have to file a tax return doesn’t have anything to do with if you were (or were not) employed.  It depends entirely on how much income you received during the year.  Thus, those who were unemployed AND earned more than the filing threshold should know that unemployment benefits do qualify as taxable income.  In other words, Uncle Sam will count unemployment payments received as taxable income.

How To Report Unemployment Benefits Received On Your Return
Around late January or early February of the year FOLLOWING the year in which you received your benefits, you should get a Form 1099-G.  Box 1 will contain the amount of benefits you received.  If there were any Federal or State taxes taken out, they will be listed as well.

When you file your return, report your unemployment income on line 19 of Form 1040 [U.S. Individual Income Tax Return], line 13 of Form 1040A [U.S. Individual Income Tax Return], or line 3 of Form 1040EZ [Income Tax Return for Single and Joint Filers with No Dependents], depending on which form you use.  The Federal withholding’s will be tabulated in the appropriate section and the net result will either be a refund or a balance due.

What If You Didn’t Have Enough Taken Out?
In this post on our sister site we discuss how taxes work and how the refund or balance due is derived.  If you are still unemployed and receiving benefits when you discover you didn’t have enough withheld, contact the paying agency ASAP.  Instruct them that you would like to increase your withholdings.  As discussed in the post above, you will probably have to simply complete Form W4 and submit it to them.

What If You Can’t Pay The Balance Due?
In this post, we discuss what you can do if you can’t pay all at once.  The general options are set up a payment plan or tell the IRS why you can’t pay (e.g. unemployed, it would cause an undue hardship, etc.).  Just note that with the latter, you will have to supply some paperwork as proof as to why you can’t pay.  What, you expected the IRS to just take your word for it?

If you find yourself in the predicament of needing to set up an installment agreement and owe less than $10,000, take a look at the Got IRS Debt? page for our current pricing to assist you.

Misclassified Employees & Taxes

Sometimes you take a job and it seems like it will be the best gig in the world.  The employer tells you that they will pay you weekly, that they won’t take taxes out and that they’ll even give you a 1099 at the end of the year so you can file your taxes.  But then you get that 1099, take it to your tax preparer and they tell you that you owe a bunch of money in taxes.  Wait?  How can this be?  Your preparer tells you that your 1099 causes you to be treated as an independent contractor or self-employed for tax purposes.  Self-employed?  That can’t be right.  I worked as an employee for that company for the entire year!  Thus, the problem at hand.

In this post on our sister site, we discuss how an employer is supposed to make the proper determination as well as what the tax differences are via being W2 versus 1099.  But when they improperly classify you as an independent contractor, it can cause you a whole lot of grief come tax time.  So how do you fix it?  Well, it’s really a two step process of trying to resolve the situation and filing the tax return.

Obtaining Proper Classification
The first thing you want to do is bring the matter to the attention of your employer.  Let them know that you don’t believe that the classification is correct and that you believe you were an employee.  This IRS site will give you a little assistance in making that determination.  If the employer is uncooperative or flat out refuses that you were an employee, you can ask the IRS to make the determination via filing form Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.  The employer will then need to respond to the IRS.  Once the IRS rules, they will send a determination to you and the employer.  If it is deemed that you were in fact an employee, the employer will then become liable for their share of the employment (payroll) taxes.  The unfortunate thing is that so will you.

Filing A Misclassified Employee Tax Return
Listed below are the steps on how to file your taxes if you are a misclassified employee and don’t have a W2.

  • File Form SS-8 so that you can begin the determination process.
  • Review Form 8919 Uncollected Social Security and Medicare Tax on Wages.
  • If you have a Form 1099-MISC from the employer, then you will have most of what you need to fill out columns A and B.  If you don’t have that form, then you will need to obtain the information from the employer (who may not want to give you their EIN if the two of you aren’t on good terms).
  • Tally up the amount of income that you received from the employer and enter it on line 6 of the form as well as line 7 of your Form 1040.
  • Use lines 7 through 12 to calculate your share of the Social Security and Medicare tax.  You will then enter this on line 58 of your Form 1040.

The downside to this is that you WILL have a liability with the IRS.  No income, Social Security or Medicare taxes were taken out.  But if you visit this page of our site, you can learn how we can help you resolve the issue with the IRS if you don’t want to tackle it on your own.

Top 3 Groups With IRS Debt

This form can be the death of you!

This form can be the death of you!

When it comes to running afoul of the IRS, certain generalities often come to mind regarding the types of people. Terms like deadbeat, scofflaw, tax evader, tax protester and the like tend to come to mind. But did you know that most of the people who generate IRS debt actually didn’t intend to? Furthermore, did you know that most of them (professionally) will fall into three categories? Let’s take a deeper look.

Independent Contractors. Working for yourself can be a dream. Whether it’s being a consultant or driving for Uber on the weekends, being your own boss can feel liberating. Oftentimes, when one is first approached with being a contractor, one of the things that will be “sold” to them is how no taxes will be taken out of your check. How can that be? We’ll that’s because most independent contractors are paid via Form 1099-MISC from a tax perspective. While earning a bigger check can sound wonderful at the onset, it’s a thing that come back to bite you come tax time.

Attorneys. If you’re an attorney who works in private practice for yourself, then you can suffer the same consequences as those who are independent contractors. This is because those who report compensation to attorney’s also tend to do so via Form 1099-MISC (see a trend here). If you look at the form, you will notice that box 14 is labeled “Gross proceeds paid to an attorney.”

Realtors. Realtors are another group that also tend to get into tax trouble with the IRS. Can you guess why? Correct; it’s because they receive their commissions via Form 1099-MISC!

The Problems Caused By Form 1099-MISC.
Being paid as a contractor is not an issue. They key is to know the difference in how an contractor deals with their taxes versus an employee. In this post on our sister site, one can learn some of the details. However, the summary version is that when you work as a contractor, YOU are the one who has to withhold AND remit the taxes to the IRS and state taxing authorities.  How do you do this? Via estimated tax payments.

Key Takeaways?

  • Those as independent contractors are at greater risk for running afoul of the IRS
  • If you will be paid via Form 1099-MISC, you need to consult with a tax professional
  • You will want to make sure that you are doing estimated tax payments (a.k.a. quarterlies)
  • If you don’t pay enough in estimated taxes, you can quickly generate a tax bill that you can’t satisfy.

Are you an independent contractor/freelancer who needs help staying in Uncle Sam’s good graces? Give us a call or shoot us an email. We’d be happy to tell you the steps you need to take and assist you if needed.

Revenue Agents vs. Officers

One item that taxpayers always get a little confused on is the difference between and IRS Revenue Agent and a Revenue Officer. The two are quite distinct despite the similarities in title. If you are dealing with tax debt, your case may be assigned to a Revenue Officer (RO) at some point. This post will help you understand the difference between the two positions.

Job Description & Duties
Revenue Agents primarily work for the Examination Division. Their job is to conduct tax audits of individuals and businesses as well as trusts and non-profit organizations. Revenue Agents generally conduct tax audits of the most complicated tax returns ranging from small “Schedule C” businesses to the largest multi-national corporations. They are also assigned to the IRS’ Offshore Voluntary Compliance Program to determine whether the failure to file a Form TDF 9-22.1, Foreign Bank Account Report (FBAR) and will be subject to FBAR penalties.

ROs on the other hand work for the Collection Division. Their job is to collect money, or more precisely, collect all that is available. In this post, we go into great depth about the entire collection process and where the RO fits into it.  ROs are assigned to the most difficult IRS tax debt cases. Those individuals or business whom the IRS has been unable to collect from through letters, phone calls and tax levies and garnishments generated by IRS computers are generally assigned to a RO after a period of time.

Qualifications
Revenue Agents have a college degree and are highly trained in all aspects of auditing, tax law, research, and report writing. The minimum requirement for the job generally includes having a bachelor’s degree or higher in accounting from an accredited college or university that included at least 30 semester hours in accounting.  While Revenue Agents are not required to be CPAs, a few of them are.

ROs also must have a have a college degree, but the requirements are different. A RO can have a bachelor of Fine Arts and be qualified for the job. This is why ROs initially engage in months of training and then weeks of training on an on-going basis. It’s no surprise that when it comes to the best ROs, the IRS has a lot of money and time invested in them.

Interested in a job in either role? Check out this additional info from the Bureau of Labor Statistics.

Interesting Facts About Revenue Officers

  • A RO doesn’t carry a badge. If someone flashes a gold badge and says they are from the IRS, that’s not a RO. That is an agent form the IRS Criminal Investigation Division (CID). This means that you are being investigated for a criminal matter and you need to reach out to an attorney! These cases may include tax evasion, fraudulent tax returns, large failure-to-file cases, money laundering, and false documents or statements submitted to the IRS under the penalties of perjury.
  • A RO cannot arrest you. If any CPA, attorney or enrolled agent tells you they can stop a RO from arresting you, find a new professional! ROs have no arresting authority. All a RO can do is make a “referral” to the CID. This means they lay out the facts why they think you should be arrested. Referrals are made when they align with the types of cases mentioned above and the CID only accepts a fraction of them.
  • A RO isn’t graded on how much money they collect. A RO does not get promoted for bringing in the most money. But rather, how many cases they successfully remove from their “inventory” of collections matters. A RO would rather you enter into a resolution option like an offer in compromise today, than be sandbagged for 2 years, even though you wind up paying in full.
  • A RO MUST attempt initial contact in person. Everyone thinks their RO is a total jerk for showing up, unannounced, to make first contact with a taxpayer. But little do most taxpayers know that Internal Revenue Manual Section 5.1.10.3 (Initial Contact) requires that they make first contact with a taxpayer in person. You may not have been home the first time they showed up, so if you are wondering why someone from the IRS left a card for you at your home or on your car, don’t ignore it. There will be further contact!
  • Many ROs are friendly and reasonable. Most employees working for the IRS are normal, hard working folks like you and I. They go to work, attempt to do a good job and then head home to relax just like we do. Thus, understand that they want to close your case and they need your help to do so. They will not “go away” if you ignore them and neither will your problem (it will just get shifted to another part of the process).

Needless to say, if you are uncomfortable dealing with an RO or simply don’t want to talk to them, then give us a call. We’d be happy to talk to them on your behalf and help you (and them) make your tax matter a thing of the past!

How To Assemble Your 1040 Income Tax Return

If you are filing an old tax return, then unfortunately, it must be sent to the Internal Revenue Service via paper (versus electronically).  As we’ve become accustomed to E-Filing returns, sometimes it seems that the nuances of assembling a paper return have become something of a lost art (even for us practitioners).  The IRS processes paper tax returns in a specific manner, but don’t worry about decoding their system.  After you’ve finished preparing your return, it will take you just a few minutes (by following the steps below) to have your tax forms organized and ready for mailing/processing.

Step 1
Check your return for completeness and errors.  We recommend reviewing the following:

  1. All of your personal information (e.g. name, address, etc)
  2. Be sure your Social Security number is entered correctly
  3. Ensure only one filing status is checked
  4. Ensure that an allowable exemption is entered for each dependent you are claiming
  5. Ensure that you’ve included a daytime phone number

Step 2
Sign your return. The IRS won’t accept your return for processing unless it’s signed. If you’re married and file a joint return, both of you must sign it. The person whose name appears first on the tax return must sign in the “Your Signature” box, and the spouse listed second signs in the “Spouse’s Signature” box.

Step 3
Prepare your refund or payment information. If you’re due a refund and want direct deposit, include your bank account information in the “Refund” section above the signature boxes. If you owe taxes, prepare Form 1040-V, the voucher used to make a payment.  Just make sure not to staple your payment or voucher to the return.

Step 4
Gather your tax forms and schedules for assembly. Place your Form 1040 on top and other forms and schedules for your return behind it. On the schedules and forms you’ll notice an “attachment sequence” number in the upper right corner.  Use the attachment sequence numbers as your guide, following them in numerical order, starting with the lowest number.

IRS Sequence Numbers

IRS Sequence Numbers

Step 5
Attach any additional statements that are needed.  In some cases, you might need more room to list deductions or report entries on your return. If you prepare an additional statement, write your Social Security number at the top of your statement and note which form the statement is supplementing. You’ll attach your statement behind the related IRS form in your tax return. For example, if you list additional investment expenses on your statement for Schedule A, you’ll write “Additional Statement for Schedule A”, write the line number and amount of expense you’re reporting and attach the statement behind your Schedule A.

Step 6
Staple all your forms and schedules together in the upper right corner.

Step 7
Attach W-2 and 1099 income documents. You’ll receive a few copies of each income document that’s mailed to you. Find the federal copy of each form and staple them to the front of your Form 1040 in the income section. Only staple these forms to the first page of your 1040 – do not allow your staple to go through all the forms in your return.

Step 8
Check this post for information on the addresses where the return should be mailed to.

Processing Times & Refund Status
If you file a complete and accurate paper tax return, your refund will usually be issued within six to eight weeks from the date it is received.

If it hasn’t been received in the time frame outlined above and you are wanting to know the status, feel free to check the Federal or State Where’s My Refund Page(s) outlined in this post.  You can also check by calling the IRS Refund Hotline at 800–829–1954. If you use the online tool or call, just be prepared to provide your Social Security number, your filing status and the exact whole dollar amount of the refund shown on your return.

 

How Long Should I Keep My Tax Records?

While the IRS will not tell a taxpayer how long they need to keep their tax records, it’s prudent to keep them anyway.  But just what should you keep and for how long? As a general rule of thumb, if you “attempted’ to file your return correctly, then you will want to keep everything for 3 years.  However, take a look at the two tables shown below for further details and items only applicable to certain situations.

Supporting Tax Documentation To Keep

Item Supporting Record
Income Form(s) W-2
Form(s) 1099 (INT, DIV, Etc.)
Bank statements
Form(s) K-1
Expenses Canceled checks or other proof of payment
Invoices
Receipts
Home Closing statements/HUD-1
Purchase and sales invoices
Proof of payment
Insurance records
Investments Brokerage statements
Mutual fund statements
Form(s) 1099
Form(s) 2439

 

Length Of Time One Should Keep Their Tax Documentation

Situation Retention Period
Owed tax and the subsequent three situations do not apply to you 3 years
Did not report income that is more than 25% of the gross income shown on the return you filed 6 years
Filed a fraudulent return Indefinite
Do not file a return Indefinite
File a claim for credit/refund after you filed your return 3 years or 2 years after tax was paid (whichever is later)
File a claim for a loss from worthless securities 7 years

 

How were the lengths of time determined?  Most of them coincide the the various IRS Statute of Limitations.  This is the length of time the IRS has to assess additional tax against a taxpayer, request further information or subject a return to audit.  Needless to say, one wants to make sure they have their “proof” for at least the length of the statute.  However, it may be advisable to keep your support indefinite.

For example, if you make contributions to your IRA, you will want to probably keep all of your tax returns.  Why?  Well, when it comes time for you to make your withdrawals come retirement, those that represent a return of the money you contributed are tax free.  How will you know how much you contributed?  Exactly; you’ll need the originally filed tax returns!  So keep those tax records as long as you think you may need to; you never know when you may have to reference them to prove your case.

How To Find Your Prior Year E-File PIN

When you attempt to E-File your taxes, you will often times be prompted for your PIN.  What exactly is this?  It’s a 5 digit number located on the signature line of Income Tax Return.  This “E-File PIN” serves as your signature.  If you filed a return in the previous year, you will want to enter in the same number. What if you can’t find it? This post will discuss your options.

Identity Verification

When you E-File, the IRS wants to make sure that it is “really you” that is attempting to file the return.  They can do this by having you verify your prior year PIN or the prior year adjusted gross income (AGI) reflected on the return.  Without your PIN or AGI, you won’t be able to e-file the current return.

3 Ways to Find Your PIN

If you filed taxes last year, you can obtain your PIN, by doing one of the following:

Look at a copy of your Return. Contact whomever prepared your tax return last year for a copy. From that return, you’ll be able to see the PIN that was used on the signature line.  If you used tax software, you can contact the service provider as they should still have it on file.  Alternatively, they may have emailed it to you when you actually filed last year. As such, take a look in your email and see if it is there.

Use the IRS PIN tool. If locating a copy of the return isn’t an option,  you can use the IRS PIN Tool to retrive it.  It’s a useful and easy to use tool and only requires you to know your basic information (e.g. name, address, date of birth, social security number), along with the filing status used (single, married filing jointly, etc).  Then, within seconds (or minutes), the IRS website will provide your the PIN.

Call the IRS. You can always call the IRS directly at 1-800-829-1040 to obtain your PIN.

In closing, here are a few things to keep in mind:

  1. The one thing to keep in mind is that your E-File PIN IS NOT the same as an identity theft PIN.  You can read more about the process of dealing with tax identity theft and obtaining an ID Theft PIN in this post.
  2. If you make a “new” 5-digit E-File PIN for your taxes this year, make sure you write it down. Your current year  PIN will be used when filing your tax return next year.
  3. E-file PINs can be confusing, but you shouldn’t let that stop you from filing. If you’re confused about your PIN or have any other tax related issue, our team of xperts are standing by to assist you.  Just give us a call or shoot us an e-mail via the links at the top and bottom of this page!

Should I Amend My Tax Return?

Sometimes you will get a Form 1099 or Form K1 after you already filed your income tax return.  Sometimes you will “remember” that W2 or 1099-MISC that you should have gotten in the mail but didn’t (like when you move and don’t tell your old employer).  No matter what the reason is, sometimes you simply need to make some changes to your return.  But what changes require you to file an amendment and just how do you go about the whole thing?  Keep reading dear friend, keep reading.

When you should make changes.

Amend to correct errors.  You should file an amended tax return to correct errors or make changes that are needed to your original tax return. For example, you should amend to change your filing status, correct the amount of income reported, or fix erroneous/omitted deductions or credits.

Don’t amend for errors where the IRS also receives a form.  You normally won’t need to file an amended return to correct math errors where the IRS receives the same form. The IRS will typically correct those for you.  For example, if you failed to report $1,000 of interest reported on Form 1099-INT, the IRS will usually fix it and send you a letter telling you they did so.  But if you transposed the income number for your cash based vending machine business on Schedule C (i.e. $8,999 vs $9,899) then you’ll want to file an amendment to report the correct figure as the IRS will never know it is wrong.

How long do you have to file your amendment?

You usually have three years from the due date of your original tax return to file an amended return.  This is particularly true if you need to claim a refund. You can file it within two years from the date you paid the tax, if that date is later. For example, the last day for most people to file a 2011 claim for a refund was April 15, 2015 as the due date for that return was April 15, 2012.  For more information about this and other IRS statute of limitations, check out this post.

How do you file an amendment?

Use Form 1040X, Amended U.S. Individual Income Tax Return, to correct your tax return.  Note that this form must be filed via paper as it can’t be e-filed. As such, check out this post on the IRS website for the address applicable to your state as to where it should be mailed.  It should also be noted that you will want to include the Form 1040X, the original schedules that you filed and then the amended or changed schedules.  This way the IRS will be able to see what was originally filed and what was changed.

Other helpful things to know.

Wait to file for a “second” refund.  If you are due a refund from your original return, wait to get that refund before filing and amended return to claim an “additional” refund.  Amended returns take up to 16 weeks to process so:

  1. you don’t want things to get crossed up in the IRS system by having two returns being simultaneously processed.
  2. expect to wait a while before you receive your money.  Amended refunds will come via check, even if you provide direct deposit information.

Pay additional tax as soon as you can.  If you owe more tax as a result of your amendment, pay the tax as soon as you can. This will stop interest and penalties from accruing unnecessarily. You can use IRS Direct Pay to pay this amount directly from your checking or savings account

Don’t amend to correct Form 1095-A errors.  Taxpayers who filed a 2014 tax return and claimed a premium tax credit using incorrect information generally do not have to file an amended return even if additional taxes would be owed. The IRS may contact you to ask for a copy of your corrected Form 1095-A to verify the information.

Track your amended return.  You can track the status of your amended tax return three weeks after it’s been filed with the IRS ‘Where’s My Amended Return?’ online tool or by calling 866-464-2050. The tool can track the status of an amended return for the current year and up to three years back.  If you have filed amended returns for multiple years, you can check each year one at a time.

Need help filing your amendment?

If you don’t want to go through the hassle of doing all those calculations, filling out the various forms and then trudging down to the post office to wait in line and mail them, why not give us a call?  We’d be happy to help you navigate the process and get the correct forms to the IRS ASAP.

States With No Income Tax

When tax time rolls around, you typically have to file a state income tax return at the same time that you file your federal income tax return.  However, if you live or work in one of these seven states you will not  have to file an income tax return come tax time:

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Washington
  • Wyoming

In addition to the above states, the following two only tax income from dividends and interest:

  • Tennessee
  • New Hampshire

Living in one of these states will certainly save you from the hassle of having to file an extra return during tax season, but it won’t necessarily save you any money. These states make up for the gap left by not collecting income taxes by charging relatively higher property, sales, and fuel taxes.  Based on 2013 data, the following graphics indicate where each of these states derived their revenue:

Alaska

Florida

Nevada

South Dakota

Texas

Washington

Wyoming

Tennessee

New Hampshire

Normally, you have to file a resident tax return in the state where you are a resident.  That state will tax you on all of the income earned, no matter what state it is from.  Thus things can get a little complicated if you live near the boarder in any of the “non-tax” states but work in one that does charge its residents an income tax.

So if you are a resident of a state without an income tax, you will still need to file a return in any other state where you earned money. Conversely, if you are a resident of a state with an income tax, but you work in one of the seven without one, you will not have to file a nonresident return there.

Remember, you can easily take care of all your state income tax returns at the same time you file your Federal return.  Have unfiled state returns that you need to take care of?  Feel free to give us a call or shoot us an email.