Bankruptcy and Your Taxes

You may have wondered what tax professionals do after the filing deadline. What? You’ve never wondered about that? Well, I’ll tell you anyway. Tax professionals use “down time” to keep up with tax law changes with continuing education. Last week, I got one of my 2019 continuing education hours by taking a free IRS webinar, all about what an individual or business taxpayer should know about taxes when filing for bankruptcy.

Hopefully, none of you (or any of my clients) will be in this situation. But, just in case, I’m sharing a few tips I learned from the IRS webinar, “Understanding Bankruptcy from an IRS Perspective”:

Notify the IRS

Anyone who has filed for bankruptcy, or who is in the process of filing for bankruptcy, should contact the IRS’ Centralized Insolvency Operations (CIO) Unit to report the filing. The bankruptcy could be related to unpaid taxes or not. The CIO will place a “hold” on any federal tax collection activities for the duration of the bankruptcy case. They also coordinate the IRS’ representation if there are any unpaid federal taxes.

Check Your Status

For individuals, the most common type of bankruptcy is a Chapter 13, although they sometimes file under Chapter 7 or Chapter 11. Chapter 13 bankruptcy is only available to wage earners, the self-employed and sole proprietors. To qualify, a taxpayer must have regular income, have filed all required tax returns for the four years prior to the bankruptcy filing and meet other requirements in the bankruptcy code.

Meet All Deadlines

During the bankruptcy case, the taxpayer must continue to file, or get an extension of time to file, all required income tax returns. All current taxes must be paid as they come due. Failure to file returns and/or to pay current taxes for the duration of the bankruptcy case may result in the case being dismissed with no discharge of tax debt.

What Else to Expect

Tax refunds can be received while in bankruptcy. However, refunds may be delayed or used to pay down tax debts. Successfully completed bankruptcy plans result in a discharge of debt, releasing the debtor from personal liability for the discharged debts. Some taxes may be discharged, depending on the facts and circumstances of the case.

You now have an idea of what to do about taxes when filing for bankruptcy. Plus, you’ve learned what tax professionals do after the filing deadline – keep up with tax law changes with continuing education.

Are you Eligible for the EITC?

Everything you hear about the new tax law is bad news – state and local taxes capped at $10,000 and miscellaneous deductions eliminated. It seems like a lot of tax benefits are gone or reduced. Isn’t there any good news?

Yes, there is good news about taxes! Some tax benefits have been retained, including one that helps hard-working people who deserve a financial break. It’s called the Earned Income Tax Credit, or EITC, a valuable benefit for working people with low-to-moderate income. Eligibility for the credit and the credit amount depend on your earned income and number of children in your household.

A tax credit is even better than a tax deduction because it’s a dollar-for-dollar reduction of your tax liability, not a reduction of your taxable income. Even better, the EITC is a refundable credit. The EITC could take your tax liability to a “negative” amount, meaning that your refund is even more than just paying back all of your federal taxes due for the year.

To qualify for EITC, you must have earned income (e.g., wages or self-employment income). Your income cannot exceed a specified amount that is adjusted annually by the IRS. To get the credit, you must file an income tax return, even if you do not owe any tax or are not required to file.

Some people don’t know about this credit or do not know that they qualify. Not taking a credit you qualify for? That’s just like giving away money! Who wants to do that?

Don’t miss your EITC refund. Don’t let your friends and family miss their EITC refund. Each year, 30% of the EITC-eligible population is new to this valuable tax credit, many of whom don’t know about it.

Need help? Get details about income limits and credit amounts at www.irs.gov/eitc. Made less than $55K in 2018? Check if you qualify for a larger federal tax refund at www.irs.gov/eitc.

Did you get the hint that you should look into the EITC on the IRS website? Great! Make sure you check it out and keep your friends, family and neighbors from missing a tax credit because they don’t know about EITC. They will thank you.

New Tax Law Still Requires Patience

Top down view of a cluttered desk with hands folded showing a watch.
Photo by rawpixel on Unsplash

In January 2018, less than a month after the Tax Cuts and Jobs Act was passed, I blogged that we all need patience. “Less than a month after passing a new law is too soon for all the details and unintended consequences to be fully explained,” I said.

Little did I know back then that we would need so much patience now, a year after the law was enacted.

Many new tax law provisions became effective in 2018, making the 2019 tax filing season the first time that many taxpayers will be aware of how the tax law impacts her or him. Getting clarity about those impacts may not be quick or easy, especially for businesses. Figuring it out will take some patience, whether you prepare your own taxes or pay a tax professional to do it.

Tax filing season officially opened this week. The deadline to file or extend an individual return is April 15, new law or not. During those 12 weeks of tax filing season, the following people will need to show and be shown lots of patience:

  • Self-Preparers – Reading instructions not your thing? You could be sorry if you rush into preparing your 2018 taxes without slowing down and understanding the new rules. Approach your tax software as though it were the first time you’ve used it. Everything will look so different, you will want to take each step with patience and care.
  • Tax Professionals and Their Clients – Your tax preparer may ask new questions and require more documentation to ensure your returns are accurate and comply with all the new rules. She or he will also need to explain the new rules and why you may not get your expected refund. Those conversations could be more stressful than usual, so a bit more patience will be needed by all parties.
  • IRS Employees – If you need to call an IRS representative, please remember that this mess is not her or his fault. Plus, as of this writing, the federal government is partially shut down. That IRS employee could be working without pay. Demonstrating patience on the phone makes the situation more pleasant for everyone.

The 2019 tax filing season is going to be more stressful than usual because of the new tax law and its impact. Approaching your software, your tax professional and the IRS with some patience will go a long way to making the 2019 tax filing season as painless as possible.

Phishing for your Tax Dollars

I hadn’t quite decided on this week’s blog topic when I saw an e-mail snagged in my spam folder. The sender was “IRS”. The heading was “Second Notice of Delinquent Taxes”. What a gift! A blog topic!

 

Like many taxpayers who receive a message from the “IRS” dunning them for cash, I knew that I didn’t owe the IRS anything. Thankfully, I knew better than to open or reply to it. Keep reading to know how to identify phishing, and what to do when it happens to you.

1.      What is phishing?

 

Phishing is a scam usually done through unsolicited email and/or websites that pose as legitimate senders or sites. Scammers use phishing to lure unsuspecting victims to provide personal and financial information. Bogus emails can appear to come from the IRS or your tax professional requesting information, including mother’s maiden name, passport and account information that is used to steal your identity and assets.

 

  1. How do I know if it’s phishing or really the IRS?

 

The easiest way to check for phishing is to place your cursor over the sender’s name, revealing the sender’s e-mail address. An address that doesn’t look legitimate is probably a scam. For the IRS, anything other than “irs.gov” is suspect. The IRS doesn’t initiate contact with taxpayers by email, texts or social media to request money or financial information. Most IRS communication is still through the good, old-fashioned USPS.

 

  1. What should I do with a phishing e-mail claiming to be from the IRS?

 

If you receive an email claiming to be from the IRS that contains a request for delinquent tax balances or financial information, immediately do the following:

 

  1. Don’t reply.
  2. Don’t open any attachments. They can contain malicious code that may infect your computer or mobile phone.
  3. Don’t click on any links. Visit the IRS’ identity protection page if you clicked on links in a suspicious email or website and entered confidential information.
  4. Forward the email as-is to the IRS at [email protected].
  5. Delete the original email.

 

Don’t get phished! When you get an e-mail that looks suspicious or is from an unfamiliar sender, stop and check it out before deciding to open it. If it’s phishing for your tax dollars, don’t even think about opening it! Just forward to [email protected] and delete!

 

Real Estate Professionals and Taxes

Real estate professionals take a lot of training and pass a really tough exam to earn a license to conduct business. Buyers and sellers of real estate are depending on their knowledgeable agent or broker to locate properties, bring the parties together, and navigate transactions to the settlement table.

 

Unfortunately, all that training and exam-taking doesn’t cover the special IRS tax rules that real estate professionals need to know and understand. Real estate professionals who don’t know the rules could end up getting an unwelcome tax notice about underpaying or incorrect filing.

 

Real estate professionals can avoid tax headaches by knowing about and understanding these three areas:

 

  1. Business Type for Tax Purposes

Real estate professionals operate their business as a sole proprietorship, unless the she or he forms a partnership or incorporates. The IRS considers licensed real estate professional as statutory nonemployees and treated as self-employed. This is because substantially all payments for their services are directly related to sales or other output, rather than to the number of hours worked. Real estate services are often performed under a written service contract providing that they will not be treated as employees.

 

  1. Tax Responsibilities

Real estate professionals are individually responsible for filing and paying all taxes, including federal, state, and local income, as applicable. Business income and expenses are reported on Schedule C, “Profit or Loss from Business,” and filed with the individual income tax return. Net business profits are also subject to the employer and employee portions of the Medicare and Social Security taxes (i.e., FICA), totaling 15.3% of net profit. FICA is paid to the IRS with the individual business owner’s income tax return.

 

  1. Deduction for Business Expenses

Expenses incurred to run a business as a sole proprietorship are deductible. The IRS does not publish an exhaustive list of eligible business deductions. The rules state that the business can deduct expenses that are “reasonable and customary” for that business. Common deductible expenses for real estate professionals include marketing, education, business licenses, and payroll taxes. Keep track of business expenses throughout the year; they really add up and reduce your taxable income.

 

Special IRS tax rules that real estate professionals need to know and understand aren’t included in the licensing test materials. Don’t know the rules? Consult www.irs.gov or with a qualified tax professional. You’ll be very glad that you did.

Make your Tax Withholdings “Just Right”

We all want to be like Goldilocks when we pay our income taxes – we want to get it “Just Right”. Not too hot (paying too much) or too cold (paying too little). How do you get it “Just Right” the Bear Family – eh — the IRS? Interest on underpaid taxes can be almost as scary as an angry Papa Bear!

 

Figuring out if your tax withholding is too high or too low is easier than you think. The IRS published a Withholding Calculator for employers in January 2018, found here. It reflects the new tax law passed in December 2017. Using this tool and making any indicated adjustments can help to avoid a serious too-hot or too-cold situation when you file your taxes next year.

 

The Withholding Calculator says to gather your pay information and last year’s tax return to get started. Actually, there’s more you need to know to get the most accurate and helpful results. Follow these three tips to get your Tax Withholdings “Just Right”:

 

1.      Understand Terms — Get clarification for any unfamiliar terms used in the Withholding Calculator so you answer the questions accurately. Terms like “pre-tax retirement plan,” “qualifying person,” and “taxable earned income” could mean something different than what you think. The IRS defines its terminology, but it’s not always super clear to everyone. Good news – a quick Internet search will provide links to sites where terms are explained in plain and simple language.

 

2.      Identify Changes — Compare your life and work situation from last year to your circumstances now. If you’ve changed your marital status, purchased or sold a home, or added an employer-provided benefit, your answers for this year will be different than they were for last year. Be sure you know how to answer each question based on your life and work circumstances now. If anything else changes, you will want to go through the Withholding Calculator again later in the year.

 

3.      Know Your Pay Frequency – Entering the wrong pay frequency, i.e., how often you get paid, really throws off the Withholding Calculator. One small difference, such as being paid bi-weekly (every other week, or 26 times a year) instead of semi-monthly (twice a month, or 24 times a year) could mean owing more money when you file your return next year. Miscalculating by two pay periods could make a significant difference.

 

Make sure your tax withholding is “just right” with the IRS Withholding Calculator and avoid a too-hot or too-cold situation when you file your taxes next year. Otherwise, you could be staring an angry Papa Bear in the eye next April 15!

How Americans Spend their Tax Refunds

The numbers are huge! Just a few days before the tax deadline, almost 120 million tax returns had been filed. More than 70% of those tax returns resulted in refunds back to the taxpayers totaling almost $243.6 billion. The average refund check or direct deposit amount was $2,831, slightly larger than last tax season.

 

So how do American’s spend their tax refunds?

 

GOBankingRates, a financial information and resources website, recently polled American taxpayers about how they planned to spend their tax refunds. The results were encouraging for money folks who preach fiscal responsibility. Here’s the full article. It’s an interesting read.

 

Per the survey, the five top ways that Americans spend their tax refunds are:

 

  1. Put into Savings – Forty-three percent of the survey respondents said they will put their refunds into savings. The survey was not specific about the type of savings. Let’s hope that savings includes an emergency fund for immediate needs and retirement contributions to meet long term goals.

 

  1. Pay Off Debt – Thirty-six percent said they will use the money to pay off debt. If that’s your situation, too, start by paying debt with the highest interest rate, like a credit card balance. More debt to pay after your refund is all used? Shift the amount you were paying on the paid-off balance to the next largest debt to get it paid off more quickly.

 

  1. Pay Toward a Vacation – Ten percent set aside their refund to pay for a vacation. Seems like a nice reward for getting through the year and filing that tax return. If your vacation funding choices are limited to putting it on a credit card or waiting for your tax refund, the refund “wins” every time – unless you can pay the card balance off each month.

 

  1. Splurge on a Luxury Item – Six percent go out and buy themselves a gift, whatever their heart desires. The bigger the refund, the bigger the splurge – jewelry, car, latest “bright, shiny object”. Let’s hope that these folks feel okay doing this because they already saved an emergency fund and maximized their retirement contributions.

 

  1. Necessary Major Purchase – Five percent need to use their refund for a major necessary purchase, like a home repair or appliance. Waiting to buy something you really need can be stressful, or even unsafe. Setting aside funds for emergencies and maintaining good credit are two ways taxpayers can avoid waiting for major purchases.

 

What about getting no refund?  The GOBankingRates survey found that 36 percent of those polled this year didn’t expect to receive a tax refund. Why is that a smart move? Well, you’ll have to check back and read my next blog to find out.

Need 2018 Estimated Tax Payments?

Phew! Tax season 2018 is over! So how did it turn out? Did you have to pay when you filed your 2017 returns? Do you know if you are withholding or paying enough for 2018?

 

April is a good time to check on what you are projected to owe for your 2018 taxes and see if it’s enough, or too much. That’s especially true this year because of the new tax law and changes to employer withholding tables. Word on the street is that the IRS was really aggressive in decreasing employer withholdings in order to increase paychecks. That can make employees feel rich now, but it could bite them hard when their 2018 tax returns are due.

 

If all your income comes from wages, chances are that your tax withholdings will cover your income tax liability. But if you are self-employed or receive other income, such as interest, dividends, capital gains, or rent, you might need to make estimated income tax payments. On top of that, if you don’t pay enough of your taxes on time, you could get hit with interest and penalties.

 

What the Required Payments?

If you owed additional tax for 2017, you may have to pay estimated tax for 2018. Estimated payments should be made if:

 

  • You expect to owe at least $1,000 in tax for 2018, after subtracting your withholding and refundable credits.

AND

 

  • You expect your total withholding and refundable credits to be less than the smaller of 90% of your 2018 tax liability or 100% of your 2017 tax liability.

 

What Are the Penalties?

Penalties are assessed if the required payments described above aren’t made as income is received, at least quarterly. Interest penalties are assessed on the underpaid amount, accrued daily from the date it was due and until it is paid. Interest rates are adjusted periodically and daily accruals really add up.

 

What Should You Do?

Clearly, the IRS and other taxing agencies are serious about wanting their money on time. You can figure out your 2018 federal income tax bill by using the IRS Withholding Calculator, updated for the new tax law – . People who are self-employed or have investment income should check out the IRS web page about tax estimates.

 

When in doubt, or if you are not comfortable with DIY tax estimates, be sure to consult with a qualified tax professional. She or he will help you identify all the information needed to project your 2018 tax liabilities, pay enough taxes on time, and avoid interest penalties.