Often times, taxpayers don’t include certain types of income because they don’t believe it’s taxable or that they don’t need to because the amount is so minute. All income is taxable and it has to be reported on your tax return. Below is a list of some of the most commonly missed sources of income.

Unemployment benefits are taxable. If you get unemployment, you will receive a 1099-G Form from the IRS at the beginning of the year. If your unemployment benefits came from non-union funds that you contributed to, the amount that exceeds your contribution can be taxed. The American Recovery and Reinvestment Act made it possible for the first $2,400 of unemployment benefits to be tax-free.

Gambling winnings are taxable and have to be reported on your tax return. Casino, lottery and horse and dog track winnings must all be included. Cash winnings and the market value of other non-cash prizes are also taxable. If you win cash and prizes on a game show, or any other contest, the market value of the prize is considered taxable income.

Performance-based bonuses that are given by employers are taxable. Cash, gift cards, trips, and property are considered taxable. If you receive a bonus in the form of goods or services, the market value of those goods or services is taxable, so are holiday bonuses.

If you are awarded damages by the court for pain and suffering or money loss, this money is not taxable. Punitive damages (the excess of your loss) is taxable.

If your employer reimburses you for business expenses, you will have to pay taxes on it, however, you can take deductions on the expenses you incurred for business expenses to begin with, so there is still an upside.

Severance pay or payment at the end of employment, when a contract was signed, is taxable income.

For more information about taxable income, contact a tax professional or visit www.irs.gov.

Daniel Stoica Accounting Professional

Another school year is about to begin and families all across the country are buying new clothes and school supplies, yet most parents tend to forget that tax time is just around the corner, as well. There are some tips to help you stay organized and plan for April now, so you can get some credits and deductions when April arrives.

Fall

This is the time of year when taxpayers should really begin to think about their taxes. The year is nearly at an end and if you are working, you can make your best guess has to how much you have made this year. Once you have figured that out, you can determine which tax bracket you’re in and adjust your withholdings accordingly. If you think you haven’t paid enough, now is the time to talk to your employer about taking more taxes out of your pay check. Yes, it will mean less take-home money, but you also won’t end up owing the IRS in April. Although, if you have overpaid your taxes, you’ll be looking at a nice refund at tax time, which means you may be able to spend a little more at Christmas.

This is also the best time of year to make donations to qualifying charities because you will still have time to get those receipts before April.Winter

Winter

With all of the holiday preparation and events during winter, you are most likely not thinking about your taxes. Keep in mind, though, that December 31^st is the end of the tax year, so if you are going to make any large purchases in order to lower your tax liability, you should do it before time runs out. If you make donations during this time of year, get them done right away. You can also make your January mortgage payment or defer any extra income to keep your liability as low as possible.

January is when most people receive their tax forms in the mail and their W-2s from their employers. You can file your taxes after the middle of January, but many taxpayers begin paying in March or April. If you would rather not file early, you should get your financial records and receipts together so you are prepared.

Spring

If you are one of the few taxpayers who gathered everything early, when spring arrives you can file your taxes easily and quickly. April 15^th is the tax deadline. All tax returns must be postmarked by midnight on April 15^th, unless you filed for an extension. The sooner you get it done, the less you have to worry about it. If you have your tax return prepared by a professional, it’s best to get it done before April because once April arrives, they will be busy.

Thankfully, April 15^th is in the middle of spring, so, once your taxes are filed, you can enjoy the rest of the season. If you are expecting a refund, you will have some extra money in your pocket, as well. It’s never too early to plan for tax season. The sooner the better. You could use your refund to purchase something that will give you a deduction or credit on next year’s taxes.

Summer

The summer months are a time to relax, so if you filed your return on time and didn’t request and extension, you can enjoy your summer without the worry. If you missed that deadline and filed for an extension, you should really get on it now, otherwise, you could end up paying penalties and interest. Taking care of your taxes right away will allow you to enjoy a stress-free summer.

When you aren’t planning barbecues and other parties, you can get an early start on next year’s taxes. Keep all of you financial documents and receipts throughout the year in one place. It is a lot easier to keep track of your records if they are safe and in one place, it will also keep you from having to hunt everything down as it gets closer to tax time. 

Daniel Stoica Accounting Professional

When you are in the military and under the age of 30, retirement looks like a long way off, but saving for it now is crucial if you plan to retire early. The sooner you save, the sooner you can retire. By following these simple guidelines, you can enjoy life now and still have enough saved for later, when the time comes to retire.

1) Invest: Make your military pay work for you right away. Begin investing early so you can plan your retirement sooner. You will gain interest on your investment which will help your investment to grow quicker.

Interest earns money on your investment, so, basically, you are making money from the money you put in, without having to do anything. Because of this military personnel will have more savings available to them. If you only invest $100 a month at 18 years old, you could potentially be a millionaire by the time you reach retirement. It will also allow you to what you want to do as you keep track of the money you are investing.

2) Consistent investment plan: If you invest something every month, regularly, you can receive long-term gains. Military personnel have the potential to invest more over a longer period time because it is steady income. Plan to retire now by saving now and as your savings grow, so does your knowledge of investing, which will enable you to invest in something with bigger returns.

The perfect investment for a young soldier would be a low-cost broad market index investment. It is an easy investment and virtually no maintenance. It take very little knowledge and about an hour to make your investment work for you.

3) Diversification: When you diversify, you have less risk. If all of your money is invested in the stock market, you stand to lose all of your money if the market crashes. By placing your money in several different investments, you have a greater potential of making a substantial profit.

4) Tax benefit vehicles: Investment vehicles will give you benefits to help you towards retiring at a young age. Roth IRAs are great investments that help lower your taxes. 40% of your income goes to pay taxes, so if you invest in a Roth IRA, you can keep more of the money you earn.

Planning an early retirement now is the perfect reason to invest. Diversifying your investments will give you more security and more gains, plus affords tax benefits. If you begin now, you will be able to have the things you want in retirement without worry.  

 Daniel Stoica Accounting Professional

Most working parents still have to work during the summer, even when their children are out of school. Because of this, there are extra expenses for child care if you have a child 13 years of age or younger. These expenses add up, but there is now a tax credit for parents who send their children to summer day camp.

 The Internal Revenue Service recently announced that expenses for summer day camp for your child could give you tax credits on your federal tax return.

Dianne Besunder, media relations spokesperson for the IRS said, “If you pay someone to care for your child, spouse, or dependent, you can claim the Child and Dependent Care Credit on your federal income tax return.”

People who are working, or looking for work, need to have child care while they do so. Day care and summer day camp qualify for this tax credit, which can be up to 35% of your expenses, depending on your income.

There are 9 qualifying factors that allow you to claim the Child and Dependent Care Credit.

1. Care must have been given to at least one qualifying person. This would be your dependent child who is 13 years old or younger, a spouse and anyone else who is physically or mentally disabled whom you care for. You must list each person on your tax return.
2. Care must be given so you, or your spouse, can work, or look for work.
3. You, or your spouse, must have earned income from wages, salary, tips, or earnings from self-employment. If you, or your spouse, were a full-time student, or care for a disabled person, you may qualify as having earned income.
4. You may not pay your spouse or other dependent, for the care. Your child may not be 19 years old or older at the end of the year, even if they are not your dependent. The care-giver must be identified on your tax return.
5. You must file as single, married filing jointly, head of household, or qualifying widow(er) with a dependent child.
6. The qualifying person must have lived with you for at least six months out of the year. The only exceptions are birth or death of the qualifying person, or if the child is of separated or divorced parents.
7. For the 2011 tax year, you are allowed up to $3000 of your expenses for the year for one dependent and $6000 for two or more dependents.
8. The expenses must be reduced by the amount of dependent care benefits that are provided by your employer which are deducted or left out of your income.
9. If you pay someone to care for your dependent in your home, you may have to withhold social security and Medicare tax, and also pay federal unemployment tax. Publication 926, Household Employer’s Tax Guide, explains this in detail.

Use the 2441 Form, Child and Dependent Care Expenses, to figure you credits, and send it in with your tax return.

Daniel Stoica Accounting Professional

One of the most common questions asked at tax time is, “How do I avoid being audited?” The question itself is more common than the probability of actually being audited. Only 1% of all taxpayers have actually been audited.

When you know what information on your return will trigger an audit, it will help you to avoid one. It is by no means a guarantee, but it will definitely reduce your chances. By looking at past audits, you will see what common issues you need to take a close look at.

High deductions – Deductions that are unusually high compared to your income sends a red flag to the IRS. They annually publish the “Statistics of Income” and, although the book offers a range for typical income, you have to use common sense here. If you are at the lower spectrum of the income bracket, and you happen to claim high deductions in association with that lower bracket, you might trigger an audit, despite the fact that the deductions may be valid.

High Income – Higher income is usually considered an advantage, but from the IRS’s perspective, it causes them to look a little closer, which can be a disadvantage. Past audits show that a chance for an audit of a taxpayer who makes less than $100,000 is 0.93%, whereas a taxpayer whose income is over $100,000 has a 1.77% chance of being audited. With income over $200,000, your potential for an audit jumps to 2.87% and anyone who makes $1 million will  have a 9.37% chance of being audited.

Cash Income – When you work in a profession where you handle cash, such as receiving tips, it makes the IRS curious. They will most likely compare your bank deposits and the income you have claimed on your taxes. If they don’t add up, you may find yourself being audited.

Self-Employment – Self-employed taxpayers tend to write-off as many expenses they can in order to keep as much of their money as possible. The IRS is sure to verify that these expenses and deductions are legitimate.

But just because some items on a tax return might trigger a red flag with the IRS, it isn’t a guarantee that you will be audited. Your best bet to avoid an audit, though, is to expect that it will happen. Make certain that your deductions are correct and you have a record of every expense and pay stubs to show the IRS, just in case.

Of course, not having to deal with an audit is the best thing that could happen, and if you keep yourself apprised of the issues the IRS looks at, you will avoid that letter from them.

 Daniel Stoica Accounting Professional

The Internal Revenue Service is helping Military personnel with a new law that gives income exclusions for death benefits and specific types of home sales. Some qualifying taxpayers need to file an amended return in order to claim these tax breaks. The IRS has asked that they put the words “Military Family Tax Relief Act” in red at the top of these returns to speed up the processing of the forms.

This new law doubles the benefit that is paid to survivors of deceased  Military personnel to $12,000. It makes the whole amount tax-free and the changes are effective for deaths that occurred after Sept. 10, 2001. Only $3,000 was tax-free before this new law took affect. Those who already received these benefits paid taxes on the benefits that were received for deaths after the effective date have the option of filing an amended return on the 1030X Form, which will reduce their adjusted gross income by the $3,000 they had previously reported as taxable. For those who got these benefits in 2003, and all future years, won’t have to report them on their tax returns.

Some taxpayers may even be able to exclude the gain on the sale of their home if they have owned and used the home as their primary residence for at least two of the five years before the sale. A maximum exclusion may apply to taxpayers who are serving in the Military who fulfil at least part of the two-year rule. Some Military personnel keep ownership of a home while they are away on active duty but when they return, they sell it without living in it. This may cause them to become disqualified for the exclusion.

The new law allows taxpayers on extended duty in the Military or who are serving overseas to suspend this five-year period for up to 10 years during their tour. They are considered to be on “qualified” extended duty when they are stationed at least 50 miles from the residence they intend to sell, or when they are living in government housing under Military orders for more than 90 days, or for an indefinite period.

These changes apply only to home sales that take place after May 6, 1997. The Military taxpayer can use this provision for one property at a time. They may also exclude the gains on only one home sale in a two-year period. The law allows for qualified Military taxpayers who sold their homes before 2001 until November of 2011 to file their amended returns in order to claim the exclusion, even though a regular amended return must be filed within three years of the original return’s due date.

You need to use the 4506 Form, “Request for Copy or Transcript of Return,” to get a previous  year’s tax return. This form, and the 1040X Form can be found on the IRS Web site.  If you need more information, consult a tax professional. 

 Daniel Stoica Accounting Professional

Recently, the Internal Revenue Service declared that the 2011 Spring issue of the Statistics of Income Bulletin is available. The issue features information on high-income tax returns that were filed for the 2008 tax year.

More than 4.3 million returns were filed by taxpayers with adjusted gross incomes of $200,000 or more for the 2008 tax year. That equals 3% of all returns filed for 2008.

The Statistics of Income Division of the IRS announces the bulletin every quarter. The articles in the bulletin give the most recent figures available from several different tax returns that are filed by U.S. taxpayers. This quarter’s issue of the bulletin includes articles on the following:

-Individual income tax figures, sorted by the age of the taxpayer. For the 2007 tax year, individual taxpayers filed nearly 143 million returns. 27.1 of those were filed by those between the ages of 35 and 44. Those were the most returns filed by any age group that year.
-Individual income tax data, according to the state. Individual taxpayers from the state of Connecticut claimed the highest adjusted gross income, on average, in the United States for the 2007 tax year. Connecticut was the only state where the average adjusted gross income was more than $90,000.
-Foreign recipients of United States Income. For the 2008 tax year, U.S. income payments to foreign workers totalled $659.7 billion. Eight countries, including the United Kingdom, Cayman Islands, Germany, Japan, Switzerland, Canada, France, and the Netherlands, accounted for nearly 67% of all income paid to foreign people.
-International boycott reports. For the 2008 tax year, 138 United States entities got almost 3,700 requests to participate in boycotts that were unsanctioned by the U.S.
-Gift tax returns. Individuals filed about 235,000 federal gift tax returns with over $40.2 billion in assets that were transferred during 2008.

The Statistics of Income Bulletin is available for download at irs.gov/taxstats. You can find printed copies at the office of the Superintendent of Documents, U.S. Government Printing Office, P.O. Box 371954, Pittsburgh, PA 15250-7954. The cost of an annual subscription is $53, and single issues cost $39.

For more information about these figures, you can write to the Director, Statistics of Income (SOI) Division, RAS:S, Internal Revenue Service, P.O. Box 2608, Washington, DC 20013-2608.

Daniel Stoica Accounting Professional

According to most tax professionals, people often don’t realize that the income they earn from auctions and consignment sales are taxable.  The Tax Gap is the amount of tax that goes unpaid every year and  this blog will help taxpayers understand what income they need to report and the deductions they might be able to take.

The Tax Gap results from taxpayers under-reporting their taxable income. Most people know they have to pay their taxes, but most need a better understanding of their full obligations.

What Is Taxable?
Income from all auctions and consignment sales are taxable. But there are certain exceptions to this. The income is generally categorized as either business or ordinary income. This income may qualify for capital gain treatment. There are also some situations in which income is excluded from taxable income.

Business income earned from an auction or consignment is taxed just like earned income from any other retail or service business. This includes income tax, self-employment tax, employment tax, or excise tax. A retail or service business owner has to include this income as business income.

A person must report money received from a sale whether it’s income from a business or not.  Reportable income is the income received that is above the original cost of the item. This money can be business income or capital gains.

Income resulting from auctions similar to a garage or yard sale is not required to be reported. However, there might be exceptions to this. If an online garage sale turns into a business with recurring sales and the purchase of items for resale, it is considered an online auction business.

Some people do sell products or services online as a hobby. This income must be reported, but expenses are limited in deductions. The deductions must not be more than the income and can only be taken if the deductions are itemized on your 1040, Schedule A, Itemized Deductions.

What’s a Deductible Expense?
Auction and consignment sellers are in the business of making a profit and can deduct expenses that are claimed as ordinary and necessary. An ordinary expense is one that is common in a business. A necessary expense is one that is helpful for a business. Auction and consignment fees and commissions that are verifiable are allowable business expenses.

Expenses related to personal, living, or family matters are not deductible. There are, however, expenses that are partly personal and partly business-related. The business portion of these expenses are the only ones that are deductible.

A common expense issue is a home that is also used for business. A person might be able to deduct expenses for the business use in their home if they use one part of their home exclusively for the business, generally referred to as an exclusive use requirement.

Auction and consignment sellers, however,  may figure their deduction to the expenses that relates to the space in the residence that is used on a regular basis to store inventory and/or product samples if the residence is the only location of their auction or consignment business. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation.

These rules can get tricky, so it’s a good idea to seek the advice of a tax professional to find out what you must claim as income and what you can and can’t deduct as an expense.

Daniel Stoica Accounting Professional

More than half of the people who filed their taxes got refunds this year, a little more than usual, but the amount of those refunds has surged over the last ten years. Many Americans have overpaid on their taxes throughout the year to get a larger refund at tax time.

Last year’s refunds averaged over $3,000, and this year’s average is not far behind, according to the Internal Revenue Service. This is nearly twice as much as the $1,700 average from 1999.

Current tax data from the IRS shows the growth in refunds hasn’t been limited to any one income level. People who suffered job or investment losses during the recession overpaid inadvertently, giving them bigger refunds.  The past decade also brought short-lived tax benefits where many taxpayers may not have adjusted their withholdings. A few examples include: the American Opportunity Education Credit; the Home-Buyer Credits; and the Expanded Child Credit.

Tax professionals and other financial advisors often frown on large tax refunds because they add up to interest-free loans to the government, thereby reducing investment capital in the same amounts. Many advise that it’s better to have the money in hand every month and invest it, spend it or just let it earn interest.  To many Americans, thought, a $3,000 check looks a lot better than $3,000 coming out of their paychecks over the year.

If your refund seems too big or too small, fixing it usually means making changes to your W-4. It’s the form your employer uses to figure withholdings on your paycheck. Amending it involves three worksheets and two tables, which is sometimes overwhelming to the average person.

The W-4 can be a headache even for people familiar with the 1040. A withholding allowance isn’t the same thing as an exemption. It’s intimidating for even the most seasoned taxpayers. If you aren’t comfortable filling out your own W-4, don’t try. It’s better to hire a tax professional.

If you pay a professional to do your taxes, he or she will most likely give you free help with your W-4. Most accountants do offer it. H&R Block doesn’t charge to fill out your W-4, if you are using them to prepare your taxes. Turbotax has a W-4 feature as part of its software program. The IRS also offers a withholding calculator at the IRS website. Make sure you have your paycheck and your tax return when you have this done to avoid any complications or delays.

Daniel Stoica Accounting Professional

People often  hold on to many myths when it comes to taxes.  Below is a list of those myths and how you can save money by separating fact from fiction.

Students are exempt.
A lot people think there’s an exemption for students, but students must pay taxes on all of their income, no matter how many credits they are taking or whether they are a full-time student.

There are special credits for students, though, such as, the Lifetime Learning Credit and the new American Opportunity Credit. Distributions from a 529 Plan are tax-free, but the income is taxed.

Students who during the summer check the “exempt” box on their W-4′s, but if they didn’t have any taxable income last year and don’t expect to have any this year, then they have nothing to claim.

I can’t claim my working child as a dependent.
If you are providing more than half your child’s support, they qualify as your dependent, and you can deduct any costs you paid for that child. Support is what’s spent, not what’s earned.

You can also qualify for an exemption if your child doesn’t earn more than the value of the exemption.

A child qualifies as a full-time student if he or she is a full-time student for at least five months during the tax year.

I can sell my house tax-free because I’m over age 55
The old law was that if you were older than 55, you could eliminate as much as $125,000 in gains from taxes, but you could only do that once. The new rules are even better.

Under the current law, age doesn’t matter. If you sold property that was your principal residence for at least two out of the last five years, you can exclude as much as $250,000 in gains, and $500,000 on a joint return. You can take the gain exclusion every two years if you qualify.

I can deduct my sales taxes too
If you file a Form 1040 and itemize your deductions on Schedule A, you can claim either state and local income taxes OR state and local sales taxes, but you cannot claim both.  If you decide to claim your sales taxes, you have to make sure that you save your sales receipts throughout the year so that you can add up the total amount of sales taxes you paid. 

If you were not very good about saving all of your receipts, you can choose to claim your state and local sales taxes instead.  One other option would be to fill out the worksheet and use the general sales tax tables found in the Instructions for Schedule A (Form 1040), but you can also use the IRS Sales Tax Deduction Calculator. 

I have to file a joint return if I’m married
If you’re married, you can always file married filing separately. You will pay more in taxes by doing so, but in some situations, this can be to your advantage.

If you’re married, you can’t file as single or head of household. However, if you’re separated and you have a child there are provisions that will let you file as head of household. Speak with a tax professional to get the most accurate information.

The tax codes are complicated and can change regularly. If you aren’t sure of the new rules, again, seek the advice of a tax professional.

Daniel Stoica Accounting Professional