If you receive tips as compensation at your workplace, you need to be aware of some facts from the IRS.

Very Important: Tips are taxable. Tips are subject to the following taxes-  federal income, Social Security and Medicare.  The value of non-cash tips, such as tickets, passes or other items of value, is also considered income and subject to tax.

You must include tips on your tax return. You must include in gross income all cash tips you receive directly from customers, tips added to credit cards, and your share of any tips you receive under a tip-splitting arrangement with fellow employees.

You must report tips to your employer. If you receive $20 or more in tips in any one month, you should report all of your tips to your employer. Your employer is required to withhold federal income, Social Security and Medicare taxes.

You need to keep a running daily log of your tip income. You can use IRS Publication 1244, Employee’s Daily Record of Tips and Report to Employer, to record your tip income.

For more information see IRS Publication 531, Reporting Tip Income, and Publication 1244. You can find these publications at www.irs.gov. You can also order these forms by calling 800-TAX-FORM (800-829-3676).

Daniel Stoica Accounting Professional

Time and circumstances seem to change on a daily basis. Once upon a time, the majority of marriages lasted a lifetime. Today, however, the chances of a lasting marriage are less than 50%. Because of that, the changes in taxes are important to note.

As we all know, divorce isn’t pretty. Parents fight, children rebel, and the long process of divorce takes its toll on everyone involved, not to mention the cost. Just because your divorce is final doesn’t mean you still don’t have issues. It’s now time to deal with taxes. When you understand how your taxes change, it makes the divorce process a little easier.

Alimony can be an issue in divorce. Alimony is payments made by one party to the other to maintain the lifestyle they have become accustomed to. Every state regards alimony differently, but the premise is the same. The IRS has strict rules regarding alimony that all taxpayers need to know.

The IRS does tax alimony payments that are received. The payer gets the better deal. They get a deduction on alimony payments they pay. It only applies, however, when alimony payments are granted in the divorce decree. If there is nothing about alimony written in the decree, the payments are not taxed, nor are they deductible.

In the case of child support, the IRS would rather avoid the subject matter altogether. Therefore, child support is neither taxable nor deductible.  However, if you don’t pay your child support as required by the court, they will take it from any refunds you may be entitled to. That is the only involvement the IRS has.

The IRS doesn’t care that you’re contemplating divorce, in the middle of divorce, or legally divorced, so it’s up to you, the taxpayer, to make sure you completely understand all of the tax issues.

Daniel Stoica Accounting Professional

Truckers and owners of heavy highway vehicles were notified by the IRS that their highway use tax return will be due on November 30^th, 2011. It is normally due by August 31^st.

The extension was put in place to help stop any confusion in regards to multiple filings in case Congress modifies the tax after September 30^th, 2011. Under the regulations that were recently filed by the Federal Register, the 2290 form-Heavy Highway Vehicle Use Tax Return, began on July 1^st, 2011. It applies to all vehicles that are used during the month of July, as well as vehicles that will be first used during August and September. Taxpayers are advised not to make payments before November 1^st.

To help truckers to apply for their state vehicle registrations before November 30^th, these new regulations are required by all states. They must accept the stamped Schedule 1 of the 2290 form as proof of payment. This will be provided by the IRS for the prior year, which ended on June 30^th, 2011. Federal law states that all state governments must get proof of payment of the highway use tax in order for truckers to get their vehicle registrations. Generally, once a taxpayer has filed their return and paid the taxes, the Schedule 1 is stamped by the IRS and returned to the taxpayer. States will then accept this Schedule 1 as proof of payment, but only through September 30^th. 

If anyone is registering a new or used vehicle between July and November, this new regulation will require all states to register the vehicles, without proof of payment, but only if the person who is registering the vehicle shows a copy of the bill of sale showing that the purchase was made within 150 days.

The highway use tax is used for trucks, tractors and buses with a weight of at least 55,000 pounds. Vans, pick-ups and panel trucks are not taxable because they are generally under 55,000 pounds.

Normally, the 2290 form and payments are due on August 31^st for trucks and all other taxable vehicles. The taxable amount can be up to $550 for each vehicle and is based on the weight of the vehicle. Other rules apply for vehicles with very little use on the roads, for logging, or for agricultural vehicles. It also applies to vehicles that transferred ownership during the year and were first used after July.

The IRS received nearly 650,000 2290-forms and highway use tax payments of $886 million last year.

Contact the IRS or a tax professional if you have any questions about this extension. 

Daniel Stoica Accounting Professional

It’s summer and school is out, which means plenty of students will be out looking for summer jobs. Keep in mind, though, that the IRS wants you to remember that you won’t be keeping all of the money you will make from that summer job. You will have taxes withheld from your pay check.

There are six IRS tips to keep in mind when you start your summer job.

1. On your first day of your new job, you will be required to fill out a W-4, Employee’s Withholding Allowance. Your employer will use this form to determine how much tax will be taken out each pay period. If you have more than one summer job, you will fill out a W-4 for each job. To make sure the correct amount is being taken out, you can check the Withholding Calculator on the IRS website.

2. Depending on the type of summer job you get, you might get tips as part of your income. All tips are taxable and you must account for that at tax time. 

3. A lot of students take on odd jobs during the summer to make some extra money, and any income your receive, from either baby-sitting or mowing lawns, is taxable.

4. If you earn $400 or more from those odd jobs, you will also end up having to pay self-employment taxes, because you are, basically, self-employed. These taxes pay for your Social Security and Medicare benefits. Social Security and Medicare are for the self-employed as well as those who work for someone else, for when you retire. Your self-employment tax is calculated on the 1040 Form, Schedule SE.

5. If you are in the ROTC program for advanced training, your food and lodging allowances are not taxable. But active duty pay, the pay you get for summer ROTC, is subject to tax withholding.

6. There are special rules that apply if you are a newspaper carrier. You are considered a “direct seller” and are self-employed as far as your taxes are concerned, if you meet the following conditions:

-Your job involves delivering newspapers.
-All of your pay comes from sales instead of the hours you work.
-You are under contract as a newspaper delivery service worker that states you are not an employee and must withhold your own taxes.

Keep these simple tips in mind when looking for your summer job and you will not be penalized for not withholding enough in taxes come tax time.

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

On June 9th, 2011, the Internal Revenue Service stated that about 275,000 businesses have lost their tax-exempt status because they didn’t file the required annual reports for three years in a row. They think that many of these businesses are no longer doing business, but stated that they will help the existing businesses apply for the restoration of their tax-exempt status.

In 2006, congress passed the Pension Protection Act, which requires many tax-exempt organizations to file a yearly information notice with the IRS. In 2007, the law set the same filing requirement for smaller businesses. The law revokes an organizations’ tax-exempt status if it doesn’t file the required notices for three years in a row.

The IRS has made an effort for many years to let organizations know about the changes in the law. They have provided many notices that include mailing out more than 1 million letters to businesses that hadn’t filed. And last year, the IRS published a list of organizations that were at risk of losing their tax-exempt status and allowed smaller businesses to have an another five months to file the required notices. Nearly 50,000 organizations did actually file during this extension period. The IRS thinks most of the small tax-exempt businesses are currently complying with the 2006 law.

During the last few years, the IRS has helped tax-exempt businesses learn about their filing requirement and has given them more time to file. IRS Commissioner, Doug Shulman, said, “We know there are some organizations, especially small ones, that don’t know about the new filing requirement. We are helping these organizations keep their tax-exempt status without threatening their operations.”

Additionally, the IRS issued a message about how businesses can apply for reinstatement of their tax-exempt status, including the retroactive ones. The IRS also gave relief for small tax-exempt organizations with yearly gross receipts of $50,000 or less for 2010. The relief lets those eligible organizations recover their tax-exempt status. The full details of this relief are available in Notice 2011-43, Notice 2011-44 and Revenue Procedure 2011-36.

If a business is on this list of organizations whose tax-exempt status has been revoked, it’s because the IRS records show that the organization didn’t file the required notices for 2007, 2008 and 2009.

A list of organizations whose tax-exempt status were revoked is available on the IRS website. It includes each business’s name, EIN and last known address. You may search by the state where the organization is located. Also, it includes the date of the revocation, as well as the date it was posted to the list. The IRS updates this list on a monthly basis and includes other organizations that lose their tax-exempt status.

The tax-exempt groups that file their required returns are not affected by the listing. The IRS believes that many of the recently revoked organizations are no longer in business and should be removed from the list.

This listing shouldn’t have any affect on those who have made contributions to revoked organizations. This is because donations made before the listing of an organization’s name stay tax-deductible. Organizations that are on the list that don’t get reinstatement aren’t eligible to get tax-deductible contributions, and any income may be taxable.

The organizations whose tax-exempt status has been revoked are listed in IRS Publication 78, the Cumulative List of Organizations. The updated version of Publication 78 will be published on the IRS website soon. Donors should not rely on the IRS to send a determination letter to the organizations before the date of revocation.

Existing organizations that want their tax-exempt status reinstated have to fill out an application and pay a user fee even if they were already required to file. More information on the reinstatement process, including retroactive reinstatement, can be found on the IRS website.

Daniel Stoica Accounting Professional

With the NBA play-offs well under way, there are probably thousands of basketball fans out there who have bet money on the winning teams. But do you know that the money you win has to be claimed on your 2011 taxes?  It does, and your tax professional can help you with the details. 

Most everyone enjoys gambling, whether it be at a casino, a horse race, or joining the sports pool at work. The problem is that most people don’t understand how the winnings affect their tax return. Here are a couple of examples.

 Twenty-five years ago, someone on Social Security could  go to Las Vegas and win $50,000. And because they were on Social Security, they had not been required to file a tax return for many years. Because gambling winnings are considered added income, that senior citizen ended up having to pay taxes on their social security income, which they normally wouldn’t have had to do.

Another example is that of someone who likes to do a little gambling at the local casino after work. Over the course of the year, they win $250,000, but over the course of that same year, they end up spending more than what they had won. When tax time comes around, they don’t understand why they owe so much in taxes when they had spent more than they had won.

Your winnings from gambling are taxed  a little differently than your earned income. These winnings are part of your adjusted gross income. Schedule A is where the amount you have spent is deducted. The IRS will limit what can be deducted if your adjusted gross income is too high; this also includes medical expenses, college tuition credits, child tax credits, and exemptions. The IRS records these deductions before gambling losses are ever deducted. This means that even if you only break even with your winnings, you will still lose your tax deductions, which will cost you more money.

 IRS Tax Topic 419 – Gambling Income and Losses

The following rules apply to casual gamblers. Gambling winning must be reported on your tax return and are fully taxable. You must file Form 1040 and include all of your winnings, including, but is limited to, winnings from lotteries, raffles, horse races, and casinos. It includes cash winnings and also the fair market value of prizes such as cars and trips. For additional information, refer to Publication 525 Taxable and Non-taxable Income.

A payer is required to issue you a Form W-2G if you receive certain gambling winnings or if you have any gambling winnings subject to Federal income tax withholding. All gambling winnings must be reported on your Form 1040, including winnings that are not subject to withholding. In addition, you may be required to pay an estimated tax on your gambling winnings. For information on withholding on gambling winnings, refer to Publication 505 Tax Withholding and Estimated Tax.

You may deduct gambling losses only if you itemize deductions. However, the amount of losses you deduct may not be more than the amount of gambling income reported on your return. Claim your gambling losses on Form 1040, Schedule A, as a miscellaneous itemized deduction that is not subject to the 2% limit.

It is important to keep an accurate diary or similar record of your gambling winnings and losses. To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses. Refer to Miscellaneous Deductions for more information.

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

IRS Tax Tip: IR-2011-39, April 7, 2011

If you are one of those taxpayers who will do just about anything to get out of paying your taxes, and you think you found a way to get out of it, you might want to reconsider it because the IRS will find out.

The IRS recently released its annual list of the worst tax scams with a warning to consumers to not even try pulling one over on the government. There are probably many taxpayers who haven’t filed yet because they owe money. They may have been thinking about ways to get around paying them, which will cause a lot of problems down the line, including fines, liens, and even jail.

The annual “dirty dozen”, as the IRS refers to scams people have used to evade paying taxes, are listed below. They range from putting money in offshore accounts to claiming non-existence dependents.  Some of the most devious scams have been perpetrated by dishonest tax preparers who used tactics to get more of a refund for their clients and take some off the top for themselves.

Besides the obvious scams, there are some methods that have most likely crossed the minds of many taxpayers. The IRS has reported that some taxpayers have lied about how much they earn, embellished or made up charitable donations and claimed they withheld more in Social Security in order to reduce their taxable income.

The IRS has also reported that some taxpayers try to get out of paying their taxes by claiming that paying taxes is not mandated in the constitution. (There are several videos on YouTube that claim this, as well). Others have even gone as far as to claim that it’s “against their religion”. The Supreme Court has, again and again, determined this to be a unjustified argument.

If the IRS believes you have tried any of these scams, you will be audited and fined $5,000 or more, or even incarcerated for worse offenses. And, if you know someone who has tried to pull off one of these scams, you should notify the IRS. You may be rewarded for your honesty.

Here is the full list of the worst scams:
• Hiding income offshore – This is where taxpayers deposit money in banks in such places as the Cayman Islands or Switzerland
• Identity theft and phishing – This scam has been running rampant for quite some time. People steal IDs and Social Security numbers to take another person’s identity
• Return preparer fraud – Tax preparers making false claims on their clients’ tax returns for their own gain
• Filing false or misleading forms – exaggerating or claiming false information on your tax return to pay less on their taxes
• Frivolous arguments – claiming that paying taxes is unconstitutional or against your religion
• Nontaxable Social Security benefits with exaggerated withholding credits – trying to take more credits and deductions on income that is actually taxable
• Abuse of charitable organizations and deductions – claiming to have given to charity or exaggerating how much you actually did give to a charity
• Abusive retirement plans – transactions that taxpayers use to avoid the limits on contributions to IRAs, as well as transactions that are not properly reported as early distributions
• Disguised corporate ownership – Corporations are formed and operated in certain states for the purpose of disguising the ownership of the business or financial activity by means such as improperly using a third party to request an employer identification number,
• Zero wages – reporting that you made no money at all during the tax year
• Misuse of trusts – the inappropriate use of private annuity trusts and foreign trusts to shift income and deduct personal expenses
• Fuel tax credit scams – individuals who claim the tax credit for nontaxable uses of fuel when their occupations or income levels make the claim unreasonable

To avoid becoming one of the “dirty dozen”, consult with a trusted tax professional to prepare your taxes.

Daniel Stoica Accounting Professional