Hit and Miss: Buying items with Cryptocurrency

Cryptocurrency has been consistently evolving. Now days, you can use cryptocurrency as a form of payment to buy your next pair of shoes. However, cryptocurrency is not treated the same as normal currency. Cryptocurrency is an investment asset. You have to consider capital gains when cryptocurrency is used to purchase an item. This means there is a reportable taxable event every time cryptocurrency is used to make a purchase. What a pain!

Making matters worse, virtual currency exchanges and virtual currency wallets may not keep track of your tax reporting requirements. However, there are apps out there to help with record keeping.

How does this work? Say if you purchase 500 units of a coin at $1.00 per unit. You now have $500 worth of a coin. The coin does well over time and your 500 units are now worth $750. This means each unit is worth 750 / 500 = $1.50 per unit. You decide to purchase $150 pair of shoes with the coin. You will need to use 100 units at $1.50 per unit to purchase the shoes for $150. This is a reportable tax transaction. You will need to keep track of the gain on the sale. In this example, the gain is 100 units times the difference of $1.50 and $1.00, 100 * (1.50 – 1.00) which equals $50.00 tax gain. Phew! This is only one transaction. Now image you have a coin tied to a credit card and you use it for every day costs. You would need to do this type of calculation each time the credit card is use. This is starting to get complicated. Is it worth the headache? Especially, when you have to do this for every purchase you make. Maybe if you strike it rich with that unknown coin that grows 5,000%!

Opt-in or Opt-out of the new Child Tax Credit

Starting on July 15th parents will start to benefit from the new Child Tax Credit. According, to the IRS those who are eligible will receive a letter in the mail that explains the payment of the advanced child tax credit. Eligibility will be based on your adjusted gross income (AGI) on your filed 2020 or 2019 return.

However, there are two options on how to receive these payments. You can either get half of the payment throughout the year in monthly installments and then the other half on your 2021 tax return (opt-in). The other option is to opt-out from getting advance payment for child tax credits and receive the whole payment on your 2021 tax return. Now, that you have these options you may be wondering as to what you should do.

We recommend consulting with your tax professional to figure out what is the best option for you. This way you can best evaluate what will work for you and your family.

Time is ticking because this decision needs to be made by July 1st.

If you have not filed your 2020 or 2019 return, please work with your tax preparer on filing them so you can qualify for this credit.

To see the eligibility requirements please go to the IRS website to learn more about it.

 

 

Failure to File and Failure to Pay Penalties for Income Taxes

Would you believe that the penalty of not filing a tax return is much higher than the penalty for not paying the taxes owed? It is recommended to file a tax return on time to keep penalties from getting too high. As the penalties continue to grow on the already existing tax balance, interest is growing on top of that.

Failure to File Penalty

The Failure to File Penalty is 5% of the unpaid tax each month up to a maximum of 25%. There is a minimum penalty of $205, unless the individual owes less then 205 dollars, then the penalty is 100% of the amount owed. For example, for someone who would owe $100 after filing, the penalty for not filing is another $100. If someone owes $800 the penalty would be $205. Say if the amount due is around $5,000 the penalty would be and extra $250 a month for 5 months with a maximum penalty of $1,250.

Failure to Pay Penalty

The Failure to Pay penalty is 0.5% of the unpaid taxes each month. It can build up to as much as 25% of their unpaid taxes as well. For example, if after filing an income tax return there is a tax balance of $1000, IRS will charge an extra $5 penalty each month up to a maximum of $250.

Michigan Tax Credits

Just like filing your federal income tax return, certain states have their own income tax return. And just like the federal return, the state return has possible credits to help offset your income for the year. Two of the main credits for Michigan are the Homestead Property Tax Credit and the Home Heating Credit.

Homestead

Before getting into the property tax credit and the home heating credit it is important to understand homestead. An individual’s homestead is the place where they have a permanent home. The place you plan to return when you go away for a while. And the individual must own and occupy or be contracted to pay rent and occupy the home. An individual only has one homestead at a time. Second homes or other property one owns does not qualify as homestead.

Homestead Property Tax Credit

The purpose of this credit is to help families or individuals who have a household income of $50,000 or less. The credit is based off household income and property taxes paid. The maximum amount for this credit is $1,200. To claim the credit it is as easy as filling out Form MI-1040CR and meeting the qualifications. The qualifications for the credit are as followed:
• Homestead is in Michigan
• Resident of Michigan for at least 6 months
• You own or pay rent on a property in which property taxes were levied
• If you own a home: The taxable value is $135,000 or less
• If you rent a home: Your total household resources are $50,000 or less

If an individual is blind or a veteran, then Form MI-1040CR-2 is also filled out to obtain a large credit amount.

Home Heating Credit

Similar to the Property Tax Credit there are qualifications and a form for the Home heating credit. The form is the MI-1040CR-7 and the qualifications are:
• Michigan homestead
• Own home or contracted to pay rent
• No full-time student who was claimed as a dependent
• Did not live at college or university
• Income is within limits- Shown below in chart

Different from the Property credit the Home heating credit is based off the number of exemptions. With the standard allowance and ceiling goes up with the number of exemptions taken. Below is a chart on the amounts allowed with the income ceiling as well for 2017.

Exemptions               Allowance                            Ceiling
0 or 1                        $465                                  $13,271
2                               $626                                  $17,871
3                               $787                                  $22,471
4                               $948                                  $27,071
5                              $1,109                                $31,671
6                              $1,270                                $36,271
Over 6             +$161 for each additional           +$4,600 additional

Now both the Homestead Property Tax credits and the home heating credit are both great credit for lower income families in Michigan. These should be taken if an individual qualifies for them. However, when couples are married filing separate, some don’t take the credits. With Form 5094, Married Filing Separately and Divorced or Separated Claimants Schedule, it is possible to calculate total household resources.

Self Employed Quarterly Taxes

Going from an employee to a boss sounds great, and doing something you love everyday is inspirational. However, as a self-employed individual it is important to know about paying quarterly income taxes.

When to pay Quarterly Taxes

For individuals in a sole proprietorship, a partnership, or an S-corp. if the estimated taxes owed at the end of the year are over $1,000, then it is important to pay quarterly taxes.

Quarterly taxes, are taxes paid at the end of every business quarter during the fiscal year. A fiscal year is a year as established for taxing and accounting purposes.

Businesses whose fiscal year starts on January 1st the due dates for quarterly tax payments are: April 17th, June 15th, September 17th and January 15th of the following year. If the tax return is filed before January 31st the fourth estimated tax payment is not due if the tax is paid in full when the return is filed. If the businesses fiscal year does not start on January 1st then the estimated taxes are paid on different dates all depending on when the fiscal year starts.

If a tax is owed and is not paid in full when the tax return is filed there could be a penalty applied to the account.

How much to Pay

As an employee, taxes are taken out of your income automatically, the amount paid to the government in taxes is about 19% of your income. This is broken down into three taxes, federal income taxes, social security, and medicare.

There are different ways to calculate how much to pay in estimated quarterly taxes. It is possible to take the estimated the tax owed by taking the AGI, figuring out the taxable income amount, take off deductions and credits to find out about how much will be owed. However, it is easier to figure out how much to pay off last year’s tax return and estimating off that based on the amount owed last year.

How to Pay

The IRS has many options to help everyone pay their taxes on time, in a way comfortable for the individual. Some different ways to pay the IRS estimated/quarterly taxes are:

• Pay Online
• Direct Pay
• Pay by Card
• Electronic Fund Withdrawal
• Online Payment Agreement
• Pay by Cash
• Pay by Check or Money Order

There are stipulations on some of the different ways to pay the IRS. Paying by card there is a small processing fee. Paying by cash is only possible under special circumstances and the individual must make a request. Paying by check or money order must be sent to the correct address which changes depending on where the individual lives.

To learn more on how to pay the IRS the link below shows all the possible ways.

https://www.irs.gov/pub/irs-pdf/f1040es.pdf

What to Expect When Being Audited on a Tax Return

Finally, you filed this year’s tax return and now can relax. Then suddenly a letter in the mail from the IRS, an audit. No worries, it is not as bad as it seems.

What is a Tax Audit?

A tax audit is an examination of individual or business income tax returns carried out by the IRS. The examination is to verify that the deductions and income are accurate.

Just because the IRS is auditing a tax return, it does not mean the tax return is wrong. Sometimes it is random selection so that the IRS can make sure everything is correct. In addition, if a tax return looks like there is a problem or if a tax return involves issues with other taxpayers, an audit may occur.

The Steps in the Audit

Step for when the IRS decides to audit an individual or business tax return:

• A letter from the IRS will be received in the mail
• Gather Supporting Documents
• IRS reviews documents
• Agree on an outcome

The letter will have all of the reasons and documentation needed for the audit. In addition, the contact information, like the mailing address for audits completed by mail, for the IRS is on the letter. If there are too many documents to mail other options include scheduling a face-to-face audit with an IRS representative.

Audit Timeline

The IRS tries to audit tax returns as soon as possible after filing. Most will be for tax returns filed in the last two years. However, the IRS can pull returns from the last six years for an audit if needed. The time the audit itself varies from case to case and depends on how much information is needed and the availability of both the individual and the IRS.

Once the IRS has mailed the audit request, 90 days are provided to collect the information and provide it to the IRS. An extension can be filed with the IRS; this request can be mailed to the IRS. After that if it is not resolved then that IRS can request extending the statute of limitations for assessment tax.

Audit Outcome

An audit can end in three ways: No change, Agreed, or Disagreed.

• No change: An individual has supplied documentation on all of the concerns and there are will be no changes on the tax return.
• Agree: The IRS proposed some changes to the tax return and the individual understand the changes and agrees with them.
• Disagree: When the IRS proposes changes, the individual disagrees with the changes. When the outcome is disagree a conference with an IRS manager, or the IRS offers mediation is the next step.

Another option is filing an appeal if time allows it. After all of the information is given and a conclusion is reached, the audit is over.

Self-Employed Quarterly Taxes

Going from an employee to your own boss sounds great and doing something you love everyday is inspirational. However, as a self-employed individual it is important to know that you must pay quarterly taxes.

For individuals in a sole proprietorship, a partnership, or an S-corp. if the estimated tax owed at the end of the year is over 1000 it is important to pay quarterly taxes.

When to pay Quarterly Taxes

Quarterly taxes, as the name implies, are paid at the end of every business quarter during the fiscal year. A fiscal year is a year as established for taxing and accounting purposes.

Businesses whose fiscal year starts on January 1st the due dates for quarterly tax payments are: April 17th, June 15th, September 17th and January 15th of the following year. If the tax return is filed before January 31st the fourth estimated tax payment is not due if the tax is paid in full when the return is filed.

If the businesses fiscal year does not start on January 1st and starts on a different date, such as July 1st then the estimated taxes are paid on different dates. If a tax is owed and is not paid in full when the tax return is filed there could be a penalty applied to the account.

How much to Pay

As an employee, taxes are taken out of your income automatically and the business matches the amount you pay. The employee has 6.2% withheld from there income and then the employer matches that making it 12.4% of an individual’s income goes to the government. When an individual is self-employed, they must cover the whole 12.4% by themselves because they are the employee and the employer.

There are different ways to calculate how much to pay in estimated quarterly taxes. It is possible to take the estimated the tax owed by taking the AGI, figuring out the taxable income amount, take off deductions and credits to find out about how much will be owed. However it is easier to figure out how much to pay off last year’s tax return and estimating off that.

How to Pay

The IRS has many options to help everyone be able to pay their taxes on time, in the most comfortable way for the individual. The different ways to pay the IRS estimated/quarterly taxes are:

• Pay Online
• Direct Pay
• Pay by Card
• Electronic Fund Withdrawal
• Online Payment Agreement
• Pay by Cash
• Pay by Check or Money Order

There are stipulations on some of the different ways to pay the IRS. Paying by card there is a small processing fee. Paying by cash is only possible under special circumstances and the individual must make a request. Paying by check or money order must be sent to the correct address depending on where the individual lives. To learn more on how to pay the IRS the link below shows all the possible ways.

https://www.irs.gov/pub/irs-pdf/f1040es.pdf

The Time is Ticking to Collect Your Tax Refund

There are limitations for how long someone has to collect their refund, and there are two rules to go along with the limitations.

Rule 1

The first states that if after three years the tax return has still not been filed then the refund expires. For example if a 2016 tax return is due by April 18, 2017, the refund expires after April 18, 2020. That rule is called the due date rule. The due date rule is the most common.

Rule 2

The other rule slides through the cracks sometimes. This rule states that after two years from the date the taxes were paid someone could claim their refund. For example, same employee as above, a W-2 wage earner their last paycheck was on December 31, 2016, under this rule, they would have until December 31, 2018 to collect their refund.

Use whichever rule provides more time to collect. So in this case the employee would have until April 2020 to file and collect their tax refund using the due date rule.

Statute of Limitations

Likewise, the IRS only has three years to audit a tax return, then 10 years to collect any taxes owed. There is also the deadline for when someone must file his or her return by. All of these laws together create the Statutes of Limitations. Under the statutes of limitations, if the money is not collected in the time allotted the government keeps the money. The taxpayer cannot obtain the money, nor can it go towards future taxes.

Rental Income and Expenses

Graduated college and getting ready to buy a house, then what? Is the plan to live there forever? What happens when it is time to move? For some the answer is yes they plan to live in their first house for the rest of their lives. For others they plan to just sell the house and move to the next when it is time. Then there are the few that decide to keep the old house and make it a rental for some extra income.

Now this house could be a vacation home that they visit one week out of every year, or a condominium they rent out to college students. Either way reporting the income from the rental home is a step in filing the yearly tax return.

Where to Report Rental Income

If renting out the property us just for some extra money, then the income and expenses are reported on the Schedule E, Supplemental Income and Loss. However, if this is how an individual is making a living, by renting out properties, then the income goes on the Schedule C, Profit or Loss from Business (Sole Proprietorship).

After knowing where to report the income and expenses of the rental property, it is important, to understand what would counts as income and expenses.

Income and Expenses

Incomes for the rental property are; amounts paid to cancel the lease, advanced rent payments, and security deposits. These all go into the income made from the rental property.

Some of the rental expenses are; depreciation, repair costs, and operating expenses. Other expenses include such as mortgage interest, real estate taxes, insurance, but there are limitations if the owner uses the house for part of the year, such as a vacation house.

It is only possible to deduct expenses for when the rental property was available to the general population. Therefore, family and friends that can go stay for free or little charge do not count as days the rental property was on the market.

Example:

Family and friends stay for 37 days in the rental home, and the home was then up for rent to the public the other 328 days in the year, then it is possible to deduct 90% of the expenses. Because 90% or the days it was available to the public.

Renting properties gives another person a place to sleep and grow. This also gives extra money the homeowner to help them in next chapter of their life. When renting the property just remember that the income and expenses need to go on the yearly tax return, and the rest will be easy.

How to Fill out Form 1040- Part 4: Lines 13 & 14

Both lines 13 and 14 have something in common. They are either gains or losses on the sale of different property. The difference between the two are; line 13 is for a personal asset sold and can use Schedule D and/or Form 8949. Whereas line 14 is for business property and uses Form 4797.

Line 13: Capital gain or (loss).

When selling personal assets and taking a gain or a loss on them is needed information to fill out your 1040 correctly. The form used to organize the information is Schedule D. After Schedule D is filled out it gets attached to the back of the 1040.

To fill out the schedule it is first good to understand if your asset is a short-term or a long-term capital gain. A long-term gain is having the asset for a year or more before selling it. Where a short term gain is having the asset for under a year and then selling it and receiving the gain.

After that is established it will be important to know the proceeds from the item and the cost basis for the item. This is to help figure out the gain or loss amount of the sold property. The third part of the schedule is the summary section of the form. This part continues on to find the total of all sales.
Sometimes a schedule D is not needed for the asset sold. If this is the case, then next to line 13 on the 1040 there is a box. This box when checked lets the IRS know you had income or a loss from the sale of an asset but a Schedule D was not needed.

Line 14: Other Gains or (loss)

Very similar to line 13, however, instead of using forms 8949 and Schedule D, Form 4797 is filled out. Line 14 is used for assets that were used in trade or in business. Once Form 4797 is filled out then attach it to the back of your 1040.

To fill out the 4797 you will need to know the date the asset was acquired, the date sold the sale price, the depreciation amount of the asset, the cost basis, and then the gain or loss amount. To find the gain or loss amount take the sale price and subtract the depreciation amount and the cost basis.

There are different parts on the Form 4797 that contribute to the type of asset that was sold and when the asset was sold. Part 1 is for assets kept over a year. Part 2 is for ordinary gains or losses, also for short-term gains. In addition, Part 3 is for Gain from disposition of property under sections 1254, 1250, 1252, 1254, and 1255.