The tax man cometh and before too long – filing taxes will need to be on your to-do list. This guest post points out areas of potential complication with your upcoming taxes. Seek professional help to ensure that all t’s are crossed and i’s are dotted.
Having a Home Office
If you are a sole proprietor, and you work out of your home, filing your taxes can be daunting. For example, if you have a separate tax ID for the business, you will have to file a separate return. This means that you will have to submit a return for yourself and a separate one for the company.
However, if you are using the same tax ID, you would only need to fill out a ‘Schedule C’ to report your business expenses. It only gets more complicated if you have a separate tax ID number.
If you have contractors working for you instead of employees, you will have to issue 1099 to each contractor. You are also required to file a copy with the government.
If your earnings from self-employment are substantial, you may need to pay estimated taxes on a quarterly basis, every three months. This will help to lower your tax liability.
Your home office will have to be used exclusively for the business if you expect to get any deductions for the space.
Please be sure to keep copies of all receipts just in case there is an audit.
Dependent Claim Conflict
If you are single or divorced and have to claim a dependent, it is best to clear it up with the other parent. Only one person can claim a dependent.
If someone else claims the dependent, and you also claim said dependent, whoever files his or her return first will benefit from the full tax credit.
The person who files later, the claim will get rejected.
If the return got done electronically, you could still prepare the return online, but instead of E-filing, you would have to print out a paper copy and sign it before mailing.
Before mailing the return, include a letter to the IRS explaining that someone else had claimed the same dependent.
The IRS will review your tax return along with the other party’s return. Whoever is more entitled to the claim, per the IRS, that person will get the full tax credit.
Some people have a habit of reporting a higher amount of deductions on their W4 form. The argument is that they do not want to lend the government any money and have to wait a full year to collect the money owed as a refund.
To explain further, when you fill out your W4 form, you can claim anywhere from zero to 9 dependents. If you claim zero, that is the highest amount of taxes that will get deducted from your paycheck.
To the far extreme, if you claim nine dependents, that is the lowest amount of taxes that will get taken out of your paycheck.
Most people claim from zero to two. In this instance, you might be due a refund.
On the other hand, if you claim nine dependents, you may have to pay an under-withholding penalty. This happens because enough taxes did not get deducted from your paycheck.
To remedy the situation, at the end of the year, you can write a check for the amount you think that you will owe the IRS to your employer.
This is similar to paying estimated tax but not to the government, and you pay it only once.
Specify to the payroll director how much of the money is for federal income tax and how much is for state income tax.
Once the money gets deposited, on your next paycheck, you will see the amount that you paid allocated to either federal or state taxes.
Unfortunately, not everyone can afford to write a big check at the end of the year. The rule of thumb is to save the extra funds from the increased withholding, from each paycheck, to get interest on the money.
However, not everyone sticks to that rule. For that reason, you are better off claiming from zero to 2 withholdings on your W4 form.
Another option is to pay estimated taxes on a quarterly basis, every three months.
Affordable Care Act
You will have to report on your tax return whether you have health insurance or not. If you do not have health insurance, it is advisable to file before February 15, 2016. That date is the open enrollment deadline.
You will have to be insured for at least nine months in 2015 to avoid any penalties due to the Affordable Care Act. The current penalty for lack of health insurance is $325 or 2 percent of your annual household income. They use the higher amount.
The government charges for the penalty on a monthly basis, so you will not have to pay the full amount if you lack health insurance. The payments get stretched out.
The fee gets added to your tax bill or gets subtracted from your refund.
The government has provided exemptions from paying the tax, but you will have to qualify. The circumstances include specific hardships, some life events, health coverage or financial status, and membership in some groups. You are entitled to apply for those exemptions.
Reporting Interest Income
Some people have multiple bank accounts all over the place. If your accounts earn interests, the bank will send you a 1099 INT at the end of the year.
It is your responsibility to report them on your tax return. Failure to report these interests could result in penalties.
If you forget to report the interest you accrued on a bank account, you can either provide the IRS with the information and pay a small fine or you can file an amended tax return to include the interest not originally reported.
Filing taxes can be less complicated if you can plan ahead and make sure that you have things in order such as making sure that you use your home office exclusively for business, paying the necessary estimated taxes, and making sure that you and someone else is not claiming the same dependent. Additionally, get health insurance to avoid any penalties and report all interest income on your tax return.