The following article was sponsored by Windigo Incorporated
Income tax in America is a relatively simple process when your life is relatively simple. If you work the same job in the same state for the entire year, you will likely have just one W2 form that you can enter into a tax software program. Click the button and you are done.
If your life is not “normal” or “simple,” which is often the end result of those who would label themselves as red pill, then navigating the set of tax implications and options available becomes challenging. The following circumstances contain a number of pitfalls and signify when you should look for tax help.
1. You operate an online business
Those that operate online businesses have been able to avoid tax pitfalls for some time, as they are on the edge of a “new economy” and the IRS has had to take time to figure out how to deal with them. That couldn’t last forever, though, and now third-party payment providers like Paypal, Stripe, and American Express report payments to business owners directly to the IRS.
States are also clamoring for their share of sales tax revenue from online retailers by assigning a “nexus of business,” forcing online businesses to pay income tax where they are deemed to reside. If an online business is making more than $30,000 in gross revenue per year, they are on the radar and should consult a tax professional for potential pitfalls, especially one who understands e-commerce and online tools.
What this means: If you own a corporation or a partnership (or LLC sometimes) you need to at least file an extension by March 15, report your gross income, before Paypal or credit card fees, and have those line up with at least the 1099-K. Failure to file a return or extension by March 15 can result in a 25% tax penalty when you do file.
2. You live or have financial interests in another country
Another new law taking effect expands the look of the treasury department to those living abroad. Going by the acronym FATCA, the short story is that foreign countries will be reporting information related to US citizens to the IRS. Foreign earned income exclusion solves most tax issues as long as it is reported properly.
This is also related to FATCA under another acronym: FBAR. FBAR requires those with foreign bank accounts holding an aggregate of more than $10,000 US at any time in another country to report these accounts…to the financial crimes enforcement unit. This one is somewhat tricky as there aren’t any additional taxes due, but there are terrible penalties for not reporting. $10,000 per bank account as a civil penalty for non-willful omission.
What this means: If you have foreign accounts there is a second deadline in June to file the FinCen Report 114, which discloses the foreign bank and property information. This is not the same as your income tax. You must report this every year.
3. You have no health insurance, pay for your own, or have foreign health insurance
New for 2015 is a tax penalty for those who don’t have, or don’t have the right kind, of health insurance. There is no need to worry about this if you have employer health coverage. The penalty for not having health insurance doubles every year from here on out, with this tax filing year being $325. As an added twist, those who are out of the country also must have qualified health insurance or pay the penalty. “Out of the country” in this case means for more than 330 days in a year.
What this means: If you are facing a $325 health care penalty this year, ask or research exemptions that you may qualify for before filing. There are close to 20 specific ways to qualify for them.
4. You have a child
Having a child, if your income is $45,000 or less, or you are self employed, opens up all sorts of doors for tax relief. The holy grail is earned income tax credit, but there are multiple other choices. If you have a child with a “baby mama” she will likely scoop up all of these benefits and you should get advice or an estimate of what these tax benefits may be, in case you have to enter a legal battle. Any tax professional should be able to advise on this.
What this means: If there is a dispute you and the baby’s mother as to who can claim, know this: File your return first! The person who files first will have their return accepted while the second parent has their return rejected and must file a claim with the IRS…which is not fast to resolve.
5. You get divorced
Unforeseen tax impacts of divorce are like salt in the wound of the financial devastation that can come along with it. Your pocketbook can take severe tax penalty hits if you have to split a retirement fund, sell or buy a house, or otherwise exchange property with a spouse after divorce. Furthermore, he who was the children also gets the tax breaks.
Not scary enough? The IRS gets many of their leads for audits and fraud investigations from disgruntled divorcées, where the wife will report the husband for tax fraud for leverage, innocent spouse protection, and even a share of the tax collected as an informant reward.
You should be armed with the tax numbers before you agree to anything in a divorce.
What this means: If you are getting divorced, consult a tax expert in addition to a lawyer before signing anything. Otherwise, you may have to pay a 20% tax penalty on split items like retirement funds, or could get penalized for back taxes if your ex informs on you.
A Convenient Solution
If you think you need tax help but are wary of the costs, it’s less expensive than you think. A consultation to get advice on your specific situation can be had for less than $100, and paying to have someone else file your taxes can be done for between $600 and $1800 dollars depending on the complexity of the situation. Our prices are 1/3 the average tax penalty for a late or inaccurately filed tax return.
When seeking tax assistance it’s important to find someone that you can trust, that understands your situation and has credentials to help you. At Windigo Incorporated you work with the principal of the business, who is enrolled to practice before the IRS and has personal experience with online businesses, foreign income, and divorce. Click here to browse our services and get your low-cost estimate today.
I use an accountant because he knows loopholes.
Yeah Wesley Snipes did that too… 😉
Glad I’m not black
Lol! Yeah loopholes ain’t fo black folks…
Technically, Wesley Snipes did not use an accountant. He used Eddie Ray Kahn, a tax protester who was known for trying every discredited tax scheme in the book. Eddie is still serving out a 30 year sentence at Club Fed for his shenanigans.
Yeah I was joking but thanks for the clarification.
Number 5 is pure truth. If you are getting divorced make sure to consult BOTH your lawyer and a tax professional before signing any property settlement agreement or letting the judgement of a court become final. In most jurisdictions if the property or asset is not specified in either the settlement or judgement it can be taxed just like you acquired it for the first time.
Transfer the title of a car after a marriage is declared over? Pay sales tax on it again.
Transfer a deed? Depending on the jurisdiction you will end up paying at least another round of recording fees if not a bunch of other recording taxes.
Split a retirement fund improperly? Pay income tax AND the penalty.
Divorce becomes final any time within the calendar year? You are filing separately and single. Make sure you have adjusted withholding for this event or you will get a nasty little surprise with a big tax bill.
Professionals exist for a reason people. Make sure to seek out and follow their advice each and every time. Life is full of pitfalls, many of which are not apparent to the average Joe.
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What’s mine is mine.
We fuck you ups, man. We takes the money.
I clicked and looked around. Neither are CPAs. My advice after working two years as a tax attorney, if you earn enough that you can’t just bang out a 1040EZ, go to a real CPA.
I looked and at least one is an Enrolled Agent, a designation which has the same standing with the IRS as CPAs and attorneys. From the IRS website…
“Enrolled agents, like attorneys and certified public accountants (CPAs), have unlimited practice rights. This means they are unrestricted as to which taxpayers they can represent, what types of tax matters they can handle, and which IRS offices they can represent clients before. Learn more about enrolled agents in Treasury Department Circular 230 (PDF)”http://www.irs.gov/Tax-Professionals/Enrolled-Agents/Enrolled-Agent-Information
As an Enrolled Agent myself, I see this sort of “CPAs are the only ones who can do taxes” untrue dogma being repeated all of the time. As a tax attorney yourself, I’d think that you’d be more up on the 3 IRS unlimited practice designations rather than repeating the “CPA only” lie.
True. I apologize. My pedigreeism is showing through. We never used EAs as the ones in our area stunk on ice. I’m sure there are very qualified EAs out there.
As a practicing CPA specializing in tax planning and preparation, I can certainly tell you that there are an awful lot of stupid CPAs out there. Whether you hire a CPA or Enrolled Agent should depend on your impressions of that person and recommendations from people you trust.
Most of my referrals come from other clients, investment brokers, attorneys, and business contacts. I maybe get one or two occasional referrals from being a member of the AICPA and my state society.
Good article, couple of points of clarification, not to correct the author but to add additional insight:
1) Corporations and S corporations (the difference between the two is that in a C corporation, the profits are taxed at the corporate level. With an S corporation, the profits are passed out to the shareholders and reported on their individual income tax returns and the owner pays the tax on the profits. Assuming the use of a calendar year (as opposed to fiscal), these are required to be filed or extended by March 15th.
2) Partnerships and LLC’s generally work the same way as an S corporation, in terms of their passthrough nature, but the return or extension is due by April 15th (again, assuming use of calendar year). Some folks form an LLC where they own 100% of the membership interests – they are in effect operating as a sole proprietor but use the limited liability protection offered by the LLC. This is usually called a single member LLC or a disregarded entity. If you form an LLC and own 100% of it, you don’t need to file a separate tax return – all activity is reported on your 1040.
3) Another situation where you might want to use a tax preparer is if you own a rental property (or several), and that’s not your primary trade or business (i.e., you have a job but also own some properties on the side). There are passive income and loss rules that can trip up the unaware.
4) If you are not a salaried employee, but have your own business (or work as a 1099’d contractor), make sure to set money aside for estimated tax payments, since you won’t have withholding to do that for you. You need to budget for taxes like you would for any other expense so you don’t get caught off guard when it’s time to file.
5) Lastly – keep good records, and keep them for at least three years from when you file, until the statute of limitations has passed.
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Where do I plug in my hair dryer?
This is a great article. Sometimes it’s what you don’t know that can cause you trouble at tax time.
I have been doing my own taxes since 2002. I am Canadian by the way, if this means anything. I never had problems. My taxes are always quite simple to do.
May sure you max out your RRSP. That way the CRA can snag and hold it if there is a problem. Hide it in a pickle jar in the backyard.
This is why I love the United States government. They fuck you in the ass and pick your pocket at the same time.
Gives new meaning to the term “reach around”.
#There’s 1 for you. 19 for me
Cos I’m the TAXMAAAN# …
I gave up doing my own taxes when I hit the AMT.
It’s amazing how much time and money are wasted figuring out taxes. Think of all the R&D budget improvement and extra spending cash businesses could harness.
But then the bureaucrats wouldn’t have as much power if we had a simple flat tax. Since lawyers write law and taxes, they ain’t gonna do shit about it. Got to keep that gravy train rolling…
I would simplify it as follows:pay as much or as little as you want.