In addition to traditional income sources like employee wages and business profits, there are a number of other activities and transactions that the IRS classifies as potentially taxable. It is important to consider all of these “taxable events” when you prepare your returns.
Some of the most commonly overlooked taxable events include:
– Investment income, including receiving stock dividends or cashing in bonds
– Converting a traditional IRA to a Roth IRA
– Forgiveness (discharge) of a loan or other debt, including student loans
– Sale of assets such as vehicles, musical instruments, or a home at a gain (that is, for more than you paid to purchase the assets)
– Sale or exchange of cryptocurrency (like Bitcoin), or making purchases with cryptocurrency
– Withdrawing funds from a retirement plan (or from the cash value of a life insurance policy if you withdraw more than you have paid in premiums)
– Gifts and inheritances
An experienced tax professional can advise you about which events in your life may have tax implications, and how to properly report those events. For example, in some cases, you may only need to declare the event to the IRS if the amount of money involved exceeds a minimum threshold, known as an “exclusion.”
The Tax Cuts and Jobs Act (TCJA) of 2017 changed the rules for deducting meal and entertainment expenses on business tax forms. For the most part, the 50% deduction for meals directly connected to the conduct of your business remains intact, as long as the expense is not extravagant. However, the deduction for entertainment expenses has been eliminated, with only a few very specific and rare exceptions.
Applying the new law can get complicated, because entertainment activities such as attending a basketball game often include the purchase of food. To find out if your meals associated with an entertainment event still qualify for the 50% deduction, you may need to consult a tax advisor with extensive knowledge of business tax rules. Most importantly, the TCJA expressly forbids reporting entertainment expenses under another expense category (such as advertising) in order to claim a deduction.
If you derive income from any activity where you are not an employee, from occasional dog sitting to playing guitar for tips at your local coffee shop, then the IRS requires you to classify the activity as either a hobby or a business on your tax returns. Importantly, this decision must be based on IRS rules governing what constitutes a business, not on how you personally view the activity. If you are unsure how those rules apply to you, a qualified tax advisor can help.
If your project is reported as a business, you may be able to deduct almost all expenses related to the project, even if those expenses result in a net loss some years. However, your net business income (profit) will be subject to self-employment tax. Meanwhile, hobby income is exempt from self-employment tax, but the Tax Cuts and Jobs Act (TCJA) eliminated most deductions for hobby-related expenses. Generally, if an endeavor involves very little expense and accounts for a small percentage of your annual income, it is probably best to report it as a hobby. In many other cases, you may be surprised to learn that you can, or even must, call your favorite hobby a business—and that doing so has significant tax advantages.
The IRS states that federal taxes must be paid on a “pay as you go” basis, not just at the end of the tax year. This means that if you receive significant income that is not subject to withholding, it is likely necessary for you to make estimated tax payments throughout the year. In addition to those who officially classify themselves as self-employed, many people who participate in the “gig” and/or “sharing” economy must also make these payments.
For example, if you drive for a rideshare service, rent out a spare room to travelers, or work for a few hours a week as a freelance dog walker, your income from those activities may be taxable. Because you don’t have an employer who withholds tax from paychecks, you must essentially handle the withholding yourself by making an estimated tax payment each quarter.
However, if you receive both employee income subject to withholding and additional, “side gig” income, you may be able to avoid making estimated tax payments by increasing the amount withheld from your regular paychecks. A qualified tax advisor can help you determine how much tax you are likely to owe, and whether it is more advantageous to adjust your withholding or make estimated payments.
If you use your car, van or truck for business purposes, you may be able to claim a vehicle expense deduction on your tax return. You may either use the standard mileage rate or report the actual expenses associated with business uses of the vehicle. Actual expenses include gas, repairs, insurance and depreciation. Each expense must be prorated based on how much you use the vehicle for business rather than personal purposes, so extensive record keeping is required.
Claiming the standard mileage rate, on the other hand, requires only tracking the number of miles you drive for business purposes throughout the year. Simply multiply your yearly mileage total by the standard rate, which will be 58 cents per mile for 2019.
As a broad rule, the standard rate may yield a larger deduction for fuel-efficient and older vehicles, whereas deducting actual expenses may be advantageous for many newer vehicles. However, in order to be able to choose the method that gives you the largest possible deduction each year, you must use the standard rate for the first year that the vehicle is used for business.
Making sure that the correct amount of tax is being withheld from your paychecks is the best way to avoid an unpleasant IRS surprise next spring. Here’s a simple way to do a September withholding checkup:
– On your pay stub for the pay period ending August 31 or September 1, find your year-to-date federal income tax withholding. If the stub does not have this information, you can request it from your employer’s payroll manager.
– Calculate two-thirds (66.67%) of the total federal income tax you paid for tax year 2018. Increase this percentage if you received a raise for (or during) 2019. For example, use 70% if you received a small raise, or 75-80% if you received a substantial raise.
The amount you found in step 1 should be greater than or equal to the amount you found in step 2. If it is not, you can obtain a new W-4 Form from your employer and request that an additional amount be withheld from your paychecks. The IRS also has a withholding calculator that can be found at: https://www.irs.gov/individuals/tax-withholding-estimator.
An experienced tax pro can help you determine what this amount should be. By adjusting your withholding now, you can spread out your tax payments over several months, instead of being stuck with one large, unexpected bill in April.
The IRS may assign certain cases of overdue debts to private debt collectors, but only after giving written notice. Any payment to the private debt collectors should only be made payable to the U.S Treasury.
There are currently only four contractors authorized for collection: CBE Group of Cedar Falls, Iowa; Conserve of Fairport, N.Y.; Performant of Livermore, Calif.; and Pioneer of Horseheads, N.Y.
The Tax Cuts and Jobs Act (TCJA) created a new deduction for many taxpayers with business income. The Qualified Business Income (QBI) deduction applies to income derived from “pass-through entities”—businesses whose earnings are reported on individual owners’ tax returns rather than corporate returns. If you are a sole proprietor, partner, LLC owner, or shareholder in an S corporation, you may be eligible to claim the deduction.
If you qualify, you may be able to deduct a portion of your business earnings from your adjusted gross income (AGI) on your tax forms. Because the QBI deduction reduces your taxable income, it may result in significant tax savings.
If you have student loans, you may be able to deduct up to $2,500 per year in loan interest on your federal tax forms. Because this deduction is classified as an adjustment to your gross income, you do NOT have to itemize deductions in order to claim it.
For any loan on which you paid $600 or more in interest during the year, you should receive a Form 1098-E from the loan issuer to help you prepare your federal return.
The student loan interest deduction is phased out for individual taxpayers with a modified adjusted gross income above $65,000 (or $135,000 for joint filers). Additional IRS rules may affect whether your loans qualify for the deduction.
If you purchased alternative energy equipment for your home in 2018, you may be eligible for a tax credit of up to 30% of the cost of materials and installation. Qualifying equipment may include solar water heaters, solar panels, and fuel cell systems. If you end up owing no tax for 2018, you may be able to carry any surplus energy tax credit over to future years.
Under current laws, credits for home renewable energy equipment may be reduced after 2019 and will expire completely in 2021.