Category Archives: Taxes

You’re Emancipated From Paying Taxes…At Least For A Few Days

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Do you know what Emancipation Day is? If you don’t, you’re not alone. Rather than a federal holiday, it’s actual observed in Washington, DC, and honors the emancipation of the slaves in the District of Columbia. I’m sure the history buffs out there are crying foul – after all, didn’t President Lincoln sign the Emancipation Proclamation effectively ending slavery in the United States in January 1863? Yes, he did: however, he’d signed a similar law ending slavery in our nation’s Capital a full nine months earlier, in April of 1962.

Now that you know the history of Emancipation Day, you’re probably thinking: what on earth does this regional holiday have to do with my taxes? This year, a whole lot.

Because Emancipation Day – officially April 16th – falls on a Monday this year, pushing back the filing deadline to Tuesday, April 17th. Federal tax law requires that the IRS honor legal holidays in DC, even though the rest of the company doesn’t celebrate it – and, most likely, doesn’t know the background behind it (but thanks to my brief history lesson, you’re no longer a part of that latter segment of the population).

If you’re one of the nearly one in five taxpayers who’s waited until the last minute to file your taxes, you’ve already missed out on many of the perks of filing early, including:

  • Getting your refund earlier. The IRS usually gets refunds out within six to eight weeks – and as little as eight days if you e-file – but often experiences a backlog after tax due day, resulting in a delay
  • Having a chance to double-check your tax forms. This is especially critical if you do your own taxes and aren’t quite sure of what you’re doing
  • Time to pay your tax bill. It’s a misnomer that you can delay paying that bill by filing an extension 4868 form. In fact, that’s totally wrong; filing a 4868 form only delays when you have to file your tax forms, not when you have to pay your bill

Procrastinating leading up to the filing deadline forces you to act quickly and decisively at this point. It’s crucial that you have all your paperwork together – that means all your receipts, W-2 or 1099 forms, your 1040/Schedule A if you’ll be itemizing, your mortgage interest form from your lender, and any other pertinent documents need to be in order. You’ll also need a plan of attack as to who is going to help you file your taxes: will you go to a CPA? A tax service like Jackson Hewitt or H&R Block? Will you do them yourself? If you plan to pay someone, make sure you set up an appointment in advance, so you don’t find yourself left out in the cold. And finally, plot how you’ll get that all important postmark before the clock strikes midnight on the morning of April 18th, lest your tax forms turn into a pumpkin a la Cinderella. The days of your local post office staying open late are long gone, as the USPS has largely eliminated those after-hours collection sites to cut costs.

Readers, when do you file your taxes? Do you wait for the filing deadline, or did you submit your tax forms months ago?

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California Tax Calculation Steals Money From Part-Year Residents

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I love taxes (have you noticed yet?), so now that we’re at the end of February, all of my 1099s and W2s have arrived and there’s nothing holding me back from filing.

I use TurboTax, so I went online, plugged in all of my information, and was pleased to see that I would be getting a $2,500 refund from the IRS! Pretty sweet, though that means I overpaid my taxes throughout 2011.

In 2011, it was pretty difficult to estimate taxes correctly. I moved from DC to California, I switched companies, and I had a growing business that I had to make estimated tax payments for.

I did by best to accurately pay my estimated taxes when they were due, but obviously I overpaid by a bit. Not a big deal, it’s always nice to get some extra money put into your bank account.

The difficult part of filing taxes this year was the move betweem DC and California. Each state has different tax laws, and I had to split my income between the two states, which meant recording all income and expenses on the day I moved and allocating everything according to where I called home that day.

It was a hassle, but eventually I got it right. In DC, I was owed about $125, which is sweet (better than owing money!), but California told me that I owed them over $600. That’s a lot, and I didn’t understand how I could have estimated so poorly. I knew how much I made while in California and I had calculated my tax burden, so why was this a surprise to me?

The Problem

After digging through the forms, I realized that California has an insane way of calculating taxes for part-year residents.

I’m going to use nice, big, round numbers to demonstrate how California calculates taxes for people in this situation and show that they are really just stealing money from their constituents. This isn’t reflective of my actual situation, but shows how this situation affects a lot of people who move to California.

The Example

A single person makes $120,000 in 2011, $60,000 in one state, and $60,000 in California. They move on July 1st, so they live in each state for 6 months each. The question is how much should California tax this resident? We know that they earned $60,000 while in California, so we’d expect them to calculate the tax due based on that $60,000, right?

WRONG!

Instead, California calculates the tax based on the entire $120,000, then says since the person only lived in California for half the year, cuts the tax bill in half.

Well, since we know that tax rates are progressive, the difference in these calculations is enormous. In the first (and more logical) calculation, the tax bill would be $3,228. In the second (and more insane) calculation, the tax bill comes out to $4,404. That’s a difference of $1,176!!

The Frustration

This makes me so angry because I spent the time to find out exactly how much I made while a resident of California. So why can’t I just pay taxes on the amount I actually earned while in California instead of some silly overly complicated calculation? I see no reason why I should have to pay a penny more, it feels like they are stealing my money just because they can.

I contacted the advisory board of California, but to no avail. The law is the law, so even though they are stealing my money, there’s not much I can do.

I’m not going to go broke because of the amount of money the State of California is stealing from me. But it’s not an insignificant amount of money, and I wish there was something I could do!

Readers, am I just whining or do California’s tax laws make no sense?

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Paypal Income Reporting Requirements for Bloggers

Written by in Business, Taxes
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For tax year 2011, the IRS did something very interesting: they required payment settlement entities to file Form 1099-K for payment transactions. This includes PayPal accounts that received at least 200 transactions and $20,000 total during the calendar year.

If you’re a blogger, the majority of payments are made via Paypal, so this adds a completely new hassle to the income reporting equation. The two biggest problems are:

  • Not everyone uses their PayPal account solely as a business account. For sole proprietorships, some payments from businesses should be marked as income. However, payments made from friends shouldn’t be. The IRS requirement doesn’t differentiate the different payments (unless they are made as personal payments). Therefore, in some cases, the 1099-K issued by PayPal may over-report income.
  • This also raises the issue of being taxed twice on the same income. If someone pays me over $600, they are required to file a 1099-MISC. If they pay via PayPal, PayPal then records that payment on the 1099-K. We shouldn’t be required to pay taxes twice on the same income!

The 1099-K changes are designed to prevent tax evasion, which amounts to over $300 billion a year in the U.S. I like the idea of holding people responsible for their taxes, and this holds people accountable for their online business ventures which in the past may have gone under the radar. For example, eBay re-sellers are required to report their online income, but it’s been easy to avoid it in the past.

However, this puts a large burden on taxpayers. eBay sales of used goods will still show up on the 1099-K, even though they shouldn’t be considered taxable income (if you sell something for less than it’s worth, it’s generally not taxable).

Because this is so confusing, the IRS did something smart. Really smart. On December 6th, the IRS released the 2011 Instructions for Schedule C, the form to mark profit or loss from business, and in it they gave all business owners a little reprieve and helped us prepare for our 2012 taxes as well.

First, while the 1099-K requirement still stands for 2011, the IRS has deferred the requirement to report the amounts on the 1099-K.

“However, for 2011, the IRS has deferred the requirement to report these amounts.”

What this means is that while you may get a 1099-K from PayPal, you don’t have to record that number on your taxes. You are, of course, still responsible to pay taxes on your income that you received through PayPal, but you can do it the same way it’s been done in the past, by recording only the actual business income on line 1b. You can simply enter ’0′ on line 1a.

Additionally, the 1099-K reporting requirement eliminates the need for some 1099-MISC filings, according to Don Frank, partner-in-charge of outsourcing with CliftonLaronAllen. The 1099-MISC indicates (in a not-so-straightforward way) that businesses should not complete Form 1099-MISC if the payment will already be reported on a 1099-K. So if someone pays you via PayPal and you will be issues a 1099-K, you won’t need to be issued a 1099-MISC as well. This avoids the double taxation issue.

Kudos to the IRS for realizing what a hassle this would be for 2011. I’ve started to prepare for 2012 by separating my personal and business PayPal accounts and by tracking PayPal transactions separately so I won’t have to go through at the end of the year and figure out which transactions were included on the 1099-K and which need to be recorded on the schedule C separately.

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Should Tax Evaders Be Given A Safe Haven?

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In 2009 and 2011, the IRS has given tax evaders who have hidden money in offshore accounts a chance to come clean and avoid jail time. The two programs have netted the IRS at least $4.4 billion so far, but should the rules be relaxed for these people?

Taxpayers who disclose offshore accounts must pay a 27.5% penalty in addition to any back taxes, interest, and late charges for up to 8 years. But they avoid going to prison.

$4.4 billion is a nice chunk of change, and that lets the U.S. public off the hook for that much money. So maybe we should all be fans of these types of programs. Others will argue that the rich can just pay off their crimes and avoid any real punishment.

Tax evasion costs over $300 billion a year, so we want back as much as we can, right? Maybe $4.4 isn’t a huge number overall, but for the amount of offshore money hidden, it seems to be a decent pull.

I’m just starting to do my taxes and I’m doing everything I can to report properly and follow the laws. I’m not trying to avoid my tax duties. If I do, then it means someone else will have to make up the difference. I don’t like passing the buck on to someone else.

Based on our current economic situation, I am in favor of collecting these payments. The penalties are harsh enough to still make it hurt, and the benefit of a clean conscience, having the money back in the U.S., and not having even more penalties if they are caught instead of turning themselves in.

Readers, what do you think? Should we accept money we wouldn’t have otherwise have or should we be stricter with people who hide money from the government?

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