Designating a beneficiary of your traditional IRA is critically important and more complicated than you may realize. This decision will affect the minimum amounts that you must withdraw from the IRA when you reach age 70 ½, who will get what remains in the account after your death, and how that IRA balance can be paid out to beneficiaries.
What’s more, a periodic review of whom you’ve named as IRA beneficiaries is vital to ensure that your overall estate planning objectives will be achieved in light of changes in the performance of your IRAs and in your personal, financial, and family situation. For example, if your spouse was named as your beneficiary when you first opened the account several years ago and you’ve subsequently divorced, your ex-spouse will remain the beneficiary of your IRA unless you notify your IRA custodian to change the beneficiary designation.
The issue of naming a trust as the beneficiary of an IRA comes up regularly. There is no tax advantage to naming a trust as the IRA beneficiary. Of course, there may be a non-tax-related reason, such as controlling a beneficiary’s access to money; thus, naming a trust rather than an individual(s) as the beneficiary of an IRA could achieve that goal. However, that is not typically the case. Naming a trust as the beneficiary of an IRA eliminates the ability for multiple beneficiaries to maximize the opportunity to stretch the required minimum distributions (RMDs) over their individual life expectancies.
Generally, trusts are drafted so that IRA RMDs will pass through the trust directly to the individual trust beneficiary and, therefore, be taxed at the beneficiary’s income tax rate. However, if the trust does not permit distribution to the beneficiary, then the RMDs will be taxed at the trust level, which has a tax rate of 39.6% on any taxable income in excess of $12,500 (2017 rate). This high tax rate applies at a much lower income level than for individuals.
Distributions from traditional IRAs are always taxable whether they are paid to you or, upon your death, paid to your beneficiaries. Once you reach age 70 ½, you are required to begin taking distributions from your IRA. If your spouse is your beneficiary, he or she can delay distributions until he or she reaches age 70 ½ if your spouse is under the age of 70 ½ upon inheritance of your IRA. The rules are tougher for non-spousal beneficiaries, who generally must begin taking distributions based upon a complicated set of rules.
Since IRA distributions are taxable to beneficiaries, beneficiaries usually wish to spread the taxation over a number of years. However, the tax code limits the number of years based on whether the decedent has begun his or her age 70 ½ RMDs at the time of his or her death.
To ensure that your IRA will pass to your chosen beneficiary or beneficiaries, be certain that the beneficiary form on file with the custodian of your IRA reflects your current wishes. These forms allow you to designate both primary and alternate individual beneficiaries. If there is no beneficiary form on file, the custodian’s default policy will dictate whether the IRA will go first to a living person or to your estate.
This is a simplified overview of the issues related to naming a beneficiary and the impact on post-death distributions. Uncle Sam wants the tax paid on the distributions, and the rules pertaining to how and when beneficiaries must take taxable distributions are very complicated.
It should also be noted that some members of Congress have expressed their displeasure with stretch-out IRAs that have permitted some beneficiaries to extend for decades the payout period from the IRAs they inherited. These legislators would prefer that total distribution from inherited IRAs be made within five years after the IRA owner’s death. So it is possible that we will see tax law changes in this area.
It may be appropriate to consult with Dagley & Co. regarding your particular circumstances before naming beneficiaries.
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Can’t pay your tax liability for 2016? We have the information you need to know:
First, do not let your inability to pay your tax liability in full keep you from filing your tax return on time. If your return is not on time, you must still pay the “failure to file” penalty, which accrues at a rate of 5% per month on the amount of tax that you owe based on your return.
If in doubt, you can delay the “failure to file” penalty for six months by filing an extension, but this still won’t keep you penalty free.
Although an extension provides you with more time to file your actual return, it is not an extension of your payment date. If you do not pay the balance of your 2016 tax liability, you will be subject to the “failure to pay” penalty. This penalty accrues at the rate of 0.5% per month or partial month (up to a maximum of 25%) on the amount that you owe based on your return.
If both penalties apply, the “failure to file” penalty drops to 4.5% per month or part thereof, so the total combined penalty remains 5%. The maximum combined penalty for the first five months is thus 25%. Thereafter, the “failure to pay” penalty will continue to increase at 1/2% per month for 45 more months (up to an additional 22.5%). Thus, the combined penalties can reach a total of 47.5% over time. Both of these penalties are in addition to the interest charges on the late payments.
The bottom line is that, if you owe money, it is best to file your return on time even if you can’t pay the entire liability. That will minimize your penalties. Paying as much as you can with your return will further minimizing your penalties. By the way, neither the penalties nor the interest are tax-deductible.
Possible Solutions – The following are possible ways to pay your tax liability when you don’t have the funds readily available:
- Relatives and Friends – Borrowing money from family members or close friends is often the simplest method to pay a tax bill. One advantage of such loans is that the interest rate will probably be low; however, you must also consider that loans of more than $10,000 at below-market interest rates may trigger tax consequences. Any interest paid on this type of loan would be nondeductible.
- Home-Equity Loans – A home-equity loan is another potential source of funds; such a loan has the advantage that the interest is deductible as long as the total equity loans on the home don’t exceed $100,000. However, in today’s financial environment, qualifying for these loans may be too time-consuming.
- Credit or Debit Cards – Using your credit card to pay your taxes is another option. The IRS has approved three firms to provide this service. The disadvantages are that the interest rates are relatively high and that you must pay the merchant fee (because the IRS does not). For information about this fee and about making payments by credit card, visit the IRS website.
- Installment Agreements – You can request an installment arrangement with the IRS. You must be up-to-date when filing your returns. There are also fees associated with setting up an installment agreement, and if you do not follow some strict payment rules, the agreement can be terminated. If your liability is under $50,000 and you can pay off the full liability within 6 years, you will not be required to submit financial statements, and you can apply online. When applying online, you’ll get an immediate acceptance or rejection of your payment plan.
The fee for establishing such an agreement can be as high as $225, but it can be as low as $31 if you set up an online payment agreement and pay using direct debit from your bank account. You will also be charged interest, but the late-payment penalty will be half of the usual rate (1/4% instead of 1/2%) if you file your return by the due date (including extensions).
If any of the following occur, the installment agreement may terminate, causing all of your taxes to become due immediately: the information you provided to the IRS in applying for the agreement proves inaccurate or incomplete; you miss an installment; you fail to pay another tax liability when it is due; the IRS believes that its collection of the tax involved is in jeopardy; or you fail to provide an update regarding your financial condition when the IRS makes a reasonable request for you to do so.
- Pension Plans – Tapping into one’s pension plan or IRA should be a very last resort, not only because it degrades your future retirement but also because of the potential tax implications. Generally, except for Roth IRAs, the funds in retirement accounts are pretax; as a result, when withdrawn, they become taxable. If you are under 59½, any such distribution will also be subject to the 10% early-withdrawal penalty. Federal tax, state tax (if applicable), and this penalty can chew up a hefty amount of the distribution, which may be too high a price to pay.
A Final Word of Caution – Ignoring your filing obligation only makes matters worse, and doing so can become very expensive. It can lead to the IRS collection process, which can include attachments, liens or even the seizure and sale of your property. In many cases, these tax nightmares can be avoided by taking advantage of the solutions discussed above. If you cannot pay your taxes, please call Dagley & Co. to discuss your options.
April is an important month for many as tax season comes to a close. If you have not filed your tax returns, please reach out to Dagley & Co. and we can set up a one-on-one appointment before Tax Day on April 18th. Here are all your important individual due dates for the month of April:
April 1 – Last Day to Withdraw Required Minimum Distribution
Last day to withdraw 2016’s required minimum distribution from Traditional or SEP IRAs for taxpayers who turned 70½ in 2016. Failing to make a timely withdrawal may result in a penalty equal to 50% of the amount that should have been withdrawn. Taxpayers who became 70½ before 2016 were required to make their 2016 IRA withdrawal by December 31, 2016.
April 10 – Report Tips to Employer
If you are an employee who works for tips and received more than $20 in tips during March, you are required to report them to your employer on IRS Form 4070 no later than April 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.
April 15 – Taxpayers with Foreign Financial Interests
A U.S. citizen or resident, or a person doing business in the United States, who has a financial interest in or signature or other authority over any foreign financial accounts (bank, securities or other types of financial accounts), in a foreign country, is required to file Form FinCEN 114. The form must be filed electronically; paper forms are not allowed. The form must be filed with the Treasury Department (not the IRS) no later than April 15, 2017 for 2016. An extension of time to file of up to 6 months may be requested This filing requirement applies only if the aggregate value of these financial accounts exceeds $10,000 at any time during 2016. Contact our office for additional information and assistance filing the form or requesting an extension.
April 18 – Individual Tax Returns Due
File a 2016 income tax return (Form 1040, 1040A, or 1040EZ) and pay any tax due. If you want an automatic six-month extension of time to file the return, please call this office.
Caution: The extension gives you until October 16, 2017 to file your 2016 1040 return without being liable for the late filing penalty. However, it does not avoid the late payment penalty; thus, if you owe money, the late payment penalty can be severe, so you are encouraged to file as soon as possible to minimize that penalty. Also, you will owe interest, figured from the original due date until the tax is paid. If you have a refund, there is no penalty; however, you are giving the government a free loan, since they will only pay interest starting 45 days after the return is filed. Please call this office to discuss your individual situation if you are unable to file by the April 18 due date.
Note: the normal April 15 due date is a Saturday, and the following Monday is a federal holiday in the District of Columbia, so for almost all individuals their 2016 Form 1040 returns aren’t due until the next business day, which is Tuesday, April 18.
April 18 – Household Employer Return Due
If you paid cash wages of $2,000 or more in 2016 to a household employee, you must file Schedule H. If you are required to file a federal income tax return (Form 1040), file Schedule H with the return and report any household employment taxes. Report any federal unemployment (FUTA) tax on Schedule H if you paid total cash wages of $1,000 or more in any calendar quarter of 2015 or 2016 to household employees. Also, report any income tax that was withheld for your household employees. For more information, please call this office.
April 18 – Estimated Tax Payment Due (Individuals)
It’s time to make your first quarter estimated tax installment payment for the 2017 tax year. Our tax system is a “pay-as-you-go” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-go” requirement. These include:
- Payroll withholding for employees;
- Pension withholding for retirees; and
- Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.
When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This penalty is equal to the federal short-term rate plus 3 percentage points, and the penalty is computed on a quarter-by-quarter basis.
Federal tax law does provide ways to avoid the underpayment penalty. If the underpayment is less than $1,000 (the “de minimis amount”), no penalty is assessed. In addition, the law provides “safe harbor” prepayments. There are two safe harbors:
- The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of what is owed in the current year, you can escape a penalty.
- The second safe harbor is based on the tax owed in the immediately preceding tax year. This safe harbor is generally 100% of the prior year’s tax liability. However, for taxpayers whose AGI exceeds $150,000 ($75,000 for married taxpayers filing separately), the prior year’s safe harbor is 110%.
Example: Suppose your tax for the year is $10,000 and your prepayments total $5,600. The result is that you owe an additional $4,400 on your tax return. To find out if you owe a penalty, see if you meet the first safe harbor exception. Since 90% of $10,000 is $9,000, your prepayments fell short of the mark. You can’t avoid the penalty under this exception.
However, in the above example, the safe harbor may still apply. Assume your prior year’s tax was $5,000. Since you prepaid $5,600, which is greater than 110% of the prior year’s tax (110% = $5,500), you qualify for this safe harbor and can escape the penalty.
This example underscores the importance of making sure your prepayments are adequate, especially if you have a large increase in income. This is common when there is a large gain from the sale of stocks, sale of property, when large bonuses are paid, when a taxpayer retires, etc. Timely payment of each required estimated tax installment is also a requirement to meet the safe harbor exception to the penalty. If you have questions regarding your safe harbor estimates, please call this office as soon as possible.
CAUTION: Some state de minimis amounts and safe harbor estimate rules are different than those for the Federal estimates. Please call this office for particular state safe harbor rules.
April 18 – Last Day to Make Contributions
Last day to make contributions to Traditional and Roth IRAs for tax year 2016.
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Have not yet filed your 2013 federal tax return? If not, you need to act quickly because your return must be filed by April 18, 2017. Otherwise, you forfeit your refund, and the money becomes the property of the U.S. Treasury.
The IRS estimates that more than 1 million taxpayers have not filed their 2013 tax returns and that more than $1 billion of unclaimed refunds are available for those taxpayers. The IRS estimates that these taxpayers will have an average refund of $763.
By failing to file a return, people stand to lose more than just refunds for taxes withheld or paid during 2013. In addition, many low- and moderate-income workers did not claim the Earned Income Tax Credit (EITC), which helps individuals and families with incomes below certain thresholds. For unmarried individuals in 2013, these thresholds were $46,227 for those with three or more children, $43,038 for those with two children, $37,870 for those with one child, and $14,340 for those with no children. Each amount is $5,340 more for married joint filers. In addition, parents who are eligible to claim the refundable portion of the child tax credit and the American Opportunity Tax Credit (education tax credit) will forfeit those benefits if they don’t file a return.
When filing a 2013 return, the law requires that the return be properly addressed, mailed and postmarked by April 18th. There is no late-filing penalty for those who qualify for a refund.
As a reminder, taxpayers seeking a 2013 refund should know that their checks will be held if they have not also filed tax returns for 2011 and 2012. In addition, their refunds will first be applied to any amounts that they still owe to the IRS and may be used to offset unpaid child support or past-due federal debts caused by student loans, repayment of unemployment compensation and state taxes owed.
Contact Dagley & Co. with any questions, or make your tax appointment today.
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“Do I have to file a tax return?” is a question heard a lot during this time of year. The answer to this popular question is a lot more complicated than many would think. To understand, one must realize the difference between being required to file a tax return vs. the benefit of filing a tax return even when it’s not required to file. We’ve put together a comprehensive description for your better understating:
When individuals are required to file-
- Generally, individuals are required to file a return if their income exceeds their filing threshold, as shown in the table below. The filing thresholds are the sum of the standard deduction for individual(s) and the personal exemption for the taxpayer and spouse (if any).
- Taxpayers are required to file if they have net self-employment income in excess of $400, since they are required to file self-employment taxes (the equivalent to payroll taxes for an employee) when their net self-employment income exceeds $400.
- Taxpayers are also required to file when they are required to repay a credit or benefit. For example, if a taxpayer acquired health insurance through a government marketplace and received advanced premium tax credit (APTC) they are required to file a return whether or not they are otherwise required to file. A return is required in order to reconcile the APTC with the premium tax credit they entitled based upon their household income for the year. So generally if you receive a 1095-A you are required to file.
- Filing is also required when a taxpayer owes a penalty, even though the taxpayer’s income is below the filing threshold. This can occur, for example, when a taxpayer has an IRA 6% early withdrawal penalty or the 50% penalty for not taking a required IRA distribution.
2016 – Filing Thresholds
Filing Status Age Threshold
Single Under Age 65 $10,350
Age 65 or Older 11,900
Married Filing Jointly Both Spouses Under 65 $20,700
One Spouse 65 or Older 21,950
Both Spouses 65 or Older 23,200
Married Filing Separate Any Age 4,050
Head of Household Under 65 $13,350
65 or Older 14,900
Qualifying Widow(er) Under 65 $16,650
with Dependent Child 65 or Older 17,900
When it is beneficial for individuals to file-
There are a number of benefits available when filing a tax return that can produce refunds even for a taxpayer who is not required to file:
- Withholding refund – A substantial number of taxpayers fail to file their return even when the tax they owe is less than their prepayments, such as payroll withholding, estimates, or a prior over-payment. The only way to recover the excess is to file a return.
- Earned Income Tax Credit (EITC) – If you worked and did not make a lot of money, you may qualify for the EITC. The EITC is a refundable tax credit, which means you could qualify for a tax refund. The refund could be as high as several thousand dollars even when you are not required to file.
- Additional Child Tax Credit – This refundable credit may be available to you if you have at least one qualifying child.
- American Opportunity Credit – The maximum for this credit for college tuition paid per student is $2,500, and the first four years of post-secondary education qualify. Up to 40% of the credit is refundable when you have no tax liability, even if you are not required to file.
- Premium Tax Credit – Lower-income families are entitled to a refundable tax credit to supplement the cost of health insurance purchased through a government Marketplace. To the extent the credit is greater than the supplement provided by the Marketplace, it is refundable even if there is no other reason to file.
For more information about filing requirements and your eligibility to receive tax credits, please contact Dagley & Co. for more information. We recommend not procrastinating, no matter what your stance on filing may be!
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Did your business utilize an independent contractor in 2016? Did you pay him/her $600 or more during the calendar year? If so, you are required to issue him/her a Form 1099-MISC. The purpose of this form is to avoid penalties and the possibility of losing the deduction for his/her labor and expenses in an audit. Different from last year, the IRS moved up the filing due date to January 31, 2017.
In addition to being used to report payments to independent contractors, Form 1099-MISC is also used to report payments made by a business for rents and royalties and to attorneys for legal services, among others. If there are no independent contractor payments to report, the 2016 1099-MISC issued for other payments continues to be due to the IRS by the normal due date of February 28, 2017. However, where both independent contractor and other payments are being reported, the January 31 due date should be observed so that late filing penalties are avoided regarding the independent contractor payments.
It is not uncommon to have a repairman out early in the year, pay him less than $600, then use his services again later in the year and have the total for the year exceed the $599 limit. As a result, you may have overlooked getting the information from the individual that you need to file the 1099-MISCs for the year. Therefore, it is good practice to always have individuals who are not incorporated complete and sign an IRS Form W-9 the first time you engage them and before you pay them. Having a properly completed and signed Form W-9 for all independent contractors and service providers eliminates any oversights and protects you against IRS penalties and conflicts. If you have been negligent in the past about having the W-9s completed, it would be a good idea to establish a procedure for getting each non-corporate independent contractor and service provider to fill out a W-9 and return it to you going forward.
IRS Form W-9, Request for Taxpayer Identification Number and Certification, is provided by the government as a means for you to obtain the data required to file 1099s for your vendors. It also provides you with verification that you have complied with the law in case the vendor gives you incorrect information. We highly recommend that you have potential vendors complete a Form W-9 before you engage in business with them. The W-9 is for your use only and is not submitted to the IRS.
The penalty for failure to file the required informational returns is substantial and is $260 per informational return. The penalty is reduced to $50 if a correct but late information return is filed not later than the 30th day after the January 31, 2017, required filing date, or it is reduced to $100 for returns filed after the 30th day but no later than August 1, 2017. If you are required to file 250 or more information returns, you must file them electronically.
Please note: To avoid penalties, all forms must be sent to the IRS by January 31, 2017.
Dagley & Co. is here to prepare your 1099 for submission. We recommend using this 1099 worksheet to provide us with the information needed to prepare your 1099.
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When two married people are jointly involved in the operation of an unincorporated business, it is very common, yet incorrect, for all of that business’s income to be reported as just one spouse’s income, even when/if they both work in the business.
In such cases, the spouse not taking credit for his or her portion of the earned income loses out on the chance to accumulate his or her own eligibility for Social Security benefits. In addition, to claim a child care credit, both spouses on a joint return must have earned income (or imputed income if one of the spouses is a full-time student or is disabled), so unless the spouse not including a portion of the income from the joint business has another source of earned income, the couple will not be allowed a child care credit.
There are ways to remedy this situation, however. One option is to file a partnership return for the activity, in which case each spouse will receive a K-1 that reports his or her share of the net profit. An approach that avoids the necessity of filing a partnership return, and that is probably less complicated, is a qualified joint-venture election, in which each spouse elects to file a separate Schedule C for his or her respective share of the business. This gives them both self-employed income for the purposes of the self-employment tax and for claiming the child care credit.
A qualified joint venture refers to any joint venture involving the conduct of a trade or business if:
(1) The only members of the joint venture are husband and wife,
(2) Both spouses materially participate in the trade or business, and
(3) Both spouses elect to apply this rule.
Generally, to meet the material participation requirement, each spouse will have to participate in the activity for 500 hours or more during the tax year.
If the net income from the business exceeds the annual cap on income subject to the Social Security tax, the combined self-employment tax for the spouses with split Schedule Cs will exceed what a single spouse would have paid if he or she had filed a single Schedule C.
An additional benefit when filing split Schedule Cs is the opportunity for both spouses to participate in IRAs and self-employed retirement plans.
If you have questions about how splitting the business income between spouses might apply to your specific situation, please contact Dagley & Co. today.
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Have you used an independent contractor this year in your business? If yes, and you paid them $600 or more, you are required to issue them a 1099-MISC after the close of the year. If you fail to do so, and your business’s income tax return is subsequently audited, you could lose the deduction for those payments and end up paying taxes on that income yourself, not to mention potential penalties.
A big tax trap for businesses is the $600 reporting threshold. Say your business uses the services of an independent contractor early in the year at a cost below the $600 threshold, and you don’t bother to obtain the necessary reporting information from the contractor. If you use the contractor’s services again later in the year and the combined total you’ve paid him or her exceeds the reporting threshold, you won’t have the required reporting information.
Sorry to say, you may find it difficult to obtain that information after the fact, as not all self-employed individuals report all their income, and contractors may not be willing to give you their tax ID information once they’ve completed the work and gotten your payment for their services. So, it is good practice to collect that information upfront before engaging the contractor regardless of the amount.
The IRS provides Form W-9 – Request for Taxpayer Identification Number and Certification – as a means for you to obtain the data required from your vendors in order to file the required 1099-MISC forms after the close of the year. A completed W-9 also provides you with verification that you complied with the law should the vendor provide you with incorrect information.
In addition, there are substantial penalties if you fail to file a correct 1099-MISC by the due date and you cannot show reasonable cause for not filing. Generally, for 1099 forms due in 2017, the penalty is $50 per 1099-MISC for not filing by the due date. The penalty increases to $100 if the form is not filed within 30 days of the due date and $260 after August 1, 2017. The maximum penalty for small businesses is $532,000, so you can see this is not a reporting requirement to be taken lightly.
Oh, and by the way, the due date for filing 2016 Forms 1099-MISC with the IRS is January 31, 2017, when you are reporting nonemployee compensation (box 7 of the form), which includes the income paid to independent contractors. This due date is a month (two months if you’ve been filing your 1099s electronically) earlier than it has been in the past. So now both the government’s copy and the one you provide the contractor are due by the same date.
If you have questions related to your 1099-MISC reporting requirements or need assistance filing the required forms after the end of the year, please give Dagley & Co., CPA a call.
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At Dagley & Co. we hear a lot about the complexity of the tax code, as well as a lot of rhetoric from Washington about simplifying it. Tax codes were originally written to bring in money (taxes) to pay for government costs. But over the years, Congress has used tax codes more as a tool to manage social reform. As a result, the code has become very complex.
So with taxes becoming more complex with each passing year, why do people think they can prepare their own returns? We use software-costing thousands of dollars, so why do individuals, not educated in tax law and using low-cost computer software, think they can get their tax result right? Well, they may not, and they may miss deductions, credits, income exclusions, retirement benefits, and even more beneficial filing options just to save a few bucks on tax preparation costs.
However, paying a little more in tax than they need to should not be their biggest concern. A more troublesome situation is getting more tax refund than they are entitled to, and then a year or two later getting a letter from the IRS wanting the excess back. This is especially devastating to lower-income individuals and families that spend what they bring in just making ends meet and have no savings to fall back on when the IRS comes calling, leaving them with even a bigger financial hole.
To make matters worse, they may not even understand the IRS letter or the issue it is dealing with, and since they did their own return, they have no one to call for help in getting the tax assessment reduced or knowing how to get penalties abated.
Professional tax preparation offers more than just entering numbers into a computer program. If you usually file your own tax returns, perhaps you should consider a firm that can not only prepare your taxes properly, but also provide tax, financial and retirement guidance. We are also here to help plan for the future. Give Dagley & Co., CPA’s a call this year, we are here to help.
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The question many taxpayers ask during this time of the year is, “Must I file a tax return?” or “Should I file a tax return? These questions are far more complicated than people believe. To fully understand, we need to consider that there are times when individuals are REQUIRED to file a tax return, and then there are times when it is to individuals’ BENEFIT to file a return even if they are not required to file.
When individuals are required to file:
Generally, individuals are required to file a return if their income exceeds their filing threshold, as shown in the table below. The filing thresholds are the sum of the standard deduction for individual(s) and the personal exemption for the taxpayer and spouse (if any).
Taxpayers are required to file if they have net self-employment income in excess of $400, since they are required to pay self-employment taxes (the equivalent to payroll taxes for an employee) when their net self-employment income exceeds $400.
Taxpayers must also file when they are required to repay a credit or benefit. For example, taxpayers who underestimated their income when signing up for health insurance on a government health insurance marketplace and received a higher advance premium tax credit than they were entitled to are required to repay part of it.
Filing is also required when a taxpayer owes a penalty, even though the taxpayer’s income is below the filing threshold. This can occur, for example, when a taxpayer has an IRA 10% early withdrawal penalty or the 50% penalty for not taking a required IRA distribution.
2015 – Filing Thresholds
Filing Status Age Threshold
Single Under Age 65 $10,300
Age 65 or Older 11,850
Married Filing Jointly Both Spouses Under 65 $20,600
One Spouse 65 or Older 21,850
Both Spouses 65 or Older 23,100
Married Filing Separate Any Age 4,000
Head of Household Under 65 $13,250
65 or Older $14,800
Qualifying Widow(er) Under 65 $16,600
with Dependent Child 65 or Older $17,850
Consequences of Not Filing – If you have been procrastinating about filing your 2015 tax return or have other prior year returns that have not been filed, you should consider the consequences if you are REQUIRED file. The April 18 due date for the 2015 returns is just around the corner.
Failing to file a return or filing late can be costly. If taxes are owed, a delay in filing may result in penalty and interest charges that could substantially increase your tax bill. The late filing and payment penalties are a combined 5% per month (25% maximum) of the balance due.
April 18, 2016 is also the last day to file a 2012 return and be able to claim any refund you are entitled to.
Even if you expect to have a tax liability and cannot pay all the tax due, you should file your tax return by the due date to minimize penalties.
When it is beneficial for individuals to file – There are a number of benefits available when filing a tax return that can produce refunds even for a taxpayer who is not required to file:
Withholding refund – A substantial number of taxpayers fail to file their returns even when the tax they owe is less than their prepayments, such as payroll withholding, estimates, or a prior overpayment. The only way to recover the excess is to file a return.
Earned Income Tax Credit (EITC) – If you worked and did not make a lot of money, you may qualify for the EITC. The EITC is a refundable tax credit, which means you could qualify for a tax refund. The refund could be as high as several thousand dollars even when you are not required to file.
Additional Child Tax Credit – This refundable credit may be available to you if you have at least one qualifying child.
American Opportunity Credit – The maximum credit per student is $2,500, and the first four years of postsecondary education qualify. Up to 40% of that credit is refundable when you have no tax liability and are not required to file.
Premium Tax Credit – Lower-income families are entitled to a refundable tax credit to supplement the cost of health insurance purchased through a government health insurance marketplace. To the extent the credit is greater than the supplement provided by the marketplace, it is refundable even if there is no other reason to file.
DON’T PROCRASTINATE! There is a three-year statute of limitations on refunds, and after it runs out, any refund due is forfeited. The statute is three years from the due date of the tax return. So the refund period expires for 2015 returns, which are due in April of 2016, on April 15, 2019.
For more information about filing requirements and your eligibility to receive tax credits, please contact Dagley & Co.