Taxes

Ask the Readers: Are You Ready for Tax Season?

Ashley Jacobs — Tue, 18 Feb 2020 09:30:13 +0000

We're already a few weeks into tax season! For many people with complicated returns, tax prep started well before January. But even if your situation is fairly simple, you would still need to gather documents, review your finances, and account for any big changes that may have happened over the past year.

Are you ready for tax season? What documents do you still need, if any? Are you filing your own taxes or hiring someone to do it?

Tell us whether you're ready for tax season and we'll enter you in a drawing to win a $20 Amazon Gift Card!

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Follow us on Twitter
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You must be 18 and U.S. resident to enter. Void where prohibited.

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Tell us whether you're ready for tax season and we'll enter you in a drawing to win a $20 Amazon Gift Card!

This article is from Ashley Jacobs of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

What to Do Now to Prepare for Tax Season

Emily Guy Birken — Tue, 10 Dec 2019 17:17:09 +0000

Preparing for tax season often seems more like a sprint than a marathon. You receive your W2 forms in the mail in late January, and then it's time to excavate your receipt shoe box and spend a stressful weekend trying to make sense of your tax return. All in all, it feels like a hurried, overwhelming, and nerve-wracking chore that you dread every year.

But what if filing your taxes didn't have to be quite so stressful?

The trick to making your tax season a breeze is preparing for it early. As in, right now. If you want an easy and relaxed tax season, here's what you can do now to get ready.

Make a list of the information you'll need

One of the most frustrating moments in tax preparation is discovering you're still missing one vital piece of information after you've gathered everything you thought you needed. And it's even worse if you don't know how to find the missing information.

So look over the specific info you need to file now, to give yourself time to gather all the items well before Tax Day. Specifically, you'll need:

A copy of last year's tax return
The Social Security or Tax ID number of every member of your household
The income records of every member of your household
Receipts for your deductible expenses
Records of any taxes you've paid throughout the year

Putting together your list of necessary information and checking each item off as you gather it will ensure that you're fully prepared when you finally sit down to file. (See also: The 7 Most Common Tax Questions for Beginners, Answered)

Organize your receipts

Keeping track of tax-related receipts throughout the year is one of the most difficult parts of handling your taxes. Many people throw all of their receipts for work-related expenses, charitable donations, mortgage payments, medical expenses, and interest statements in a single folder or box to deal with "later."

Now is an excellent time to dig out your receipts and start organizing them according to category. Having your receipts neatly separated now will make it easy to sort the last few that come in as the year comes to a close, and can help you get into the habit of putting them in order as you receive them.

Gather your paystubs together

Though the majority of filers will receive either a W2 or 1099 form from their employer(s), it's still a good idea to gather your paystubs before the end of the year to get a rough idea of your income. That will help you identify any potential mistakes on your W2 or 1099 forms as soon as they arrive. It's far better to catch a mistake early rather than find you need to request a corrected form close to the IRS deadline.

Plus, checking over your paystubs all at once gives you a chance to take a look at your federal and state tax withholding over the year, as well as any pretax contributions you've made to your 401(k) or IRA.

Review your W4

Another great reason to look at your paystubs now is that it gives you a chance to review your W4 with your employer.

The W4 form determines how much tax withholding is taken from each paycheck. If you expect to receive a large refund this year, you can adjust your withholding allowances now to ensure that more of your paycheck will come home with you in 2020. If, on the other hand, you worry that you may owe money because you didn't have enough withheld, now is a good time to adjust your W4 to be sure you don't have the same problem in the coming year. (See also: Are You Withholding the Right Amount of Taxes from Your Paycheck?)

Send more money to your retirement fund

If you have access to a tax-deferred retirement account like a 401(k) or an IRA, now is the time to see how much money you have set aside this year, and try to increase that number.

As of 2019, workers under 50 years old can save up to $19,000 in a 401(k) and up to $6,000 in an IRA. And every dollar you put into these kinds of accounts reduces the amount of income you have to pay taxes on.

Now is an excellent time to try to maximize your 2019 contribution. You have until the end of the calendar year to maximize your 2019 401(k) contribution, but you can continue contributing to your 2019 IRA until April 15, 2020.

Getting into the habit of increasing your contribution now can also help you reach the maximum in 2020, which is going up to $19,500 for 401(k) accounts, although the IRA maximum will hold steady at $6,000. (See also: 8 Tax Return Mistakes Even Smart People Make)

Plan ahead for your refund

If you expect to receive a refund this year, start thinking about the best way to use the money now. We tend to think of a tax refund as "free money," even though it's just your own salary being returned to you. But with a free money mindset, it's very easy to go overboard spending the refund on fun stuff, like a vacation or a new gadget.

There's nothing wrong with enjoying your tax refund, but taking a hard look at your budget and finances now can help you to determine if having fun with your refund is the best use of the money. Is there some debt you could pay down (or pay off) with the refund instead? Or is there a major goal you're saving toward — like a down payment on a house — that would benefit from an injection of cash?

Thinking through the best use of your tax refund before you have it in your hot little hands makes it more likely you'll make good decisions with it. Once you have the money in your possession, it's very tempting to make it rain instead of saving for a rainy day.

Make your tax season less stressful

Getting a jump start on your filing chores will not only make tax season much easier, but it can also help you prepare for your finances in the coming year. Start 2020 on the right financial foot by starting your tax season preparation early.

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Ask the Readers: Do You File Your Own Taxes?

Ashley Jacobs — Tue, 19 Feb 2019 09:30:08 +0000

Editor's Note: Congratulations to P, Samantha, and Tabathia for winning this week's contest!

You don't want to get your taxes wrong, but if your finances are fairly simple and you're usually pretty organized, it's pretty safe to file taxes on your own.

Do you file your own taxes? What do you think is the most complicated part of the process? What advice would you give to someone who is filing their own taxes for the first time?

Tell us whether you file or own taxes and we'll enter you in a drawing to win a $20 Amazon Gift Card!

Win 1 of 3 $20 Amazon Gift Cards

We're doing three giveaways — here's how you can win:

Follow us on Twitter
Tweet about our giveaway for an entry.
Visit our Facebook page for an entry.
Follow @janetonthemoney on Twitter.

Use our Rafflecopter widget for your chance to win one of three Amazon Gift Cards:

a Rafflecopter giveaway

Giveaway Rules:

Contest ends Monday, February 25th at 11:59 p.m. Pacific. Winners will be announced after February 25th on the original post. Winners will also be contacted via email.
This promotion is in no way sponsored, endorsed or administered, or associated with Facebook or Twitter.
You must be 18 and U.S. resident to enter. Void where prohibited.

Good Luck!

Tell us whether you file or own taxes and we'll enter you in a drawing to win a $20 Amazon Gift Card!

This article is from Ashley Jacobs of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Best Money Tips: Tax Secrets of the Rich

Amy Lu — Thu, 05 Jul 2018 08:30:11 +0000

Welcome to Wise Bread's Best Money Tips Roundup! Today we found articles on tax secrets of the rich, ways to adopt a zero-waste lifestyle, and household chores you should outsource.

Are You Withholding the Right Amount of Taxes from Your Paycheck?

Damian Davila — Tue, 03 Apr 2018 08:30:14 +0000

In 2017, the IRS received 152,235,000 tax returns — and of those returns, more than 73 percent were granted a refund. With the average refund last year standing at $2,895, you might think getting a windfall in the spring is a good thing. But rather than giving the government an interest-free loan all year, wouldn't you have preferred to have an extra $241.25 per month in your paycheck?

On the other hand, the 27 percent of taxpayers not receiving a refund may be getting the opposite — a big tax bill. They may not be having enough money withheld from their paychecks for taxes.

This is why it's important to withhold the right amount of taxes out of your paycheck. Let's review how to cover your projected tax liability while minimizing your refund. (See also: Bigger Paycheck or Bigger Tax Refund — Which Should You Pick?)

Meet the IRS Withholding Calculator

With the passing of the Tax Cuts and Jobs Act, many Americans are still trying to figure out the full effects of this legislation on their paychecks. In an effort to help taxpayers make sense of recent changes to the tax law, the IRS updated its Withholding Calculator on February 28, 2018.

While the IRS recommends that all taxpayers take a second look at how much in taxes they're taking out of their paychecks, the agency highly encourages the following groups to check their withholdings for 2018:

Two-income families.
People with two or more jobs at the same time or who only work for part of the year.
People with children who claim credits such as the Child Tax Credit.
People who itemized deductions in 2017.
People with high incomes and more complex tax returns.

How to use the IRS Withholding Calculator

Here's your game plan to achieve a "Goldilocks" withholding rate on your paycheck this year.

1. Gather your latest pay stub(s) and latest tax return

If you don't receive a pay stub in the mail, contact your human resources office to get a copy or learn how you can download one online from your company portal. Depending on your unique financial situation, you may also want to find your 2016 return (or your 2017, if you've completed it) to more accurately estimate your 2018 income, budget, expenses, and list of tax credits.

2. Provide general information and list potential tax credits

In the first two sections of the IRS Withholding Calculator, indicate your filing status, whether or not anybody can claim you as a dependent, how many jobs you and your spouse (if applicable) have, how many dependents you will claim on your return, and whether or not you or your spouse will be 65 or older on January 1, 2019.

Additionally, you will need to list any applicable tax credits, such as the Child Tax Credit and Earned Income Tax Credit. This is why it's helpful to have past returns handy to help you estimate those credits. (See also: 8 Tax Return Mistakes Even Smart People Make)

3. Detail your wage income and withholding

Next, enter your gross wages, salaries, tips, and any bonuses you expect to receive in 2018. Using your most recent pay stubs, enter the total federal income tax withheld to date in 2018 and the federal income tax withheld from your last salary payment. Indicate how frequently you receive your paychecks, and, if applicable, when you started this job in 2018, and when you expect this job to end in 2018.

If you receive any other taxable income, make sure to include it as well. The IRS Withholding Calculator is only as accurate as the information you enter, so leaving that income out may result in a higher tax liability.

4. List deductions

Here is one of the biggest changes implemented by the Tax Cuts and Jobs Act. If your standard deduction ($12,000 for individuals, $18,000 for heads of household, and $24,000 for married filing jointly) is more than your total itemized deductions, your standard deduction will be used to calculate your withholding. Otherwise, your total itemized deduction amount will be used. So, this is why it still pays to keep track of all of those deductions throughout the year.

Use your latest return to estimate your 2018 itemized deductions, including medical and dental expenses, paid taxes (up to $5,000 for single filers and $10,000 for married filers for applicable state and local income taxes, property taxes, or sales taxes), gifts to charity, and other itemized deductions. Remember that beginning in 2018, job and certain miscellaneous expenses are no longer deductible. (See also: 12 Things You Should Know About the New Tax Law)

5. Adjust your W4

Once you have entered all the data, the IRS Withholding Calculator will provide you with clear instructions on how to update your W4 with your employer. Depending on your situation, some action items may include changing your filing status, adjusting your number of allowances, and withholding an extra amount every paycheck.

Following the instructions from the calculator, you'll cover your tax liability just right.

Revisit the IRS Withholding Calculator as necessary

Don't set it and forget it. If your job (Promotion? Salary bump? Side gig?) or life situation (Married? Baby?) changes, revisit the IRS Withholding Calculator. The calculator will help you make sure you have the right amount of tax withheld from your paycheck at work.

The IRS recommends submitting your updated W4 to your employer as soon as possible. Withholding takes place throughout the year, so it's better to take this step right away.

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This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

It's Your Last Chance to Claim These 8 Tax Deductions

Kat Tretina — Thu, 29 Mar 2018 09:30:24 +0000

The deadline to file your tax return is quickly approaching, so it's a good idea to wrap things up and double check for any deductions or credits you might have missed.

It's extra important to pay close attention and make sure you're getting the most of deductions this year. The Tax Cuts and Jobs Act eliminates several popular deductions for the 2018 tax year, which means this is the last chance you'll have to claim them on your return.

To minimize your tax bill and increase your chances of getting your refund, make sure you take advantage of your last opportunity to claim these deductions. (See also: 12 Things You Should Know About the New Tax Law)

1. Unreimbursed work expenses

If you were not reimbursed for required work expenses, such as a job uniform, work-related education, business travel, or union fees, those costs are tax deductible for tax year 2017. The new tax law eliminates this deduction.

2. Job-related moving expenses

If you've moved in the last year for work, you may be able to deduct certain expenses like hiring movers or renting a truck. To qualify under the current rules, you must have moved at least 50 miles from your previous address, your moving date must correspond to when you started your new job, and you must work full-time for at least 39 weeks during the first 12 months after your move. This deduction will no longer be available for the 2018 tax year and beyond.

3. Tax preparation

The new law eliminates your ability to deduct tax preparation expenses, such as the cost of using software or hiring someone to do them for you. If you spent money for tax preparation in 2017, this will be your last year to claim that deduction.

4. Casualty and theft losses

Under the current tax law, you can deduct any casualty and theft losses that you experienced during the tax year. For individual taxpayers, you can deduct losses due to a fire, storm, or from theft. Under the new law, you will only be able to deduct casualty losses if the loss is attributable to a disaster as declared by the president, such as a hurricane.

5. Alimony deductions

If you've gone through a divorce and you pay alimony, the money you pay your former spouse under a divorce or separation agreement is currently tax deductible. Depending on how much you pay in alimony, the tax deduction can be significant.

Under the new tax plan, alimony payments will no longer be deductible. The change will apply to any divorce or separation that occurs after December 31, 2018.

6. Personal exemptions

With the current tax structure, you can claim a personal exemption of $4,050 for yourself, your spouse, and each of your dependent children. The new tax plan eliminates personal exemptions.

Instead, the plan increases the standard deduction from $6,350 to $12,000 for single filers, from $12,700 to $24,000 for married filing jointly, and from $9,350 to $18,000 for heads of household. Although some people will benefit from the change to a higher standard deduction, the elimination of the personal exemption could hurt families with multiple children, lower incomes, or single parents.

7. Mortgage interest deduction

Currently, you can deduct the interest you paid on a mortgage or home loan balance as large as $1 million. For mortgages that originate after December 15, 2017, the limit is lowered to $750,000. Although that number is still high, it could affect homeowners in areas with sky-high real estate prices.

8. State and local tax deductions

Current law allows you to deduct the full amount of either your state income taxes or state and local taxes. You can also deduct property taxes. For those in areas with a high cost of living, this deduction is a significant help.

The new tax law merges the three taxes together and caps the deduction at $10,000. With a smaller deduction available for state and local taxes, some families could face a higher tax bill.

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This article is from Kat Tretina of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Things You Need to Know About Gift Tax

Kat Tretina — Thu, 22 Mar 2018 09:30:15 +0000

A recurring question each tax season centers on financial gifts; what they are and how they are taxed. Gifting money, property, or valuables to your friends and loved ones can be complicated if your gift exceeds certain monetary limits. Once your gift has exceeded these limits, it becomes subject to gift tax.

Understanding gift tax can be enormously beneficial to you and the receiver of your gift. Whether you are trying to pass on money or expensive items to a family member or friend, understanding the gift tax can help you save over the long run.

What is the gift tax?

The gift tax is a tax on anything with a tangible value that is given to someone without receiving anything, or less than the item's full value, in return. The gift tax is paid by the donor in most situations. The point of such a tax is to prevent people from gifting away all of their assets before they die in an attempt to avoid estate taxes.

For example, if a loved one gifts you their old car for less than its fair market value, it could be subject to the gift tax. For the purposes of gift tax, the IRS defines fair market value as "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts."

How the gift tax actually works

Only gifts that exceed a certain tangible value in a year are subject to the gift tax. For tax year 2017, that exclusion was $14,000. In 2018, the federal gift tax exclusion will rise to $15,000. For a couple, these exclusions are per person. So, a married couple in 2018 could gift an adult child $30,000 to buy a home without being subject to gift tax, so long as the gift is deemed to be split between the two parents.

If your gift is more than the exclusion amount, you will need to complete IRS Form 709: U.S. Gift (and Generation-Skipping Transfer) Tax. You must complete this form every year you make a qualifying gift.

When you actually have to pay gift tax

To make matters confusing, you don't actually have to pay gift tax until you surpass the lifetime gift limit. (It's the same amount that's exempt from estate tax, by the way.) That limit was $5.49 million per person for tax year 2017, but was increased to $10 million, indexed to inflation, with the passage of the new tax law in December 2017. The IRS recently announced the recalculated lifetime limit for decedents who pass in 2018 has been set at $11.18 million. Any gifts that fall under the annual exclusion limits do not count against that lifetime limit. Regardless of whether or not you have to pay up, you still have to file Form 709 each year you gift more than the exclusion amount.

If you have three children, and you give each of them $18,000 in 2018, you have surpassed the exclusion by $3,000 per child, or $9,000 total. That $9,000 will count against your lifetime tax-exempt gift limit of $11.18 million.

What isn't subject to gift tax?

A number of gifts are exempt from the gift tax. Exempt gifts include:

College tuition. If you are willing and able to pay the tuition for your child, grandchildren, relatives, or friends, you do not have to pay the gift tax.
Political contributions. Political contributions, as long as they remain within the legal limit, are tax exempt. Be sure that you still file the required tax documents to record any political contributions.
Medical bills. Like tuition, payments made directly to a medical institution to cover the cost of care or medical bills for a loved one are exempt from the gift tax and do not need to be declared on your taxes.
Gifts to your spouse. If you buy your spouse a gift, such as an expensive piece of jewelry, that gift is not taxable.
Charitable donations. Any gifts you make to a qualifying charity, including cash or valuables, are not subject to the gift tax.

Be sure to speak with a tax expert, wealth management firm, or estate manager if you have more complicated questions or concerns in regard to gifts and the gift tax. (See also: How to Choose the Best Tax Preparer)

[Editor's note: An earlier version of this article incorrectly reported the lifetime gift tax exemption. The exemption is $11.18 million for 2018, and not $5.6 million.]

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This article is from Kat Tretina of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Tariffs: What They Are and How They Impact Your Finances

Tim Lemke — Fri, 16 Mar 2018 09:30:20 +0000

President Trump recently announced new tariffs on imports of steel and aluminum, in a move that got mixed reviews from business and political leaders. The new tariffs would increase levies on aluminum by 10 percent and steel by 25 percent.

There is much debate about the sensibility of these tariffs, but rather than wade into that morass, let's examine what tariffs are and how they impact the economy and your investments.

What is a tariff?

A tariff is essentially a tax that the government places on imported items. For example, the government may choose to place a tax on foreign cars or imported cotton. There are tariffs placed on an eye-popping number of products, from building materials and vegetables, to chemicals and even live animals. Tariffs can be imposed on a per-item basis, by weight or size, or by percentage of value.

Tariffs can even vary depending on the country. For example, the U.S. may impose a tariff on shirts made in China, but not in Vietnam. The United States imposes tariffs on imports from many countries, but also has free trade agreements with many nations that allow both parties to import goods without tariffs.

Why do tariffs exist?

The first tariffs in the United States came shortly after the nation ratified the Constitution, and were motivated largely by the government's need for revenue. Tariffs played a big role in funding the government in the days before income taxes.

Tariffs today still produce billions in revenue for the government, but they are also designed to help protect U.S.-based industries and companies. In essence, tariffs imposed on imported goods make those goods more expensive, thus giving a competitive advantage to American firms. But opponents of tariffs say they can hurt international trade and ultimately lead to lower economic growth worldwide.

How does a tariff impact prices?

Tariffs impact the cost of many of the products we buy. Just look at the label on the shirt you're wearing or your child's toy. Even if a product is manufactured or assembled in the United States, it may be made with materials that were produced overseas. Given that there are levies placed on thousands of imported goods, it's almost impossible to hold a product that isn't made more expensive by tariffs.

The specific impact on price varies, however. Some tariffs are relatively small and are barely noticed by consumers. Even significant tariffs may not impact the cost of an individual item by very much. (One analysis said the cost of a can of Campbell's soup may go up less than one cent as a result of Trump's higher tariff on steel.) At various times in history, however, tariffs have led to problematic increases in prices. For example, tariffs on agricultural imports during the Great Depression, which were designed to support American farmers, led to higher food prices at a time when people were struggling financially.

What industries are impacted by tariffs?

Nearly every business is impacted by tariffs to some extent, either directly or indirectly. A tariff on steel, for example, will impact the steel industry overseas but in turn could make costs higher for American construction companies that use steel. Similarly, a tariff on aluminum could mean higher costs for the beer industry because its beverages are sold in aluminum cans.

The U.S. has placed relatively high tariffs on clothing manufactured overseas, while electronics have tariffs that are much lower.

How does this impact my investments?

While tariffs are designed to protect and bolster U.S. industries, the actual impact on a company's bottom line — and investors — is not easy to predict. Consider the auto industry. There have long been tariffs on imported cars and automotive parts, but foreign car companies including Toyota and Honda have still recorded high sales while the U.S. auto industry has gone through struggles.

After President Trump's announcement regarding steel and aluminum tariffs, the S&P 500 dropped more than 1.3 percent. But analysts have downplayed any fear of a broader economic downturn, suggesting that companies and the national economy are too large for it to be impacted by any one tariff. Moreover, since many investors have diverse portfolios, the impacts may even out, as some companies may benefit from tariffs while others might see negative impacts.

"It usually takes more than cost pressures in one or two sectors to cause a recession," Fisher Investments wrote regarding the recent tariff order. "We don't mean to dismiss the personal impact any of this can have on workers and small business owners, but markets are callous, and at times like this, we think investors are best off thinking like markets."

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

15 Odd American Taxes You May Have to Pay

Paul Michael — Fri, 16 Mar 2018 09:00:06 +0000

Benjamin Franklin famously said, "In this world nothing can be certain, except death and taxes." What we can also be certain of is that strange, sometimes archaic taxes will always endure. For whatever reason, the following tax laws still exist, and they continue to bewilder the average taxpayer. (See also: The 11 Oddest Things America Has Ever Taxed)

1. The coffee cup lid tax

Colorado has a strange idea of what is essential packaging, and what is superfluous to requirements. As it turns out, the disposable cup that holds your morning coffee or tea is required, but the lid that stops it splashing everywhere (especially in the car) is "nice to have." As it's a nonessential, it is subject to an additional 2.9 percent tax. If you drink a $4 coffee every day, that adds up to an extra $40 every year.

2. The candy tax

Willy Wonka would be no fan of the Prairie state. For some reason, Illinois has decided that any sweet candy or other sugary treat is liable for an additional 5 percent sales tax, on one condition — that the snack contains no flour. So, something like a Kit Kat or Milky Way bar will not be subject to the tax, whereas a 3 Musketeers bar or chocolate covered raisins come with that extra charge.

3. The fur coat tax

First thoughts on this tax? Good. With advances in fabrics and science, there's no need to kill an animal purely for its fur. However, it still happens. While many clothing items are exempt from sales tax in Minnesota, garments that have three times more fur than any other material are subject to an additional 6.875 percent sales tax. If you want the fur look, faux fur is just as good and is exempt from the tax. Also, if the garment has only a little fur, perhaps on the collar or cuffs, it also escapes the tax.

4. Drug dealers and thieves must report their income

Mark this one down as very strange but true. You may think that a drug dealer or thief wouldn't care too much about reporting their income on a tax return, however, let's not forget that taxes, not murder or racketeering, sent Al Capone to Alcatraz. According to the IRS, "Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity."

5. The arrow excise tax

If you hunt with a bow and arrow, or partake in the sport of archery, your wallet could be getting hit with a hefty fee of 43 cents per arrow. The tax goes back to 1937's Wildlife Restoration Act, with the proceeds from the tax going to the U.S. Fish and Wildlife Service. If your arrows are longer than 18 inches, or are used with a specific kind of bow with a certain amount of draw, you'll get hit with the tax. Shorter arrows, and certain arrows for children's bows, are exempt.

6. The tattoos and piercings tax

Hey there body-modders of Arkansas, this one stings. Did you know that since 2002, your state has added an additional tax on any tattoos or piercings you get? It amounts to a 6 percent sales tax, which may not seem like a lot, but can add up over time. So, why did Arkansas impose this strange tax? To discourage people from getting them done, of course. However, anyone who is ready to endure hours of pain or the burn of a tattoo is probably not going to be put off by a sales tax.

7. The starving artist tax break

Are you a performing artist? A busker perhaps, or someone that sketches tourists on the streets of your city? Well, you're in luck … if you're broke. That's the irony of the starving artist deduction, which has some bizarre specifications. First, you must have worked for at least two employers and received at least $200 in income from each one during the year. Second, your expenses must be more than 10 percent of the income you receive from performances. And finally, your adjusted gross income must be less than $16,000. If you qualify, you can deduct paints, brushes, dancewear, or anything else you need to ply your trade.

8. The hot air balloon tax

Here's an odd one form the state of Kansas, which can have an impact on anyone that makes a living from hot air balloon rides. If you use the hot air balloon to do sightseeing jaunts, soaring high above the landscape for miles, you don't get taxed. But, if the balloon just goes up and down, staying tethered at all times, it stops becoming a mode of air transportation and is instead considered an amusement ride. In Kansas, that's subject to an amusement tax of 6.5 percent.

9. The 100th birthday tax break

In England, if you manage to stay alive long enough to hit triple digits, you actually get a congratulatory card from the Queen. In New Mexico, you get an even better gift. Providing you have resided in the state for at least six months, are a resident on December 31, and are not listed as a dependent on someone else's taxes, you will become completely exempt from state income taxes. Now that's worth a party in itself.

10. The vending machine fruit tax

If you're looking for a tax to make you scratch your head in disbelief, this is a contender. California, which considers itself a healthy state, incentivized fresh fruit purchases by exempting them from tax. Great, right? Well, there's a loophole. And wherever there's a loophole, there's a way to make money. If that fruit is sold from a vending machine, it somehow loses its healthy status, and gets taxed at a whopping 33 percent of the sale price.

11. The flush tax

When you gotta go, you gotta go. But the folks in Maryland are paying a little more than the rest of us to do so. In fact, the "flush tax" that was established in 2004 doubled from $30 per year to $60 per year in 2012, meaning every resident of the Old Line State is paying around $5 per month more than the rest of us just to go to the bathroom. However, it's all for a good reason. The local CBS affiliate reported last year that additional money raised by the tax has lead to state of the art upgrades that reduce nitrogen and solid waste by millions of pounds per year.

12. The belt buckle tax

If you had to take a wild guess on which state would impose a tax on belt buckles, Texas would probably be last on your list. After all, ornate, decorative, and patriotic belt buckles are as much a part of the Texan wardrobe as boots and hats. However, it's perhaps this predominance of buckles that made one lawmaker see dollar signs. So, get ready to pony up the dough, because you'll get taxed an additional 6.25 percent sales tax on every belt buckle you buy in Texas.

13. The sexually explicit business tax

Utah has a tax that doesn't go over well with adult service providers. According to the Utah State Tax Commission, the sexually explicit business tax is an additional tax on "admission and user fees, retail sales of tangible personal property including food and drinks, and services occurring in a business with nude or partially nude individuals." How much is it? An additional 10 percent tax on top of regular sales and use taxes. In short, if you're going to do naughty things in Utah, you have to have a slightly bigger wallet.

14. The exceptional tree tax break

Do you live in Hawaii? Do you have a magnificent specimen of a tree in your backyard or front lawn? Well, congratulations. A strange but perfectly legitimate tax break still exists that allows you to write off up to $3,000 in qualified costs and expenditure on your tree maintenance. Exceptional doesn't mean, "Wow, my tree looks awesome!" In this case, the state takes into account age, rarity, location, size, aesthetic quality, endemic status, and if it is, in fact, worthy of preservation. If you check all those boxes, you get the write-off.

15. The blueberry tax

The state of Maine is the largest producer of wild blueberries in the world. Whether you're eating blueberry pancakes, blueberry pie, or blueberry muffins, chances are the delicious fruits came from Maine. Not only that, but they were helped along by the Maine Wild Blueberry Tax. This tax imposes 1.5 percent tax on every pound of wild blueberries sold. The money is used for investment and research that keeps Maine's hugely successful blueberry business thriving.

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This article is from Paul Michael of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Countries With No (Or Very Low) Taxes

Nick Wharton — Mon, 05 Mar 2018 09:30:06 +0000

Though it may seem unthinkable to U.S. citizens, there are many countries all over the world that offer residents the benefit of no, or very low, income taxes. But before you start packing your suitcase and heading overseas for a tax-free life, keep in mind that U.S. taxation is based on citizenship, not residency. This means that regardless of what tax haven you base yourself in, you're still subject to U.S. tax regulations. As a U.S. citizen, you are obligated to inform the U.S. government of any income and assets held or earned overseas, and you will be taxed accordingly.

It's not all bad news, though. There are many ways that you could still significantly reduce the amount of tax you pay, including heading to one of the following destinations. (See also: 5 Tax Myths That Can Be Costly for Expats)

1. The Bahamas

The Bahamas is a little slice of tropical paradise that's long been a favorite getaway for warm weather lovers, boasting over 300 days of sunshine per year. Made up of around 700 islands blessed with countless white sand beaches, crystal clear waters, and incredible coral reefs perfect for snorkeling and scuba diving, it's easy to see why. Though the islands lie just north of Cuba and slightly south of Florida in the Atlantic Ocean, they are considered Caribbean.

As if living on an exotic island doesn't sound enticing enough, the Bahamas also offers zero income tax, corporate tax, capital gains tax, and wealth tax. You only have to obtain residency, rather than citizenship, to access the tax-free benefits, but the country specifically aims to attract wealthy transplants. Though there are various ways to gain residency, purchasing a property of $1.5 million gets your application fast-tracked.

2. Monaco

A tiny sovereign nation lodged into the southeast corner of France and overlooking the Mediterranean Sea, Monaco is one of the most popular tourist destinations on the French Riviera. Despite its diminutive size, this principality oozes glitz and glamour. The harbor brims with impressive yachts owned by the rich and famous, luxurious cars cruise up and down the palm-lined streets, and the beach is overlooked by some of the world's most expensive real estate.

One of the main reasons for its status as a magnet for the wealthy is its policy of not levying income taxes. To become a resident of Monaco, you need to get a temporary residence card, which will allow you to live in Monaco for 12 months. But you only need to live in Monaco for three months out of that year to maintain your residency.

Thanks to its location in the heart of Europe and convenient transportation, it's been a popular base for high roller individuals for decades. Many work elsewhere while maintaining residency in Monaco, allowing them to benefit from the lax tax regs. (See also: 13 Financial Steps to Take Before Retiring Abroad)

3. United Arab Emirates

Made up of an alliance of seven individual regions, each with their own absolute monarchy, the United Arab Emirates (UAE) is one of the Middle East's most wealthy economic hubs. The country enjoys an opulent reputation for luxury shopping, seven-star hotels, fine dining, and extravagant night life options. Probably the best known state is Dubai, which has a magnificent skyline packed with skyscrapers, including the Burj Khalifa, the world's tallest structure.

There are over three times as many expats living in the UAE as there are citizens, which highlights just how attractive life here is for outsiders. The main reason for this is the lack of income tax, in addition to high wages and good job opportunities. The UAE has, however, recently implemented excise tax and it launched a value added tax (VAT) at the beginning of 2018, meaning the cost of living will rise, if only slightly.

4. Bermuda

Another slice of Caribbean paradise, Bermuda is known for its pink sand beaches, incredible scuba diving sites, and for sharing its name with the mysterious and contentious Bermuda Triangle. Though it's a British island territory, it displays diverse and vibrant influences from the U.S., Africa, and European countries such as Portugal. This little island has many natural wonders to discover and an active calendar of arts and entertainment to enjoy.

As an established offshore financial center, Bermuda has a thriving financial industry that attracts many expats. It doesn't have any income tax, but there is a payroll tax in place, of which companies can pass up to 6 percent onto the employee.

Be warned, however: the cost of living in Bermuda is exorbitantly high, with rent for a 900-square-foot apartment topping $4,500, according to Expatistan. That could offset any benefits gained by low taxes. (See also: 4 Countries Where You Can Live on $1,000 a Month)

5. British Virgin Islands

Located in the Caribbean, the British Virgin Islands are made up of four main islands and around 50 smaller cays and islands that include some of the most exclusive in the region. Thanks to its geographical makeup, it's extremely popular among sailors, who, with members of a large yachting community, drop their anchors near the largely uninhabited islands they come across.

There are virtually no taxes levied on the British Virgin Islands, meaning there is zero capital gains tax, inheritance tax, estate duty, and corporation tax. Though there is technically an income tax, rates are set at zero, effectively making it null.

Gaining residency for the British Virgin Islands is not an easy process, though. You need to have already lived within the territory for 20 years. You are also only permitted to leave the territory for a maximum of 90 days per year unless it's for education or due to illness.

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This article is from Nick Wharton of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Tax Myths That Can Be Costly for Expats

Nick Wharton — Tue, 27 Feb 2018 09:30:09 +0000

Benjamin Franklin once famously said, "In this world, nothing can be said to be certain, except death and taxes." You might assume that by no longer living in the U.S. you've defied the tax half of this statement. That even if you have not yet cracked the secret to everlasting life, by skipping the country, you're able to fly quietly under the IRS's radar. However, you'd be very, very wrong. Here are five tax myths that can be costly for expats and digital nomads. (See also: 9 Ways Expats Can Maintain Their Credit Scores)

1. You're out of sight, out of mind for the IRS

There are still an unsettling number of people who believe that if you no longer live in the U.S., you're no longer liable to pay taxes here. Unfortunately, this could end up being a catastrophically costly mistake. The fact is that the U.S. is one of the few countries in the world that bases its tax system on residency and citizenship.

It doesn't matter whether you live, work, and earn your income elsewhere. The same tax system still applies even if you're paying taxes into your new country's tax system. As an American citizen, you're still obligated to file your tax returns in the U.S. every year if you have a certain level of income ($10,400 for a single person in 2017).

Filing doesn't necessarily mean you're going to actually have to pay taxes, as there are various exemptions you may qualify for (which I'll mention below). But essentially, the U.S. government says that's not for you to determine on your own, and your income must still be reported annually. Failing to do so will potentially lead to you being pursued by the IRS for moneys owed. You can be fined or even have your passport revoked.

2. You must renounce U.S. citizenship to lower taxes

Because you're required to file taxes no matter where in the world you are, some people think that the only way to lower their taxes is to renounce citizenship. Though this might be true in some extreme instances, there are actually many ways to retain your citizenship and still lower your U.S. taxes.

The Foreign Earned Income Exclusion was designed to help you avoid double taxation, and will allow you certain tax exclusions provided you meet the criteria. These might include foreign earned income as well as foreign housing, and the IRS offers a simple way to check if you're eligible through its Interactive Tax Assistant Tool.

To receive these exemptions you do actively have to claim them by filling out the relevant tax forms for the foreign earned income exclusion, so don't be fooled into believing that because you qualify, you don't have to file for them. You also need to declare your earnings in full; this is not an opportunity to not report the earnings that may be excluded. (See also: 8 Tax Return Mistakes Even Smart People Make)

3. If none of your balances in foreign bank accounts are over $10,000, you don't have to declare them

The Report of Foreign Bank and Financial Accounts (FBAR) regulations are often misinterpreted. Some people take them to mean that if none of your foreign bank accounts have a balance of over $10,000 dollars, you don't have to report them. In reality, the rules clearly state that you must submit an FBAR if "the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported."

This means that if you have one or more foreign accounts, you need to add the balances together rather than count them separately. It's not just bank accounts, either, and includes any "bank account, brokerage account, mutual fund, trust, or other type of foreign financial account." It's also not limited to your own accounts; it covers any account in which you have a financial interest or have signature authority over.

If at any stage throughout the year they cumulatively totaled more than $10,000, you need to fill out the FBAR. Failure to do so can be punishable with a fine of up to $100,000, or up to 50 percent of the balance of the accounts at the time of the violation, for each violation.

4. Failing to file tax returns for many years will mean you owe back taxes

There are a significant number of U.S. citizens who have lived outside the country for many years without realizing they need to pay taxes. For those people, it can be daunting to think they suddenly have to start filing taxes again and declare earnings to cover the entire period of living outside the U.S. Nobody wants to become liable for thousands of dollars of back taxes, and it can be tempting to think you've gotten away with it for so long, so why change now?

Luckily, in recent years, the government has made it far easier to manage taxes owed with introduction of what is known as streamlined filing compliance procedures.

Essentially, you have to certify that your nonpayment of taxes was due to "non-willful conduct" rather than deliberate avoidance, and you'll be able to come clean consequence-free. It's beneficial for both the government, who gets taxes they otherwise wouldn't be collecting, and the taxpayer, who no longer needs to live in fear.

5. The IRS is never going to catch you

Even if you're living off the grid on some far-flung desert island and haven't been back to the U.S. in years, if you have a bank account, you're probably traceable. Under the Foreign Account Tax Compliance Act of 2010 (FATCA), foreign financial institutions must pass on data relating to the assets of any of their clients who are U.S. citizens. Your financial records are transparent, so regardless of whether you report your accounts or not, the IRS can still access them.

Though you might think it's unlikely that you'll be investigated unless you're a wealthy individual, don't bank on it. The IRS has explicitly claimed it's getting harder and harder to avoid detection, and if you're still operating outside of the regs, the net is closing in.

It’s not worth it to try to avoid the IRS, even if you’re living overseas. Facing up to your responsibilities will ultimately be easier in the long run.

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This article is from Nick Wharton of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Here's What to Do If You Get Audited

Mikey Rox — Tue, 27 Feb 2018 09:30:09 +0000

We often exaggerate the phrase, "My worst nightmare," but when it comes to getting audited, it's true. Audits are many people's worst nightmare — but they don't automatically have to mean financial disaster. To help navigate the unwelcome process, consider these important steps to take as suggested by tax professionals.

1. Don't panic

A lot of folks' first response to receiving their audit notice is to panic. Just the word "audit" has the ability to throw everything into a tizzy. But in all probability, if you've reported your taxes accurately (or at least tried to), the situation is likely not as bad as you think.

"It can be easy to fly off the handle and make what can be simple requests for information into a pressure-filled, stress-inducing scenario," says certified financial planner Joel Ohman. "This need not happen if you have someone — a CPA, tax attorney, or other trusted professional — representing you and counseling you."

Slow down, take a deep breath, and call whoever does your taxes. Trust them; rely on their advice.

2. Read the notice carefully

Take a good look at the audit notice you received. Many audits are desk audits or computer document-matching audits rather than the complete tax return audits done in-person.

"If the audit request is a document-matching audit, they will typically ask you to verify certain lines on the return," explains Grafton "Cap" Willey, CPA and managing director of the New England division of CBIZ MHM. "Very often they will propose an adjustment based on the information they have received. They will state that you reported 'such and such' and they have additional documents that they do not see reported."

3. Prepare the required documents

Documentation is the key to success in audits. Provide organized documents such as 1099s, K-1s, W-2s, and canceled checks, and reconcile them to the amounts claimed on the return. If you do not have adequate documentation, it's more likely that you won't get the deduction.

"IRS information is not always correct, so look it over carefully and make sure that they have the correct information," Willey adds. "Investment gains and losses are often misrepresented and very often the IRS will assume a zero-cost basis on unreported transactions. Providing corrected information will usually satisfy them."

When going through your documentation, if you come up with more deductions than you claimed, don't be afraid to submit them in your response. The IRS can be very strict on accepting documentation for charitable donations and business expenses, however.

4. Submit your documents on time

Don't make matters worse by missing deadlines. An audit is a serious matter that can result in heavy fines, and you don't want to put more stress on the process by being uncooperative. Follow the guidelines and get your documents submitted by the date expected. (See also: The Easiest Way to Avoid a Tax Audit)

5. Don't let your mouth get you in more trouble

The IRS is very good at making people feel nervous about being audited, and when people are nervous, they tend to ramble — sometimes to harsh consequences.

"Remember the IRS's job is to appropriate your money for government needs, and your job is to justify why you should keep the money yourself," explains CFP Brent Dickerson, owner of Trinity Tax Advisory. "They are not your friend, and they are not there to help you keep money for yourself; many people in an audit situation fail to remember this fact. They let down their guard and often say things that they don't even realize can bite them. Therefore, it's in your best interest to have a representative work on your behalf with the IRS."

6. Bring your CPA with you to your in-person audit

If the audit is an in-person audit, consider bringing along a tax professional to represent you at the audit.

"The IRS is not afraid to try to intimidate a taxpayer representing themselves," Willey says. "A tax professional that has experience with tax audits should be aware of the rules and know when the agent may be fishing for issues. Very often, giving a tax professional a power of attorney authority may avoid the taxpayer from having to sit down with the IRS agent, which many taxpayers would like to avoid."

Make sure your records are well organized and well documented; make it easy for the agent to follow. If they have confidence that you're presenting good documentation, they will be more likely to accept what is presented to them.

7. Don't be afraid to disagree and negotiate

Sometimes a tax audit is a negotiation — you may have to concede to some changes on smaller items in order to not have big changes on larger items. It really depends on the agent. Some agents nitpick minor items, while other agents go straight for the big issues.

"In my experience, IRS field agents tend to rigidly apply the law in favor of the Treasury," says Matthew T. Eyet, Esq. of Sandelands Eyet LLP. "If at the end of the audit you think the agent got it wrong, file a protest to take your case to the Office of Appeals where the appeals officers are typically more taxpayer-friendly in their analysis."

In addition, he adds, unlike field agents, appeals officers are allowed to consider the hazards of litigation when negotiating a settlement. This almost always means a better result for you.

8. Hire an enrolled agent if you're caught red-handed

If you've really dug yourself a hole and committed criminal acts by submitting fraudulent taxes, you'll need more than a CPA to help you. An enrolled agent is a tax expert and recognized by the IRS as having unlimited right of representation. They're your best hope of the least amount of recourse.

"If you are facing counts of criminal charges, you'll need a lawyer," says Dickerson. "If your business is being audited or if you have a sole-proprietorship with lots of accounting needs, then you may want to opt for a CPA. All of these professionals have their own specialties when it comes to tax and each is able to represent clients in front of the IRS — but only attorneys can represent in cases of criminality." (See also: 10 Reasons You Should Really Fear an IRS Audit)

9. Pay what you owe ASAP

You want this situation to be over, and the best way to accomplish that is to pay what you owe immediately. If you don't, you run the risk of added interest and penalties with late fees on top of that.

If you don't pay the balance in full in the first 21 days of receiving notice of what you owe (for balances less than $100,000), penalties begin accruing. The faster you can get this squared up and put behind you, the better.

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This article is from Mikey Rox of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Creative Ways to Relieve Stress During Tax Season

Emily Guy Birken — Mon, 26 Feb 2018 09:00:06 +0000

Tax season is upon us, which means millions of Americans will be stressing out about filing their IRS forms correctly and whether they will receive a refund this year.

But just because getting ready for Tax Day can be emotionally taxing (see what I did there?) doesn't mean it has to be. In fact, you can find fun ways to de-stress while preparing your taxes and waiting on your refund check. Here are five ways to let off some steam this tax season. (See also: 6 Moves You Should Make Now for Your 2018 Taxes)

1. Have a tax-themed movie marathon

Watching movies is a time-honored way of getting out of your own head for a little while. If you choose comedies to watch, you'll reap even more stress-relief benefits as laughter releases neuropeptides that help fight stress and cause the body to release its own painkillers. Put that together and it's clear that a tax-themed comedy movie marathon could be just ticket to feeling less overwhelmed by tax season.

Can't think of any tax-themed comedies? There's a surprisingly large number of films that fit the bill:

Stranger Than Fiction features Will Farrell as a tax auditor who discovers that he is actually a fictional character in a famous author's book.

The Blues Brothers kick off their mission from the big man upstairs when they learn the orphanage where they were raised owes $5,000 in back taxes and will have to close if they can't pay the IRS.

Happy Gilmore begins with the title character's grandmother owing $270,000 in back taxes. High jinks ensue as Gilmore (played by Adam Sandler) realizes his ice hockey skills make him an excellent golfer.

The Producers shows what happens when a Broadway producer and his accountant realize they can keep all of their investors' money if they intentionally produce a flop. This tax fraud is a major problem when their flop turns out to be a smash hit.

2. Write a profane limerick about paying taxes

While simply shouting "You forking IRS buttheads!!" (or something a little more profane) each time you get frustrated filling out your 1040 form will certainly help you to relieve your tax-related stress, taking the time to really savor the profanities you'd like to spout about your annoyance can make this even more fun. Plus, expressing your feelings verbally allows you to blow off steam and release those feelings so they aren't stuck in your mind.

Limericks are traditionally both profane and funny, and you can challenge your friends to each come up with their own tax limericks. Whoever comes up with the funniest or most foul-mouthed poem wins.

3. Dance it out

There are a surprising number of tax-related songs out there, which means having a tax dance party would be brilliant way to dance your stress away. Not only does dancing get your heart rate up, which is an immediate mood booster, but cutting a rug to the following songs can remind you that tax woes are so universal that even famous musicians have to deal with them. (See also: These 7 Exercises Are Scientifically Proven to Increase Happiness)

"Taxman" by The Beatles
"Mo Money Mo Problems" by The Notorious B.I.G.
"Sunny Afternoon" by The Kinks
"Movin' Out" by Billy Joel
"Money" by Pink Floyd

4. Host a potluck

Socializing is an important part of reducing stress, and if you're worried about money because your tax bill is about to be due, hosting a potluck can be a great way to spend time with friends without emptying your wallet, or theirs. Each person can be assigned a dish, or bring desserts or beverages, and you can collectively commiserate over how you all wish you could stick it to The Man. (See also: Throw an Awesome Potluck Dinner With These 6 Easy Tricks)

5. Use extra IRS forms to make papier-mâché

Tax time is an ideal opportunity to get back in touch with your artistic side, and if you can use some of the infuriatingly complex tax forms to create your work of art, all the better. Creating a papier-mâché bowl or vase out of your excess IRS forms can feel immensely satisfying while also relieving your tax-related stress.

If it's been awhile since you last made papier-mâché, don't worry. It's easy! Gather together your excess IRS forms, as well as some extra newspaper or other scrap paper to make sure you have enough paper for your project. Find a large plastic bottle or other large base for your papier-mâché project. Tear or cut the paper into one-inch wide strips. Mix one part water to three parts white glue. Dip your paper strips in the glue mixture, and start layering those bad boys on your base, placing no more than four layers of paper at any spot.

Let it dry completely, pull the papier-mâché shell from the base, and start painting it however you like. Consider painting the words "I survived filing my taxes!" across it and making it as a keepsake of this year's tax season.

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This article is from Emily Guy Birken of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

What You Need to Know About Canceled Debt and Taxes

Holly Johnson — Thu, 15 Feb 2018 09:30:09 +0000

Imagine having years of punishing credit card debt canceled and gaining the clean slate you've always wanted. Then, out of nowhere, you receive a form in the mail that says you actually owe money for having that debt wiped away.

That situation happens all the time to consumers who have had part or all of a debt forgiven. The reality is, canceled debt may help you regain control of your finances, but the IRS still wants its share of what it sees as income you received. (See also: 12 Things You Should Know About the New Tax Law)

How debt is canceled

To understand the tax ramifications of canceled debt, it helps to know how this phenomenon works in the first place. How does someone get their debt canceled?

According to Steven J. Weil, president of RMS Accounting in Fort Lauderdale, Florida, debt can be forgiven on credit card balances, mortgages, auto loans, or nearly any other type of loan. This debt can become canceled in a variety of ways. One way is when consumers use a debt settlement company to negotiate a payment of less than they owe. (See also: 4 Ways to Negotiate Credit Card Debt)

Another example is when consumers who owe more than their homes are worth get their mortgage company to forgive the remaining balance during what is called a "short sale." A short sale is when the net proceeds from selling the property fall short of the debts secured by liens against the property. All the lien holders must agree to accept less than the amount owed on the debt in order for a short sale to go through.

Forgiven debt doesn't just go away, says Weil. "Whether it's consumer debt, auto debt, or any other type of debt, it becomes income to the consumer when they don't pay off their debt. The government rectifies this situation by charging taxes on forgiven amounts."

Unfortunately, consumers don't always know they are required to pay income taxes on forgiven debt. So, imagine their surprise when they receive a 1099-C in the mail that could lead to a larger tax bill.

What the tax law says

Creditors and debt collectors that accept at least $600 less than the amount you owe them are required by law to file 1099-C forms and send consumers a copy to use when they file their taxes.

As Weil notes, the form should clearly list the amount of debt you had forgiven — not the amount of debt you once owed.

Weil uses the following example to explain how forgiven debt is figured. Imagine you ran up your Visa card with a $10,000 balance (including principal, interest, and late fees) and cannot keep up with the monthly payments. After the debt is sent to collections, you work with a debt settlement company to reach a settlement that says you'll pay $3,000 to have the entire debt forgiven. In this case, the $7,000 in forgiven debt would end up on the 1099-C, says Weil. This form is then sent by the creditor that accepted the settlement to the consumer.

At least that's the way it should work. In some cases, consumers don't receive the 1099-C for whatever reason. But not receiving the form doesn't remove your liability, says Weil.

When your debt is forgiven, it becomes income to you — even if the creditor you work with fails to send a 1099-C. "If you don't get the form, you need to call the creditor and ask for it," says Weil.

Weil also says that, when somebody tells you they will forgive your debt, you need to get documentation of the event in writing. An official letter from the creditor acknowledging your forgiven debt amount will suffice when you're filing your taxes in the absence of a 1099-C, he says. Further, getting the agreement in writing will also protect you down the line if the details of your forgiven debt get jumbled somehow between your creditor and the IRS. (See also: What Happens If You Don't Pay Your Taxes)

Exceptions to the rule

Weil notes that the IRS offers several exceptions that let consumers in certain financial situations avoid paying taxes on forgiven debts. Those exceptions include insolvency. If after your debt is forgiven you have no cash or assets to sell to pay taxes on your debt, you won't have to pay income taxes.

But note that the exclusion applies only to the amount by which you were insolvent. So if you had $10,000 of credit card debts canceled at a time when you had $2,000 in assets, the insolvency amount is $8,000. You'll report $2,000 ($10,000 minus the $8,000 insolvency amount) as income on your tax return.

Also, if debt forgiveness makes you solvent, then it's taxable, notes Weil.

Other exceptions that let you avoid paying taxes include debt discharged in bankruptcy, debt given as a gift by a friend or family member, and certain business real estate and farm exclusions, he says.

If you're curious whether you'll qualify for an exclusion, Weil says it's best to speak with a tax professional who can look at the details of your unique tax situation.

When consumers aren't informed

If you're a consumer who has been hit with this surprise tax in the past, you may be wondering why you weren't informed of your tax liability. According to Weil, it's up to consumers to educate themselves on the best ways to handle their debts, including forgiven debt. Ideally, the different companies we work with will warn us about taxes we might owe, but you should never count on it.

Weil says debt settlement companies in particular should really be doing their part to educate consumers on their tax liability. These companies, which may be for-profit or nonprofit, usually tell consumers to stop paying their bills and save money for debt settlement in a joint escrow account instead. This way, when (or if) the debt settlement company strikes a deal to settle your debts, you'll have the cash on hand to pay the agreed-upon settlement amount.

Considering the fact that debt settlement companies can charge high fees and are supposed to be on the side of consumers, one would think these companies would lay out all the details for those they help. But they don't always.

"There's a lot of nondisclosure," says Weil. Because of this, "consumers should be very careful of debt consolidation and settlement agencies, particularly those that are for-profit."

The bottom line: You may owe taxes on forgiven debts, and you may receive a 1099-C in the mail from your creditor. If you don't receive the form, the onus is on you to figure out your tax liability.

This article is from Holly Johnson of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Tax Mistakes Freelancers Need to Stop Making

Aja McClanahan — Wed, 07 Feb 2018 09:00:06 +0000

No doubt about it, being a freelancer is hard. From serving clients to staying on top of your money game, there's no shortage of work to do. Sometimes, things may be overlooked or set on the back burner while you tackle pressing business matters. However, there is one major thing that just can't be ignored — taxes.

As your own chief financial officer you'll need to be aware of major tax missteps that could ultimately ruin your business. Ideally, you'll engage the help of an experienced small business accountant who knows the ins and outs of tax strategies for freelance business owners. However, you've got to have your ducks in a row to double and triple check their suggestions and advice, too. (See also: What Freelancers and Side Giggers Need to Know About Income Taxes)

These are the top tax mistakes freelancers really need to stop making.

1. Not paying self-employment tax

As a freelancer, you probably have a number of clients that pay you without deducting any taxes. Because you are a contractor, you are responsible for any and all taxes on your income.

Self-employment tax is a term that covers two main taxes: Social Security and Medicare. As an employee of a company, your employer would cover part of this tax. However, lucky you, since you are your own employer, you get to pick up the tab on the entire tax bill.

On the other side of paying all these taxes, you do get some reprieve by deducting a portion of these payments from your gross income, which can reduce the amount of taxes you owe overall.

Just know that it's very important to pay self-employment taxes on your freelance income. If your client issues you a 1099 form, it's also transmitted to the IRS. The IRS becomes aware of this income and can demand you to make an accounting for that money if they suspect you owe taxes on it.

2. Not having an accounting system

Making a lot of money as a freelancer can also increase your tax liability. If you don't have a good system in place to track all of your income and expenses, you could end up paying more (or less) taxes than you're supposed to.

Charleen Fariselli is a CPA who has worked with small businesses for over 10 years. She says that freelancers who don't accurately track income and expenses are at a disadvantage. "This affects their taxes because they don't have a good accounting system and are often losing deductions so they pay more in tax," she says.

Charleen also adds that a lack of a good accounting system can have an impact on making timely, accurate tax payments: "These freelancers can't calculate what their taxable income is each quarter for making tax payments, so they over or underpay, if they pay at all."

The good news is that there are many accounting software options out there to help you organize your books, including QuickBooks, Xero, Wave, and Freshbooks. You can also use a simple Google Sheets document. (See also: 5 Free Accounting Tools for Freelancers)

3. Mixing business with pleasure

One of the worst things a freelancer can do is allow their business expenses and income to spill over into their personal finances. For example, a business owner may use a business credit or debit card to cover a personal expense like purchasing groceries for their family.

The biggest problem with this behavior is how it affects record keeping for tax filing purposes. Joshua Zimmelman of Westwood Tax & Consulting says that bad record keeping can cause confusion for freelancers at tax time. "Too many freelancers miss out on deductions because their finances are not organized," he says. "Separating your expenses from the start makes filing your tax return so much easier."

If you need help keeping your personal and business finances separate, you can opt for a business checking account or credit card. You could also use both.

If you do have to use money from your business dealings to cover personal expenses or vice versa, make sure you keep a record of such transfers. A small business CPA can help you categorize (loan, owner draw, paycheck, etc.) the transactions so that you don't run into problems with record keeping or tax liabilities. (See also: The 5 Biggest Mistakes Freelancers Make)

4. Neglecting retirement savings

The freelance life can be a roller-coaster ride of feast or famine, but it's still important to keep savings in the equation — especially retirement savings. Saving for retirement is not only critical for your golden years, but can also help you save on taxes.

When you put money away for retirement, it reduces the amount of your income tax withholding. Joanna Zarach is a consultant who helps freelancers plan for retirement. She says, "Solo retirement plans are the most effective way to lower your tax bill now and to build tax-free growth in your investment accounts."

There are different options to save for retirement. Some smart options include:

Individual 401(k): This type of account is ideal for solopreneurs who want higher contribution limits. You can save with pretax dollars while receiving tax deductions for employer contributions (you are the employer) as well.
SEP IRA: Tax-deductible contributions are made by the employer (in this case, you). Growth is tax-deferred until withdrawal.
ROTH IRA: With this type of retirement account, you save after-tax income that grows tax-free forever.

5. Neglecting health care contributions

Paul Jacobs is a CPA, EA, and officer at Palisades Hudson Financial Group. He says he often sees freelancers, "Forgetting to deduct health insurance premiums. A great tax break that is available to the self-employed is the ability to deduct this expense."

As a small-business owner, there are tax benefits when you pay insurance premiums for yourself and family members. Premiums for medical, dental and, in some cases, long-term health insurance qualify.

Reporting these premiums on your taxes can reduce your adjusted gross income (AGI) which can make you eligible for certain tax breaks. The only caveat here is that you may now have to itemize deductions in order to take advantage of this deduction come tax time due to the recent Tax Cuts and Jobs Acts of 2017.

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This article is from Aja McClanahan of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

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