SavvySugar

Don't Forget Uncle Sam When You're Counting Your Tips

Emily Co — Mon, 13 Feb 2012 00:15:22 PST

If you're in the service industry, a big chunk of your income may come from tips. But don't think you can get away with not filing taxes for them. Here are a couple of tips from the IRS:

Tips are taxed. Your tips will face federal income, Social Security, and Medicare taxes. You will also be taxed on nonmonetary tips like tickets, and gifts will be counted as income.
Include them on your tax return. Include your cash tips, tips added to credit card bills, and tips you split with co-workers when reporting gross income on your tax return. "Report your tips with your wages on Form 1040, line 7; Form 1040A, line 7; Form 1040EZ, line 1; Form 1040NR, line 8; or Form 1040NR-EZ, line 3."
Report to your employer. If you earn more than $20 in tips, you need to report this income to your boss. Your employer is required to withhold federal income, Social Security, and Medicare taxes. You don't have to report nonmonetary tips to your boss. If you don't report these tips to your employer, you will face a penalty.
Record your tips. Be organized and record your tip income. You can use Form 4070A, Employee's Daily Record of Tips, to record your tip income. To get the form, ask your employer or the IRS for Publication 1244, Employee's Daily Record of Tips and Report to Employer. Publication 1244 includes a year's supply of Form 4070A. Record nonmonetary tips separately and include that on your tax return. You can even keep a tip diary electronically by requesting access to an electronic system provided by your employer.
Watch the deadline. Turn in your monthly tip records with your employer by the 10th of the next month.
Don't include mandatory service charges: don't note down mandatory service charges in your tip diary as these are considered part of your wages, not tips.

What the Rise in IRS Audits Means For You

LearnVest — Fri, 13 Jan 2012 04:30:24 PST

We're thrilled to present this smart LearnVest story here on Savvy!

It’s the word that strikes fear into people everywhere: audit.

And audits are up . . . well, at least for some prominent groups of people.

In 2011, one in eight of the country’s millionaires were audited, a rate not seen since 2004. Similarly, audits were up for those making $200,000 a year or more - one in 25 of whom were audited in 2011. According to CNN Money, it was the third year in a row the IRS increased its efforts to uncover tax fraud.

As you might guess, the chances that the IRS will audit someone making less than $200,000 is a lot lower.

Audits Get a Bad Rap

Before we go any further, we should clarify for those less familiar with the workings of the tax system that a tax audit isn’t a condemnation. It just means that the IRS conducts an official investigation into the finances of a business or individual in order to detect any foul play or accidental oversights in their taxes.

Audits are dreaded by honest folk (not to mention those deliberately operating outside the law) because of the hassle involved in dredging up past paperwork and because of the fear that the IRS will uncover a mistake that necessitates immediate payment to the government.

Why Now?

What with the perspective induced by the realization that Americans make up an entire half of the global one percent, "millionaire" holds even more weight. But it's nothing compared to "offshore accounts," which set our imaginations aflame.

We mention it because the IRS is taking particular in interest in offshore accounts, which are disproportionately held by wealthy people looking for tax shelters. This new focus might contribute to the increase in millionaires being investigated. In fact, the IRS is being rather generous in that it's offering reduced penalties and no jail time to taxpayers who confess to having offshore accounts. (The offer stands for a limited time only.)

But if one in eight millionaires were audited last year, should nonmillionaires start gathering their files? Perhaps not: in 2011, only one in 98 taxpayers earning less than $200,000 per year was audited.

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6 Tax Moves to Make in January

Emily Co — Fri, 06 Jan 2012 05:00:45 PST

Although taxes are due in April, you should get started in January so you'll be less flustered come tax time. Also, your W-2 will be coming in the mail, so it's the perfect time to organize your paperwork. Start prepping now so you can get your refund even sooner. Kathy Pickering, executive director of The Tax Institute at H&R Block, names the top things to know before you file a 2011 return.

7 Smart Tax Moves to Make Before the Year's End

Emily Co — Tue, 27 Dec 2011 10:30:46 PST

Now that the year is quickly winding down, you might find yourself with countless to-dos to tackle. Make sure you remember to put some of these tax chores on your list. Kathy Pickering, the executive director of The Tax Institute at H&R Block, shared a couple of smart moves every savvy taxpayer should make before the end of 2011.

Offset capital gains with capital losses: "It has been a roller coaster ride with market fluctuations over the past year, but there is some good news. Taxpayers with a large net capital gain in 2011 could reduce their tax liability by selling stock before Dec. 31 if it would generate a loss. Capital losses don’t just offset capital gains - if capital losses exceed capital gains, up to $3,000 of capital losses can be used to offset ordinary income such as wages."
Claim casualty losses from natural disaster: "The president declared a record-breaking number of federal disasters in 2011 including Hurricane Irene, tornadoes in the Midwest and Texas wildfires. Taxpayers in a federal disaster area who sustained casualty losses (e.g. damaged or loss property) can claim their losses on a tax return for the year the disaster occurred or on the prior year’s return."
Pay it forward: "Those who have not taken full advantage of the American Opportunity Credit should considering paying spring college tuition before Dec. 31 to take advantage of this tax break on their 2011 return. Also, taxpayers can pre-pay their December mortgage payment due in early January or make an additional student loan payment to claim the highest possible interest deduction on a 2011 tax return."

Read on for more smart tax moves.

Tax Reminder: Oct. 17 Is Coming Up!

Emily Co — Tue, 11 Oct 2011 14:52:46 PDT

For all you tax procrastinators, the Oct. 17 deadline is coming up for those who requested a tax filing extension. The deadline is two days later because Oct. 15 falls on a Saturday.

You must file by Oct. 17 if you want to avoid penalties and added interest. This means by midnight if you're filing electronically, and if you're going the snail mail route, you need to postmark your envelope by that day. Remember, it's always better to get it done earlier than later, so you won't be rushing the process and making mistakes.

When You Need to File a Gift Tax Form

Emily Co — Wed, 05 Oct 2011 14:01:13 PDT

You may love spoiling your significant other with gifts, but remember, Uncle Sam is watching. Of course, to be taxed on these gifts, you need to be spending quite a lot on your love. Here's what you'll need to know before filing a gift tax form, according to the IRS:

When you gift away $13,000 in cash or gifts to someone you're not married to, you need to file the Form 709.
You won't be taxed for paying for tuition or medical expenses.
Gifts for a political organization aren't taxable.
Gifts to your spouse are tax-free if they are US citizens.
If you are married, you and your spouse can give away up to $26,000 to a gift recipient.

When reading about these gift tax rules, I immediately thought of the Huffington Post article that covered the alarming trend of college students seeking sugar daddies online to pay off their student debt. Seems like these sugar daddies are circumventing the filing of gift tax forms because they are mostly paying for their recipients' tuition bills.

Tax Hikes For the Rich Is Not "Class Warfare," Says Obama

Emily Co — Mon, 19 Sep 2011 12:43:54 PDT

The White House is proposing a new tax rate for the wealthy - those earning more than $1 million will have to pay, at the very least, the same percentage of taxes as middle-income Americans are paying. It's called the Buffett Rule, and it's part of the debt reduction plan President Obama proposed today, which aims to reduce the federal deficit by $3 trillion in the next 10 years.

However, there are naysayers who are calling this move "class warfare." In his defense, Obama said, "This is not class warfare, it's math . . . I reject the idea that asking a hedge fund manager to pay the same tax rate as a plumber or teacher is class warfare." The president goes on to say that the country can no longer "afford special lower rates for the wealthy" and that the millionaires need to be paying their fair share. "Warren Buffett's secretary shouldn't pay a higher tax rate than Warren Buffett," Obama said.

Weigh in with your thoughts below: is this class warfare or a fair move?

Buffett Wants Higher Taxes For the Über-Rich

Emily Co — Mon, 15 Aug 2011 11:44:46 PDT

In an op-ed piece in The New York Times today, billionaire philanthropist Warren Buffett eloquently advocated his belief that the superwealthy should be taxed more and that the government should quit "coddling" them. Here's an excerpt:

Our leaders have asked for "shared sacrifice." But when they did the asking, they spared me. I checked with my megarich friends to learn what pain they were expecting. They, too, were left untouched. While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we megarich continue to get our extraordinary tax breaks.

Buffett stated that he was taxed lower than his employees percentage-wise and that although he paid $6,938,744 in taxes last year, it only made up 17.4 percent of his taxable income. Why should he and the other wealthy individuals be protected by the government when the rest of the country is struggling to earn a living? He proposed tax rates should be raised immediately for those making over $1 million, and those who make over $10 million should get an even higher tax rate.

It has long been argued that taxing those in the highest income bracket will lead to less job creation because there is less incentive for them to invest, but Buffett says he and other investors didn't invest less back in the '80s and '90s when tax rates were much higher for the richest. The higher tax rates weren't much of a deterrent. Do you agree with Buffett - is the government "coddling" the rich?

Keep or Throw Away? Your Important Documents

SavvySugar — Sun, 26 Jun 2011 03:05:47 PDT

Tax time always makes me motivated to reorganize my important documents, especially when I'm knee-deep in a pile of random papers that make it harder to find what I need. I'm vowing to stop getting lost in my financial records by following a time line for holding on to them. Do you know how long you should keep certain files? Take the quiz!

Take the Quiz

What President Obama's Tax Return Says About Him

Emily Co — Wed, 20 Apr 2011 12:00:00 PDT

Just because you're the president, it doesn't mean you get to skip out on taxes! The White House recently released a copy of President Obama's tax return, which gives a little insight into the head of state. Here's what I gleaned from them:

He diversifies his income. Although he's making $400,000 as the president, most of his income actually comes from his books. However, sales have been flagging in the recent years. His income took a hit from $5.5 million in 2009 to $1.7 million last year.
He pays taxes. President Obama paid $453,770 in taxes. He paid about 26.2 percent in federal income taxes.
He still has mortgage payments. The president is just like the rest of us and still has debts to pay off. The Obamas claimed an itemized deduction of $49,945 for home mortgage interest on their Chicago house.
He doesn't use Turbo Tax. In the form, the Obamas used Michael Solheim of Wineberg, Solheim, Howell & Shian in Chicago, as their CPA. I'm guessing he's too busy with other important things to file his taxes on his own!
He files early. The president signed the tax form last Tuesday, while the first lady signed it last Wednesday.
He gets tax refunds. The Obamas overpaid in taxes and are getting a $12,334 refund.
He's philanthropic. 36 charities have received charitable goodwill from the Obamas, and the couple has donated $245,075 to nonprofits. His favorite charity is apparently the Fisher House Foundation, an organization that provides humanitarian support to US Armed Forces members and their families. How do we know it's his favorite NGO? The couple gave the bulk of their donation dollars, $131,075, to it. Obama also reacted to immediate crisis - he gave $15,000 to the Clinton-Bush Haiti Fund.