Anyone who collects tips must include those tips in their taxable income. This requirement is not limited to waiters and waitresses; it applies to anyone who collects tips, including taxicab, Uber, Lyft, and similar drivers; beauticians; porters; concierges; and delivery people.
Tips are amounts freely given by a customer to a person providing a service. They are generally given as cash but also include tips made on a credit or debit card or as part of a tip-sharing arrangement. Tips can also be in the form of non-traditional gifts such as tickets to events, wine, and other items of value. If you receive $20 or more in tips in any month, you should report all of your tips to your employer.
Generally speaking, tax return mistakes are a lot more common than you probably realize. Taxes are naturally complicated, and the paperwork required to file them properly is often convoluted. This is especially true if you’re filing your taxes yourself — and all of this is in reference to a fairly normal year as far as the IRS is concerned.
The 2018 tax year, however, certainly does not qualify as a “normal year.”
With the passage of the Tax Cuts and Jobs Act, even seasoned financial professionals are having a hard time digesting all of the changes that they and their clients are now dealing with. All of this is to say that if you’ve just discovered that you’ve made a BIG mistake on your tax return this year, the first thing you should do is stop and take a deep breath. It happens. It’s understandable. There ARE steps that you can take to correct the situation quickly — you just have to keep a few key things in mind.
You know the old line about the inevitability of death and taxes? It’s still true. What isn’t inevitable, however, is the need to pay penalties to the IRS. It happens, but it doesn’t have to, and the main reason that it does is because taxpayers don’t educate themselves about the rules. When you get hit with an IRS penalty, it adds on to a number that you already wish you didn’t have to pay.
To ensure that you get through tax season without unnecessary costs and aggravation, here’s a list of the tax penalties that the IRS most frequently assesses against taxpayers.
Receiving notification from the Internal Revenue Service that there’s some kind of problem is one of the most bone-chilling situations an American taxpayer can experience. Just receiving an envelope with a return address from the IRS can strike fear. There are many different reasons that the IRS might reach out, but some are more common than others.
This is a common question: How long must taxpayers keep copies of their tax returns and supporting documents?
Generally, taxpayers should hold on to their tax records for at least 3 years after the due date of the return to which those records apply. However, if the original return was filed later than the due date, including if the taxpayer received an extension, the actual filing date is substituted for the due date. A few other circumstances can require taxpayers to keep these records for longer than 3 years.
The statute of limitations in many states is 1 year longer than in the federal statute. This is because the IRS provides state tax authorities with federal audit results. The extra year gives the states adequate time to assess taxes based on any federal tax adjustments.
If you have been procrastinating about filing your 2017 tax return or have not filed other prior year returns, you should consider the consequences, including the penalties, interest, and aggressive enforcement actions. Plus, if you have a refund coming for a prior you may end up forfeiting it.
If you haven’t filed your return and you owe taxes, you will be subject to both a late payment and a late filing penalty. You should file a return as soon as possible and pay as much as possible to reduce the penalties and interest.
If you have received an IRS envelope from the Internal Revenue Service (IRS) in your mailbox that does not contain a refund check, it will probably cause an increase your heart rate likely increased. But Don’t panic, though; most of the issues in these letters can be dealt with simply and painlessly.
Every year, the IRS sends millions of letters and notices to taxpayers, notifying them of changes to their account, requesting additional information, and alerting them to payments that are due. Many of these letters are issued in error or are sent only because of a misinterpretation of facts.
If you get such a letter, it may be for one of several reasons; perhaps you overlooked an item of income or the amounts you reported on your return don’t match other information that the IRS received. It is also possible that someone else is using your SSN or is claiming your child as a dependent. The list goes on.
With all of the tax reform changes and the corresponding reductions in most taxpayers’ income tax withholding, there are serious concerns that the reduction in withholding, although providing more take-home pay now, could end up resulting in unexpected taxes due at tax time next year. For that reason, taxpayers should be overly cautious about their payroll withholding for 2018. One need only look at the W-4 instructions to realize that an individual without any substantial tax training can quickly become lost when filling out the worksheets. It is not business as usual.
What adds to the problem is that many taxpayers count on a refund to pay property taxes, insurance, and other large expenses. The W-4 worksheets are designed to withhold the correct amount of tax with no substantial refund, and many tax practitioners are reporting that clients’ withholdings for 2018 have been reduced to seriously low amounts.
Alimony is the term used for payments to a separated spouse or ex-spouse as part of a divorce or separation agreement. Since 1985, to be alimony for tax purposes meets several criteria listed in this week’s article.
Divorce Agreements Completed before the End of 2018 – For divorce agreements finalized before the end of 2018, the recipient (payee) of alimony must include it in his or her income for tax purposes. The payer is allowed to deduct the payments above the line (without itemizing deductions), technically referred to as an adjustment to gross income. The spouse receiving the alimony can treat it as earned income for purposes of qualifying to make an IRA contribution, thus allowing the recipient spouse to contribute to an IRA even if he or she has no other income from working.
Divorce Agreements Completed after 2018 – Under the Act, for divorce agreements entered into after 2018, the alimony is not deductible by the payer and is not taxable income for the recipient. Since the recipient isn’t reporting alimony income, it cannot be treated as earned income for purposes of the recipient making an IRA contribution.
Ever wonder where your income puts you in comparison with the rest of the U.S. taxpayers? Each year the Internal Revenue Service publishes a Statistics of Income Bulletin. The latest set of figures is for 2015 tax returns and provides some interesting statistics.
For 2015, taxpayers filed 150.49 million individual income tax returns, which was an increase of 1.27 percent over the 148.6 million returns filed for 2014. The total gross income of the 150.49 million 2015 returns was $10.21 trillion, which was a 5.8 percent increase over 2014.