by Fresh Start Tax | Jan 31, 2017 | Tax Help
Exemptions and Dependents Can Reduce Taxable Income
Most taxpayers can claim an exemption for themselves and reduce their taxable income on their tax return. They may also be able to claim an exemption for each of their dependents. Each exemption normally allows them to deduct $4,050 on their 2016 tax return.
Here are key points to keep in mind on dependents and exemptions:
1. Personal Exemptions.
Taxpayers can usually claim exemptions for themselves and their spouses on a jointly filed tax return.
For married taxpayers filing separate returns, an exemption can only be claimed for a spouse if that spouse:
• Had no gross income,
• Is not filing a tax return, and
• Was not the dependent of another taxpayer.
2. Exemptions for Dependents.
A dependent is either a child or a relative who meets a set of tests. Taxpayers can normally claim dependents as exemptions.
List a Social Security number for each dependent. For more on these rules, see IRS Publication 501, Exemptions, Standard Deduction and Filing Information.
3. No Exemption on Dependent’s Return.
If a taxpayer can claim a person as a dependent, then that dependent cannot claim a personal exemption on his or her own tax return. This is true even if no one claims that person on a tax return.
4. Dependents May Have to File.
A dependent may have to file a tax return. This depends on certain factors like total income, whether they are married and if they owe certain taxes.
5. Exemption Phase-Out.
Taxpayers earning above a certain amount will lose part or all the $4,050 exemption. See Publication 501 for details.
6. E-file Your Tax Return.
The IRS urges taxpayers to kick the paper habit. IRS E-file options include free Volunteer Assistance, IRS Free File, commercial software and professional assistance.
7. Try the IRS Online Tool.
Get questions answered by using the Interactive Tax Assistant tool on IRS.gov.
Taxpayers should keep a copy of their tax return.
Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.
by Fresh Start Tax | Jan 25, 2017 | Tax Help
Five Tips on Whether to File a 2016 Tax Return
Most people file a tax return because they have to. Even if a taxpayer doesn’t have to file, there are times they should. They may be eligible for a tax refund and not know it.
Here are five tips on whether to file a tax return:
1. General Filing Rules.
In most cases, income, filing status and age determine if a taxpayer must file a tax return.
Other rules may apply if the taxpayer is self-employed or a dependent of another person. For example, if a taxpayer is single and under age 65, they must file if their income was at least $10,350.
There are other instances when a taxpayer must file. Go to IRS.gov/filing for more information.
2. Tax Withheld or Paid.
Did the taxpayer’s employer withhold federal income tax from their pay? Did the taxpayer make estimated tax payments?
Did they overpay last year and have it applied to this year’s tax? If the answer is “yes” to any of these questions, they could be due a refund.
They have to file a tax return to get it.
3. Earned Income Tax Credit.
A taxpayer who worked and earned less than $53,505 last year could receive the EITC as a tax refund.
They must qualify and may do so with or without a qualifying child. They may be eligible for up to $6,269. Use the 2016 EITC Assistant tool on IRS.gov to find out.
Taxpayers need to file a tax return to claim the EITC.
4. Additional Child Tax Credit.
Did the taxpayer have at least one child that qualifies for the Child Tax Credit? If they do not qualify for the full credit amount, they may be eligible for the Additional Child Tax Credit.
Beginning in January 2017, by law, the IRS must hold refunds for any tax return claiming either the EITC or the Additional Child Tax Credit until Feb. 15. This means the entire refund, not just the part related to either credit.
5. American Opportunity Tax Credit. To claim the AOTC, the taxpayer, their spouse or their dependent must have been a student enrolled at least half time for one academic period to qualify.
The credit is available for four years of post-secondary education. It can be worth up to $2,500 per eligible student. Even if the taxpayer doesn’t owe any taxes, they may still qualify. Complete Form 8863, Education Credits, and file it with the tax return.
Instructions for Forms 1040, 1040A or 1040EZ list income tax filing requirements. Taxpayers can also use the Interactive Tax Assistant tool on IRS.gov.
They should look for “Do I need to file a return?” under general topics. The tool is available 24/7 to answer many tax questions.
All taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity.
Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.
by Fresh Start Tax | Jan 11, 2017 | Tax Help
What is Form 1099-K?
Form 1099-K, Payment Card and Third Party Network Transactions, is an IRS information return used to report certain payment transactions.
You should get a 1099-K by the end of January if, in the prior calendar year, you received payments:
• from payment card transactions (e.g., debit, credit or stored-value cards)
• in settlement of third-party payment network transactions above the minimum reporting thresholds of
◦ gross payments that exceed $20,000, AND
◦ more than 200 such transactions
Collectively, all payment card transactions and all third-party payment network transactions (once the threshold amounts have been met) are referred to as reportable payments or transactions.
NOTE: The thresholds of greater than $20,000 and more than 200 transactions apply only to payments settled through a third-party network; there is no threshold for payment card transactions.
Did you receive a 1099-K?
If you received a 1099-K, use it to assist you to correctly file your income tax return. Also be sure to retain it for your records.
Remember, you must report all income you receive from your business on your tax return. In most cases, your business income will be in the form of cash, checks, and debit and credit card payments.
Therefore, you should consider the amounts shown on Form 1099-K along with all other amounts received when calculating gross receipts for your income tax return.
Refer to Publication 583, Starting a Business and Keeping Records, for more detailed information and assistance regarding proper record keeping.
Did you receive a letter related to 1099-K from the IRS?
You received one or more of these letters because you may have underreported your gross receipts. This is based on a comparison of your tax return and the Form(s) 1099-K furnished to you that shows an unusually high portion of receipts from 1099-K reportable transactions. It is very important that you respond to the IRS.
The current versions of the letters are reflected on the left side of this page and contain active links to each document. These are periodically updated.
Following are some tips to help you with the inquiry.
• Read the letter thoroughly and complete any worksheets.
• Gather your tax records, including the Forms 1099-K that you received, and determine if you agree with the letter about underreporting your gross receipts.
• Respond to the letter in a timely manner.
• If you have questions or need more time to respond, contact the person listed in the letter.
• If appropriate, consult your tax professional for assistance.
How is the IRS going to use this information?
The IRS uses the information reported from third parties to ensure individuals and businesses meet their tax obligations.
The IRS is integrating the new information supplied on the Form 1099-K into a variety of areas, including its compliance efforts, to ensure fairness and address non-compliance.
All 1099-K activities respect taxpayer rights and provide opportunities for taxpayers and tax practitioners to offer explanations or corrections if they receive a letter, a notice or audit.
by Fresh Start Tax | Jan 10, 2017 | Tax Help
Understanding Your Form 1099-K
Form 1099-K, Payment Card and Third Party Network Transactions, is an IRS information return used to report certain payment transactions to improve voluntary tax compliance.
You should receive Form 1099-K by January 31st if, in the prior calendar year, you received payments:
• from payment card transactions (e.g., debit, credit or stored-value cards), and/or
• in settlement of third-party payment network transactions above the minimum reporting thresholds of –
◦ gross payments that exceed $20,000, AND
◦ more than 200 such transactions
What does my Form 1099-K report to me?
A Form 1099-K includes the gross amount of all reportable payment transactions.
You will receive a Form 1099-K from each payment settlement entity from which you received payments in settlement of reportable payment transactions.
A reportable payment transaction is defined as a payment card transaction or a third party network transaction.
• Payment card transaction means any transaction in which a payment card, or any account number or other identifying data associated with a payment card, is accepted as payment.
• Third party network transaction means any transaction that is settled through a third party payment network, but only after the total amount of such transactions exceeds $20,000 and the aggregate number of such transactions exceeds 200.
The gross amount of a reportable payment does not include any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts or any other amounts. The dollar amount of each transaction is determined on the date of the transaction.
NOTE: The minimum reporting thresholds of greater than $20,000 and more than 200 transactions apply only to payments settled through a third-party network; there is no threshold for payment card transactions.
What should I do with this information?
It is important that your business books and records reflect your business income, including any amounts that may be reported on Form 1099-K.
You must report on your income tax return all income you receive from your business.
In most cases, your business income will be in the form of cash, checks, and debit/credit card payments.
Business income is generally referred to as gross receipts on income tax returns. Therefore, you should consider the amounts shown on Form 1099-K, along with all other amounts received, when calculating gross receipts for your income tax return.
In addition:
• Check your payment card receipt records and merchant statements to confirm that the amount on your Form 1099-K is accurate
• Review your records to ensure your gross receipts are accurate and reported correctly on your income tax return
• Determine whether you have reported income from all forms of payment received, including cash, checks, and debit, credit and stored-value card transactions.
• Maintain documentation to support both the income and deductions you report on your income tax return
Do any of these statements apply to the Form(s) 1099-K you received?
• The Form 1099-K does not belong to you or is a duplicate
• The payee Taxpayer Identification Number (TIN) is incorrect
• The gross amount of payment card/third party network transactions is incorrect
• The number of payment transactions is incorrect
• The Merchant Category Code (MCC) does not correctly describe your business
If so, consider the following:
• If the Form 1099-K does not belong to you, contact the Payment Settlement Entity (PSE) listed on the Form 1099-K to try determine why you received the document.
The name and telephone number should be shown in the lower-left part on the form. If a PSE name and number are not shown, contact the Filer at the number shown in the upper-left corner on the form. Retain any correspondence with the PSE
• If there is an error on the form, request a corrected Form 1099-K from the PSE. Keep a copy of any corrected Form 1099-K you receive with your records as well as any correspondence with the PSE
What should I do when the total gross payment amount shown on Form 1099-K does not belong to me?
In some cases, the total gross payment amount on Form 1099-K may not belong to you. The following examples illustrate such situations and provide information that may help you determine how to account for the amount of gross payments shown on the Form 1099-K you received.
• If you report your business income on Form 1120, 1120S or 1065 and you receive a Form 1099-K in your name:
◦ If you report your business income on a Form 1120, 1120S or 1065 and you receive a Form 1099-K in your name as an individual (showing your social security number), contact the PSE listed on the Form 1099-K to request a corrected Form 1099-K showing the business’s TIN.
In addition, request that the PSE use the business’s TIN on all future Forms 1099-K. Report the income from the Form 1099-K along with any other sources of income on the appropriate income tax return.
Retain all correspondence with the PSE to show that this error was corrected.
• If you shared your credit card terminal with another person or business:
◦ If you shared your credit card terminal with another person or business, your Form 1099-K will include payment card transactions belonging to the person or business that shared your terminal, in addition to your own payments.
Where required, you should file and furnish the appropriate information return (e.g., Form 1099-K or 1099-MISC) for each person or business with whom you shared a card terminal.
The information return should include the total payment card transaction amount in addition to any other income belonging to the other person or business.
You should retain records of payments issued to each person or business sharing your terminal, including but not limited to shared terminal written agreements and cancelled checks.
• If you bought or sold your business during the year:
◦ If you bought or sold your business during the year, your Form 1099-K may include payments for transactions made before you purchased or after you sold the business.
This can occur when the tax identification number and business name associated with a credit card terminal are not updated with the new owner’s information.
You should request a corrected Form 1099-K from the PSE/Filer listed on the form. Its name and telephone number are on the form. Also keep a copy of corrected Form(s) 1099-K with your records and retain the purchase or sales agreement that substantiates the timing of the ownership change.
• If you changed your business entity structure during the year:
◦ If you changed your business structure during the year, such as incorporating or converting from a sole-proprietorship (Schedule C) to a partnership (Form 1065), or vice versa, and continued using the same card terminal, the amount shown on the Form 1099-K will not correspond with your new entity’s tax return.
Be sure to timely notify your merchant acquirer of any change to the name and tax identification number that links the terminal to your current business structure.
Be sure to maintain documentation to support the correct income and deductions for both business entities.
• If you allow your customers to receive cash back when they use their debit cards for purchases:
◦ If you allow your customers to receive cash back when they use their debit cards for purchases, the Form 1099-K you receive will include those cash back amounts as part of the gross amount of payment card transactions.
Generally, you would not include cash back amounts as part of your business’s gross receipts on your income tax return, nor would you claim such amount paid to a customer as a business expense. It is important that you maintain records of customer cash back activity over the course of your tax year.
• If your business (or businesses) has multiple sources of income:
◦ If your business (or businesses) has multiple sources of income, you may report business income on more than one line of a return or on multiple returns or schedules.
For example, assume you operate a retail business and also have rental income. You accept payment cards for both businesses, but because you have only one credit card terminal to process these transactions, your 1099-K will include gross payment card receipts for both businesses.
You should use your books and records to ensure that all gross receipts are reported on the appropriate line or schedule.
In this case, the gross receipts from the retail business should be reported on Schedule C, and the amounts related to the rental activity included in the rental income reported on the Schedule E.
by Fresh Start Tax | Jan 10, 2017 | Tax Help
Form 1099 K Reporting Requirements for Payment Settlement Entities, just another way for big brother to keep up on us.
Beginning in January 2012, payment settlement entities (PSEs) are required by the Housing Assistance Tax Act of 2008 to report on Form 1099-K the following transactions:
• All payments made in settlement of payment card transactions (e.g., credit card);
• Payments in settlement of third party network transactions IF:
◦ Gross payments to a participating payee exceed $20,000; AND
◦ There are more than 200 transactions with the participating payee.
The IRS Verification Processes
We verify that tax returns are correct and complete using the following processes:
• TIN Matching Program
Use the IRS Taxpayer Identification Number (TIN) Matching Program an Internet based pre-filing e-service, to ensure the Forms 1099-K you submit has the correct TIN. The program permits you to verify the TIN furnished by the taxpayer against IRS records prior to filing information returns.
• Name Control
,The name control (a sequence of characters derived from a taxpayer’s name) and TIN on an electronically filed return must match our records.
Refer to Reasonable Cause Regulations and Requirements for Missing and Incorrect
Name/TINs for more information.
Filing Deadlines & Procedures
Your Form 1099-Ks are due to merchants by January 31. In addition, your Form 1099-K is due to the Internal Revenue Service by the following dates:
• February 28 for paper filing. For more information review General Instructions for Certain Information Returns.
• March 31 for electronic filing using the online FIRE System (Filing Information Returns Electronically). For more information review Publication 1220 (PDF).
