If you read the previous article about backup withholding, some of this will sound familiar. Put simply, backup withholding imposes an additional withholding tax on recipients of certain types of passive income. Under-reporting income or inaccurate information on tax filings trigger this additional tax. Recipients bear the brunt of it, but how do payers like other financial firms handle backup withholdings? Let’s take an example:
Dak Wilson has stock investments managed by Orange County-based Third Foundation. Dak annually earns income from dividends of those investments, which Third Foundation pays to him. Dak originally submitted tax forms to Third Foundation with an SSN typo that was overlooked. The IRS attempted to contact Dak by mail 4 times to amend the error. After the 4th notice, the IRS additionally notified Third Foundation that Dak Wilson is now subject to a backup withholding due to his incorrect SSN information. Third Foundation must start applying the backup withholding (a flat 28% as of 2016) on Dak’s investment income until they are notified by the IRS to cease the additional withholding.
The backup withholding occurred through the incorrect information provided by Dak Wilson (the payee) to Third Foundation (his payer) for the dividends to be payed to him. Third Foundation must also notify Dak that a backup withholding was made within 15 days of the first payment that was subject to it. Publication 1281 goes into greater detail regarding the processing of backup withholding to the IRS.
Backup withholding is an unpleasant circumstance to fall into. As a payee, it’s additional income out of your pocket. Payers must also process the additional paperwork. Having a knowledgeable support team, like our team at MiklosCPA, can help avoid or rectify these kinds of issues. We are a California-based accounting firm with depth of knowledge and experience in supporting small businesses through their accounting and taxation needs. If you would like to learn more about our services, please do not hesitate to reach out!
Do you have passive income like stock or rental income? Improperly providing information to payers, such as banks, can cause a backup withholding on your passive income. Certain types of income on your Form 1099 may be subject to the backup withholding. Currently, the rate is set at 28% for certain income payments made. However, you can avoid this withholding by providing correct and accurate information.
Income subject to Backup Withholding
Interest income
Dividends
Patronage Dividends
Rents, Profits, and Other income (as in the “other income” line noted on a person’s Form 1040)
Independent contractor commissions, fees, and related income
Brokers and barter transactions
Fishing boat operators payments
Payment card and third party network transactions
Royalty payments
Prevent Backup Withholding
Provide correct tax identification (TIN) numbers such as your Social Security Number or Employer Identification Number (EIN). Incomplete or incorrect numbers will trigger a backup withholding.
Do not under-report interests or dividend income on your tax return. After a 120-day period and notifying you of the under-reporting by mail, the IRS informs your payer that you have been under-reporting dividend or interest income. The payer will then start the backup withholding.
Backup withholding is an not widely known issue that can take away what you earn from investment or other types of passive income. To prevent such penalties from the IRS requires a knowledgeable source of advising. MiklosCPA can certainly assist you with that and other accounting needs. MiklosCPA is a tax advisory and accounting firm that utilizes its experience and knowledge of tax to help businesses take care of their taxation and accounting needs. Businesses can then focus on what needs to be done, which is to succeed and grow. If you are interested in learning more about our services, feel free to contact us.
Paying your student loans can help with your taxes! More specifically, paying off the student loan interest can potentially lower your tax bill.
Paying off the interest accrued on your loan can be claimed as a deduction towards your adjusted gross income (AGI). Your AGI determines how much of your income will be considered taxable. As a result, it ultimately affects your tax bill to the IRS. You can claim up to $2,500 in student loan interest that you paid in a year as a deduction towards your AGI. Of course, there are some considerations before claiming the student loan interest deduction on your individual income tax.
Qualified student loan – The loan that you will claim the interest deduction on must be a qualified student loan. It has to be a loan taken out by you, a spouse, or your dependent towards educational purposes paid within a reasonable period after you took the loan. Loans taken from relatives or employer plans do not qualify.
Qualified Educational Expense – The expenses used by the loan have to be qualified education expenses. Registration fees, books, and lab materials are generally considered qualified expenses. Transportation costs such as parking fees also qualify. Even room and board expenses MAY qualify if the residence is a property owned and operated by the educational institution, such as an on-campus dormitory.
Eligible Education Institution – Generally any accredited university or vocational school that is able to receive federal student aid money.
To help calculate your student loan interest deduction, organizations that maintain student loans like banks or
quasi-government entities, such as MOHELA, send out IRS Form 1098-E within the early part of the year if they receive student loan payments of at least $600 from the previous year. The 1098-E notes the amount of interest accrued, which determines the deduction amount. The deduction begins to phase out if your AGI is at least $50,000 up to $80,000 if filing single. For those married filing jointly, the phaseout begins at $130,000 up to $160,000.
Want to know more about what educational credits and tax advantages are out there? Follow us on our social media for future tax tip articles and share it with your friends and relatives!Have a more specific question? Please do not hesitate to schedule a call with us. MiklosCPA is a California-based accounting firm that has helped businesses plan out accounting and tax strategies.
Generally, US taxpayers living abroad as Expats have access to the same exemptions, deductions, and credits like citizens living in the United States. Expats also have access to the Foreign Income Exclusion that we discussed in a previous article. However there are some additional considerations for expats planning to file their taxes while living abroad.
Any income or expenses you claim for the foreign income exclusion cannot be used or claimed on any other related credits or deductions that can be claimed. Example: you cannot use the housing expenses you claimed on the foreign housing exclusion as a deduction.
Exemptions can be claimed for your children born abroad, so long as you are a US citizen at the time your child was born, even if your spouse may not be a non-citizen.
Charitable contributions made to foreign charities are generally nondeductible. There are some exceptions for some Canadian, Mexican, and Israeli charities due to certain tax treaties.
Moving expenses may be deductible if the expenses incurred are related to your work at a new location.
If you pay taxes to a foreign country, you may be eligible for an income tax credit based on the amount you pay to a foreign country.Use IRS Form 1116 “Foreign Tax Credit” to figure the amount of foreign tax paid to determine the credit.
If you chose to not claim the credit, foreign income taxes can also be taken as a deduction instead. Report it as a deduction on your schedule A for your 1040 Form.
The United States has negotiated many tax treaties with other countries. Under these treaties, US expats are entitled to certain credits, deductions, exemptions, and other options to assist their tax liabilities. For more specific details, the IRS website provides details on these treaties and what can be claimed.
Hopefully you found this info for expat taxes informative. As complex as the tax code can get here in the states, just imagine how complex each person’s taxes can get if they live abroad! We here at MiklosCPA, a SoCal CPA firm, have knowledge and experience in helping expats and foreign nationals plan and properly prepare their taxes for compliance with the IRS. If these articles have piqued your interest, please do touch base with us.
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The first part in this series covered the general advantages and rules surrounding the American Opportunity Credit. Now we will be taking a look at its related credit, the Lifetime Learning Credit. Many of the qualifications and rules are similar to the American Opportunity Credit, such as what are considered qualified educational expenses, who qualified as an eligible student, parents being able to claim dependent students, and other rules. See our other article on qualified educational expenses for more details.
Unlike the American Opportunity Credit, the Lifetime Learning Credit may be claimed on your individual tax return for an unlimited amount of years. You do not even need to be pursuing a degree or be a part-time student to qualify.
Up to $2,000 of the credit may be claimed perreturn for the first $10,000 of qualified educational expenses. Just like the American Opportunity Credit, there is also a modified adjusted gross income (MAGI) limit, but the number is set a bit lower at $67,000 if filing single and $134,000 if married, filing jointly. The credit begins to get phased out at $57,000 if filing single and $114,000 married, filing jointly.
However, unlike the other credit, the Lifetime Learning Credit is nonrefundable. So, even if your final tax bill that you owe is a negative number, it may not be refundable. For example:
Dominic signed up in 2018 at Cypress College for the fall semester for one class in automotive repair. He paid $230 in registration fees, $35 for a parking permit, and $500 in lab materials and books. At the start of 2019, Dominic prepares his tax return and claims the Lifetime Learning Credit.
He later learns from his tax preparer that he cannot claim the parking amount on the credit. So, his total credit he can claim goes down to $730 for 2018. He also learns that even after his deductions and other adjustments are calculated, his total tax liability he has to pay is $500. He will not be getting a refund, but the Lifetime Learning credit cancels out ($500-$730= -$230) the tax he has to pay.
Even if the credit may not be refundable, it is stilladvantageous to use the Lifetime Learning Credit because it can potentially turn the amount you may owe to the IRS into nothing, which translates into savings for you. It is also less strict in its eligible student requirements by not demanding part-time status, so even just taking one class at a community college can allow you to use this credit.
Did you find these articles on education credits informative? Please share with your friends and associates who may be interested in learning about utilizing education credits! Follow up on our social media pages for future tax tips and other “good to know” articles.
MiklosCPA is a California-based CPA firm that provides tax accounting services for businesses to help them effectively manage their taxation needs.If you are interested in learning more about our services, feel free to contact us!
What happens when you pay for an “in home person” to provide child care tax wise? MiklosCPA was recently approached by a family who had a person come in regularly to provide “in-home” child care for their son and daughter. They were confused by all the different rules and exemptions and wanted our CPA firm to help untie the knot for them regarding child care taxes.
When you really look at this kind of arrangement, you really are hiring what is known as a “Household Employee”. When you do so, you have the option of either withholding or not withholding the employee’s Social Security, Medicare taxes, and income taxes.
There are, however, a few pointers that you should be careful of:
When you hire a household employee:
Find out if the person can legally work in the United States. Find out if you need to pay state taxes.
When you pay your household employee:
Withhold social security and Medicare taxes. Withhold federal income tax. Decide how you will make tax payments. Keep records.
By January 31st of the following year:
Get an employer identification number (EIN). Give your employee Copies B, C, and 2 of Form W-2, Wage and Tax Statement.
By February 28th of the following year (March 31st, if you file Form W2 electronically):
Send Copy A of Form W-2 to the Social Security Administration (SSA).
By April 15, of the following year:
File Schedule H (Form 1040), Household Employment Taxes, with your 2016 federal income tax return (Form 1040, 1040NR, 1040-SS, or Form 1041). If you do not have to file a return, file Schedule H by itself.
Example:
Let’s say you pay a household employee to care for your child and pay cash wages of $100 every Friday when she is at your Azusa home. You expect this employee to make $1800 or more for the year. You decide to pay the social security and Medicare taxes for that employee.
Then every paycheck, you would pay an additional $15.30 for the employee’s taxes. This is broken down into $7.65 for you, and $7.65 for your employee in terms of the total Social Security and Medicare tax due. For income tax purposes you would indicate that your employee’s wages were $107.65, or the regular wages plus the portion of the Social Security and the Medicare tax covered.
You are required to fill out a W-2 as well before the first month of the following tax year, and maintain your records for four years.
Does this sound too confusing? We agree that child care taxes and withholdings are in fact confusing. However, our accounting practice is here for the rescue and can manage your reporting requirements and perform the payroll functions for your household employee.
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MiklosCPA is a top-rated cloud-based Certified Public Accounting firm in Los Angeles, Orange County, California serving small businesses and start-ups.
