Advantages of Filing Income Tax Returns Online

In order to fulfill your duty as a responsible citizen of the nation, one of the primary tasks you need to do is to pay for your income tax returns in a timely manner. Failing to do so can add to the taxable amount you need to pay, thereby putting a dent on your pockets, as well as degrade your image in the banking sector, which may lead to rejection of loans, etc. due to lowering of your credit score. This means that filing up for income tax returns should be a priority for every individual, and should be completed well within the given time period in order to avoid interest or penalty payment at a later stage.

In order to provide aid to your tax return filing related woes, technology has provided some great resources. With the advent of the internet era, it is now possible to do e-filing of your income tax returns. This comes as a great boon for most tax payers, as they can simply file for the returns from the comforts of home, after a hard day’s work. And the best part is that it’s totally free of cost. Income tax filing websites provide a simple platform for you to fill in your details and file for income tax.

In addition to saving your time and money, there are a number of other advantages of filing your returns online. Some of these have been shown in the list below:

    • Intuitive application procedure: This is a highly intuitive online application procedure, which is customized according to the tax payer’s income tax situation.

 

    • Income Tax Calculator Tools: If you want to make an estimate of the refund you’ll be receiving, it is a good idea to make use of income tax calculator tools available online. You have to enter your basic details such as Name, Age, Residential Status, etc. After this, you need to make use of your pay slip to give the details of the income you have earned. Please note that you only need to enter your taxable income for the particular year, which is calculated after deducting the various savings and other non-taxable investments you may have invested in. In case if you did not apply these already, the income tax calculator will give you an option to add any tax deductibles at a later stage. You can apply these and calculate your tax refund accordingly.

 

    • Free Software Programs: There are various free online programs that are available over the internet to allow you to calculate your tax deductibles for free. New users need to sign up for creating a new account. These free filing programs are much more in-depth than the income tax calculator and these will calculate your return automatically.

 

    • Secure Gateway: The payment gateway is secured by Verisign, and you could be certain that your details are in safe hands.

 

  • Auto-Read forms: The Form 16 could automatically be read by the website, this helps you save on a lot of time as there’s no need to enter every small detail.

 

Overlooked Tax Changes Are Coming

An old saying goes “the third time is the charm.” I guess for Congress, we can say the 35th time is the charm.

Last summer Congress passed its 34th short-term transportation extension bill since 2009, more formally known as The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (HR 3236). President Obama signed the bill into law in July. It was set to expire in November and was extended for two additional weeks before a true long-term highway bill was signed on December 4.

For now, however, I want to go back and focus on the contents of that 34th short-term bill to ensure some important permanent tax changes do not go overlooked now that Congress has moved on. Most of these changes take effect for the 2016 tax year, so taxpayers still have some time to adjust.

Filing Deadlines

The new law changes various filing due dates for certain tax returns. Partnership tax returns will now be due on March 15, one month earlier than under the old law. For partnerships that operate on a fiscal year, the return will be due on the 15th day of the third month following the close of their tax year. C corporation tax returns got moved back one month, to an April 15 deadline. S corporations, which are truly more like partnerships for tax purposes, will keep their existing March 15 deadline. All of these entities will eventually be able to request a six-month extension if necessary, a change from the five months formerly available. Corporations, however, will not have access to this extra month until 2026.

The new partnership filing deadline reflects a logical change, since many individuals cannot complete their personal returns until a partnership’s return is done and the partnership is able to report the owner’s share of pass-through income. The American Institute of Certified Public Accounts (AICPA) and several state CPA societies have advocated such changes for several years.

While these organizations are right that the new deadline is logical in theory, it is far from certain the new deadline will substantially reduce the number of extensions in reality. If anything, the new partnership deadline may actually increase the number of extensions overall, since tax practitioners may be unable to file more returns with a deadline one month sooner. Once the return is extended, any sense of urgency is gone, and the earlier deadline’s benefit along with it.

The other major deadline change pertains to the FinCEN Report 114, more commonly known as the FBAR, which is the form for reporting foreign bank and financial accounts. The requirement to report foreign accounts has moved up from June 30 to April 15, to align with the better-known due date for individual tax returns. And, as is allowed for individual tax returns, taxpayers can now request a six-month extension to file the FinCEN Report 114, which formerly was not an option.

Form 3520, which reports transactions with foreign trusts and receipt of certain foreign gifts, is now also due on April 15. Like the FBAR, Form 3520 now offers taxpayers the option of a maximum six-month extension.

While the ability to request an FBAR extension is a nice change, the new due date could be a trap for self-preparers or other taxpayers who miss this change and file in late June as usual. The law does provide penalty relief for first-time filers who file late by mistake, but nothing for repeat filers who miss the new deadline and forget to file an extension. The Treasury may eventually issue regulations addressing this issue, but for now, taxpayers beware.

Income tax returns for estates and trusts will now have two weeks more when they file for an extension, bringing the period to five and a half months total. This makes the new extended due date September 30 for calendar year filers.

New Basis Reporting Rules for Executors

The new law also introduced provisions regarding the reporting of cost basis for inherited property. The law requires executors of estates that are required to file federal estate tax returns to provide an informational return, filed with both the Internal Revenue Service and each of the beneficiaries, in order to make sure the beneficiaries who inherit property report its cost basis correctly.

Generally, when a beneficiary inherits property the cost basis is reset to the fair market value as of the decedent’s date of death. For individuals who die with low-basis assets, this is a significant benefit. Since the low basis gets “stepped up” at death, beneficiaries pay less capital gains tax when they later sell the assets, or even avoid tax altogether. The IRS viewed this as a problem because there were no formal reporting requirements specific to cost basis, and thus beneficiaries did not always get accurate basis information when they inherit property. The IRS worried that beneficiaries were using incorrect – presumably higher – basis when they eventually sold the property.

While well-intentioned, however, this new law leaves many open questions and creates a variety of problems.

The law states that the new form will be due no later than thirty days after the estate’s tax return is filed or thirty days after the return was due (including extensions), whichever is earlier. The law initially applied to all returns required to be filed after July 31, 2015, but Notice 2015-57 (released on August 21, 2015) delayed the due date for any statement required to be filed with the IRS or provided to a beneficiary until February 29, 2016. It’s a good thing the leap year gave us that one extra day in February.

In December 2015, the IRS issued a draft Form 8971 for executors to use to report the basis under this new law. Based on the draft, the new form will require the estate’s executor to list the beneficiaries’ names, tax identification numbers and addresses. This part of the form is filed with the IRS, but not shared with the beneficiaries. The executor will also complete a separate schedule and provide copies to each beneficiary and the IRS. This new Schedule A requires the executor to describe the property, note whether it increased estate tax, and provide the valuation date and the value.

However, thirty days after the filing of the estate tax return is too soon to tell the beneficiaries what assets they will receive. In many cases the assets held as of a decedent’s death are sold during the administration of the estate, and often even after the estate tax return is filed. Thus the assets and basis reported on the estate tax return, and the new Form 8971 filed 30 days later, may not be the same as the assets the beneficiaries ultimately receive. This could easily create more confusion for both executors and beneficiaries.

The IRS could also challenge the value reported on the estate tax return for up to three years later, within the statute of limitations, forcing the executor to file an updated basis reporting form in order to report the final value as agreed upon. But what if the beneficiary already sold that asset and used the basis as originally provided? The IRS has not released the final version of the form, nor provided formal instructions. So taxpayers continue to wait for more guidance, with time running out before the February 29 deadline. It will not be surprising if the IRS extends this deadline again.

Besides the issue of exactly how to report the information on the new Form 8971, executors cannot be sure which estates are truly required to file in the first place. The new law states that all executors who are required to file an estate return are also required to file the new basis reporting form. The key word here is “required.” With the federal estate tax exemption up to $5.45 million per person for 2016, few estates are truly required to file a federal estate tax return.

However, many executors voluntarily file returns solely for the benefit of electing what is known as “portability.” Portability allows a surviving spouse to benefit from the deceased spouse’s unused estate tax exemption. Under current conditions, the surviving spouse could secure a total estate tax exemption of $10.9 million, comprised of her own $5.45 million exemption and that of her deceased partner. Assuming an executor files an estate tax return solely to elect portability and a return would not be otherwise required by the law, one could conclude the new Form 8971 basis reporting is also not required. Yet in practice, this is unclear. Taxpayers continue to wait for guidance from the Treasury on this issue, too, as the February deadline looms.

In the face of new deadlines and reporting requirements, it is nice to know that some things never change: for instance, the well-known April 15 deadline for individual income tax returns. Actually, hold that thought. For tax year 2015, that deadline is April 18, 2016, since the 15th falls on the Friday during which the District of Columbia celebrates Emancipation Day. In Maine and Massachusetts the deadline is pushed one day further, to April 19, due to the observation of Patriots’ Day in those states.

 

Tax Tips For Investing In Mutual Funds

There are some tax downfalls linked with trading mutual funds that should be given consideration. Awareness of these downfalls will reduce taxes and stop surprises from happening while visiting your CPA firm.

One thing to be aware of is, that it is possible to sell a mutual fund unknowingly or what one client called a “Stunner” sale. This may arise if your mutual fund has an option to issue checks out of your investment in the fund. Whenever checks are deducted from the investment, a partial sale of the investment is being executed. A taxable gain or deductible loss arises from each check written, with the exception of funds that have shares that are always one dollar values (e.g. money markets). Furthermore, each sale needs to be listed on the annual income tax return as a line item.

Some clients are also surprised when taxable sales results from rebalancing the portfolio of fund investments. Most mutual funds allow investors make modifications and allocate the way the account is invested. Rebalancing and reviewing an investment portfolio is a basic principle of money management. The rebalancing and transferring of money from one mutual fund to another mutual fund is a taxable sale of the mutual fund that was transferred.

Maintaining records is also important. Investors should save all the official tax receipts and correspondence such as Form 1099-DIV, statements and trade confirmations. The statements are helpful when the time comes to calculate the costs of investments that have been sold. Most fund companies allow investors to reinvest their dividends to purchase additional shares or fractional shares when the dividend is paid. These documents are necessary to calculate the amount of taxable gain or deductible loss when the investment is sold. This paperwork has extra valuable during an IRS audit. Some clients receive statements at the end of the year with comprehensive lists of all the transactions for the year, we usually recommend keeping the annual statements and discarding the other accounts statements received during the year. Always save the envelopes that say “tax information inside.”

In 2011 record keeping requirements were cut down and streamlined. New rules make it necessary for mutual fund companies to track all gains or losses on investments sold by the company and to provide this information to investors. The company must also report whether the gains and losses are short or long- term.

For the investments purchased before 2011, the mutual fund companies usually give investors all the information they have available to facilitate calculating any gain or loss on the sale of the fund.

Timing is another concept to consider. Gains distributions can be a bad thing believe it or not. As a general rule, investors should avoid purchasing a fund close to the capital gain distribution or dividend date. The dividend is taxable and increases an investor’s tax liability. These payments increase the tax in spite of the fact; the money is being reinvested in new shares. On the other hand, an investor maybe considering selling a mutual fund near the end of the year, and should weigh out the tax and non-tax implications of the sale in the current year versus a sale in the succeeding year. The sale in succeeding year transfers the gain or loss to the next tax year.

Long term investors should also assess which shares of the same investment should be held and which should be sold. There are guidelines in identifying such shares and following the guidelines can reduce tax. One way reduce tax is to identify shares that have been held longer than one year and qualify for the more preferable long-term capital gain rate. Another way to save on taxes is loss harvesting, for example, suppose Karla owns 100 shares of Google. She bought 40 shares at $40 per share, 30 shares at $80 per share and the remaining 30 shares at $50 per share. Karla then sells 30 shares at $70 per share. Specifically identifying the shares, Karla can match the shares she sold with the 30 shares she purchased for $80 per share, generating a tax loss.

 

Which Tax Records Should I Keep?

Concerned as to the amount of time you should keep your personal income tax records? Sometimes, taxpayers need to present these documents when the government reviews or audits a filed return or is trying to levy or collect tax. Also, these documents are required by creditors, homeowners associations, other concerned parties that have requisites to determine before giving someone the right to use money or extending credit to obtain property and for any other transactions that these documents are deemed necessary.

Retain your income tax records indefinitely. The accompanying records, income documents and deduction source information that are supporting financial evidences, should be kept usually for six years. Generally, the time limit for the IRS to assess tax for a given tax year is three years after the tax return was due or filed whichever is later, except for cases of fraud or a substantial understatement of income.

The IRS goes back more than three years when they determine more than 25% of gross income is not declared on a return, they consider this a substantial understatement of income, and the period for collection can be extended to six years. Also, IRS has no time limits and they can collect tax at any time when no return has been filed for a tax year. That is why it is necessary to keep your records for circumstances like these.

Hanging on to tax returns forever and other important source documents for six years should be sufficient. No one really knows when the IRS will try to go back to previous years and try to collect tax. When tax returns are filed electronically, make sure to obtain a hard copy paper version of the return from the accountant who prepared/filed your return.

Property records need to be retained until the property is sold. The tax effects of the dealings that take place this year may be affected by the purchases in the past. These purchase documents should be held on to until the property is sold. The following are some common examples:

Home was purchased in 1976 for $50,000. Additional $15,000 was incurred for renovations in 1993 and the home is sold this year for $200,000. To calculate the gain on the transaction, the cost information needs to be available. (e.g. purchase price plus renovations). In the event the IRS questions the return, the purchase and cost documents would need to be presented to the IRS. In this example, retain the records for six years after the tax return was due or filed whichever is later.

Some taxpayers have gains that qualify for primary home sale exclusion, which allows certain homeowners to exclude up to $500,000 of gain from the sale of a home. Even if this benefit applies to you, records relating to the home purchase and improvements should still be retained. The benefit may not be available in the future and it is impossible to know how much the house will be worth in the future.

There could be cases where new property will take the cost of the old property. In this case, the old property records should be kept until six years after the new property is sold. Let’s say, a business car was purchased in 2010 and is now a trade in for a new business vehicle in 2015. When the new business vehicle is sold, any gain or loss is based in part, on the purchase records from the trade in vehicle. Thus, the records should be kept for six years after the tax return was due or filed whichever is later.

Longer record retention periods also apply to investments in shares of ownership in a small business, mutual funds, stocks, etc. In cases of these typical investments, when dividends are reinvested, every dividend reinvestment is a purchase. Thus from the year the investment is sold, the records should be kept for six years after the tax return was due or filed whichever is later.

In case of damaged and stolen properties, calculating the casualty and theft loss deduction is determined, in part, by the cost of the property that was damaged or stolen. Having the records that support the cost of these properties is important in order to support your basis. Thus, from the year of the loss, the records should be kept for six years after the tax return was due or filed whichever is later.

For married persons wherein separation or divorce becomes a potential, you should make sure that you have access to any tax documents relating to you that are being kept by your spouse. Better yet, make copies of these tax documents as access to these documents may become difficult later on. Both spouses are liable for joint returns.

Storing Record Electronically – This may also be practical and easier. The necessary period to keep electronic versions is the same for paper versions. Always back up your electronic tax records.

Damage or Loss of records – Consider keeping your most important documents in a safety deposit box. Also consider maintaining important records in a central convenient location.

Sometimes, records which are lost or damaged can be reconstructed. For example, the CPA Firm can provide copies of these damaged documents as they are required by law to keep copies of tax returns for a period of three years. We recommend maintaining copies of the returns and source documents electronically.

Furthermore, other people/businesses, who have helped you with purchase or sale of property, keep records. For example, you purchased mutual funds from a mutual fund company; the company can help reconstruct the costs of the mutual funds.

Anyhow, it is still the safest course of action to keep copies of the documents yourself in the safest place possible as you can never be sure whether third parties have actually kept records of the documents you need. This article is an example for purposes of illustration only and is intended as a general resource, not a recommendation. We hope this article was helpful.

 

The 10 Minute Income Tax Tune-Up

Are You Needlessly Over-paying Your Income Taxes?

The “Ten Minute Income Tax Tune-Up”

Income Taxes (hereafter IT) generally are the largest single bill in your life. They are a BIG annual and non-amortizing expense. Income taxes comprise 30%-40% of your daily labor, ’till the day you die. Income taxes are thus The Forever Bill.

But IT are also, by definition, a variable expense. IT can, and must, be proactively monitored and managed throughout the entire course of the year. A tax plan is always a part of your business plan. Makes sense, right?

The following IT Savings Worksheet illustrates a gross income of $1 million. But the entire $1 million is taxable ordinary income. Ouch. The Tax Man cometh. It’s not what you earn. It’s what you keep. The 8 simple steps below will save you big money:

Tax Tune-Up / Tax Savings Worksheet

1. Gross Income: $1,000,000.00

2. Gross Business Expenses: $400,000.00

3. Net Business Income Before Taxes: $600,000.00

4 Tax Bracket – 40%

5. Lifestyle Costs $200,000.00 – Your personal expenses.

This $200,000 is after-tax consumption, and is NOT tax-deductible.

6. Reportable Gross Income: $333,000

Lifestyle Costs divided by the inverse of your tax bracket. In Florida, your Income Tax Bracket is a maximum of 40%. The Inverse of your bracket is.60. Divide.60 into your Lifestyle Costs, which is #5 above. This is the Gross Income that you must report on your Personal 1040 Tax Return to live the $200,000 lifestyle that you have chosen in # 5. So, the correct Gross Income on your Personal 1040 is: $333,000.00

Please note that Step 6 is The Key: Only bring home the pre-tax $333,000 that is needed to pay for your after-tax lifestyle costs of $200,000.

7. Amount available for Pre-Tax Savings (#3 minus #6): $267,000

8. IT saved in this example: $106,800.00

Number 7 above x 40% (combined state and federal tax bracket).

In this hypothetical example, you paid $133,200 in IT (40% x Reportable Income of $333,000). Before this Tax Tune-Up, you were going to pay $240,000 in IT (40% x $600,000). But, instead of reportable Income of $600,000, you reported $333,000, and left $267,000 in the corporation as pre-tax income. By keeping $267,000 in your Corporation pre-tax, you have saved $106,800 of otherwise-lost IT dollars. (40% x $267,000).

You then add this 106,800 of “soft” tax dollars saved… to your “hard”, after-tax dollars of $160,200 (60% of $267,000). This equals a 66% rate of return, tax free ($106,800 / $160,200). Recapturing 40% In “dead” tax dollars on your net, after-tax 60% is a 66% rate of return, tax-free. All because you reported $333,000 of income, just enough to pay for your $200,000 lifestyle costs, while keeping the remaining $267,000 in your Corporation.

The instant that you utilize IT Reduction as part of your Business Plan… You earn a 66% tax free rate of return. This 66% rate of return is “instant” the moment that you deploy the $267,000 into a legal tax deduction inside your Corporation.

The happy ending for you is that you continue to lead the lifestyle that you want ($200,000). We simply did NOT bring $267,000 out of your corporation as taxable income. You reported income of $333,000, not $600,000. That saved you forty percent on $267,000 of Income = $106,800. The non-reportable $267,000 was put to work inside your Corporation in a legitimate tax-deduction that became an Asset. Converting otherwise-lost “dead” tax dollars into Assets. Simple, Legal, Smart.

Think about it: You just made 66%, instantly, and tax-free. There is no reporting of income. You simply “recaptured” otherwise-lost IT dollars. That’s not a taxable event. That’s just smart business. By recapturing “dead” IT dollars, you add forty cents of new-found “soft” money to your “hard,” after-tax sixty cents; and that earns you sixty-six percent, tax-free. In the end, your Corporation has an Asset, instead of a cancelled check from the IRS.

 

Preparing for Your Tax Returns

A tax return needs to be completed once a year, paper tax returns must be done by the end of October, and online ones need to be done by the end of January of the following year. If you have an accountant they will talk to you through all of this and tell you what it is you need to do to help prepare them for the returns.

How do I know if I need to do a tax return?

If you fall into one of the following categories you are required to complete a tax return:

• Self-employed – if you work for yourself, you will need to complete a return for every year you are trading for

• Director of a company – this does not include those who work for a non-profit organisation

• High income – If you earn more than £100,000 you need to complete a tax return as your tax code doesn’t collect the full amount you should be paying

You are also required to file a tax return if you have property, savings or other investments over a certain level that you receive income from. This includes income from overseas and estates of the deceased. There are other reasons one may need to complete it, your accountant will be happy to help you establish whether this includes you or not.

How do I complete a tax return?

This can be done online or in paper form. The online facility can help you work through the process but hiring a reliable accountant may be far more beneficial to you. Not only will this ensure you are completing it correctly but it will also mean you save yourself time.

Around April time each year, you will receive a letter from HMRC telling you to complete a tax return. If you don’t receive this letter but feel you should have then make sure you speak to your accountant.

How can I help my accountant?

Any accountant will appreciate you helping them, so try giving them the following information for each tax year(6th April -5th April):

• Any employment details (P60 form)

• Receipts and invoices that are deductible from your income

• Bank interest details

• Pension contributions

• Income from letting a property or land

• Capital gains or losses you’ve made

Your accountant may also need other information from you like whether you gift to charity or any other taxable income that isn’t included here.

 

Income Tax Basics For Young Professionals

So you have only just started earning and are on the path of self discovery especially with regards to your financial life, right? And one of the vital aspects to that would be – taxes. Understanding tax is not easy, but very much necessary. So, lets take it one step at a time – we are going to specifically look at – Income Tax. Here are some of the common confusions and relevant explanations surrounding the whole process.

What is income tax?

Income tax is the tax you pay to the government. It is based on the income you earn, i.e. when your income exceeds a certain slab, then you are required to pay tax on the excess amount earned.

Why should I pay tax on my earnings?

Every citizen is obligated to pay income tax as per law [Income Tax Act]. The collected sum is used for further development of the nation.

How much should I pay?

The amount of tax you will have to pay is purely dependent on which income slab your salary falls in. The percentage of tax to be paid will also vary depending on:

1) Whether you are a man, woman or a senior citizen [the income slabs are different for all three]

2) Your income and the slab it belongs to(that is specific to you). For instance, the tax payable by someone who is earning between 180,000 and 500,000 will be 10% of the amount that exceeds 180,000.

Similarly, if the income is between 500,000 and 800,000, then the taxable income is a fixed amount plus 20% of the amount that exceeds 500,000 and so on.

How often should I pay?

Income Tax is paid on a yearly basis. The duration considered here is between April 1st to March 31st of the next year. This period is also known as a financial year or ‘previous year’.

And the last date to file your income tax returns would be July 31st.

How to file income tax?

Filing Income tax can be a daunting task, which is why you have to options:

– doing it yourself

– engaging a good chartered accountant.

You also have the facility of filing income tax online or offline.

What are the documents required for filing tax?

The documents to be submitted while filing are as follows:

1. Form 16 – is given to you by the company you work for. It consists details of the tax that was deducted from your salary. This is the main indication that you have paid income tax.

2. Form 16A – is given to you by the bank or financial institution where you have invested in term deposits. This indicates the various tax deductions at source for your account.

3. Bank Statement Summary – shows the transactions performed by you throughout the financial year. This will include everything from savings, investments, expenses, loans and also income earned.

4. Property details – any property sold or bought by you in the previous financial year should be recorded and duly submitted at the time of filing tax returns.

5. Interest certificate – In case you are paying monthly installments towards your housing loan, if you want to save on tax, then you will have to show the supporting documents in the form of interest certificate from the institution that provided you the loan.

6. Investment details – if you haven’t already declared it in the Form 16, then do it here. Details of your investments in tax saving tools such as public provident fund and so on.

7. Receipt of advance tax (if any) – to show that you have paid advance tax.

Is the salary I receive the only form of income?

No, there are various types of taxable income:

1. Your salary
2. Rental Income (if any)
3. Income from business
4. Capital gains (for eg, sale of property)
5. Incomes from bank deposits, cash gifts and so on.

Some of the key points to be kept in mind while filing income tax are as follows:

  • Make sure your signature is uniform across all the documents you use for filing
  • Do not overwrite or misspell in the form
  • Double check the PAN number you have given.
  • Even the date written matters
  • Original TDS certificates and receipts to be produced at the time of filing.
  • Avoid delay payment of tax as it attracts a fine.