deductions

15 Odd American Taxes You May Have to Pay

Paul Michael — Fri, 16 Mar 2018 09:00:06 +0000

Benjamin Franklin famously said, "In this world nothing can be certain, except death and taxes." What we can also be certain of is that strange, sometimes archaic taxes will always endure. For whatever reason, the following tax laws still exist, and they continue to bewilder the average taxpayer. (See also: The 11 Oddest Things America Has Ever Taxed)

1. The coffee cup lid tax

Colorado has a strange idea of what is essential packaging, and what is superfluous to requirements. As it turns out, the disposable cup that holds your morning coffee or tea is required, but the lid that stops it splashing everywhere (especially in the car) is "nice to have." As it's a nonessential, it is subject to an additional 2.9 percent tax. If you drink a $4 coffee every day, that adds up to an extra $40 every year.

2. The candy tax

Willy Wonka would be no fan of the Prairie state. For some reason, Illinois has decided that any sweet candy or other sugary treat is liable for an additional 5 percent sales tax, on one condition — that the snack contains no flour. So, something like a Kit Kat or Milky Way bar will not be subject to the tax, whereas a 3 Musketeers bar or chocolate covered raisins come with that extra charge.

3. The fur coat tax

First thoughts on this tax? Good. With advances in fabrics and science, there's no need to kill an animal purely for its fur. However, it still happens. While many clothing items are exempt from sales tax in Minnesota, garments that have three times more fur than any other material are subject to an additional 6.875 percent sales tax. If you want the fur look, faux fur is just as good and is exempt from the tax. Also, if the garment has only a little fur, perhaps on the collar or cuffs, it also escapes the tax.

4. Drug dealers and thieves must report their income

Mark this one down as very strange but true. You may think that a drug dealer or thief wouldn't care too much about reporting their income on a tax return, however, let's not forget that taxes, not murder or racketeering, sent Al Capone to Alcatraz. According to the IRS, "Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity."

5. The arrow excise tax

If you hunt with a bow and arrow, or partake in the sport of archery, your wallet could be getting hit with a hefty fee of 43 cents per arrow. The tax goes back to 1937's Wildlife Restoration Act, with the proceeds from the tax going to the U.S. Fish and Wildlife Service. If your arrows are longer than 18 inches, or are used with a specific kind of bow with a certain amount of draw, you'll get hit with the tax. Shorter arrows, and certain arrows for children's bows, are exempt.

6. The tattoos and piercings tax

Hey there body-modders of Arkansas, this one stings. Did you know that since 2002, your state has added an additional tax on any tattoos or piercings you get? It amounts to a 6 percent sales tax, which may not seem like a lot, but can add up over time. So, why did Arkansas impose this strange tax? To discourage people from getting them done, of course. However, anyone who is ready to endure hours of pain or the burn of a tattoo is probably not going to be put off by a sales tax.

7. The starving artist tax break

Are you a performing artist? A busker perhaps, or someone that sketches tourists on the streets of your city? Well, you're in luck … if you're broke. That's the irony of the starving artist deduction, which has some bizarre specifications. First, you must have worked for at least two employers and received at least $200 in income from each one during the year. Second, your expenses must be more than 10 percent of the income you receive from performances. And finally, your adjusted gross income must be less than $16,000. If you qualify, you can deduct paints, brushes, dancewear, or anything else you need to ply your trade.

8. The hot air balloon tax

Here's an odd one form the state of Kansas, which can have an impact on anyone that makes a living from hot air balloon rides. If you use the hot air balloon to do sightseeing jaunts, soaring high above the landscape for miles, you don't get taxed. But, if the balloon just goes up and down, staying tethered at all times, it stops becoming a mode of air transportation and is instead considered an amusement ride. In Kansas, that's subject to an amusement tax of 6.5 percent.

9. The 100th birthday tax break

In England, if you manage to stay alive long enough to hit triple digits, you actually get a congratulatory card from the Queen. In New Mexico, you get an even better gift. Providing you have resided in the state for at least six months, are a resident on December 31, and are not listed as a dependent on someone else's taxes, you will become completely exempt from state income taxes. Now that's worth a party in itself.

10. The vending machine fruit tax

If you're looking for a tax to make you scratch your head in disbelief, this is a contender. California, which considers itself a healthy state, incentivized fresh fruit purchases by exempting them from tax. Great, right? Well, there's a loophole. And wherever there's a loophole, there's a way to make money. If that fruit is sold from a vending machine, it somehow loses its healthy status, and gets taxed at a whopping 33 percent of the sale price.

11. The flush tax

When you gotta go, you gotta go. But the folks in Maryland are paying a little more than the rest of us to do so. In fact, the "flush tax" that was established in 2004 doubled from $30 per year to $60 per year in 2012, meaning every resident of the Old Line State is paying around $5 per month more than the rest of us just to go to the bathroom. However, it's all for a good reason. The local CBS affiliate reported last year that additional money raised by the tax has lead to state of the art upgrades that reduce nitrogen and solid waste by millions of pounds per year.

12. The belt buckle tax

If you had to take a wild guess on which state would impose a tax on belt buckles, Texas would probably be last on your list. After all, ornate, decorative, and patriotic belt buckles are as much a part of the Texan wardrobe as boots and hats. However, it's perhaps this predominance of buckles that made one lawmaker see dollar signs. So, get ready to pony up the dough, because you'll get taxed an additional 6.25 percent sales tax on every belt buckle you buy in Texas.

13. The sexually explicit business tax

Utah has a tax that doesn't go over well with adult service providers. According to the Utah State Tax Commission, the sexually explicit business tax is an additional tax on "admission and user fees, retail sales of tangible personal property including food and drinks, and services occurring in a business with nude or partially nude individuals." How much is it? An additional 10 percent tax on top of regular sales and use taxes. In short, if you're going to do naughty things in Utah, you have to have a slightly bigger wallet.

14. The exceptional tree tax break

Do you live in Hawaii? Do you have a magnificent specimen of a tree in your backyard or front lawn? Well, congratulations. A strange but perfectly legitimate tax break still exists that allows you to write off up to $3,000 in qualified costs and expenditure on your tree maintenance. Exceptional doesn't mean, "Wow, my tree looks awesome!" In this case, the state takes into account age, rarity, location, size, aesthetic quality, endemic status, and if it is, in fact, worthy of preservation. If you check all those boxes, you get the write-off.

15. The blueberry tax

The state of Maine is the largest producer of wild blueberries in the world. Whether you're eating blueberry pancakes, blueberry pie, or blueberry muffins, chances are the delicious fruits came from Maine. Not only that, but they were helped along by the Maine Wild Blueberry Tax. This tax imposes 1.5 percent tax on every pound of wild blueberries sold. The money is used for investment and research that keeps Maine's hugely successful blueberry business thriving.

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This article is from Paul Michael of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Here's What to Do If You Get Audited

Mikey Rox — Tue, 27 Feb 2018 09:30:09 +0000

We often exaggerate the phrase, "My worst nightmare," but when it comes to getting audited, it's true. Audits are many people's worst nightmare — but they don't automatically have to mean financial disaster. To help navigate the unwelcome process, consider these important steps to take as suggested by tax professionals.

1. Don't panic

A lot of folks' first response to receiving their audit notice is to panic. Just the word "audit" has the ability to throw everything into a tizzy. But in all probability, if you've reported your taxes accurately (or at least tried to), the situation is likely not as bad as you think.

"It can be easy to fly off the handle and make what can be simple requests for information into a pressure-filled, stress-inducing scenario," says certified financial planner Joel Ohman. "This need not happen if you have someone — a CPA, tax attorney, or other trusted professional — representing you and counseling you."

Slow down, take a deep breath, and call whoever does your taxes. Trust them; rely on their advice.

2. Read the notice carefully

Take a good look at the audit notice you received. Many audits are desk audits or computer document-matching audits rather than the complete tax return audits done in-person.

"If the audit request is a document-matching audit, they will typically ask you to verify certain lines on the return," explains Grafton "Cap" Willey, CPA and managing director of the New England division of CBIZ MHM. "Very often they will propose an adjustment based on the information they have received. They will state that you reported 'such and such' and they have additional documents that they do not see reported."

3. Prepare the required documents

Documentation is the key to success in audits. Provide organized documents such as 1099s, K-1s, W-2s, and canceled checks, and reconcile them to the amounts claimed on the return. If you do not have adequate documentation, it's more likely that you won't get the deduction.

"IRS information is not always correct, so look it over carefully and make sure that they have the correct information," Willey adds. "Investment gains and losses are often misrepresented and very often the IRS will assume a zero-cost basis on unreported transactions. Providing corrected information will usually satisfy them."

When going through your documentation, if you come up with more deductions than you claimed, don't be afraid to submit them in your response. The IRS can be very strict on accepting documentation for charitable donations and business expenses, however.

4. Submit your documents on time

Don't make matters worse by missing deadlines. An audit is a serious matter that can result in heavy fines, and you don't want to put more stress on the process by being uncooperative. Follow the guidelines and get your documents submitted by the date expected. (See also: The Easiest Way to Avoid a Tax Audit)

5. Don't let your mouth get you in more trouble

The IRS is very good at making people feel nervous about being audited, and when people are nervous, they tend to ramble — sometimes to harsh consequences.

"Remember the IRS's job is to appropriate your money for government needs, and your job is to justify why you should keep the money yourself," explains CFP Brent Dickerson, owner of Trinity Tax Advisory. "They are not your friend, and they are not there to help you keep money for yourself; many people in an audit situation fail to remember this fact. They let down their guard and often say things that they don't even realize can bite them. Therefore, it's in your best interest to have a representative work on your behalf with the IRS."

6. Bring your CPA with you to your in-person audit

If the audit is an in-person audit, consider bringing along a tax professional to represent you at the audit.

"The IRS is not afraid to try to intimidate a taxpayer representing themselves," Willey says. "A tax professional that has experience with tax audits should be aware of the rules and know when the agent may be fishing for issues. Very often, giving a tax professional a power of attorney authority may avoid the taxpayer from having to sit down with the IRS agent, which many taxpayers would like to avoid."

Make sure your records are well organized and well documented; make it easy for the agent to follow. If they have confidence that you're presenting good documentation, they will be more likely to accept what is presented to them.

7. Don't be afraid to disagree and negotiate

Sometimes a tax audit is a negotiation — you may have to concede to some changes on smaller items in order to not have big changes on larger items. It really depends on the agent. Some agents nitpick minor items, while other agents go straight for the big issues.

"In my experience, IRS field agents tend to rigidly apply the law in favor of the Treasury," says Matthew T. Eyet, Esq. of Sandelands Eyet LLP. "If at the end of the audit you think the agent got it wrong, file a protest to take your case to the Office of Appeals where the appeals officers are typically more taxpayer-friendly in their analysis."

In addition, he adds, unlike field agents, appeals officers are allowed to consider the hazards of litigation when negotiating a settlement. This almost always means a better result for you.

8. Hire an enrolled agent if you're caught red-handed

If you've really dug yourself a hole and committed criminal acts by submitting fraudulent taxes, you'll need more than a CPA to help you. An enrolled agent is a tax expert and recognized by the IRS as having unlimited right of representation. They're your best hope of the least amount of recourse.

"If you are facing counts of criminal charges, you'll need a lawyer," says Dickerson. "If your business is being audited or if you have a sole-proprietorship with lots of accounting needs, then you may want to opt for a CPA. All of these professionals have their own specialties when it comes to tax and each is able to represent clients in front of the IRS — but only attorneys can represent in cases of criminality." (See also: 10 Reasons You Should Really Fear an IRS Audit)

9. Pay what you owe ASAP

You want this situation to be over, and the best way to accomplish that is to pay what you owe immediately. If you don't, you run the risk of added interest and penalties with late fees on top of that.

If you don't pay the balance in full in the first 21 days of receiving notice of what you owe (for balances less than $100,000), penalties begin accruing. The faster you can get this squared up and put behind you, the better.

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This article is from Mikey Rox of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Ways to Profit Off Your Cabin Fever

Tim Lemke — Fri, 09 Feb 2018 10:00:05 +0000

Winter can be the pits. The weather's cold, and getting outside can be tough. You've got cabin fever, and you can't wait for spring.

But perhaps you can use the time stuck inside to your advantage. Now may be the time to get a handle on your finances and perhaps even make a little extra money while you're cooped up.

Consider these ways to improve your finances during the long, cold winter.

1. Optimize your investments

You may have spent much of the last year simply watching your investments do their thing, and thankfully they've probably done well. Every portfolio is due for a review now and again, so consider taking a look at your investments to ensure you're set up for maximum returns.

This may mean rebalancing your stocks and mutual funds so you aren't disproportionately invested in one area. It may mean selling some investments that have underperformed, or doing the same for stocks that may be due for a sharp fall. Making some good choices now could allow you to enjoy another year of worry-free investing. (See also: How an Exit Strategy Can Make You a Better Investor)

2. Get your taxes in order

Your tax returns will be due in mid-April. It's always wise to avoid waiting until the last second to file, and you should consider using this winter time to research the best ways to avoid paying too much at tax time.

Perhaps there are tax credits and deductions you never knew you could take advantage of. Maybe you have time to make IRA contributions or make other moves to reduce your tax liability. Or maybe you need time to dig up those receipts from charities you donated to in 2017. Doing taxes may not seem like fun, but it can be interesting, especially if you do the work to maximize your savings. (See also: 7 Surprising Tax Deductions You Might Miss)

3. Put together a pitch for a raise

Now may be the time of year when you can focus on advancing your career. Maybe you've been seeking a raise or promotion for a while, but haven't had the time to build your case. With a little time on your hands, now you may have the ability to develop a solid pitch to your supervisor. This may mean collecting examples of goals you've achieved, or ways in which you've helped the company. It may mean collecting data on salaries and how yours compares to the industry average. Take the time to find the right tone, make the right arguments, and go for it. (See also: 5 Times You Should Demand a Raise)

4. Look for a new job

What if you don't want a promotion or raise, because you can't stand your job to begin with? What if you feel like the only way to make more money is to switch companies or careers? Well, use the winter months to look for a new one. If you're stuck inside, take the time to update your resume, get active on LinkedIn, and reach out to your online network.

There are many employers that post new jobs at the start of the year, because they may have received the budget approval to hire. The caveat to this is that many people look for new jobs as part of their New Year's resolutions, so you may face some stiff competition. But if you want a new job and know what you're looking for, take advantage of the time to search for a new career in a thoughtful and deliberate way. (See also: 8 Signs You Should Quit Your Job)

5. Develop a side hustle

Perhaps a raise or a new job isn't yet in the cards. That's OK, you can still boost your income by finding other ways to make money on the side. Maybe now is the time to develop that pottery hobby into something revenue producing. Perhaps all this time inside the house will lead you to start a profitable blog or podcast. Whatever it is, you have the ability to make some extra cash just by leveraging your current talents. And who knows? Maybe the side hustle can eventually become your main hustle. (See also: 14 Best Side Jobs For Fast Cash)

6. Create budgets

Why not use the start of a new year to get smarter about spending less money than you earn? Now is the time to take a look at your spending and develop real limits on what you're buying and how much you are paying.

Ideally, you should have numerous budgets for things like eating out, entertainment, housing costs, automotive expenses, and even gifts. These budgets should be attainable but allow you to save money at the end of each month. Sticking to budgets can be hard, but even if you lose discipline during the year, you may succeed in reducing expenses in some areas and making progress in reducing debt or boosting your savings. (See also: Build Your First Budget in 5 Easy Steps)

7. Review your insurance policies

Oh yeah, everyone loves looking at insurance policies in their spare time. Exciting stuff, huh? It's true that this does not seem like fun, but a periodic review of your policies related to auto insurance, homeowners insurance, health insurance, and life insurance — as well as the rates you are paying — is a good financial move.

During this process, you may find that you are underinsured and placing yourself at risk, or that you are paying too much for insurance for someone in your situation. If you do a little rate shopping, you may find you can save significant money by switching providers. (See also: 7 Times to Update Your Homeowners Insurance)

8. Put on a sweater

When you're inside during the winter, you'll be tempted to crank that thermostat for maximum comfort. Consider instead keeping the house temperature lower and simply wearing more layers. While you may feel like you need the thermostat set to 72, you could probably get used to having it below 68.

Last year, my family's main heater broke during a snowstorm, and our house temperature fell into the 50s. Guess what? We threw on some extra sweatshirts, cuddled under some more blankets, and survived fine. Every few degrees of temperature on the thermostat could add up to hundreds of degrees — and dollars — annually, so dial it back and save. (See also: 5 Big Winter Expenses That Could Freeze Your Budget)

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Tax Mistakes Freelancers Need to Stop Making

Aja McClanahan — Wed, 07 Feb 2018 09:00:06 +0000

No doubt about it, being a freelancer is hard. From serving clients to staying on top of your money game, there's no shortage of work to do. Sometimes, things may be overlooked or set on the back burner while you tackle pressing business matters. However, there is one major thing that just can't be ignored — taxes.

As your own chief financial officer you'll need to be aware of major tax missteps that could ultimately ruin your business. Ideally, you'll engage the help of an experienced small business accountant who knows the ins and outs of tax strategies for freelance business owners. However, you've got to have your ducks in a row to double and triple check their suggestions and advice, too. (See also: What Freelancers and Side Giggers Need to Know About Income Taxes)

These are the top tax mistakes freelancers really need to stop making.

1. Not paying self-employment tax

As a freelancer, you probably have a number of clients that pay you without deducting any taxes. Because you are a contractor, you are responsible for any and all taxes on your income.

Self-employment tax is a term that covers two main taxes: Social Security and Medicare. As an employee of a company, your employer would cover part of this tax. However, lucky you, since you are your own employer, you get to pick up the tab on the entire tax bill.

On the other side of paying all these taxes, you do get some reprieve by deducting a portion of these payments from your gross income, which can reduce the amount of taxes you owe overall.

Just know that it's very important to pay self-employment taxes on your freelance income. If your client issues you a 1099 form, it's also transmitted to the IRS. The IRS becomes aware of this income and can demand you to make an accounting for that money if they suspect you owe taxes on it.

2. Not having an accounting system

Making a lot of money as a freelancer can also increase your tax liability. If you don't have a good system in place to track all of your income and expenses, you could end up paying more (or less) taxes than you're supposed to.

Charleen Fariselli is a CPA who has worked with small businesses for over 10 years. She says that freelancers who don't accurately track income and expenses are at a disadvantage. "This affects their taxes because they don't have a good accounting system and are often losing deductions so they pay more in tax," she says.

Charleen also adds that a lack of a good accounting system can have an impact on making timely, accurate tax payments: "These freelancers can't calculate what their taxable income is each quarter for making tax payments, so they over or underpay, if they pay at all."

The good news is that there are many accounting software options out there to help you organize your books, including QuickBooks, Xero, Wave, and Freshbooks. You can also use a simple Google Sheets document. (See also: 5 Free Accounting Tools for Freelancers)

3. Mixing business with pleasure

One of the worst things a freelancer can do is allow their business expenses and income to spill over into their personal finances. For example, a business owner may use a business credit or debit card to cover a personal expense like purchasing groceries for their family.

The biggest problem with this behavior is how it affects record keeping for tax filing purposes. Joshua Zimmelman of Westwood Tax & Consulting says that bad record keeping can cause confusion for freelancers at tax time. "Too many freelancers miss out on deductions because their finances are not organized," he says. "Separating your expenses from the start makes filing your tax return so much easier."

If you need help keeping your personal and business finances separate, you can opt for a business checking account or credit card. You could also use both.

If you do have to use money from your business dealings to cover personal expenses or vice versa, make sure you keep a record of such transfers. A small business CPA can help you categorize (loan, owner draw, paycheck, etc.) the transactions so that you don't run into problems with record keeping or tax liabilities. (See also: The 5 Biggest Mistakes Freelancers Make)

4. Neglecting retirement savings

The freelance life can be a roller-coaster ride of feast or famine, but it's still important to keep savings in the equation — especially retirement savings. Saving for retirement is not only critical for your golden years, but can also help you save on taxes.

When you put money away for retirement, it reduces the amount of your income tax withholding. Joanna Zarach is a consultant who helps freelancers plan for retirement. She says, "Solo retirement plans are the most effective way to lower your tax bill now and to build tax-free growth in your investment accounts."

There are different options to save for retirement. Some smart options include:

Individual 401(k): This type of account is ideal for solopreneurs who want higher contribution limits. You can save with pretax dollars while receiving tax deductions for employer contributions (you are the employer) as well.
SEP IRA: Tax-deductible contributions are made by the employer (in this case, you). Growth is tax-deferred until withdrawal.
ROTH IRA: With this type of retirement account, you save after-tax income that grows tax-free forever.

5. Neglecting health care contributions

Paul Jacobs is a CPA, EA, and officer at Palisades Hudson Financial Group. He says he often sees freelancers, "Forgetting to deduct health insurance premiums. A great tax break that is available to the self-employed is the ability to deduct this expense."

As a small-business owner, there are tax benefits when you pay insurance premiums for yourself and family members. Premiums for medical, dental and, in some cases, long-term health insurance qualify.

Reporting these premiums on your taxes can reduce your adjusted gross income (AGI) which can make you eligible for certain tax breaks. The only caveat here is that you may now have to itemize deductions in order to take advantage of this deduction come tax time due to the recent Tax Cuts and Jobs Acts of 2017.

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This article is from Aja McClanahan of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Worst Reasons to Buy a House

Dan Rafter — Wed, 31 Jan 2018 09:30:09 +0000

Each month you send a rent check to your landlord. Meanwhile, every homeowner you know insists that you're wasting that money. They say that you should buy a home and that owning is a smarter financial move.

But are they right? Not necessarily.

There are good reasons to buy a home: You get a place to call your own and raise your family. You get more space. You'll gain more — but not complete — control over your monthly housing payments.

This doesn't mean, though, that owning is always the better financial choice. In fact, there are many myths about homeownership that could persuade you to buy for the wrong reasons. Here are four of them.

1. Owning a home is a great investment

It might seem that purchasing a home, holding onto it for years, and then selling it for a profit is a great reason to buy. But the truth is, homes aren't good investments for most owners.

Robert Shiller, a Yale economist, has long studied the housing industry, and ranks as a true expert when it comes to real estate and economics. Speaking to The Motley Fool in 2014, Shiller unveiled the numbers proving that housing historically has not been a good investment.

Shiller found that from 1890 through 2012, home prices when adjusted for inflation did not grow one cent. Homeowners would have made significantly more money by investing in the stock market during this same time. Shiller reported that the value of the S&P 500 increased more than 2,000 times from 1890 through 2012. Shiller also found that from 1890 through 1980, the real value of home prices actually fell by about 10 percent.

Don't buy a home thinking that it's a smart financial investment. It's not. A home is a place to raise your family and retreat to at the end of a long day. It's not supposed to be a moneymaker. (See also: Stop Thinking of Your House as an Investment)

2. You're tired of throwing away your money on rent

Advocates of homeownership often tell you that you're throwing away your money every time you pay a rent check. What they don't say is that this doesn't change much after you buy a house — at least not initially.

Most of us take out a mortgage loan to finance the purchase of a house. The bank behind your mortgage will technically own most of your house after you close on it. And in the earlier years of owning a home, the vast majority of the money you send toward the bank goes toward paying off interest. Only a small amount of each monthly payment goes toward paying down the principal of your balance.

So, you're still throwing your money at someone with nothing concrete to show for it. You're just throwing it at your bank instead of your landlord. And if you don't hold onto your house long enough — say, more than seven years — you'll have paid far more in interest than in reducing your principal balance by the time you sell. (See also: Why I Choose to Rent Instead of Buy)

3. You can build equity

Earning equity is one of the most popular reasons for people to buy a home. Say you owe $150,000 on your mortgage and your home is worth $220,000. You now have $70,000 worth of equity. You can borrow against that in the form of a home-equity loan or home equity line of credit to pay for everything from a child's college education, to major home improvements, to reducing credit card debt. (See also: 4 Smartest Ways to Use a Home Equity Loan)

You earn equity in two ways: First, every time you make a payment, you are reducing your mortgage amount. Second, if your home increases in value, your equity will grow automatically.

The problem is that home values can fall, and building equity when that happens is a true challenge. Say after three years of owning your home, you've reduced your mortgage amount to $200,000. If home values have fallen since you purchased your residence and your home is now worth just $190,000, you don't have any equity. Instead, you are underwater — meaning that you owe more on your mortgage than what your home is worth. (See also: 6 Times It's Actually OK to Be Underwater on Your Home)

You can't control whether the value of your home falls or rises. Millions of homeowners discovered this in 2007 and 2008, when home values across the country plummeted. Many of the owners who bought in 2005 and 2006 still owe more on their mortgages than what their homes are worth. Building equity isn't a guarantee.

4. Owning a house comes with big rewards at tax time

Advocates of buying a home point to the deductions that owners can take come tax time: Owners can deduct the interest they pay on their mortgages, as well as their property taxes.

But these deductions are becoming less valuable to some people. First, the new tax reform law says that owners will only be able to deduct the interest on their mortgage loans up to $750,000, rather than the $1 million that it was previously. Federal tax reform will also limit the amount that taxpayers can deduct in state and local property and income taxes on their federal returns to a maximum of $10,000.

The biggest change, though, might be the new standard deduction. Taxpayers filing their federal returns can either itemize their deductions or take the standard deduction. Tax reform will boost the standard deduction from $6,350 to $12,000 for individuals. It will increase the standard deduction for couples filing jointly from $12,700 to $24,000.

There is no financial reason for taxpayers to itemize their deductions if they aren't greater than the standard deduction. As the standard deduction increases, a greater number of taxpayers will take it instead of itemizing. This means we'll see fewer homeowners taking advantage of the property tax and mortgage interest deductions.

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

12 Things You Should Know About the New Tax Law

Tim Lemke — Thu, 11 Jan 2018 09:30:06 +0000

The long-debated changes to America's tax code are now law. President Trump closed out 2017 by signing the Tax Cuts and Jobs Act, bringing sweeping changes to how much individuals and companies will pay in tax beginning this year.

What does the new tax law mean for you? Here are some key take-aways.

1. You'll probably pay less in taxes

There's been a lot of debate about who benefits the most from the new tax law, but what's clear is that just about everyone will see at least some decrease in how much they pay. At the very least, your personal tax bracket is likely lower. The new tax brackets are: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent. (They were previously 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent). A tax reform calculator can help you grasp how much tax you'll pay under the new law.

2. Corporations will pay less tax, too

The new tax law greatly simplifies and lowers taxes for companies. Corporations will now pay a flat rate of 21 percent on all profits, down from as much as 35 percent under the previous law. This brings the United States' corporate tax rate below the global average. The new law also eliminates the alternative minimum tax (AMT) for corporations.

3. You'll get more money back if you have kids

One of the final provisions added to the new tax bill was an increase in the child tax credit. This is a credit you receive if you have a dependent aged 17 or under. The credit was doubled, from $1,000 to $2,000 per child. The refundable portion of the credit was also increased to $1,400.

4. You can (probably) still deduct mortgage interest

Under the new tax law, the deduction for mortgage interest was capped at $750,000, but if you bought your house before December 15, 2017, it's still $1 million. So for most people, mortgage interest will still be deductible. It's important to note that this only applies to your primary residence; interest on vacation homes is not deductible. (The previous law allowed for a tax break on second homes.)

5. You can deduct property and local taxes, up to a point

There was some debate in Congress about whether property taxes, state taxes, and local taxes would be deductible, and they ultimately will be. However, these deductions will be capped at $10,000. This could mean higher taxes for those people living in certain places, such as California and New York. Some state and local lawmakers are exploring ways to offset that burden.

6. Many deductions are now gone

Under past tax law, you could deduct moving expenses from your taxes. You could deduct many work-related expenses that were not reimbursed from your employer. You could even deduct any costs you incurred when you did your taxes. These deductions and many others are gone. However, it is unclear whether taxpayers will feel the need to itemize deductions in the future anyway.

7. Itemizing may no longer make sense

As we indicated above, the new tax bill does allow for some itemized deductions, but it may not matter. That's because the standard deduction has been doubled, to $12,000 for single filers, $18,000 for heads of household, and $24,000 for married couples filing jointly. For many people — especially those who don't own homes — it may be hard to collect the amount of deductions to make itemizing worthwhile. The Joint Committee on Taxation said that 94 percent of taxpayers may now choose to take the standard deduction, up from 70 percent under the previous law.

8. There are no more personal exemptions

Under the previous tax law, the IRS allowed you to reduce your tax liability by claiming a personal exemption. This exemption was $4,050 during the last two years. The new tax law eliminates personal exemptions and instead significantly boosts the standard deduction ($12,000 for singles and $24,000 for married couples). For most people, this still will result in lower taxes.

9. Investment income will be treated roughly the same

There were some adjustments to how investment income is treated, but dividends and capital gains will generally be taxed as they were under the previous law. Long-term capital gains — investments held for more than a year — will still be taxed at 15 percent for most people and 20 percent for the highest earners. Short-term capital gains will still be taxed as normal income, though that means the taxation will be less, since income tax brackets are lower under the new law.

10. The "marriage penalty" is almost gone

Under the previous tax law, it was possible for people to be stung by higher taxes if they got married. That's because in some instances, a couple with similar incomes filing jointly would jump to a higher tax bracket. Under the new law, the thresholds for filing jointly are exactly double those for single filers, except for married couples earning more than $300,000.

11. The health care individual mandate may be eliminated

Under the Affordable Care Act, anyone who did not purchase health insurance was subject to a penalty of 2.5 percent of your income or $695, whichever was higher. That penalty will go away in 2019 under the new tax law.

12. None of the changes apply to 2017

It's important to know that when you file your tax return over the next few months, you won't be working with the new tax law. Any money you earned in 2017 is taxed under the previous tax structure. This is important to remember when claiming deductions and trying to figure out proper tax rates for your income. You won't have to worry about the 2018 tax law until you file your tax return in 2019.

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Don't Get Audited! How Your Side Gig Needs to Handle Taxes

Damian Davila — Thu, 26 Oct 2017 09:00:06 +0000

The gig economy is booming. In 2016, a TIME poll found that 45 million Americans offered some kind of good or service through an online platform, whether it was running errands, renting out their homes, or offering rides in their cars. With so many people earning extra income this way, you can bet that Uncle Sam wants its fair share of those earnings. Understanding some basic rules about taxes in the gig economy can help you avoid frustration and penalties.

Renting out your home

At $924 per month, Airbnb hosts command the highest average monthly income out of all others taking part in the sharing economy. Here are some key things to keep in mind if you rent your space. (See also: 13 Things I Learned From Renting Out My Home on Airbnb)

1. The 14-day rule

According to the IRS, if your rental property also serves as your residence, and you rent out the space for no more than 14 days during the year, you don't have to report those earnings as income. Note that you also cannot claim any deductions from rental expenses if you rent for fewer than 14 days per year.

Airbnb and similar companies will still report your earnings even if you're under the two-week threshold. But as long as you provide documentation that you meet the 14-day rule, you don't have to include rental income on your federal return. If you do have to report income, use Schedule C or E of Form 1040.

2. Deductible expenses

The IRS allows you to deduct a long list of applicable costs for your rental operation, including advertising, cleaning and maintenance services, utilities, property insurance, and property taxes. Check the rental section on IRS Publication 527 for a full list of eligible expenses.

You can deduct 100 percent of direct rental expenses such as fees to Airbnb and rental insurance, and allocate a portion of general expenses such as mortgage interest and utilities. If you only rent out a room that is one-sixth of the size of your home, you can only allocate one-sixth of a general expense.

3. Form 1099-K

When you earn over $20,000 and make over 200 transactions in a calendar year, Airbnb will issue you a Form 1099-K. Airbnb will mail you this form and keep an electronic copy under "Payout Preferences." This form is an IRS information return used to report certain payment transactions, which improves your voluntary tax compliance.

4. Pay attention to local occupancy taxes

On top of the IRS, you should also keep an eye on state and local government agencies. For example, throughout 2017 the House Finance Committee of Hawaii is evaluating an "Airbnb bill" to collect hotel room and general excise taxes from Hawaii-based short-term and vacation rentals.

5. Report rental losses

In the event that your rental operation goes sour, you can deduct losses up to applicable limits. Let's imagine that you own a $400,000 home and that you spent $400 to get a room ready for rental. However, nobody took you up on your offer. Per the IRS at-risk rule (for property placed in service after 1986), you can write off up to $400,000 in rental losses. So, you can deduct the $400 as a rental loss on your return.

Driving people in your car

Lyft and Uber drivers make an average $377 and $364 per month, respectively. Here are some tax-related pointers to keep in mind when declaring that income. (See also: How to Get a High Rating and Make More Money as an Uber Driver)

1. Keep track of all 1099s

Unlike a full-time employer, Uber and Lyft won't issue you a W-2. Instead, these and other ride-sharing companies issue two types of 1099 forms to most drivers.

Form 1099-K: Includes all payments that you received from customers directly related to driving.
Form 1099-MISC: Keeps track of all other non-driving income, such as payments for referrals and other types of bonuses.

While companies aren't required to issue a 1099-K unless you process 200 transactions or more (and make at least $20,000), and they're not required to issue a 1099-MISC unless you make at least $600, Uber and Lyft generally will issue those forms anyway just to remind you to report your income made through ride-sharing.

On Uber, access your tax documents by logging in to partners.uber.com and clicking "Tax Information." On Lyft, look for tax documents in the "Tax Info'" tab of the "Driver Dashboard" of your Lyft app.

2. Deduct applicable expenses

You'll quickly notice in Box 1a of your 1099-K that the reported amount is actually greater than what you received. The reason is that the reported amount in that box includes Uber's commission and other fees. On your Schedule C, Profit or Loss from Business (Form 1040), you can deduct those fees and other applicable expenses. Some examples are:

Bottled water and snacks for your passengers.
Business taxes and license costs.
Highway tolls.
Car cleaning expenses.
Car maintenance costs.
Gas.

It's a best practice to keep a copy of all receipts so that you can back up your claims. One great way to do so is to open a bank account or credit card and use it solely for driving-related expenses. That way, your monthly statement becomes your monthly expense report. (See also: When You Should Get a Business Credit Card Over a Consumer Card)

3. Include mileage in your return

Within your 1099s, you'll also receive a summary for "On-Trip" mileage. For all business miles driven in 2017, you can deduct 53.5 cents per mile. So, if you were to drive 2,000 miles, you would deduct $1,070 (2,000 x $0.535) on your return.

You may also deduct additional miles that Uber and Lyft didn't report as long as those miles are directly related to your gig. Some examples are miles that you drove before a ride was canceled or on your way to meet an Uber or Lyft inspector. Keep a detailed log of those miles and include date, time, initial mileage, and final mileage.

4. Consider getting a separate smartphone

An internet-enabled smartphone is a key part of your operation. To make it easier for the IRS to identify what mobile phone expenses are related to your driving, get a new phone and use it exclusively for Uber or Lyft. This way you'll be able to deduct 100 percent of all phone costs, including cost of the phone, monthly charges for voice and data, and any essential accessory (chargers or mounts) from your driving income.

Tips for all side giggers

Whatever your gig, be sure you're keeping up with your taxes.

1. Report all income

From assembling furniture through TaskRabbit to delivering business supplies with Postmates, there are plenty of other ways to make money through the sharing economy. (See also: 13 Ways to Make Money Online That Aren't Scams).

All companies have to issue you a 1099-MISC once you make $600. Even when you don't hit that threshold and don't receive a form, report the income on your return. The IRS charges a 25 percent inaccuracy penalty on top of applicable taxes and interest for late payments.

If you happen to complete additional tasks or services for a client that aren't tracked on an app or website, it's a good idea to still include them in your income. When you're making the bulk of your income through the gig economy, your federal tax return becomes a key document to prove how much you make per year. This can be useful when applying for a credit card or other form of credit.

2. Make estimated federal and state tax payments

Lessen the tax blow by submitting estimated tax payments throughout the year. Use Form 1040-ES, Estimated Tax for Individuals to submit tax payments up to four times per year. For tax year 2017, you can submit payments on April 18, June 15, September 15, and January 16, 2018.

Most states also allow side-giggers and freelancers to submit estimated tax payments. To learn more about your state tax obligations, contact your local state tax office.

3. Adjust withholding from your day job

Don't pay more taxes than you have to. If a full-time employer is already withholding taxes from your paycheck, use the IRS Withholding Calculator to adjust how much is taken out. It has been estimated that 75 percent of Americans pay too much in taxes throughout the year. The calculator will provide you suggestions to adjust your withholding so that you meet your tax liability and keep the most out of your day job paychecks.

4. Hire an accountant

Using Schedule C from Form 1040 is a great way to reduce your taxable income, but is also a way to increase your chances of receiving an audit from the IRS. Individuals using Schedule C are more likely than corporations to get an audit. If you're planning to include a very long list of deductions, paying a professional will be worth your while to hedge against a potential audit. You can deduct what your accountant charges you as a business expense, after all.

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This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The New Grad's Guide to Debt Management

Mikey Rox — Wed, 14 Jun 2017 08:31:16 +0000

According to Student Loan Hero, the average 2016 graduate left college with $37,172 in student loan debt. The class of 2017 will graduate owing roughly the same amount, if not more.

For many young adults, a student loan is the only option for obtaining a degree. The problem, however, is that it takes years to pay off these balances. Some graduates also have difficulty juggling student debt with their other expenses.

Luckily, student loan debt doesn't have to cripple a new grad's finances. Here are a few strategies to help graduates manage their debt and stay on track.

1. Get organized and prepared for that first bill

Student loan repayment typically begins six to nine months after graduating college. You'll likely receive information regarding your first payment in advance. If you haven't received this information yet, it doesn't hurt to contact your student loan lender to ask about your due date and minimum payment. Having this information early helps you prepare your budget ahead of time.

To stay organized and avoid late payments, set up automatic reminders a few days before your student loan payments are due. If you have multiple lenders, look into consolidating all your loans into a single loan. This way, you don't have to juggle multiple payments and due dates. If consolidation isn't an option, contact your lenders to see if you're allowed to change your due dates. It might be easier to manage student debt when due dates are within a few days of each other. (See also: What's the Difference Between Student Loan Refinancing and Consolidation?)

2. Sign up for autopay to stay on schedule

Signing up for autopay is one way to avoid missing a due date on your student loans, which can trigger a late fee or a negative mark on your credit report. With autopay, your student loan lender automatically drafts monthly payments from your checking or savings account on a specific day of the month. As a bonus, your lender may reduce your interest rate when you agree to automated payments. This results in paying less interest over the life of the loan.

Of course, the key to making this a successful solution is ensuring that there's always enough money in your checking account to cover the deductions — something you'll really need to stay on top of.

3. Request forbearance if you need more time

If you're scheduled to begin repaying your student loan, but you don't have enough income, don't ignore the bills. Student loan lenders — especially federal lenders — are flexible and offer assistance to students requiring financial help.

One provision is forbearance, which allows you to temporarily suspend student loan payments for a certain number of months. For example, request a one-month forbearance if you have a temporary hardship, or request a one-year forbearance if you experience longer financial troubles. Keep in mind that interest continues to accrue with forbearance, which can put you deeper in the hole. Only use this option as a last resort.

Deferment, on the other hand, is an income-based hardship provision. This option works the same as forbearance in that it suspends monthly payments without penalty. With a deferment, however, the federal government pays the interest that accrues during this period. (See also: 4 Things You Need to Know About Deferring Student Loans)

4. Deduct student loan interest

Student loan interest is a deductible expense, so remember to include this item when filing your income taxes. This is critical in cutting your tax liability, especially when you're already on a tight budget. Since it's an "above-the-line deduction," you don't have to itemize your tax return to take advantage of this write-off. You're allowed to write off up to $2,500 of student loan interest paid annually. This will reduce how much you owe in federal and state taxes. (See also: 4 Ways Student Loans Impact Your Taxes)

5. Hold off on other types of financing

After finishing college, you're likely ready to get your "adult" life started. This might include buying a new car and furnishing an apartment. But since you're fresh out of school with student loan debt, try to hold off on other types of financing — at least for now.

The more debt you acquire, the harder it might be to juggle student loan and other credit payments. If you can avoid a car loan and unnecessary credit card debt, the money you would have spent on these expenses can go toward paying down student loan debt.

6. Live at home

The financial decisions you make as a young adult can affect your life later on. Although your friends might move into their own apartments, buy new cars, and spend most of their money on fun stuff, consider the benefits of living at home after graduation. By doing so, there's an opportunity to put a major dent in your debt. I did it for two years immediately following college, and I wasn't even a little bit embarrassed about it; I've paid off two student loans as a result.

Whether you have credit card debt or student loan debt, minimizing your expenses now and prioritizing debt elimination sets the foundation for a strong financial future. Not only should you pay off debt, you should use this time to build a solid emergency fund. It'll be easier to save money and get ahead financially when you commit to living as cheaply as possible. (See also: 8 Surprising Ways to Pay Off Your Student Loans)

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7 Lessons From Tax Day to Remember for Next Year

Tim Lemke — Fri, 21 Apr 2017 08:00:10 +0000

Cue the sigh of relief: Another tax season has come and gone. Before you kick back and relax, though, take a little moment of self-reflection. Did Tax Day make your stress levels soar?

If the answer is yes, it's time to brush up on a few key lessons to take with you into the 2017 tax year. We guarantee you'll be breathing a little easier come next April.

1. Keep track of all your income

Specifically, don't forget about taxes you'll need to pay on any income you earn during the year outside of a full-time job. This includes money from freelance work or self-employment, dividends on investments, interest payments, and even gambling winnings. Be sure to track all of this income so that you're not surprised by a tax bill later.

2. Save all of your paperwork

Make sure you keep careful track of any forms and paperwork necessary to file your taxes. This includes your W-2 or any 1099s, as well as documents from banks, investment firms, and your mortgage company. These forms are usually sent out in February.

More immediately, if you make any contributions to charity, you'll need the documentation. If you own a small business, you'll need receipts for all expenses you plan to deduct. If you plan to seek deductions for any unreimbursed medical expenses, you'll need a bill from your health care provider. All of these are important in order to enter accurate information on your tax return. As you gather them throughout the year, set them aside in a file or box that you keep in a safe place.

3. Deductions and credits are your friends

A credit is a straight reduction in your tax bill. A deduction means you reduce the amount of your income that is taxable. Either way, these tax breaks should not be overlooked.

You can get a tax credit for having a kid. You can get a tax deduction if you pay interest on your mortgage. You can get a tax deduction for charitable donations. There are even deductions and credits for using energy-efficient appliances or driving a hybrid car. The list of possible deductions and tax credits is massive, and chances are, you qualify for at least a few. Most tax preparers and tax preparation programs will walk you through these deductions and credits to make sure you're getting the maximum benefit. If you haven't paid much attention to potential tax deductions or credits in the past, however, make sure you start this year. It could save you significant money.

4. Understand how tax-advantaged investment accounts differ

In addition to claiming tax credits and deductions, you can reduce your tax bill in advance simply by saving for retirement. If you use a 401(k), traditional IRA, or Roth IRA to build your nest egg, there are considerable tax advantages, and you need to understand the main differences.

With a 401(k) and traditional IRA, any money you contribute to your account throughout the year will be deducted from your taxable income now. In some cases, this could move you into a lower tax bracket and save you considerable money on this year's tax bill. With a Roth IRA, money you contribute is taxed now, but you will not have to pay taxes on any investment gains when you withdraw the money at retirement.

5. If you are getting a big return, that's not a good thing

Getting money back on your taxes is certainly better than owing so much to the IRS that you pay a penalty. But if you are getting a considerable amount back after filing your return, you may have had too much taken out of your paycheck and overpaid taxes throughout the year. So in a sense, the government has been holding onto your money interest-free for no reason when you could have been using it for yourself. To make sure this doesn't happen again, ask your employer for a new W-4 and increase the number of exemptions you claim.

6. If you make a mistake, you can amend your return

Tax time can be nerve wracking because people are petrified of making a mistake and having the IRS come after them. But the actual chances of the government knocking on your door are quite low. The IRS simply does not have the staff to audit many individuals, and when they do, they usually target either very wealthy people or people with very complicated tax returns.

If you do discover that you made a mistake, you can file an amended return without much hassle. Simply file Form 1040X, Amended Tax Return, along with the corrected (or missing) documents you did not originally file with your return. This happened to me once when I forgot to report some dividend income, and I never had the taxman knock on my door. (See also: The Easiest Way to Avoid a Tax Audit)

7. Use your taxes as a learning opportunity

Even with all these lessons under your belt, tax time can still be a tedious and stressful time of year. When all else fails, change your perspective. I personally find the process of doing taxes to be fairly educational. You can see a clear picture of how much money you actually took in during the year, and how much the government takes. The process of finding deductions can be a learning experience as well. If you approach doing your taxes with an attitude of curiosity, you may find the whole process to be less painful.

This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Here's How Your Taxes Will Change After You Start a Small Business

Dan Rafter — Mon, 10 Apr 2017 08:30:17 +0000

Starting a small business or taking on a side gig can do wonders for your household income. But that entrepreneurial spirit does come with at least one negative: Filing your income taxes will become much more complicated.

How will your taxes change after you start a small business or take on a side gig? Here are five key ways. Make sure you understand all of them before you start filing your income taxes.

1. Say hello to estimated payments

Starting a successful small business will introduce you to the world of quarterly estimated tax payments. As the name suggests, you make these payments four times during the tax year. It's a way for the federal and state governments to ensure that you won't owe them big dollars every April 15.

Business owners who file as sole proprietors, partners, and S-corporation shareholders must make estimated tax payments if they think they'll owe $1,000 or more for the given tax year. Generally, your estimated tax payments, made to both the federal government and your local state government, are due April 15, June 15, September 15, and January 15 of the following year. (These dates might change if they happen to fall on a weekend or holiday.)

How much you pay each quarter depends on how much money your business makes. The IRS says that calculating your estimated tax payments requires you to first determine your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.

It's all complicated. And even if you take your time calculating a quarterly figure, there's no guarantee that you'll pay enough each quarter so that you won't owe your state or the federal government tax money at the end of the year.

Your best bet is to hire an accountant or tax expert to work with you to determine the right amount of estimated taxes to pay each quarter. (See also: What Freelancers and Side Giggers Need to Know About Income Taxes)

2. Self-employment tax can be a big hit

When you work for an employer, that employer withholds 6.2 percent of your paycheck for Social Security, and 1.65 percent for Medicare. Your employer also matches these amounts, meaning that, in essence, 15.3 percent of your income each year goes into Social Security and Medicare taxes on 92.35 percent of your net earnings (but as an employee, your employer splits the cost with you).

If you are running your own business or side gig, you are responsible for paying the entire amount. Make sure that you prepare for this by setting aside 15.3 percent of your net revenue throughout the year. This is money that you don't include in your quarterly estimated payments. Instead, it's due in April when you file your income taxes.

If you don't set aside this money, you might be scrambling to come up with thousands of dollars to send to your state government and the federal IRS. (See also: The 5 Biggest Mistakes Freelancers Make)

3. You'll have to become a master at tax deductions

Not all of the tax changes that come with owning a business are bad. Consider tax deductions. In general, you can deduct the cost of anything that you use to run your business. If you buy a new computer for your business, you can deduct the cost of it. You can deduct the cost of office supplies and health insurance. You can even deduct part of the costs of travel and business meals, as long as these trips and dinners really were held for business-related matters.

If you run your business out of your home, you can also deduct home office expenses. This means that you can deduct a portion of your utility bills, for instance, depending on the square footage of your home office. Just be careful with home office deductions. You actually have to use your home office only as an office. Don't try to trick the government. If you get caught taking a larger deduction than you actually deserve, you could face heavy fines.

Be honest about your business deductions in general. Don't try to write off an expensive meal if you only spent two minutes during it bragging about the success of your business. That doesn't count as a business expense.

Remember, too, that deducting something doesn't make it free. It just means you'll be paying a bit less for it. If you spend, say, $1,000 on new office equipment, your deduction — depending on your tax bracket — means you might only pay $750 for it. Don't treat tax deductions as an excuse for overspending. (See also: 7 Surprising Tax Deductions You Might Miss)

4. Goodbye, 1040EZ

Before starting your own business, you might have filed your income taxes using the 1040EZ or 1040A tax forms. Once you are running your own business or side gig, your tax form will become more complicated.

Most people starting new businesses operate these enterprises as a sole proprietorship. When you are filing in this category, you'll have to file your taxes with form 1040 while also including either a Schedule C (Profit or Loss from Business) or Schedule C-EZ (Net Profit from Business).

If you are responsible for paying self-employment tax, you'll also have to include a Schedule SE.

5. You'll probably need tax help

Odds are high that you'll need help from an accountant or tax-prep firm when filing your income taxes as a business owner. Taxes simply get more complicated, and making a tax mistake can cost you big in the form of missed deductions or penalties.

Hiring an account or tax-preparation firm isn't free. But it's usually an important investment for business owners to make. (See also: 14 Reasons Why an Accountant Is Worth the Money)

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Here's How Your Taxes Will Change After You Have a Kid

Tim Lemke — Tue, 28 Mar 2017 09:30:33 +0000

There's no question that having a kid will change your life financially. Introducing a new child to your household adds a slew of new costs, but the good news is that the American tax code is written to help families with some of these expenses.

The IRS — yes, that benevolent organization — offers a variety of tax credits, deductions, and other incentives that could lead to a smaller tax bill when you have a child. But this also makes your taxes more complicated. So here's a review of what your new baby might mean as you file this year's return.

You get to claim an exemption just for having a kid

When you have a child, you can claim an exemption that will reduce your taxable income by $4,050. And for each child you have, you get to claim another exemption. (So four kids represents $16,200 deducted from your taxable income.)

You can also claim the child tax credit

Yes, you get an additional break on your taxes just by adding a member to your family. You can reduce your tax bill by $1,000 for every dependent in your household. This usually includes any family member 17 or under that lives with you, including adopted children, foster children, and even nieces and nephews if you are their primary caregiver. The benefit is reduced once you hit $110,000 gross income if filing jointly, or $75,000 if filing alone.

You can reduce your taxable income by saving for college

The second you have a child, you can begin saving for college and get some nice tax breaks for doing it. The most popular vehicle is called a 529 college savings plan, and many states allow you to deduct contributions from your taxable income. Gains on the investments in a 529 plan also are not taxed. (See also: The 9 Best State 529 College Savings Plans)

You may save money when you eventually send your child to school. As of 2016, it was possible to get a $2,000 Lifetime Learning Credit each year for qualified education expenses, or a $2,500 American Opportunity Credit. There are some subtle differences between the two credits, which you can learn more about at the IRS website.

You might take advantage of a health savings account

You and your partner might not worry about health care expenses, but they become more of an issue when you have kids. Many employers offer health savings accounts (HSAs), which allow you to divert some money into an account to pay for health care expenses you might accrue. Any money placed in an HSA is deducted from your taxable income. You may find it's worth contributing to an HSA if your child has health challenges, or if you have a health insurance plan with a high deductible. (See also: How an HSA Saves You Money)

You might save less for retirement — and thus pay more tax

Are you planning to dial back your retirement savings in order to meet the financial demands of a new child? If so, it's important to know how that impacts your tax bill. Any contributions you place in a 401(k) or traditional IRA are deducted from your taxable income, so if you are putting less aside, your tax bill may be higher. Ideally, you'll be able to save at the same rate as always, but if not, be sure to anticipate paying more in tax.

You may pay less tax if you stop working

Many families find that their gross income goes down after having a kid because one parent stops working full-time or altogether. Lower income means lower taxes, and you may even move into a lower tax bracket. (Moving from $80,000 to $60,000 in earned income, for example, means you pay 15 percent in tax instead of 25 percent when filing jointly.) This lower tax helps take the sting out of having less income overall, and in some cases, you may even end up with more take-home pay.

If you pay for child care, you might get a tax break

The IRS allows parents to save money on their taxes if they pay someone to care for their children. This is a great thing for working parents. The child and dependent tax credit offers up to $1,050 for one person receiving care, or $2,100 for two or more. Poorer families can get 35 percent back of any qualifying child care costs.

Many parents may save more on their taxes by instead utilizing a dependent care flexible savings account. If your employer offers such an account, you can set aside as much as $5,000 of your paycheck to cover child care costs. Contributions to this account are deducted from your taxable income, thus reducing your tax liability.

If you employ a nanny, your taxes could get complicated

In most cases like the situations above, there are tax breaks to help offset the cost of child care. But if you directly hire a nanny — as opposed to hiring one through an agency — you may be considered an employer in the eyes of the IRS. That means a boatload of paperwork, and you're on the hook for things like Social Security, unemployment, and Medicare taxes. So be sure to take all of this into account when researching child care options.

Expanding your home may have tax advantages

When you have a child, you may realize you need to expand your home with a new family room, bedrooms, or other space. The bad news here is that you can't claim the cost of home improvements on your taxes. But, any home upgrades will be added to the cost basis of your home. Thus, you may be able to reduce or even eliminate capital gains taxes when you sell.

If you do make upgrades, you can deduct the cost of things to make the home more energy-efficient, such as Energy Star rated windows and appliances.

Adopting a child comes with a big tax break

If you adopt a child, you get some significant tax breaks in addition to the ones listed above. The Federal Adoption Tax Credit gives families a maximum of $13,460 to offset qualified adoption expenses. This can include adoption fees, court fees, travel costs, and attorney fees, among other costs. Parents who adopt a child may also receive additional tax credits from their state.

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Here's How Your Taxes Will Change After Marriage

Dan Rafter — Wed, 01 Mar 2017 10:00:18 +0000

Life tends to get more complicated after marriage. And your taxes are no exception.

Getting married will change the way you file your taxes every April 15. There is good news, though: Many of the changes will be positive ones that can help boost your deductions and save you money.

Let's look at five of the biggest tax changes you'll face after the wedding bells stop ringing.

1. Filing Jointly vs. Separately

Once married, couples have to face a big tax decision: Should they file their taxes jointly or separately? In most cases, married couples who file their taxes jointly save more money. But there can be exceptions.

Couples who file their taxes jointly in 2017 will qualify for a standard deduction of $12,700. When married couples file separately, they each can claim a standard deduction of $6,350. Note that if your spouse chooses to instead itemize their deductions, you will have to as well.

Filing jointly makes especially good financial sense for married couples in which one person earns significantly more than the other. The averaging effect of combining two incomes can bring these couples out of higher tax brackets.

When couples file jointly, they might also qualify for several tax credits and deductions that they wouldn't otherwise get if filing separately. This could include the earned income tax credit, child and dependent care tax credit, American Opportunity Act education credit, and the Lifetime Learning education tax credit. Couples who have adopted might also qualify for adoption tax credits when they file jointly. You also will not be allowed to deduct student loan interest if you and your spouse opt to file separately.

This doesn't mean that filing jointly is always the right decision for married couples. Say one spouse has significant medical expenses, casualty losses, or miscellaneous itemized deductions. Taxpayers can deduct medical expenses and casualty losses only after they pass 10% of their adjusted gross income for the year. That milestone can be easier to reach when couples file separate tax returns.

Taxpayers can deduct miscellaneous itemized deductions after they exceed 2% of their adjusted gross income. If one spouse has a significant amount of these deductions, it might make financial sense for this taxpayer to file separately because the spouse will be able to claim a greater percentage of these deductions.

2. You Might Be on the Hook for Your Spouse's Filing Mistakes

Before you got married, you were responsible for the information you provided on your own tax return. If you are married and filing your taxes jointly, you are now also responsible for any information your spouse provides on his or her tax return.

This means that if your spouse provides incorrect information on deductions, charitable contributions, or income, you could also face financial penalties from the IRS. If you suspect your spouse may have been dishonest with their tax returns, intentionally or not, you may choose to protect yourself by filing separately. This will ensure you're only responsible for your own tax liabilities.

3. It's Easier to Protect Your Estate From Taxes

You might be worried that too much of your estate will be gobbled up by taxes after you die. Being married should ease these concerns. Federal laws state that you can leave any amount of money to your spouse after you die without generating estate taxes. This makes it far easier to protect the financial assets that you want to leave behind.

4. Your Tax Bracket Might Change

The rate at which your income is taxed depends on the amount of money you made during the most recent year. Filing your taxes jointly might change your tax bracket.

In 2017, married couples filing jointly who earned $18,650 to $75,900 in the previous year will fall into the 15% tax rate. This means this couple would pay $1,865 in taxes plus 15% of any money they earned over $18,650. Married couples filing jointly who earned $75,900 to $153,100 would fall into the 25% tax rate. They would pay $10,452.50 in taxes plus 25% of any dollars they earned over $75,900.

The rates go up from there. It's important to note that depending on your spouse's earnings, your tax rate might rise or fall after you get married if you decide to file jointly.

5. If You Bought a Home, You Could Enjoy Major Deductions

Owning a home comes with an important tax deduction: the home mortgage interest deduction. This deduction allows homeowners to deduct the interest they pay on their mortgage loan throughout the year. This deduction can be especially valuable during the years in which you first own your home, as a large amount of your monthly mortgage payment will be made up of interest. You can also deduct the property taxes that you pay on your home each year, as well as any mortgage points.

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

10 Surprising Ways Real Estate Cuts Your Taxes

Damian Davila — Fri, 24 Feb 2017 10:00:13 +0000

Once you own property, you may be eligible for a long list of tax breaks, whether you use it as your primary home, for rental income, or sell it for profit. Let's run through familiar benefits, such as the mortgage interest deduction, and also the various (stunning!) tax breaks real estate investors, landlords, and homeowners enjoy.

1. Mortgage Interest

This is the most familiar of all deductions and one of the very few times that you can use the interest that you're paying to reduce your tax bill. Besides deducting mortgage interest that you're paying for the purchase of your primary residence, you can also deduct mortgage interest from a second mortgage or a home equity line of credit (HELOC).

You can deduct up to $500,000 ($1 million if married filing jointly) in all mortgage interest used to buy, construct, or make substantial improvements in your first home (and second, if applicable). You can't, however, deduct any mortgage interest for purchases on a third home and so on. You can also deduct up to $50,000 ($100,000 if married filing jointly) from all home equity debt for reasons other than to buy, build, or substantially improve your first or second home.

2. Mortgage Interest Credit

Recipients of a mortgage credit certificate (MCC) by a state or local government under a qualified mortgage credit certificate program could be eligible for a federal income tax credit of up to 20% of their annual mortgage interest. Figure this credit on Form 8396. The best part is that the remaining 80% of your mortgage interest is still eligible as a deduction!

3. Points

Charges paid by a borrower to secure a mortgage (also known as origination fees, maximum loan charges, or discount points) can generally be deducted. However, if you were to pay points to refinance an existing mortgage, you would amortize the points over the life of the mortgage. When you refinance a loan, your lender will send you a Form 1098 listing the points that you paid, but in the event that they don't, look for your points in your HUD-1 settlement sheet.

Page 6 of IRS Publication, 936 Home Mortgage Interest Deduction provides a useful diagram to determine whether or not your points are fully deductible for this year.

4. Real Estate Taxes

You can deduct real estate taxes, including state, local, or foreign, you paid on real estate you own that wasn't used for business. Tally only taxes paid to government institutions and don't include itemized tax charges for services to specific property or people, such as a gardener or trash collection service. If you were to sell your property and receive a refund or rebate of real estate taxes, you would reduce your deduction by the amount of the refund or rebate.

5. Mortgage Insurance Premiums

You can deduct eligible mortgage insurance premiums provided by government authorities, including the Department of Veterans Affairs, the Federal Housing Administration, and the Rural Housing Service, as well as private mortgage insurance (PMI) issuers on loans issued after December 31, 2006. (See also: What Is Private Mortgage Insurance, Anyway?)

In 2017, you can't deduct your mortgage insurance premiums if your adjusted gross income is more than $54,500 ($109,000 if married filing jointly). If your adjusted gross income falls between $50,000 and $54,500 ($100,000 and $109,000 if married filing jointly), your deduction is limited and you must use the Mortgage Insurance Premiums Deduction Worksheet to figure your deduction.

6. Capital Gains Exemption

Eventually, you may sell your real home. Depending on several factors, such as years of ownership, substantial improvements, and neighborhood developments, your home may have appreciated by several thousands of dollars. To lessen the tax hit on taxable capital gains from the sale of your property, the IRS may exempt up to $250,000 ($500,00 if married filing jointly) of that gain from your income.

In general, you qualify for a capital gains exemption as long as you have owned and used your home as your main home for a period aggregating at least two years out of the five years before its date of sale. Consult Publication 523, Selling Your Home for more details. The beauty of this tax break is that there is no restriction as to how many times you can use it!

7. Investment Interest

Real estate investors also get a tax break on interest paid on money they borrowed that is allocable to property held for investment. Such investors need to use Form 4952 to figure out their investment interest expense deduction.

Despite its name, this investment interest deduction doesn't cover interest gained from passive-income activities or securities that generate tax-exempt income.

8. Expenses for Business Use of Homes

Freelancers, independent contractors, and small business owners can deduct expenses for business use of their homes. With Form 8829, you can claim the area used regularly and exclusively for business to allocate a deductible portion from a wide range of expenses, including utilities and depreciation.

If your deductions for home business are greater than the current year's limit, you can carry over the excess to 2017! This carry-over will be subject to the deduction limit for that year, whether or not you live in the same home during that year.

9. Tax Credits for "Green" Improvements

To encourage more energy efficient home improvements, the IRS provides tax credits for qualifying expenses. Here are two examples:

Windows, doors, and skylights that met the ENERGY STAR program requirements and were installed between January 1, 2012 and December 31, 2016 at the homeowner's primary residence may grant you up to $500 in energy efficiency tax credits.
Solar energy systems provide a tax credit of 30% of cost with no upper limit through December 31, 2019. The credit will decrease to 26% in 2020, drop to 22% in 2021, and goes away in 2022.

To learn about other tax credit opportunities from energy efficient home improvements, visit EnergyStar.gov.

10. Deductions From Rental Income Activities

Rental real estate provides several tax breaks to landlords. For example, landlords could potentially deduct:

Local transportation expenses to collect rental income or to manage, conserve, or maintain rental property;
Expenses for managing, conserving, or maintaining rental property from the time it was made available for rent;
Depreciation expenses for the wear and tear of rental property;
Local benefit taxes for maintaining, repairing, or paying interest charges for the benefits;
Legal and professional fees directly related to operating expenses; and
Prepaid insurance premiums.

To learn the full list of rental expenses and guidelines for deduction, consult Publication 527, Residential Rental Property. If you use some of your rental properties for personal purposes throughout the year, then you should hire a tax pro to appropriately deduct expenses for rental income. Hiring an accountant to report income from your rental activities is itself an eligible deduction, after all! (See also: 4 Times You Should Splurge and Hire a Pro)

This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The 7 Most Common Tax Questions for Beginners, Answered

Carrie Kirby — Fri, 17 Feb 2017 10:00:18 +0000

It's tax season: That joyous time when you look back on what you earned last year and figure out whether you gave enough of it to Uncle Sam. Think of it as Christmas for the government.

If you're new to filing a tax return, the process can seem daunting. The forms have cryptic names. Making a mistake can have serious consequences, whether it's inadvertently paying too much, or paying too little and getting audited. A quick lesson in the basics of filing a tax return might help.

Before we begin, a reminder: I'm not an accountant. If you have a question about your individual tax situation that you can't answer by consulting the Internal Revenue Service, ask a professional. (See also: 6 Great Places to Get Free Tax Advice)

1. Do I Have to File a Tax Return?

You may be surprised to learn that not all adults are required to fill out a federal tax form every year. According to the Internal Revenue Service, you could be off the hook if you earned less than $10,000, or if certain other criteria were met. However, you may still want to file, because you could qualify for a tax credit that puts money back in your pocket. (More on that below.)

2. Do I Need to Hire an Accountant to File?

No. If your tax situation is simple — for instance, if all your income comes from your full-time job and your earnings are modest — your filing process should be straightforward. Of course, hiring an accountant could save you time. The IRS estimates that the "short form," 1040A, takes about 10 hours to file.

If you want to do your own taxes but are worried you'll make a mistake, using a tax prep website can be a good compromise. TurboTax, H&R Block, and TaxAct all offer free versions for simple returns. If your taxes are a bit more complicated — for instance, if you want to search for possible deductions — you can get both state and federal taxes filed through these sites for between $40 and $100. (See also: 8 Ways to File Your Taxes for Free)

3. Where Do I Find Tax Forms?

If you file online, you don't need to locate forms — any of the websites mentioned above will ask you questions and then submit your return online. But if you want to take pencil to paper, you can print out tax forms from the IRS website or pick them up, along with instruction booklets, at a public library or post office.

4. What Money Do I Have to Pay Taxes On?

You have to pay taxes on almost any money you make, whether it's from working, selling something, or even finding buried treasure. That said, there are plenty of exceptions, such as most gifts, compensation for injuries, proceeds from selling your home (within limits), and investment gains inside certain retirement accounts (you'll pay taxes on the gains inside your IRA eventually, but not now).

Getting paid in cash, making money doing something illegal, or working without documentation do not exempt you from paying taxes on the money you make.

5. Will I Get a Refund?

Most employers take money out of your check week after week, all year. Because no one knows exactly how much you're going to owe the IRS until the year ends, this withholding is merely an estimate. Once you work out your taxes, it may happen that the money taken out of your check every week turned out to be too much. If that happens, the IRS will refund the difference.

On the other hand, if it turns out that the money withheld was less than your tax liability, you will have to send the IRS a check.

Just because you got a refund last year doesn't mean you'll get one this year. Things change; for instance, if you made more money this year, you might have moved to a higher tax bracket, causing you to owe more.

Moreover, getting a huge tax refund isn't necessarily a great thing. While receiving a fat check is always fun, what this really means is that you gave the government an interest-free loan all year. If you get a large refund this year, you should look into having the amount taken out of each paycheck reduced so that it doesn't happen again next year.

6. What's the Difference Between a Deduction, an Exemption, and a Credit?

All three are ways the tax code allows you to reduce the tax you owe.

For the average taxpayer, an exemption and a deduction are practically the same thing: They both reduce the amount of your income that counts toward your taxable total. The most well-known exemption is for your children: For 2016, everyone gets to subtract $4,050 from their income for a dependent child living in the home.

We get tax deductions for charitable donations we make, mortgage interest, and for some work-related expenses, among many other things. For example, if you earned $50,000 this year, donated $2,000, and spent $1,000 looking for work, your taxable income would be $47,000 (minus any other exemptions and deductions you have).

Tax credits are subtracted directly from your tax bill, not your income. For instance, if your tax bill for the year is $5,000, but you can claim a $4,000 tax credit, you only have to pay $1,000.

One of the most important tax credits to know about is the earned income tax credit, a benefit for working people with low-to-moderate income. Qualifying families can receive between $3,373 and $6,269, depending on their number of qualifying children (or $506 for no qualifying children). The best part is, if your credit is more than you owe on taxes, you'll get the balance back as a "refund."

For instance, say you and your spouse owed $5,000 in taxes in 2016, but you qualified for the maximum credit of $6,269. The IRS would send you a refund check for $1,269 — plus any taxes that had been withheld from your paychecks. This is why it may be a very good idea to file a tax return even if you didn't earn enough for it to be required.

7. What If I File Late?

If you're not going to be able to submit your tax return and any tax owed by the deadline (in 2017, it's April 18), you should at least file for an extension by that date. If you were expecting a refund, being late on submitting your forms isn't a big deal. But if you end up owing a payment, the IRS will charge late fees every month — so don't delay.

Of course, it's never too late to pay money you owe to the IRS. If you failed to file or to pay what you owed in past years, you can file a "back tax return" now. If less than three years have gone by, you can even claim refunds for past years.

This article is from Carrie Kirby of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Common Tax Mistakes We Need to Stop Making

Damian Davila — Wed, 18 Jan 2017 10:00:14 +0000

In an ongoing effort to prevent tax fraud and collect the right amount of money, the IRS audits close to 1% of all returns. If being audited by the IRS isn't nerve racking enough, about 30% of audits are made in person, adding extra pressure. So, let's start 2017 on the right foot and review five ways to protect yourself from an audit.

1. Declare at Least $1 in Gross Income

Depending on your unique financial situation, you may not have gained any money throughout the year. However, declaring no adjusted gross income increases your probability of getting audited by more than fivefold! In 2014, the IRS audited 5.26% of all returns with no adjusted gross income. On the other hand, the IRS only audited 0.93% of returns declaring $1 to $24,999 in the same year.

So, find a way to get some income and dramatically lower your chances of an audit!

2. Use an Accountant When Making Over $200,000

According to 2014 and 2015 IRS audit data, returns with gross incomes between $25,000 and $199,999 have the lowest range of probability of an audit.

Like a Las Vegas casino, the IRS is currently chasing the "whales" — individuals with a high net worth. In 2014, 1.75% of returns with an unadjusted gross income of $200,000 to $499,999, and, get this — a whopping 10.53% of those with an adjusted gross income of $5 to $10 million, were audited. It seems that there's some truth to "more money, more problems." So, if you're making a gross income of $200,000 or higher, hedge against the higher chances of potential IRS audit by using the services of an accountant. (See also: 4 Times You Should Splurge and Hire a Pro)

3. Include Income From All W-2s and 1099s

The IRS gets a copy of every single W-2 and 1099 form that you receive. So, forgetting to include the income reported on those forms to calculate your tax obligation or refund may result in an audit.

While it's generally easy to trace back your W-2s, keep in mind that there are different types of 1099 forms, including:

1099-C: Cancellation of Debt, which is sometimes a taxable event;
1099-DIV: Dividend and Distribution Income;
1099-H: Health Coverage Tax Credit (HCTC) advance payments;
1099-INT: Interest Income;
1099-MISC: Miscellaneous Income, which are payments to independent contractors; and
SSA-1099: Social Security Benefit Statement.

You will receive an applicable 1099 form after reaching certain thresholds. For example, you will receive a 1099-MISC when you received at least $600 in payment for your services as a freelancer or independent contractor. On the other hand, you only need to make at least $10 in interest income to receive a 1099-INT. Regardless of whether or not an organization issues you a 1099, include the taxable income in your return.

If you haven't received a 1099 by January 31st, the IRS recommends contacting the issuing organization or the IRS directly at 1-800-829-1040 to request a substitute form.

4. Use Schedule C Correctly

The Schedule C is a form in which sole proprietorships provide details on their calculations of net profit or loss. When used properly, Schedule C allows freelancers, independent contractors, and small business owners to effectively deduct businesses expenses, including expenses for business use of a home (Form 8829).

Taxpayers using Schedule C frequently make intentional or unintentional errors on this form. And the IRS has noted that it can get a better bang for its auditing buck in inspecting the returns of sole proprietorships. The result: Roughly 3% of small businesses under Schedule C get audited, compared to just 1% of corporations. The IRS pays close attention to businesses with large net losses and cash-intensive activities, such as car washes and food vendors.

Make sure that you have supporting documentation, such as receipts, statements of personal and business bank accounts, and inventory count sheets for all the numbers that you include in Schedule C. For example, if you have an advertising expense, keep the bill or receipt as proof of that expense. If the IRS were to have reasonable doubt that your numbers are accurate, the agency would send you a Form 4564, Information Document Request. Be proactive, review this sample Form 4564 from the IRS, and make sure to keep the type of records that the IRS would ask from you in case of an audit due to a Schedule C.

In the end, a taxpayer using Schedule C could benefit from using a professional tax preparer. They can also deduct that expense in their Schedule C, after all.

5. Automate Calculations

Completing your tax return by hand increases your odds of making math errors, miscalculating work sheets, and misreading tables. Just in 2015, the IRS sent out 1,679,367 math error notices to taxpayers for a total of 2,177,802 math errors!

To decrease your chance of computational errors, incorrectly transcribed values, and omitted entries, consider hiring a pro that will double check all the work for you or using a tax preparation software that will do all the calculations for you.

The Bottom Line: Prevent That Audit!

Better safe than sorry. If the IRS notifies you of an audit by phone or mail (no emails!), you are most likely to either have to pay extra or experience no change. In 2015, only 3.33% of examined individual income tax returns resulted in additional refunds to the taxpayer. Take action and use these five ways to prevent common tax mistakes that increase your chances of an IRS audit.

This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: