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Archive | Tax Time

Tips for parents who share custody or alternate tax benefits

Some parents who have a legal agreement with their child’s other parent about who claims the child on their taxes may have some questions this tax season about the child tax credit and the 2021 recovery rebate credit. Here’s what people in this situation need to know before filing their 2021 federal tax return.

Economic Impact Payments and the Recovery Rebate Credit

The third Economic Impact Payment was an advance payment of the 2021 recovery rebate credit. The IRS used taxpayers’ 2020 or 2019 tax information to determine eligibility and amounts. Here’s what this means for people who share a qualifying dependent:

  • If an eligible taxpayer did not receive a third-round Economic Impact Payment for a qualifying dependent they will claim on their 2021 tax return, they can claim the 2021 recovery rebate credit, regardless of any Economic Impact Payment the other parent received.
  • If a taxpayer received a third-round Economic Impact Payment for a dependent they won’t claim on their 2021 tax return, they are not required to pay back all or part of the Economic Impact Payment if, based on the information reported on their 2021 tax returns, they should have received less.

Child Tax Credit

The IRS determined who received 2021 advance child tax credit payments based on the information on taxpayers’ 2020 tax returns, or their 2019 return if the IRS hadn’t processed the 2020 return. In other words, the parent who claimed the Child Tax Credit for a qualifying child on their 2020 return would have received the advance child tax credit payments in 2021. Here’s what that means for these parents:

  • Families who knew they would not claim a child on their 2021 return had the option to unenroll from receiving monthly payments by using the Child Tax Credit Update Portal at IRS.gov. People who did not unenroll and received monthly payments during 2021 for a child they won’t claim on their 2021 tax return could have to repay those payments when they file. They may be excused from repaying some or all of the excess amount if they qualify for repayment protection.
  • An eligible parent who did not receive advance payments for a qualifying child will be able to claim the full amount of the child tax credit for that child on a 2021 tax return even if the other parent received advance child tax credit payments.

Get the correct information to file an accurate return

Taxpayers who received these advance credits in 2021 need to compare the total amount they received with the amount they’re eligible to claim. Individuals can view the total amount of their payments through their individual Online Account. If spouses received joint payments, each of them will need to sign into their own account to retrieve their separate amounts.

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Taxpayers can start the 2022 tax year off right by checking their withholding

One way people can get the new tax year off to a good start is by checking their federal income tax withholding. They can do this using the Tax Withholding Estimator on IRS.gov.

This online tool helps employees avoid having too much or too little tax withheld from their wages. It also helps self-employed people, who have wage income, estimate tax payments that they should make to avoid unexpected results at tax time. Having too little withheld can result in a tax bill or even a penalty at tax time. Having too much withheld results in less money in their pocket. The estimator can help them get to a balance of zero or a desired refund amount.

Taxpayers can use the results from the Tax Withholding Estimator to determine if they should:

  • Complete a new Form W-4, Employee’s Withholding Allowance Certificate and submit it to their employer.
  • Make an additional or estimated tax payment to the IRS.

The Tax Withholding Estimator asks taxpayers to estimate:

  • Their 2022 income.
  • The number of children they will claim for the child tax credit and earned income tax credit.
  • Other items that will affect their 2022 tax return when they file in 2023.

The Tax Withholding Estimator does not ask for personally identifiable information, such as a name, Social Security number, address, and bank account numbers. The IRS doesn’t save or record the information entered in the Estimator.

Before using the Estimator, it can be helpful for taxpayers to gather applicable income documents including:

  • Their pay stubs
  • Forms W-2 from employers to estimate their annual income
  • Forms 1099 from banks, issuing agencies and other payers including unemployment compensation, dividends, distributions from a pension, annuity or retirement plan
  • Form 1099-K, 1099-MISC, W-2 or other income statement for workers in the gig economy
  • Form 1099-INT for interest received
  • Other income documents and records of virtual currency transactions

These documents are not needed to use the estimator but having them handy will help taxpayers estimate 2022 income and answer other questions asked during the process.

The Tax Withholding Estimator results will only be as accurate as the information entered by the taxpayer. People with only pension income should not use the Estimator. Those with wage income can account for current or future pension income. People with more complex tax situations should use the instructions in Publication 505, Tax Withholding and Estimated Tax. This includes taxpayers who owe alternative minimum tax or certain other taxes, and people with long-term capital gains or qualified dividends.

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Taxpayers must report tip money as income on their tax return

Tax Tip 2022-23

From the IRS

For those working in the service industry, tips are often a vital part of their income. Like most forms of income, tips are taxable. Therefore, it’s also vital that people understand the tax obligations that come with tip income. Here’s some information to help taxpayers report tip income so they don’t receive a surprise tax bill.

Taxpayers must include all tips they receive in their gross income. This includes:

  • Tips directly from customers.
  • Tips added using credit, debit or gift cards.
  • Tips from a tip-splitting arrangement with other employees.

The value of non-cash tips, such as tickets, passes or other items of value is also income and subject to tax.

Three things can help taxpayers to correctly report their tip income.

  • Keep a daily tip record.
  • Report tips to their employer.
  • Report all tips on their income tax return.

Use the Interactive Tax Assistant
This online tool provides answers to tax law questions. Taxpayers can use the Interactive Tax Assistant on IRS.gov to find out if their tip income is taxable.

What employers need to know
If an employee receives $20 or more in any month, they must report their tips for that month to their employer by the 10th day of the next month. The employer must withhold federal income, Social Security and Medicare taxes on the reported tips.

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Workers in your home and Social Security taxes

By Vonda Van Til, Social Security Public Affairs Specialist 

Do you plan to pay a cleaning person, cook, gardener, babysitter, or other household worker at least $2,400 in 2022?  If you will pay at least $2,400 to one person during the year, which may include transportation, meals, and housing, you have additional financial responsibilities to consider.  

When you pay at least $2,400 in wages to a household worker, you must do all of the following: 

  • • Deduct Social Security and Medicare taxes from those wages. 
  • • Pay these taxes to the Internal Revenue Service. 
  • • Report the wages to Social Security. 

Accurate reporting is important as employees earn credits toward Social Security benefits and Medicare coverage.  You can currently earn Social Security or Medicare credit for every $1,510 in wages that are reported.  Generally, people need 10 years of work to qualify for: 

  • • Retirement benefits (as early as age 62). 
  • • Disability benefits for the worker and the worker’s dependents. 
  • • Survivors benefits for the worker’s family. 
  • • Medicare benefits. 

You can learn more about reporting household worker income by reading Household Workers www.ssa.gov/pubs/EN-05-10021.pdf

Vonda Van Til is the Public Affairs Specialist for West Michigan.  You can write her c/o Social Security Administration, 3045 Knapp NE, Grand Rapids MI 49525 or via email at vonda.vantil@ssa.gov.  

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Tax Time Guide: American Rescue Plan changes can boost refunds for many families

People should file even if they haven’t for years

WASHINGTON–The Internal Revenue Service today urged Americans to file a 2021 federal income tax return so they can take advantage of key tax benefits included in the American Rescue Plan and other recent legislation.

Often, individuals and families can get these expanded tax benefits, even if they have little or no income from a job, business or other source. This means that many people who don’t normally need to file a return should consider doing so this year. Because claiming these benefits could result in tax refunds for many people, individuals should file an accurate return electronically and choose direct deposit to avoid processing delays and speed delivery of their refund.

Expanded tax benefits

A new fact sheet, FS-2022-10, available now on IRS.gov, describes many of these expanded tax benefits. But the IRS emphasized that these benefits are only available to people who file a 2021 federal income tax return. Benefits include:

An expanded Child Tax Credit: Families can claim this credit, even if they received monthly advance payments during the last half of 2021.

An increased Child and Dependent Care Credit: Families who pay for daycare so they can work or look for work can get a tax credit worth up to $4,000 for one qualifying person and $8,000 for two or more qualifying persons.

A more generous Earned Income Tax Credit: The American Rescue Plan boosted the EITC for childless workers. There are also changes that can help low- and moderate-income families with children.

The Recovery Rebate Credit: Those who missed out on last year’s third-round of Economic Impact Payments (EIP3), also known as stimulus payments, may be eligible to claim the RRC. This credit can also help eligible people whose EIP3 was less than the full amount, including those who welcomed a child in 2021.

A deduction for gifts to charity: The majority of taxpayers who take the standard deduction can deduct eligible cash contributions they made during 2021. Married couples filing jointly can deduct up to $600 in cash donations and individual taxpayers can deduct up to $300 in donations. In addition, itemizers who make large cash donations often qualify to deduct the full amount in 2021.

See the fact sheet for more information.

The IRS reminds early filers that by law, the agency cannot issue EITC refunds before mid-February. The same rule applies to refunds that include the Additional Child Tax Credit (ACTC). This year, the ACTC is typically claimed by Americans abroad who did not have a main home in the United States for more than half of 2021. Normally, the mid-February restriction does not apply to the Refundable Child Tax Credit (RCTC) claimed by people who had a main home in the U.S., unless they also claim the EITC.

Helpful reminders

The IRS urges everyone to make sure they have all their year-end statements in hand before filing their 2021 return. Besides all W-2s and 1099s, this includes two statements issued by the IRS — Letter 6419, showing their total advance Child Tax Credit payments, and Letter 6475, showing their total EIP3 payments. Individuals can also use IRS Online Account to see the total amounts of their third round of Economic Impact Payments or advance Child Tax Credit payments. Married spouses who received joint payments will each need to sign into their own account to retrieve their separate amounts.

For most Americans, the tax-filing deadline is April 18, 2022. For residents of Maine and Massachusetts, the deadline is April 19, 2022. For Americans who live and work abroad, it’s June 15, 2022. Anyone who needs more time to file can get an automatic extension until Oct. 17, 2022.

Taxpayers can find answers to questions, forms and instructions and easy-to-use tools online at IRS.gov. They can use these resources to get help when it’s needed at home, at work or on the go.

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Tax Time Guide: Important considerations before filing a 2021 tax return

WASHINGTON—Now that the 2022 tax season is open, the Internal Revenue Service reminds taxpayers to make sure they’ve got what they need before they file and to consider free resources available to help them get organized.

This news release is part of a series called the Tax Time Guide, a resource to help taxpayers file an accurate tax return. Additional help is available at IRS.gov or in Publication 17, Your Federal Income Tax.

Don’t file before ready

While taxpayers should not file late, they also should not file prematurely. People who file before they receive all the proper tax reporting documents risk making a mistake that may lead to processing delays.

Typically, year-end forms start arriving by mail or are available online in January. Taxpayers should review them carefully. If any of the information shown is inaccurate or not available, taxpayers should contact the payer right away for a correction or to ensure they have their current mailing or email address.

New this year, the IRS sent Letter 6419, Advance Child Tax Credit Reconciliation, in January 2022 to help individuals reconcile and receive the full amount of their 2021 Child Tax Credit. This letter includes the total amount of the 2021 advance Child Tax Credit payments issued and the number of qualifying children used to calculate their advance payments. People need this important information to accurately claim the other half of the 2021 Child Tax Credit when filing their 2021 tax return and prevent delays in processing. The IRS reminds people to check this information carefully.

Most eligible people were already issued their third Economic Impact Payment and won’t include any information about it when they file. However, people who didn’t qualify for a third payment or did not receive the full amount may be eligible for the 2021 Recovery Rebate Credit based on their 2021 tax situation. They will need the total amount of their third Economic Impact Payment to file an accurate tax return to avoid a processing delay. Taxpayers can sign into their IRS Online Account to view the total amount of the third-round Economic Impact Payment or wait to receive IRS Letter 6475.

Individuals not required to file must file a tax return to claim important tax credits

The IRS strongly encourages individuals who are not required to file a tax return to file one this season to claim potentially thousands of dollars in tax credits. By filing a tax return, individuals could claim:

  • The Recovery Rebate Credit to receive any remaining 2021 stimulus payments that they might not have received (for example, if they added a new child or other dependent in 2021);
  • The remaining Child Tax Credit for which they are eligible, including any monthly payments that they might not have received (for example, if they added a new qualifying child in 2021); and
  • The Earned Income Tax Credit, the federal government’s largest refundable tax credit for low- to moderate-income families (the amount of which has been nearly tripled for filers without children).

View IRS account information online

Individuals can use their IRS Online Account to securely access information about their federal tax account, including payments, tax records and more.

To help with filing a return, individuals can view:

  • The total amounts of Economic Impact Payments issued for tax year 2021
  • The total amount of advance Child Tax Credit payments
  • Their adjusted gross income from their last tax return
  • The total of any estimated tax payments they made, and refunds applied as a credit

They can also now make and track payments and manage communication preferences, including the option to go paperless and request email notifications for certain notices available online. Taxpayers are encouraged to register for an online account, if they haven’t already, or sign in to access this information and explore these new features.

Important 2021 Tax Documents 

Organized tax records make preparing a complete and accurate tax return easier and may help taxpayers find overlooked deductions or credits.

Taxpayers should wait to file until they have all their supporting income statements including but not limited to:

  • Forms W-2 from employer(s)
  • Forms 1099 from banks, issuing agencies and other payers including unemployment compensation, dividends and distributions from a pension, annuity or retirement plan
  • Form 1099-K, 1099-Misc, W-2 or other income statement if they worked in the gig economy
  • Form 1099-INT if they received interest payments
  • Other income documents and records reporting virtual or crypto currency transactions
  • Form 1095-A, Health Insurance Marketplace Statement, to reconcile advance Premium Tax Credits for Marketplace coverage
  • Letter 6419, 2021 Total advance Child Tax Credit Payments to reconcile advance Child Tax Credit payments
  • Letter 6475, 2021 Economic Impact Payment, to determine eligibility to claim the Recovery Rebate Credit.

Free help

Once taxpayers have collected all their tax documents and information, they’re ready to consider how they will file.

IRS Free File is a great option for eligible taxpayers who are only filing a tax return to reconcile 2021 advance payments and claim the remaining portion of their Child Tax Credit or to claim the 2021 Recovery Rebate Credit, either because they didn’t receive a third-round Economic Impact Payment or did not receive the full amount. IRS Free File can also be used to claim the Earned Income Tax Credit, which provides a refundable tax credit based on a filer’s income and family size.

IRS Free File is available to any person or family who earned $73,000 or less in 2021. This year, there are eight IRS Free File products in English and one in Spanish.

Taxpayers can use a “look up” tool to choose from one of the Free File Providers. Each provider sets its own eligibility standards, generally based on income, age and state residency giving taxpayers who earned $73,000 or less at least one product to use for free.

Free File is just one way the IRS provides free tax preparation options to taxpayers through a partnership model. The IRS also partners with community organizations to train IRS-certified volunteers to prepare and electronically file basic income tax returns for qualified individuals for free.

Qualified taxpayers who generally make $58,000 or less, persons with disabilities and limited English-speaking taxpayers who need help preparing their own tax returns can get free tax help at one of thousands of community volunteer sites through the Volunteer Income Tax Assistance (VITA) program.

And the Tax Counseling for the Elderly (TCE) program offered by AARP, offers free tax help for all taxpayers, particularly those who are 60 and older, specializing in questions about pensions and retirement-related issues unique to seniors.

Members of the military and qualifying veterans can use MilTax, a Department of Defense program that generally offers free online tax preparation and e-filing software for federal returns and up to three state returns.

New alternative media preference to help taxpayers

Beginning Jan.31, 2022, taxpayers can complete Form 9000, Alternative Media Preference, to choose to receive their IRS tax notices in Braille, large print, audio or electronic formats. This includes notices about additional taxes or penalties owed. Taxpayers can include the completed form with their tax return, mail it as a standalone form to the IRS or call 800-829-1040 to elect their preferred format.

As a reminder, Forms 1040 and 1040-SR are available in Spanish, and Schedule LEP, Request for Change in Language Preference, allows taxpayers to request information in 20 different languages besides English.

E-file and choose direct deposit

The IRS encourages taxpayers to file electronically and use direct deposit to get their refunds. Combining e-file with direct deposit is the safest and fastest way to receive a refund. Taxpayers can file electronically through a tax professional, IRS Free File or commercial tax preparation software. When choosing e-file and direct deposit, most people receive their refunds in less than 21 days.

People who don’t have a bank account can visit the FDIC website or use the National Credit Union Administration’s Credit Union Locator Tool to find an institution that allows them to open an account online and for tips on how to choose the right account. Veterans can check out the Veterans Benefits Banking Program for access to financial services at participating banks. Taxpayers can also ask their preparer if they offer other electronic refund options.

Although most refunds are delivered in 21 days, it could take longer if the tax return includes errors, is incomplete or requires further security review. Paper-filed tax returns and paper refund checks will take even longer this year.

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Common tax return mistakes that can cost taxpayers

From the Internal Revenue Service

Tax laws are complicated but the most common tax return errors are surprising simple. Many mistakes can be avoided by filing electronically. Tax software does the math, flags common errors and prompts taxpayers for missing information. It can also help taxpayers claim valuable credits and deductions.

Using a reputable tax preparer—including certified public accountants, enrolled agents, or other knowledgeable tax professionals—can also help avoid errors.

Filing too early

While taxpayers should not file late, they also should not file prematurely. People who don’t wait to file before they receive all the proper tax reporting documents risk making a mistake that may lead to a processing delay.

Missing or inaccurate Social Security numbers

Each SSN on a tax return should appear exactly as printed on the Social Security card.

Misspelled names

Likewise, a name listed on a tax return should match the name on that person’s Social Security card.

Entering information inaccurately 

Wages, dividends, bank interest, and other income received and that was reported on an information return should be entered carefully. This includes any information needed to calculated credits and deductions. Using tax software should help prevent math errors, but individuals should always review their tax return for accuracy.

Incorrect filing status 

Some taxpayers choose the wrong filing status. The Interactive Tax Assistant on IRS.gov can help taxpayers choose the correct status especially if more than one filing status applies. Tax software also helps prevent mistakes with filing status. 

Math mistakes 

Math errors are some of the most common mistakes. They range from simple addition and subtraction to more complex calculations. Taxpayers should always double check their math. Better yet, tax prep software does it automatically. 

Figuring credits or deductions 

Taxpayers can make mistakes figuring things like their earned income tax credit, child and dependent care credit, child tax credit, and recovery rebate credit. The Interactive Tax Assistant can help determine if a taxpayer is eligible for tax credits or deductions. Tax software will calculate these credits and deductions and include any required forms and schedules. Taxpayers should Double check where items appear on the final return before clicking the submit button. 

Incorrect bank account numbers

Taxpayers who are due a refund should choose direct deposit. This is the fastest way for a taxpayer to get their money. However, taxpayers need to make sure they use the correct routing and account numbers on their tax return. 

Unsigned forms

An unsigned tax return isn’t valid. In most cases, both spouses must sign a joint return. Exceptions may apply for members of the armed forces or other taxpayers who have a valid power of attorney. Taxpayers can avoid this error by filing their return electronically and digitally signing it before sending it to the IRS.

The IRS urges all taxpayers to file electronically and choose direct deposit to get their refund faster. IRS Free File offers online tax preparation, direct deposit of refunds and electronic filing, all for free. Some options are available in Spanish. Many taxpayers also qualify for free tax return preparation from IRS-certified volunteers.

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Top 5 things to remember when filing income tax returns in 2022

WASHINGTON—With filing season beginning January 24, the Internal Revenue Service reminded taxpayers about several key items to keep in mind when filing their federal income tax returns this year.

Given the unprecedented circumstances around the pandemic and unique challenges for this tax season, the IRS offers a 5-point checklist that can help many people speed tax return processing and refund delivery while avoiding delays.

*File an accurate return and use e-file and direct deposit to avoid delays. Taxpayers should electronically file and choose direct deposit as soon as they have everything they need to file an accurate return. Taxpayers have many choices, including using a trusted tax professional. For those using e-file, the software helps individuals avoid mistakes by doing the math. It guides people through each section of their tax return using a question-and-answer format.

*For an accurate return, collect all documents before preparing a tax return; make sure stimulus payment and advance Child Tax Credit information is accurate. In addition to collecting W-2s, Form 1099s and other income-related statements, it is important people have their advance Child Tax Credit and Economic Impact Payment information on hand when filing.

Advance CTC letter 6419: In late December 2021, and continuing into January, the IRS started sending letters to people who received advance CTC payments. The letter says, “2021 Total Advance Child Tax Credit (AdvCTC) Payments” near the top and, “Letter 6419” on the bottom righthand side of the page. Here’s what people need to know:

The letter contains important information that can help ensure the tax return is accurate.

People who received advance CTC payments can also check the amount of the payments they received by using the CTC Update Portal available on IRS.gov.

Eligible taxpayers who received advance Child Tax Credit payments should file a 2021 tax return to receive the second half of the credit. Eligible taxpayers who did not receive advance Child Tax Credit payments can claim the full credit by filing a tax return.

Third Economic Impact Payment letter 6475: In late January 2022, the IRS will begin issuing letters to people who received a third payment in late January 2021. The letter says, “Your Third Economic Impact Payment” near the top and, “Letter 6475” on the bottom righthand side of the page. Here’s what people need to know:

Most eligible people already received their stimulus payments. This letter will help individuals determine if they are eligible to claim the Recovery Rebate Credit (RRC) for missing stimulus payments.

People who are eligible for RRC must file a 2021 tax return to claim their remaining stimulus amount.

People can also use IRS online account to view their Economic Impact Payment amounts.

Both letters—6419 and 6475—include important information that can help people file an accurate 2021 tax return. If a return includes errors or is incomplete, it may require further review while the IRS corrects the error, which may slow the tax refund. Using this information when preparing a tax return electronically can reduce errors and avoid delays in processing.

*Avoid lengthy phone delays; use online resources before calling the IRS. Phone demand on IRS assistance lines remains at record highs. To avoid lengthy delays, the IRS urges people to use IRS.gov to get answers to tax questions, check a refund status or pay taxes. There’s no wait time or appointment needed—online tools and resources are available 24 hours a day.

Additionally, the IRS has several ways for taxpayers to stay up to date on important tax information:

Follow the IRS’s official social media accounts and email subscription lists to stay current on the latest tax topics and alerts.

Download the IRS2Go mobile app, watch IRS YouTube videos, or follow the IRS on Twitter, Facebook, LinkedIn and Instagram for the latest updates on tax changes, scam alerts, initiatives, products and services.

Taxpayers can also get information in their preferred language. The IRS translates tax resources into several languages and currently has basic tax information in 20 languages. People can also file Schedule LEP, Request for Change in Language Preference, to receive written communications from the IRS in their preferred language.

*Waiting on a 2020 tax return to be processed? Special tip to help with e-filing a 2021 tax return: In order to validate and successfully submit an electronically filed tax return to the IRS, taxpayers need their Adjusted Gross Income, or AGI, from their most recent tax return. For those waiting on their 2020 tax return to be processed, here’s a special tip to ensure the tax return is accepted by the IRS for processing. Make sure to enter $0 (zero dollars) for last year’s AGI on the 2021 tax return. For those who used a Non-Filer tool in 2021 to register for an advance Child Tax Credit or third Economic Impact Payment in 2021, they should enter $1 as their prior year AGI. Everyone else should enter their prior year’s AGI from last year’s return. Remember, if using the same tax preparation software as last year, this field will auto-populate.

*Free resources are available to help taxpayers file. During this challenging year, the IRS reminds taxpayers there are many options for free help, including many resources on IRS.gov. For those looking to avoid the delays with a paper tax return, IRS Free File is an option. With Free File, leading tax software providers make their online products available for free as part of a 20-year partnership with the Internal Revenue Service. This year, there are eight products in English and two in Spanish. IRS Free File is available to any person or family who earned $73,000 or less in 2021. Qualified taxpayers can also find free one-on-one tax preparation help around the nation through the Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs.

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How small business owners can deduct their home office from their taxes

Photo by Annie Spratt on Unsplash

Tax tip 2022-10 from IRS.gov

The home office deduction allows qualified taxpayers to deduct certain home expenses when they file taxes. To claim the home office deduction on their 2021 tax return, taxpayers generally must exclusively and regularly use part of their home or a separate structure on their property as their primary place of business.

Here are some details about this deduction to help taxpayers determine if they can claim it:

Employees are not eligible to claim the home office deduction.  

The home office deduction, calculated on Form 8829, is available to both homeowners and renters.  

There are certain expenses taxpayers can deduct. These may include mortgage interest, insurance, utilities, repairs, maintenance, depreciation and rent.  

Taxpayers must meet specific requirements to claim home expenses as a deduction. Even then, the deductible amount of these types of expenses may be limited.  

The term “home” for purposes of this deduction:  

Includes a house, apartment, condominium, mobile home, boat or similar property.

Also includes structures on the property. These are places like an unattached garage, studio, barn or greenhouse.

Doesn’t include any part of the taxpayer’s property used exclusively as a hotel, motel, inn or similar business.

Generally, there are two basic requirements for the taxpayer’s home to qualify as a deduction:  

There generally must be exclusive use of a portion of the home for conducting business on a regular basis. For example, a taxpayer who uses an extra room to run their business can take a home office deduction only for that extra room so long as it is used both regularly and exclusively in the business.

The home must generally be the taxpayer’s principal place of business. A taxpayer can also meet this requirement if administrative or management activities are conducted at the home and there is no other location to perform these duties. Therefore, someone who conducts business outside of their home but also uses their home to conduct business may still qualify for a home office deduction.  

Expenses that relate to a separate structure not attached to the home may qualify for a home office deduction. They will qualify only if the structure is used exclusively and regularly for business.  

Taxpayers who qualify may choose one of two methods to calculate their home office expense deduction:  

The simplified option has a rate of $5 a square foot for business use of the home. The maximum size for this option is 300 square feet. The maximum deduction under this method is $1,500.

When using the regular method, deductions for a home office are based on the percentage of the home devoted to business use. Taxpayers who use a whole room or part of a room for conducting their business need to figure out the percentage of the home used for business activities to deduct indirect expenses. Direct expenses are deducted in full.

Share this tip on social media — #IRSTaxTip: How small business owners can deduct their home office from their taxes. https://go.usa.gov/xtbkP

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BBB: Tips to avoid tax scams

From the Better Business Bureau

January 19, 2022 — It is the new year, and that means preparing to file your taxes. While the actual due date seems far away, starting early can save you from headaches down the road. 

Scams are common during tax season. The number one scam to watch out for is identity theft. This happens when a scammer uses your Social Security number and other personal information to file a tax return in your name in order to collect your refund. Consumers often don’t realize they’re victims until they get a written notice from the IRS saying someone else had already filed a return.

“The easiest way to avoid a tax scam is to file as early as possible, so the scammers don’t have a chance to use your information and file before you do,” says Lisa Frohnapfel, President & CEO of the Better Business Bureau Serving Western Michigan. “It is always important to protect your personal information; however, filing early can help protect your tax return.” 

Another popular scam involves people impersonating the IRS. The scammers call, email or text claiming to be from the IRS. They pressure you to provide personal information or a payment. They may claim you owe money and must pay right away by prepaid debit card or wire transfer. If you don’t comply, the scammer threatens you with arrest and fines. 

The Better Business Bureau Serving Western Michigan has tips on how to avoid falling victim and file safely. 

File your taxes as early as possible. 

The IRS does not initiate contact with taxpayers by email, text or social media to request personal financial information. This includes requests for PIN numbers, passwords or similar access information for credit cards, banks or other financial accounts.

If you do owe, the IRS will give you a chance to ask questions or appeal. The IRS will never demand immediate payment, require a specific form of payment, or ask for credit or debit card numbers over the phone. Pressure to act quickly is a red flag that it is a scam. 

Write down your Identity Protection Pin from the IRS before you file your return. Victims of identity theft and others can be issued a six-digit number that will be used to confirm your identity, along with your Social Security number. But, once you apply for a PIN, you cannot opt-out and must use the pin each year you file your federal tax return. You will receive a new PIN each December by mail. Visit the IRS for more information about the program. Read BBB’s tips about the IRS PIN. 

Make sure you are accessing the REAL IRS when filing electronically. Visit irs.gov, and make sure the lock symbol is in the browser window. This means the website is secure and safe to enter personal sensitive information.

Only deal with trustworthy tax preparation services. See our tips for finding the right tax preparer for you. 

If you are the victim of tax identity theft, contact the IRS at 1-800-908-4490. You should also file a complaint with the Federal Trade Commission (FTC) at ftc.gov/complaint or by calling 1-877-FTC-HELP. The FTC also offers a personalized identity theft recovery plan at identitytheft.gov.

Visit bbb.org/taxtips for more resources on how to find a qualified accountant or tax preparer near you and learn more ways to avoid tax scams. 

Report any tax scams to bbb.org/scamtracker.

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The tax responsibilities that come with shutting down a business

From the IRS

There are many reasons a business owner may choose to close their doors, and there are many things that must be done to go out of business. Two important steps all business owners must take are fulfilling their federal tax responsibilities and informing the IRS of their plans. The closing a business page of IRS.gov is designed to help owners navigate the process of shutting down.

Small businesses and self-employed taxpayers will find a variety of information on the page including:

• What forms to file

• How to report revenue received in the final year of business

• How to report expenses incurred before closure

The page also details steps all business owners should take when closing a business.

File a final tax return and related forms. The type of return to file and related forms depends on the type of business.

Take care of employees. Business owners with one or more employees must pay any final wages or compensation, make final federal tax deposits and report employment taxes.

Pay taxes owed. Even if the business closes now, tax payments may be due next filing season.

Report payments to contract workers. Businesses that pay contractors at least $600 for services including parts and materials during the calendar year in which they go out of business, must report those payments.

Cancel EIN and close IRS business account. Business owners should notify the IRS so they can close the IRS business account.

Keep business records. How long a business needs to keep records depends on what’s recorded in each document.

The page also provides helpful information for business owners declaring bankruptcy, selling their business and terminating retirement plans.

Posted in Business, Tax TimeComments Off on The tax responsibilities that come with shutting down a business

IRS resources to help small business employers understand and meet their tax responsibilities

Last week was National Small Business Week. The IRS acknowledges that small business employers have unique tax responsibilities, and they make valuable contributions to the economy. The agency has a variety of information and resources to help employers understand and meet these unique tax responsibilities. Most of these resources are available anytime at IRS.gov.

Due to the COVID-19 pandemic, new legislation was enacted to aid not only struggling business owners, but also individuals. Employers have direct access to people who may be eligible for advance Child Tax Credit payments. The IRS is asking employers to help spread the word about these payments during National Small Business Week.

Materials for employers and others who can help are available on the IRS website at https://www.irs.gov/newsroom/2021-child-tax-credit-and-advance-child-tax-credit-payments-resources-and-guidance.

Other IRS online resources can help employers answer common tax-related questions about worker classification, employment taxes deadlines, what forms to file and more. Here are a few of these resources:

Small Business and Self-Employed Tax Center 

This page features links to useful tools and common IRS forms with instructions. Taxpayers can find help on topics such as starting or operating a business, recordkeeping, filing and paying taxes. A link to the IRS Tax Calendar for Businesses and Self-Employed also provides at-a-glance key tax dates for businesses. https://www.irs.gov/businesses/small-businesses-self-employed

Self-Employed Individuals Tax Center

This a great resource for sole proprietors and others who are in business for themselves. This site has many handy tips and references to tax rules a self-employed person may need to know. Self-employed taxpayers will find info on a variety of topics, including how to make quarterly payments and self-employed tax obligations. https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center

Sharing Economy Tax Center

For taxpayers engaged in the sharing economy, this site provides answers to tax questions, links to forms and resources related to the sharing economy. The gig economy—also called sharing economy or access economy—is activity where people earn income providing on-demand work, services or goods. Often, it’s through a digital platform like an app or website. https://www.irs.gov/businesses/gig-economy-tax-center

Small Business Forms and Publications

Employers can select and download multiple small business and self-employed forms and publications or call 800-829-3676 to order forms and publications through the mail. Aspiring entrepreneurs who are unsure which tax publications may be relevant to them should review the Starting a Business section (https://www.irs.gov/businesses/small-businesses-self-employed/starting-a-business), for an overview of federal tax responsibilities. https://www.irs.gov/businesses/small-businesses-self-employed/small-business-forms-and-publications

Posted in Business, News, Tax TimeComments Off on IRS resources to help small business employers understand and meet their tax responsibilities



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