Understanding Tax Lingo

Article Highlights

  • Filing status
  • Adjusted gross income (AGI)
  • Taxable income
  • Marginal tax rate
  • Alternative minimum tax (AMT)
  • Tax Credits
  • Underpayment of the estimated tax penalty

When discussing taxes, reading tax-related articles, or interpreting instructions, it’s helpful to understand the lingo and acronyms used by tax professionals. It can be difficult to understand tax strategies if you are not familiar with the basic terminologies used in taxation. The following article provides the necessary details associated with the most frequently encountered tax terms.

Filing Status

Generally, if you are married at the end of the tax year, you have three possible filing status options: married filing jointly, married filing separately, or, if you qualify, head of household. If you were unmarried at the end of the year, you would file as single, unless you are eligible for the more beneficial head of household status. A special status applies to some widows and widowers.

When using the married joint status, the income, deductions, and credits of the spouses are combined for reporting on the tax return. If the spouses file using the married separate status, they each file a separate tax return, and if they reside in a separate property state, each spouse includes just his or her own income and deductions on their individual return. In community property states, generally, the incomes and deductions of the spouses are combined and then split 50%/50% for married separate tax return reporting purposes.

Head of household is the most complicated filing status to qualify for and is frequently overlooked as well as incorrectly claimed. Generally, the taxpayer must be unmarried AND:

  • pay more than one half of the cost of maintaining as his or her home a household that was the principal place of abode for more than one half of the year of a qualifying child or certain dependent relatives, or
  •  pay more than half the cost of maintaining a separate household that was the main home for a dependent parent for the entire year.

A married taxpayer may be considered unmarried for the purpose of qualifying for head of household status if the spouses were separated for at least the last six months of the year, provided the taxpayer maintained a home for a dependent child for over half the year.

Surviving spouse (also referred to as qualifying widow or widower) is a rare status used only for a taxpayer whose spouse died in one of the prior two years and who has a dependent child at home. Joint rates are used. In the year the spouse passes away, the surviving spouse may file jointly with the deceased spouse if not remarried by the end of the year. In rare circumstances, for the year of a spouse’s death, the executor of the decedent’s estate may determine that it is better to use the married separate status on the decedent’s final return. The married separate status would then also require the surviving spouse to use the married separate status for that year.

Adjusted Gross Income (AGI)

 AGI is the acronym for adjusted gross income. AGI is generally the sum of a taxpayer’s income less specific subtractions called adjustments (but before the standard or itemized deductions). The most common adjustments are penalties paid for early withdrawal from a savings account, and deductions for contributing to a traditional IRA or self-employed retirement plan. A taxpayer’s AGI limits many tax benefits and allowances, such as credits, specific adjustments, and some deductions.

Modified AGI (MAGI)

Modified AGI is AGI (described above) adjusted (generally up) by tax-exempt and tax-excludable income. MAGI is a significant term when income thresholds apply to limit various deductions, adjustments, and credits. The definition of MAGI will vary depending on the item that is being limited.

Taxable Income

Taxable income is AGI less deductions (either standard or itemized). For years 2018 through 2025, another item that is subtracted when figuring taxable income is the deduction for qualified business income (generally 20% of qualified income from pass-through businesses such as partnerships, rentals, and sole proprietorships). Your taxable income is what your regular tax is based upon using a tax rate schedule specific to your filing status. The IRS publishes tax tables that are based on the tax rate schedules and that simplify the tax calculation, but the tables can only be used to look up the tax on taxable income up to $99,999.

Marginal Tax Rate (Tax Bracket)

Not all of your income is taxed at the same rate. The amount equal to your standard or itemized deductions is not taxed at all. The next increment is taxed at 10%, then 12%, 22%, etc., until you reach the maximum tax rate, which is currently 37%. When you hear people discussing tax brackets, they are referring to the marginal tax rate. Knowing your marginal rate is important because any increase or decrease in your taxable income will affect your tax at the marginal rate. For example, suppose your marginal rate is 24%, and you are able to reduce your income $1,000 by contributing to a deductible retirement plan. You would save $240 in federal tax ($1,000 x 24%). Your marginal tax bracket depends upon your filing status and taxable income. You can find your marginal tax rate using the table below.

Keep in mind when using this table that the marginal rates are step functions and that the taxable incomes shown in the filing-status column are the top value for that marginal rate range.

 

2019 MARGINAL TAX RATES
TAXABLE INCOME BY FILING STATUS
Marginal Tax Rate Single Head of Household Joint* Married Filing Separately
10% 9,700 13,850 19,400 9,700
12% 39,475 52,850 78,950 39,475
22% 84,200 84,200 168,400 84,200
24% 160,725 160,700 321,450 160,725
32% 204,100 204,100 408,200 204,100
35% 510,300 510,300 612,350 306,175
37% Over 510,300 Over 510,300 Over 612,350 Over 306,175

*Also used by taxpayers filing as surviving spouse

Capital Gains Tax Rates

Lower tax rates apply for gains upon sale of most property, such as stocks and real estate, held for over one year. These rates are 0%, 15% and 20%. Which rate applies depends on the amount of your taxable income.

Taxpayer & Dependent Exemptions

Before the changes made by the 2017 tax reform, you were allowed to claim a personal exemption for yourself, your spouse (if filing jointly), and each individual qualifying as your dependent. The deductible exemption amount was adjusted for inflation annually; the amount for 2019 is $4,200. However, the tax reform suspended the deduction for exemptions for 2018 through 2025.

Dependents

To qualify as a dependent, an individual must be the taxpayer’s qualified child or pass all five dependency qualifications: the (1) member of the household or relationship test, (2) gross income test, (3) joint return test, (4) citizenship or residency test, and (5) support test. The gross income test limits the amount a dependent can make if he or she is over 18 and does not qualify for an exception for certain full-time students. The support test generally requires that you pay over half of the dependent’s support. However, there are special rules for divorced parents and situations where several individuals together provide over half of the support.

Qualified Child

A qualified child is one who meets the following tests:

  1. Has the same principal place of abode as the taxpayer for more than half of the tax year except for temporary absences;
  2. Is the taxpayer’s son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or a descendant of any such individual;
  3. Is younger than the taxpayer;
  4. Did not provide over half of his or her own support for the tax year;
  5. Is under age 19, or under age 24 in the case of a full-time student, or is permanently and totally disabled (at any age); and
  6. Was unmarried (or if married, either did not file a joint return or filed jointly only as a claim for refund).

Deductions

A taxpayer generally can choose to itemize deductions or use the standard deduction. The standard deductions, which are adjusted for inflation annually, are illustrated below for 2019.

Filing Status Standard Deduction
Single $12,200
Head of Household $18,350
Married Filing Jointly $24,400
Married Filing Separately $12,200

The standard deduction is increased by multiples of $1,650 for unmarried taxpayers who are over age 64 or blind. For married taxpayers, the additional amount is $1,300. The extra standard deduction amount is not allowed for elderly or blind dependents. Those with significant deductible expenses can itemize their deductions instead of claiming the standard deduction. The standard deduction of a dependent filing his or her return will often be less than the single amount shown above.

Itemized deductions generally include:

  1. Medical expenses which are limited to those that exceed 10% of your AGI for 2019.
  2. Taxes consisting primarily of real property taxes, state income (or sales) tax, and personal property taxes, but limited to a total of $10,000 for the year.
  3. Interest on qualified home acquisition debt and investments; the latter is limited to net investment income (i.e., the deductible interest cannot exceed your investment income after deducting investment expenses).
  4. Charitable contributions, generally limited to 60% of your AGI, but in certain circumstances, the limit can be as little as 20% or 30% of AGI.
  5. Gambling losses to the extent of gambling income, and certain other rarely encountered deductions.

Alternative Minimum Tax (AMT)

The Alternative Minimum Tax is another way of being taxed that has often taken taxpayers by surprise. The Alternative Minimum Tax (AMT) is a tax that was originally intended to ensure that wealthier taxpayers with massive write-offs and tax-sheltered investments pay at least a minimum tax. However, even taxpayers whose only “tax shelter” is having a large number of dependents or paying high state income or property taxes were being affected by the AMT. Your tax must be computed by the regular method and also by the alternative method. The higher tax must be paid. The following are some of the more frequently encountered factors and differences that contribute to making the AMT greater than the regular tax.

  • The standard deduction is not allowed for the AMT, and a person subject to the AMT cannot itemize for AMT purposes unless he or she also itemizes for regular tax purposes. Therefore, it is important to make every effort to itemize if subject to the AMT.
  • Itemized deductions:

Interest in the form of home equity debt interest that cannot be traced to a deductible use. For years 2018–2025, interest paid on home equity debt is also not allowed for regular tax purposes.

  • Nontaxable interest from private activity bonds is tax-free for regular tax purposes, but some is taxable for the AMT.
  • Statutory stock options (incentive stock options), when exercised, produce no income for regular tax purposes. However, the bargain element (the difference between the grant price and exercise price) is income for AMT purposes in the year the option is exercised.
  • Depletion allowance in excess of a taxpayer’s basis in the property is not allowed for AMT purposes.

A certain amount of income is exempt from the AMT, but the AMT exemptions are phased out for higher-income taxpayers.

AMT EXEMPTIONS & PHASE OUT – 2019
Filing Status Exemption Amount Income Where Exemption Is Totally Phased Out
Married Filing Jointly $111,700 1,467,400
Married Filing Separate $55,850 $797,100
Unmarried $71,700 $733,700
AMT TAX RATES—2019
AMT Taxable Income Tax Rate
0 – $194,800 (1) 26%
Over $194,800 (1) 28%
(1) $97,400 for married taxpayers filing separately

Your tax will be whichever is the higher of the tax computed the regular way and by the Alternative Minimum Tax. Anticipating when the AMT will affect you is difficult because it is usually the result of a combination of circumstances. In addition to those items listed above, watch out for transactions involving limited partnerships, depreciation, and business tax credits only allowed against the regular tax. All of these can powerfully impact your bottom-line tax and raise a question of possible AMT. Fortunately, due to tax reform that the increased AMT exemption amounts and set higher thresholds before the exemption is phased out, fewer taxpayers are now paying AMT. Tax Tip: If you were subject to the AMT in the prior year, you itemized your deductions on your federal return for the prior year, and had a state tax refund for that year, part or all of your state income tax refund from that year may not be taxable in the regular tax computation. To the extent that you received no tax benefit from the state tax deduction because of the AMT, that portion of the refund is not included in the subsequent year’s income.

Tax Credits

Once your tax is computed, tax credits can reduce the tax further. Credits reduce your tax dollar for dollar and are divided into two categories: those that are nonrefundable and can only offset the tax, and those that are refundable. In addition, some credits are not deductible against the AMT, and some credits, when not fully used in a specific tax year, can carry over to succeeding years. Although most credits are a result of some action taken by the taxpayer, there are some commonly encountered credits that are based simply on the number or type of your dependents or your income. These and other popular credit are outlined below.

Child Tax Credit

Thanks to tax reform, the child tax credit has been increased to $2,000 per child (up from $1,000 in 2017). If the credit is not entirely used to offset tax, the excess portion of the credit, up to the amount that the taxpayer’s earned income exceeds a threshold of $2,500, but not more than $1,400, is refundable. The credit begins to phase out at incomes (MAGI) of $400,000 for married joint filers and $200,000 for other filing status. The credit is reduced by $50 for each $1,000 (or fraction of $1,000) of modified AGI over the threshold.

Dependent Credit – A nonrefundable credit is available to taxpayers with a dependent who isn’t a qualifying child, and like the increased child tax credit is designed to offset the loss of the exemption deduction as a result of tax reform. The dependent credit is $500. A qualifying child, the taxpayer, and if married, the spouse are not eligible for this credit. A child who isn’t a qualifying child but who qualifies as a dependent under the dependent relative rules would qualify the taxpayer to claim this credit.

Earned Income Credit

This is a refundable credit for a low-income taxpayer with income from working either as an employee or a self-employed individual. The credit is based on earned income, the taxpayer’s AGI, and the number of qualifying children. A taxpayer who has investment income such as interest and dividends in excess of $3,600 (for 2019) is ineligible for this credit. The credit was established as an incentive for individuals to obtain employment. It increases with the amount of earned income until the maximum credit is achieved and then begins to phase out at higher incomes. The table below illustrates the phase-out ranges for the various combinations of filing status and earned income and the maximum credit available.

2019 EIC PHASE-OUT RANGE
Number of Children Joint Return Others Maximum Credit
None $14,450 – $21,370 $8,650 – $15,570 $529
1 $24,820 – $46,884 $19,030 – $41,094 $3,526
2 $24,820 – $52,493 $19,030 – $46,703 $5,828
3 $24,820 – $55,952 $19,030 – $50,162 $6,557

Residential Energy-Efficient Property Credit

This credit is generally for energy-producing systems that harness solar, wind, or geothermal energy, including solar-electric, solar water-heating, fuel-cell, small wind-energy, and geothermal heat-pump systems. These items qualify for a 30% credit with no annual credit limit. Unused residential energy-efficient property credit is generally carried over through 2021. The credit rate reduces to 26% in 2020 and 22% in 2021. The credit expires after 2021.

Withholding and Estimated Taxes

Our “pay-as-you-earn” tax system requires that you make payments of your tax liability evenly throughout the year. If you don’t, it’s possible that you could owe an underpayment penalty. Some taxpayers meet the “pay-as-you-earn” requirements by making quarterly estimated payments. However, when your income is primarily from wages, you usually meet the requirements through wage withholding and rely on your employer’s payroll department to take out the right amount of tax, based on the information shown on the Form W-4 that you filed with your employer. To avoid potential underpayment penalties, you are required to deposit by payroll withholding or estimated tax payments an amount equal to the lesser of:

1) 90% of the current year’s tax liability; or

2) 100% of the prior year’s tax liability or, if your AGI exceeds $150,000 ($75,000 for taxpayers filing as married separate), 110% of the prior year’s tax liability.

If you had a significant change in income during the year, we can assist you in projecting your tax liability to maximize the tax benefit and delay paying as much tax as possible before the filing due date.

Please contact us if we can be of assistance with your tax planning needs.

Will Independent Contractors Become Extinct?

Article Highlights:

  • New California Legislation
  • Employee or Independent Contractor
  • Dynamex
  • ABC Test
  • Impact on Employers
  • Impact on Workers
  • Safe Harbor

The California legislature recently passed landmark labor legislation that essentially makes it very difficult, if not impossible, to legally classify an employee as an independent contractor (self-employed). Governor Newsom was quick to sign it into law, and it generally became effective on January 1, 2020. Many believe this legislation will suppress entrepreneurship and innovation.

Although this issue currently pertains to California, other smaller states are sure to follow, and this will ultimately become an issue for employers nationwide.

Background

The distinction between employee and independent contractor is governed by both federal law and state law. It has always been a complicated issue at both the federal and state levels, and the state and federal guidelines often differ. However, because of the significant payroll tax revenues involved, the states are generally the most aggressive in classifying workers as employees.

In the California case, the legislation was prompted by a labor case that was ultimately settled by the California Supreme Court. In that case, Dynamex Operations West, a trucking company, was treating its drivers as employees. It started classifying them as independent contractors to reduce costs, which caught the eye of the California Employment Development Department and ultimately reached the California Supreme Court. The court determined the drivers were employees and not independent contractors. However, in making that decision, the California Supreme Court adopted the “ABC test” used by some other states to make their determination.

As a result of this decision, the California Legislature passed legislation (AB-5) codifying, with some exceptions, the ABC test for determining whether a worker is an independent contractor.

The ABC Test

Several states, including Massachusetts and New Jersey, have also adopted the “ABC” test. The test is a broad means of determining a worker’s status as either an employee or a contractor by considering three factors. If a worker passes all three, then he or she is an independent contractor:

(A) That the worker is free from the hirer’s control and direction, in connection with the performance of the work, both under the contract for the performance of such work and in fact;

(B) That the worker performs work outside the usual course of the hiring entity’s business; and

(C) That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

The objective of the ABC test is to create a more straightforward, clearer test for determining whether a worker is an employee or an independent contractor. It presumes that a worker hired by an entity is an employee and places the burden on the employer to establish that the worker meets the definition of an independent contractor. But California’s AB-5 legislation did not just adopt the ABC test; it also added numerous and complicated exceptions to using the ABC test, which will surely enrich California labor attorneys.

Impacts on Employers

Employers who have been treating a worker as an independent contractor but must treat him or her as an employee must pay at least minimum wage and provide sick time, meal and rest periods, and health insurance. The employer will also have to pay worker’s compensation benefits and health insurance. On top of that, California has severe monetary penalties for misclassifying workers. Impacts on Workers: The impacts on workers vary by occupation. Some workers incur significant amounts of expenses, and under the tax reform, they can no longer deduct employee business expenses on their tax returns. Thus, for example, an Uber driver who must provide the vehicle and pay for the gas, insurance, and upkeep would be unable to deduct these substantial costs of providing the service and would have to pay taxes on his or her gross income.

Large Employers Are Fighting Back

Some larger employers are fighting back and challenging AB-5. Uber and DoorDash have joined forces with some contract drivers to file a suit in the U.S. District Court for Central California, alleging that AB-5 violates individuals’ constitutional rights and unfairly discriminates against technology platforms. The California Trucking Association (CTA) successfully obtained a temporary injunction against AB-5 for CTA drivers by contending that AB-5 is in direct conflict with several federal laws related to motor carriers. Regardless of the outcomes of these cases, they will be appealed, and the ultimate outcome could be months, if not years, away.

This leaves few choices for smaller employers other than to carefully assess the provisions of AB-5 when treating a worker as an independent contractor. For those who are unsure, it might be wise to consult a labor attorney. The safe-harbor option is to treat all workers as employees until all of the legal challenges to AB-5 have run their course.

Please contact us if you have further questions.

Are Solar-Powered Batteries the Answer to Power Outages?

Article Highlights:

  • Wildfires
  • Planned Power Outages
  • Solar Batteries
  • Solar Tax Credit

Over the past few years, several wildfires have been blamed on power lines downed during periods of low humidity and gusty winds, which typically occur in the fall. The 2018 Camp Fire, sparked by downed power lines, was the deadliest in California history, claiming 85 lives and causing more than an estimated $16 billion in damages.

Wind events can last for days, and the loss of power for extended periods can result in spoiled food and other inconveniences for homeowners who lack other power sources. Planned power outages are already being implemented by some utility companies. They may become commonplace in the future, since gusty weather comes every year, and power companies must consider their financial liabilities if a downed line sparks a wildfire.

As a result, homeowners and businesses in fire-prone areas will need to be proactive in planning for these emergency power outages and decide whether they need to provide themselves alternate power sources during outages or ride out the powerless periods. Of course, alternative power sources come with a price tag, which will play into that decision.

Even if you do not live in a wildfire-prone area, you may be in an area that is susceptible to power outages and may want to consider alternative power sources during outages.

Businesses can, of course, write off the cost of providing themselves alternate power sources. Still, the tax law doesn’t allow homeowners to deduct the expenses of a generator or other outage-mitigation measures. However, one tax credit applies to homeowners who install solar power property, and that credit extends to batteries that are charged solely by solar power. (1)

Even if you only have a standard solar power system without a battery back-up, you will still lose power during an outage because of how most panels are connected to the electric grid. However, if you have a battery incorporated into your solar system, your home can run off the solar energy stored in your battery when there is a power outage.

Homeowners who already have a solar installation can add a storage battery and qualify for the solar credit for the cost of the battery. (1) Those who do not already have a solar system may want to consider the cost of installing a solar system with a battery.

Installing a solar system with a battery or adding a battery to an existing system may be a convenience item for some and worth the cost. However, the costs can be substantial, and a household’s energy needs may not justify the price of a solar system, much less the cost of a battery. Carefully consider your needs before deciding whether to invest in a solar system. Although it will not qualify for a solar credit, a battery system attached to the electric grid may be another option.

If you want to take full advantage of the solar tax credit, you need to act soon, as it is being phased out. Note that 2019 is the last year that the credit is equal to 30% of the cost of a solar system. The credit amount drops to 26% in 2020 and 22% in 2021, the final year of the credit. The credit is nonrefundable, which means it can only reduce your tax to zero, and any excess is carried over to the subsequent year. During periods of possible outages, keep your car’s gas tank filled, as service stations can’t pump gas without power. Keep some cash handy, since without power, your credit/debit cards will not work, and ATMs won’t be able to distribute cash. External batteries to charge cell phones will come in handy as well.

If you have questions related to how the solar credit might apply to your particular circumstances, please contact us.

(1) A battery attached to solar panels is qualified solar electric property if it’s charged only by solar energy. A software-management tool is an eligible solar electrical property where the software is necessary to monitor the charging and discharging of solar energy from a battery attached to solar panels. Earlier installations of qualifying property don’t affect the availability of the solar for qualifying property in later years. Thus, where a qualifying solar panel system was installed in Year 1, an additional solar credit could be claimed in Year 2 for the installation of a battery that was connected to the system and was qualified solar electric property. (IRS Letter Ruling 201809003)

Crowdfunding Can Have Unexpected Consequences

Article Highlights:

  • Crowdfunding Sites
  • Gifts
  • Charitable Gifts
  • Business Ventures
  • SEC Registration

Raising money through Internet crowdfunding sites prompts questions about the taxability of the money raised. Several sites host money-raising projects for fees ranging from 5 to 9%, including GoFundMe, Kickstarter, and Indiegogo. Each site specifies its own charges, limitations, and withdrawal processes. Whether the money raised is taxable depends upon the purpose of the fundraising campaign.

Gifts – When an entity raises funds for its own benefit and the contributions are made out of detached generosity (and not because of any moral or legal duty or the incentive of anticipated economic benefit), the contributions are considered tax-free gifts to the recipient.

On the other hand, the contributor is subject to the gift tax rules if he or she contributes more than $15,000 to a particular fundraising effort that benefits one individual; the contributor is then liable to file a gift tax return. Unfortunately, regardless of the need, gifts to individuals are never tax-deductible.

A “gift tax trap” occurs when an individual establishes a crowdfunding account to help someone else in need (whom we’ll call the beneficiary) and takes possession of the funds before passing the money on to the beneficiary. Because the fundraiser takes possession of the funds, the contributions are treated as a tax-free gift to the fundraiser. However, when the fundraiser passes the money on to the beneficiary, the money then is treated as a gift from the fundraiser to the beneficiary; if the amount is over $15,000, the fundraiser is required to file a gift tax return and to reduce his or her lifetime gift and estate tax exemption. Some crowdfunding sites allow the fundraiser to designate a beneficiary so that the beneficiary has direct access to the funds which keeps the fundraiser from encountering any gift tax problems.

Gifts to specific individuals, regardless of the need are not considered a charitable contribution under tax law. An example is raising funds to help pay for someone’s funeral expenses. Another example, which includes a little tax twist, would be raising money to help someone pay for their medical expenses. Because it is a gift, it is not taxable to the recipient, but if the recipient itemizes their deductions, any amount of the gift the recipient spends to pay for their or a spouse’s or dependent’s medical expenses can be included as a medical expense on the recipient’s Schedule A.

Charitable Gifts – Even if the funds are being raised for a qualified charity, the contributors cannot deduct the donations as charitable contributions without proper documentation. Taxpayers cannot deduct cash contributions, regardless of the amount, unless they can document the contributions in one of the following ways:

  • Contribution Less Than $250 – To claim a deduction for a contribution of less than $250, the taxpayer must have a canceled check, a bank or credit card statement, or a letter from the qualified organization; this proof must show the name of the organization, the date of the contribution, and the amount of the contribution.
  • Cash contributions of $250 or More – To claim a deduction for a contribution of $250 or more, the taxpayer must have a written acknowledgment of the contribution from the qualified organization; this acknowledgment must include the following details:
    • The amount of cash contributed;
    • Whether the qualified organization gave the taxpayer goods or services (other than certain token items and membership benefits) as a result of the contribution, along with a description and good-faith estimate of the value of those goods or services (other than intangible religious benefits); and
    • A statement that the only benefit received was an intangible religious benefit, if that was the case.

Thus, if the contributor is to claim a charitable deduction for the cash donation, some means of providing the contributor with a receipt must be provided.

Business Ventures – When raising money for business projects, two issues must be contended with: the taxability of the money raised and the Security and Exchange Commission (SEC) regulations that come into play if the contributor is given an ownership interest in the venture.

  • No Business Ownership Interest Given – This applies when the fundraiser only provides the contributor nominal gifts, such as products from the business, coffee cups, or T-shirts; the money raised is taxable to the fundraiser.
  • Business Ownership Interest Provided – This applies when the fundraiser provides the contributor with partial business ownership in the form of stock or a partnership interest; the money raised is treated as a capital contribution and is not taxable to the fundraiser. The amount contributed becomes the contributor’s tax basis in the investment. When the fundraiser is selling business ownership, the resulting sales must comply with SEC regulations, which generally require any such offering to be registered with the SEC. However, the SEC regulations carve out a special exemption for crowdfunding:
  • Fundraising Maximum – The maximum amount a business can raise without registering its offering with the SEC is $1.07 million in 12 months. Non-U.S. companies, businesses without a business plan, firms that report under the Exchange Act, certain investment companies, and companies that have failed to meet their reporting responsibilities may not participate.
  • Contributor Maximum – The amount an individual can invest through crowdfunding in any 12 months is limited:
  • If the individual’s annual income or net worth is less than $107,000, his or her equity investment through crowdfunding is limited to the greater of $2,200 or 5% of the investor’s annual net worth.
    • If the individual’s annual income or net worth is at least $107,000, his or her investment via crowdfunding is limited to 10% of the investor’s net worth or annual income, whichever is less, up to an aggregate limit of $107,000.

On the bright side, even if the money raised is income to the business, it will probably net out to zero taxable if it is spent on tax-deductible business expenses.

Does the IRS Track Crowdfunding? – The answer is, maybe. It depends on the aggregate number of backers contributing to the fundraising campaign and the total amount of funds processed through third-party transaction companies (credit card, PayPal, etc.). These third-party processors are required to issue a Form 1099-K reporting the gross amount of such transactions. There is a de minimis reporting threshold of $20,000 or 200 reportable transactions per year. The question is, will the third party follow the de minimis rule?

If you have questions about crowdfunding-related tax issues, please contact us

Tax Issues Related to Hobbies

Article Highlights:

  • Hobby Losses
  • Not-for-Profit Rules
  • Determining Factors
  • Trade or Business Presumption
  • Hobby Tax Reporting
  • Self-Employment Tax

Generally, a hobby is an activity an individual enjoys for leisure, and without the goal of making money. A hobby is a way to describe an activity that is not known to create any income. Tax law generally does not allow deductions for personal expenses except those allowed as itemized deductions on the 1040 Schedule A, and this also applies to hobby expenses.

Some hobbyists try to get a tax deduction for their hobby expenses by treating their hobby as a trade or a business. For instance, if someone’s hobby expenses exceed their hobby’s income, they may try to report the difference between hobby income and expenses as a deductible business loss. To curtail hobbies being treated as businesses, the tax code includes rules that do not permit losses for not-for-profit activities such as hobbies. The not-for-profit rules are often referred to as the hobby loss rules.

The distinction between a hobby and a trade or business sometimes becomes blurred, and the determination depends upon a series of factors, with no single factor being decisive. All of these factors have to be considered when making the determination:

  • Is the activity carried out in a businesslike manner?
  • How much time and effort does the taxpayer spend on the activity?
  • Does the taxpayer depend on the activity as a source of income?
  • Are losses from the activity the result of sources beyond the taxpayer’s control?
  • Has the taxpayer changed business methods in attempts to improve profitability?
  • What is the taxpayer’s expertise in the field?
  • What success has the taxpayer had in similar operations?
  • What is the possibility of profit?
  • Is profit from asset appreciation possible?

Because determining these factors is so subjective, the IRS regulations provide that the taxpayer has a presumption of profit motive if an activity shows a profit for any three or more years during five consecutive years. However, if the activity involves breeding, training, showing, or racing horses, then the period is two out of seven consecutive years.

Making the proper determination is important because of the differences in tax treatment for hobbies versus trades or businesses. If an activity is determined to be a trade or business in which the owner materially participates, then the owner can deduct a loss on his or her tax return, and it is not uncommon for a business to show a loss in the startup years.

However, hobbies (not-for-profit activities) have special, unfavorable rules for reporting the income and expenses, which have been exacerbated by the 2017 passage of the Tax Cuts and Jobs Act (tax reform). These rules are:

  1. The income is reported directly on the hobbyist’s 1040;
  2. The expenses, not exceeding the income, are deducted as a miscellaneous itemized deduction. Thus, the expenses are only allowed if a taxpayer is itemizing deductions, rather than taking the standard deduction; and
  3. Due to tax reform, for tax years 2018 through 2025, miscellaneous itemized deductions that must be reduced by 2% of the taxpayer’s adjusted gross income – which is the category into which the hobby expenses fall – have been suspended (are not deductible). Thus, for those years, there is no deduction at all for hobby expenses, and any hobby income will be fully taxable. Example: Marcia has an income of $750 from her hobby (a not-for-profit activity) of coin collecting and expenses of $500. So, Marcia must include the $750 on her 1040. But because miscellaneous itemized deductions are currently suspended, she will not be able to deduct her $500 in expenses, leaving the full $750 as taxable income. 

Another concern for hobbyists who are reporting income from their hobby on their 1040 is whether or not that income is subject to self-employment tax. Luckily, there is an exception for sporadic or one-shot deals and hobbies, which are not subject to self-employment tax.

If you have questions related to how the not-for-profit rules may apply to your hobby, please contact us.

Tax Ramifications Related to an Old Vehicle

Article Highlights:

  • Trading in a Vehicle
  • Selling a Vehicle
  • Gifting a Vehicle
  • Donating a Vehicle to Charity

If you are planning on buying a new car, you may be wondering what to do with the old one. There are a number of options, some of which have tax implications and some of which don’t. These options include trading the car in with the dealer, selling it to a third party, donating it to a charity, gifting it to someone, or even keeping it as a second car. Here are the details for each option.

Note:  This article does not discuss in detail how to treat the disposition of a vehicle used for business.

Trade-In – Although you may be able to get more for your car by selling it yourself, trading the car in with the dealer eliminates the hassle of selling the vehicle and is the option selected by many people when they purchase a new car. Prior to the passage of the tax reform, if a vehicle was used partially for business and the disposition of that vehicle would have resulted in a gain, it was better to trade the vehicle in because the tax law allowed the gain to be deferred. However, that is no longer an option. Now, whether you trade in your vehicle or sell it to a third party, it is treated as a sale.

If a car has been used 100% for personal purposes (no business use), whether you trade it in or sell it generally makes no difference since, except in rare cases, the vehicle will have declined in value and there would be no gain from the transaction. When there is a loss from the sale of personal-use property, tax law does not allow the loss to be deducted. On the other hand, the law says that when a personal-use item such as a vehicle is sold for a profit, the profit is taxable.

Sell the Vehicle – There are a variety of online websites you may use to determine the value of your used vehicle for little to no cost. There are also used car dealers that will buy your car and relieve you of all the DMV transfers and sales tax issues. Of course, you can sell it yourself through online sites or perhaps by just placing a “for sale” sign in the car, in which case you need to make sure the title is properly transferred so you have no future liability. It is also important to be cautious of potential buyers, to make sure someone does not try to scam you with a bad check or the promise of a future payment. In most states, vehicle sales are “as is” sales, provided you do not attempt to conceal a material defect.

Gift It to Someone – It is quite common for individuals to gift their old car to a child, a family member, or an acquaintance. There are no gift tax ramifications as long as the fair market value (FMV) of the vehicle is less than the annual gift tax exclusion amount ($15,000 for 2019). Where a married couple jointly makes the gift, the annual gift tax exclusion applies to each spouse; thus, the vehicle’s value could be as much as $30,000 without any tax ramifications. If the vehicle’s FMV exceeds those limits, a gift tax return is required. The gift is not allowed as a charitable contribution on the former owner’s income tax return, even if the person to whom the car is given is “needy.”

Donate the Vehicle to Charity – You’ve probably seen or heard ads urging you to donate your car to charity. But donating a vehicle may not result in a big tax deduction, or any deduction at all. A few years back, this was a popular type of charitable donation promoted by many charities. However, vehicle donations were so abused by taxpayers claiming values higher than what the vehicles were worth that Congress had to step in. The result is a number of rules that, in some cases, limit the amount of the charitable deduction to $500.

The deduction is limited for motor vehicles, as well as for boats and airplanes, contributed to charity whose claimed value exceeds $500 by making it dependent upon the charity’s use of the vehicle and imposing higher substantiation requirements.

If the charity sells the vehicle without any “significant intervening use” to substantially further the organization’s regularly conducted activities or without any major repairs, the donor’s charitable deduction can’t exceed the gross proceeds from the charity’s sale of the vehicle. Examples of qualifying significant intervening use include delivering meals every day for a year or driving 10,000 miles during a one-year period while delivering meals.

The gross proceeds limitation on a donor’s auto contribution deduction doesn’t apply if the charity sells it at a price significantly below FMV (or gives it away) to a needy individual. This exception applies only if supplying a vehicle to a needy individual directly furthers the donee’s charitable purpose of relieving the underprivileged who need a means of transportation. In this case, the fair market value of the vehicle is used to determine the amount of the contribution.

Additionally, a deduction for donated vehicles whose claimed value exceeds $500 is not allowed unless the taxpayer substantiates the contribution with a contemporaneous written acknowledgement from the donee. To be contemporaneous, the acknowledgment must be obtained within 30 days of either (1) the contribution or (2) the disposition of the vehicle by the donee organization. The donor must include a copy of the acknowledgment with the tax return on which the deduction is claimed.

Acknowledgement by the donee organization must include whether the donee organization provided any goods or services in consideration of the vehicle as well as a description and a good -faith estimate of the value of any such goods or services. Or, if the goods or services consist solely of intangible religious benefits, a statement to that effect. Form 1098-C incorporates all of the required acknowledgement elements for the donee (charitable organization) to complete. The donor is required to attach copy B of the 1098-C to his or her federal tax return when claiming a deduction for contribution of a motor vehicle, boat, or airplane.

If you have questions about what to do with an older vehicle, please contact us.

Foreign Account Reporting Requirements (FBAR)

Article Summary:

  • Foreign Account Reporting Requirement
  • Financial Crimes Enforcement Network
  • Penalties for Failure to File
  • Type of Accounts Affected
  • Form 8938 Filing Requirements

U.S. citizens and residents with a financial interest, signature, or other authority over any foreign financial account need to report that relationship by filing FinCEN Form 114 if the aggregate value of the accounts exceeds $10,000 at any time during the year. The due date for 2018’s report was April 15, 2019, with an automatic six-month extension to October 15, 2019. Failure to file can result in draconian penalties. Form 114 is filed electronically with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) BSA E-Filing System and not as part of the individual’s income tax filing with the IRS.

Keep in mind that “financial account” includes securities, brokerage, savings, checking, deposit, time deposit, and any other accounts at a financial institution. Commodity futures and options accounts include mutual funds, and non-monetary assets such as gold. It becomes a “foreign financial account” if the financial institution is in a foreign country. If you own shares of a foreign stock or a mutual fund that invests in foreign stocks, and the stock or fund is held in an account at a financial institution or brokerage located in the U.S., this is not considered a foreign financial account.  In addition, the FBAR rules don’t apply to it. An account maintained with the branch of a foreign bank physically located in the U.S. is not a foreign financial account.

You may have an FBAR requirement and not even realize it. For instance, perhaps you have relatives residing in a foreign county and they have put you on their bank accounts in case something happens to them. If the combined value of those accounts exceeds $10,000 at any time during the year, you will need to file the FBAR. Or if you are gambling at an online casino and it is based in a foreign country, and your account exceeds the $10,000 limit at any time during the year, you will have an FBAR reporting requirement.

You may also have an additional requirement to file IRS Form 8938, which is like the FBAR requirement but applies to a wider range of foreign assets with a higher dollar threshold. If you are married and you and your spouse file a joint return, if the value of certain financial assets exceeds $100,000 at the end of the year or $150,000 at any time during the year, you must file Form 8938. If you live abroad, the thresholds are $400,000 and $600,000, respectively. For other filing statuses, the thresholds are half of those amounts. The penalty for failing to file the 8938 is $10,000 per year, and if the failure continues for more than 90 days after you receive an IRS notice of failure to file, the penalty can go as high as $50,000.

As you can see, not complying with the foreign account reporting requirements can have very serious repercussions. Please contact us with questions or if you need assistance in meeting your foreign account reporting obligations.

How Does Combining a Vacation with a Foreign Business Trip Affect the Tax Deduction for Travel Expenses of a Self-Employed Individual?

Article Highlights:

  • Primarily Business
  • Primarily Vacation
  • Special Circumstances
  • Foreign Conventions, Seminars and Meetings
  • Cruise Ships
  • Spousal Travel Expenses

Effective for years 2018 through 2025, the Tax Cuts and Jobs Act of 2017 suspended the deduction of miscellaneous itemized expenses that must be reduced by 2% of the taxpayer’s adjusted gross income. Employee business expenses, including travel expenses, fall into this category. Therefore, this discussion only applies to self-employed individuals for years 2018-2025.

When a self-employed individual makes a business trip outside of the U.S. and the trip is 100% devoted to business, all the ordinary and necessary business travel expenses are deductible, just as if the business trip were within the U.S. On the other hand, if the trip also incorporates a vacation, special rules determine the deductibility of the travel expenses to and from the destination; when the other business travel expenses, such as lodging, meals, local travel and incidentals, can be deducted; and when they must be allocated. So, whether you are just visiting one of our neighboring countries or traveling to Europe or even more exotic locales, here are some travel tax pointers:

Primarily Vacation – If the travel is primarily for vacation and only a few hours are spent attending professional seminars or meeting with foreign business colleagues, none of the expenses incurred in traveling to and from the general business location are deductible. Other travel expenses must be allocated on a day-by-day basis, and only the business portion is deductible.

Primarily Business – If the trip is primarily for business and meets one of the conditions listed below, the expenses incurred in traveling to and from the business destination are deductible in full (same as for travel within the U.S.).

(1) The travel outside the U.S. is for a period of one week or less (seven consecutive days, excluding the departure day but including the day of return). In addition, all other ordinary and necessary travel expenses are fully deductible.

(2) Less than 25% of the total time outside the U.S. is spent on non-business activities. In addition, all other ordinary and necessary travel expenses are fully deductible. (If 25% of more of the total time is spent on non-business activities, a day-by-day allocation of all travel expenses between personal and business activities is necessary and only the business portion is deductible.)

(3) The individual incurring the travel expenses can establish that a personal vacation or holiday was not a major consideration. In addition, all other ordinary and necessary travel expenses are fully deductible.

(4) The taxpayer did not have “substantial control” over arranging the trip. (For self-employed taxpayers, who would generally have substantial control over the trip arrangements, this provision likely won’t apply.) In addition, all other ordinary and necessary travel expenses are fully deductible.

When determining what constitutes business and non-business time, business days include: days en route to or from the business destination by a reasonably direct route without interruption; days when actual business is transacted; weekends or standby days that fall between business days; and days when business was to have been transacted but was canceled due to unforeseen circumstances.

Non-business days are days spent on non-business activities as well as weekends, holidays and other standby days that fall at the end of the business activity, if the taxpayer remains at the business destination for personal reasons.

Foreign Conventions, Seminars or Meetings – Tax law does not permit a deduction for travel expenses to attend a convention, seminar or similar meeting held outside of the North American area unless the taxpayer establishes that:

(1) The meeting is directly related to the active conduct of the taxpayer’s trade or business, and
(2) It is “as reasonable” for the meeting to be held outside of the North American area as it is within the North American area.

The IRS defines “North American area” quite broadly and includes not just the U.S., Canada and Mexico, as you would expect, but also Bermuda, several countries in the Caribbean basin, U.S. possessions such as American Samoa and other Pacific island nations, and some Central American countries as well.

Cruise Ship Conventions – In order for a taxpayer to deduct the cost of attending a convention related to his or her trade or business on a cruise ship, the ship must be a U.S. flagship, and all the ports of call must be within the U.S. or its possessions. In addition, the maximum deduction is limited to $2,000 per attendee. Substantiation requirements include certain signed statements by both the taxpayer and an officer of the convention sponsor.

Spousal* Travel Expenses – Generally, deductions are denied for travel expenses for a spouse, dependent or employee of the taxpayer on a business trip unless:

  1. The spouse is an employee of the taxpayer, and
  2. The travel of the spouse, etc., is for a bona fide business purpose; and
  3. The expenses would otherwise be a deductible business travel expense for the spouse.*These rules also apply to a dependent or employee of the taxpayer.

Since a spouse, dependent or other individual who is an employee will be denied a deduction for business travel expenses in years 2018 through 2025, condition #3 can’t be met. This means that “spousal” travel expenses won’t be deductible for years 2018 through 2025.

However, the law allows a deduction for the single rate for lodging on qualified business trips, and frequently, there is no rate difference between one and two occupants. Thus, virtually the entire lodging expense for an accompanying spouse will be deductible. When traveling by car, the law does not require any allocation because the spouse is also traveling in the vehicle. Thus, if traveling by vehicle, the entire cost of the business-related transportation would be deductible. Generally, this would also apply to taxis at the destination.

As you can see, determining the tax deduction for a foreign business trip of a self-employed individual that is combined with a vacation can be complicated. If you need additional tax guidance or assistance planning such a trip, please contact us.

Protecting Yourself from Scams, ID Theft and Cyber Criminals

Article Highlights:

  • ID Theft
  • What’s in Your Wallet or Purse
  • Phony E-mail
  • Pop-up Ads
  • Only Access Secure Websites
  • Avoid Phishing Scams
  • Security Software
  • Educate Children
  • Passwords
  • Phony Charities
  • Impersonating the IRS
  • Back Up Files
  • If It Is Too Good to Be True

As much as the Internet has changed our lives for the good, it has also opened us up to threats from crooks all over the world. They’re smart, and are always coming up with new tricks to separate you from your hard-earned dollars or with an illegal way to use your stolen ID. They apply for loans and credit cards with stolen IDs, file fraudulent tax returns, make purchases with stolen credit card info, and tap into your bank account with stolen account information, and the list goes on. As a result, everyone needs to be very careful and mindful of the tricks used by these scammers to not end up becoming a victim.

Tarlow & Co is committed to using safeguards that protect your information from data theft. To further protect your identity, you can also take steps to stop thieves. This article looks at a variety of tricks and schemes crooks use to dupe individuals, along with actions you can take to avoid being scammed, keep your computer secure, avoid phishing and malware, and protect your personal information.

ID Theft – The primary information ID thieves are looking for is your name, Social Security number, and birth date. So, constantly be aware of where you use that information, and always question anyone’s need for it when they ask. The fewer institutions that have your ID information, the lower the chances your data will be hacked. Treat personal information like cash – don’t hand it out to just anyone. Social Security numbers, credit card numbers, and bank and even utility account numbers can be used to help steal a person’s money or open new accounts. Every time you receive a request for personal information, you should think about whether the request is truly necessary. Scammers will do everything they can to appear trustworthy and legitimate.

Stolen IDs are also frequently used by cyber thieves to file fraudulent tax returns in your name, to take advantage of refundable tax credits such as the earned income tax credit, the child tax credit and the American Opportunity Education Credit, leaving you to deal with the IRS’s identity theft protocol.

What’s in Your Wallet or Purse – What is in your wallet or purse can make a big difference if it is stolen. Besides the credit cards and whatever cash or valuables you might be carrying, you also need to be concerned about your identity being stolen, which is a far more serious problem. Think about it: your driver’s license has 2 of the 3 keys to your identity. And if you also carry your Social Security card, bingo! An identity thief then has all the information needed.

Phony E-mail – Be aware that an unsolicited e-mail with a request to download an attachment or click on a URL could appear to be from someone you know, such as a friend, work colleague or tax professional. It could be that their e-mail has been hacked and someone else is sending the e-mail, hoping to trick you into some scam. Be alert for suspicious wording or content, and don’t click on any embedded links or attachments if there is any doubt.

Pop-up Ads – Don’t assume Internet advertisements, pop-up ads, or e-mails are from reputable companies. If an ad or offer looks too good to be true, it most likely is not true. Take a moment to check out the company behind it. Type the company or product’s name into a search engine with terms like “review,” “complaint” or “scam.”

Only Access Secure Websites – Only provide personal information over reputable, encrypted websites. Shopping or banking online should be done only on sites that use encryption. People should look for “https” at the beginning of a Web address (the “s” stands for “secure”) and be sure “https” is on every page of the site.

Avoid Phishing Scams – The easiest way for criminals to steal sensitive data is simply to ask for it. Learn to recognize phishing e-mails, calls or texts from crooks that pose as familiar organizations such as banks, credit card companies or even the IRS. These ruses generally urge taxpayers to give up sensitive data such as passwords, Social Security numbers and bank account or credit card numbers. They are called phishing scams because they attempt to lure the receiver into taking the bait.

For example, you might get an e-mail disguised as being from your credit card company asking you to verify your password. Companies will never do that because only you have that information, which is why you have to change it if you forget it.

Security Software – It is good practice to use security software. An anti-malware program should provide protection from viruses, Trojans, spyware and adware.

Set security software to update automatically so it can be upgraded as threats emerge. Also, make sure the security software is on at all times. Invest in encryption software to ensure data at rest is protected from unauthorized access by hackers or identity thieves.

You should never download “security” software from a pop-up ad. A pervasive ploy is a pop-up ad that indicates it has detected a virus on your computer. Don’t fall for it. The download most likely will install some type of malware. Reputable security software companies do not advertise in this manner.

Educate Children – Today’s children are probably more adept at using the Internet than their parents but are not mindful of the hazards. Educate your children about not giving out or posting online their Social Security numbers or birth dates. It may also be appropriate not to allow them to use a device that contains sensitive information such as tax returns, financial links, etc. It is not uncommon for crooks to use children’s IDs to file fraudulent tax returns. Also, block your children from freely downloading apps to their mobile devices without parental supervision.

Taxpayers have reported an increase in e-file problems because their children’s SSNs have already been used in a previously e-filed return, which results in the e-filed return being rejected.

Passwords – Use strong passwords. The longer the password, the tougher it will be to crack. Most sites require a minimum of eight characters, with at least one number and one character. Many sources suggest using at least 10 characters; 12 is ideal for most home users. Mix letters, numbers and special characters. Try to be unpredictable – don’t use names, birthdates or common words. Don’t use the same password for many accounts, and don’t share them on the phone, in texts or by e-mail. Consider using a “passphrase” versus a password. And remember, legitimate companies will not send messages asking for passwords.

Phony Charities – The fraudsters pop up whenever there are natural disasters, such as earthquakes or floods, trying to coax you into making donations that will go into the scammer’s pockets and not to helping the victims of the disaster. They use the phone, mail, e-mail, websites and social networking sites to perpetrate their crimes. The following are some tips to avoid fraudulent fundraisers:

  • Donate to known and trusted charities. Be on the alert for charities that seem to have sprung up overnight in connection with current events.
  • Ask if a caller is a paid fundraiser, who he/she works for and what percentages of the donation go to the charity and to the fundraiser. If any clear answers are not provided, consider donating to a different organization.
  • Don’t give out personal or financial information—including a credit card or bank account number—unless the charity is known and reputable. You might end up donating more than you had planned on.
  • Never send cash. The organization may never receive the donation, and there won’t be a record for tax purposes.
  • Never wire money to a charity. It’s like sending cash.
  • If a donation request comes from a group claiming to help a local community agency (such as local police or firefighters), ask the people at the local agency if they have heard of the group and are getting financial support.
  • Verify the charity – Check out the charity with the Better Business Bureau (BBB), Wise Giving Alliance, Charity Navigator, CharityWatch or IRS.gov.

Impersonating the IRS – Thieves will try to impersonate the IRS in an attempt to frighten you into making a quick payment, without checking on the validity of you owing any taxes.

The very first thing you should be aware of is that the IRS never initiates contact in any other way than by U.S. mail. So, if you receive an e-mail or a phone call out of the blue with no prior contact, then it is a scam. Do not respond to the e-mail or open any links included in the e-mail. If it is a phone call, simply hang up.

Additionally, it is important for taxpayers to know that the IRS:

  • Never asks for credit card, debit card or prepaid card information over the telephone.
  • Never insists that taxpayers use a specific payment method to pay tax obligations.
  • Never requests immediate payment over the telephone.
  • Will not take enforcement action immediately following a phone conversation. Taxpayers usually receive prior written notification of IRS enforcement action involving IRS tax liens or levies. Some scammers even threaten immediate arrest if the payment is not made immediately – don’t be bullied by these criminals.

When in question, contact your Tarlow tax advisor before making tax payments or providing information.

Back Up Files – No system is completely secure. Back up important files, including federal and state tax returns, business books and records, financials and other sensitive data onto remote storage, a removable disc or a back-up drive.

If It Is Too Good to Be True, It Probably Isn’t – Many e-mail scams are based around supposed foreign lotto winnings, foreign inheritances and foreign quick-buck investment schemes. Don’t let the lure of the dollar signs cloud your better judgement. The only one that makes out in these instances is the cyber crook.

If you have any questions, please contact us.

What Are the Differences Between an IRS Tax Lien and a Tax Levy?

If you’re reading this, the chances are high that you’re one of the many, many people who have received a notice from the Internal Revenue Service. Some level of correspondence with the IRS is natural ‒ particularly leading up to and in the immediate aftermath of tax season. But if you’ve received notification that the government is about to file a tax lien or tax levy against you, suddenly you’re talking about an entirely different ballgame.

But the most important thing you can do at this point is stay calm. Yes, both of these notices mean that your financial situation has just gotten significantly more complicated. But you do have rights in each scenario that you would do well to protect at all costs.

What Is an IRS Tax Lien?

An IRS tax lien is a very specific type of claim that the government (in this case, the Internal Revenue Service) makes on your property. That property can include but is not limited to real estate and other types of assets. Typically, this is something that occurs when you’re past due on your income taxes and you’ve failed to make proper arrangements to get yourself back up-to-date again.

A tax lien can affect you in a number of different ways, all of which are less than ideal. Even though tax liens no longer appear on your credit report, your credit rating will still suffer ‒ thus harming your ability to get a loan or secure new credit for your business. Tax liens also usually appear during title searches, which can impact your ability to sell your house or refinance the mortgage you already have.

What Is an IRS Tax Levy?

A tax lien is essentially the first part in a two-step process. That second step takes the form of a tax levy, which involves the actual seizure of the property in question in an effort to pay the tax money you owe. Via a tax levy, the IRS can do everything from garnish your wages, seize assets like real estate or even take control of your bank accounts to get their money.

At the very least, you’re likely to go through wage garnishment ‒ meaning that you’ll be taking home far less money at the end of the week in your paycheck. A 21-day hold might be placed on your bank account in an effort to encourage you to “work things out,” and if you don’t, they may even try to seize your home as a last resort.

Luckily, there are a few things that the IRS CAN’T seize even by way of a tax levy. These include things like unemployment benefits, certain pension benefits, disability payments, workers’ compensation and others.

What Can I Do About Them?

Thankfully, even in the unfortunate event of a lien or levy, you do still have some options available to you.

More than anything, if you CAN pay your tax bill, you SHOULD pay your tax bill. If necessary, get on an IRS payment plan to help you get back up-to-date. Yes, your past due balance will continue to accrue both interest and penalties until you’ve paid it off. But the choice between paying interest and losing your house isn’t really a choice at all.

It’s also important for you to actively work to protect your rights if you feel it necessary to do so. After receiving either a lien or a levy notice, you can always file an appeal with the IRS Office of Appeals if you feel you’re being treated unfairly. It is within your right to ask for a conference with the IRS agent’s manager so that your case can be reviewed by a fresh set of eyes. If nothing else, this is a great way to make sure that your side of the story is known.

You can also apply for a Withdrawal of the Notice of Federal Tax Lien, which will remove the public notice of a tax lien filing. If the IRS has notified you that any of your property is about to be seized, you can file something called a Certificate of Discharge. This will remove the property in question from the effects of the tax lien, allowing you to sell something like your home (or another asset) without worrying.

A seasoned Tarlow tax professional can assist with these challenges. Please call us with any questions and for assistance.