published March, 2018
OK, you’re hip, you’re modern, you’re buying and selling cryptocurrencies.
Those aren’t traceable, so they’re not taxable, right?
The IRS has determined that cryptocurrency is “property” (IRS Notice 2014-21), and when you exchange out of one currency into something else, you may have a reportable gain or loss.
Let’s say you bought 12 bitcoin on 1/1/17 and paid US$800 per bitcoin (US$9,600). Then you got all excited and sold (good for you!) on 12/15/17, at the peak of US$17,900 (x12 = US$214,800). And, with your $200k, you bought XRP for US$0.861760, or 249,257 on the same day.
Time passes, and you decide to buy a house, so you sell your XRP 249,257 on 3/24/18 and since the value has declined, you convert it back to US$161,073 so you can pay the down payment. You’re still doing really well, you made US$9,600 into US$161k. You expect to pay tax on $151k, the difference.
But, one currency into another is NOT a “tax free exchange” so there are two reportable transactions here. First you’ve got a taxable gain on the bitcoin in 2017 of $205,200. Then, you’ve got a loss on XRP of US$53,727. Because they are in separate calendar years, they do not “net” against each other. You owe tax on the US$205k for 2017, and then you have a capital loss in 2018 of US$53k, which you can take against other income at $3,000/year (unless you have a future capital gain to offset it).
Each time you sell, you have something to report. You need to track when and what you bought, and what and when you sold for, and report this on your taxes.
How will they catch me? Coinbase, the exchange service, will be reporting your transactions to the IRS, and I expect any other reputable exchange to do the same.
Well, what if I pay my contractor with XRP instead of dollars? If you were going to have to report to the IRS if you’d paid with US$, you still have to report at the exchange rate the day you paid (think 1099s denominated in US$).
(Thanks to Peter Schiff for the example.)
published June, 2016
If you owe estimated payments, the next one is due June 15th. Individuals and Entities both have the same deadline this quarter.
Do you owe them?
If you’re making money that doesn’t have withholding (something other than a W-2, for example), you probably will owe estimated payments for 2016.
How much do I owe?
It depends! For individuals, there is a de minimus exclusion of $1,000 for federal tax—if you owe less than $1,000 when we calculate your 2016 return, there is no late penalty—providing you’ve paid in what you owe sufficiently to cover your tax within this tolerance limit.
If you owe more than $1,000 federal tax on your 2016 return, then we look to the current year 2016, and the prior year 2015. If you’ve paid in 90% of the tax on your 2016 return in a timely manner (i.e. you made your payments evenly through the year), you’re OK. But we generally don’t know what you’re going to owe until the return is done, so…
We look to the prior year, 2015. If you’ve paid in 100% of the total tax you owed in 2015, you’re OK…unless your AGI was over $150,000 (less if you’re married filing separate). Then, you must pay in 110% of the 2015 amount due to avoid a penalty. So if you have a paycheck, but also get a K-1, you’ll need to make a payment on the K-1 part of your income, for example.
What if I owe and I don’t pay?
There’s a penalty, of course! For the IRS, the penalty is 3% annually, plus interest for an underpaid amount, calculated to the day they get the payment.
But I haven’t finished my 2015 return yet, how do I know what to pay?
Yep, that’s a problem. Accounting for any known changes in income, we usually opt to pay in for 2016 at least what you owed for 2014. Ask me if you need payment vouchers—we need to be sure the IRS credits the proper year for your payments. And let us finish the 2015 return!
Entities also owe something—there’s a minimum payment for California LLCs, California S Corporations, and California C Corporations. (Partnerships that are not LLCs don’t owe generally.) If you only owe the minimum FTB $800, the June 15th payment is $320.
published January, 2016
Don’t forget to gather the information for your 1099s, along with the rest of your tax information. If you don’t do your 1099s, there can be a variety of penalties, and the IRS has just doubled some of the penalties, which are based on when you file—the later, the greater the penalty. Once you’ve finished your 1099s, you must transmit “the red copy” with a Form 1096, which is like a cover sheet and summary of the 1099s you’re sending in.
Most people haven’t seen penalties imposed, but a second client got a penalty notice this last year, so it appears the IRS is starting to impose the penalties.
published November, 2015
When the IRS thinks you owe money, the send you a letter. (Scam notes: They don’t call you on the phone and demand money without allowing you to dispute the amount—if that happens, it is probably a scam. Don’t send them money over the phone, they are NOT the IRS.)
The letter they send will go to the address they have on file for you. If you don’t respond to their letter, they’ll send another one. And a couple more. After this, they might find your bank account and take the money they think you owe—and that usually gets people’s attention. If you don’t get the letter because they don’t have your proper address, that is your fault for not letting them know how to contact you. If you use a new address on your tax return, they will update your address in their records. There’s a form (hey, it’s the IRS!).
Form 8822 for individuals, or Form 8822-B for businesses (https://www.irs.gov/pub/irs-pdf/f8822.pdf). The second page of the form tells you how to get it to them.
The California Franchise Tax Board also has Form 3533 (https://www.ftb.ca.gov/forms/2014/14_3533.pdf). They allow you to fill this out on-line. You can also file a return with the corrected address, or send in an estimated payment, or do this on-line at “MyFTB” if you have an account.
There is a separate form if you pay payroll taxes with the Employment Development Department, Form DE24 (http://www.edd.ca.gov/pdf_pub_ctr/de24.pdf).
published October, 2014
How does this help you? Short term, you have little choice of the tax rate you fall into. But you should not be “surprised” at how much tax you owe. Too many people are. In the long term, you may want to see what you can do to move “down” this list. Be sure to read the caveat in the last paragraph.
As you know, money pulled early from retirement is “expensive” money, both in terms of taxes, and also beause it will not be there when you retire. Hopefully, you won’t need to draw money from retirement funds early to meet living expenses. If you do, know that the tax rate is closer to 40% than 10%. The federal penalty for early withdrawal is 10%, plus the state adds a penalty also. And, you have to pay income tax on the money. The retirement fund people may offer to withhold federal (and state) tax, but they default to just withholding the penalty amount, not the penalty plus the income tax.
The self-employment income tax rate is closer to 50%. This includes federal and state income taxes, plus 15.3% for Social Security and Medicare. This includes income to partners in a partnership or members of an LLC who are performing services.
Income from wage jobs can be more like 30%. You pay income tax on this money, and they withhold half of the Social Security and Medicare from your check before you even get it. I think of this withholding as a tax. The benefit here is that the income tax is withheld before you ever see it, in hopefully the correct amounts.
Ordinary income is not earned by services, so there is no Social Security nor Medicare to pay. This would include things like interest—but with current interest rates you’d have to have a LOT of money to make any substantial amount of interest, and S Corporation earnings. There is still income tax on this, but it is taxed at a lower rate.
Capital gains rates are lower, closer to 15%, but you have to first buy an asset, and then sell an asset. See the definition of assets in a later issue.
Even better is cash flow without income tax recognition. I’m not suggesting you don’t report your income! Always report all your income in full. The tax code, however, allows you to take a depreciation expense against income from some capital assets. So it is possible to have cash flow that does not get taxed at all. The tax rate on this money is 0%.
Income tax rates are “progressive”—that is to say, the more money you make, the higher the rate is on your income, so the rates above are not only for a specific income level, they will also change as the rates get changed each year. Also, Social Security has an upper limit (this is a component of SE tax). This is a very broad illustration of tax rates and there are many nuances, adjustments, rules and limitations. I’ve spent 15+ years on this topic. Your actual results may vary.
published September, 2014
For an individual, the federal penalty for “failure to file” is 5% of the unpaid balance for each month, or part of month that the return is late, up to a maximum of 25%. (There is no penalty if the return shows no tax due.) If you have a “failure to pay” penalty for the same month(s), the filing penalty is reduced by the failure to pay penalty. California charges up to 25% with a minimum penalty of the lesser of $135 or 100% of the tax due.
For an LLC or S Corporation, the federal penalty for “failure to file” is $195 for each month, or part of a month, up to twelve months, multiplied by the number of members/shareholders during the year (!). If tax is due, the penalty is 5% of the amount due up to a maximum of 25%. California also charges 5% of the tax due for failure to file up to 25%.
If you were on extension but don’t file by the extended deadline, the extension is ‘vacated’ and you go back to the original due date of 3/15 or 4/15. So, if you file one day late, on 9/16 or 10/16, you’re already at the maximum late penalty.
If you owe money too, there is interest and penalties on the amount due.
If you think you won’t be able to get me your materials, let me know soon, and I’ll refer you to someone who would be willing to file your return late for 2013.
published August, 2013
Several of my California business clients have received notices that they were supposed to have filed Use Tax Returns with the California Board of Equalization.
Don’t panic if you got one of these notices. They are, for the most part, looking for sales tax on purchase you made from out of state. When you buy something in California for use in California, you pay sales tax in the location where the “transfer” takes place, like the store. When you buy something from out of state, you don’t pay sales tax to that “foreign” state, like Nevada, but if you are the end user of some tangible product, like a book or a toner cartridge, California wants you to report the purchase, and pay “Use” tax (which equals sales tax) on what you bought.
The CA BOE has gone completely on-line, so if you have the “express login code” and the account number, conveniently provided for you on the letters they’re sending out, you can file this on-line.
To find any purchases, I usually start with things from Amazon.
published June, 2013
If you’ve got a “financial interest” or signature authority over one or more financial accounts outside the US, AND if the value of these accounts totals over $10,000 at ANY TIME during the year, you need to report them by 6/30/13.
The penalty for failing to file can be up to $10,000.
The Form is Form TD F 90-22.1 Report of Foreign Bank and Financial Account (FBAR). The IRS has a help phone line and email: 866-270-0733 or FBARquestions@irs.gov
published January, 2013
1099s and W-2’s are due out to contractors and employees by January 31st. Then copies with transmittal forms are due to the IRS by February 28th. Personal estimated payments for the fourth quarter of income from 2012 are due January 15th. Corporate returns are due March 15th and personal returns are due…um…I forget exactly when. (April 15 as per usual)
Have you made payments to an individual or partnership from your business in amounts over $600? For non-employee compensation, you must issue 1099-MISC forms in January 2013.
Have you heard about the 1099-K? It is a new (as of last year) 1099 that credit card processors have to issue to their merchants—so Visa, Paypal, AmEx, etc will be sending statements to you, if you’ve accepted credit cards this year. A copy will also go to the IRS so they can match the income reported to your tax return.
Here’s the news: if you’ve paid vendors with a credit card or Paypal, you DON’T have to include those payments on a 1099-MISC (the 1099-K is filed instead of the 1099-MISC per IRS instructions). So, now you have to keep track not only of what you paid, but how payment was rendered. If you’re using QuickBooks and populate the check number field with the following:
Gone are the days of bringing a stack of 1099s in to the office and saying “here’s all my income.” Some of your income may be duplicated if you accept credit cards, and you wouldn’t want to pay too much tax.
published June, 2012
For individuals who owe estimated payments, the second payment for 2012 is due June 15. Yes, I know, it isn’t quite the end of the second quarter yet, but the amount is based on what you owed for 2011, but if you’re making a ton more money in 2012, let me know so we can adjust your payment amount up. Also, if you’re making a lot less, let me know this as well, so we can adjust your payment down.
For corporations, the second quarter payment is also due June 15. If you have a corporation and you’re making money, you probably have to make payments for the corp AND yourself!
The systems is supposed to be a “pay as you go” plan so you make the income tax payments as you are earning the money.