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What Are the Pros and Cons of Filing an Extension?

As with most things, there are pros and cons to filing an extension on your taxes. Let’s take a look at the pros of getting an extension to file first.

Pros

1. You can avoid a late-filing penalty if you file an extension. The late-filing penalty is equal to 5 percent per month on any tax due plus a late-payment penalty of half a percent per month.

Tip: If you are owed a refund and file late, there is no penalty for late filing.

2. You can also avoid the failure-to-file penalty if you file an extension. If you file your return more than 60 days after the due date (or extended due date), the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a late-filing or late-payment penalty if you can show reasonable cause for not filing or paying on time.

3. You are able to file a more accurate–and complete–tax return. Rather than rushing to prepare your return (and possibly making mistakes), you will have an extra 6 months to gather required tax records. This is helpful if you are still waiting for tax documents that haven’t arrived or need more time to organize your tax documents in support of any deductions you might be eligible for.

4. If your tax return is complicated (for example, if you need to re-characterize your Roth IRA conversion or depreciate equipment), then your accountant will have more time available to work on your return.

5. If you are self-employed, you’ll have extra time to fund a retirement plan. Individual 401(k) and SIMPLE plans must have been set up during the tax year for which you are filing, but it’s possible to fund the plan as late as the extended due date for your prior year tax return. SEP IRA plans may be opened and funded for the previous year by the extended tax return due date as long as an extension has been filed.

6. You are still able to receive a tax refund when you file past the extension due date. Filers have three years from the date of the original due date (April 18, 2017) to claim a tax refund. However, if you file an extension you’ll have an additional six months to claim your refund. In other words, the statute of limitations for refunds is also extended.

Cons

And now for the cons of filing an extension…

1. If you are expecting a refund, you’ll have to wait longer than you would if you filed on time.

2. Extra time to file is not extra time to pay. If you don’t pay a least 90 percent of the tax due now, you will be liable for late-payment penalties and interest. The failure-to-pay penalty is one-half of one percent for each month, or part of a month, up to a maximum of 25 percent of the amount of tax that remains unpaid from the due date of the return until the tax is paid in full. If you are not able to pay, the IRS has a number of options for payment arrangements. Please call the office for details.

3. When you request an extension, you will need to estimate your tax due for the year based on information available at the time you file the extension. If you disregard this, your extension could be denied, and if you filed the extension at the last minute assuming it would be approved (but wasn’t), you might owe late-filing penalties as well.

4. Dealing with your tax return won’t be any easier 6 months from now. You will still need to gather your receipts, bank records, retirement statements and other tax documents–and file a return.

Tax Preparation Made Easy

Here are 4 easy steps I wanted to share with you for making it easy to have your 2016 taxes prepared:

1. Gather your forms.  Be sure you know where your W-2, 1099, 1098 and other forms are.  It’s also important to understand what forms you will use to prepare your taxes or have others prepare them.  Search www.irs.gov for information on the proper forms to use based on your circumstances. I think it’s important that you are engaged in this process, rather than just handing a shoebox full of receipts and other papers to the tax preparer to sort through. In my experience this professional certainly won’t be happy with you and may even charge you extra. Seriously, organize your information and know for yourself what your income and expenses are so you are educated.  Sandy Botkin, a well known tax attorney and CPA, says, “The seven most expensive words are ‘My tax accountant takes care of my taxes.’”   Stay in control of your own finances, money and taxes.  It could be worth as much as $2,000 each year. 

2. Decide how you should file.  Tax software is available and of course professionals can help. Search online to get help on how to prepare your taxes.  If your taxes are simple and you have no business activities recorded, then it can be inexpensive to hire someone rather than doing it yourself.  I have always prepared my own returns, then I hire a professional to check what I have done. This has been the most cost efficient method for me as it saves on the hourly rate paid a professional to do your taxes. Plus, I have always found that using a professional improves my situation and I make the necessary changes for the following year.

3. Determine when to file.  This year, April 18 is the tax filing deadline.  If you file early, you still have time to pay any balance owed up and until April 18.  Remember that when you extend your tax filing, it doesn’t extend your need to pay.   All money owed needs to be paid by April 18 or you will have to work out a payment plan with the IRS and this will cost you extra money in interest and penalties.  

4. Get organized for next year. Since you just finished preparing your 2016 returns, you learned some things about your organization.  Identify those helpful items for next year and implement them now.  As the years come and go you will get better and better at being organized.  

For more information on how to pay the proper amount of taxes, contact me: peter@moneymastery.com.

IRS Rule for What Constitutes a Business Day When Traveling

As I have noted in the last three posts, business travel can be a great tax deduction, but there are rules for deducting these expenses properly. If you know the rules, you can take these deductions with confidence, all while enjoying some time away from home. In this post I will cover the rules for what constitutes a business travel day.

The IRS considers each day you are on the road traveling as a “busi- ness day.” That means that you don’t have to wait until you get to the seminar or business meeting before you can deduct 50 percent of your food and 100 percent of your other on-the-road expenses (which I outlined in my last post Requirements for Deducting On-the-Road Travel Expenses). You can begin deducting them the minute you get onto the road.

I’ll use my example traveler, Loni, to illustrate:

Loni decides to travel to Las Vegas by car from her home in Evanston, Wyoming. She gets in the car on Thursday afternoon at about 3:00 p.m. and begins driving towards Las Vegas; it will take her approximately eight hours to get there if she drives straight through. She stops about 6:00 p.m. to eat at a nice little roadside restaurant and pays $10 for the meal. She doesn’t keep a receipt for her dinner but does write it in her tax diary. Even though she hasn’t reached the trade show yet, her time on the road can still technically be considered a business day because she’s making efforts to get to a place where she will conduct the actual business meetings; thus, all of her life-sustaining expenses are
deductible.

Now, let’s suppose instead that Loni decides to leave for the trade show in Las Vegas about five days early so she can stop in Salt Lake City along the way to ski and have fun with friends. The IRS has a rule that says she should try to travel at least 300 miles every day if she wants to count each of those traveling days as business days. To figure whether you are within the bounds of this rule, take the number of miles you are driving to your destination and divide by 300. Round up for fractions. In Loni’s case the total travel miles (if she took a more direct route and did not stop in Salt Lake City) from Evanston to Las Vegas are 650 miles. She would take that 650 miles and divide by 300, which gives her a little over two days to get to Las Vegas if she wants to write off the expenses she incurs while on the road. Does she have time to stop in Salt Lake and ski? Maybe, but it would have to be a very quick trip. Maybe Loni decides not to ski in Utah on the way to the tradeshow, but you can see from this example that it could be possible.

To further understand how this rule works, let’s suppose that instead ofHamburger going skiing, Loni decides she wants to take her husband with her to the trade show in Las Vegas. She certainly doesn’t feel like traveling 650 miles alone. And besides, she has hired her husband, Kurt, to handle all her office and computer equipment, so she wants him to browse around the trade show and get new ideas for the best ways to update her home office. Because he’s going to be at the trade show conducting his own business and he is her employee, Loni can deduct all of Kurt’s traveling expenses as well.

Now Loni decides that taking her three kids to Las Vegas would be fun, too, so she packs up the whole family in the car. What can she deduct of the costs she will incur to take her entire family to the show? She can deduct anything she would have spent had she gone alone.

Loni’s Deductions If She Takes Her Entire Family

Gas: Yes, she would have used fuel to drive either way. However, the rules that govern this deduction are covered under the “Transportation” category, which I will cover in an upcoming post.

Tolls: Yes, she can take these no matter who travels with her.

Lodging: Yes, if she has to stay in a room then that hotel room is deductible, but only the portion that the hotel or motel charges for a single occupant.

Food: Yes, but only 50 percent of her own meal costs and not those of her three growing children.

Other: Yes, anything she might have to purchase for herself, but not for those in her family. For example, let’s say Loni wanted to get her hair done in Las Vegas at the hotel beauty salon. Could she deduct the cost of that haircut and style? Yes, at 100 percent. Now let’s assume she also wanted to have her daughter come with her to get a trim. Could she deduct the cost of her daughter’s haircut. No, because this is not an expense she would incur on her business travel if she were alone.

Suppose Loni wanted to get some dry cleaning done while she was at the trade show. Could she take this laundry to the hotel cleaners and then write off the expense? You bet. Remember, the IRS rule says that you can deduct any and all expenses (except for food) that you would incur while on the road at 100 percent.

More travel deduction ideas in my next post.

Requirements for Deducting On-the-Road Business Expenses

In my last post, More on the Value of Deducting Travel Expenses, I outlined more reasons why learning the rules for deducting business travel can be a great way to save tax dollars. I mentioned at the end of that post that there are IRS requirements for what travel expenses can be deducted. Let’s take a look at the way travel is categorized for the purpose of making expense claims. Expenses are deducted in one of two ways, depending on what type of expense you have while traveling:

1) On-the-road expenses: Any and all costs necessary to sustain life while traveling for the purpose of doing business, except for transportation expenses.

2) Transportation expenses: Expenses you incur traveling to and from your destination.

On-the-Road Expenses

You can deduct 100 percent of the cost of lodging, laundry, hairstyling and haircuts, dry cleaning, shoeshines, and even manicures while on your business trip! So if you get your nails done while you are at a convention, for example, you can deduct 100 percent of that little trip to the salon!

Now what about food? Food is only 50 percent deductible. Screen shot 2016-06-01 at 4.07.57 PM

What about transportation? Cost to travel to and from your destination are not considered “on-the-road” expenses by the IRS, and are governed by another set of rules that I will detail in an upcoming post.

 

Here are the rules for “On-the-Road travel deductions:  

You do not need a receipt for travel expenses under $75 per expense. But there are two exceptions to this rule:

1. You must have a receipt for all lodging, regardless of the cost.

2. You should also try to have receipts for all transportation (this is not transportation for getting to or from your destination, but transporta- tion once you have arrived such as rental cars, bus fares, train fares, and taxi fares). While not absolutely necessary, I recommend getting receipts for these expenses when you can. If you spend $100 on a cab that takes you from the airport to your hotel, must you have a receipt for that cost? Yes, because it’s transportation and it cost more than $75. After arriving at your destination, let’s suppose you eat a nice buffet breakfast and spend $10 for it. Do you have to have a receipt for that meal expense? No, because you ate it while on business travel and it shutterstock_254497954cost under $75.

When it’s time to go home, you check out of your hotel and get the bill, which is $395. After you pay the bill you are sure to take the receipt for that lodging expense because you will need it in order to substantiate your very nice tax deduction for that hotel bill.

The “receipt” rules are fairly simple: Remember to keep receipts for lodging and local transportation. Otherwise, you probably won’t need a receipt for almost anything else you purchase on your trip because it’s unlikely that any expense will exceed $75. Last tip:  Be sure to write down all on-the-road expenses in a tax diary! The IRS expects everything and I do mean everything, to be documented!!!!!

Deducting Travel Expenses from Taxes Makes So Much “Cents”

It is so simple to deduct your travel expenses, if you have a business activity of some kind.  You must do a little planning in advance and keep good documentation but this will allow you to save taxes big-time!

First, you need to think outside the W-2 box and decide on a way that you can start a small business on the side to make more money and save taxes as well.  You can start out as a sole proprietor, use your own name and Social Security number and get down to business.  You don’t need a merchant account to collect money using a credit card, although this is helpful.  You don’t need to have a bank account with your business name on it, although this is helpful.  The main thing is to start.  Once you get going, you will learn a lot!

Your business activity needs to have a purpose to make money.  You areTaxCuts not required to make money initially, but must have a goal to earn a profit.  This profit potential is how the IRS defines your activities.  You are the person on the firing lines.  You have to manage your cash flow so you can make money.  You will need a cell phone to call and set appointments, so this is a valid business expense, as are meals, dry cleaning and so forth.

Keep in mind that as you work at this business enterprise, you just might make more money.  Wouldn’t that be fun to make more money? You will have expenses as you try to make money and here are just a few of those expenses you can deduct:

  • Office supplies
  • Business miles on a car used for business purposes
  • Parking fees
  • Some entertainment expenses
  • Travel expenses

The last bullet point on the list, travel expenses, can be one of the best and most enjoyable ways to save tax money while operating a small business.

Duane, a coaching client of mine, called me from Louisiana and told me he was planning a vacation to Hawaii and asked what he could do in order to deduct some of his travel expenses  I checked with Sandy Botkin, a tax attorney, and Sandy said all he needed to do was schedule appointments in advance of traveling to show business intent, then keep good records of his trip.  Since Duane is a dentist, he researched other dentists like himself on the island of Maui and found two dentists willing to meet with him and conduct a dental practice interview.

Duane returned home after his trip with a glowing report.  One dentist in particular he interviewed showed him how he had doubled his revenue by installing implants for his patients who did not have any teeth.  The extra high quality of life that was added to this patient was immense so Duane decided to get additional schooling on dental implants and has since doubled his revenue.  The education and information he picked up in Hawaii was rewarding for Duane, but what was even more wonderful is that he could write off almost the entire trip as a business expense because he followed the tax rules governing business travel.

Creating a business activity can be fun and rewarding, especially as you deduct valid travel expenses associated with your activity.  For more information on this topic, explore the book MONEY:  What Financial “Experts” Will Never Tell You available here on Amazon.com.

Adjust Your Withholding to Stop Getting a Tax Refund

Many people fear tax day on April 15This date is special for me because my granddaughter was born on tax day.  But most people dread this day of accountability because they might owe the IRS a bunch of money.

In a recent Money Mastery class I taught, I asked the class members how many got a tax refund each year?  Many hands went up, so I tested them for understanding.  I asked them how they felt getting money, rather than paying?  As expected, each person who had received a refund said it made them very happy.  My follow up question was to ask how much of a refund they received.  The answers averaged $4,200 per family.  WOW! That’s a lot of money that sat in IRS coffers all year that these people were unable to use themselves for their own benefit… remember, this is their money, they just gave it to the IRS to use all year instead of using it themselves.

Here’s how the numbers work, in general: $4,200 divided by 12 months = $350 each month they over-paid in taxes.

I explained to class members that if they would go to www.irs.gov and use the W-4 calculator to see how many exemptions they should claim in order to pay just the right amount of taxes all year, then of course they would not receive the $4,200 refund.  Then I shutterstock_154523414asked which they would prefer to have, $350 more each month, or the $4,200 in the spring each year?  Unbelievably, 100 percent said they would rather get the $4,200.

That’s when things got fun for me. I began explaining the numbers on the board this way:

  • Use the $350 per month to pay down a 22% interest rate credit card with a $5,600 balance.
  • If the $350 was used each month, it would pay $77 of principal on the card, thus eliminating $924 off the balance.

I then asked the class the question:  Would you like to have paid off $924 more debt or receive the $4,200 in the spring?  They all said they wanted that “extra $924!”  And they said it with gusto.

As you read this, if you do get a large tax refund each year, I suggest you take a good, hard look at this. A tax refund is not a nice little bonus check the IRS is giving you each year. It isn’t “magical money” you look forward to getting so you can take that neat vacation, or buy some new consumable. It is your money you are giving to the government to use that earns them interest, not you. It is wasted money. It is money you are not using all year to pay down debt or to create savings categories in your Spending Plan, or to invest in something that earns you interest. It is money that you taxeslikely use as a lump “fun money” sum in the spring instead of paying the right amount of taxes as you go so you have full use of your own money to help get yourself out of debt, and controlling your spending.

Don’t give your money to the government to use all year. Do the wise thing and get online to calculate how much you need to pay all year so that you don’t receive a refund but don’t have to pay any or much on April 15. Make that day a great day, even if you do not have a beloved granddaughter for whom you celebrate a birthday!

Never Worry about an IRS Audit Again

Wouldn’t it be great if you never had to worry about getting audited by the IRS, especially if you run a home-based business?  And how can you avoid giving 30, 40, or even 50 percent in over-inflated tax payments to the government?  Simple.  By taking the time to properly document your activities every day. Without keeping track on a daily basis of your business activities you cannot boldly and confidently deduct every expense to which you are legally entitled.  Recording your daily activities using a systematic and orderly tracking approach can help you save thousands of tax dollars and will help you “bullet-proof” your records.

Habit #1: Keep a Detailed Tax Diary.  This diary, which can be your appointment book or daily planner, is the focal point of your documentation system.  It should include:

  • All of your appointments.
  • Where and when you travel.
  • Where you go by automobile.
  • Where and when you entertain business contacts.

Habit #2:  Keep Permanent Records. These include prior years’ tax returns, stock purchases and sales, equipment purchases, etc.  Generally, you want to keep any record that relates to more than one tax year.  If you purchase property, your permanent files should include the purchase documents, closing statements, deeds, and other expenses related to the purchase.

Habit #3:  Keep Business Records.  These include time sheets for part-time help, receipts, invoices, cancelled checks, and other evidence that you do business on a regular basis.

Failure to keep accurate records can result in very stiff penalties if you are ever audited.  But you need never worry if you document your activities.  The key is to record everything!

 

Posted by Alan Williams on 02/21/05