Blog – Phoenix Tax Consultants

Keeping Tax Files: What are the rules?

Once you are done filing your tax returns, what should you do with all the receipts, forms, and other paperwork? Should you just shred them and reduce the clutter or keep them?

The IRS recommends that you should keep any documents that prove how much income you have earned and any other documents that support deductions or credits you claim. However, if you will get one record (like your W-2) at the end of the year that summarizes all the crucial information, you don’t have to worry about keeping every single document. 

The IRS has 3 years after the due date of your tax return or when you filed if later to trigger an audit, so it’s advised to keep the records until that time has passed. 

But, in a few cases, you should keep the records even longer. For example, cost basis informations for assets you may sell later.

Pro Tip: You should keep your W-2 forms around for non-tax purposes as well. For example, if you ever need to apply for Social Security Benefits, you will need your W-2 to verify your income.

Documents that should be kept for 1 year

You should keep your pay slips at least until you can check them against your W-2 forms. If all the figures match, feel free to get rid of the stubs. The same goes for your monthly brokerage statements; only shred them once you have matched them up with your 1099s and year-end statements. 

Documents that should be kept for 3 years

Any documents that support your income, credits, and deductions claimed on your return should be maintained for at least 3 years after the tax-filing deadline has passed. This 3-year rule also applies to the following records:

  • Form 1098, if you deducted mortgage interest
  • Form 1099s that show your capital gains, income, interest, and dividends on investments
  • Form W-2s that report your income
  • Documents showing your contributions to a tax-deductible retirement-savings account, such as an IRA
  • Documents showing eligible expenses for withdrawals from 529 college-savings plans and Health Savings Accounts.
  • Receipts and/or cancelled checks for charitable contributions 
  • Records related to the property you own or your investments even after you sell
  • Investing records showing your transactions for mutual funds, bonds, stocks, and other investment purchases after you sell them
  • Keep documents related to any property you inherit or receive as a gift after you sell/dispose the property.

If you no longer itemize deductions on Schedule A due to the significant increase in the standard deduction in the beginning of 2018, you might not need to save as many records. For example, people who don’t deduct charitable contributions any longer, they don’t need to hold onto the cancelled checks or donation receipts for tax purposes.

Documents that should be kept for 6 years

If you have failed to report at least 25% of your income, the IRS has up to 6 years to initiate an audit. This is especially important for freelancers and self-employed people; you may earn business income from a variety of sources and may have overlooked some amount. 

So, practice caution and keep your 1099s and other receipts of business expenses for at least 6 years.

Documents that should be kept for 10 years

Have you ever paid taxes to a foreign government? If yes, then you might be eligible to a deduction or a credit on your US tax returns (depending on what you want).

If you decided to claim a deduction in the past, you are allowed to change your mind within ten years and instead claim a credit via filing an amended return. 

Also, if you previously claimed foreign tax credit, you have 10 years to correct it. 

This is why it’s best to save any documents and receipts related to foreign tax payments for at least 10 years.

How to Store Your Tax Documents

There is no official, IRS-recommended way to keep your tax records; just keep them in an organized manner. Some people prefer storing their records digitally while some prefer the old-fashioned paper records. 

Consider organizing your documents first by year, and then by category (like income forms and bank statements). If you are going the digital route, just take pictures or scan the documents and store them anywhere you want (in a Dropbox or iCloud).

Or, you can buy a good-quality file folder and store your receipts there.

Keep saving and arranging your records throughout the year so you have everything neat and tidy during the tax season. 

Understanding State And Local Taxes

The federal government allows states to collect taxes in order to finance public and government services. Health benefits, law enforcement departments, public schools, and other institutions depend on these local and state taxes to keep serving the citizens.

There are different types of state and local taxes, such as property taxes, individual income taxes, sales taxes, vehicle license taxes, corporate income taxes, etc. In this post, you’ll learn how to file these tax returns for the income you earned in 2019. 

How Can I File My Tax Returns?

You first need a Wage and Tax Statement (also known as a W-2 form) from your employer(s) where you worked during 2019. If you work as a freelance professional, you may receive a 1099 form from various payers to assist in preparing your return. 

According to the IRS, the best way to file tax returns is doing it electronically (online). This also makes it easier to request direct deposit for your refund; people who file online, typically receive their refund within 3 weeks, as opposed to 6 weeks or more (for people who file via mail). At Phoenix Tax Consultants we offer both electronic and mailed tax return options for our clients. 

Taxes should be estimated and paid throughout the year but amounts owed at tax time become payable on the 15th of April, 2020. If you have a complicated return and need to request for an extension, you should file this request by 15th April or face penalties and interest charges.

Different Types of Deductible State and Local Taxes

There are four kinds of non-business taxes that are deductible:

  • State and local property taxes (for personal property)
  • State and local real estate taxes
  • State and local general sales taxes
  • State, local, and foreign income taxes

In order to be considered “deductible”, you must have paid the tax (that was imposed on you) during the tax year. And you can only claim these taxes as an itemized deduction.

Note: You can only deduct up to $10,000 (if individuals) or $5,000 (if married, but filing separately). 

State and Local Property Taxes

The personal property taxes will be based solely on the value of your properties, such your car, boat, a painting, a bike, etc. Even if this tax is collected more (or less) than once every year, it must be imposed on you on an annual basis.

There are some fees and taxes you are not allowed to deduct, including:

  • Social security taxes
  • Federal income taxes 
  • Stamp taxes (or transfer taxes) on property sale
  • Estate taxes
  • Any fees charged by the Homeowner’s Association 
  • Service charge on trash collection, sewer cleaning, water supply.

State and Local Real Estate Taxes

Most local and state governments charge an annual tax on the entire value of a real estate property. Known as real estate tax, it is deductible if is assessed uniformly at a like rate on all properties throughout the jurisdiction.

If you are paying a loved one’s property taxes for them because they are getting old or are really sick, and can’t afford to do it themselves – it is not deductible. After all, it was not imposed against you.

You have to be the property owner in order to claim the deduction.

State and Local General Sales Taxes & Income Taxes

You can either choose to deduct general sales taxes or state and local income taxes – you are not allowed to deduct both. 

You can use the optional sales tax tables or your actual expenses if you decide to deduct the general sales taxesMost people compare what they paid in state, local and foreign income tax to what they paid in sales tax, and then deduct the bigger amount out of the two.

Tax Scams

They say only two things in life are certain: death and taxes. But these days, it seems that getting scammed by IRS imposters is also likely. While the American taxpayers are busy filing taxes, there’s a small group that has been working hard to scam innocent people out of their hard-earned money.

Statistics show that thousands of people fall prey to tax scammers each year, and considering this is the tax season, it’d be wise to be mindful of the common tax scams in 2019, such as:

  • Getting calls from IRS agent imposters 
  • Scammers filing your tax return with your stolen ID
  • Getting fake emails about a tax refund
  • Fake tax preparers. 

Getting Calls From IRS Agent Imposters 

Things got relatively worse when scammers or fake IRS agents figured out how to make their caller ID show up as the IRS. Once the targeted victim picks up the phone, the scammer claims that some IRS payment is urgently due and if they don’t pay up, they will get arrested. 

At this point, many innocent people get scared into taking action, but if they don’t, the scammer calls again, pretending to be from the DMV or police. 

So be cautious and keep in mind that the IRS never:

  • Threatens to bring cops to have you arrested for not paying
  • Calls to demand immediate payment (they will first send you a bill in the mail, if you owe any taxes).
  • Demands payment without giving you the chance to appeal or question the amount “you owe”.
  • Asks you to use a specific payment method to pay the money, like wire transfer, gift cards, or prepaid debit card.
  • Asks for debit or credit card numbers over the phone.

Scammers Filing Your Tax Return 

This is one of the most common ways a tax scam works: When you go to file your taxes, you find out that you already have – or worse, someone else has been using your Social Security Number. Identity theft is a real concern in this country and one sure shot way to avoid it is to file your taxes early. 

The longer you wait, the more chance the scammer has to file a fake return and take off with your refund. Meanwhile, you’ll be left behind sorting through the mess with IRS. 

Also, if you filed a federal tax return last year that listed your address in the following states:

  • Georgia 
  • Florida 
  • Michigan 
  • District of Columbia 
  • California 
  • Nevada 
  • Maryland 
  • Rhode Island 
  • Illinois 
  • Delaware 

Or, you received a letter from the IRS enabling you to opt-in, you can request a Tax Identity Protection (IP) Pin. This way, the IRS will send you a new IP pin every year, and you can’t file your taxes without it. 

Getting Fake Emails About A Tax Refund 

There are some tax scams where the scammer sends out an email (that looks like it’s from the IRS), and claims that there is a refund for you. They will say that you just need to enter your banking information and Social Security Number, and the refund amount is yours. 

Sometimes, when it sounds too-good-to-be-true, it usually is. 

Another form of this scam is, you will get a fake IRS email that says you are in trouble; this email will also include a part of your old tax return to prove it’s real. Then when you click on the attachment, you download a malware in your computer which compromises every vital piece of information you have there.

So, make sure you only hire someone you know; don’t just go with anyone you have never heard of. 

To Sum it Up

If you know the tell-tale signs of a tax scam, it is easy to avoid them. Here are a few tips to help you protect against such scams:

  • Don’t respond to the IRS emails or listen to calls from the IRS.
  • Be careful with your account passwords (change them frequently and don’t share them with anyone).
  • File your tax returns early.
  • Don’t click on “download attachments” file or attached links in emails that claim to be from the IRS.
  • Don’t ever use public internet (Wi-Fi) to do banking transactions or when filing returns. 
  • If you receive a bill (through mail or email), always check with the IRS to ensure its authenticity.
  • Think before you act: the IRS is a government agency, not the Mafia. They will never force you to pay or make a decision on the spot. Never succumb to the pressure of claims like “you have to pay immediately”.

The IRS is a traditional institution. It never makes contact via email, text messages, phone calls, or social media. Whether you owe any back taxes or the IRS owes you a refund, the real agency will never call, email, or text you about it – they will send a letter in the postal mail. Unfortunately, scammers are known to send letters as well so use your caution.

If you receive any such calls, be sure to contact the IRS directly at 800-829-1040 to find out whether the call was legitimate. At Phoenix Tax Consultants we staff IRS Enrolled Agents and are here to help should you have any questions.

Small Business Owners: Filing Quarterly Taxes

As a small business owner, you may think that the IRS has bigger fish to fry than your small firm. But many reports have cited that the IRS is increasingly cracking down on small businesses for tax audits. 

You can avoid a lot of headaches (and fines!) by understanding and fulfilling your business tax responsibilities. If this is your first time filing taxes as a small business owner, you probably have a lot of questions about how much you need to pay in taxes and when to pay it. This post will help you learn what you need to know about filing quarterly business taxes.

How Do I Go About Paying Estimated Quarterly Taxes?

The IRS says that individuals, sole entrepreneurs, partners, and corporation shareholders need to pay quarterly estimated taxes if they expect to owe $1,000 or more in taxes when their state tax returns or federal returns are filed. Small business owners can easily calculate their estimated tax payments by using Form 1040-ES

To calculate your quarterly payment, you will estimate your expected adjusted taxable income, gross income, small business tax credits, and deductions for the year. If you’ve never filed a business tax return before, it’s best to consult your accountant or a tax professional for assistance in calculating these estimates.

Looking at your taxes from the previous year as a guide is considered the best way to estimate these numbers (if this is not your first time filing returns).

When Should I Pay the Quarterly Returns?

Here are the deadlines to file the quarterly estimated taxes for small business owners:

  • April 15th (for the period of January 1st – March 31st)
  • June 17th (for the period of April 1st – May 31st)
  • September 16th (for the period of June 1st – August 31st
  • January 15th (for the period of September 1st – December 31st)

These dates may/will change if the due date is falling on a public holiday or a weekend. 

Note: If you – the business owner – fail to submit at least 90% of the taxes you owe, you’ll be subjected to serious penalties. So please make sure you work with a skilled tax expert to calculate the amount owed and then get it double-checked. Being extra cautious never hurts.

How Much Should I Pay in Estimated Quarterly Taxes? 

According to the IRS, you have to make estimated payments if the following two conditions apply: 

  1. You expect your refundable and withholding credit to be less than the smaller of: 
  • 100% of the total tax on your last year’s return or 110% for higher wage earners, (your last year’s return must cover all twelve months), or
  • 90% of your total expected tax for the current year (2019).
  1. You expect to owe at least one thousand dollars in tax for this year after subtracting your refundable and withholding credits.

How to Pay the Estimated Quarterly Taxes?

Filing taxes online is much easier, especially with the IRS e-file system. You can also any other appropriate accounting or tax software to do this, we suggest using your trusted team at Phoenix Tax Consultants. 

Once you have calculated the figures, you can submit the payments online through the IRS website or the electronic federal tax payment system. You can also use your credit or debit card to make the payments. 

If you want to do it the traditional way, you can file your returns by mail. Just make sure you follow all the instructions laid out by the IRS, based on the form you’re submitting. Also ensure that you mail your return to the right address; this reduces the chances of any hassle in case the IRS encounters any issues with receiving or processing your returns. And you can remit a money order or check using an estimated tax payment voucher

For assistance with your small business tax filings contact Phoenix Tax Consultants.

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