February 2024

Avoid IRS Penalties and 6 More Reasons Not to Wait Until the Last Minute to File

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The last day to file your 2023 federal tax return is April 15, 2024. If you’ve procrastinated on completing your taxes for the year, don’t put it off any longer! Here’s why you should not wait until the last minute to start filing taxes.

Avoid the last-minute tax filing scramble.

Unless you keep accurate track of the forms you need as they arrive in the mail, you may very well find that you are missing some important documents when you sit down to complete your taxes. If you wait until the last minute, you may not have the time you need to find whatever forms you are missing.

Businesses and employers are required to send you your 1099s and W-2s by Jan. 31. Ideally, you would have notified your employer if you hadn’t received your forms by early February. However, if you still haven’t filed your taxes, the first thing you should do is make sure you have all tax forms and documentation of your income.

What if I’m missing tax forms?

If you believe you have not received your income documents, there are a few things you can do. First, search through your email to make sure you didn’t receive a digital copy of it. While most companies don’t email it due to security concerns, many post it in a secure company portal and send out an email notifying you that it is available. If you still can’t find it, reach out to your employer to see if they can reissue the form. If your employer mails forms, make sure they have your most up-to-date address on file.

Lastly, if you are still having problems locating your W-2, call the IRS. You can reach them toll-free at 800-829-1040. You will need to provide personal information, such as your address, Social Security number, and your employer’s name and address. The IRS can then contact your workplace to try to locate your missing documents.

While it is possible to file your tax return without the proper tax forms, by doing so, you are taking a risk. There is no way to ensure you are completing an accurate tax return without the correct forms. That heightens the likeliness of errors, which can get you in trouble with the IRS. Making errors on your tax return can result in fees, penalties, and in severe cases, even jail time. It’s always best to eliminate that risk by completing your taxes sooner rather than later.

Get your refund sooner.

If you are hoping for a tax refund, the sooner you file your taxes, the sooner you can receive your money.

While there is no guarantee you will receive a tax refund, knowing whether you owe additional taxes or are owed a refund is always nice to find out sooner rather than later. And if you have money waiting to be claimed, why wait to get it? Once you receive your money, you can put it to good use by paying down debt or investing it.

On the flip side, if you end up owing taxes, it’s also a good idea to know about that as soon as possible, too.

Prepare for your tax bill.

Tax bills are never a welcome thing, but they are the reality for many tax filers. There are many reasons you might not have had enough tax withheld from your paychecks throughout the year. For example, certain life events like having a baby or getting married might change your tax situation. If you didn’t update your W-4 after a life event with tax implications, there’s a chance you may end up owing money if you didn’t adjust your withholdings appropriately.

In any case, it’s always best to know how much tax you owe as early as possible so you can make arrangements to pay the bill. If you don’t have enough money stashed away to cover the cost, you may need some time to pull the funds together. That’s why filing before the last day of the tax season is critical. The more days you give yourself to formalize a plan, the better.

Fortunately, the IRS offers short-term payment plans to ease the burden of paying all at once. You can set up an IRS payment plan through TaxAct®. The quicker you can start making payments, the less you’ll have to pay in interest fees on the amount you still owe after the April 15 deadline.

Eliminate the stress.

Perhaps one of the most motivating reasons to file your taxes today is to avoid the stress of waiting until the very last minute. Because let’s face it, the April 15 tax deadline comes just at the start of spring. The yard needs attention, the house could use a good spring cleaning, and the kids are starting up practice for summer sports. Who wants to be stuck inside completing their taxes during the first nice days of spring? Not to mention, any task becomes more stressful when it’s left to the last minute. Things you wouldn’t expect oftentimes go wrong.

For instance, if you use tax preparation software like TaxAct to file, you may have a question and find it hard to get immediate answers if customer service is swamped dealing with an influx of other last-minute filers. A few extra days allow you time to get help without the stress of a deadline looming. Not to mention, what if something else comes up like a work obligation or your child getting sick? There’s always the chance of an unexpected inconvenience that completely throws off your schedule for the day and compromises the time you have available to file.

Take a load off your shoulders and complete your taxes as early as possible. Your future self will thank you.

Reduce the risk of identity theft.

Sadly, tax fraud and identity theft are all too common. In some cases, thieves use your personal information to file a fraudulent tax return in your name. In turn, they receive your tax refund.

If this happens, once you go to file your income tax return, it is likely to be rejected by the IRS because, according to their records, you already submitted a return. While the IRS will work with you to sort out your case of identity theft, it can be a major stressor. Further, it can drastically prolong the amount of time it takes to receive your tax refund.

Fortunately, by filing early, you can save yourself that headache. That way, identity thieves have less time to file a phony tax return in your name. If they try and you already filed one, their fraudulent return would be rejected and potentially investigated. Protect yourself by filing as early as you can.

Still need more time? File an extension.

Filing your taxes before the tax deadline has many benefits. But if you waited until the very last minute this year, don’t forget you can always file for an extension on or before the April tax deadline. To file an extension, you must complete Form 4868, which will give you six more months to complete your tax return. You can use TaxAct to file an extension for free, making your new tax deadline Oct. 15, 2024.

It’s important to note, however, that a tax extension only provides you with more time to complete your tax return. You must still estimate and pay any taxes you owe by the original April 15 deadline. If you come up short and pay less than what you actually owe, you will incur interest fees and penalties.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

More to explore:

Do Tax Extensions Give You More Time To Pay Your Tax Bill?

How Long to Keep Tax Records and How to Dispose of Them

Guide to Social Security Taxes

4 Benefits to Filing Taxes Early

Tips For Filing an Amended Return

The post Avoid IRS Penalties and 6 More Reasons Not to Wait Until the Last Minute to File appeared first on TaxAct Blog.

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Tax Facts for Members of the Sharing Economy, Including Uber and Lyft Drivers

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Updated for tax year 2023.

The business of sharing your car with a total stranger or using it to run various errands is now a multi-billion-dollar marketplace, and many people are taking advantage of this easy way to earn a buck. In fact, while the value of the sharing economy was an impressive $150 billion in 2023, Statista forecasted this number to jump to $794 billion by 2031.

While the sharing economy provides new career opportunities and can help us expand our pocketbooks, it’s important for those participating to remember one thing: You’re probably not an employee, and that can mean different tax implications than you’re used to.

Working as an independent contractor

More than likely, if you’re driving for Uber® or Lyft® or petsitting through Rover®, you’re considered an independent contractor, which means a whole different world when it comes to taxes.

As an independent contractor, you don’t have an employer to withhold taxes from your paychecks for you. But you still have to pay federal and state income taxes as well as self-employment tax, which consists of Social Security and Medicare taxes for those working for themselves.

If this sounds confusing, don’t worry. We’ll tell you all about how to stay in Uncle Sam’s good graces.

Filing taxes when you’re self-employed

First things first. Whether Uber is your full-time gig or you just shuttle folks around occasionally, you have to pay attention to how much income you’re earning.

If you make money as a rideshare driver, errand-runner, or grocery-getter, you’ll need to report your earnings on Schedule C, Profit or Loss from Business.

For many taxpayers who do not keep their books, Schedule C is the best way to actually determine if they have $400 or less of net income. However, if you make more than $400 in self-employment income throughout the year, you’ll also need to complete Schedule SE, Self-Employment Tax. This form is used to calculate the self-employment tax due on your net earnings.

Luckily, TaxAct® Self-Employed makes it easy to complete both forms. Once you enter your information for Schedule C, our tax prep software determines if Schedule SE is needed and, if so, automatically completes it for you.

Paying estimated taxes

After you determine your net income, you may need to start paying quarterly estimated taxes to avoid a large tax bill and penalties when it comes time to file your income tax return.

Since taxes aren’t being automatically withdrawn from your earnings, you’ll have to account for them separately. To prepare for quarterly tax payments, make sure you set aside money throughout the year to cover those costs. A simple way to save for estimated tax payments is to have a portion of your monthly income automatically transferred to a separate account so you aren’t tempted to spend it.

Offset taxes with tax deductions

Driving for Lyft or Uber can be as easy as pushing a few buttons on your phone, but remembering to keep track of your expenses is a bit harder.

First, be sure to log your mileage while you’re on the clock. You’ll want to report those miles as a business expense on your tax return using Schedule C. Claiming them as expenses will help cut down your business income, meaning you’ll likely owe less tax.

There are several apps that can help you track how much you drive for work. Keeping mileage records will also give you a backup if the IRS ever asks for documentation to support the mileage deduction you want to claim.

As a driver, you can also deduct other car-related expenses as long as those costs relate to your business. This includes basic service, repairs, car payments, lease fees, registration, insurance, tolls, and even passenger amenities like snacks or extra phone chargers. For a closer look at what rideshare drivers can deduct on their taxes, check out this article.

Allocating business expenses against total expenses is another way TaxAct can help you. For example, when it comes to the number of business miles driven versus personal miles, simply input your data and our tax software will quickly help you sort it out.

Even if you’re not earning cash as a driver for Uber or Lyft, you can still deduct vehicle-related expenses if you work for services such as Instacart or Postmates. Mileage, along with many of the same operating expenses, can be deducted from your tax return, too.

Pay attention to your 1099 form

As tax season approaches, you’ll likely receive a version of Form 1099 in the mail from the company through which you contract your business.

For example, Form 1099-K, Payment and Third Party Network Transactions, reports the total of your customers’ processed payments. Keep in mind this amount will likely be higher than the dollar amount you saw hit your bank account as it includes the rideshare company’s commissions and other services fees.

There is a chance you won’t receive a 1099-K if the company through which you provide services processed less than $20,000 in payments or fewer than 200 transactions under your name. However, even if you don’t get a 1099-K, you’ll still need to report any earned income on Schedule C and pay taxes on the income you earned.

Depending on the payer, you may also receive Form 1099-NEC, Nonemployee Compensation. In certain instances, you may have duplicate payments show up on both Form 1099-K and Form 1099-NEC, so it’s important to check these forms against your own records to ensure you report your income correctly. Income documented on these forms needs to be reported on Schedule C when you complete your tax return.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

All trademarks not owned by TaxAct, Inc. that appear on this website are the property of their respective owners, who are not affiliated with, connected to, or sponsored by or of TaxAct, Inc.

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Estimated Tax Payments and Retirement: What You Need to Know

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Updated for tax year 2023.

If you’ve been an employee all your working life, you’re probably used to having income tax withheld from your pay. However, when it comes time to retire, you might be surprised to find you may need to make estimated tax payments on your income four times a year.

At a glance:

You may need to make quarterly tax payments in retirement.
There are several ways to make estimated tax payments, including mail, electronic funds withdrawal, or the IRS online payment system.
Late payments may lead to penalty charges, but these can sometimes be abated with a written request.

For some people during retirement, the days of simply filing a tax return at the end of the year and paying any taxes due are gone. In fact, if you did not make estimated tax payments when you were supposed to, you may owe penalties and interest on the amounts you should have paid throughout the year.

So, how do you know if you need to make estimated tax payments in retirement? Are there any alternative options available to you? Here are our answers to some of the most asked questions about estimated tax payments.

Do I need to make quarterly estimated payments?

If you have substantial income from investments, taxable retirement plan withdrawals, or other sources from which you do not have income tax withheld, you probably need to make quarterly estimated payments to avoid penalties and interest.

However, you may owe little to no federal income tax if your income is low. For instance, you won’t owe a penalty if you owe less than $1,000 after you file your taxes.

If your income was modest in the previous year, the safe harbor rules may also keep you from owing penalties and interest. The safe harbor rules apply if you paid at least 90% of the current year’s tax or 100% of the prior year’s tax, whichever is smaller.

If your tax liability last year was $0, you typically don’t have to make estimated tax payments throughout the current year.

The easiest way to determine if you will owe more than $1,000 in tax for the year is to use the TaxAct® Income Tax Calculator to estimate your income taxes.

Can I avoid estimated tax payments?

Thankfully, it’s not hard to make estimated tax payments. However, if you really don’t want to be bothered with them, there are two alternatives:

Increase withholding on income. You can have income tax withheld on retirement withdrawals or other types of income. If your spouse is still working, they might consider increasing their income tax withholding.
Take more withdrawals from tax-free retirement plans. For example, if you have both Roth and traditional IRAs, you can plan your withdrawals to minimize your taxable income for the year.
Practice good tax planning. Planning your tax year carefully is always a good idea, and making estimated tax payments can be a helpful motivation to do so. Consider taking steps such as making charitable contributions and paying deductible expenses before the end of the year, avoiding taking more taxable retirement withdrawals than you need, and selling investments that have decreased in value when it is tax-advantageous for you to do so. By taking these actions, you may be able to reduce your taxable income and potentially avoid owing estimated tax payments in the future.

How do I make quarterly estimated tax payments?

If you need to make quarterly payments, you can calculate the amount you need to pay with TaxAct’s Income Tax Calculator and print out quarterly payment vouchers. Each quarter, you’ll need to print a voucher, attach a check or money order, and mail it to the IRS by each voucher due date.

If you’d rather pay electronically, you can set up Electronic Funds Withdrawal (EFW). This can also be done through TaxAct, and your quarterly payments will be deducted from your bank account automatically.

The IRS also has a free payment system called the Electronic Federal Tax Payment System (EFTPS). You can set it up at www.eftps.gov/eftps. However, you’ll need to plan ahead to use EFTPS as it requires you to receive an EFTPS Personal Identification Number (PIN) and set an internet password.

Another option is to make your payments by credit or debit card using the IRS’s phone system and website. This should be a last resort because you’ll likely pay an additional convenience fee to your bank with this method.

Don’t forget you may also need to make state estimated tax payments if your state has an income tax.

Estimated tax payments are due on April 15, June 15, Sept. 15, and Jan. 15. When a due date falls on a weekend or holiday, the due date is the following business day.

I recently retired but haven’t made estimated tax payments. Am I in trouble?

If you recently retired and didn’t know you needed to make estimated tax payments, go ahead and relax on this one. Trust us, you’re not the first retiree to be surprised by the requirements for estimated tax payments.

The worst that can happen is the IRS may charge you penalties and interest based on the difference between when you should have made payments and when you actually paid. In some cases, if you end up with a penalty, you may be able to have it abated. To receive this potential abatement, you’ll need to write the IRS, explain the situation, and specifically ask for an abatement of penalties.

The bottom line

Navigating estimated tax payments during retirement might initially seem overwhelming, but understanding the rules and available tax strategies can help reduce stress. Whether it’s adjusting withholding, planning withdrawals, or utilizing tax-efficient practices, you have several options to manage your tax obligations effectively. Staying informed and proactive can help you stay on top of your tax responsibilities and enjoy your retirement years with greater peace of mind.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

The post Estimated Tax Payments and Retirement: What You Need to Know appeared first on TaxAct Blog.

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Can I Claim My Boyfriend or Girlfriend as a Dependent on My Tax Return?

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Updated for tax year 2023.

If you and your significant other are living together without being married, you probably share many expenses, and one of you may even be financially supporting the other. In such a scenario, you may wonder if you can claim your girlfriend or boyfriend as a dependent on your tax return to take advantage of any tax benefits.

Claiming a dependent on your taxes can lower your taxable income, but does your significant other count as a dependent? Here are the facts on how you could claim a domestic partner on your tax return according to the IRS dependent rules.

What are the tax benefits of claiming my boyfriend or girlfriend as a dependent?

When you claim someone as your dependent, you are responsible for their financial well-being, including providing for their food, clothing, housing, and other necessities. If you provide over 50% of their financial support throughout the year, you may qualify to claim them as your dependent. This can help you qualify for certain tax credits and deductions when you file your taxes, ultimately saving you money.

For example, if your significant other qualifies as your dependent, you may be able to claim the Credit for Other Dependents, a tax credit worth up to $500. If your boyfriend or girlfriend had a lot of medical and dental expenses during the year that you helped pay for, you may also be able to deduct some of those expenses if you itemize.

What are the requirements for claiming my significant other as a dependent?

The IRS dependent rules are very particular regarding who qualifies as a dependent. Many couples don’t fall within the IRS rules and will have to file taxes as individuals if they are not yet married. If you are uncertain whether you can claim your domestic partner on your tax return, TaxAct® can help you determine whether the individual qualifies during the filing process.

According to the IRS dependent rules, only qualifying children and relatives count as dependents. But don’t let the term “relative” confuse you. A domestic partner can be considered a relative under IRS regulations if they meet specific qualifications.

If you want to claim your boyfriend or girlfriend as a dependent on taxes, your situation has to meet all of the following IRS requirements:

1.   You must live together.

To qualify as a dependent, your significant other must have lived with you for at least one calendar year. If you lived together for a shorter time, you cannot claim your significant other as a dependent.

2.   Your significant other earned less than $4,700 in 2023.

According to the IRS dependent rules, your boyfriend or girlfriend must have earned less than $4,700 during the 2023 tax year if you want to claim them as a dependent. If your partner earned more than $4,700 in 2023, they have essentially earned enough to prove to the IRS that they can care for themselves financially.  Even if you live with your partner and pay most of the bills, if your significant other earned more than the threshold in a year, you won’t be able to claim your boyfriend or girlfriend as a dependent on your tax return.

3.   You must provide more than 50% of their financial support.

You may be able to claim your significant other as a dependent on your taxes if you pay for over 50% of their basic living expenses. Living expenses may include housing, groceries, education, medical expenses, and more.

You will need to keep track of all these expenses to prove that you provide more than 50% of your significant other’s financial support. Keep all receipts, documentation, and bills, so you have them handy when you need them. Documentation is key when you are claiming any sort of special tax deduction in case the IRS asks for proof.

When can’t I claim my significant other as a dependent?

Even if you and your partner meet the above qualifications, the IRS dependent rules include several caveats and further restrictions.

For instance, you cannot claim your partner as a dependent on your taxes if someone else can claim them as a dependent on their tax return. Each dependent can only be claimed by one taxpayer. So, if your significant other’s parents, children, or ex-spouse claim them as a dependent, you cannot also claim them as a dependent.

Lastly, to claim your boyfriend or girlfriend as a dependent, they must be a citizen, national, or resident of the United States. Residents of Canada or Mexico can also qualify.

What about the Child and Dependent Care Credit?

The Child and Dependent Care Credit (CDCC) is a tax break for people who pay child or dependent care costs to care for a qualifying dependent. A common example would be a parent paying daycare costs for someone to watch their child while the parent works.

Though they may sound similar, claiming your domestic partner on your tax return as a dependent differs from claiming the CDCC. You will not qualify to claim this credit unless your significant other is sick or unable to care for themselves and you paid for them to receive care while you worked or looked for work.

How do I actually claim my partner on my taxes?

Now that you know whether or not you can claim your partner as a dependent on your tax return, let’s look at how you can make the claim when filing your taxes. If you file your return using TaxAct, our tax prep software will ask you questions about your dependents and help you claim any associated tax credits or deductions.

 

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

The post Can I Claim My Boyfriend or Girlfriend as a Dependent on My Tax Return? appeared first on TaxAct Blog.

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Form 1099-NEC vs. Form 1099-K: What’s the Difference?

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Updated for tax year 2023.

At the beginning of every tax season, you receive informational tax forms in the mail from your places of employment, financial institutions, and organizations you did business with throughout the year that the Internal Revenue Service (IRS) wants to hear about.

Two of those forms may look very similar if you’re an entrepreneur, a freelancer, or otherwise self-employed: Form 1099-NEC and Form 1099-K.

While these tax forms appear similar, they serve different purposes. To correctly report your income this coming tax season, it’s important to understand what each of those forms tells you. Let’s take a look at the differences.

Form 1099-NEC and Form 1099-K both report income.

Form 1099-NEC and Form 1099-K report the business income you received during the tax year. You and the IRS receive both forms, but there are some key differences.

The purposes of the forms are different.

Businesses send Form 1099-NEC, Nonemployee Compensation, if you earn at least $600 in freelance work or contract labor during the year. Depending on how many clients you had during the tax year, you may receive more than one 1099-NEC. Your 1099-NEC form tells you how much these clients paid you during the year.

If you accept bank card transactions or use third-party platforms for payment (PayPal, Square, etc.), these institutions may also send you Form 1099-K, Payment Card and Third Party Network Transactions. The form shows your total bank card revenue for the year. The third party must send you a 1099-K form if you had at least 200 transactions totaling at least $20,000 in payments during the 2023 year. You may receive more than one 1099-K if your gross receipts exceed the reporting threshold in multiple platforms.

In other words, Form 1099-NEC reports income from a particular business, regardless of the form of payment. Form 1099-K reports bank card and payment app income from all your customers and clients.

Corporation requirements aren’t the same.

Businesses are generally not required to send you Form 1099-NEC if your business is incorporated and treated as an S corporation or a C corporation. However, financial institutions must send Form 1099-K to all businesses with bank card revenue, regardless of whether they are incorporated. Non-profit organizations also receive Form 1099-K.

Income can be reported twice.

Sometimes income can show up twice — on Form 1099-NEC and Form 1099-K. For example, let’s say you clean carpets for a large business and earned $35,000 last year. You also accept credit cards for payment via an app like Square. The companies you cleaned for sent you Form 1099-NEC showing the payments they made. But because you received some payments via credit card, Square also sent you Form 1099-K reporting those payments.

This is why keeping good records is essential — to avoid paying income and self-employment tax on the same money twice. Always check your 1099 forms against your own records to ensure you report your income correctly.

You may notice discrepancies with Form 1099-K.

Form 1099-K shows the gross amount of income paid by your customers. Generally, you receive a smaller amount after bank card processing fees are taken out, but don’t worry — you don’t pay tax on the gross amount. Be sure to report your fees and other expenses on your income tax return to calculate your tax based on your net income. The good news? Filing with TaxAct® can help make those calculations easy, so you don’t have to wonder if you’re overpaying in taxes.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

The post Form 1099-NEC vs. Form 1099-K: What’s the Difference? appeared first on TaxAct Blog.

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How Long to Keep Tax Records and How to Dispose of Them

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Tax documents can take up a lot of space in your filing cabinet, but many of us are wary of throwing them away. If fears of a tax audit or identity theft live rent-free in your head, don’t let them get to you. You only need to keep your tax records for so long, and there are ways to dispose of them securely when the time comes for your tax filing.

How long should I keep my tax return documents?

You should keep your tax documents per the IRS’s period of limitations. This is typically three years, which is the amount of time you are allowed to amend your return, and the IRS is allowed to assess additional tax.

However, the IRS statute of limitations is sometimes longer than three years. Because of this, the IRS recommends keeping tax records for different lengths of time depending on your tax situation:

In most cases, you should keep your tax records for three years from the date you initially filed the income tax return or two years from the date you paid the tax (whichever is later). This includes any documents related to potential tax deductions. Additionally, it’s important to keep records organized and readily accessible in case of IRS inquiries.
Keep your tax records for six years if you didn’t report income that you should have reported, and this income makes up more than 25 percent of the gross income listed on your tax return.
Keep tax records for seven years if you filed a claim for a loss from worthless securities (like stocks) or bad debt deduction.
Keep tax records indefinitely if you didn’t file a tax return, or you filed a fraudulent return.

Are there any specific tax documents I should keep for a longer period?

There are some exceptions to the above rules for certain types of tax documents:

You should keep employment tax records for at least four years after the date that you paid the tax or after the date that the tax was due (whichever is later).
You should keep property records (real estate, stocks, personal items, etc.) until the statute of limitations expires for the year in which you disposed of the property.
You may need to keep other nontax records longer in compliance with whoever sent you the form — for example, a creditor or insurance company may advise that you keep their records longer than the IRS does.

How should I organize my tax records?

You are free to practice whatever form of recordkeeping works best for you. Just be sure you can easily find all the materials you may need in case the IRS asks for documentation.

If you prefer to keep hard copies of your tax records, the best way to store them is in a locked, fireproof safe with your other important documents. This ensures they are well-organized and ready for tax preparation.

On the other hand, if you prefer digital recordkeeping to physical files, the IRS is also fine with that. The IRS should accept them without issue as long as the digital copies are legible. You will, however, want to make sure that you keep digital records on file until the statute of limitations is up. And be sure to take extra precautions to safeguard your information from hackers.

Remember that both digital and paper files have advantages and disadvantages. Be sure to store them securely. You may even consider storing both digital and hard copies of your files for tax purposes.

Can I access my old tax returns in TaxAct®?

Yes, with TaxAct, you can access prior year returns for free up to seven years. That feature of our tax software makes digital recordkeeping easy! Plus, having access to past returns can be valuable, especially if you need to claim a tax refund or review past financial data.

What is the best way to dispose of confidential tax documents?

Once you’ve decided you no longer need hard copies of your tax forms and supporting documentation, it’s time to start thinking about how to get rid of them. You don’t want to toss sensitive information in the trash for someone to use for identity theft potentially, so how should you dispose of confidential documents?

We know not everyone has the convenience of a shredder sitting in their home, but shredding is one of the best ways to destroy private documents. If you don’t have a shredder, some companies offer secure document destruction at a reasonable price for quick and easy disposal.

The bottom line

Remember, though it may be tempting to throw all old tax records in a drawer once you have filed for the year, you can save yourself a lot of effort and headaches by filing your tax records properly. This way, if you are ever audited, you can produce the required documents in a timely manner, giving you one less thing to stress about. By staying organized now, you are already one step ahead for next year’s taxes.

And while you don’t need to hold onto your tax documents forever, disposing of them is not as simple as throwing them in the trash. To protect yourself from identity theft, make sure to destroy tax documents safely and securely. Engaging in proper tax planning can also help you anticipate and manage your tax obligations more effectively.

 

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

The post How Long to Keep Tax Records and How to Dispose of Them appeared first on TaxAct Blog.

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4 Things to Consider After Filing a Tax Extension

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The tax deadline has come and gone. If you didn’t quite finish your tax return, you should have filed Form 4868, Application for Automatic Extension of Time to File, to the IRS.

That automatic extension gives you another six months to file your tax return, which means it’s now due Oct. 15, 2024. With that extra time, it’s easy to simply breathe a sigh of relief, put away your documents, and forget about taxes for now.

Before you do, however, consider the following:

Completing your return won’t be any easier in October

Unless you are waiting for a specific form or piece of information, there’s probably nothing that will make filing your return easier in the fall. In fact, life has a way of being busy 365 days a year. And it certainly won’t get easier to remember your financial details for 2023 six months from now. You may as well keep working on your return and finish it up as soon as possible.

If you have most of your information, do as much as you can now. Use estimates where necessary so you have a good idea of how much tax you may owe.

If your return is complex or if you keep finding deductible receipts, you may be tempted to continue putting off filing your return. But, rather than wait, go ahead and file. If you find a significant tax item after you file, you can always file an amended return.

You can’t get a refund until you file

If the IRS owes you money, you should file your return and get your refund as soon as possible. Ask yourself this, “Why am I letting Uncle Sam hold on to my money?” That money is yours, and there are a variety of ways you can put it to good use. For instance, you could use it to pay down any debt you have, especially something with a high interest rate like credit card debt. No one likes to continuously pay those sky-high interest rates. You could also use it to invest in your business, stocks, or other money-making ventures.

If you owe more tax, you could be penalized

Even if you paid tax when you filed for your extension, you could discover you owe more when you finish your return. It happens. Owing penalties and interest on top of your tax bill only makes things worse. The longer you wait to file, the more you’ll have to pay in penalties and interest.

Don’t forget to enter payments you made with your extension

When you resume working on your tax return, be sure to enter any taxes you paid when you filed for an extension so you don’t overpay. It’s an easy mistake to make.

Ready to start filing your tax return? Get started with TaxAct® today, and make filing easier on your future self — we’ll save your progress so you can file with ease down the road.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

More to explore:

5 Reasons to File a Tax Extension
The Benefits of Filing a Tax Extension Form
7 FAQs About Tax Extensions

The post 4 Things to Consider After Filing a Tax Extension appeared first on TaxAct Blog.

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Tax Deductions for Uber® and Lyft® Drivers

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Updated for tax year 2023.

If you work as a rideshare driver for Uber, Lyft, or another rideshare service, you spend much of your time and energy driving strangers from one place to another.

Whether you do this as a side gig or a full-time job, you can claim your mileage, fees, and other day-to-day expenses as business write-offs. And even better — as an Uber or Lyft driver, you can claim a few additional write-offs during tax time that are unavailable to regular businesses.

Here are several ways to save on taxes as a rideshare driver this year.

Mileage

If you work as a rideshare driver, keeping a record of your business miles is crucial if you want to claim the mileage deduction. One of the easiest ways to do this is by using the standard mileage rate. For the year 2023, you can deduct 65.5 cents per mile for business mileage using this standard rate. The IRS sets this standard rate and takes into account various costs such as gas, car maintenance, and depreciation, among other factors.

You can deduct miles driven on the way to pick up your first passenger, driving passengers to their destination, between passengers, and on the way home from picking up your last passenger.

For more information on this tax deduction, check out How to Claim Mileage Deductions and Business Car Expenses. If you want to estimate your mileage deduction for 2023, you can also use our handy mileage reimbursement calculator.

Passenger amenities

Offering “extras” to your passengers is a solid way to make good tips. But did you know passenger amenities are also tax deductible? Water bottles, snacks, gum, mints, phone chargers, and even subscriptions to music streaming services like Spotify® — as long as they’re purchased for your passengers, these can all qualify for a tax write-off.

The next time you stock the backseat with extra phone chargers and beverages, make sure you save your receipts. Keep detailed records of amenity expenses so you can deduct these as business expenses when tax season rolls around.

Fees and tolls

Fees are often inescapable as a rideshare driver. Regardless of which rideshare service you drive for, they all earn a portion from your fares. But while you can’t prevent Uber and Lyft from taking their cut of your profits, you don’t have to worry about paying taxes on money you didn’t receive — you can deduct fees and commissions charged by the rideshare platform as part of your business expenses.

The 1099 tax form(s) you get in the mail from the rideshare service should list any fees and commissions they took from your earnings. If you opt for paperless tax documents, you can also view these figures via your online account or driver dashboard.

Parking fees and tolls you paid while transporting or picking up passengers are also tax-deductible, so keep track of those fees as well.

A clean ride

Having a clean car is just as important as having good amenities when it comes to ratings. A clean car exterior sets a good first impression, which sets you up for success. It’s equally important to maintain your vehicle’s interior — most passengers aren’t interested in leaving their ride covered in pet hair or wearing a strange odor they didn’t have before they got in your car, so keeping things clean is essential.

Not only will keeping a clean ride help with higher ratings and better tips, but it will also help increase the value of your Uber or Lyft tax deductions. Car washes, cleaning supplies, detailing and upholstery cleaning, and air fresheners can be deducted on your tax return, so keep your receipts for these services.

Your cellphone

Many rideshare drivers keep a separate business phone line for their work. If you do have a separate phone or phone line you use exclusively for your rideshare service, it’s considered a business expense — AKA another tax deduction you can add to your growing list of rideshare driver tax write-offs.

But what if you don’t use a separate phone or phone line while working? If you use your personal phone for business purposes, you can still claim a percentage of your phone expenses as a business deduction. Like with all rideshare driver tax deductions, all you need to do is keep track of those receipts. Thankfully, most phone services keep track of your phone bills online, so it’s pretty easy to log in and find the information you need.

Roadside assistance

Ever had a flat tire on the way to pick up your next fare? Or find yourself frantically searching for fuel in the middle of an unfamiliar route? If you pay for roadside assistance like AAA or a similar service provided by your insurance provider, that’s yet another tax deduction you can claim as an Uber or Lyft driver.

Since you’re using this service to ensure your passengers enjoy a safe and convenient ride, some (or all) of those membership fees are tax-deductible and help lower your taxable income. Just make sure you document the membership costs and clearly indicate their association with your rideshare business.

You’re a small business owner, so file taxes like a boss.

As a rideshare driver, you’re considered an independent contractor. This means you’re responsible for setting aside money typically taken out of your paycheck by an employer, such as Medicare and Social Security taxes.

Fortunately, TaxAct® can help you pay estimated taxes, claim tax deductions, and simplify the tax filing process in general. With TaxAct Self-Employed, you can file with confidence backed by a $100k Accuracy Guarantee*. Keep more of that hard-earned cash in your pocket this year and take advantage of rideshare driver tax deductions when you file with TaxAct.

 

*Guarantee limited to $100,000 to pay legal or audit costs and the difference in lower refund or higher tax liability. Additional terms and limitations apply. Read about the TaxAct Maximum Refund and $100k Accuracy Guarantees.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

All trademarks not owned by TaxAct, Inc. that appear on this website are the property of their respective owners, who are not affiliated with, connected to, or sponsored by or of TaxAct, Inc.

 

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How Will Buying an EV Affect My Taxes?

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Updated for tax year 2023.

Electric vehicles (EVs), plug-in hybrid electric vehicles (PHEVs), and other clean-energy vehicles continue to gain popularity, especially as gas prices soar. Is it time for you to make the switch?

If you’re new to the EV market, you no doubt have a lot of questions — topics like EV battery range, maintenance costs, and affordability among them. However, many people tend to overlook the potential tax implications of purchasing an electric vehicle.

To help you understand how buying an EV might affect your taxes and your wallet, we’ve put together a comprehensive guide designed to help you decide if you (and your budget) are ready to go electric.

We’ll start with the most exciting part: electric vehicle tax credits.

What is the electric vehicle tax credit?

The EV tax credit is simply a tax incentive for purchasing a clean energy vehicle. This credit is nonrefundable, so it cannot exceed your tax liability.

The EV tax credit has had a lot of changes recently — in August 2022, Congress passed the Inflation Reduction Act (IRA), a bill that included large investments in clean energy, including big changes to tax incentives for EV purchases. We know changes to tax credits can be confusing, which is why we’ve outlined all the details you need to know below.

How do I qualify for the full $7,500 federal electric vehicle tax credit?

The federal clean vehicle tax credit is still worth up to $7,500. To qualify for the full electric vehicle tax credit in tax year 2023, you must meet different requirements set by the IRS depending on when you purchased and started driving the EV.

For vehicles placed in service Jan. 1 to April 17, 2023, you can claim an EV tax credit of up to $7,500 total using the following calculations:

$2,500 base amount
Plus $417 for a vehicle with at least 7 kilowatt hours of battery capacity
Plus $417 for each kilowatt hour of battery capacity beyond 5 kilowatt hours

To qualify for the clean energy credit, vehicles need to have a minimum of 7 kilowatt hours of battery capacity, meaning the minimum credit for vehicles placed in service during this time would be $3,751 ($2,500 + [3 X $417]).

For vehicles placed in service April 18, 2023, and after, you can still claim an EV tax credit of up to $7,500, but the vehicle must also meet new critical mineral and battery component requirements. Because of this, the tax credit calculations look a little different:

$3,750 if the vehicle meets the critical minerals requirement only
$3,750 if the vehicle meets the battery components requirement only
$7,500 if the vehicle meets both

A vehicle that doesn’t meet either requirement will not be eligible for a credit.

Who qualifies for the EV tax credit?

To qualify for the EV tax credit for tax year 2023, you must meet the following requirements:

You must have purchased the vehicle for your own use (not for resale)
You must primarily use the vehicle within the U.S.

If you meet the above criteria, you also need to meet the IRS’s income requirements depending on your filing status. To qualify for the EV tax credit in 2023, your modified adjusted gross income (AGI) cannot be more than:

$300,000 for those married filing jointly
$225,000 for heads of household
$150,000 for all other filers

The IRS allows you to use your modified AGI from the year before you took delivery of the vehicle, if that helps you qualify for the EV tax credit. For example, say you are a single filer who purchased an EV in 2023. Your modified AGI in 2023 was $175,000, putting you over the limit to claim the tax credit. However, your modified AGI in 2022 was $120,000. In this case, you could use your AGI from 2022 to qualify for the tax credit in 2023.

What vehicles qualify for the EV tax credit for 2023?

Vehicles must also meet certain criteria to be eligible for the tax credit. To qualify in tax year 2023, your vehicle must:

Have been purchased new
Have a maximum MSRP of $80,000 (for vans, sport utility vehicles, and pickup trucks) or $55,000 (for other vehicles)
Have a battery capacity of at least 7 kilowatt hours
Have a gross vehicle weight rating of less than 14,000 pounds
Be made by a qualified manufacturer (not required for fuel cell vehicles)
Undergo final assembly in North America
Meet the critical mineral and/or battery component requirements (for vehicles placed in service April 18, 2023, or after)

When purchasing the vehicle, the dealership also needs to report the required information (your name and taxpayer ID number) to both you and the IRS, otherwise you will not be eligible to claim the credit.

How do I know what vehicles meet the “final assembly completed in North America” and other requirements?

According to the IRS, you’ll be able to find your vehicle’s weight, battery capacity, and final assembly location (also called “final assembly point”) on the vehicle’s window sticker along with its VIN.

The IRS also has an ongoing list of qualified manufacturers that meet all the Inflation Reduction Act requirements. However, not all clean vehicles made by the manufacturers on this list are guaranteed to qualify, so be sure to verify your vehicle’s requirements with your dealer before purchasing if you are unsure.

How do I claim the clean vehicle credit when I file my taxes?

You’ll need to use Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit, to claim the tax credit when filing your income tax return.

TaxAct® can help you claim the EV tax credit when you file with us. If you’re having trouble, here are detailed instructions for how to do so using our tax preparation software.

Can I claim the electric vehicle tax credit for a used car purchase?

As of Jan. 1, 2023, you can claim a used clean vehicle credit for qualified used EVs from a licensed dealer, provided you meet certain requirements.

Just like the regular EV tax credit, the used EV tax credit is nonrefundable, meaning if your tax credit exceeds the amount you owe in taxes, you won’t be able to claim the excess as a tax refund.

To qualify for the used clean vehicle credit:

You cannot be the original owner of the vehicle.
You must have bought the vehicle for your own personal use and not for resale.
You can’t be claimed as a dependent on another person’s tax return.
You can’t have claimed another used vehicle credit in the three years before the purchase date.

Just like the new clean vehicle credit, eligibility for the used EV credit depends on your income. To qualify for the used EV tax credit in 2023, your modified AGI cannot be more than:

$150,000 for those married filing jointly or surviving spouse
$112,500 for heads of household
$75,000 for all other filers

Also like the credit for new clean vehicles, you can use your prior year modified AGI if that helps you meet the used clean vehicle credit requirements above.

Only certain used vehicles qualify for the credit. To qualify, the used vehicle must meet all the following requirements:

Have a sale price of $25,000 or less (including dealer-imposed costs or fees not required by law; excluding fees required by law like taxes and title or registration fees)
Have a model at least two years earlier than the calendar year in which you bought the vehicle (for example, only 2021 and older vehicles would qualify for the credit if purchased in 2023)
Have been purchased from a licensed dealer
Not have already been transferred to a qualified buyer after Aug. 16, 2022
Weigh less than 14,000 pounds (gross vehicle weight rating)
Have a battery capacity of at least 7 kilowatt hours
Be used primarily within the U.S.

The dealership must report the required information to you and the IRS at the time of sale to qualify for the used clean vehicle credit.

Are there any state tax credits for buying an EV?

Some states offer additional tax incentives for purchasing (or sometimes leasing) an EV. Each state has different eligibility requirements, many of which differ from the federal EV tax credit requirements discussed above. Because of this, you may still be able to claim a tax rebate from your state even if you don’t qualify for the federal tax credit. So, don’t forget to check!

You can find each state’s unique laws and tax incentives on the U. S. Department of Energy website.

Here’s an example: Colorado residents can claim the state’s EV tax credit for qualifying vehicles titled and registered in Colorado that were purchased or leased before Jan. 1, 2029. How much of a credit you can claim depends on the vehicle type and year you purchased the vehicle but amounts range anywhere from $500 to $12,000.

What are some other tax considerations when buying an EV?

If you’re still on the fence about purchasing an electric vehicle, here are some more tax considerations and financial implications to keep in mind.

1. Higher upfront cost

Currently, clean energy vehicles tend to cost quite a bit more than their traditional counterparts. Purchasing an EV will likely land you with a higher monthly payment, and you’ll pay more in sales tax if you live in a state that charges sales tax.

However, federal and state tax credits can help offset the extra upfront costs of purchasing an EV. And remember, you’ll also be saving money that you would otherwise spend on gas when driving a conventional vehicle.

2. Municipal excise taxes

You may also pay higher municipal excise taxes when driving an EV. Since these vehicles run on electricity, you would be subject to any local municipal taxes on electricity when charging your vehicle’s battery. While this might not seem like a big deal, receiving an unexpectedly high electric bill is never fun, so it’s something to keep in mind.

3. Extra vehicle registration fees (in some states)

It’s also important to note that some states have imposed additional registration fees on clean energy vehicles.

These states justify the extra annual fee by claiming they get a large portion of public funding for highways and bridges through fuel tax revenue (the tax you pay when buying gasoline). Since EV drivers do not pay taxes on gasoline, some states have imposed special registration fees to offset this lost revenue.

As of 2023, 24 states charge extra annual fees for EVs and even some hybrid vehicles. The exact amount depends on your state and vehicle type, but fees currently range from an additional $50-$200 per year.

It’s unclear how long states will continue to impose these fees as more consumers decide to go electric. For now, at least, it’s something to consider when deciding if an EV will fit within your budget.

Is an EV right for you?

Ultimately, it’s up to you to decide whether purchasing an EV, plug-in hybrid, or another alternative fuel vehicle is the right decision. Consider the financial implications carefully to decide whether an all-electric car fits within your budget and lifestyle.

If you decide it’s time to make the switch, just make sure you familiarize yourself with all the electric car tax benefits available to you at both the federal and state level — you don’t want to leave any money on the table.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

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What Tax Forms Do I Use to File My Business Return?

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Updated for tax year 2023.

Starting a new business and keeping it going through its first year is an impressive accomplishment.

When you file a federal income tax return for your business, the paperwork and forms you will use depend on how your business is organized.

Here’s how you’ll file your business return, based on your business type:

Sole proprietor

If you decided to keep it simple and structure your business as a sole proprietorship, you’re in luck. The paperwork and tax filing requirements are far easier as a sole proprietor than for any other type of business.

As a sole proprietor, you are the business. You can report all of your business income and expenses on a Schedule C, which you file with your personal income tax return (Form 1040). The business itself is not taxed separately.

You don’t have to worry about the net worth of your Schedule C business from year to year, because you and the business are the same.

If you have more than one business, report each business activity on a separate Schedule C. If you have a farm that you run as a sole proprietor, file Schedule F with your 1040 individual income tax return.

C corporation

If you’ve incorporated as a C corporation (C corp), you will file Form 1120 for your business return. Form 1120 is a little more involved than a Schedule C. It asks more questions, and you must provide balance sheet information for the beginning and end of the tax period.

Form 1120 is not filed as part of your personal income tax return. The corporation reports any dividends or other tax information that applies to you on the applicable Form 1099.

C corps must pay tax on their earnings, if applicable. Their shareholders also pay tax on dividends and other returns. This is called double taxation because the same income is taxed twice.

Partnership

If your business is structured as a partnership, you will use Form 1065 to file your return. A partnership, unlike a corporation, does not pay tax. Instead, it passes net income, income tax credits, and other tax items through to each of the partners — those people who have a beneficial interest in the business.

Each partner receives a Schedule K-1 that reports their share of items to report on their tax return. When you receive a Schedule K-1 from your partnership return, you report partnership tax items on Schedule E, Part II, of your Form 1040 individual tax return.

S corporation

S corporations (S corps) are structured like C corporations but have a limited number of shareholders. Like a corporation, an S corp sells shares but the income passes directly through to its shareholders.

S corp profits and losses are reported on Form 1120-S. The shareholders report the associated income and loss on their personal tax returns, using their individual income tax rates. This enables the S corp to avoid double taxation on its income.

Nonprofit organization

Nonprofit organizations, such as ministries, charities, and many educational organizations, file Form 990 to report information including income, expenses, and balance sheet information.

If you run a nonprofit organization, you must also provide information about the officers of the organization and your sources of funding.

If your nonprofit organization pays you — for example, if you are an employee of your nonprofit organization — you’ll receive a Form W-2 or another similar form so you can report earnings on your individual income tax return.

Limited liability company (LLC)

If your business is organized as a limited liability company and you own 100% of it, you can still file Schedule C with your individual income tax return, just as you would with a sole proprietorship.

However, you have additional filing choices with a multi-member LLC. Depending on whether you want to be treated as a C corporation or an S corporation, you can choose to file Form 1120 or 1120-S, respectively. Alternatively, you can file as a partnership, using Form 1065.

What are the deadlines for filing my business taxes?

Due March 15:

Form 1120-S (S corps, LLCs taxed as S corps)
Form 1065 (partnerships, LLCs taxed as partnerships)

Due April 15:

Form 1120 (C corps, LLCs taxed as C corps)
Form 1040 Schedule C (sole proprietors)

If you filed for a business extension, the following due dates apply:

Due Sept. 15:

Form 1120-S (S corps, LLCs taxed as S corps)
Form 1065 (partnerships, LLCs taxed as partnerships)

Due April 15:

Form 1120 (C corps, LLCs taxed as C corps)
Form 1040 Schedule C (sole proprietors)

Note: If any of the above dates fall on a weekend or federal holiday, the payment deadline falls on the next business day instead.

 

This article is for informational purposes only and not legal or financial advice.

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