Red Flags

tax return red flagI’ll always call the UK my home, but I have lived and worked in the U.S. for the past 15 years.  I used an accountant for many years to help me file my income taxes, and once he retired, I decided I could do it on my own.  Big mistake!  I received a letter last year from the Internal Revenue Service saying I was being audited.  I didn’t know what I had done to deserve it.  I felt like the walls were closing in on me, my air conditioning had broken and I needed to call air conditioning repair Hoover, and that I was going to have a stroke.  I called my accountant friend and he helped calm me down, and the audit wasn’t as bad as I had thought it would be, though it wasn’t very pleasant either.  Anyway, once it was over, I started doing some research about why they picked me to audit.  I’ve compiled a list of things that can cause red flags on your tax return.  Avoid these and hopefully you won’t find yourself in the same situation I did last year! 

tax audit

Mathematical Errors:  All tax returns are run through a computer, and if there are numerical errors, this will draw attention to your return.  There are plenty of free tax software programs that you can run your return through before submitting it to check for mathematical errors.

Taxable Income:  If you report a different amount of income than what is listed on your W-2 and 1099 forms, you will flag the IRS’ computers.  The people who pay you send a copy of your W-2 and 1099 directly to the IRS, so there’s really no way to hide any taxable income from them.

Filing Position:  Comparisons are made between similar taxpayers or private corporations.  They look at the relationship of purchases, sales, and tax returns of other businesses in the same industry, as well as the tax returns of shareholders of a private corporation in comparison to the corporation’s taxes.  Filing positions which are not in line with industry expectations will tip off the IRS that they need to investigate.

Typing Errors:  When you pay a tax preparer to file your taxes, you assume that they are going to do everything correctly, but this is not always the case.  Even if you do them yourself, it is very easy to make simple typing and entry errors on your return.  No matter who prepares your return, it is extremely important to review everything for errors or you might be faced with an audit.

Charitable Deductions:  If you donate to charity, you can file for tax deductions, but will send out warning signals if you report unusually high numbers.  The IRS likes statistics so if you report charitable donations that are not similar to others with your income level, they will think you are up to something.  Be sure to assess your donations accurately if you donate clothing or other items, and be sure to take the proper steps when making large monetary donations.

High Income:  While it’s great that you are earning a lot of money, the IRS audits people with an income over $200,000 four times more than the national average.  There’s not much you can do about this, so just be sure to keep excellent documentation of everything and you should be fine.    

income tax auditWhile the IRS says that audits are completely random, they do monitor and investigate anomalies in tax returns.  Just keep accurate records and report all of your earnings every year, so even if something looks funny on your return, you’ll be able to back it up if they do decide to look into it.

Kevin T

My Two Worst Nightmares: Bridges and Taxes

About a year ago, I saw a show on how the infrastructure of the U.S. is falling apart, and I was truly terrified. My fear of bridges has become so bad that I almost have a panic attack every single time I have to drive or walk on one. I’ll even stop my car in front of the bridge and then speed over it after all the other cars have driven over it. I would give anything to have never seen that documentary, but in some strange way I’m glad I watched it. The reporters were right, the bridges and roads of the United States are falling apart, but why isn’t anyone fixing them? I mean the government collects taxes from 45% of all Americans. Can they not use some of that money to fix these horrible bridges?? Don’t get me wrong, I hate paying taxes almost as much as I hate bridges, but if I am going to have to pay the government, can’t they at least use that money to help keep me safe. Only 2% of tax dollars in 2015 went towards fixing the infrastructure. Bridges are collapsing every year, but the government does not seem to want to fix them. After my fear of bridges worsened, I became more nervous about other objects collapsing. I noticed a lot of dead limbs in my back yard that looked like they might fall at any moment. I decided that if the government was not going to use my tax dollars to fix the U.S., I would use my tax returns to make my house a safer place. I called Hoover Tree Service / BirminghamBesttreeservice.com. They were affordable and got rid of all the dead limbs hanging over my house. I now feel much safer at home, which helps mbridge_in_SE_bodkin1_Flickre with my anxiety over bridges. I cannot believe that after the amount of people who have died on bridges they continue to ignore this problem. I fear for my life on a daily basis, and no one will help fix the problem. I hope that with the presidential election around the corner, the next president will put more of the American tax payer’s money towards fixing the infrastructure. This is a serious problem that needs to be addressed. If we are going to be forced to pay taxes than we need to raise our voices about the issues that our important to us. This can be fixed if people demand for the government to do something about it.

Where Do My Tax Dollars Really Go?

Each month I look forward to getting my paycheck, and I don’t think I’m the only working American that feels that way, but it always pains me a little to see what’s left after taxes. Well, my agony got me a little curious, and I started looking into what the government is really doing with my money. Now, I do realize that I can’t track exactly which federal programs my paycheck goes to, but I wanted to know more about the programs that the government funds, so maybe it won’t be so painful the next time I see the amount of money they take out of my paycheck. npp-where-2015-green_large While doing some research, I found this diagram that helped me better visualize where my money is going. If we break it down to just one dollar, we can see in the diagram that the largest part of the American’s tax dollar is going towards the military, medicaid, and healthcare, and the smallest part of the dollar is going towards housing and community. Something else that I found interesting, is the amount of money being used to support the military, and the lack of money being used to support veterans. If these men and women are fighting so hard for this country, then why isn’t there a larger part of my tax dollars going towards their well being. Even though it is my money that they are taking, I have no say as to where that money goes.  I think many Americans wonder where their money is going, and we should have a right to know. If the government has the right to tax us, then we have a right to see what the Department of the Treasury is doing with it. The bigger question is whether or not the government is actually using the money for the programs in the diagram above or something entirely different. If you haven’t thought about it already, I encourage you to look into where your money is going. It is important to know what is happening in the government whether we want to know it or not, and if we choose to stay informed, we might not feel so depressed when we see the amount of money the government takes out of our paychecks.

It’s a Scam!

tax scam

Just the other day, I was out to lunch with a good friend of mine when she received a phone call from a number she didn’t recognize.  She had been waiting for a call back from a job interview, so she answered the call thinking she was going to hear some good news.  I could only hear her end of the conversation, but I could tell that she was not receiving the good news she had hoped for.  As I sat there, thinking about things I could say to console her after not landing the job, I watched her become very distraught.  She was on the phone for several minutes, and had grabbed a pen from her purse and was frantically jotting down some information.  Once she got of the phone, she was in tears so it took her a few minutes to tell me what was going on. 

Apparently, the person on the phone was an IRS agent who claimed that my friend owed thousands of dollars in back taxes and if she didn’t put the money on a prepaid debit card and call them back with the number, she was going to be arrested and her license would be revoked.  My friend was frantically grabbing her purse and other belongings and said we had to leave immediately, that she only had an hour to get back to them with the debit card number. 

As we were riding to the bank, I kept telling myself that something didn’t seem right about this.  I know the IRS wants our money, but would they really only give you an hour to go get a prepaid debit card to pay them?  My friend didn’t even know she owed back taxes.  She says she has always received a refund when she filed because she had paid too many taxes over the years. 

So I decided to search the web to see if I could find out what was going on.  The first thing that popped up was an article discussing how there are rings of scammers who have been posing as IRS agents for the past two years, threatening and scaring taxpayers into making an immediate payment on the phone to pay a bogus debt.  There is another phone scam where the caller says they are from the IRS and need to verify some of the information that they received on their tax return, requesting personal information such as social security numbers and bank account numbers. 

I called the IRS to ask them if they knew about these scams and they stated that they had caught a number of these criminals but that there were still a great deal of them out there.  So if you ever get a phone call from someone stating they work for the IRS, do not give them any information.  The IRS will always send you a letter stating that you owe money before they call and demand you pay it within an hour.  They’ll never have you arrested or revoke your license if you don’t pay them immediately, and they’ll never ask you for personal information like your social security number over the phone.  So if you receive a fishy phone call like this, just hang up on these crooks and don’t let them try to scam you!

Kevin T

Why I Hate Taxes

no taxesI hate taxes.  There.  I said it.  Most sane people would agree with me.  I work hard for the money I earn and don’t think that I should have to give any of it away to people who can do with it what they see fit.  It just doesn’t seem very fair.  After moving to the United States 15 years ago, I’ve come to realize that I hate taxes even more than I did before, and I didn’t think                                                 that was possible. 

In America, the people who earn the most money pay the least amount of taxes while the middle class, who are struggling to make ends meet in today’s society, are paying more taxes.  It would be different if we actually saw some value from our contributions.  Americans actually pay 15-20% less in taxes than what is paid in the UK, but there is hardly anything to show for it.  There is no national health care system that guarantees a member will not go bankrupt in the event of a serious medical condition.  There is no free or inexpensive higher education.  Parents have to start saving for college before their children are even born, and once a child graduates from college, they are usually in so much debt it takes half of their life to pay it off.  There is no money for childcare, and families spend a huge portion of their salaries paying for childcare, which almost defeats the purpose of even working.  But it is impossible for a family to survive on one salary while the other parent stays at home with the children. 

The U.S. spends billions on the military, national security, and big pharmaceutical companies while the taxpayers who are giving the government their money are getting nothing in return.  What about the 50 potholes I drive over every day to work?  The roads all over this country are in terrible condition, causing damage to vehicles and costing people thousands of dollars in repairs.  Don’t get me started on the education system in America.  Most schools are a joke, funding is cut every year, teachers make hardly any money, and the future of the country, the children, are suffering because of this.  It seems like the police are always around to issue speeding citations and parking tickets, but the minute there is a shooting or dangerous situation, they are nowhere to be found.  Taxes should be used on things that can benefit the citizens of the country, not on things that will benefit the government and large corporations. 

Another reason I hate paying taxes is because they are so in-your-face in America.  Sales tax is added on to the price of whatever you buy, making everything even more expensive and reminding everyone that they could probably afford it if it weren’t for all the taxes being taken out of their paychecks every month.  Then, on top of everything else, you have to file a complicated tax return every year that spells out exactly how much money you shelled out to the government for what seems like nothing. 

So my proposed solution is that everyone pays a flat 15% of their income and it is used on particular things that everyone votes on, things that will benefit everyone.  Then whatever is left over can be used to pay for national security and everything else the government says we so desperately need…but I guess this is why I’m not a politician.

Kevin T

Blogging All the Way to the Bank

taxes on blogging

If you love writing, whether it be to tell a story, share information, or to try to make people laugh, blogging is a great way to let your voice be heard (or seen).  In this day and age, writing blogs is a great way to make a living if you want to work from home.  If you have great writing skills and can get your page ranked online, people will start to pay you to advertise their products, sponsor their posts, and review products because they know you have quite a bit of traffic reading your site.  While it is a great way to make money if you do it right, there are certain things you need to know about paying taxes as a blogger:

Declaring Income:  As soon as you start earning money from your blog site, you should declare it.  Even if you are just making a little bit of pocket money, it is still payment for a service and must be declared as earnings, and you must pay the correct taxes and National Insurance on it.  If you aren’t earning much, you might not have to pay taxes but you are still responsible for the National Insurance and you still must report your earnings.

Registering with Her Majesty’s Revenue and Customs (HMRC):  Register with the HMRC as a freelance writer so you will receive a tax number to be used when you file your return.  Keep careful records from the beginning, including all of your income and expenses.  Keep all invoices and receipts neatly organized for reference when you file. 

Reporting:  When reporting your income to the HMRC, do not leave anything out.  You must declare any income made from sponsored posts and advertising, the value of items that you keep after reviewing them, and any cash made from selling reviewed items.

Claiming Expenses:  Since your blog writing is essentially a business, you can claim all of your expenses related to it, including:  conference tickets, travel, hotels and meals if an overnight trip is necessary, a percentage of your utility bills if you use an area in your home as a work space, and a percentage of your phone and internet bills.  Keep all of your receipts and organize them by category in case you need to locate a particular receipt in the future.  There are certain things you cannot claim as expenses when you are a blog writer, such as:  childcare costs, your own wages, clothing, or anything bought for personal use like a personal mobile phone.

Think of something you are passionate about and start writing blogs.  You can build your blog site up and research ways to push it up in the rankings online so you can accumulate devoted followers.  Before you know it, you may be able to quit your day job and start working from home as a professional blogger.  Just be sure to treat it as a real business and do your due diligence in reporting your income and paying the appropriate taxes.

Kevin T

blogging and taxes

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Preparing for the End (of the Tax Year)

tax timeAs each new year begins, it seems that time speeds up, and before we know it, it is time to file our taxes once again.  We really don’t think much about taxes until it’s time to do all the paperwork and filing, but we should be thinking about them throughout the year.  Here are some top tips for things you should be considering throughout the year to ensure everything goes smoothly next April:

Tax Rate:  First things first, make sure you are paying an appropriate tax rate.  In some situations, you might want to transfer assets to your spouse or partner, or protect your personal allowance by increasing pension contributions or donations to charity.  Determine whether your investments are held in the most appropriate manners each year based on all the changes in taxation that occur frequently.  It is also very important to keep accurate records of all of your income and earnings in the unfortunate event of an enquiry.

Property Ownership:  This year, purchasing investment properties and second homes will result in a 3% increase in the Stamp Duty Land Tax.  If a property is used as the owner’s only residence, or main residence, any gain on disposal is exempt from the Capital Gains Tax.  Married couples can only have one exempt residence between them.  If you rent out furnished property, the current 10% wear-and-tear tax deduction will be replaced with tax relief for the costs of furnishing replacement.

Capital Gains Tax:  There are many different things to consider regarding Capital Gains Tax.  It’s important to remember that you can claim capital losses to help offset any gains in the current year or future tax years.  If you’re an entrepreneur, there is an additional entrepreneur’s relief deduction.  You can also give an asset to a spouse or partner as a gift without suffering a tax liability.

Pensions:  The annual allowance for tax-deductible pension savings has been the same for a couple of years, but for individuals earning a certain amount, that will change.  Make the most of annual contributions if you earn more than that threshold amount.  The lifetime allowance is being reduced slightly, so be sure to consider your overall contributions as well.  There are various protections you can file for if necessary.

Tax Efficient Investments:  There are several tax efficient investments provided by the state including National Savings, Social Investment Tax Relief, Venture Capital Trusts, and others.  They all have annual limits, but any gains incurred on these investments and loans may be exempt from the Capital Gains Tax.

Inheritance Tax:  In most cases, a 40% inheritance tax is paid on the value of an estate when someone dies, less any exemptions.  It is important to plan for this throughout your life in order to reduce the inheritance tax by reviewing regularly.  Be sure to meet any conditions for available exemptions to help offset the tax.

Hopefully you will begin considering some of these points now and will have a plan put into place when it comes time to file your taxes next year.  There are many other parts to the year-end tax review so it is usually best to work with a professional to ensure all of your affairs are in order.

Kevin T

tax planning time

A Few Thought Before We Begin

As we go along the post will become more and more targeted.  We must start this journey with the basics and it would be helpful to the reader to have a broad spectrum familiarity with the purpose of taxes and the sometimes abuse.

Taxes are now being dressed up and fees and licenses and sold to you as anything but a tax.  You as a citizen should know better.

So lets get into all this, follow along closely so you can use this information to your advantage.

Kevin T.