Taxes

How to Figure Our Earnings Before and After Taxes (EBIT)

June 19, 2020 By Tamila McDonald Leave a Comment

If you run a business, there is a slew of financial information that you need to track. One critical figure is your earnings before tax (EBT), a metric that can help you assess your company’s financial performance and its overall health. It’s also vital to be able to calculate your earnings after tax (EAT), ensuring you understand what you owe (or paid out in taxes) and what you’re bringing in otherwise. If you want to be able to figure out your earnings before and after taxes, here’s what you need to know.

Calculating Earnings Before Tax

In the simplest terms, EBT is a reflection of the company’s revenue minus expenses, not including taxes. It’s a standard line item on income statements, making it a crucial figure to calculate.

Typically, you start by determining your gross sales. That is the foundation of your company’s income, so it serves as the strongest starting point.

Next, you deduct your cost of goods sold (COGS). Next, you’ll subtract your general, administrative, and operating expenses. After that, factor in interest and depreciation.

For example, let’s say your company sold 50 widgets during May for a sales price of $500. Your gross sales would be $25,000. But producing those widgets cost $100 a widget, making your monthly COGS $5,000. That means your company’s gross revenue is $20,000 ($25,000 – $5,000).

Next, you could consider your overhead costs. For this example, between rent, wages, and other operating expenses, that figure comes in at $9,000. By subtracting that from the gross revenue, you get $11,000. That $11,000 is your earnings before interest, tax, depreciation, and amortization (EBITDA).

If you have no physical assets, that EBITDA is also your earnings before interest and tax (EBIT). But, if you have assets, then you’d have to calculate depreciation and subtract that from the $11,000. For simplicity, we’ll say that isn’t a factor.

For companies without assets, if you have interest-related expenses, you would need to subtract those. For instance, if your interest expenses were $1,500 a month, your EBT would be $9,500.

Calculating Earnings After Taxes

Part of why EBT is so important is that it represents your company’s taxable income. With that figure, you can calculate your EAT.

Precisely how you complete that calculation depends on your business’s tax bracket. In the U.S., the federal rate is 21 percent. If your monthly EBT was $9,000, that would make your annual EBT $108,000. If you subtract 21 percent from $108,000, you get $85,320 for your EAT.

Now, it’s important to note that there can be state taxes to contend with as well. Those will vary depending on your location and, potentially, by your taxable income level. Not all states use a flat-rate, so you’ll need to determine your bracket to complete the final calculation.

Why EBT and EAT Both Matter

Both EBT and EAT are crucial figures. Not only do they speak to the health of a company, but they make comparing the states of several businesses easier. Hence why they are a crucial part of income statements, especially in the eyes of potential investors and lenders.

For example, since each state can have different tax rates, EBT allows investors to examine a company’s performance against another’s fairly. One business isn’t being incidentally penalized for operating in a jurisdiction with higher taxes.

In contrast, EAT gives clear indications of a company’s profitability. It shows how much the organization has left after handling all of its obligations, including taxes.

Together EBT and EAT paint a holistic picture. As a result, they can be vital for the full assessment of a company’s current state.

Do you have any other tips that can help a person figure out their earnings before and after taxes? Share your thoughts in the comments below.

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How to Avoid Tax Identity Fraud

June 4, 2020 By Kathryn Vercillo Leave a Comment

Nobody wants to become the victim of identity theft. As the COVID-19 pandemic persists, and economic strain begins to affect more and more people, the risk becomes even greater. In particular, tax identity fraud is a big concern. After all, with one stimulus check already sent out, and perhaps another on the way, your taxes are playing an even bigger role than usual in your life right now. Here is all that you need to know about preventing tax identity fraud.

What Is Tax Identity Fraud?

Arming yourself with knowledge is the best thing that you can do to avoid becoming the victim of any scam. Therefore, it’s important to learn as much as you can about tax identity fraud. This is a form of identity theft specifically linked to your taxes. Typically, someone steals your tax ID information then uses it to file taxes, redirecting the tax refund directly to their own accounts.

Even if you owe money to the government, they can still utilize key information, such as your social security number. Then they make up fake forms, report fake income, and request the tax refund.

Many people have delayed doing their taxes this year because the government offered an extension due to COVID-19. Therefore, fraudsters have more time this year than usual to take advantage of your account. Additionally, stimulus checks are going out to the same addresses where people have their tax refunds directly deposited. Therefore, fraudsters have even more incentive to attempt tax identity fraud.

How to Prevent Tax Identity Fraud

Anyone can become a victim of identity theft, including tax identity fraud. The fact is that we put a lot of personal information out there into the world. We have to in order to run our daily financial lives. As a result, that information can be at risk. However, there are actions that you can take to limit the likelihood of becoming a victim of tax identity fraud.

Protect Your Personal and Financial Information

You can take action to protect your personal information. Here are some of the things that you can do:

Limit how often you give out your social security number. This is the number one piece of identifying information that a scammer needs to commit tax identity fraud. Oftentimes, when asked for a social security number, you don’t actually have to provide it. Ask the person requesting it (such as a credit card customer service representative) if there is another form of personal identification that they will accept instead.
Generally speaking, don’t give out personal financial information. More specifically, if you receive an unsolicited request for this information (via email, text, or over the phone), be careful. Chances are that this is a fraudulent attempt. Note that email messages and letters sent through the mail often look very official. However, if you didn’t request the activity, and they’ve contacted you first, be wary.
Use smart computer hygiene to protect your information. Install antivirus software. Use personal firewalls on your computer. Use encryption programs. Don’t save personal information so that your computer automatically enters it for you; enter it manually each time. Change all passwords frequently.

Additional Password Tips

We use passwords online for many different accounts. Make sure that you always use different passwords, choosing particularly challenging passwords for financial accounts that contain your personal identifying information. Here are some additional password tips:

Use a different password on every single account.
Make it a long password that doesn’t include real words.
Use two-factor / multi-factor authorization for passwords on any site that offers it.
Change your passwords regularly on every account. You can use a password manager to help you with this.
If you can create a User ID that differs from your email address, do so.

Monitor For Identity Tax Fraud

You can also prevent identity tax fraud, or at the very least nip it in the bud, by knowing what signs to look for. Monitor all of your accounts very carefully. In particular, make sure that you:

Regularly review your credit report. Go through it with a fine-tooth comb. Anything that doesn’t look right should be disputed. If you see accounts that you aren’t familiar with, contact the credit reporting bureau immediately to report potential fraud.
Always review your Social security statement. You get one each year. Do you ever look at it closely? You should. The most important thing to look for is whether or not the earnings are correct. People who steal your identity may use it to obtain employment. Their earnings then show up under your social security number. This means that they have access to your social security number, putting you at risk of tax identity fraud.
Read notices that come from the IRS. You need to be careful because scammers can create mail that looks very real. That said, if your account has potentially been compromised, the IRS will send you an official notice. Therefore, carefully review any mail that comes. Contact the IRS directly to respond. Double-check the phone number to call online to make sure that it matches what the mail says.

Additional Tips to Prevent Tax Identity Fraud

Generally speaking, you should try to file your taxes as early as possible each year. Even though the government extended the filing deadline this year, savvy consumers still filed early. Fraudsters have to file before you do if they want the return to come to them. Therefore, they take action very early in the year. If you file as soon as you’re able to each year, you are less likely to become a victim of tax identity fraud. If you try to file and receive a notice that you can’t because of duplicate filing, chances are that tax identity fraud is the reason.

What To Do If You Become a Victim

As soon as you suspect that you might be a victim of tax identity fraud, take action. The IRS has a complete guide to tax-related identity theft that will tell you step-by-step what to do.

Read More:

Why Haven’t I Received My Stimulus Check?

April 18, 2020 By Kathryn Vercillo 4 Comments

Approximately 80 million Americans received their stimulus check, also called the Economic Impact Payment, to assist them with paying bills during COVID-19 challenges. However, that leaves a lot of us who have not received our checks. I’m trying not to cave in to stimulus check anxiety. Nevertheless, I find myself wondering, “why haven’t I received my stimulus check, yet?” More importantly, when will I?

Reasons I Might Not Have Received My Stimulus Check

There are many reasons that people have not received their payments yet. I thought that I was covered because I filed both 2018 and 2019 taxes, and I was fairly certain that my direct deposit information was on file. However, it turns out that might not have been the case. Here are my best guesses for why I haven’t received the $1200 Economic Impact Payment, yet:

I filed my taxes using TurboTax.

It seems that even though they have my direct deposit information on file, it’s possible that the IRS itself doesn’t have that information. I don’t exactly understand why this is, but I’ve read several articles suggesting that this is a likely reason I haven’t received my deposit.

I only recently filed my 2019 taxes.

My research suggests that if you filed taxes only recently then perhaps they haven’t been processed, yet. This can delay the check. I filed just before April 15th. (Yes, I’m aware that tax filing extensions were automatic this year but I decided to get mine out of the way.) According to TurboTax, my filing was accepted. Nevertheless, perhaps it hasn’t been processed, yet. This makes me wonder: “if I hadn’t filed my taxes, would I have received my stimulus check?”

There’s a glitch in the system.

When I tried to use the IRS “Get My Payment” tool to figure out why I hadn’t received my payment, I ran into some problems. First, the system was overwhelmed, because of course millions of other people are wondering the same thing that I am. Second, when I got in, it said that they couldn’t determine my eligibility.

This could be because of the above two reasons. Or it might just be a glitch in the system. I imagine that they are doing their best to keep the system up and running as accurately as possible. Nevertheless, the sheer number of people accessing a system that was put into place so rapidly means that there are glitches.

Other Reasons People Haven’t Received Checks

Here are some of the other reasons that people might not have gotten their payments, yet, although they don’t apply to me:

Earning enough money to not qualify for the check
Failure to file taxes in the past two years
Receiving social security or other assistance; those checks are coming soon
The system couldn’t verify your identity

What I’m Doing To Get My Stimulus Check

Right now I’m just keeping an eye on things. There are still new payments coming soon. Many of these will be mailed as paper checks instead of going through direct deposit. I’m going to hold off, avoid anxiety about the situation, and wait to see what happens. A lot of people are in the same boat. We’ll figure this out.

What are you doing with your stimulus payment if you already received one?

Don’t Forget to Do These 5 Things Before Submitting Your Taxes

March 23, 2020 By Tamila McDonald Leave a Comment

Filing your taxes can be an arduous process. For many filers, the process is complex and confusing. Whether you use online software or head to a professional, it’s easy to forget some critical steps. If you want to make sure that your taxes are in tip-top shape, here are five things you need to do before submitting your taxes.

1. Double Check Social Security Numbers

When it comes to common mistakes, incorrect Social Security numbers is one of the biggest. Many people don’t have their Social Security number memorized, let alone their family members. They may think that what they listed is correct, only to be wrong.

Plus, it’s easy to accidentally mistype these nine-digit identifiers. Typos happen quite often, even when people try to be careful. By doubling checking every Social Security number on your return, you ensure that there isn’t a mistake that could impact your taxes.

2. Explore Every Possible Credit and Deduction

There are a surprising number of tax credits and deductions. If you accidentally overlook one, the IRS isn’t going to tell you. All that happens is you end up overpaying for the year (unless you catch it later yourself and choose to amend your return).

Before you hit submit on your taxes, review your eligibility for credits and deductions. For example, if you attend college (or just graduated last year), you might be eligible for the lifetime learning or American Opportunity Tax Credit, along with student loan interest deductions.

Even if you are fairly certain you don’t qualify, it doesn’t hurt to take a moment and check. That way, you decrease your odds of missing something that could have helped you put more money back in your pocket.

3. Look for Free E-Filing Options

Many tax software providers will let you start preparing your tax documents for free. But, once it comes time to file, you have to pay for their service. Otherwise, the forms you worked so hard on don’t make it to the IRS.

However, many people are eligible for free e-filing options. Not only can you use the software to prepare your documents, but you can also get it into the hands of the IRS without paying a dime.

If you want to find options, the IRS Free File Online search tool can help. Just choose your income level and see which products are available.

4. See If You’re Being Claimed as a Dependent

Many young adults want to file their own taxes. But, if their parents have been financially supporting them (paying at least half of their child’s living expenses), they might want to claim their kid as a dependent. This makes them eligible for certain tax breaks, so it’s an attractive option for them.

It’s critical to find out if anyone who is eligible to do so plans to claim you as a dependent. Otherwise, if there’s a mismatch, it could cause your or your parents’ claim to be rejected. If that happens, then there will be some IRS headaches to deal with that could likely been avoided with a quick conversation.

5. File Even If You Don’t Technically Have To

If your annual income was below the standard deduction ($12,200 for single filers for the 2019 tax year), you technically don’t have to file a tax return if you are under the age of 65 and don’t have any special circumstances. However, that doesn’t mean you shouldn’t file.

For anyone who paid taxes during the year, such as those who worked for someone else and received a W-2, it’s always better to file. You likely had taxes pulled from your pay, and you might be eligible to get that money back. Plus, there’s a chance that you qualify for tax credits or deductions that could lead to a refund, too.

Unless you at least go through the process, you won’t know if you are owed money. As a result, it’s always best to at least complete the forms. That way, you’ll know whether filing is worth your while.

Is there something else people need to make sure they do before submitting their taxes? Let us know in the comments below.

If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

5 Tax Breaks You May Have Overlooked

January 3, 2020 By Tamila McDonald Leave a Comment

When a typical person or couple files their taxes, they are usually eligible for at least a few tax breaks. The trick is, deductions and credits aren’t typically applied automatically. In many cases, you have to choose to pursue that tax deduction on your return. If you don’t, then you end up overpaying.

Most Overlooked Tax Breaks

There are certain tax breaks that people are fairly familiar with, regardless of whether they apply to their tax situation. For example, most people know about the child tax credit and earned income credit, even if they don’t personally qualify.

However, there are many others that aren’t as widely known. As a result, tax filers may miss them simply because they don’t realize the deductions or credits are available.

By understanding which tax deductions are frequently overlooked, you can decrease your odds of overpaying. See if any of the situations apply to you and, if so, make an effort to secure that tax break.

Here is a look at five tax breaks that taxpayers frequently miss.

1. Gambling Losses

Whether you live in a state with casinos, spent some time at the track, played the lottery, or took a trip to Las Vegas in 2019, you might be eligible for a tax break. Gambling losses are deductible in some situations.

If you want to claim the deduction, you do have to itemize. In some cases, that approach won’t make sense. But, if you are itemizing anyway, it could help you lower your tax bill.

Additionally, the deduction is limited to how much you report as gambling winnings as part of your taxable income. As a result, it could help you offset how much you owe if you happened to come out ahead when gambling.

2. Jury Pay Given to Your Employer

If you work for a company that pays you your usual wage when you’re on jury duty but requires you to hand over your jury duty pay to them, then you are eligible for a small tax break. Jury pay has to be reported as taxable income. But, if you had to give that check to your employer, you can deduct that amount.

3. Child Care Expenses

Through the Child and Dependent Care Tax Credit, you might be to reduce your tax bill. You can get between 20 and 35 percent of up to $3,000 or $6,000 of your dependent or child care costs back as a credit if you qualify.

Eligibility is based on a few factors. First, you have to be using the service so that you can work. Second, for child care, the child must be under the age of 13. For spouses’ or parents’ or other dependents’ care, they must be deemed incapable of self-care and live with you for more than half of the year.

The size of the credit decreases for higher-income households, though it never disappears completely. While the credit isn’t refundable, it can help you reduce your liability significantly.

4. Dependent Tax Credit

Even if a dependent no longer qualifies you for the child tax credit, that doesn’t mean you can’t get a break. Older children, including college-aged kids, as well as aging relatives who you are providing care for in your home, can make you eligible for a dependents credit of $500.

This tax credit does phase out for higher-income households. If your adjusted gross income is above $200,000 ($400,000 if you are married filing jointly), you’ll fall in that category.

5. Student Loan Interest Paid by Parents

If a parent is paying back your student loans, you are the one who can legally claim the student loan interest deduction. Only the person who is responsible for the debt can deduct the interest, regardless of who is actually paying the bill. This includes adult children who aren’t being claimed as dependents by their parents.

The best part about this deduction is you don’t have to itemize to claim it. That makes it significantly more accessible. Additionally, you aren’t taking a deduction from your parents, as they can’t legally claim it anyway.

Claiming a Tax Break

In most cases, the federal government doesn’t just take your word when you say you are eligible for a tax break. Instead, it requires some form of evidence or proof.

Depending on the deduction or credit, what you need to support your claim varies. You might need details from a specific tax document, like a 1098-E for student loan interest. For the child care tax credit, you have to provide information about the care provider and have proof that you incurred the expenses.

Incorrectly claiming a tax break has consequences. If you aren’t sure you have what you need to claim a deduction or tax credit, it’s wise to review the IRS website. It will outline what you need in each scenario. You can also speak with a tax professional, as they are typically well aware of what it takes to qualify.

Do you know of any other tax breaks people accidentally overlook? Share them in the comments below.

US Expat taxes – Who, What, When, and How

December 30, 2019 By Susan Paige Leave a Comment

Did you think the IRS was going to let you escape the joy of filing your annual Form 1040 just like that?

Sorry, it doesn’t work like that.

Who Has to File an Annual US Tax Return?

Screenshot source

Pretty much every American ex-pat must file an annual Form 1040, exactly the same as you used to at home. The IRS is remorseless in pursuing non-filers.

Screenshot source

You might think that paying tax in the UK would be enough, and you probably won’t have to pay any American federal taxes. However, the IRS insists that you send them a tax return if your pre-tax income is higher than the appropriate line in the table above.

What Do You Have to Tell the IRS?

Your Form 1040 is only the beginning: You also have to send them details of all your non-US bank accounts.

The Bank Secrecy Act (BSA) gives the Department of Treasury the authority to collect information from United States persons, including ex-pats, who have financial interests in or signature authority over financial accounts maintained with financial institutions located outside of the United States.

The BSA requires that a FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR), be filed if the maximum values of the foreign financial accounts exceed $10,000 in the aggregate at any time during the calendar year

Source: Joshua Ashman (CPA and CEO of Expat Tax Professionals)

You must also fill in and send Form 8938 Statement of Foreign Financial Assets (FATCA reporting) as an attachment to your Form 1040.

Joshua Ashman (CPA) also tells us that there are many other forms you need to send if you have investments or other financial activities outside the US:

Form 5471: must be filed by certain shareholders of foreign corporations

Form 8621: must be filed by certain shareholders of passive foreign investment companies (such as foreign mutual funds)

Form 3520: must be filed to report transactions with foreign trusts (including foreign pension plans treated as foreign grantor trusts) and receipt of certain foreign gifts

Form 8865: must be filed for each controlled foreign partnership in which the taxpayer is a 10% or more partner

Not only, but also . . .

Some US states are reluctant to change your status as a taxpayer, so you must also file state-level tax returns until you can convince them that you have moved away and cut all ties with the state. Most notable in this regard are; California, New Mexico, South Carolina, and Virginia.

When are the Deadlines?

Your deadline at home was 15th April following the end of the calendar year. Your deadline as an ex-pat is the same, 15th April. Any tax that is due and that is unpaid at that date is subject to interest.

As a foreign resident US citizen, you get an automatic file-forming extension to 15th June, and you can file a request for a further automatically-granted extension to 15th October.

Penalties for late or non-filing are pretty hefty, so it is worth your while to get your paperwork in on-time.

What if You Have Missed a Deadline?

It will always cost less to file late than not at all, so get it done sooner rather than later.

If you have just realised that you should have filed last year and the years before that. Don’t panic.

The penalties for non-filing of foreign bank information are especially horrendous at $10,000 per account per year, but the IRS will forego any penalties if you apply for forgiveness under their Streamlined Procedures. You still have to send them three years’ tax returns and six years’ FBARs, but you pay no late filing penalties, and you don’t have to send 1040s and FBARs going back to the year dot.

Joshua Ashman (CPA) tells us:

In recent years, the IRS has made it clear to taxpayers that it is more interested in disclosure than in punishing late filers or non-filers. Back in 2014, the IRS expanded the Streamlined Procedures, allowing taxpayers to participate if they can explain in a written statement how their delinquency was not intentional.

The Quick-Read Version

The IRS has long arms and will come after you if you omit to file. It might not be this year or next year, but they will come.

As an American, you must file annual tax returns with the IRS and some states’ tax authorities, even if you have lived abroad your entire life, and even if all your UK income is taxed at source by HMRC.

You have until 15th June 2020 to file your 2019 Form 1040 and associated declarations. Penalties for non-filing should give you an incentive to prioritise the task over the coming months. Good luck.