"Do not be fooled into believing that because a man is rich he is necessarily smart. There is ample proof to the contrary." - Julius Rosenwald

SavingAdvice.com Blog

Bridging the gap between saving money and investing

filing taxes

When Are Scholarships Treated As Taxable Income?

By Leave a Comment

If you want to be smart about saving money on college then you definitely want to apply to get scholarships. But are scholarships are straightforward as they seem? Are they really free money? When tax time comes around, you might find yourself asking: “Are Scholarships Taxable Income?”

Most Scholarship Money Is Not Taxable Income

In most cases, scholarships truly are “free money”? In other words, they aren’t considered taxable income. Therefore, the student doesn’t typically have to report the scholarship as income on their taxes. However, there are exceptions to this norm. Therefore, if you want to make sure that you have your taxes done properly, there are some nuances that you should know about.

Usually Scholarships Aren’t Taxable Income If …

According to the Charles Schwab blog, scholarships usually aren’t taxable income provided the following things are true:

  • The money goes to an individual who is enrolled to get a degree at an eligible institution (which may be online or on campus)
  • Scholarships are used to pay for specific expenses outlined by the scholarship provider. For example, scholarships usually go to pay for tuition, additional tuition-related fees, books, supplies for classes, etc. They may or may not be allowed to pay for room and board. Read the terms of the scholarship carefully.
  • It’s a true scholarship and not payment. For example, it’s not work-study payment.

Congratulations!

You can now use the SavingAdvice promo code to get $25 off expert tax prep with H&R Block. Click here for details. 

Exceptions When Scholarship Money Might Be Taxable Income

With all of that in mind, some of the exceptions when scholarship money might become taxable income include:

  • You don’t use the money to attend classes for a degree program. If you receive a scholarship to attend a program that isn’t a degree program then it’s always considered taxable income. You must pay taxes on that money. In contrast, if you’re taking classes towards an Associates, Bachelors, Masters or PhD then it’s not likely to count as taxable income.
  • All or some of the money goes to pay for expenses that aren’t approved for use. For example, if the student uses $2000 of a $10,000 scholarship to pay for food, and that’s not included in what’s allowed, then it’s sometimes considered taxable income.
  • The money is a fellowship, work-study, or other payment for services the student provides (such as working as a teaching assistant on campus).

Get all of your tax questions answered with H&R Block’s Tax Information Center!

Other Tax Considerations for Students and Their Parents

As a student – or the parent of a college student – you might want to look carefully at your taxes. Asking if scholarships are taxable income is a smart place to start. However, don’t stop there. Make sure that you learn about tax deductions for college students. Moreover, be sure to find out if you qualify for education-related tax credits. There are many ways to reduce college costs; smart tax filing is one of those ways.

Read More:

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.

 

Check out these helpful tools to help you save more. For investing advice, visit The Motley Fool.

Congress is About to Ban Free Online Tax Filing

By 1 Comment

Ban free online tax filing

Just in time for Tax Day, Congress is backing a bill that will ban the Internal Revenue Service from creating a free tax filing system. The for-profit tax preparation industry is ecstatic to see this long-sought-after goal finally get attention on Capitol Hill. But what do these companies have to gain when we ban free online tax filing?

Can They Really Ban Free Online Tax Filing?

Well, that’s not exactly what is happening. You’ll still be able to file for free through third-party services. However, under the new bill, you would not be able to file for free online with the IRS.

Last week, the House Ways and Means Committee passed the Taxpayer First Act. The bill covers a large number of administrative changes to the IRS.

One of the many provisions outlined in the bill will make it illegal for the IRS to create its own online tax filing system. This will help shield the tax preparation industry’s profits. Popular tax filing companies, such as TurboTax, Intuit, and H&R Block, have lobbied for this for years.

In previous years, the IRS hasn’t made it easy for people to file with them (or cheap). The agency could provide even better services than the aforementioned companies with free online systems, pre-filled tax forms, and salary data. However, the IRS just hasn’t put that together for taxpayers. And, now, it may never get the chance to. The new bill would bar the IRS from doing so.

“This could be a disaster. It could be the final nail in the coffin of the idea of the IRS ever being able to create its own program,” said Mandi Matlock, a tax attorney with National Consumer Law Center.

Who Files For Free?

To be eligible to file your taxes for free, you have to make less than $66,000. About 70 percent of American taxpayers qualify to file for free but only 3 percent of eligible people do so.

Critics of the free filing program say the tax preparation companies deliberately underpromote the free services so that they don’t know they are eligible. Or, in some cases, they are upselling paid products versus informing people about their free tax filing options.

Banning the IRS Free Filing Service is a Business Move

There is already an understanding between The Free File Alliance, a private industry group, and the IRS that the IRS cannot create its own filing system. In exchange, the companies offer free services for folks who are eligible.

Passing the bill would solidify that “unspoken” agreement and put it into law. The Free File Alliance has told shareholders an IRS-created software or other IRS systems could pose a direct threat to their business dealings.

Last year, Intuit and H&R Block spent $6.6 million on lobbying related to this deal with the IRS. Not to mention, the House Ways and Means Committee received $16,000 in contributions from the two companies during the last two election cycles.

An H&R Block spokesperson said, “Free File should be the subject of ongoing improvement, and we are committed to working with all parties to strengthen and improve Free File on behalf of the American taxpayer.” The current bill, according to a spokesperson for Rep. Wyden (D-Oregon), is bipartisan and includes priorities of the chairmen and other ranking members.

Before anyone gets too excited about these changes (one way or another), the bill is currently being looked at by members of Congress. While previous efforts to pass similar bills have died out in the past, many people are worried that this may be the year the IRS gets cut out of the free filing game. The Taxpayer First Act, should it be passed, is also aiming to restrict the use of private debt collectors by the IRS to individuals over a certain income threshold.

Readers, what do you think about the potential ban for the IRS? Is it a good thing?

Read More

What Happens If You Don’t File Taxes?

By Leave a Comment

what happens if you dont file taxes

Tax day is April 15, 2019. If you don’t file your taxes, or get your return postmarked by that date, you might face some serious consequences. This is true even if accidentally don’t file. If you are wondering what happens if you don’t file your federal tax return by the deadline, here’s what you need to know.

Failure-to-File Fees

If you don’t file your taxes, you will have to deal with failure-to-file fees. Essentially, you are stuck with a costly financial penalty.

The standard failure-to-file penalty rate is 5 percent of your unpaid taxes for every month that you don’t file. This starts accruing once you miss the 11:59 pm April 15 deadline. Although there is a cap of 25 percent, it will add up quickly.

Congratulations!

You can now use the SavingAdvice promo code to get $25 off expert tax prep with H&R Block. Click here for details. 

Failure-to-Pay Fees

If you don’t file your taxes and owe an IRS tax debt, you also get stuck with failure-to-pay fees. This penalty is on top of the failure-to-file fees, increasing your tax debt even more.

The standard failure-to-pay fee is one-half of 1 percent every month. These fees also start accruing once you miss the 11:59 pm April 15 deadline. There is no cap on this penalty, so it will keep adding up over time, increasing your IRS tax debt.

IRS Notifications

Once the IRS notices that you didn’t file, they will send a notification letter. It lets you know that you will be paying penalties and provides guidance on how to square things away.

In some cases, the IRS may even create your return for you, using information they collect from your employer, banks, investment accounts, and similar entities. However, the IRS doesn’t consider whether or not you qualify for certain deductions, so your tax bill may be much larger than if you just file on your own.

If you don’t respond to the IRS notifications, then the agency might take more drastic steps. This can include seizing your financial assets, putting a lien against your home, or garnishing your wages. Plus, all of the penalties are increasing your tax debt during this time, so you’ll still have to pay them even if the IRS takes these measures.

Get all of your tax questions answered with H&R Block’s Tax Information Center!

Criminal Charges

It is important to note that the IRS does not jail people for owing taxes. If you file your taxes and have an IRS tax bill, you won’t go to prison for the debt.

However, failing to file could land you in jail. Willfully not filing your return is a misdemeanor while tax evasion is a felony. The IRS does have a high burden of proof to show that you intentionally didn’t file, so jail time isn’t really common. It is technically possible though, especially if they can prove that you made the decision not to file on purpose.

How the IRS Catches People Who Don’t File Their Taxes

The IRS is a large organization and handles millions and millions of tax returns. In just one week in March, over 84 million returns were received. Many people would assume that the IRS isn’t going to notice a single missing return, but that isn’t necessarily the case.

One of the things the IRS has one its side is information. For example, if you work for a company, that employer sends the IRS a copy of your Form W-2. Even if you don’t file personally, the IRS knows you had income. Banks and investment companies submit copies of your Form 1099 to the IRS as well, for recording purposes.

While the IRS might not catch your failure-to-file immediately, they will in the future. They will know you didn’t file, and calculate the penalties based on the deadline of April 15, 2019, not when they happened to notice.

What to Do If You Can’t File Your Taxes On Time

Even if you can’t pay the taxes you owe immediately, it is crucial that you file your federal tax return by 11:59 pm on April 15. There are options to help people who can’t pay all that they owe right away, including payment plans and Offers in Compromise.

If you simply need more time, then make sure to file for an extension before the filing deadline. While this won’t help you avoid failure-to-pay fees, it does prevent any failure-to-file fees from accruing as long as you file before the extension deadline of October 15, 2019.

Have you ever forgotten to file your taxes? Share your thoughts in the comments below.

Read More:

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.

Are You Missing Out on Your Earned Income Tax Credit?

By Leave a Comment

Earned Income Tax Credit

Are you missing out on a four-figure check each year without even knowing it? An earned income tax credit can provide a positive impact on a family’s finances and go back into the economy. However, to claim the credit you need to file taxes and have the knowledge of the credit itself.

What is an Earned Income Tax Credit?

The IRS website defines an earned income tax credit (EITC) as a benefit for working people with low-to-moderate income. In many cases, the EITC reduces the overall amount you owe the IRS or provides a refund. To qualify for an EITC, you need to meet certain requirements.

First, you need to files your taxes. You must also have some type of earned income from the tax year in which you are filing. Your income must be less than $45,802 if you are single and have two children. For married couples filing jointly with two children, household income must be less than $51,492.

How Much is an EITC?

The average amount American families typically receive nationwide is currently around $2,488. Across the country last year, 25 million workers and families received $63 billion in earned income tax credits.

However, your EITC will vary depending on your income, filing status, and the number of children being claimed on your return. A married couple filing jointly this year with three or more children could receive a credit of up to $6,431.

Why the Money is Going Unclaimed

According to The Detroit Free Press, nearly $80 million went unclaimed three years ago. This was because 26,000 households eligible for the credit in the Detriot area simply didn’t file their taxes.

This is one of the reasons many people’s EITC goes unclaimed. Another reason is (and this is what they found in Detriot) people just don’t know about the credit and who is eligible. After the City of Detroit launched a targeted awareness campaign, $63 million more is being claimed in EITC each year.

“It was a blessing to learn about this tax credit,” said Renee Perkins, a Detriot citizen. Many of the people receiving these are in need. They are single parents or low-income families. For people like Perkins, who expects to receive a tax refund of $6,000 this year, an EITC can be life-changing.

Understanding the EITC

People who don’t make a lot of money or don’t understand the federal income tax system may not think they need to file. Typically, the rule of thumb is any single person under the age of 65 with a gross income over $12,000 must file. For married couples filing jointly, the threshold is a bit higher ($24,000).

This is a bit higher than previous years, meaning more people may qualify for an EITC. Last year, the amounts were $10,400, and $20,800. Even if you don’t have to file taxes, filing can actually help you get more money.

Additionally, if you haven’t filed and believe you may be entitled to EITC from previous years, you can amend your returns for up to three years. If you believe you may have missed out on an earned income tax credit in the past, you may want to consider cashing in on them before you lose it.

It is crazy to think thousands of families are passing up cash that could positively impact their finances. If you aren’t quite sure whether or not you qualify or have any tax questions, all families and individuals with an income under $55,000 may be eligible for the Accounting Aid Society’s free full-service tax help. This agency will help you file your federal, state, and local returns and will help ensure you receive any tax credits and benefits.

Readers, how many of you look forward to this tax credit?

Read More

Tax Season 2019: 5 Things You Should Do Now to Prepare

By Leave a Comment

tax season 2019

With 2018 coming to a close, now is a great time to start preparing for tax season. Since there were multiple changes to the tax rules, you could be one of the lucky individuals whose taxes are more complicated this year. Early preparation now can make filing taxes a little less stressful. Here are five things you should do to get ready for tax season 2019.

1. Gather Basic Information

Although tax documents aren’t in the mail yet, there’s still a lot of information you can start gathering today. For example, locate the Social Security cards for yourself and, if applicable, your spouse and dependents. This ensures that, if you don’t find them and don’t know the numbers, you have time to request new cards.

Similarly, track down your copy of your tax returns from last year (2017 taxes filed in 2018) – being able to refer to them will speed up your filing this year.

There are various other items you can start collecting now, including, but not limited to:

  • Receipts for business or self-employed expenses
  • Records of rental property expenses
  • Property tax records
  • Educational expense records
  • Charitable donation records
  • Medical costs information

Any details that you can pull together today will make your filing day easier. Then, you can put the information into a folder and make sure it is ready.

2. Plan for Incoming Documents

While employers and various other entities have until January 31 to send tax documents to filers, that doesn’t mean you shouldn’t start planning for their arrival. Begin by figuring out which companies should be sending what, and create a list to track the information.

In some cases, you can refer to your previous tax filing for guidance. However, you can also create a simple list based on your situation.

As you start to plan, include potential records relating to income, such as:

  • Form W-2 for wages
  • Form 1099-G for unemployment benefits received
  • Form 1099-Misc for freelance work
  • Form 1099-R for annuity, IRA, or pension income
  • Form 1099-D for earned dividends
  • Forms 1099-B and 1099-S for the sale of property or stocks
  • Form W-2G for gambling winnings

In most cases, you won’t have documents coming in all of those categories, but that can give you an idea of what may be arriving. This decreases the odds that you will file before you have all of the documents on hand, as it is easy to accidentally overlook a potential incoming document during this hectic time.

3. Max Out Your Retirement

Both 401(k)s and traditional IRAs can result in tax breaks, depending on your situation. If you haven’t hit your annual contribution limit, then you may want to stash extra cash in your retirement account.

This could potentially increase your deductions, lowering your tax liability. Plus, it can make your retirement more secure.

For a traditional IRA, you can contribute $5,500 annually or less if you are age 49 or younger. For those 50 and older, the maximum amount is $6,500. Those limits do not apply to rollover contributions, so keep that in mind if you want to add more to your account and make sure you are calculating properly.

4. Figure Out What You Need to File

While all taxpayers essentially have to file a federal return, only some also need to submit a state return. If you haven’t moved and your financial situation is largely the same as last year, then you can use your previous tax returns as guidance.

However, if you have relocated to a new state or had a significant change in your financial situation, then you may need to file a state return even if you didn’t previously.

There are only seven states which don’t require a state income tax return. They are:

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Washington
  • Wyoming

Two states only need returns if you had income from interest or dividends. They are:

  • New Hampshire
  • Tennessee

If you live in any other state, then anticipate filing a state return as well, even if your move was recent. Additionally, be aware that you may have to file a nonresident tax return if you earned money in a state with state income taxes, even if you don’t live there.

5. Don’t “Spend” Your Tax Refund Before You Have It

Many people anticipate tax refunds each year, especially if they had one the year before. However, the tax law has changed significantly, so your tax burden may have changed even if much of your financial life remained steady.

If you want to use your refund for a big purchase, don’t spend the money now based on the assumption that you will get it back. You can’t be certain about your tax liability until you prepare your documents with all of the information on hand.

Ultimately, as the adage goes, don’t count your chickens before they hatch. Instead, wait until you know exactly how much you owe or how much you are getting back. Then, and only then, should you make a spending decision for your refund.

Do you have any tips for preparing for tax season 2019? Share them in the comments below.

Read More:

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.

Late-Filing Excuses That Work With The IRS

By 1 Comment

Late Filing Taxes
If you are looking at potentially filing your taxes late, you are probably looking at some fines attached to that. However, the Internal Revenue Service is not as unforgiving as they may seem. There are a few excuses that may actually allow them to waive the fees associated with filing late.

Of course, excuses like “my dog ate my return” probably aren’t going to cut it with the IRS (or your teacher with your homework). There are a few surprising excuses that will work with the government agency though, some of them you would have never thought were real. So, if you are looking at trying to come up with an excuse to file late, here is what will and will not work.

You can get away with not filing your taxes on time if:

If you are sick. If you have some sort of prolonged health issue, mental illness or chronic illness, you can file your taxes late with no penalty. This is especially if the illness is affecting your ability to concentrate or your short-term memory.

You fear the IRS. This is so real! If you can prove that the IRS has caused you some kind of high anxiety, you can get out of filing your taxes on time. One man lost his job and felt overwhelmed by Schedule C instructions. Because of this being so overwhelming, he simply shut down and didn’t file or pay his taxes for about seven years. However, the IRS dropped all of his fines because the agency agreed that he did not intend to not pay them, he was simply overwhelmed.

You have been burglarized. If you’ve been robbed and your computer with all of your tax records on it was stolen, you can get out of paying late fees, etc.

If there was a death. If you are mourning the loss of a loved one, you can file your taxes late without penalty. This usually has to be a close family member (not your cousin three times removed).

The IRS understands when certain things in life happen. Even though the agency seems “big and bad,” they will generally accept all of the above excuses (plus some). However, the following excuses won’t get you anywhere with the IRS.

You cannot say it is “against your religion” to pay taxes. People have tried this and it doesn’t work. Although religious places (nonprofits) don’t have to pay taxes, their followers still do. Whether you’re Christian, Muslim, Jewish or Atheist, you still have to pay taxes on any income you receive.

You cannot claim ignorance to tax laws. This is the case with literally every law in place in the United States of America. Saying “I didn’t know” does not get you out of paying a penalty or accepting punishment for the broken law.

Your preparer just sucks. You cannot tell the IRS that your tax preparer blew you off, didn’t do their job or is having a hard time filing your taxes. This excuse simply does not fly.

If all else fails, you can also go with the “one-time free pass” the IRS gives. Yes, the IRS has a forgiving side. They allow each taxpayer in the U.S. a one-time penalty-free waiver. So, if you have filed all of your returns and have paid all of your taxes in the past, you can still get your one “get out of jail free” card from the IRS and file late once.

Photo: Flickr: 401(K) 2012