Friday, June 6, 2014

How Fast Can I Get my Refund?


This is a very untimely post, but I was writing about it for my upcoming book and decided it HAD to be a blog post so...

That's the most common question, and the answer is, despite anything anyone tells you, I don't know.  Anyone who promises to get you your refund faster than someone else is, as I said before, full of crap.  There are things you can do to make sure it doesn't go slower, those being: electronically file, make sure it's accurate, don't owe any government agencies money, and use direct deposit.  By not owe government agencies money, I mean, delinquent student loans, child support, government benefit agencies, and of course, back taxes.  If you do, the government can, and will, take the money out of your tax return, and it often delays the return as well.  If you ever get less money from the Feds than you expected, this is a likely culprit.  


I'm sure the answer above isn't very satisfactory, so I'll expound on it.  The IRS says you can expect an electronically filed refund in 10-21 days assuming there are no issues.  In fact, last year the IRS wouldn't even talk to you about your refund status unless it had been at least 21 days.  This pissed a lot of people off, but I agree with the IRS (this time).  People start calling the IRS after 14 days and tie up the lines that should be getting used to answer real questions and deal with real problems.  Do yourself and everyone else a favor, don't worry for 21 days.  You can check the status of your refund HERE.  You need your SSN, filing status, and your refund amount.  If you use a professional that takes your fees out of your refund, make sure you use the original refund amount, not the amount you will be getting after fees.  The honest truth is that the most people will get their money in 6 to14 days, and the vast majority within 28 days.  If it takes longer, either you (or your preparer) did something wrong, the IRS is taking a longer look (nothing you can do about this) or the IRS is messing up (not too likely, but it happens).  The Where's my Refund system at the link above should give you an update as to the cause of the delay, and sometimes tell you what to do.  You will also generally get a letter if the IRS decides to take an extended look.


Having said all of the above, those dates are from the time the return is accepted, and are the time frames for your money to get to the bank (your bank can legally hold a direct deposit for 4 days after receiving it, but if they do, I'd find a new bank).  When you send your return to the IRS electronically, they do a number of checks immediately, and, if they fail, it is rejected.  Common causes for rejection are names, SSN's, or birthdays on the return not matching IRS records, A person on the return has already been claimed or already filed, last year's Adjusted Gross Income that you provide to software isn't correct, or not including First Time Home Buyer's Credit payback on the return when required.  There are literally hundreds of other reject causes, but suffice it to say, the clock in the paragraph above doesn't start until you correct the problem and resubmit.  Most rejection problems are easy to solve, and, if you use a professional they should walk you through solving them.  I would say that 80% of my client's rejections are solved over the phone in 24 hours, another 10% require modifications to the return that affects the refund, about 5% require the return to be mailed in, and about 5% don't get resolved because the client disappears, or is unable or unwilling to make the changes required to the return.  If your return gets rejected, don't panic.  Your software support or tax pro should be able to help. 


Now let's mention a few wrinkles that some tax companies will introduce.  The first one is a system for withholding your tax preparation fees from your refund.  The way this works is that you agree to have your refund deposited with the tax companies bank, who immediately forwards the money (minus fees) to your bank account.  The main thing to understand about this is that they have no control over the speed of your refund.  They don't send you your money until the IRS sends it to them.  If the IRS sends you less, you get less.  If the IRS doesn't send enough to cover the fees, the company will expect you to make up the difference.  They will also take any back fees that you owe them from prior tax returns.  Also, if you are a careful tax return reviewer, you might panic that the direct deposit information on the back of the Form 1040 is wrong.  That's because it's the bank's information, and that's okay.  There is almost always a fee for this service, but it's usually not too much.  My mantra is that the fastest and cheapest way to get your tax return from a professional is pay the fee up front, electronically file, and use direct deposit.


Last thing is getting your money faster than the IRS sends it to you.  No matter what they call it, this is a LOAN.  They are required to disclose this fact, but not all are as conscientious about it.  Couple things to know about these.  First, they are EXPENSIVE.  Since the loan is for only a couple weeks, the interest has to be outrageous to make any money.  Plus, your fees have to cover them for the people who don't end up getting a refund.  The second thing is that they're not guaranteed.  Once you e-file, the bank can approve or disapprove the loan.  Generally if they say no, you only get charged for the conventional product of having your fees withheld and the timing is just like any other product.  The big thing to know is, if they loan you money, and the IRS doesn't issue you a refund to pay it off, the bank will want their money back.  This can be a lot of money.  My advice is to avoid these like the plague. 

Saturday, May 24, 2014

Make Estimated Tax Payments the Easy Way

The IRS has rolled out a Direct Pay system for making regular tax payments (balance dues from your tax return) as well as estimated payments.  It is done via direct debit from your checking account.  I was a little leery at first of recommending clients give bank account information to the IRS, for fear the IRS could potentially access their accounts in the event of a dispute, but the website says they do not retain account information after the payment is made.  I'm not one to blindly trust the government, but I think that statement on the website would result in a whole heap of trouble for the IRS if they abused it, so I'm pretty comfortable with the system.

You can access the system HERE

Wednesday, April 16, 2014

Depreciation Recapture - an inaccurate description

I just rough drafted this in response to a question about depreciation recapture.  If you know taxes, please ignore that this is pretty inaccurate terminology wise, but captures the gist of what the questioner really wanted to know:



Taxpayer: So I bought this house for $150,000 and I'm renting it out to people.  Since I spent $150,000, I get to deduct that, right?

IRS: No

Taxpayer: Why not?

IRS: Because then every business would buy a bunch of really expensive crap on credit, and deduct it from their taxes, and never pay any taxes.  I’ll tell you what, you can deduct the mortgage interest, real estate taxes, insurance and pretty much everything else you spend, just not the house.

Taxpayer:  Well that’s kinda fair, but I am ultimately going to pay $150,000 back to the bank, so I should be able to deduct it.  And what about the people who pay cash?  Can they deduct it?

IRS: Nope.  Still too big of a deduction, besides, the house is probably going to go up in value.

Taxpayer: Yeah, and then you’ll make me pay taxes on the gain!

IRS:  Exactly!  How about this, we’ll let you deduct a little of the house, every year, until you’ve deducted it all.  We’ll pick a perfectly common sense and easy to calculate number, like…27 and a half!

Taxpayer: 27.5?  That’s your perfect, logical and sensible number.

IRS:  Yep.  You can deduct 1 twenty-seventh and a half of the house’s value every year until you’ve deducted the full value.

Taxpayer, Well, it’s a little stupid, but I guess it’s fair.

IRS: BUT!  Since we’re letting you deduct a number that’s not real (since you didn’t actually pay it during the year) you subtract it from what you paid for the house when figuring out the gain when you sell it.

Taxpayer:  Now that’s just stupid!

IRS:  Not really.  If we let you deduct the whole $150,000 right up front, it would only make sense that when you sold the house you have to pay taxes on every penny you make on the sale, so we’re just doing the same thing.

IRS: One Twenty-Seventh and a Half at a time.

Monday, March 17, 2014

Avon, Pampered Chef, Party Lites, Amway, etc. MLM Tax Guide

This is a Tax Guide for all the would be home-based business millionaires.  The time to think about taxes is before you open the business, but, if you already have, the time is now!  This guide will tell you virtually everything you need to know about how taxes should, and do, work for a Multi Level Marketing type business.  The kind of business where someone in the business recruits you to sell the products, and, eventually, recruit others into the business.  This guide works for Amway, Mary Kay, Avon, Pampered Chef, Herbalife, Isagenix, Scentsy and dozens of others you've never heard of.

Most clients I see trying these businesses out have not given a thought to taxes, and, are getting very little help from the businesses they are making money for.  In fact, the first piece of advice I'll give is to ignore virtually everything the company, other associates or friends tell you about how to handle taxes for these businesses.  To go further, I'll tell you to ignore every piece of tax information the company provides, except the 1099MISC they issue you (if you gross >$600) and the invoices for the products you buy and sell.  You can, and should, keep better and more useful records all by yourself.  More on that point later.

First, a couple of terms, some basic advice, and some warnings:

1.  You should be, at this point, a sole proprietor.  This means that you own and run the business by yourself, with no employees.  You will file the business taxes as a part of your personal taxes, usually on a Schedule C.  I strongly encourage you not to have any partners, even your spouse.  Your spouse can help, but should generally not be an employee, and not have any true decision making power, except the power that is normal in a healthy spousal relationship (advice and support, but no "official" role).  The reasons for this are myriad, and anyone who's delved into a partnership can attest to the issues that arise.  For now, just trust me.  Later you may want to form a more complicated business entity, but that will require professional assistance and guidance.

2.  You are going to spend more time doing taxes, and it's going to cost more.  Even if you use software (which I highly discourage if you are running a business) you will pay more for the programs.

3.  You might not actually be a business.  Most of the people starting these businesses will never have a dime of profit, and, after a few years, the IRS will put the kabosh on taking a negative income from your business off of your regular taxable income.  This is called Hobby Income.  It means you do it more for fun than for profit.  You still have to claim the income (on Line 21 - Other Income), but you deduct the losses on your Itemized Deductions (subject to 2% of income limit, maximum deductions equal to income and a bunch of other restrictions that ensure that you pay taxes on the income instead of getting write offs.)  My advice is to go full bore, gung-ho towards making a profit for 3 years.  File the Schedule C's and take the losses on your taxes (improving your refund).  If, after three years, you haven't made a profit, and gross revenues aren't approaching 5 digits ($10,000), take real stock of where you're at.  If revenues are growing and profitability seems close, keep things going.  If revenues are flat, profits are a distant dream, and/or your enthusiasm is waning, bite the bullet and either shut the business down, or tone it back and start filing as a Hobby.

4.  Some good research and reading can both help you make a profit, and can help win the Hobby vs. Business argument with the IRS.  Here are some great books to help you cheaply grow your business:

The Ultimate MLM Boot Camp: How to Succeed in Network Marketing
Guerrilla Marketing, 4th edition: Easy and Inexpensive Strategies for Making Big Profits from Your SmallBusiness
EntreLeadership: 20 Years of Practical Business Wisdom from the Trenches

You can also do some cool, cheap marketing.  I assume you have business cards, right?  You can make magnets out of them here:

Business Card Magnets

5.  The IRS doesn't like your business model.  They tend to believe most MLM businesses are actually hobbies.  They will scrutinize the line between business and personal expenses.  They think pretty much every seminar you attend is a personal expenses.  Be very careful to document what you deduct and be prepared to explain how it will actually benefit your business and is not a personal expense.

Moving along.  Here's the advice you need to make things work...

Record Keeping:  This is where the rubber meets the road.  Good record keeping will save you when it comes to tax time.  Your records don't need to be extensive, but they do need to be accurate and useable.  I hate double entry bookkeeping and would never recommend it as a tool for a home-based business.  I also have found that the various bookkeeping software programs are virtually useless when it comes to taxes.  They may help when it comes to managing the business, but they suck for doing taxes.  The best and easiest record keeping method I've found involves a small notebook, a big notebook and an envelope or box.  The small notebook is for mileage, discussed below.  The big notebook is for every other expense.  You need simple columns set up: date, description, cost and payment received (if you pay something, it goes in the cost column, if you’re paid it goes in the payment received column.).  You can add categories, but don't really need to, if you're unsure something's deductible, write it down and let your tax guy tell you if it's deductible.  The box/envelope is for receipts - just throw them in.  Really?  No sorting, categorizing or organizing?  No.  Simply put, your odds of ever needing them for an audit are slim to none.  Save the box, notebooks and tax returns for 7 years, and then throw it all away.  If you ever do get audited, there's plenty of time to sort through the box and organize it to match the notebooks - but why do it if it's not necessary.  If I'm doing your taxes I'm going to use the notebooks, and remind you that you should have a receipt for everything.  You don't have to prove things to me.  It’s important to understand not to over think things.  For example, if you make a sale involving sales tax, which you know a portion will go to the government, you still write down 100% of what you were paid (including the tax).  Later, when you remit the sales tax to the government, it is entered as a payment (deduction.)  Get it – you get money, it’s entered as income, you pay money, it’s entered as a deduction.

The trick to your kind of business is that sometimes you don't make the sale, it happens through a website and is fulfilled by the company, with the payment going straight to the company, the product going straight to the consumer, and you getting a commission.  Generally the company will only report the commission as income to you, which means you don't need to track any expenses like shipping, sales tax or the wholesale price - just the commission, which you can track when the payment comes to you.  Just make sure your company handles it this way, and you'll be good.  If the product is paid for by you, comes to you, and then you pass it on to the client for a markup, the entire price paid goes into your records as income, and all the costs to you (shipping, wholesale price, sales tax) go into your records as an expense.

Expenses: You can deduct any ordinary and necessary expenses for your business.  I generally describe the requirements like this: If it will make you more money, is required by someone in authority, or makes your business more efficient or your life as a business person easier, it's probably deductible.  Here's a non-exhaustive list:

1.  Pretty much anything the company charges you for.  If they deduct it off your commission check, deduct it off your taxes (you report the gross commission, not the commission after deductions).


2.  Marketing Expenses:  Business cards, website fees, posters, signs, sponsorships, commercials, advertising, pretty much anything you do to get someone to call YOU when they want your product.

3.  Insurance:  I'm not talking about homeowners insurance here.  I'm talking about ‘oops I screwed up and someone is suing me insurance.’  Sometimes this is called Errors and Omissions Insurance, sometimes it’s a liability bond, or a rider on your homeowner’s insurance.  Also, if you pay a rider to your car insurance for business use, the difference between that and regular insurance is deductible.  There is also a self employed health insurance deduction that allows you to deduct your health insurance costs if you have no other insurance source (if you can get insurance through your spouse’s work this is a no-go.)

4.  Entertainment Expenses:  Those party expenses count.  The food, the favors, the entertainment.  It all counts if you expect there's a chance you'll make money.  Eventually you'll be with a client, or potential client, and pick up the tab for lunch, or dinner.  Generally, if you expect the expense to result in a sale that makes you money, either immediately, or in the future (whether it ultimately does or not doesn't matter, as long as you expect it to) it's deductible.  I recommend writing the name of the client on the receipt, as well as a quick description - "referral source", "potential client" or something like that.

5.  Travel Expenses:  These are a toughie.  People love conflating personal and business travel.  If you travel to Maine to visit family and see the lobster festival, and try to sell to some family and friends, the trip is primarily personal.  You can deduct expenses DIRECTLY RELATED to the sales efforts, but little else.  I recommend keeping business and personal separate.  You can visit a friend for dinner on a three day business trip, but don't do business for an hour on a three day personal trip.  Also avoid what I call BS travel.  Flying to Vegas to assess potential markets is transparent vacationing disguised as business travel, especially if you spend 23 out of every 24 hours in the casino!  Be reasonable!  Go on trips that are going to increase your money-making potential.  Stay away from any others.  For legitimate travel, you get airfare, rental car, tips, taxis, laundry, internet and phone, as well as 50% of meals and any other reasonable and necessary expenses.  Travel assumes overnight trips away from your home area.

6.  Cell phones, laptops and tablets:  Do yourself a favor, get a business only laptop, cell phone, tablet and/or computer.  It is simply too difficult to calculate expenses on a part personal and part business electronic device.  Don't share your business number with friends and family (other than wife and kids).  If you keep everything separate, the deductions are easy and legitimate.  If you don't, you have to establish a business use percentage, and worry about listed property rules - which suck!

7.  Vehicle Expenses:  Keep a mileage log.  Let me say it again, unless you have a vehicle that is 100%, no s**t, total business and no personal use, keep a mileage log.  Don't worry about gas, repairs, oil changes, insurance or any other car expenses (except as discussed above under insurance).  There are other ways to track vehicle expenses, but mileage is the best.  Do track annual car taxes and finance charges.  The easiest mileage log is a notebook where you right the date, the trip purpose and the miles driven.  You will also need to know the total miles the vehicle is driven for the year, so write the odometer reading down every January 1st!  Mileage will be one of your biggest expenses, so keep track of it religiously!  10,000 miles of properly tracked vehicle mileage can result in $1500 of tax savings!

8.  Home Office:  Set aside a space in your home that is 100% business use.  Never used for anything else, and regularly used for business.  This is where you keep your business records, your business computer or laptop, make your sales calls from and meet clients.  The tax term is regular and exclusive business use.  If you do this, you deduct a percentage of the household expenses - rent, interest, taxes, utilities, insurance, repairs, etc, based on the square footage of the office ratioed to the home square footage.  Expenses directly related to the office, such as a dedicated phone line; do not have to be ratioed.  You can also take a small depreciation deduction for the home losing value (let your tax guy handle this - it's a b**ch!.  The IRS "simplified" this, allowing you to take $5 for every square foot of Home Office, up to $1500, but it's BS to call it simplifying, because any tax guy worth their salt is going to run the numbers both ways and take the number that makes the most sense.

9.  Depreciation:  Some items that you buy for your business, that have a useful life longer than a year will have to be depreciated over time rather than deducted all at once (examples include computers, digital cameras, machinery, big tools or office furniture).  There are many options for deducting it up front, but be wary of this, there are tripwires that can cost you if you dispose of something before it has passed its useful life.  Talk about these items with your tax advisor.

10.  The stuff you buy to sell:  This can get tricky.  If everything you sell is paid for and shipped through the company, it's easy, as discussed above about commissions.  If you order the stuff, pay for it and either deliver it or ship it to the customer, you have to track the wholesale price, shipping, sales tax and the amount you received.  Even worse, if you order items to keep on hand for later sale directly to customers, you need to track all the purchases you made (at your cost is my recommendation) and track what is sold and what is on hand.  This is the devil called inventory.  You need to know what you have on hand at the beginning and end of the year, what you bought, and what you sold.  The easiest way to do this is with an inventory notebook - now you have three.  If you buy something, write it down with date, description and price paid.  Have columns for date sold, and price sold for, and another column to make a note if it's disposed of without selling it (given away, used by yourself, or expired/lost/stolen.  Track each item as it's disposed of, and then, at the end of the year, total everything left - that's Ending Inventory, everything bought during the year - that's Cost of Goods Sold, and everything sold - that's Gross Receipts.  Ending Inventory this year becomes Beginning Inventory next year.  If you sell some this way and some through the company on commision, you'll have to add commissions to your Gross Receipts, but I think you get the point.  If I ran a business like this I would desperately try to avoid inventory, but that might cost you some sales - so - do what works best for you.

11.  Taxes:  Mainly sales taxes.  You need to work with your State or County to make sure you collect and remit sales taxes.  Don't blow this off.  Things get bad.  The sales tax you collect and remit is deductible if included in the price you charge, and the income you report.  You also may need to pay business taxes and licensing fees to State/County/City.  These are deductible, but you need to work these out on your own - this is an income tax guide, and these other taxes vary too much by locale to cover here.  Again, don't screw these up.  The local governments can be worse than the IRS if you mess up.

There's more that's deductible, but I think you get the idea.

Keep the record keeping up to date.  It's a nightmare to back fill.  Work your ass off to generate business and make money.  Research best practices and talk to the people making money doing this.  The idea is to MAKE money, and then be pissed off that you are paying taxes on it.  Getting a big tax deduction from your unprofitable business is only good at tax time.  Paying taxes is a sign of success!


Tuesday, February 18, 2014

Don't Touch that 401K or IRA!!

Okay, now that I've got your attention, you can touch it, just talk to your tax guy or gal first.

Really.

Your financial advisor is not a tax guy.  Your banker is not a tax guy.  Your insurance guy is not a tax guy.  Talk to a tax guy or gal first!  There are a LOT of rules about taking money out of tax advantaged accounts.  These accounts include SEP's, SIMPLE's, IRA's 401K's TSP's, 457's, 403b's and more.  There are some exceptions that get you out of taxes and penalties, but they are complicated.

I'm not even going to go into them in this post.  Talk to your tax guy!

I will say that the withholding is not, "paying the taxes already."  The withholding is rarely enough.  Meeting an exception to the penalty does not prevent taxation, just the penalty.  Some exceptions only count for IRA's, but not 401K's.  Some count for 401K's, but not IRA's.  Only your tax dude can give you the right advice.

Two examples of bad advice:

1.  A client recently took $10,000 out of his 401K to purchase a home.  His banker told him that was an exception to taxes.  WRONG!  It's an exception to penalties, not taxes, and, oops, that exception only applies to IRA's, not 401K's.  Unhappy client!

2.  Another client, age 59, left her job.  She was going to use her 401K to buy a house.  A big house.  Her financial advisor told her to roll it over to an IRA to avoid taxes while looking for a house.  She knew she would pay taxes, but thought she could avoid the penalty.  Her financial advisor told her she could.  WRONG!  Having it in an IRA when buying the house avoids the penalty on the FIRST $10000.  The other part of nearly $200,000 was fully penalized at 10%.  To add insult to injury, because she was older than 55, she could have taken it out of the 401K without penalty, for ANY reason.  Once it hit the IRA, she had to wait until 59 and a half, or meet an exception.  That's right, even with the bad rollover, 6 months would have saved her THOUSANDS!  Unhappy client!

Talk to the tax experts, not the banking/insurance/financial experts.  I won't give you investment advice, don't take tax advice from the wrong guy.

Relax.  It will be okay.

Thursday, February 13, 2014

What do you do with that Big Tax Refund?

About 200 tax returns into the tax season and I have seen a lot of big tax refunds.  If you read my last post, you know that I'm not opposed to a big tax refund, but, what's the best thing to do with the money?  The answer is, it depends...

1.  If you're behind on any bills, please, for the love of God, catch them up and keep the bill collectors at bay.  After that...

2.  If something important, like your car or your HVAC system is broke, get it fixed, and fixed good.  After that...

3.  If you don't have $1000 dollars saved for an emergency, open a savings account and put $1000 dollars in it, and please, for the love of God, Don't Touch It, unless you have an emergency.  After that...

4.  Spend some of it, no more than 20%, on you or your family for something that makes you, and them, happy.  You should enjoy the fact that you've accomplished steps 1 through 3.  That's more than many families will accomplish in their lives.  A $1000 emergency fund is a BIG DEAL, and you should be proud of it.  After that...

5.  Pay off credit card debt.  All of it, and shred those credit cards, and get a debit card only.  After that...

6.  Pay off student loan or car debt.  After that...

7.  Put away 3 to 6 months of expenses in that savings account we talked about in Step 3.  Leave It Alone!  It's for emergencies.  After that...

8.  Feel free to spend the rest on something you want, or a vacation you desire.  If you've accomplished Steps 1 through 7, you probably have a good budget, and a good plan for your future.  Everything that follows is optional, and you can do any of the steps in any order.  If you want...

9.  Fully fund that Roth IRA for the year.  You have until April 15th.  Or...

10.  Sock some money away for the kid's college fund.  Maybe an Education Savings Account or a 529 plan.  Or...

11.  Put a big chunk towards the house.  Big payments now increase the power of the normal payments you make.  Don't listen to the morons who say you should always have a mortgage.  They don't know what the hell they're talking about.  The Super Tax Genius rules say NEVER do anything just for the tax benefit, and owing money to the bank qualifies as one of the dumber things you can do.  Or...

12.  Upgrade the house.  Maybe new counters, new bathroom.  Whatever.  You've demonstrated that you're smart enough to spend your money the way you want.  I would probably jump on Step 11, but if you've got 1 through 7 done, you don't need me to nag you.

If some of these ideas seem familiar, that's because many of them were inspired by listening to Dave Ramsey.  I don't think his advice is absolutely necessary for everyone, but if you've tried to get your financial life in order and failed, you should follow his plan, TO THE LETTER.  If you're out of debt and your retirement plan is on track, you probably don't need all of his advice, though we can always learn something.  Check out the link by clicking his name.  He's helped a lot of people.

Here's a link to his book:
Dave Ramsey's Complete Guide to Money: The Handbook of Financial Peace University