Monday, March 27, 2017

Are Tips Taxable? IRS Offers ‘Tips’ on Tips

Generally, income received in the form of tips is taxable. The IRS provides some information that helps taxpayers report tip income correctly:
  • Interactive Tax Assistant Tool. The ITA tool is a tax-law resource that asks taxpayers a series of questions and provides a response based on the answers. Taxpayers can use Is My Tip Income Taxable?.
  • Show all tips on a tax return. Use Form 4137, Social Security and Medicare Tax on Unreported Tip Income, to report the amount of any unreported tip income to include as additional wages. This includes the value of non-cash tips such as tickets, passes or other items.
  • All tips are taxable. Pay tax on all tips received during the year. This includes tips directly from customers and tips added to credit cards. This also includes  tips received from a tip-splitting agreement with other employees.
  • Report tips to an employer. If employees receive $20 or more in any month, they must report their tips for that month to their employer by the 10th day of the next month. Include cash, check and credit card tips received. The employer must withhold federal income, Social Security and Medicare taxes on the reported tips.
  • Keep a daily log of tips. Use Publication 1244, Employee's Daily Record of Tips and Report to Employer, to record tips. This will help report the correct amount of tips on a tax return.
For more on this topic, see Tip Recordkeeping & Reporting and Publication 531, Reporting Tip Income, on IRS.gov.


Taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.

Thursday, March 23, 2017

Free Tax Help Available for the Military

The Volunteer Income Tax Assistance program provides free tax help to military members and their families. On or off base, VITA is easy to find — even overseas.   Keep these five tips in mind about free tax help for the military:

1. Armed Forces Tax Council. The Armed Forces Tax Council directs the military tax programs offered worldwide.

2. Certified Staff. Military VITA-certified employees staff these sites. They receive training on military tax issues, like tax benefits for service in a combat zone. They can help with special extensions of time to file tax returns and to pay taxes or with special rules that apply to the Earned Income Tax Credit.

3. What to Bring. Take the following records to a military VITA site:
  • Valid photo identification.
  • Social Security numbers for the taxpayer, their spouse and dependents; or individual taxpayer identification numbers (ITINs) or adoption taxpayer identification numbers (ATINs) for those who don’t have Social Security numbers.
  • Birth dates for the taxpayer, their spouse and dependents.
  • Wage and earning forms, such as Forms W-2, W-2G, and 1099-R.
  • Interest and dividend statements (Forms 1099).
  • A copy of last year’s federal and state tax returns, if available
  • Routing and account numbers for direct deposit of a tax refund.
  • Total amount paid for day care and the day care provider’s identifying number. This is usually an Employer Identification Number or Social Security number.
  • Other relevant information about income and expenses.
4. Joint Returns. If married filing a joint return, generally both persons need to sign. If both can’t be present to sign the return, they should bring a valid power of attorney form unless eligible for an exception. Publication 501, Exemptions, Standard Deduction, and Filing Information, has more details.

5. Use IRS Free File. Taxpayers with income of $64,000 or less qualify for Free File software. Those with income more than $64,000 can use Free File Fillable Forms. Using the IRS2Go app, a taxpayer can now use their cell phone or tablet to prepare and e-file their federal tax return through IRS Free File.

Taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.

Additional IRS Resources:

IRS Reminds Seniors to Remain on Alert to Phone Scams during Tax Season

With the 2017 tax season underway, the IRS reminds seniors to remain alert to aggressive and threatening phone calls by criminals impersonating IRS agents. The callers claim to be IRS employees, but are not.

These con artists can sound convincing when they call. They use fake names and bogus IRS identification badge numbers. They may know a lot about their targets, and they usually alter the caller ID to make it look like the IRS is calling.

The victims are told they owe money to the IRS and must pay it promptly through a preloaded debit card or wire transfer. If the victim refuses to cooperate, they are often threatened with arrest. In many cases, the caller becomes hostile and insulting. Alternately, victims may be told they have a refund due to try to trick them into sharing private information. If the phone isn’t answered, the phone scammers often leave an “urgent” callback request.

“The IRS warns seniors about these aggressive phone calls that can be frightening and intimidating. The IRS doesn't do business like that," said IRS Commissioner John Koskinen. “We urge seniors to safeguard their personal information at all times. Don't let the convincing tone of these scam calls lead you to provide personal or credit card information, potentially losing hundreds or thousands of dollars. Just hang up and avoid becoming a victim to these criminals‎."

In recent years, thousands of people have lost millions of dollars and their personal information to tax scams and fake IRS communication.

Later this spring, the only outside agencies authorized to contact taxpayers about their unpaid tax accounts will be one of the four authorized under the new private debt collection program. Even then, any affected taxpayer will be notified first by the IRS, not the private collection agency (PCA).

The private debt collection program, authorized under a federal law enacted by Congress in 2015, enables designated contractors to collect tax payments on the government’s behalf. The program begins later this spring. The IRS will give taxpayers and their representative written notice when their account is being transferred to a private collection agency. The collection agency will then send a second, separate letter to the taxpayer and their representative confirming this transfer. Information contained in these letters will help taxpayers identify the tax amount owed and help ensure that future collection agency calls are legitimate.

The IRS reminds seniors this tax season that they can easily identify when a supposed IRS caller is a fake. Here are four things the scammers often do but the IRS and its authorized PCAs will not do. Any one of these things is a telltale sign of a scam.

The IRS and its authorized private collection agencies will never:
  • Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. The IRS does not use these methods for tax payments. Generally, the IRS will first mail a bill to any taxpayer who owes taxes. All tax payments should only be made payable to the U.S. Treasury and checks should never be made payable to third parties.
  • Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.
  • Demand that taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed.
  • Ask for credit or debit card numbers over the phone.
If you don’t owe taxes, or have no reason to think that you do:
  • Do not give out any information. Hang up immediately.
  • Contact the Treasury Inspector General for Tax Administration to report the call. Use their “IRS Impersonation Scam Reporting” web page. You can also call 800-366-4484.
  • Report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add "IRS Telephone Scam" in the notes.
If you know you owe, or think you may owe tax:
  • Call the IRS at 800-829-1040. IRS workers can help you.
Remember, too, the IRS does not use email, text messages or social media to discuss personal tax issues involving bills or refunds. The IRS will continue to keep taxpayers informed about scams and provide tips to protect them. The IRS encourages taxpayers to visit IRS.gov for information including the “Tax Scams and Consumer Alerts” page.


Additional information about tax scams is available on IRS social media sites, including YouTube Tax Scams.

Wednesday, March 22, 2017

Top Ten Adoption Tax Credit Facts to Consider

Taxpayers who have adopted or tried to adopt a child in 2016 may qualify for a tax credit. Here are ten important things about the adoption credit:
  1. The Credit. The credit is nonrefundable, which may reduce taxes owed to zero. If the credit exceeds the tax owed, there is no refund of the additional amount. In addition, if an employer helped pay for the adoption through a written qualified adoption assistance program, that amount may reduce any taxes owed.
  2. Maximum Benefit. The maximum adoption tax credit and exclusion for 2016 is $13,460 per child.
  3. Credit Carryover. If the credit exceeds the tax owed, taxpayers can carry any unused credit forward. For example, the unused credit in 2016 can reduce taxes for 2017. Use this method for up to five years or until the credit is fully used, whichever comes first.
  4. Eligible Child. An eligible child is an individual under age 18 or a person who is physically or mentally unable to care for themselves.
  5. Qualified Expenses. Adoption expenses must be reasonable, necessary and directly related to the adoption of the child. Types of expenses may include adoption fees, court costs, attorney fees and travel.
  6. Domestic or Foreign Adoptions. Taxpayers can usually claim the credit whether the adoption is domestic or foreign. However, there are different rules regarding the timing of expenses for each type of adoption.
  7. Special Needs Child. A special rule may apply if the adoption is of an eligible U.S. child with special needs. Under this special rule, taxpayers can claim the tax credit, even if qualified adoption expenses were not paid.
  8. No Double Benefit. In some instances both the tax credit and the exclusion may be claimed but not for the same expenses.
  9. Income Limits. The credit and exclusion are subject to income limitations. These may reduce or eliminate the claimable amount..
  10. IRS Free File. Use IRS Free File to prepare and e-file federal tax returns for free. File Form 8839, Qualified Adoption Expenses, with Form 1040. Free File is only available on IRS.gov/freefile.
Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.

Additional IRS Resources:
  • Tax Topic 607– Adoption Credit and Adoption Assistance Programs

Tuesday, March 21, 2017

Tax Refund Offsets Pay Unpaid Debts

If you can’t pay your taxes in full, the IRS will work with you. Past due debts like taxes owed, however, can reduce your federal tax refund. The Treasury Offset Program can use all or part of your federal refund to settle certain unpaid federal or state debts, to include unpaid individual shared responsibility payments. Here are five facts to know about tax refund offsets.

1. Bureau of the Fiscal Service. The Department of Treasury’s Bureau of the Fiscal Service, or BFS, runs the Treasury Offset Program.

2. Offsets to Pay Certain Debts. The BFS may also use part or all of your tax refund to pay certain other debts such as:
  • Federal tax debts.
  • Federal agency debts like a delinquent student loan.
  • State income tax obligations.
  • Past-due child and spousal support.
  • Certain unemployment compensation debts owed to a state.
3. Notify by Mail. The BFS will mail you a notice if it offsets any part of your refund to pay your debt. The notice will list the original refund and offset amount. It will also include the agency that received the offset payment. It will also give the agency’s contact information.

4. How to Dispute Offset. If you wish to dispute the offset, you should contact the agency that received the offset payment. Only contact the IRS is your offset payment was applied to a federal tax debt.

5. Injured Spouse Allocation. You may be entitled to part or the entire offset if you filed a joint tax return with your spouse. This rule applies if your spouse is solely responsible for the debt. To get your part of the refund, file Form 8379, Injured Spouse Allocation. If you need to prepare a Form 8379, you can prepare and e-file your tax return for free using IRS Free File.

Health Care Law: Refund Offsets and the Individual Shared Responsibility Payment. While the law prohibits the IRS from using liens or levies to collect any individual shared responsibility payment, if you owe a shared responsibility payment, the IRS may offset your refund against that liability.

Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.

Additional IRS Resources:

Tax Time Guide: Get an Automatic Six More Months to File; Free File Now Available for Extensions

The Internal Revenue Service reminded taxpayers today that if they are unable to file their tax returns by this year’s April 18 deadline there is an easy, online option to get more time to complete their return.

The advice for those who cannot complete their tax return by April 18: Do not panic. Taxpayers who need more time to complete their return can request an automatic six-month extension. An extension allows for extra time to gather, prepare and file paperwork with the IRS, however, it does not extend the time to pay any tax due.

The fastest and easiest way to get an extension is through Free File on IRS.gov. Taxpayers can electronically request an extension on Form 4868. This service is free for everyone, regardless of income. Filing this form gives taxpayers until Oct. 16 to file their tax return. To get the extension, taxpayers must estimate their tax liability on this form and should pay any amount due.

Other fast, free and easy ways to get an extension include using IRS Direct Pay, the Electronic Federal Tax Payment System or by paying with a credit or debit card. There is no need to file a separate Form 4868 extension request when making an electronic payment and indicating it is for an extension. The IRS will automatically count it as an extension.

Direct Pay is available online and on the IRS2Go app. It’s free, does not require preregistration and gives instant confirmation when taxpayers submit a payment. It also provides the option of scheduling a payment up to 30 days in advance. Taxpayers using a credit or debit card can pay online, by phone or with the IRS2Go app. The card processor charges a fee, but the IRS does not charge any fees for this service.

Besides Free File and electronic payments, taxpayers can request an extension through a paid tax preparer, by using tax-preparation software or by mailing in a paper Form 4868. Tax forms can be downloaded from IRS.gov/forms.

The IRS reminds taxpayers that a request for an extension provides extra time to file a tax return, but not extra time to pay any taxes owed. Payments are still due by the original deadline. Taxpayers should file even if they can’t pay the full amount. By filing either a regular return or requesting an extension by the April 18 filing deadline, they will avoid the late-filing penalty, which can be 10 times as costly as the penalty for not paying.

Taxpayers who pay as much as they can by the due date reduce the overall amount subject to penalty and interest charges. The interest rate is currently four percent per year, compounded daily. The late-filing penalty is generally five percent per month and the late-payment penalty is normally 0.5 percent per month.

The IRS will work with taxpayers who cannot pay the full amount of tax they owe. Other options to pay, such as getting a loan or paying by credit card may help resolve a tax debt. Most people can set up an installment agreement with the IRS using the Online Payment Agreement tool on IRS.gov.

When the President makes a disaster area declaration, the IRS can postpone certain taxpayer deadlines for residents and businesses in the affected area. Taxpayers who are victims of a natural disaster may apply for automatic filing and payment relief. Taxpayers outside the covered disaster area but whose tax records required for filing or payment are located in a covered disaster area may also be eligible for this tax relief. Taxpayers who have been affected by recent severe weather should check Around the Nation on IRS.gov for disaster tax relief for their state.

Other taxpayers who get more time to file without having to ask for extensions include:
  • U.S. citizens and resident aliens who live and work outside of the United States and Puerto Rico get an automatic two-month extension to file their tax returns. They have until June 15 to file. However, tax payments are still due April 18.
  • Members of the military on duty outside the United States and Puerto Rico also receive an automatic two-month extension to file. Those serving in combat zones have up to180 days after they leave the combat zone to file returns and pay any taxes due. Details are available in the Armed Forces’ Tax Guide Publication 3.
This is the 10th in a series of 10 IRS tips called the Tax Time Guide. The tips are intended to help taxpayers as they get closer to the April 18 income tax filing deadline.

Monday, March 20, 2017

Know these Facts Before Deducting a Charitable Donation

If taxpayers gave money or goods to a charity in 2016, they may be able to claim a deduction on their federal tax return. Taxpayers can use the Interactive Tax Assistant tool, Can I Deduct my Charitable Contributions?, to help determine if their charitable contributions are deductible.

Here are some important facts about charitable donations:
  1. Qualified Charities. Taxpayers must donate to a qualified charity. Gifts to individuals, political organizations or candidates are not deductible. To check the status of a charity, use the IRS Select Check tool.
  2. Itemize Deductions. To deduct charitable contributions, taxpayers must file Form 1040 and itemize deductions. File Schedule A, Itemized Deductions, with a federal tax return.
  3. Benefit in Return. If taxpayers get something in return for their donation, they may have to reduce their deduction. Taxpayers can only deduct the amount that exceeds the fair market value of the benefit received. Examples of benefits include merchandise, meals, tickets to events or other goods and services.
  4. Type of Donation. If taxpayers give property instead of cash, their deduction amount is normally limited to the item’s fair market value. Fair market value is generally the price they would get if the property sold on the open market. If they donate used clothing and household items, those items generally must be in good condition or better. Special rules apply to cars, boats and other types of property donations.
  5. Noncash Charitable Contributions. File Form 8283, Noncash Charitable Contributions, for all noncash gifts totaling more than $500 for the year. Complete section-A for noncash property contributions worth $5,000 or less. Complete section-B for noncash property contributions more than $5,000 and include a qualified appraisal to the return. Taxpayers may be able to prepare and e-file their tax return for free using IRS Free File. The type of records they must keep depends on the amount and type of their donation. To learn more about what records to keep, see Publication 526, Charitable Contributions.
  6. Donations of $250 or More. If taxpayers donated cash or goods of $250 or more, they must have a written statement from the charity. It must show the amount of the donation and a description of any property given. It must also say whether they received any goods or services in exchange for the gift.
Taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.

Additional IRS Resources:

Friday, March 17, 2017

IRS, States and Tax Industry Warn of Last-Minute Email Scams

The Internal Revenue Service, state tax agencies and the tax industry today warned both tax professionals and taxpayers of last-minute phishing email scams, especially those requesting last-minute deposit changes for refunds or account updates.

As the 2017 tax filing season winds down to the April 18 deadline, tax-related scams of various sorts are at their peak. The IRS urged both tax professionals and taxpayers to be on guard against suspicious activity.

The IRS, state tax agencies and the tax industry, acting as the Security Summit, enacted many safeguards against identity theft for 2017, but cybercriminals are ever evolving and make use of sophisticated scams to trick people into divulging sensitive data.

For example, one new scam poses as taxpayers asking their tax preparer to make a last-minute change to their refund destination, often to a prepaid debit card. The IRS urges tax preparers to verbally reconfirm information with the client should they receive last-minute email request to change an address or direct deposit account for refunds.

The IRS also suggests that tax professionals change and strengthen their own email passwords to better protect their email accounts used to exchange sensitive data with clients.

This is also the time of year when taxpayers may see scam emails from their tax software provider or others asking them to update online accounts. Taxpayers should learn to recognize phishing emails, calls or texts that pose as familiar organizations such as banks, credit card companies, tax software providers or even the IRS. These ruses generally urge taxpayers to give up sensitive data such as passwords, Social Security numbers and bank account or credit card numbers.

Taxpayers who receive suspicious emails purporting to be from a tax software provider or from the IRS should forward them to phishing@irs.gov. Remember: never open an attachment or link from an unknown or suspicious source. It may infect your computer with malware or steal information. Also, the IRS does not send unsolicited emails or request sensitive data via email.


The Security Summit maintains a public awareness campaign for taxpayers – Taxes. Security. Together. – and an awareness campaign for tax professionals – Protect Your Clients; Protect Yourself – as part of its effort to combat identity theft.

IRS Reminds Taxpayers of April 1 Deadline to Take Required Retirement Plan Distributions

The Internal Revenue Service today reminded taxpayers who turned age 70½ during 2016 that, in most cases, they must start receiving required minimum distributions (RMDs) from Individual Retirement Accounts (IRAs) and workplace retirement plans by Saturday, April 1, 2017.

The April 1 deadline applies to owners of traditional (including SEP and SIMPLE) IRAs but not Roth IRAs. It also typically applies to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.

The April 1 deadline only applies to the required distribution for the first year. For all subsequent years, the RMD must be made by Dec. 31. A taxpayer who turned 70½ in 2016 (born after June 30, 1945 and before July 1, 1946) and receives the first required distribution (for 2016) on April 1, 2017, for example, must still receive the second RMD by Dec. 31, 2017.

Affected taxpayers who turned 70½ during 2016 must figure the RMD for the first year using the life expectancy as of their birthday in 2016 and their account balance on Dec. 31, 2015. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. Worksheets and life expectancy tables for making this computation can be found in the appendices to Publication 590-B.

Most taxpayers use Table III  (Uniform Lifetime) to figure their RMD. For a taxpayer who reached age 70½ in 2016 and turned 71 before the end of the year, for example, the first required distribution would be based on a distribution period of 26.5 years. A separate table, Table II, applies to a taxpayer married to a spouse who is more than 10 years younger and is the taxpayer’s only beneficiary. Both tables can be found in the appendices to Publication 590-B.

Though the April 1 deadline is mandatory for all owners of traditional IRAs and most participants in workplace retirement plans, some people with workplace plans can wait longer to receive their RMD. Employees who are still working usually can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions. See Tax on Excess Accumulation  in Publication 575. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.

The IRS encourages taxpayers to begin planning now for any distributions required during 2017. An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount in Box 12b on Form 5498. For a 2017 RMD, this amount would be on the 2016 Form 5498 that is normally issued in January 2017.

IRA owners can use a qualified charitable distribution (QCD) paid directly from an IRA to an eligible charity to meet part or all of their RMD obligation. Available only to IRA owners age 70½ or older, the maximum annual exclusion for QCDs is $100,000. For details, see the QCD discussion in Publication 590-B.

A 50 percent tax normally applies to any required amounts not received by the April 1 deadline. Report this tax on Form 5329 Part IX. For details, see the instructions for Part IX of this form.

More information on RMDs, including answers to frequently asked questions, can be found on IRS.gov.

Thursday, March 16, 2017

Check Out Tax Benefits for Higher Education

Higher education costs paid in 2016 can mean tax savings when taxpayers file their tax returns. If taxpayers, their spouses or their dependents took post-high school coursework last year, they may be eligible for a tax credit or deduction.

Here are some facts from the IRS about tax benefits for higher education.

For 2016, there are two tax credits available to help taxpayers offset the costs of higher education. The American Opportunity Credit and the Lifetime Learning Credit may reduce the amount of income tax owed. Use Form 8863 to claim the education credits.

The American Opportunity Credit (AOC) is:
  • Worth a maximum benefit up to $2,500 per eligible student.
  • Only for the first four years at an eligible college or vocational school.
  • For students pursuing a degree or other recognized education credential.
  • For students enrolled at least half time for at least one academic period during 2016. Taxpayers can claim the AOC for a student enrolled in the first three months of 2017 as long as they paid qualified expenses in 2016.
The Lifetime Learning Credit (LLC) is:
  • Worth a maximum benefit up to $2,000 per tax return, per year, no matter how many students qualify.
  • Available for all years of postsecondary education and for courses to acquire or improve job skills.
  • Available for an unlimited number of tax years
The tuition and fees deduction can reduce the amount of income subject to tax. This deduction may be beneficial for taxpayers who don't qualify for the American Opportunity Credit or the Lifetime Learning Credit. Use Form 8917 to claim the tuition and fees deduction.

The Tuition and Fees Deduction is:
  • Worth a maximum benefit up to $4,000,
  • Claimed as an adjustment to income,
  • Available even if a taxpayer doesn’t itemize deductions on Schedule A,
  • Limited to tuition and certain related expenses required for enrollment or attendance at eligible postsecondary educational institutions.
Additionally:
  • Beginning in 2016, to be eligible for an education benefit, a student is required to have Form 1098-T, Tuition Statement. They receive this form from the school they attended. There are exceptions for some students. See Publication 970 for more details.
  • They may only claim qualifying expenses paid in 2016.
  • They can’t claim either credit if someone else claims them as a dependent.
  • They can’t claim either AOTC or LLC and the Tuition and Fees Deduction for the same student or for the same expense in the same year.
  • Income limits could reduce the amount of credits or deductions they can claim.
  • The Interactive Tax Assistant tool on IRS.gov can help check eligibility.
IRS Free File. Taxpayers can use IRS Free File to prepare and e-file their federal tax returns for free. File Form 8863, Education Credits, with your Form 1040. Free File is only available at IRS.gov/freefile.

The IRS reminds students using the Free Application for Federal Student Aid (FAFSA) that the IRS Data Retrieval Tool currently is unavailable.  This does not limit an individual’s ability to apply for aid. Applicants can manually provide their tax return information. The IRS offers alternatives for the retrieval of the income information needed.

Additional IRS Resources: