Last Minute Tips to Prepare for Your US Income Tax Return
IJ Zemelman Apr-01-2015
The April 15 tax filing deadline is approaching fast. It’s time to start making preparations to get your taxes filed on time. With the IRS understaffed, it’s not likely that you will get much help if you have tax questions.
The tax filing deadline of April 15 for 2014 taxes is barely over two weeks away. Out of the 150M tax returns anticipated by the IRS, only about half have been filed.
If you are planning to prepare your own US income tax return, you may not get a lot of help from the IRS. Funding for the IRS has been cut to levels consistent with those of 1998, and adjustments have been made for inflation. With this being the case, only 43% of taxpayer phone calls to the IRS are being answered. It is also difficult for tax professionals to get through, and there is a designated hotline for tax experts. The average hold time for a professional tax preparer is at least 45 minutes, and – even when the calls are answered – IRS staff reports that they are authorized to resolve the issue at hand.
The recent budget cuts have also caused the amount of IRS audits to decrease. During the fiscal year 2014, the total rate of audits performed on tax returns was 0.86%. In previous years, the audit rate was as high as 1.11%. The budget cuts of the IRS have also affected the expediency of processing amended tax returns and audit appeals.
If you do not plan on being prepared to file your US expat tax return by the April 15 deadline, make sure to get up to a six month filing extension from the IRS.
If you aren’t prepared to file your tax return on time, you may request a six month extension by filing Form 4868. This form must be filed before April 15. Remember, though, that an extension to file does not mean that you have an extension to pay your tax debt. If you are planning on owing taxes upon filing your US expat tax return, you are encouraged to file an estimated tax return and pay your taxes by the April 15 deadline. Failure to pay your tax debt on time will result in huge amounts of interest and penalties piling up. The interest rate for unpaid taxes will be as high as 3% until the end of June.
While it’s important to pay any tax debt you may have by April 15, it’s equally important to avoid overpaying. With the IRS being so backed up on its response time, it could take months or years to get back the amount you overpaid. If you are entitled to any tax breaks which will decrease the amount of money you owe to the IRS, make sure and take those credits into consideration when filing an estimated tax return. Here are some tips for making sure that you are getting as much as you can out of the deductions and credits available to you.
It’s important to understand how the new health care provisions will impact your US income tax return. If you received an upfront tax credit to help you buy the amount of health insurance that is required under the ACA (Affordable Care Act), you may wind up owing more or being due for a refund – depending on your income levels throughout 2014.
If you had the ACA required health care coverage during the entire year of 2014, you will be required to check the box on Line 61 of Form 1040. You may owe a penalty if you did not have coverage for the entire year. If you owe a penalty or you were – for one reason or another – exempt from this coverage requirement, you must file Form 8965. The instructions for Form 8965 contain an explanation of how to calculate the penalty if you did not have required coverage and were not exempt. Keep in mind that employers will not be required to furnish proof of ACA-qualified insurance to their employees until the tax year of 2015.
In the previous year, millions of taxpayers were given an upfront tax credit to help purchase ACA-required insurance. If a taxpayer’s income was higher than anticipated, a higher tax could be owed to compensate for the difference. Conversely, if a lower income than anticipated was earned, the taxpayer could wind up receiving money back. The Kaiser Family Foundation estimates that roughly have of the recipients of the tax credit will be required to make a repayment for an average amount of $794. It also estimates that roughly 45% of taxpayers will receive back an average amount of $773. Considering all taxpayers, the average refund amount is currently $2,893.
If you are among the taxpayers who were sent erroneous forms by the Department of Health and Human Services in February and you haven’t yet filed your tax return using this information, you are required to postpone filing your US income tax return until corrected forms have been sent out. If you are among the group of taxpayers who filed their tax returns using this erroneous information, you have been given a free pass by the IRS.
You may be subject to double reporting this year if you had employee stock options in 2014. Even if you have overlapping reports on the same income, you should file both forms with your US income tax return while being careful not to overpay.
New for 2014, financial institutions are required to report income from the sale of employee stock options to the IRS if the employee receives cash. With this being the case, it is possible for income to be reported twice – once on Form W-2 issued by the employer and once on Form 1099-B issued by the financial firm. If you had the same income reported twice on these forms, you must file both forms to avoid having your US income tax return flagged. Make sure to file both forms to ensure timely processing and pay special attention to document the amounts correctly on your tax return so that you are not overpaying.
Make sure that you not only double check all forms (W-2s, 1099s, etc.) for accurate information, but also that you are including all received income reports with your US income tax return.
While the IRS audit rate was down last year, there is one category that went up from recent years. That category was the correspondence exams of US Taxpayers who earned more than $200K. These correspondence exams occur when the IRS identifies a discrepancy between the taxpayer’s income tax return and that which was submitted by a third party such as an employer or financial institution. It is extremely important to review all tax forms to ensure that they reflect accurate earnings throughout the tax year. If possible, make sure to correct any errors by requesting revised tax forms.
If you are unable to get revised tax forms from the issuing institution, you are encouraged to enter the false data on your income tax return and then make another entry to indicate the proper amount. If the information on your 1099 is incorrect, you must denote it as it is on Form 1099 and adjust accordingly so it can be recognized as a valid discrepancy.
If you have made charitable donations of $250 or more, you are required to have documentation from the charity to which you donated.
If you made a cash donation to a charity which was $250 or above, you must have a donation notice which was issued by the charity indicating the amount you donated. The notice must include the date and amount of your donation and the value of any goods or services (meal, party favor, etc.) you received in return. If your donation was less than $250, your bank record or cancelled check will suffice as proof of your deductible donation. If you made a charitable donation through one or more payroll deductions, you may have to contact the charity to get a letter. These types of donations usually don’t get a letter automatically and are not denoted on the employee’s W-2.
If you donated a vehicle or appreciated asset (stocks, for example) to a charity, then special rules apply. To find out how to claim these types of donations, refer to IRS Publication 526 and IRS Publication 561.
If you qualify to deduct medical expenses, make sure to take advantage of this deduction for expenses which are not covered by your insurance.
In order to claim medical deductions, they must exceed 10% of your AGI (Adjusted Gross Income) if you are 65 or younger and 7.5% of your AGI if you are older than 65. Remember that you are allowed to deduct medical expenses which are not covered by your insurance. This includes acupuncture, inpatient hospital stays, home nursing care, smoking cessation programs, and even participation in or attendance of one or more conferences on a chronic illness. Typically, you are also able to deduct transportation expenses and nontraditional treatments. To get more information on deducting medical expenses, refer to IRS Publication 502.
There are a few education deductions from which you can choose, but – generally speaking – you may only choose one of these options.
There are multiple options on the types of education deductions you may use on your US income tax return, but you must choose carefully. The deduction with the largest benefit to most taxpayers is the AOTC (American Opportunity Tax Credit). The AOTC allows a tax offset of up to $2,500 per year for each student enrolled in college. Another deduction available to US Taxpayers is the $4K fees and tuition deduction. The $4K fees and tuition deduction only reduces your taxable income and isn’t as likely to produce as much of a benefit as the AOTC. The benefit of the AOTC begins to phase out at an AGI of $160K for couples and $80K for single taxpayers. To get more information on education deductions, refer to IRS Publication 970.
If you own foreign accounts or receive income from foreign sources, make sure to file all required tax forms – not only to the IRS, but to the US DOT (Department of Treasury), as well.
If your foreign payments meet or exceed a certain threshold, you will be required to file IRS Form 8938 or IRS Form 3520. The term ‘foreign payments’ applies to any inheritance received from a relative living overseas. If you are required to file these forms, they should be attached to your US income tax return. If you have foreign financial accounts with an aggregate balance of at least $10K (even if for only one day out of the year), you will be required to file FinCEN Form 114 with the DOT on or before June 30.
If you invest in US-based stocks, exchange-traded funds, mutual funds, or other US entities with foreign holdings, these rules do not apply to you.
Make sure to keep detailed records of your tax returns in case you are facing an audit within the next couple years.
It’s always easier to get records updated for the year in which you are filing as you prepare to file your US income tax return instead of waiting until you are facing an audit by the IRS. Keep in mind that the IRS prefers to see logs for any business related deductions or deductions for charitable donations or medical bills. You will also want to have proof of your residency if you maintained a home in another state but lived there for 183 days out of the year or less. Another aspect to consider is whether or not you made a capital improvement in your home in the previous year or you are preparing to undergo other renovations. These types of expenses could save you money on your tax bill if you wind up selling your home in future years, so it’s best to keep a detailed record that you can easily find later on.
I.J. Zemelman, EA is the founder of Taxes for Expats