Wednesday, February 12, 2014

Tax Season, again

I should have done my weekly blog entry yesterday, but during tax season I spend Tuesdays and Thursdays doing volunteer tax prep, and I just didn't get to it last night.

Tax season is when I find out all the things people don't know about income taxes. It is unfortunate that they generally discover them in conjunction with a tax bill they weren't expecting, instead of the refund they were.

I wrote about gambling income/loss two years ago when I started doing this. The standard deduction has changed since 2012, but the rest of the information has not. I also wrote about unemployment compensation then. So far this year I haven't seen the problems with that I saw two years ago; people seem to be getting jobs again, rather than spending over a year on unemployment.

But there are still two things that confuse a lot of people:

  1. Reportable income and taxable income are not the same thing. For example, interest income is reported by the bank that pays it when it reaches $10 in a year. This does not mean that it isn't taxable until you get that much. The IRS rounds to the nearest dollar, so as soon as your interest goes over 49 cents, you have $1 of taxable interest income. Of course, given the rates on interest checking accounts these days and the balances most of us carry, our total interest is likely to be less than 25 cents, let alone 50. But the same thing applies to other income, especially for those of us who are self employed. We don't get a Form 1099 until somebody pays us $600 in non-employee compensation, which means that a lot of our income does not get reported to the IRS. But anyone who thinks this means we don't have to report it ourselves and pay taxes on it is going to have major problems when the IRS catches up with them.
  2. An extension of time to file your return is not an extension of time to pay your taxes. You can get an extension that stretches your filing date from April 15 to October, but you need to pay the tax due by April 15. I know that if you need an extension you're probably missing some vital paperwork and don't know how much you owe, but the IRS doesn't care, so give it your best guess. If you don't pay in April you will have to pay interest on the tax you owe, plus a penalty, which can be up to 25% of the tax. The penalty for failure to file is much worse than the one for failure to pay, so always file your return even if you don't have the money to pay the tax.
The IRS is not the enemy. They will work with you, but you have to do your part too. And, despite what many people seem to believe, they are not looking to throw you into jail (unless you are committing tax fraud or identity theft, in which case you need much more help than AARP Tax-Aide can give you). The people who work for the IRS know that the tax code is complicated and that honest mistakes happen. If they happen to your or your friends, however, make sure you learn from them.