Ed note: As we celebrate this scariest holiday, we have one reminder. If you have these tax skeletons in your closet, April 15 might be far more terrifying than Halloween next year.
Something taxing this way comes… just in time for Halloween. These are examples of mistakes commonly made with regard to taxes. Now, most people who have these issues are probably not actively trying to avoid tax. Instead, it is very easy to simply not realize that something has been left something off of the return, or that an error in record keeping or reporting could possibly lead to substantial taxes and penalties. Here are some examples of tax issues that may be a skeleton in your financial closet.
Non-filers represent a large part of what the IRS refers to as the “tax gap.” This term refers to the difference between the taxes that should be paid and the taxes that are actually paid. Some groups are more susceptible to non-filing issues than others. For example, U.S. citizens living and working abroad may not realize that they still need to file a U.S. return.
One consequence of non-filing that many people do not consider is the unlimited statute of limitations. If you owe taxes and do not file a return, the IRS can assess a tax liability against you at any time. Normally, the statute of limitations for assessment on a timely-filed return by the IRS ends three years after the original filing deadline.
However, not all non-filers owe additional tax. If you received income that was subject to withholding and did not file a return, you may be entitled to a refund if that withholding exceeded your tax liability.
2. Not Keeping Adequate Records
Once you’ve filed your return, you may be tempted to put it out of your mind as quickly as possible. Nonetheless, you should remember to hold on to any forms and records used in preparing your return. These documents include W-2/1099 forms, charitable contributions information, bank statements, sales documents, etc. Some of this information may be helpful in preparing future returns. This information will also be useful if the IRS later contacts you about this return or performs an audit. The length of time you should keep these records will vary depending on the type of record involved, but in most cases you should keep them around for at least three years.
3. Failing to Respond to IRS Notices
If the IRS contacts you, ignoring their correspondence will typically not yield positive results. The IRS processes millions of returns each year. As a result, most of your contact with the IRS will occur through direct mail rather than face-to-face interactions with an examiner. The letters sent by the IRS will usually explain the issue and provide several options for resolution. Providing a response is an important first step toward resolving any issues. But how you respond to the notice will often depend on whether or not you agree with the issues mentioned by the IRS. If you do not respond by certain deadlines, you will receive additional notices and you may lose your ability to challenge any proposed tax liability.
4. Not Reporting Income
It is often easy to overlook the fact that certain items you receive can count as income. According to the tax code, income includes virtually anything unless it is specifically excluded. Some examples of excluded items include money received from health insurance plans, life insurance proceeds received from the insured person’s death, and combat zone pay for members of the armed forces.
If the income is not excluded, then it should be included in your income. Some examples of items you might overlook include prizes received on a game show or other contest certain fringe benefits received from your employer, or income received for an activity you do sporadically such as mowing lawns or providing piano lessons.
Ed note: Kids are funny. Seriously funny. And they always have been! The difference these days is that their parents have video cameras in their back pockets and access to a distribution network that reaches millions of people each day (see: the Internet). The result? Viral video fame for lots of people who haven’t reached middle school. Oh, and new tax complexity for their parents.
“Kid stars” are no longer limited to the latest Disney sensation or a heavily produced reality show. Nowadays, children can be thrust into the spotlight with nothing more than a parent, a smartphone and an opportune moment.
However, what you the viewer may not realize is that “going viral” can make the uploaders of these videos hundreds of thousands of dollars, thanks to YouTube video ads. It’s a phenomenon that can easily leave one wondering, “Is this real life?”
Most parents upload videos of their children with the best of intentions, and oftentimes use the resulting financial windfall to fund their children’s future. In 2007 a British baby named Charlie Davies-Carr nibbled on his older brother Harry’s finger creating one of the first viral videos, “Charlie Bit My Finger.” 764 million views later, the brothers reportedly have raked in more than $500,000. Their family used the money to purchase a new house and fund their educations.
What is a sure-fire recipe for internet fame? Seven-year-olds and anesthesia. In 2008 David DeVore Jr. was being driven home from the dentist after having a tooth pulled. Feeling a little trippy from the ordeal on the way home, David’s conversation with his father would later become internet gold. David’s introspections on life have since garnered over 126 million views and have reportedly earned more than $100,000.
If you hit Internet stardom like this, what does it mean for your income tax bill? Well, of course, that income is taxable to you even though it is videos of your children. In most cases where this is only a one-time thing or a hobby, the income will only be taxed as ordinary income. However, if you go full Kid President and make this into a regular income earning activity, the IRS will likely treat the income as business income. In that case, it is subject to both ordinary income tax and the self-employment tax.
Can you get a deduction if you put all of those stacks of Internet cash away in a savings plan for your child’s future education? The answer is yes and no. Most states allow you to deduct contributions to certain college savings plans on your state income tax return. However, there is no similar deduction at the federal level. Once that money is used to fund higher-level education, though, it may qualify the parents for certain education-based credits, such as the American Opportunity Credit.
We’ve looked at a lot of issues around sports and taxes. We know that many stadiums are funded by tax dollars, that athletes can be taxed by the cities where they play road games and that big contracts also mean big tax bills.
Now, we are seeing the intersection of sports, money and taxes firsthand in Kansas City, as our Royals take on the San Francisco Giants in Major League Baseball’s World Series.
We know these events can be big business. Two years ago Kansas City hosted MLB’s All Star Game. It reportedly had a $58 million impact on the city. The Major League Soccer All Star game had up to a $20 million economic impact. The Kansas City Convention and Visitor’s Bureau thinks the World Series will have a similarly positive take away, with tourists visiting town and locals spending more at bars, restaurants and shops.
However, there are costs. Critics say the expenditures around these events are often overlooked. That could include extra security, inconveniences with travel restrictions and impacts on smaller, non-sports related businesses.
There may also be more obvious expenditures, like rallies or victory parades. So far, the most overt celebration in Kansas City has been to turn the water in several city fountains blue. If you didn’t know, Kansas City has a lot of fountains – 200 registered in the city, according to The City of Fountains Foundation.
The Kansas City Star had all the details on how the water has been colored in a handful of those. A local company that does water treatment projects for the city, Blue Valley Laboratories, creates a blue dye that is then added to the fountain water.
Right now the Royals are paying the fees to dye the city fountains blue – $1,000 for the first day and $250 for each additional day. The money goes to the city’s “Wish Upon a Fountain” foundation, and then to help restore and maintain fountains in the city.
In 2008, Philadelphia paid more than $1 million in costs related to celebrating its World Series Champions, the Phillies. When the Giants won the World Series in 2012, the parade cost a reported $225,000, and the cost of the 1,400 students who skipped school was estimated to be $158,935.
So, I guess the comfort for the losing team is fiscal savings. Cold comfort, I know.
Ed note: Kids – as much as you love them! – are expensive little creatures. Fortunately, the tax code has some nice credits you can take advantage of. However, you must be careful in your calculators. The Tax Institute breaks down one common scenario. Question I will pay $12,000 in day care expenses this year. […]
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