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FAQ

How do you lower tax withholdings on your paycheck if they are too high, other than by claiming allowances on your W4? Claiming non-existing allowances is technically illegal and can be penalized by a fine.
You claim as many allowances as you need to avoid over withholding. I’ve used dozens when complex situations unexpectedly got me months ahead of schedule or beyond my total tax liability for the year.They’re allowances not dependents. The IRS Form W-4 instructions explicitly tell you to increase them to account for things like itemized deductions.There’s no limit as long as you’re withholding substantially all of your taxes in a timely manner after income is earned.Refer to IRS Topic No. 306 Penalty for Underpayment of Estimated Tax and IRS Publication 505 (2018), Tax Withholding and Estimated Tax for the safe harbor rules. Provided the payments were timely, penalties for under withholding aren’t assessed when you withhold the least of $1000 less than your total liability, 90% of this year’s total, and 100% (110% for income over $75K married filing separately or $150K otherwise) of last year’s income tax.You can supplement your W-4 withholding with quarterly estimated tax payments when earnings vary from unpredictable situations like bonus, stock value when restrictions lapse, and capital gains/losses.I track my projected earnings and year to date withholding in a text file, recalculate my remaining state and federal income taxes when my situation changes, and work backwards from that to a number of allowances plus extra using formulas in IRS Publication 15 (Circular E) Employer’s Tax guide and Method B from the California DE 44 Employer’s guide. Unlike the W-4 and California DE-4 worksheets this accounts for year-to-date withholding and does not round up.I aim for $500 state and federal refunds so if I’m busy in the first quarter I can defer filing without penalty.
As someone who is self employed or owns a business, do you pay estimates on taxes throughout the year, or do you pay the government all at once come tax time?
Avoiding underpayment penalties requires having paid the least of $1000 less than your total liability, 90% of this year’s total, and 100% (110% for income over $75K married filing separately or $150K otherwise) of last year’s income tax.The IRS also wants to collect in the quarter you earned the taxed income.Refer to IRS Topic No. 306 Penalty for Underpayment of Estimated Tax and IRS Publication 505 (2018), Tax Withholding and Estimated Tax for the safe harbor rules.With my consulting business, I formed a LLC which opted to be taxed as an S-Corp. It employed me personally on a W2, my bank handled withholding, and my LLC filed Form 941 Employer’s Quarterly Federal Tax Return quarterly plus Form 1120S U.S. Income Tax Return for an S Corporation annually.This provides liability protection, gives you benefit options, and lets you split your pay into salary and profit distributions which aren’t subject to FICA and Medical taxes.Regardless of my employment status, I’ve always aimed for $500 state and federal refunds. With my back-of-the-envelope calculations at least that accurate, if I get busy that lets me file late without penalty. At the same time, it’s not so much I feel bad about making interest free loans to governments.Consult a CPA before doing anything.
How will enforcement of South Dakota V. Wayfair, that is collecting and remitting sales tax to states in which the business does not have a nexus or any business presence, work practically for small retail businesses?
I am just looking at the draft proposal from the Texas Comptroller (I have absolutely, positively no say in these matters) Highlights:Safe harbor Nexus: The Comptroller will not impose permit and collection responsibilities on out of state sellers whose total revenue from Texas sales in the preceding twelve calendar months is less than $500,000.The first twelve-month period for determining whether an out of state seller’s total revenue from Texas sales exceeds the safe harbor threshold amount: July 1, 2018 through June 30, 2019. The permitting and Texas sales tax collections would not begin until October 1, 2019.No retroactive application of the new law to out of state sellers that have no physical presence in Texas.The state legislature will be meeting in January 2019 to start their new session and hopefully there will be more guidance for Texas sales taxes after that.This is from the Comptroller’s guidance letter issued on June 27, 2018, “Gains from the ruling are likely to be lower than previous estimates of taxes uncollected by remote sellers. In the past year, for example, some remote sellers have volunteered to collect in anticipation of the Wayfair decision or for other reasons. Wayfair, the named plaintiff in this case, already collects Texas sales and use taxes. Also, in order to avoid imposing an undue burden on interstate commerce, the state will likely relieve some out-of-state sellers from collection responsibilities. More specific estimates will be available as the implementation and legislative process continues.”
What is the time limit to refund an excess tax remitted?
“A claim for refund must be filed within 3 years from the time the return was filed or 2 years from the date tax was paid, whichever is later. And if no return is filed, then 2 years from the date payment was made. Secondly, the IRS may refund only the amount of tax paid within three years plus the period of any extensions, or two years from the date of payment.”More information about IRS statute of limitations:IRS Statute of LimitationsWhat is an IRS Statute of Limitations?IRS statute of limitations are time periods established by law to review, analyze, and resolve taxpayer and/or IRS tax related issues.The Internal Revenue Code requires the IRS to assess, refund, credit, and collect taxes within specified limits.Once the statute of limitations has expired, the IRS cannot assess additional tax, allow a claim for refund, or take collections action.When does the Statute of Limitations expire?General rule for tax assessment – 3 yearsOn an individual tax return, the statute of limitations for the IRS to assess additional tax or initiate collections action is 3 years after the original due date of the return, or 3 years after the date the return was actually filed, whichever is later. IRC 6501For a return filed before the statutory due date (usually April 15 unless it falls on a weekend or holiday), the statute begins on the statutory due date. If a return is filed within a period of extension or after, the IRS statute of limitations begins on the actual filing date.For example, you filed an extension for your 2014 taxes to October 15, 2015. You file your tax return on July 1, 2015. Since the return statutory due date was due April 15, 2015 and July 1, 2015 is later than the statutory due date, the statute of limitations expiration date is July 1, 2018.Let’s say you file your 2014 taxes on March 15, 2015. The statute of limitations expiration date would then be April 15, 2018, since this is the later of the return filing date and statutory due date.There are three exceptions to this rule:If you understate your income by more than 25% the statute of limitations increases to 6 years.There is no IRS statute of limitations on delinquent non-filed returns.You sign a consent to extend the statute by signing Form 872Refund statute of limitations established by IRC 6511.A claim for refund must be filed within 3 years from the time the return was filed or 2 years from the date tax was paid, whichever is later. And if no return is filed, then 2 years from the date payment was made. Secondly, the IRS may refund only the amount of tax paid within three years plus the period of any extensions, or two years from the date of payment.Let’s take a look at some examples. Bob files his 2014 tax return on March 15, 2015 and pays his tax balance on the same date. Subsequently, Bob realizes that he forgot to include some expenses for his home business. His 3 years begins to run from the statutory due date of April 15, 2015. Therefore, he has until April 15, 2018 to file an amended return to claim a refund.Bob files an extension to October 15, 2015. He files and pays his taxes on September 15, 2015. He has until September 15, 2018 to file an amended return. When the tax return is filed within the extension period, the refund statute of limitations begins on the actual filing date.What if you have not filed but are owed a refund due to excess federal withholdings or estimated tax payments? For example, Bob makes a “safe harbor” estimated tax payment on December 31, 2014 and has not yet filed his 2014 tax return. On an unfiled tax return, the IRS has established a 2 year rule for filing a return in order to claim a refund. So in this case, Bob has until December 31, 2016 to file his tax return to get his refund.10-year statute of limitations on collections.Generally, the IRS may only attempt to collect unpaid taxes for up to 10 years from the date they were assessed. After this period, the IRS must cease any collections activity.Here’s an example to show how the assessment statute and collections statute work together. Bob files his 2014 return on April 15, 2015 but forgets to include stock sales on his return. The IRS has until April 15, 2018 to assess tax on the unreported income and file a lien or levy. And the IRS assesses taxes and starts wage garnishment on April 15, 2016 after sending Bob numerous tax notices which he ignores. The IRS can continue wage garnishment until April 15, 2026, or until the balance has been paid off.Note that the above rules are just general applications of the statute of limitations. There are numerous exceptions to these rules. If you are under audit, it is important to find a qualified attorney to prevent the IRS from going beyond the statute of limitations, or even to minimize how far back the IRS will audit within the statute.
How will the new internet sales tax impact consumers?
Short term, you will start paying existing sales taxes- not new taxes. Longer term the more interesting questions arise.1) Compliance costs- How much? And how will these be passed on to customers in the way of higher prices.2) Streamlined Sales and Use Tax Agreement (SSUTA) - 24 states have already signed up for this. Will the Wayfair decision push things along for the other states to sign up or to go their own way. (SSUTA does things like: create uniform taxability definitions of certain products and services, simplifies tax rates and gives immunity from audit liability for remote sellers that use the sales tax software paid for by the state members.)3) Commerce Clause – Will actions of state like New Hampshire, who are trying to block other states from forcing businesses from collecting sales taxes, force Congress’s hand and legislate uniform rules, economic/sales threshold amounts, dealing with local taxing jurisdictions?The Texas State Legislature hasn’t started meeting yet but the Comptroller has come out with some proposed changes to the tax code:1) “Safe harbor” added to provide clear guidance as to what will give a remote seller nexus. A physical presence test replaced with a sales volume threshold of $500,000 of gross revenue from in-state sales for the preceding twelve calendar months to trigger sales tax permitting and tax collections.2) No retroactive application of the new law to out of state sellers that have no physical presence in Texas.I have no idea if these will survive in Austin with the legislators in session.This is from the Comptroller’s guidance letter issued on June 27, 2018, “Gains from the ruling are likely to be lower than previous estimates of taxes uncollected by remote sellers. In the past year, for example, some remote sellers have volunteered to collect in anticipation of the Wayfair decision or for other reasons. Wayfair, the named plaintiff in this case, already collects Texas sales and use taxes. Also, in order to avoid imposing an undue burden on interstate commerce, the state will likely relieve some out-of-state sellers from collection responsibilities. More specific estimates will be available as the implementation and legislative process continues.”Here is a link to the Texas Comptroller’s proposed draft revision of Rule §3.286 concerning seller’s and purchaser’s responsibilities:http://www.ttara.org/files/docum...