What Should You Do if You Will Owe Income Tax When You File?
Consider filing early…
If you expect to owe the IRS and/or Virginia Tax Department you should file your tax returns as soon as possible. However, you do not have to pay until the tax filing deadline, which for calendar year taxpayers for the IRS is April 15th and for Virginia is May 1st. You can pay on or before April 15th, either online at www.irs.gov/e-pay or by phone at 888-729-1040 with a credit card, debit card or direct bank transfer from your bank account. You can also pay by completing and mailing IRS Form 1040-V (Voucher) with your check or money order. For Virginia you can make payments online at www.tax.virginia.gov or by mail using Form 7601P Automatic Extension Payment.
Important: Although you can obtain an automatic extension of time to file your tax returns, you cannot extend the time to pay any taxes you may owe. Failure to pay your taxes by your tax filing due date will result in stiff penalties plus interest charges.
Installment Agreements: If you cannot pay everything you owe to the IRS, you can request an installment payment arrangement. The IRS charges the following fees for setting up an installment agreement: $52 for a direct debit agreement, $102 for a standard agreement or payroll deduction agreement or $43 if your income is below a certain level. You may submit Form 9465 Installment Agreement Request indicating your proposed installment payments. The IRS will notify you within 30 days if your proposal is accepted. The installment plan will not prevent penalties and interest from accruing. Therefore, you should arrange to pay what you owe as quickly as possible. Although Virginia does not have an installment agreement form, you should be able to arrange an installment payment plan by calling the Virginia Department of Taxation at 804-440-5100.
If you do not expect to owe tax to the IRS and/or Virginia, and you cannot file your return(s) by the filing deadline, you can apply for an automatic 6 month extension to file and there will be no penalties for late filing.
Penalties and Interest charges are described at the following website links:
Tips on Tips
Are you reporting yours?
While tipping is not mandatory in most of the U.S., it is often expected in many circumstances when services are provided. The tip income from services—whether cash or included in a charge—is taxable income. As taxable income, these tips are subject to federal income, social security and Medicare taxes, and may be subject to state income tax as well.
If you received $20 or more in tips in any one month, you should report all your tips to your employer; however, all tips are taxable income and should be reported on your tax return. Also, you should maintain records of your tip income. The IRS provides Publication 1244, Employee’s Daily Record of Tips and Report to Employer, for an audit-proof record.
Beginning January 1, 2014, the IRS defines tips as follows:
- The gratuity must be made free from compulsion;
- The customer must have the unrestricted right to determine the amount;
- The gratuity should not be the subject of negotiation or dictated by employer policy; and
- Generally, the customer has the right to determine who receives the gratuity.
From now on, the IRS will treat automatic gratuities on restaurant bills as wages and not tips. Automatic gratuities are often placed on bills of large parties to prevent under-tipping. The IRS views this as the latest step in the effort to prevent underreporting of tip income.
Who Should File a 2013 Tax Return?
Learn how to determine if you should…
Do you need to file a federal tax return this year? Perhaps. The amount of your income, filing status, age and other factors determine if you must file.
Even if you don’t have to file a tax return, there are times when you should. Here are five good reasons why you should file a return, even if you’re not required to do so:
- Tax Withheld or Paid. Did your employer withhold federal income tax from your pay? Did you make estimated tax payments? Did you overpay last year and have it applied to this year’s tax? If you answered “yes” to any of these questions, you could be due a refund. But you have to file a tax return to get it.
- Earned Income Tax Credit. Did you work and earn less than $51,567 last year? You could receive EITC as a tax refund if you qualify. Families with qualifying children may be eligible for up to $6,044. Use the EITC Assistant tool on IRS.gov to find out if you qualify. If you do, file a tax return and claim it.
- Additional Child Tax Credit. Do you have at least one child that qualifies for the Child Tax Credit? If you don’t get the full credit amount, you may qualify for the Additional Child Tax Credit. To claim it, you need to file Schedule 8812, Child Tax Credit, with your tax return.
- American Opportunity Credit. Are you a student or do you support a student? If so, you may be eligible for this credit. Students in their first four years of higher education may qualify for as much as $2,500. Even those who owe no tax may get up to $1,000 of the credit refunded per eligible student. You must file Form 8863, Education Credits, with your tax return to claim this credit.
- Health Coverage Tax Credit. Did you receive Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation? If so, you may qualify for the Health Coverage Tax Credit. The HCTC helps make health insurance more affordable for you and your family. This credit pays 72.5 percent of qualified health insurance premiums. Visit IRS.gov for more on this credit.
To sum it all up, check to see if you would benefit from filing a federal tax return. You may qualify for a tax refund even if you don’t have to file. And remember, if you do qualify for a refund, you must file a return to claim it.
The instructions for Forms 1040, 1040A or 1040EZ list income tax filing requirements. You can also use the Interactive Tax Assistant tool on IRS.gov to see if you need to file. The tool is available 24/7 to answer many tax questions. And of course, you can always contact your local Peoples Tax professional who will be happy to assist you and help you determine whether you need to file or not.
Small Business Corner
When Do I Start My Tax Year?
You must figure your taxable income on the basis of a tax year and file an income tax return. A “tax year” is an annual accounting period for keeping records and reporting income and expenses. An annual accounting period does not include a short tax year. The tax years you can use are:
- Calendar year – A calendar tax year is 12 consecutive months beginning January 1 and ending December 31.
- Fiscal year – A fiscal tax year is 12 consecutive months ending on the last day of any month except December. A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month.
Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. A required tax year is a tax year required under the Internal Revenue Code and the Income Tax Regulations. You have not adopted a tax year if you merely did any of the following.
- Filed an application for an extension of time to file an income tax return.
- Filed an application for an employer identification number.
- Paid estimated taxes for that tax year.
If you file your first tax return using the calendar tax year and you later begin business as a sole proprietor, become a partner in a partnership, or become a shareholder in an S corporation, you must continue to use the calendar year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval.
Generally, anyone can adopt the calendar year. However, if any of the following apply, you must adopt the calendar year.
- You keep no books or records;
- You have no annual accounting period;
- Your present tax year does not qualify as a fiscal year; or
- You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations.
Short Tax Year
A short tax year is a tax year of less than 12 months. A short period tax return may be required when you (as a taxable entity):
- Are not in existence for an entire tax year, or
- Change your accounting period.
Tax on a short period tax return is figured differently for each situation.
Not in Existence Entire Year
Even if you (a taxable entity) were not in existence for the entire year, a tax return is required for the time you were in existence. Requirements for filing the return and figuring the tax are generally the same as the requirements for a return for a full tax year (12 months) ending on the last day of the short tax year.
For more information, see Publication 538, Accounting Periods and Methods (PDF). Or, contact Peoples’ Business Services department at (804) 204-1040. We are happy to assist!
Changing your tax year
Once you have adopted your tax year, you may have to get IRS approval to change it. To get approval, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year. See the instructions for Form 1128 for exceptions. If you qualify for an automatic approval request, a user fee is not required. If you do not qualify for automatic approval, a ruling must be requested and a user fee is required. See the instructions for Form 1128 for information about user fees if you are requesting a ruling.