Author Archives: Jinwon Kim

Many clients ask us what to do if their employer did not provide them with the form W-2?  Employers have until February 1st of each tax year to send you the W-2.  If you haven’t received your W-2, follow these four steps:

1. Contact your employer: If you haven’t received your W-2, by February 5th contact your employer to inquire if and when the W-2 was mailed to you.  Find out what mailing address was used on the W2.  It may have been returned to the employer because of an incorrect or incomplete address.  After you contacted your employer, allow a reasonable amount of time for them to resend or to issue your W-2.

2. Contact the IRS:  If you haven’t received your W-2 by February 16th, contact the IRS for assistance at 800-829-1040.  When you call, you must provide your name and address, Social Security number, phone number and have the following information:

• Employer’s name, address and the phone number
• Your dates of employment for which you haven’t received your W2
• An estimate of the salary you earned and the federal income tax withheld from your paychecks.  You can get this information from your last December paystub or earning statement.

3. File your income tax return: Even if you don’t have your W-2, you still must file your income tax return or request an extension of time to file by April 15.  If you want to file your tax return by April 15 and you still didn’t receive your W2, and you have completed steps 1 and 2 above, you may use Form 4852*, Substitute for Form W-2, Wage and Tax Statement.  Attach Form 4852 to your income tax return, estimating income and withholding taxes as accurately as possible.  There may be a delay in any refund due while the information is verified by the IRS.

4. File a Form 1040X:  You may receive your missing W-2 after you filed your icnome tax return using Form 4852, and the information may be different from what you reported on your filed return.  If this happens, you must amend your return by filing a Form 1040X*, Amended U.S. Individual Income Tax Return.

Generally, in order to claim a business tax deduction for your home, you must use part of your home exclusively and regularly:

• As your principal place of business, or
• As a place to meet or deal with patients, clients or customers in the normal course of your business, or
• In the case of a separate structure which is not attached to your home, it must be used in connection with your trade or business

If you have inventory and need storage, or have a daycare/playgroup in your home, you are required to use the property regularly but not exclusively.

Generally, the amount that is tax deductible depends on the percentage of your home that you use for business.  So let’s say that the total square footage of your home is 1,000 sq. feet and the area that you will be qualified to deduct as home office is 250 sq. feet, so your deduction will be 25%. You can allocate this percentage to your rent/mortgage, utilities, home insurance, maintenance, etc.  In some cases you also will be allowed to use Depreciation deduction on your home office.  Your deduction for certain expenses will be limited if your income from your business is less than your total business expenses. There are special rules for qualified daycare providers and for storing business inventory or product samples.

If you are self-employed, use Form 8829, Expenses for Business Use of Your Home, to figure your home office deduction. Report the deduction on line 30 of Schedule C, Form 1040.

Different rules apply to claiming the home office deduction if you are an employee.  For example, the regular and exclusive business use must be for the convenience of your employer.

For more information see Publication 587, Business Use of Your Home.

The interest that you pay on your home mortgage loans is a very important factor in your financial tax strategy. The good thing about mortgage loan is that mortgage interest may be tax deductible. This is one of the popular tax deductions that you, the taxpayers, look forward to. However, you must adhere to some rules so as to get the benefit of mortgage interest tax deduction. As the mortgage holder, you must fulfill requirements of filling out form 1040 with a schedule A. Schedule A allows you to itemize or in other words deduct your mortgage interest. The person, who is filing for the tax deduction, must be the owner of the property.  No you don’t need to be an owner of the mortgage; you need to be an owner of the property. (It is not required in every case for you to have a true debtor-creditor relationship with your lender to take the mortgage interest deduction. Title 26 Code of Federal Regulations section 1.163-1(b) provides, quote “interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness.”) The mortgage interest paid paid on your primary or secondary homes is reported by the lender on form 1098.

There are several types of interest on mortgages which may be tax deductible.  It include: the interest amount that you paid on loans to purchase a home, home equity lines of credit, and construction loans.  However, there is a limit to the amount of deduction on some loans i.e. Home Equity Line of Credit.  Interest that you pay on your third and fourth homes is not tax deductible.

Mortgage interest payment is very popular tool to receive a significant tax benefit. There are mainly two types of mortgage interest payments which are used for tax deduction, acquisition debt and equity mortgage. In the acquisition debt, the mortgage interest is paid to purchase a new home, build a new home or to remodel a home. Interests on these types of mortgages qualify for tax deductions.  Equity mortgages are the mortgages where you use your equity in your home so as to obtain the equity mortgage loan.  Per current tax regulations you can deduct the first 1.1 million in qualified home mortgage indebtedness and/or 100K in home equity line of credit.

• Gambling income includes but is not limited to: winnings from lotteries, raffles, horse and dog races and casinos, as well as the fair market value of prizes such as cars, houses, trips or other noncash prizes.
• Depending on the type and amount of your winnings, the payer might provide you with a Form W-2G and might need to withheld federal income taxes from the payment.
• The full amount of your gambling winnings must be reported on your individual income tax return form 1040 line 21.  You cannot use other forms to report the winnings, such as Form 1040A or 1040EZ.
• If you itemize deductions, you can deduct your gambling losses on line 28 of Schedule A, Form 1040, but the deduction is limited to the amount of your winnings. So you cannot deduct more that you won.
• It’s important to keep accurate records to evidence your gambling expenses. You can provide: receipts, tickets, statements or other records that show the amount of both your winnings and losses.

If you are living and working abroad you may be entitled to the Foreign Earned Income Exclusion.  The foreign earned income exclusion is adjusted annually for inflation.  For 2009, you can exclude from the U.S. taxes the maximum annual amount of up to $91,400 per qualifying person.  The foreign exclusion is not a simple tax matter and it’s recommended to seek professional help from an accountant, CPA or a tax adviser.  You must have documentation that you can produce to evidence your qualification for the foreign earned income exclusion.  Here are few important facts that you should know:

• If you are a U.S. citizen or a resident alien who lives and works abroad (outside the United States), you may be able to exclude all or part of your foreign salary or wages from your income.  You may also qualify to exclude compensation for your personal services or certain foreign housing costs.

• In order to qualify for the foreign earned income exclusion, a U.S. citizen or resident alien must have a tax home in a foreign country and earned income in that foreign country.  The taxpayer must also meet one of two tests: the bona fide residence test or the physical presence test.

• The Bona find residence test, is when you reside in the foreign country for an uninterrupted period that includes an entire tax year.  A tax year is January 1 through December 31.  Taking a brief vacation or short trip out of the foreign country, will not invalidate your residency test.
• Physical Presence Test is, when you physically present and reside in the foreign country for at least 330 full days in a 12-month period.   Full day is 24 hours and the count begins at midnight, so if you arrive and leave the foreign country in the same day, you will not meet the full day requirements.

• The foreign earned income exclusion and the foreign housing exclusion or deductions are claimed using Form 2555*, Foreign Earned Income, which should be attached to the taxpayer’s individual income tax return Form 1040.  A shorter Form 2555-EZ*, Foreign Earned Income Exclusion, is available to certain taxpayers claiming only the foreign income exclusion.  The IRS will decide whether you qualify on the basis of facts you report on Form 2555.

• Once the foreign earned income exclusion is chosen, a foreign tax credit or deduction for taxes cannot be claimed on the excluded income. If a foreign tax credit or tax deduction is taken on any of the excluded income, the foreign earned income exclusion will be considered annulled.

Gift Tax

The federal gift tax return, Form 709, is filed for every year in which a gift is made. However, a gift tax return generally is not required unless money or property worth more than the annual exclusion for that year is given to someone other than the decedent’s spouse or the gift given is not subject to the annual exclusion. The annual gift exclusion is $14,000 for 2016.

Generally, you must file Form 709 by April 15, of the year after the gift was made.  The gift tax applies to lifetime transfers of property from one person (the donor) to another person (the do-nee). A gift is made if tangible or intangible property (including money), the use of property, or the right to receive income from property is given without expecting to receive something of at least equal value in return.

If something is sold for less than its full value or if a loan is made without interest or with reduced (less than market rate) interest, a gift may have been made.  The general rule is that any gift is a taxable gift.

However, there are many exceptions to this rule.  Generally, the following gifts are not taxable gifts:

Gifts, excluding gifts of future interests, that are not more than the annual exclusion for the calendar year,

Tuition or medical expenses paid directly to an educational or medical institution for someone else,

Gifts to your spouse,

Gifts to a political organization for its use,

Gifts to certain exempt organizations de-scribed in 501(c)(4), 501(c)(5), and 501(c)(6), and

Gifts to charities.

Annual exclusion. A separate annual exclusion applies to each person to whom a gift is made. The gift tax annual exclusion is subject to cost-of-living increases.

Estate Tax. 

 For estate tax purposes, the personal representative may be required to file Form 706. If death occurred in 2016, Form 706 must be filed if the gross estate of the decedent, plus any adjusted taxable gifts and specific gift tax exemption, is valued at more than $5,450,000.  Form 706 also must be filed if the estate elects to transfer any deceased spousal unused exemption (DSUE) to a surviving spouse (this is also known as the portability election), regardless of the size of the gross estate.

If Form 706 is required, the return and payment of any tax is due within 9 months after the date of the decedent’s death. To apply for an extension of time to file the return and/or pay the tax due, use Form 4768, Application for Ex-tension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes. 

 An estate tax re-turn must be filed if the gross estate, plus any adjusted taxable gifts and specific gift tax ex-emption, is more than the basic exclusion amount. The basic exclusion amount is gener-ally equal to the filing requirement. For 2016, the basic exclusion amount is $5,450,000.

Note. The federal estate tax return gener-ally does not need to be filed unless the total value of lifetime transfers and the estate is worth more than the basic exclusion amount for the year of death. However, a complete and timely filed return is required if a deceased spouse’s estate elects portability of any unused exclusion amount for use by the surviving spouse. 

Gross estate. The gross estate includes the value of all property the decedent owns partially or in full at the time of death. Your gross estate also includes the following:

Life insurance proceeds payable to the es-tate or, if the decedent owned the policy, to his or her heirs,

The value of certain annuities payable to the estate or the decedent’s heirs, and

The value of certain property the decedent transferred within 3 years before death.

Filing requirement. The following table lists the filing requirements for estates of decedents dying after 2001.

If your assets (Real Estate, IRAs, Life Insurance, Savings Accounts, CD, Stocks, Bonds, Life Insurnace and any other Investments or Properties) exceed the exemption amounts above, then for every dollar more than the exemption, the Uncle Sam will take following persentages:

The 2016 estate tax rates
For 2016, the estate tax rates remain unchanged. The formula for computing estate taxes is rather complicated — there are 12 different estate tax “brackets”, ranging from 18% to 40%. Here are the current rates and the estate sizes they apply to.

There is also the State Inheritance/Estate Tax. The exemption amount and estate/inheritance tax rates are varied from State to State.

There is a major difference between employees and independent contractors when it comes to how much tax you as an employer has to pay and withhold from their paychecks. Additionally, it will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give to them.

Behavioral Control, Financial Control, and the Type of Relationship, are main factors that will play a key roll in making the correct determination between employees and independent contractors.

Behavioral Control-shows whether the employer directs or controls how the work is done through instructions, training, supervision or other means.

Financial Control-shows whether the employer directs or controls the financial and business aspects of the worker’s job.

The Type of Relationship-factor relates to how the workers and the business owner perceive their relationship.

If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.  A good example of an employee would be an office receptionist.  The employer first trains him/her, and directs when to answer the phones, what to say and how to take the information.

If the employer can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are most likely independent contractors.  A good example would be a computer programmer or consultant.  An employer gives him/her a certain computer project. The computer programmer is not directed nor instructed by the business owner on how to do the work. Upon completion of the computer project the employer gets the end result. If there is a need to improve or modify the computer program, the employer will notify computer programmer to make corrections or implement additional feature to the existing project.

Employers, who misclassify workers as independent contractors rather than employees, can end up with additional tax bills and face penalties for failing to pay payroll taxes and for failing to file required payroll tax forms.

Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8 – Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding – with the IRS.

To learn more see: Contractor vs. Employee, Publication 1779, Publication 15-A

If you are thinking or already attending a college, university or a graduate school, then you should know about several educational tax credits that you can claim on your personal income tax return.  If you are a dependent, your parent(s) can claim those credits on their personal income tax return. This article addresses The American Opportunity Credit.

• You can claim The American Opportunity Credit tax credit on form 8863* for tuition and certain school fees paid for higher education.

• This credit can be claimed for expenses paid for any of the first four years of post-secondary education.

• In order to completely benefit from this tax credit, your income (modified adjusted gross income) must be $80,000 or less – for single filers and $160,000 or less – for joint filers.  If you make over these amounts, this tax credit will start to decrease accordingly.

• You can claim up to $2,500 a year.  It’s based on a percentage of the cost of qualified tuition and related educational expenses paid during the taxable year for each eligible student.

• Qualified tuition and related expenses also include, expenses paid for required course materials: books, supplies and equipment required for a course of study.

• If you do not owe any taxes for 2009 or 2010, you still can receive forty percent or up to $1,000 of the credit for each eligible student as cash refund.

EARNED INCOME CREDIT

Earned Income Credit 은 저소득 서민들을 위한 정부 보조금으로 특히 자녀를 가진 서민들 에게는 가장 큰 도음이 되는 중요한 Credit 이다.  Credit 금액이 근로소득의 크기와 자녀의 수에 따라 다르지만 자녀가 세명일때  2016년 경우 maximum $6,269  이될 정도로 금액이 크고 세금이 없어도 받을수 있는 Refundable Credit 이다.  Credit 산출 방법이 복잡하고 조건이 까다롭기 때문에 전문가의 도움이  필요하다.

Earned income and adjusted gross income (AGI) must each be less than:

Investment Income Limit

Investment income must be $3,400 or less for the year.

Maximum Credit Amounts

The maximum amount of credit for Tax Year 2016 is:

• $6,269 with three or more qualifying children
• $5,572 with two qualifying children
• $3,373 with one qualifying child
• $506 with no qualifying children

The United States federal earned income tax credit or earned income credit (EITC or EIC) is a refundable tax credit for low- and medium-income individuals and couples, primarily for those who have qualifying children. When the credit exceeds the amount of taxes owed, it results in a tax refund to those who claim the credit. For a person or couple to claim one or more persons as their qualifying child(ren), the relationship, age, and shared residency requirements must be met, as well as some other requirements. U.S. tax forms 1040EZ, 1040A, or 1040 can be used to claim EIC without qualifying children. To claim the credit with qualifying children, 1040A or 1040 must be used along with Schedule EIC attached.

EIC phases in slowly, has a medium-length plateau, and then phases out more slowly than it phased in. And since the credit phases out at 21% (more than one qualifying child) or 16% (one qualifying child), it is always preferable to have one more dollar of actual salary or wages (although technically, since the EIC table moves by fifty dollar increments, it’s always preferable to have an extra fifty-dollar increment of salary or wages).

A younger single parent cannot claim EIC if he or she is also claimable as a qualifying child of their parent or another older relative, which can happen in some extended family situations. This restriction does not apply to a married couple who are claiming EIC with a child, even if one or both spouses are under the age of 19. A person claiming EIC must be older than his or her qualifying child unless the “child” is classified as “permanently and totally disabled” for the tax year (physician states one year or more). A qualifying “child” can be up to and including age 18. A qualifying “child” who is a full-time student (one long semester or equivalent) can be up to and including age 23. And a person classified as “permanently and totally disabled” (one year or more) can be any age and count as one’s qualifying “child” provided the other requirements are met. qualifying child can be a person’s daughter, son, stepchild, or any further descendant (such as grandchild, great grandchild, etc.) or a person’s brother, sister, half sister, half brother, stepbrother, stepsister, or any further descendant (such as niece, nephew, great-nephew, great-great-niece, etc.). A qualifying child can also be in the process of being adopted provided he or she has been lawfully placed, as well as an unrelated foster child who has been officially placed.

What is  Earned income?

Earned income is defined by the United States Internal Revenue Code as income received through personal effort, with the following as the main sources:

• Wages, salaries, tips, commissions, and other taxable employee pay.
• Net earnings from self-employment.
• Gross income received as a statutory employee.
• Disability payments through a private employer’s disability plan received prior to minimum retirement age (62 in 2011).
• Nontaxable combat pay received by a member of the U.S. armed services which he or she elects to include for purposes of EIC calculation. This is an all-or-none election. For each tax year, the service member must elect to include either all of the combat pay or none of it.

Qualifying children

A person or couple claiming EIC with one or more qualifying children need to fill out and attach Schedule EIC to their 1040 or 1040A. This form asks for the child(ren)’s name, social security number, year of birth, whether an older “child” age 19 to 23 was classified as a student for the year (full-time status for at least one long semester or equivalent time period), whether an older “child” is classified as disabled during the year (doctor states one year on more), the child’s relationship to claimant, and the number of months the child lived with the claimant in the United States.

Do you have an IRA or an employer sponsored retirement plan such as: 401-K, 403-B, 457, DB, Profit Sharing Plan, or other qualified retirement plans?  Did you purchase a non-qualified annuity to protect your retirement assets?  If the answer is yes, then you should know what would happen tax-wise, if you take the money out early (taking premature distribution)?  In most cases withdrawing funds early out of a retirement plan or an IRA before 59 ½, is called “an early distribution”.
• Early distributions will be reported to the IRS on form 1099-R and subsequently you will also report it on your personal income tax return.
• Early distributions are usually subject to ordinary income taxes on both Federal and State levels.  You will pay taxes based on your tax bracket.  Additionally, you also will be subject to the 10 percent tax penalty.
• If you received an early distribution from a Roth IRA, the distribution attributable to your prior contributions (the amount that you contributed also referred to as basis) is not subject to income taxes or penalties.  Any amount over the basis will be subject to the above taxes and penalties.
• There are several exceptions to the additional 10 percent early distribution penalty.  These exceptions only apply to the IRAs.  No 10% penalty applies if you withdraw the retirement money early out of the IRA for a qualified purpose such as:

– When the money is used for the purchase of a first home.  (limit of 10,000 and other restrictions apply)
– When you use the money for certain medical or educational expenses. (restrictions and limitations apply)
– Most of the exceptions apply to an IRA and not to the employer sponsored retirement plans: 401-K, 403-B, 457, Profit Sharing and the like.  So you will need to rollover your retirement funds from the company’s sponsored retirement plan to your IRA and then take early distribution for the qualified purpose above.