Well, it’s definitely a new year, this thing called 2014, and the cycle of life makes another revolution. It’s one month completed all ready, too. Time is starting to zip by again and has brought us to another episode of “Tell the Government how much money you received last year and how much of it are you going to send in.” Yes, tax time is upon us once again.
I can tell it’s tax time just by looking at my inbox. There, among notes from friends and acquaintances, are articles from various professional groups, advertisements for tax-oriented seminars; and more importantly, e-mail from many locations bearing gifts of questions and problems. Oh yes, it’s tax season all right!
At this time of year, I usually write a few articles about the income tax that “U.S. Persons” face each year. This year, with inbox already overflowing, will be no exception. I have the questions stacked and ready to go. I’ve answered each individually and, as in years past, many are close enough in subject so that I can compose a question and answer that are fit to print.
So, without further delay, here we go on this year’s adventure.
TAX TIME Q&A, 2014 STYLE
Our first question of the year appears in many forms. It’s a valid question, and deals with a common misconception that’s rampant in the ex-pat community.
Q. I calculated my own taxes on the newest form available from the IRS website, and I don’t have any taxes due. Since I’m not getting a refund, I don’t have to file a tax return this year, right?
A. Even though you don’t owe any tax and are not getting a refund, you may still be required to file a tax return. I know that sounds strange, but stranger things lurk in the Internal Revenue Code (IRC). Filing an income tax return doesn’t depend on not owing taxes. The requirement to file a return is based on your gross income. That’s not taxable income (TI) nor adjusted gross income (AGI) but your gross income prior to adjustments.
It is often possible to have deductions, exemptions and credits cancel out any taxable income and/or tax liability, yet still exceed the filing threshold in gross income.
Now, here’s where the nightmare begins. Your gross income has to be calculated “on the side,” and doesn’t really appear on your tax return. Rules for calculating gross income are provided in the tax form’s instructions and they’re pretty straightforward. Just follow the instructions and you’ll do all right. While it’s not rocket science, it’s the closest thing that comes to it that’s done with pencil and paper. If you exceed the threshold, then do yourself a favor and file that return.
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Q. Since my gross income won’t appear on the tax return, why file one if no tax is due? Who would know?
A. There’s an extremely good chance that the IRS would know. Whenever you receive income from a financial transaction, the party paying you would most likely have filed a tax report informing the IRS of the transaction and its details. Details, like, how much they paid you. The IRS collects this information all year and their computers busily compile it all, building a tax account with your name and your financial dealings in it.
Payers have thresholds they must comply with, with each different type of transaction having its own threshold. For an example, any interest paid by your bank to you that exceeds $10 must be reported by that bank to the IRS on Form 1099-INT. At the beginning of the year, your bank sends you a copy of an aggregate Form 1099-INT for your tax reporting. A payment received from a business over $400 will get you a Form 1099-MISC. Win big at the casino? A Form W-2G will accompany those Benjamins.
Another nice thing that the IRS computers do is calculate your tax based on all of the information they’ve collected during the year. If the return you file doesn’t match their calculations within a certain tolerance, you’ll receive a notice from the IRS and a bill for what they say is the balance due. If the IRS is wrong, you have to prove it.
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THIS WEEK’S SUMMARY
If there is anything that you should take away from the material in this article, it is this:
Don’t fool yourself – Honestly determine whether or not you are legally required to file an income tax return and, if you are, file the most accurate and complete return that you can.
You’ll find this advice as the best you will receive this year. Believe me when I tell you that you really do not want to get involved in an IRS action caused by your failure to file a complete and accurate return. Those of my clients whom I’ve extricated from such activity will readily and wholeheartedly agree. It’s not worth it.