Common errors have helped to make the Earned Income Tax Credit (EIC) a major source of what the IRS calls “improper payments.” The agency estimates that of the $66 billion in EIC funds paid in 2015, nearly a quarter were collected by filers who didn’t qualify to receive them. To help combat this problem, the IRS now requires additional confirmation of information regarding the EIC and three new credits beginning in 2016.
Now if you claim the EIC, the Child Tax Credit (CTC), the Additional Child Tax Credit (ACTC) or the American Opportunity Tax Credit (AOTC), additional information may be requested.
For the CTC and ACTC, you may be asked how long your children lived with you over the past year, or whether they lived with an ex-spouse, relatives, or other guardian.
If you are eligible for the AOTC, which is a credit to defray as much as $2,500 in higher education costs for you or your children, you will need to provide Form 1098-T from the college or university. You will also need receipts for related expenses.
You may also be asked to double-check the social security numbers and dates of birth for the dependents on your return, as these are two common sources of error.
If you get more questions than usual or are asked for additional documents, be aware that it’s just a new reporting requirement implemented by the IRS.
Put these items on your to-do list:
Business plan. Outline who will own the business and what the legal form will be, your qualifications to run the business, the competitive market you face, the products or services you will sell and how you intend to advertise to prospective customers. How much cash will you need to start up and where will those funds come from?
Legal form. You can incorporate, or operate as an LLC, a partnership or a sole proprietorship. Consider both tax and non-tax reasons for selecting a given entity.
Location. If your business will consist only of online sales, your world headquarters can be wherever you are. However, if your business needs foot traffic to thrive, you’ll need to research rents and other costs such as utilities, as well as zoning and traffic restrictions.
Taxes. You’ll have to work with the IRS, state tax agencies and local governments to obtain permits and occupational licenses.
Advisors. Create a business financial team that includes a banker, an insurance agent, an attorney and an accountant. Involve your advisors early and frequently in order to gain the most value from their insights.
Need more suggestions for getting your business off to a good start? Contact us. We’re here to help.
If your business is structured as a partnership or an S corporation, don’t forget the important deadlines coming up soon. On March 15:
- 2016 calendar-year S corporation Form 1120S income tax returns are due
- 2016 calendar-year partnerships Form 1065 income tax returns are due
Please contact us right away if we can assist you in filing an extension.
You may not have thought much about the alternative minimum tax, or AMT, since Congress passed a law that permanently fixed the exemption. But the tax, which you must calculate separately from your regular tax liability, is still around. Here’s how the AMT might apply to your 2016 tax return.
Certain income and deductions, known as preference items, are added to or subtracted from the income shown on your federal income tax return to arrive at your AMT taxable income. For example, certain bond interest that you exclude from your regular taxable income must be included when computing income for the AMT. This is a “preference item” because tax-exempt interest gets preferential treatment under ordinary federal income tax rules.
AMT “adjustments” also affect whether you’ll owe the tax. These include personal exemptions and your standard deduction. In the AMT calculation, these taxable-income reducers are not deductible. Instead, they’re replaced with one flat exemption, which is generally the amount of income you can exclude from the AMT. For your 2016 return, the AMT exemption is $83,800 when you’re married filing a joint return or are a surviving spouse, $53,900 when you file as single, and $41,900 if you’re married and file separately. The exemption decreases once your income reaches a certain level.
Finally, only some itemized deductions, such as charitable contributions, are allowed in the AMT calculation. Others, including medical expenses and mortgage interest, are computed using less favorable rules.
Need help determining whether the AMT will apply to you? Give us a call.