Sepulveda Tax and Accounting

Paying Estimated Tax to Avoid Penalties – Did You Know?

With more and more people deriving income from a variety of sources, including side jobs, self-employment and “gig economy” work, the IRS has reported a substantial increase in the number of Americans who underpay federal income tax during the year. Underpayment can lead to an unpleasant spring tax surprise, including substantial penalties and interest charges.

If a significant portion of your income is not subject to paycheck withholding, you may need to make quarterly estimated tax payments to avoid incurring an Estimated Tax Penalty for 2020. Common income types that may necessitate making estimated tax payments include:

- Business income, which includes rental income, as well as income from self-employment and “gig economy” work (working for a rideshare service, mowing lawns, etc.)
- Royalties and grants, including grants in support of artistic or educational endeavors
- Interest, dividend and alimony payments
- Unemployment Insurance (UI) and Social Security benefits

It is critical for those who have received UI benefits in 2020 to learn whether they must make estimated tax payments before the year ends. Many state unemployment agencies have not withheld taxes from the federal $600-per-week federal UI benefit that was paid under the CARES Act from late March through July, or from the temporary $300 weekly federal UI payment recently implemented by Executive Order. Therefore, even those who had tax withheld from their UI benefits may not have paid enough in federal taxes to avoid penalties.

The IRS encourages Americans who have received any form of non-employee income in 2020 to do a midyear tax checkup, and begin making estimated tax payments immediately if necessary. The third-quarter estimated tax payment deadline was September 15, 2020, but those who missed the deadline can minimize penalties by making a payment as soon as possible. Fourth-quarter estimated tax payments are due January 15, 2021, although taxpayers may generally skip the fourth-quarter payment if they file a 2020 return and pay all tax due by February 1, 2021.

In most cases, taxpayers will avoid 2020 tax penalties if their paycheck withholding and/or estimated tax payments for the year add up to at least 90% of their 2020 tax, or 100% of their 2019 tax, whichever is lower. A tax professional can help you determine whether you need to make estimated tax payments this year, along with when and how much to pay.

IRS online payment portal: https://www.irs.gov/payments

Renewing ITINs - Did You Know?

Individual Taxpayer Identification Numbers are used for taxpayers who are required for U.S. tax purposes to have a U.S. taxpayer identification number but do not qualify to get a social security number.

If you use an ITIN, you should check if it expires this year. If it does, information about how to renew your ITIN can be found at: https://www.irs.gov/credits-deductions/individuals/how-do-i-renew-my-itin. Keeping your ITIN current helps avoid tax refund and processing delays.

Taxpayers who have not used their ITIN to file a federal return at least once in the last three years will see their number expire Dec. 31, 2020. ITINs with middle digits 90, 91, 92, 94, 95, 96, 97, 98 or 99, that were assigned before 2013 and have not already been renewed, will also expire at the end of the year.

Extensions and FBAR Deadline - Did You Know?

For taxpayers who requested extensions to file various 2019 returns, the filing due date for those returns is October 15, 2020. This deadline applies to multiple filings that were originally due on April 15, 2020. (For most of these forms, the filing due date without an extension was subsequently changed to July 15, 2020 by the IRS due to the COVID-19 pandemic.)

The October 15 deadline to file under an extension applies to several common returns, including:

2019 INDIVIDUAL INCOME TAXES:

Most individual taxpayers who requested an automatic extension to file their 2019 federal tax returns must file by October 15. However, additional extensions may be available to some taxpayers affected by recent disasters, including hurricanes and western wildfires.

2019 CORPORATE INCOME TAXES:

The October 15 deadline also applies to C corporations that requested an extension to file their 2019 corporate income tax returns (Form 1120).

FOREIGN BANK ACCOUNT REPORT (FBAR):

Many U.S. taxpayers, including individuals and businesses, must file an annual report of their foreign bank and other financial accounts, called an FBAR. Typically, filing an FBAR is necessary if the total value of a taxpayer's foreign accounts exceeds $10,000 at any time during the calendar year. However, certain accounts, such as those held within a qualified IRA or other retirement plan, may not need to be reported. Most taxpayers who are required to file a 2019 FBAR and have not yet done so must file by October 15.

Remember that in general, an extension to file tax returns is NOT an extension to pay any tax due. Therefore, those who have not yet filed but expect to owe 2019 tax should estimate the amount they owe and pay that amount as soon as possible, even if they will not file their returns until October 15. Immediate payment will minimize any interest charges and late payment penalties. A tax professional can help you determine how much to pay and/or if an FBAR is required.

AOTC Tuition Credit Offers Tax Savings for Students or Parents – Did You Know?

If you, your spouse or any of your dependents are currently enrolled in a higher education program, or were enrolled for a previous academic period in 2020, you may qualify for the American Opportunity Tax Credit (AOTC). The AOTC program allows eligible taxpayers to claim a credit for tuition costs and certain school fees.

To qualify for the credit, a student must be taking post-secondary classes at an eligible higher learning institution, in pursuit of a degree or other recognized certification or credential. In addition, students must meet ALL of the following eligibility requirements:

- They are or were enrolled at least half time for at least one academic period (as defined by the school) in 2020.
- They had not completed their first four years of higher education as of January 1, 2020.
- Neither the AOTC nor its predecessor, the Hope credit, has been claimed more than four times total for the student, including the current year.
- The student and the person claiming the credit (if different from the student) must have a valid taxpayer identification number (TIN) before the due date for the tax return.

Additional eligibility criteria may apply to both the student and the educational institution. To claim the full credit, taxpayers must have a modified adjusted gross income (MAGI) of $80,000 or less for individuals, or $160,000 or less for couples filing jointly. A reduced credit may be available for individual taxpayers with a MAGI between $80,000 and $90,000 (between $160,000 and $180,000 for joint filers). Those with higher incomes may not claim the credit.

The maximum allowed credit per eligible student is $2,500, up to $1,000 of which may be refundable. You may claim the credit for multiple students in your household if they all meet the eligibility standards. For students who do not qualify, you may still be able to claim either the Lifetime Learning Credit or an above-the-line income deduction for tuition and fees. A tax professional can help you determine which credits and/or deductions provide the greatest tax benefit for you.

Educator Expense Deduction – Did You Know?

If you are a teacher, principal, counselor, or classroom aide who works at least 900 hours a year in a state-accredited school (grades K-12), you may qualify for the Educator Expense Deduction. This IRS rule allows you to deduct up to $250 on your tax forms ($500 for joint filers who are both educators, but not more than $250 each) for classroom supplies that you purchase at your own expense.

Allowed expenses include traditional school supplies like rulers and markers, computer equipment and software, along with specialty items like athletic gear for physical education classes. A qualified tax advisor can help you determine which of your expenses qualify for the deduction.

You may not have to itemize deductions in order to claim the Educator Expense Deduction, but the IRS does require that you have written evidence for every expense. During this hectic back-to-school period when classroom expenses are most likely to occur, it is important to remember to save your receipts.

Quarterly Estimated Tax Payments - Reminder

If you are making quarterly estimated tax payments to the IRS, the due date for the June 1 - August 31 quarter of the year is September 15.

For payments made using IRS Direct Pay, you can make payments until 8PM EST, and for payments using a credit or debit card, payments can be made up to midnight on the due date.

If the due date for making an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be considered on time if you make it on the next day that's not a Saturday, Sunday, or legal holiday.