11 Easy Ways to Spot a Get Out of Debt Scam
Have debt worries? Here is how to avoid being swindled.
Question: What are the tax benefits of leasing a car (2016 Toyota Prius) for Doordash and how does personal use affect it? – Junior B. in West Haven, CT
Leasing a car that you intend to use for business purposes, such as Doordash, does come with some tax benefits, but you want to make sure you consider all the aspects of leasing before making your decision.
When you lease a car, you get to deduct the business portion of your expenses of owning and operating the vehicle. That can add up to a sizeable deduction. It includes the business portion of:
Note that if you make any advance payments on your car, you must spread them over the entire lease period. If you make payments to actually buy the car, you can’t deduct them, even if they are called lease payments.
In addition to the standard mileage rate or actual vehicle expenses, you can deduct the full amount of any tolls and parking you paid while driving for Doordash.
One more thing: You may have heard about “inclusion amounts” and leased cars. An inclusion amount is additional income you may need to report when leasing a car for business purposes. However, the IRS only requires it if all the following are true:
That shouldn’t be a problem with a 2016 Toyota Prius. A used 2016 Toyota Prius has a list price range of around $14,000 to $27,000, according to Edmunds. That’s well under the $50,000 limit. Your lease agreement may show the “capitalized cost” of the car. If so, that is considered to be the fair market value for inclusion amount purposes.
If you’re using the car for business and personal purposes, you’ll need to determine the percentage of time it’s being driven as a business vehicle. Don’t be intimidated — if you use tax software to prepare your taxes, you can enter your business mileage, total miles driven for the year, commuting mileage (nondeductible) and your total vehicle expenses. The tax software program calculates the percentage of your vehicle use that is for business and applies it to your total vehicle expenses to determine your deductible expense.
You also have the option of using the standard mileage rate to figure your business expense deduction, but it just involves a little more legwork. The standard mileage rate for 2019 is 58 cents per business mile driven.
I usually recommend buying a car with cash instead of leasing, when a person can afford it. If you always pay cash for a car and keep it for as many years as you can, you’ll save a lot of money in the long term. But I know that’s not always an option — you may not have a down payment and verifiable income to qualify for a loan on a good car. If you’re looking to work for Doordash or any other service that requires you to provide your own transportation, a safe, reliable and even respectable car is a must.
Here are some benefits of leasing a car that you intend to use partially for business:
On the other hand, make sure you know the downsides of car leasing:
A 2016 Toyota Prius, while more economical than a new model, is still a nice car. It looks professional, is rated 4.6 stars out of 5 by Edmunds consumers and it gets 52 miles per gallon fuel economy overall. It even gets good marks for its cargo capacity, which could be important to you. In my opinion, it could be a smart move for you as you start your new venture with Doordash.
Question: I have a 529 college savings plan for my son with $56,000 in it. My son has won a full scholarship to college valued over $150,000. I’m trying to find out what I need to do to withdraw the 529 money without any penalty.
– Mike Y. in Pennsylvania
First off, congratulations are in order, as scoring a full-ride college scholarship is no easy feat.
And in this day in age, avoiding federal and private student loans — plus calling off the search for student loan forgiveness — is a huge win for your whole family.
As happy as you must be for your son, it’s also fair to be concerned with how to handle that five-figure savings balance. After all, you won’t employ it in the way you once imagined.
Thankfully, there’s a rather simple (and likely satisfying) answer to your question: The IRS allows you to withdraw an amount equal to your son’s scholarship award without facing the 10 percent penalty attached to other atypical, non-qualifying withdrawals.
Now, before you call your 529 plan account manager and ask to cash out, Mike, keep these two facts in mind:
Unlike with more traditional qualifying expenses, you’ll still have to pay federal (and potentially state) income tax on a withdrawal related to your son’s scholarship. We recommend talking to a certified tax attorney to determine what taxes you will need to pay, as well as when and how, so you can ensure you file your taxes correctly with those withdrawals included.
First, you must wait until your son officially receives his tuition reduction to make any withdrawal. After he’s handed about $37,500 of school-offered financial aid for his freshman year, for example, you can take out that amount — or $18,750 per semester, depending on the school’s billing quirks — but not a cent more.
Given the rough dollars-and-cents figures you provided in your question, you’d probably have to wait until at least your son’s third semester on campus to zero out your 529 account balance. That would allow you to fully avoid the 10 percent 529 withdrawal penalty you’d face otherwise. Attempting to pull out the entire $56,000 before your son actually receives that amount of aid would be considered a nonqualified withdrawal. Thus it would be subject to the very same 10 percent penalty you’re attempting to avoid.
If you don’t like the strings attached to your unusual but qualifying withdrawal, you could also keep your 529 plan savings right where it is. Even if you’re done making contributions, you have other account management options, including:
If your son’s scholarship won’t completely pay for secondary qualifying expenses, you could make tax- and penalty-free withdrawals from your 529 account to finance them. This could include things like books, school supplies, and computer equipment. Unfortunately, Mike, not all full rides are truly full, and your savings could still come in handy.
If your son has a sibling, or if you have another family member with (upcoming) education costs, you could change the account beneficiary. If you’re feeling extraordinarily generous, you could keep the 529 where it is, allow it to grow and eventually gift it to a grandchild. Perhaps your son’s offspring could eventually benefit from your hard-earned savings.
When you have $56,000 sitting in your college savings plan, “hard-earned” is exactly what it is. You likely stashed away hundreds of dollars every month, throwing in a little extra here and there, with the idea that you’d help your son foot the bill for college.
Now that you don’t need the savings for that specific purpose, hopefully, the IRS’ generous rules allow you to put it toward another worthy cause.
Question: The IRS said I owed them for an issue on an old tax return which I amended (recently). However, they took my 2018 refund and are charging me high amounts of fees and interest. How likely is it that they will refund me back my refund? How long is the process? Also, after the amendment goes through do they take all the fees and interest away? The amount they say I owed back was a little over $2000.00 and now it is over $6000.00. Thanks for your advice (in advance). – Desiree in California
Once your amendment processes, the IRS should retroactively adjust any penalties and interest back to match your amended return and will issue a refund to you on any funds paid towards the amended tax year within the last 24 months. If your amended return shows that you do not owe any additional tax for the year in question, you should expect to see all penalties and interest removed and your entire 2018 refund returned to you within 6-10 months of filing the 1040X. The IRS could also send you a notice requesting additional information regarding your figures on your amended return. Be sure to check for any IRS letters and respond to their requests timely.
Form 1040X is the IRS form you file for an amended tax return. It’s mostly similar to the standard Form 1040, with an added space to explain why you’re filing an amended return.
It’s important to be aware that you cannot file Form 1040X online; you must mail in the amended tax return. The IRS states that it can take up to three weeks for the amended return to even appear in their system. Then they say it can take up to 16 weeks to process the amended return. However, due to the freeze on hiring and the government shutdown, the processing time is closer to 6 months or more.
After three weeks, you can check the status of your return through the IRS website at Where’s My Amended Return?
You’ll need your Social Security Number, date of birth and zip code to locate your records. There are three possible statuses that you’ll see:
|Received||The IRS has received your Form 1040X; it’s in their system and being processed|
|Adjusted||The IRS has applied the information from your amended return to your account.|
|Completed||The IRS has fully processed your amended return and if there is no additional balance, they issued your amended tax return refund.|
With normal tax returns, the IRS has a Where’s My Refund tool that allows you to check the status of your refund. But this technology is not available with an amended tax return refund. The good news is that you can still receive the amended refund through Direct Deposit – you won’t need to wait on delivery of a paper check, which can take a few months to receive.
Unfortunately, beyond that you usually just have to be patient. The IRS will only take calls about the status of an amended tax return refund if it’s been 12 weeks since the official receipt of Form 1040X. If it has been 12 weeks, then you can call their hotline at 800-829-1040.
Question: Can my cashed out retirement be taxed more than once? – Christopher G. in California
Without much detail on the type of retirement account you’re concerned with or your reasons for cashing out, it’s hard to know exactly how to answer your question. So let’s start by covering the tax basics for some of the most popular retirement accounts: Individual Retirement Accounts (IRAs) and 401(k)s.
When you make contributions to a Roth IRA or Roth 401(k), contributions are made with after-tax dollars. In other words, pay taxes upfront but withdrawals are tax-free in retirement. Roth accounts can be a great way for people who believe they’ll face higher tax rates in the future to create a tax-free income stream in retirement.
The trouble with Roth IRAs is that not everyone can use them. For 2019, if you are single and have income over $137,000 (or married filing jointly with income of $203,000 or more) you cannot contribute to a Roth IRA. There’s no income limit for Roth 401(k) contributions, but you’ll only be able to contribute to this type of account if your employer offers a Roth option in their 401(k) plan.
If you’d rather get the tax break now, you can contribute to a Traditional IRA or 401(k). With these accounts, contributions are made with pre-tax dollars — you receive a tax break in the year you make the contributions, but when you take the money out in retirement, the distributions are considered taxable income. For 2019, you can contribute up to $6,000 to an IRA and up to $19,000 in a 401(k). People aged 50 or older can also take advantage of “catch-up” contributions which allow them to contribute an extra $1,000 to an IRA and $6,000 to a 401(k).
1. The trouble with traditional IRAs is, if you’re covered by a retirement plan at work, you might not get to deduct your contributions. For 2019, a single taxpayer with a modified adjusted gross income (MAGI) of $64,000 or less can take a full deduction for their contributions to a traditional IRA. If your MAGI is more than $64,000 but less than $74,000, you’ll receive a partial deduction, and if your MAGI is $74,000 or more, you’ll receive no deduction. For a married couple filing jointly, you need to make less than $103,000 to get the full deduction and get no deduction at all if your income is $123,000 or more.
Now, this doesn’t necessarily mean you’ll lose out on your tax break now and have to pay taxes on withdrawals in retirement. Any contributions to a traditional IRA for which you don’t receive a deduction in the year it was made are considered “basis” in your IRA. When “basis” is withdrawn, that portion of your withdrawal is not taxable.
It’s up to you — not the IRS and not the bank or brokerage that holds your IRA — to keep track of your basis. When you make a non-deductible contribution to your IRA, you are required to file Form 8606 with your tax return to report the non-deductible contribution. You should hold on to a copy of that Form 8606 — and any more 8606s you might file in the future for additional non-deductible contributions — basically forever. Don’t shred them along with your other tax documents a few years later, or you’ll lose your only record of your basis.
That’s one way in which you actually might have to pay taxes twice on your retirement. Without proof of basis, you get no deduction for the money going into the account and have to include it in your taxable income when you withdraw the money later.
2. There’s another scenario in which it might appear that you’re being taxed twice on your cashed out retirement. In this case, we’re talking about early withdrawals from an IRA or 401(k). Generally, if you withdraw money from an IRA or 401(k) before age 59½ (or the normal retirement age as defined by your 401(k) plan), the money you withdraw is taxable income and you may have to pay a 10 percent additional tax penalty.
There are a few exceptions to the 10 percent penalty. For example, you can withdraw money from an IRA to cover college education expenses or health insurance premiums while you are unemployed. The IRS has a complete list of exceptions to the penalty on early distributions.
If at all possible, try not to withdraw your retirement savings until you’re at least 59½. Unless you qualify for an exception, the taxes and penalties can eat up a big portion of the money you cash out.
Question: My wife and I (both public school teachers) purchased a home in August 2018. I took a hardship withdrawal from my tax-sheltered annuity (TSA) to pay for closing and renovation costs. I know I need to pay the taxes on the amount withdrawn, but there’s also a 10 percent penalty I must pay tax on, unless we qualify for an exception. The exception I thought we might qualify for is the “first-time homebuyer” exception. Although this isn’t my first home purchase it is my wife’s and both our names are on the purchase of the home. So my question is do I have to pay the taxes on the 10 percent penalty? thanks! – Luke in Virginia
If you’re thinking about raiding your retirement account early, or if you already took a TSA hardship withdrawal, it’s important to understand the rules. The regulations vary depending on the type of retirement account you have. I’ll cover the basics so you can prevent unexpected tax surprises and keep your retirement nest egg safe.
First, here’s a brief explainer on retirement accounts. They were designed to encourage savings and to discourage you from dipping into them before retirement — or at least before reaching age 59½.
Retirement accounts give you terrific money-saving tax breaks, and they’re my favorite way to save for the future. However, if you break account rules, you’ll have to pay expensive taxes and penalties.
Retirement accounts aren’t piggy banks you can crack open anytime you want. Some have strict regulations that make it very difficult to get money out, even if you have a devastating financial hardship.
However, there are several qualified exceptions when you can take early distributions from retirement accounts that are penalty-free. The exceptions also depend on the type of account you have — such as an Individual Retirement Account (IRA) or a workplace retirement plan — and whether it’s a traditional or Roth account. Keep reading for more clarification.
Many companies, nonprofits, and government agencies offer retirement accounts for workers. They’re a valuable perk to have, so be sure to participate if you’re eligible.
You’ve probably heard of a 401(k), which is a popular plan offered by many for-profit companies. It allows employees to have the employer contribute a portion of their wages to an individual account held by the plan.
[Find out how you can save more in your 401(k) this year.]
If you work for a public school, church, or charitable organization, you may have access to a 403(b) plan, also known as a tax-sheltered annuity (TSA). They’re similar to a 401(k) and also allow employees to put a portion of their wages into individual accounts.
Both a 401(k) and a 403(b) allow traditional and Roth options. With a traditional 401(k) or 403(b), you skip paying tax on contributions until you take withdrawals in the future. So tapping either type of traditional account early typically requires you to pay income tax, plus an additional 10 percent penalty, on amounts withdrawn.
With a Roth 401(k) or 403(b), you must pay income tax upfront on your contributions. That means you can make tax-free withdrawals in the future. However, distributions of any investment earnings would be subject to tax and a 10 percent penalty if you’re younger than age 59½.
As I mentioned, there are some exceptions to the 10 percent early TSA hardship withdrawal penalty. In general, you can withdraw money from a 401(k) or 403(b) penalty-free for:
If you have a traditional plan, you avoid the 10 percent penalty but must still pay ordinary income tax on early withdrawals. Unfortunately, there isn’t a penalty exception for using an early withdrawal from a workplace plan to purchase a home.
However, if you have an IRA, you can avoid the early withdrawal penalty for distributions up to $10,000 during your lifetime to purchase your first primary residence (or to buy a home after not owning one for two years). Again, this exception is only allowed for an IRA and not for any type of workplace retirement plan.
Question: My fiancé has not filed federal taxes since 2008, when he was laid off after 20 years of working in customer service for a bank. He filed his state taxes and paid up to 2011 to do the best he could at the time, but then he just became overwhelmed and stopped filing. Anyway, he’s now trying to do what’s right. H&R Block suggested he call the IRS and ask what he owes. Is it better to contact the IRS first or do the taxes first? He used to get letters from the IRS, but they stopped coming in 2011. Also, he has a lien, although he didn’t own anything and actually just surrendered his car last year. He’s afraid they will go into his bank account and seize his money. — Carla in California
I don’t know your fiancé’s income during the years in question. So, it’s tough to understand the full impact of not filing a tax return. Here are a few factors he should consider, though…
Not every person who earns income must file a return. The minimum income amount that would require you to file a tax return depends on your filing status and age. For 2018 returns, the minimum for a single taxpayer under age 65 is $12,000. If your fiancé earned less than that in 2018, he generally wouldn’t need to file a return. The minimum threshold changes each year, so his first step should be comparing his income for each year to the minimum income threshold, which can be found in the Form 1040 Instructions for that year .
Next, even in years your fiancé was required to file a tax return, he may not have owed. If the IRS owed him a refund based on over-withholding from a job or tax deductions and credits, there’s no penalty for filing late. However, taxpayers have only three years from the original filing deadline of a tax return to claim a refund. For example, a 2009 return would have been due on April 15, 2010. If you add three years to that filing deadline, he had until April 15, 2013 to file his 2009 return and still get a tax refund. Otherwise, that refund is lost forever. If your fiancé might be due a refund for 2015, he should file that return right away to claim it.
Let’s move on to what happens if your fiancé owed tax for the years in question. While taxpayers only have three years to claim refunds, the IRS has 10 years to collect outstanding tax debts. This 10-year window starts on the day you file. Since your fiancé hasn’t filed returns, the statute of limitations for collecting his tax liability remains open.
It’s possible the IRS assessed a proposed tax liability on his behalf through the Automated Substitute for Return (ASFR) Program. The ASFR Program allows the IRS to use third-party information (such as W-2s and 1099s) to calculate a tax liability on the taxpayer’s behalf. It’s possible that some of the notices your fiancé received from the IRS in years past were assessments from the ASFR Program. However, that program was significantly scaled back in 2017 due to lack of budget.
Now, the question is how much he owes and what he can do about it. H&R Block’s suggestion to call the IRS and find out what he owes is one option. People who haven’t filed for several years and owe back taxes are hesitant to draw attention to themselves by calling. But IRS representatives are trained to work with taxpayers who want to get compliant.
IRS Policy Statement 5-133, Delinquent Returns – Enforcement of Filing Requirements, says taxpayers are generally considered to be in good standing with the IRS if they’ve filed six years of back tax returns, although the IRS may require tax returns from further back in some situations. He can call the IRS at 1-800-829-1040 to confirm whether they will accept six years of filed returns in order to consider his account to be current.
If your fiancé doesn’t feel comfortable doing this on his own, he can authorize a professional to contact the IRS on his behalf by filling out Form 2848, Power of Attorney and Declaration of Representative .
Once your fiancé knows which years need to be filed, if he has all of his documents for those years he can prepare the returns himself using online tax preparation software or work with a professional to get caught up, year by year. If he doesn’t have documentation, a good place to start is ordering a Wage and Income Transcript. This transcript shows data reported to the IRS, including W-2 income, 1099s, and other informational returns provided to the IRS. A Wage and Income Transcript is available for up to 10 years.
He can order this himself using the Get Transcript Online tool or authorize a professional to order the transcript on his behalf using the same Power of Attorney form mentioned previously .
Getting caught up after a decade of not filing tax returns won’t be easy, but it’s preferable to the alternative. When tax returns aren’t filed late, the IRS charges interest and penalties on top of the tax owed.
Plus, the IRS has collection powers that other creditors don’t have.
You mentioned the IRS may have already placed a lien on his property. A lien attaches to all of his assets, even those he might acquire in the future. The IRS can also levy his paycheck or bank accounts. Once you’re married, if you file returns jointly, the IRS can withhold any refunds you might be entitled to in order to pay off his back taxes.
Fortunately, the IRS has several options for paying off tax debts in installments. Once your fiancé gets approved for an installment agreement, as long as he makes payments as agreed, the IRS won’t pursue any other collection action . Facing the fear of owing back taxes is often the worst part. By finding out which years need to be filed, gathering documents, and filing his returns, your fiancé can get back on track with the IRS and avoid the hefty penalties that come from being on the wrong side of the IRS.
If you need help filing this year, check out Debt.com’s extensive guide How to File Taxes.
Question: I entered into a loan modification five years ago under HARP. The modification was not honored by my lender, and I had to sue. The result of the suit was my lender reduced the principal of my loan by $115,000, and they sent me a form called 1099-C. Do I really have to pay taxes on this? – William in California
HARP stands for Home Affordable Refinance Program, and since it launched in 2009, it’s been the government’s most popular program for refinancing mortgages. Why? Because HARP is designed for homeowners who are “underwater” – meaning they owe more on their mortgages than their homes are worth.
There are a bunch of rules for qualifying – loan-to-value ratio must be 80 percent, etc. – but what’s important for William and other HARP participants to know is this: Yup, taxes can become an issue.
Like every other government program, complications abound. So I consulted two other financial experts who have sharp insights into William’s question.
“In many cases, when a lender cancels a portion — or all — of an outstanding balance, you usually have to consider that canceled debt as income and report it on your tax return for the year in which the debt was canceled,” says Crissinda Ponder, Staff Writer at LendingTree. “However, there are instances when the canceled debt can be excluded from your taxable income. One of those possible exclusions is a loan modification on your primary home. Since the principal balance on your mortgage has been reduced, you may qualify to exclude the $115,000 from your taxable income.”
So as you can see, the answer is: Yes, you must pay taxes – except when you don’t.
When you do, you need the tax form William mentioned. The IRS calls it a 1099-C. If the canceled debt is at least $600, you must fill one out. This form lists important information about the canceled debt, including the amount owed and the cancellation date.
For more on the 1099-C, I consulted Jacob Dayan. He’s the co-founder of Community Tax, one of the best tax consulting firms I’ve ever worked with.
Dayan says if the property is your principal residence, and the forgiven loan principal was part of an “arrangement entered into before January 1, 2018, or earlier,” you likely will not need to pay tax on the $115,000. But, he says…
If the home was not your principal residence, or the arrangement to forgive part of the loan principal was entered into in 2018 or 2019, then you likely owe income tax on the full $115,000. In general, there are no tax consequences for a loan. The borrower does not report the borrowed funds as income and does not report a deduction when the borrowed funds are paid back. However, when a loan is forgiven the tax consequences change and the amount of forgiven debt is taxable to the borrower.
There’s a reason for all this back-and-forth. When the home mortgage crisis gripped the country starting in 2007, Congress enacted a provision to allow homeowners to exclude canceled debt as income (meaning no tax) as long as the canceled debt was for their principal residence.
But beginning in 2018, the government scaled back that provision significantly. For the tax years 2018 and beyond, Dayan says this: “To be excludable the discharged debt must, first, cover a mortgage on your principal residence and, second, the arrangement for the forgiven loan principal must be in writing and dated before January 1, 2018.”
He continues: “if the loan covered your principal residence and the agreement to forgive the principal occurred before January 1, 2018, you will be able to exclude the $115,000 on the 1099-C and pay no tax. But if this was a rental property or second home, and the agreement to forgive the loan principal happened on January 1, 2018, or after, you will be stuck paying tax on the full $115,000.”
If it confuses and confounds you, then my expert advice is this: Consult a tax expert like Jacob Dayan. In almost every case, you’ll save significantly more on your taxes than you’ll pay for the expert advice. As you can see, tax questions can easily get complicated. It often requires an expert to unspool the details – and find you the savings.
Question: We rented our previous home for nine months out of this year. We bought our first home with cash – no loans, no mortgage, cash only in the 10th month. How would I file on my taxes that we rented but we’re now also first-time home buyers? – Kenny in Indiana
Congratulations on becoming a first-time homebuyer, and for being able to pay cash. That’s quite an accomplishment!
Even though you don’t have a mortgage, there are still some tax deductions you may be eligible for.
The first one is for your property taxes. You only lived there a few months. So, the amount you’re able to deduct on your federal income taxes probably won’t be much. The seller will likely receive the bulk of the deduction for the property taxes.
If you made any energy savings improvements before the end of the year, you may be eligible for a residential renewable energy tax credit . These upgrades include the following:
Even though you can’t deduct them now, start keeping receipts for any improvements you make. If you later sell, they’ll be added to the price you paid to determine the cost for taxes.
You’ll likely need to pay taxes on the amount of money you make through appreciation when you sell your home. The higher your cost basis, the less you’ll pay in taxes on the money you make from the sale.
Unless you were writing off a portion of your previous home rental costs on your taxes — perhaps because you are self-employed or work from home — the amount of time that you were renting isn’t that important. If you’re an active duty member of the military, you will be able to write off moving expenses , but if not, unfortunately, the new tax law doesn’t allow you to deduct them.
But back to the cash you used to buy the home. You may need to discuss potential tax liability with a professional based on where the cash came from. If you cashed in an IRA or a retirement account, or if received a gift from family members, you or your relatives may need to notify the IRS that the funds were used to purchase a home…
Gather the following documents related to your home purchase so you don’t encounter delays when you file your taxes…
[For more information on filing this year, check out How to File Taxes.]
You mentioned “we” in your question — assuming you’re married and filing jointly. It’s possible the itemized deductions may not exceed the new increased standard deduction of $24,000. A professional tax consultant can give you information about whether to itemize your expenses or take the new standard deduction.
Denny Ceizyk , staff writer for LendingTree, contributed to this report.
Question: My husband died in September 2018. We had borrowed from his 403(b) a few years ago. I used the money we still had in our bank account to pay for the funeral costs and the cost to pay his personal debts (like a car loan). Then I received a 1099R form for the amount that was rolled over into my account. I also received a 1099R for the amount that was outstanding on the loan from the 403b. How much of the money can I claim as being used for his death? I’m assuming that the funeral costs qualify. Can I also claim the amount that was used to pay off his personal debt as being used for his death? – Casey in California
Sorry for your loss, Casey.
Generally, beneficiary spouses can roll over the eligible distribution attributable to the employee to any eligible retirement plan. This would most likely be your existing or a new IRA rollover account. You had previously taken a loan from the 403(b) that appears to be unpaid at his death, and the unpaid balance of the loan was treated as a taxable distribution. The amount of the unpaid loan will be reported on a 1099R form, with the taxable amount shown in Box 2A. There should also be a code “L” reported in box 7, identifying the distribution as a loan.
Any other distributions you received will also be reported on a 1099R – even the amounts that you rolled over. There are two types of rollovers that can be reported on the 1099R.
The first type is known as a “trustee to trustee” rollover. This happens when funds are sent directly to the rollover trustee without you having received the funds. Then, the second type of rollover involves your receipt of the funds. The rolled over funds must then be deposited into the new account within 60 days of receipt.
The amount rolled over will be reported on line 16A of your 2018 income tax return. Assuming the loan was the only other taxable distribution, the loan amount will be reported on line 16B as taxable income.
Now that funds have been rolled over, you need to be aware of the “Required Minimum Distribution” rules. Basically, you must begin to take distributions from the rollover by April 1 after you have reached age 70½. Your investment advisor will notify you of the minimum amount you must withdraw each year.
You can deduct the final medical bills that you had to pay. This deduction is limited to the amount that exceeds 7.5 percent of your income and is grouped with other allowable itemized deductions: state and local taxes, real estate tax, mortgage interest, and charitable contributions. Don’t forget to add the value of any of his personal belongings that may have been donated to charity.
Should your itemized deductions fall short of the allowable standard deduction, you’re still entitled to a $24,000 to $26,600 standard deduction depending on your ages. I know this is a lot to digest, but if you struggle with it, contact a tax pro who can break it down for you. Debt.com can help you find one.
Question: I run a small business by myself. I’m 24 years old, and I started this a couple years ago. In 2017, I owed $15,000. I haven’t paid any of it yet. I haven’t filed my 2018 taxes yet, but it’s expected I owe around $13,000. Then I also have to set aside taxes for 2019. I can’t possibly save up for three tax years in a single year. Not while I am making roughly $90,000 a year between those two years. Typically, I end up making around $50,000 to $60,000 after I pay for upkeep and freelance development work. My living expenses are around $3,500 a month. I just don’t know what to do. I’d have to put 100 percent of my money towards taxes this year to catch up. I heard about an “offer in compromise” or something. I have 10 Grand saved I can use to pay something. What should I do? – Michael in Indiana
If you are unsure of your options, the best advice is to call a tax resolution expert to help determine if you qualify for any IRS resolution programs. These include…
But I can give you the basics of the process…
To begin, if you want to put yourself in the best position to qualify for an IRS resolution, the first step is to work on “compliance.” Compliance means that you have filed the past six years of tax returns, starting with the most recent (currently the 2018 return due April 15, 2019) and paying all required Estimated Tax Payments for 2019.
The IRS wants to be confident that you will not owe in the future before they agree to a resolution program. So setting aside and paying taxes for 2019 is the most important payment to make at the beginning.
After compliance is complete, you will be ready to negotiate a resolution with the IRS. In general, the IRS allows you to pay off the balance in full with a 72-month payment plan. Or it allows you to submit a financial statement to determine an appropriate resolution if you are unable to pay off in 72 months.
The financial statement is basically a list of your monthly income, monthly “allowable” expenses (like housing, vehicle, health insurance, etc.), and a list of the value of any assets (such as real estate or retirement accounts). The IRS also allows you to count any Estimate Tax Payments as an expense on the financial statement so that you are not being stretched beyond your financial capability.
The IRS will reduce the monthly payment to an amount you can afford for one instance. That’s when the financial statement shows you’re unable to pay off the balance in 72 months with a combination of the value of your assets and net income.
You may qualify for an offer in compromise if you can’t pay for 120 months.
If your financial statement shows that you cannot pay off the balance within 120 months (10 years) with a combination of the value of your assets and your net income, you may qualify for an offer in compromise and the IRS will settle for less than you owe.
To learn more, read the Debt.com report, How to Settle Tax Debt.