Answers to Common—and Not So Common—Tax Questions

As tax-filing seasons go, the past two years have been unlike any other. Income tax filings have been delayed and this year taxpayers need to get updated information on child tax credits and stimulus. It’s created a filing panic as we approach the May 17 filing deadline for 2020 federal income taxes. So, here’s everything you need to know to file correctly and avoid tax debt.

Table of Contents:

Featured 2021 tax question: Do I have to file my taxes to get my stimulus?

The biggest change to income tax filings has to do with Economic Impact Payments (EIP)—better known as stimulus payments. If you’re owed money from the first or second round of stimulus, your 2020 tax return is the only way to get it now. And your 2020 return may also directly impact how much money get from the third round of stimulus (and when you get it).

“Filing a 2020 tax return is critical for people who may not legally be required to file. First, it is the only way to get stimulus check money they are owed from the first and second checks, explains Clare Herceg, founder of Let’s Get Set, a fintech startup that’s helping new parents claim taxes and stimulus money. “These funds are issued to them through the Recovery Rebate Credit as part of their tax refund. Filing a return is also the best way to make sure you are in the system to get your third check—the $1400 one.”

Read more about how your 2020 tax return is critical if you’re missing stimulus payments »

Featured 2021 tax question: Is cryptocurrency taxed and, if so, how?

This is becoming a hot topic during tax season as more people dive into investments in cryptocurrency. But what effect do crypto transactions have on an investor’s taxes?

Mike Habib, IRS Licensed Enrolled Agent, MyIRSTaxRelief.com covers the basics of tax filing for cryptocurrency transactions…

Bitcoin, and other virtual currencies, are a bit like Ed Sheeran at this moment in time, in that it is virtually everywhere. Although the thought of dealing with the IRS is probably the last thing you want to think about right now, the simple fact remains that burying your head in the sand is simply not an option when it comes to Crypto tax help.

As you know, one of the reasons why cryptos are now so highly sought after is the fact that more and more businesses, big and small, are accepting virtual currencies, Bitcoin, as a form of payment. You can now walk into coffee shops in many towns and cities, order a small coffee and perhaps a slice of cake if you’re treating yourself, and pay for it via Bitcoin. But, and this is a big but, you must report all Bitcoin transactions when doing your taxes, no matter how small they may be. This is because even the smallest crypto transactions are taxable.

IRS placed a crucial question on page one of the 2020 1040 tax return. It reads, “At any time during 2020, did you receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?” Taxpayers should keep good records of all cryptocurrency transactions, such as the date purchased/sold and the amount purchased/sold.

Cryptocurrency is currently taxed as property. Taxpayers are required to report all transactions involving virtual currency in U.S. dollars on their tax returns, and to do so, they need to determine its fair market value as of its transaction date.

Gary Massey, MasseyandCompanyCPA.com explains how crypto transactions can lead to tax trouble…

The IRS is actively going after taxpayers who are involved in cryptocurrency.  These taxpayers are often discovered through a “John Doe Summons,” where companies are required to provide the IRS with a list of customers who trade in cryptocurrency.

Taxpayers who are suspected of improperly reporting cryptocurrency on their tax returns will receive a letter from the IRS.  This letter requires a response by a specific date.  An extension of time to respond may be requested if needed.

The taxpayer will need to file an amended or delinquent return reporting their cryptocurrency transactions or submit a letter explaining their position.  These submissions must be signed and dated under penalty of perjury and must be truthful, accurate, and complete.  Back taxes, penalties, and interest will most probably apply.  Nevertheless, procedures are available to provide relief, including offers-in-compromise, installment agreements, and penalty abatement.

However, in extreme cases, improperly reporting cryptocurrency on a tax return may be considered criminal if the facts show that the violation was intentional and the amount at stake is significant. Due to widespread publicity in the press about cryptocurrency, taxpayers will probably not be able to argue that they were unaware of the law.   Therefore, the only recourse of a taxpayer suspected of a significant cryptocurrency violation is to hand over their information to the IRS, cooperate, and hope the case does not become criminal.

General question about taxes in the U.S.

CPA Paul Miller of Miller & Company, the best-rate tax accounting firm in NYC provided some insight on some general questions about how the U.S. tax system works.

Featured Question: What is the VAT Tax, and would it work in the U.S.?

Tax expert and CPA Paul Miller responds…

VAT stands for value-added tax, which is a consumption tax that is levied on a product repeatedly at every point of sale at which value has been added. I believe this or a different version is critical to getting the US out of debt.  The US needs to add a national sales tax on every transaction; whether it’s stock sales, house sales, or an internet sale, the US needs to take this revenue and direct it towards the debt, which is a serious issue politicians are ignoring.

Business tax questions

What businesses are exempt from paying taxes in the U.S.?

Investment Advisor Andrew Rafal from Bayntree explains…

There are certain organizations that are exempt from having to pay federal income taxes. To qualify the purpose of the business must not be to generate a profit. Religious organizations, fraternities, educational organizations, and some trade/labor associations are some examples of groups that receive tax-exempt status.

Most of them register with the IRS as a 501(c)(3) within the Internal Revenue Code.

Tax lawyer Benjamin Goldburd offers more detail…

U.S. tax-exempt organizations are typically those that are dedicated to a public good instead of private profit.

These are most often religious, educational, social, some political or scientific organizations that are organizations focused on a public good. They typically take in public or private donations in order to fund their operations. These operations vary from the actual production of a product, performance of a service, or even providing funding to those that need it.

Less well-known organizations are those that are formed for political campaigns, welfare and social clubs, labor organizations, and business leagues. Each of these has its own filing requirement to gain tax-exempt status. Religious organizations that can be classified as a church or other religious institutions are tax-exempt automatically from formation and do not require the typical 501(c)(3) documentation nor IRS reporting. Many religious organizations choose to file anyway for the purposes of transparency to their members.

It is important to note that an organization is not simply granted tax-exempt status because it requests it. Most organizations are required to file for such exemption with a detailed form from the IRS (Form 1023 typically). Such a form will outline what exactly the organization is doing that requires an exemption and who will be involved. The form is quite detailed and should be prepared by a professional in order to be sure an exemption will be granted, and that the organization is properly formed.

Another important item to note is that tax-exempt organizations have to keep to many compliance requirements in order to stay tax exempt. This includes things like:

• the requirement of an impartial board of directors
• making sure no one is being paid too much for their job
• proper budgets that keep records of charitable funds
• being sure there is no misuse of exempt funds

The IRS takes these requirements very seriously, and any realization of the misuse of exempt funds can come with hefty fines to the organization and/or the persons involved. A professional can guide you in the production of compliance documentation to manage these requirements.

Lastly, just because an organization is “tax-exempt” does not mean that they are ALWAYS tax exempt. They are exempt on the monies brought in that are directly attributable to the organization’s charitable works. However, if a charity owns its own business that is unrelated to the charity itself, they will have something called unrelated business income tax or UBIT, and need to pay taxes on that income.

Tax filing questions

Featured question: How is offshore income and income earned in foreign countries taxed?

Tax lawyer Benjamin Goldburd of Goldburd McCone Attorneys explains…

U.S citizens, or tax residents, are taxed on their worldwide foreign income regardless of where they resided. That means that if you have foreign income from anything, you are taxed at your personal rate regardless of where you earned it, or where you are living.

However, there are some tax breaks and credits like a foreign tax credit that will reduce the tax owed. If you live and work abroad, you may qualify to exclude earnings from such income to an amount adjusted annually for inflation ($107,600 for 2020).

Further, in countries where the U.S. has an executed tax treaty, the tax that you pay in such a country can offset any income tax due. In some countries the income offset can be one to one, meaning every dollar of tax paid in the foreign country is credited in the US, but in other countries, the offset can be less.

It is also important to note that each country’s tax freebies, credits, or reductions or eliminations may not match the US. Take Canada for example.  Canadians have the principal residence exemption, which means that they do not have to pay tax on the gain of sale of their main residence.  Not so for Americans. We are allowed a $250,000 tax exemption on profit ($500,000 if married filing jointly). This means that if a U.S. citizen with a Canadian residence sells their home for more than $250,000, they will not owe tax in Canada, but they might owe tax in the USA. It is a good idea to hire a professional to review your foreign tax positions to be sure you are in compliance.

Two more things to keep in mind:

1. If you have foreign bank accounts with more than $10,000, regardless of whether there is income, you must file Foreign Bank and Financial Accounts Reports with the IRS.
2. If you own shares of stock of a foreign company, you might be required to pay tax on the possible income from such a company whether or not the foreign company actually pays you anything. The new concept is called Global Intangible Low-Taxed Income or GILTI. If you own at least 10% of a foreign company, this might apply to you.

Tax debt questions