As part of my divorce planning practice, I often work with clients to help them chart out their cash flows and projected tax issues to help reduce surprises. Sometimes folks can be confused about what is taxable income.
In one case, a woman asked if the monthly benefit she received from her ex-spouse’s military pension was taxable since it was considered “property” in the divorce decree in the state in which she lived.
For reference, alimony received is considered taxable income. But this is clearly not alimony and wasn’t listed as alimony in her divorce decree. Nonetheless, the monthly income she is receiving from her ex-spouse’s pension may very well be taxable.
Military retirement pay based on age or length of service is considered taxable income for Federal income taxes. However, military disability retirement pay and veterans’ benefits, including service-connected disability pension payments, may be partially or fully excluded from taxable income based on a variety of tests.
It sounds to me like this is retirement pay (and not part of any disability) so this will be added to her total adjusted gross income.
Whether or not it becomes taxable will depend on how much her total income is and home much of this income (from this and all other sources) may be offset by deductions (itemized or standard) and exemptions.
If you’re receiving any military retirement income you will likely receive a Form 1099-R from the US Office of Personnel Management each year detailing what was received and what portion is ‘taxable’.
Taxpayers may want to plan ahead and calculate whether they may have any tax owed and how much, if any, quarterly estimated tax payments that they may want or need to make. Speak with a qualified tax professional or tax adviser to help figure out this detail. Call us and we’ll be happy to help.
Common 1040 Mistakes to Avoid
You may be in a rush to get your tax returns filed but take some extra time to avoid common tax filing mistakes that I see all the time. These slip-ups often creep into federal and state tax returns.
No one wants to delay their federal tax refund. But mistakes happen. So it never hurts to check twice to make sure that you’ve filled out your 1040 form correctly.
These are some of the most common tax filing mistakes to avoid, the little slip-ups that aggravate both the IRS and the taxpayer and can cause your tax return to be rejected or delayed.
Not signing your return. If you file online like most individuals, many tax software programs require you to type your name on the “Your Signature” line and in the “Sign Here” section, along with your spouse’s name if you file jointly. In many cases you’ll need a PIN code to file. If you still file a hard-copy return, you’ve got to sign your name on the “Your Signature” line, and the same goes for your spouse on the “Spouse’s signature” line. No valid signature equals an invalid return.1
Not getting your name right. Believe or not, some people mistype their names as they e-file. More commonly, they enter an old name – a maiden name, for example – that doesn’t match the name linked to this taxpayer identification number. Another problem that I’ve encountered is with hyphenated last names. So if you’ve changed your name, the Social Security Administration (and other federal agencies, as applicable) need to know that.1
Missing the filing deadline(s) applicable to you or your business. Is your company an S corp? That means you will probably need to file a Form 1120S by March 15. Is it a sole proprietorship? That means you have until April 15 to file a Form 1040C. If you are new to making estimated tax payments, you have hopefully pored over Form 1040-ES with a tax professional to figure out how much tax is due by each quarterly payment period.2
Turning in Form 4868 (the “extension”) gives you until October 15 to file, although any federal taxes owed must still be paid by April 15. If you are a servicemember on duty outside the U.S. and Puerto Rico, you have until June 15 to file your return and pay taxes, and you can also use Form 4868 to file as late as October 15.3
If you file late (that is, you submit your return after April 15 without using Form 4868 to request an extension), you face a penalty – a 5% penalty per month following the return’s due date, capping out at a 25% maximum penalty after five months. The penalty for unpaid taxes is .5% per month after the April 15 deadline, and 6% interest a year. If you have taxes a year overdue, you will be assessed both the monthly and yearly penalties.2
Making numerical errors. Even with some of the great tax prep software now available, math errors still happen. In fact, they happen largely because people don’t use the software: the taxpayers who insist on filing paper returns are 20 times more likely to commit math mistakes than those who e-file, the IRS reports.1
And let’s not forget about those all-too-common ‘finger errors’ when typing into a calculator or on a keyboard. It doesn’t hurt to check twice.
If an electronically filed return contains a math mistake, it gets sent back to the taxpayer or tax professional for correction and resubmission. If a paper return has a math mistake, the IRS has to refigure it on the taxpayer’s behalf. That takes time and delays your expected refund.1
Additionally, some taxpayers get Social Security numbers wrong – not necessarily their own, but those of their spouses. Also, a smooth direct deposit of a federal tax refund won’t happen if a taxpayer types in an inaccurate bank account number.1
How many times has that happened to you? It’s happened to me.
Selecting the wrong filing status. This happens a lot with divorced moms and dads. To determine if they should check the “head of household” box or the “single” box, they should take the online interview at irs.gov/uac/What-is-My-Filing-Status%3F.4
I once had a couple who were each divorced and recently remarried (to each other) ask to file as “Married Filing Separately” thinking that would be less complicated. It took a little bit of time to explain that that wasn’t a good deal for them.
Claiming a credit or deduction you shouldn’t. Again, tax prep software tends to ward off this mistake. Credits often inappropriately claimed (or ignored): the Child and Dependent Care Credit, the Earned Income Tax Credit and even the standard deduction.1
Many business owners overlook deductions or claim them in error. Sometimes this can be traced back to slipshod record-keeping; other times, it stems from faulty assumptions. According to a survey from small business accounting software maker Xero, the most common merited deductions that aren’t claimed by SBOs are those for depreciation (30%), out-of-pocket capital expenses (29%) and car and truck expenses (16%).2
Claiming employees as independent contractors. Some small business owners try to save money by doing this, but the IRS may disagree with such claims. If so, the business can end up on the hook for employment taxes related to that employee.2
It’s worse in the state of Massachusetts where the definition of who is an independent contractor is even more restrictive than the feds; thus, exposing the business owner to a host of taxes and penalties later one if ever discovered.
So what steps can you take to try and reduce the risk of errors on your 1040 form? You can file electronically; you can use some of the terrific tax prep software available; you can turn to a skilled tax professional to help you prepare and file your return. No one is perfect, but those are all good moves to make this tax season.
And don’t forget to be like Santa … check twice. That’s one way to be nice.
1 – money.cnn.com/gallery/pf/taxes/2014/04/08/tax-mistakes/index.html [4/8/15] 2 – nerdwallet.com/blog/small-business/5-frequent-small-business-tax-mistakes-avoid/ [10/15/14] 3 – irs.gov/taxtopics/tc304.html [1/16/15] 4 – irs.gov/uac/What-is-My-Filing-Status%3F [1/12/15]