Sunday, July 21, 2024

Does tax season give you a headache? Taking this approach will help

Many Americans have had nightmares about sitting at the kitchen table late at night, with their head in their hands, eyes toggling back and forth between the instructions for tax forms and schedules, and a pile of receipts, while their pencil, eraser and calculator wait patiently next to their now-cold cup of coffee and their mind agitates about how they ever got themselves into this mess.

Tax season has that effect on people. It’s an unwelcome, often confusing and tedious chore that brings no joy and that everyone wishes would just go away. But if you are like me, and have been dutifully signing your name on a tax return for (going on) forty years, you must realize by now that it is not going away. Even if you move to Mexico.

If you live and work abroad, different tax rules may apply to you. Check with the IRS (or a professional) to see if you are affected. (Unsplash)

And since we can’t avoid it, we may as well embrace it. Yes, I said embrace it. As April 15 marches inevitably closer, I am providing the following five tips to get you in the right frame of mind to handle tax season with aplomb.

Tip one – Assume you have to file a tax return

Did you ever wonder what the United States has in common with the African nation of Eritrea?  

Answer: They are the only two countries in the world that tax the worldwide income of their citizens, regardless of where they live or where they earn money. 

This means that if you are a U.S. citizen living anywhere in the world, the Internal Revenue Service (IRS) wants to know how much money you made last year. And, if you happen to be an Eritrean citizen and are reading this article, you should know that the Inland Revenue Department of Eritrea also wants to know how much money you made last year. 

The happy news is that just because you are a U.S. citizen and have to file a Form 1040, U.S. Individual Income Tax Return, this does not mean that you will owe tax. Generally, if you are single and your gross income is less than $13,850, or if you are married and your gross income is less than $27,700, you won’t owe anything to the IRS. Gross income means anything that puts money in your pocket, including your earnings from work, dividends from investment accounts, distributions from IRAs and pensions, rents and royalties that you receive and profit on if you sell your home.

If your income is below the taxable threshold for your filing status, there can still be special situations that require you to file a return. To be certain, you can click the link “Do I need to file a tax return?” on the IRS website to help you decide if you need to file a return. 

If you are living and working outside the United States on April 15, you automatically qualify for a two-month tax extension until June 17, 2024, to file a return and pay tax. (coworking.tulum/Instagram)

If your income is below the taxable threshold for your filing status, and you don’t fall into one of the special situations that require you to file a return, you may still want to file. For example, you should file a return to get a refund of any income tax that was withheld from your pay or your retirement account or other distributions, to satisfy requirements to obtain a green card for a non-U.S. spouse, if you plan to apply for a loan from a U.S. bank or to get certain refundable tax credits such as the Additional Child Tax Credit for dependent children or the American Opportunity credit for higher education costs. Refundable tax credits are essentially reimbursements from the government of a portion of what you spent on what it deems “qualified costs.” Even if you don’t owe any tax, you can receive these payments, but you have to file a return to claim them.

Another reason to file a return even if you aren’t required to is to help prevent identity theft.

Consider this, if you file a return, and a fraudster files a return using your personal information, the IRS will contact you about the duplication. Following up with the IRS in this circumstance will help the agency to quickly resolve the fraud and issue you a personal protection identification number (PPIN) to use on future returns. A PPIN is an extra layer of protection to ensure the IRS only processes returns filed by you.

Tip two – Know the deadlines to file your return and pay your tax

Once you have established that you will file a tax return, you need to know when to file. I think most Americans know that April 15 is the regular due date to file a return and pay taxes. But if you can’t get your Form 1040 filed by April 15, you can file Form 4868, Application for Automatic Extension to File U.S. Individual Income Tax Return. This grants you a six-month extension until October 15, 2024. 

It’s important to note that the Form 4668 extension provides more time to file your tax return, but it does not provide more time to pay your taxes. Your tax is still due on the regular due date of April 15. The IRS can charge you interest if you don’t pay your tax by the regular due date and can also charge penalties for late filing and payment. You can use Form 1040-ES, Estimated Tax for Individuals, and worksheets on the IRS website to help you figure what amount to pay with Form 4868. 

If you are living and working outside the United States on April 15, you automatically qualify for a two-month tax extension until June 17, 2024, to file a return and pay tax. If you qualify, you need to include a statement when you file your Form 1040. The statement can simply state that you were living overseas on the regular due date and that your main place of business is overseas. Note that the rule states that you have to live and work outside the U.S. to qualify, so if you actually live and work in the U.S., scheduling your Mexican beach vacation to include April 15 won’t net you two extra months. 

If you can’t get your return filed by June 17, you can file Form 4868 by that date to get four more months, to October 15, to deal with your taxes. Again, however, your tax is still due on June 17, and interest will be charged from April 15. To avoid this, you should estimate your tax due and pay what you can with Form 4868.

Here’s a helpful chart with information about filing your 2023 income tax return.

Tip three – Don’t ignore the IRS, because the IRS will not ignore you

Many U.S. citizens who move overseas don’t know if they are still required to file a U.S. tax return, or they just put it out of mind. If you haven’t filed a U.S. return in recent memory, now is the right time to get started again. 

While being behind on filing tax returns can seem overwhelming and you may not know where to start, my recommendation is to start with the current year. The information you need is still fresh in your memory and if you file by your required due date, you can avoid interest and penalties.

Once you’ve got your 2023 return filed, you can work your way back. In most cases, though, the IRS can only go back and audit the most recent three years. So, for example, if you have not filed a return from as far back as 2016, and you haven’t been contacted by the IRS already, it’s safe to assume that you will not be contacted by the IRS about 2016. In that case, you may decide you do not need to file a return for that year.

The IRS will not email you, contact you on Facebook Messenger, or text you. The IRS will contact you by phone or mail, or, in the unlikely event that you have a fax machine, by fax. Mail is their most common means of contact. If the postal system in your overseas residence country is unreliable, you should maintain a U.S. mailing address, either through a delivery service or with a friend or family member.

If you have received a notice from the IRS, there will be a phone number on the notice. Don’t ignore it. Call the number. Ask questions. If you have received a notice from the IRS and you’ve ignored or misplaced it, and you have not been contacted further, do not assume the IRS has forgotten about you. They have not.

To learn the status of your tax situation, you can create an account on the IRS website. Once you have an account, you can verify your tax filings are up to date, see any outstanding tax balances you owe or refunds you may be due, and see copies of letters the IRS has sent you. Beginning this year, you should also be able to sign up for paperless correspondence.

Generally, to qualify for the IRS free file program, you must be filing an individual return and your income must be below a certain amount. (Shutterstock)

Tip four – Consider hiring yourself before hiring a tax return preparer

I am a tax return preparer and I am telling you that you do not need to hire a tax return preparer to file your tax return. Doing it yourself can save you hundreds of dollars. While many people may have bad memories of trying to muddle through IRS forms and instructions to do their own taxes, I think those days are long gone. 

There are now plenty of online tax return preparation platforms that walk you step-by-step through completing your tax return. There is still value in going to the IRS website and looking at the forms and instructions that will make up your return, but in most cases, the questions asked by any given software platform will provide you with a flawless tax form.

In particular, if you have what I call a “simple return,” you can most likely knock it out on a sunny afternoon with a pot of tea at your side. A simple return is some combination of a Form W-2, Wage and Tax Statement, Form 1099-INT, Interest Income, Form 1099-DIV, Dividends and Distributions, Form 1099-R, Distributions from Pensions, and Form SSA-1099, Social Security Benefit Statement. If these are all the forms you have, then all that may be required is for you to transpose numbers from these forms into the online tax prep software. And, with the click of a button, you can e-file your return, saving a trip to the post office and the cost of a stamp, which is up to sixty-six cents in 2024!

Things get a little more complicated if you are self-employed and clients give you Form 1099-NEC, Nonemployee Compensation, or Form 1099-MISC, Miscellaneous Income, or if you have income from rental property. But if you keep good records throughout the year, including expenses related to your business or property, inputting those numbers into the tax software isn’t difficult. And even if you don’t keep good records, you’ll have to pull together the numbers to give to your hired tax return preparer anyway, so after you’ve done that work, why not do the return yourself?

Additionally, for qualifying persons, the IRS has free file partners which will allow you to complete and file your tax return for free. Generally, to qualify for the IRS free file program, you must be filing an individual return and your income must be below a certain amount. You can click the link “File your taxes for free” on the IRS website to explore your options.

If you are still feeling a little trepidation about tackling your own return, take a look at your prior year’s return and then go to the IRS website and review the instructions for the different forms you filed. Even though a form may have 30 lines, you may only have to input numbers on a few lines that are relevant to your situation. 

Tip five – What to look for in a tax return preparer

If your return is more complicated than you care to take on, or if you just feel more comfortable having a professional prepare your return, there are certain steps you can take to help you find the right person. 

Like in any industry, tax return preparers have differing levels of skills, education and expertise. Anyone with a Preparer Tax Identification Number (PTIN) can prepare a tax return for someone else, but a PTIN can be obtained on the IRS website in about 15 minutes by completing an application and paying a small fee. It doesn’t guarantee any level of expertise. 

An enrolled agent (EA) is the highest credential awarded by the IRS and requires the applicant to pass an exam administered by the agency. Certified public accountants (CPAs) and attorneys acquire their skills independently but are also qualified to help you file a return. 

You can search the “Directory of Federal Tax Return Preparers” on the IRS website to find a list of current tax return preparers in your area. Social media chat groups specific to your location are also a great place to get recommendations, but be careful what you accept as truth.

Once you have a few names, don’t be afraid to contact the person. If they don’t get back to you in a timely manner, that may be a red flag. You want someone who is responsive. Though, realize that preparers are up to their necks in it right before tax deadlines, so don’t wait until the last minute to find your person. Start searching now.

Many preparers are happy to talk with you for free to see if the partnership is a good fit. If you are living and working outside the U.S., be sure to ask whether they are familiar with rules that apply to living overseas. Preparers that have a majority of their clients living in the U.S. may not be up to speed on the foreign earned income exclusion, foreign tax credits, rules for non-U.S. spouses or partners and other quirks that apply to U.S. citizens living overseas.  

Above all, though, remember that you are ultimately responsible for the accuracy of your taxes, even if someone else prepared it for you. 

Paul Carlino is an attorney living in San Miguel de Allende and the founder of Pickleball Mexico. He writes for Mexico News Daily.


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