The IRS Safe Harbor Provision

A taxpayer whose tax return shows a balance due of more than $1000 will be assessed an underpayment penalty for not paying in enough tax during the year, either through federal tax withholdings or estimated tax payments. However, the IRS safe harbor provision will eliminate the underpayment penalty in certain cases.

In order to be covered under the safe harbor provision, the taxpayer must pay at least the smaller of:

● 90% of the current year’s tax, or ● 100% of the prior year’s tax (or 110% if their adjusted gross income was greater than $150,000)

IRS Has Begun Sending Letters to Virtual Currency Owners

The Internal Revenue Service is sending letters to taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly. This is a part of the IRS’s larger efforts of educating virtual currency owners about the tax implications and, if necessary, advising them to pay back taxes and file amended returns.

IRS Notice 2014-21 (https://www.irs.gov/pub/irs-drop/n-14-21.pdf) states that virtual currency is property for federal tax purposes and provides guidance on how general federal tax principles apply to virtual currency transactions. ● Taxpayers who receive virtual currency as payment for goods or services must include the fair market value of the virtual currency in computing gross income. ● When a taxpayer exchanges virtual currency for other property (even if it’s another virtual currency), the taxpayer has taxable gain if the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency. ● Virtual currency paid by an employer as remuneration for services constitute wages for employment tax purposes and are subject to federal income tax withholding, FICA, and FUTA taxes, and must be reported on Form W-2. ● Virtual currency received by an independent contractor for performing services constitutes self-employment income.

Taxpayers who do not properly report the income tax consequences of virtual currency transactions are liable for the back taxes as well as penalties and interest. Taxpayers who willfully attempt to defraud the IRS could also be subject to criminal prosecution.

Educators Can Claim Deduction for Classroom Expenses

Educators may be able to deduct unreimbursed expenses on their tax return. Here are some things to know about this deduction:

● Educators can deduct up to $250 of qualified expenses that were not reimbursed. The deduction is $500 if spouses are eligible educators and file their return using the status Married Filing Jointly.

● Qualified expenses are amounts the taxpayer paid during the tax year for items such as books, supplies, professional development course fees, computer equipment (including related software and services) and other equipment and materials used in the classroom.

● To be considered an eligible educator, the taxpayer must be a kindergarten through grade 12 teacher, instructor, counselor, principal or aide. They must also work at least 900 hours a school year in a school that provides elementary or secondary education as determined under state law.

● The educator expense deduction is an “above the line” deduction that taxpayers can take regardless of whether or not they itemize deductions.

● As teachers prepare for the next school year, they should remember to keep receipts after making any purchase to support claiming this deduction.