Did you receive a K-1 form? It’s not a common form for most taxpayers but questions about K-1s are some of the top questions we are seeing at this time in the season. This is a document that partnerships, LLCs, S-corps, estates, and trusts use to describe to owners/shareholders what income they are receiving from the entity.

Basically, it’s a schedule that allows you to see what income you received during the tax year and the Schedule K-1 is used for pass through entities.  Realize, too, that you might receive a K-1 form if you are invested in a fund or an Exchange Traded Fund that operates as a partnership. As a result, you’ll get a form that states your portion of the profit or loss associated with the partnership.

If you are a partner or shareholder in a pass through entity, you probably received a copy of the Schedule K-1, filled out to describe how income has been distributed to you. The information from the K-1 is then put on your personal tax return.

The entity issuing the K-1 forms files them with the IRS. The recipients use their copies to make sure that they are paying the appropriate taxes.

Will You Get a K-1?

If you own a business with someone else, such as a partnership, then that business will issue you a K-1 to report your share of the income, credits, and deductions. If you own a business by yourself, either incorporated or as a sole proprietorship, then your business won’t issue a K-1.

There are a few other cases where you will receive a K-1 and not realize you were to get one – the most common has to do with your investments. If you invested in a master limited partnership (MLP), then you will receive a K-1 because MLPs are set up as partnerships with shareholders being limited partners in the enterprise. If you invested in an Exchange Traded Fund, some of those ETFs will issue K-1s if they are organized in a way that requires it. These ETFs are often trading in commodities such as gold, silver, natural gas, or oil.

Parts of the Schedule K-1

There are three different sections of the Schedule K-1:

1. Issuing entity information: This section includes information about the entity issuing the K-1. It has the EIN, as well as the address and the IRS filing location of the entity. You can also find the publicly traded partnership status, if it applies.
2. Partner/shareholder information: This is the area where the individual partner/shareholder information appears. It includes the tax ID number (usually a Social Security number) as well as name and address.
3. Financial details: In this portion, the partner/shareholder can see information about his or her profits and losses related to the entities activities. So, if you have received a distribution from your LLC, or if you have income from a partnership or S-corp, this is where it will appear. Your losses also appear in this section. This is the longest section of the form, and additional pages might be attached if warranted.

The tricky part for you, the taxpayer, with a K-1 is timing. Unlike 1099 and W-2 forms, which are due to the taxpayer by the end of January (mid-February at the latest), a K-1 isn’t due until mid-March. Employers and banks know how much they’ve paid out to people by January 1st, so the 1099 and W-2 deadlines are reasonable. Since businesses need more time to file their tax returns, the K-1 isn’t due until March 15th. That gives you just a month before taxes are due.

If you actually own the business, you can prepare your own K-1 when you prepare your business taxes.

If you still have questions about your K-1, don’t forget TurboTax has tax experts who are CPAs, IRS enrolled agents, and tax attorneys available to answer your questions, free so you can file before the tax deadline.

Most income is taxable income but there are some examples of non-taxable income and we’ll look at both.

Taxable Income

There are many types of taxable income. The income you earn from working as an employee is taxable, as is the income you earn when you are self-employed, or the income you receive as a business owner.

You are supposed to report income from wages, fees, commissions, tips, stock options and even fringe benefits. The fringe benefits you receive, even if you don’t receive cash, are taxable as income. Realize, too, that even if fringe benefits are given to someone else, or used by someone else, you are considered the recipient.

Investment income is also considered taxable. This includes income from the sale of investments; you pay capital gains on this income. You also pay taxes on income from interest earned on deposits, as well as from dividends paid out. Gains on collectibles sold (which includes physical metals) are also reported as taxable income.

You are also supposed to report and pay taxes on income from royalties. This includes royalties from copyrights, patents, and properties that produce mineral, oil and gas. Realize, too, that you pay taxes on bartering income. You will need to figure your gain for what you received in barter, although you can offset the income with the bartering services or items you provided.

Non-Taxable Income

There are a few income sources that aren’t taxable, here are some of them:
• Some disability insurance payments: While payments from a policy paid for by your employer are taxable, you don’t have to pay taxes on payments when you receive them from a plan that you pay for with after-tax dollars.
• Gift receipt: You don’t have to pay income taxes when you receive a gift. Taxes on gifts are paid by the giver – although the giver doesn’t have to pay taxes until the gift exceeds the exemption amount. Understand, though, that a prize isn’t a gift, and you pay taxes when you win a prize.
• Life insurance payout: You don’t pay taxes when you are the beneficiary of a life insurance policy.
• Municipal bond interest: When you invest in municipal bonds, they are most often tax-free at the federal level – and even usually at the state level (if you live in the state of issuance).

TurboTax will ask you questions related to your income to help you include your reportable income on your taxes.  If you still have questions, only TurboTax will let you speak to CPAs, tax attorneys, and IRS enrolled agents while you prepare your taxes, free.

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Who are your top contenders in Major League Baseball?

Infographic by Column Five Media

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Follow these rules to stay on the safe side:

How Much You Win Matters

(source)

Gamblers are lucky in that casino taxes are not progressive like income taxes are. That is, you will owe the same percentage to the IRS on a $100,000 jackpot as a $10,000 one. Yet it’s important to know the thresholds that require reporting. As Bankrate.com explains, winnings in the following amounts must be reported:

• $600 or more at a horse track (if that is 300 times your bet)
• $1,200 or more at a slow machine or bingo game
• $1,500 or more in keno winnings
• $5,000 or more in poker tournament winnings

Games exempt From Form W2-G

“W2-Gs are not required for winnings from table games such as blackjack, craps, pai gow, baccarat, and roulette, regardless of the amount.”

Reporting Smaller Winnings

(source)

What if You Win the Money at an Indian casino?

(source)

What About State Taxes?

(source)

These questions are explored below:

Bonuses Are Considered “Supplemental Wages”

Bonus Taxes

If you read the tax code, you will notice that the Internal Revenue Service goes to great lengths to categorize different types of income and treat them differently. Bonuses are another example of this. In the eyes of the IRS, bonuses are typically categorized as “supplemental wages.” As a University of Minnesota summary explains:

“The IRS defines supplemental wages as compensation paid in addition to the employee’s regular wages that includes, but is not limited to, severance or dismissal pay, vacation pay, back pay, bonuses, moving expenses, overtime, taxable fringe benefits, and commissions.”

As such, bonuses (like other supplemental wages) are treated differently than ordinary wage or salary income. There are two ways of taxing bonuses: the percentage method and the aggregate method. Which method gets applied to your bonus? Let’s find out.

The Percentage Method

(source)

The IRS specifies a flat “supplemental rate” of 25%, meaning that any supplemental wages (including bonuses) should be taxed in that amount. If you receive a $5,000 bonus, under this rule, $1,250 (25% of $5,000) goes straight to the IRS. Using this approach, the amount of your bonus – whatever it is – is “singled out” from the rest of your income and taxed directly. Employers frequently choose the percentage method because it’s easy and mindless to tax the entire bonus at a uniform rate.

In most cases, this is ideal from your standpoint as the bonus receiver and taxpayer, too. The aggregate method (described below), in addition to being more time-consuming and laborious for employers, can take a bigger tax bite out of your bonus payments.

The Aggregate Method

(source)

Unlike the much simpler percentage method, the aggregate method is when your employer adds the amount of your bonus (say, $5,000) to your most recent regular paycheck. Then, they determine the normal withholding amount based on IRS withholding tables for the sum of both amounts, subtract what was already withheld from your last paycheck, and withhold the rest from the bonus amount.

The problem with this approach is that instead of being taxed at a flat 25% – and having that 25% rate apply only to the bonus amount – you get taxed at what is almost certainly a higher rate on the combined amount of your normal pay and the bonus. The result: a higher overall tax obligation for the same amount of income.

Here is a free bonus calculator based on the aggregate method. Use it to determine your bonus-related tax obligation should your employer choose this approach.

Bonuses Exceeding $1 Million

(source)

What about high-end corporate bonuses, like those exceeding $1 million or more? These are singled out for higher taxes. If you receive a bonus of more than $1 million, your employer must withhold 35% of the amount above $1 million, as well as the standard 25% of the amount below $1 million. Of course, as discussed above, employers are not limited to the percentage method. They can, at their discretion, use the aggregate method for the bonus amount below $1 million.

In short: if you dislike the eye-popping bonuses top executives receive, you can take comfort in knowing how large a bite the IRS takes!

Why Does It Seem Like Bonuses Get Taxed More?

Employees often complain that their bonus checks have seemingly been taxed at much higher rates than their ordinary income. Yet, as The Street shows us by way of example, this is actually an illusion:

“If you make $2,500 a month but get a $5,000 midyear bonus, your withholding will be computed as if you received a single wage payment of $7,500 for the monthly payroll period. Then that $7,500 is annualized, or assumed to be part of your yearly salary. So if you earned $7,500 a month, you’d be making $90,000 annually versus $30,000. But at $90,000, your tax rate jumps to the 31% tax bracket vs. the 28%.

Under this annualized method, you would end up taking home even less of your bonus because you’d be withheld at much higher rates.”

What happened here is that your employer used the aggregate method to calculate your bonus withholdings instead of the simpler and smaller percentage method. The IRS didn’t apply a higher rate – your higher tax payment is simply a byproduct of the withholding method your employer chose.

Are you lucky enough to get a bonus this year?  Which tax method will your employer use? 

Tax Tip: If your bonus puts you in a higher tax bracket this year and you expect to make less next year, see if your employer can defer your bonus to lower your tax bill this year.

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To attempt to simplify the application of this approach, the lawmakers created income ranges that are taxed at different rates, creating tax brackets. Based on current laws, taxable income (i.e. amount reported on line 43 of Form 1040) ranging from $0 to $8,375 by a single tax filer is taxed at a rate of 10%. The income reported from $8,375 to $34,000 by this same single filer is taxed at a higer rate of 15%. Here are the 2010 tax brackets for single filers:

2010 Federal Income Tax Brackets for Single Filers

Brief History of U.S. Tax Brackets

Since 1913, when the federal income tax was made permanent, we have had tax brackets. Our first set of brackets was fairly simple, with rates ranging from 1% to 7%. This initial set of brackets applied to all tax filers. In the 40s and 50s, different tax brackets were created for Single, Married Filing Jointly, Married Filing Separately, and Head of Household.

The highest federal tax rate ever levied in the U.S. was a whopping 94% for income over $200,000 back in 1944 and 1945. Tax rates and income brackets can change each year, based on new law and inflation adjustments.

“What Tax Bracket Am I In?”

One of the most common questions tax filers have is, “what tax bracket am I in?” We already know, based on the brackets above, that every filer is effectively in every tax bracket, up to their highest. So we can assume that the question really is, “what is my highest tax bracket?” The rate associated with your highest bracket is actually called your marginal tax rate. For instance, if you make $90,000 in 2010, you will have a 28% marginal tax rate.

Does this mean that you will pay 28% of $90,000 in taxes for the year? No. It just means that the highest margin of income you report will be taxed at 28%. This is useful because generally every dollar you add to your current income will be taxed at that highest rate. Likewise, every reduction you make (i.e. tax deductible expense) will generally save you that percentage in tax dollars.

What you might be more interested in knowing though is your effective tax rate. This is the percentage of your taxable income that was actually paid in taxes. To determine your effective tax rate from last year, find your tax return and divide your total tax by your taxable income. Think of this as your average rate across all brackets.

(alancleaver_2000)

Updated Mon., March 22, 2010.

One of the most contentious issues in politics and economics is how America’s income tax burden – who pays the most and least on a yearly basis – is weighted. Countless editorials and op-ed pieces make implicit assumptions one way or the other about who pays the most, but remarkably few include hard, factual data to support those assumptions. The lack of data in much of what passes for analysis of the tax burden is not because the data is unavailable or difficult to obtain. Rather, it appears that data is simply passed over in the rush to express preconceived opinions on the matter. Consequently, public opinion (and perhaps tax policy) is being shaped largely by insinuation, rather than by data. Ultimately, however, how our tax burden is weighted is not a moral or ethical question, but a factual question – and a most important one. Below, we’ll analyze data from the Tax Foundation in detail – who pays the most, who pays the least, and how the progressive nature of American income taxation shapes the outcome. The answers we uncover might surprise you, especially if it is the first time you have seen the information being analyzed.

Progressive Taxation & The Tax Burden

(kevindooley)

The first thing to understand about America’s income tax burden is the progressive nature of its income tax system. “Progressive” is meant here not in the normative sense of “better” but in the quantitative sense of “more.” Basically, America’s income tax system is set up so that individuals (or couples filing jointly) who earn higher yearly incomes will be taxed at a higher rate. Very simply, if you earn more, you pay more. Progressive taxation is codified by the Internal Revenue Code into “brackets”, within which people who earn certain incomes fall and are taxed. Bargaineering recently published an updated list of the marginal income tax brackets for 2010, which is reproduced below:

Contrary to what I originally reported, TurboTax Blog reader Clark A. Wise astutely pointed out in comments the full truth about what these brackets mean. As these are marginal tax rates, the rate in question applies to income above and beyond the stated amount. This means, for example, that if you earn $50,000 in a year, the first $8,375 of it would be taxed at 10%, while the next $25,625 gets taxed at 15% and the remaining $16,000 gets taxed at 25%.

Therefore, you owe $837.5 in tax on the $8,375, while you owe $3,843.75 on the $25,625 and owe $4,000 on the remaining $16,000. In total, if you took no deductions or credits, you owe $8,680 in total federal income taxes.  From here (as Clark noted below in comments) we can go further to calculate what is known is your effective tax rate. You get it by dividing your total income tax  by your total taxable income, which in this case equals .1736 (or about 17%.)

It may also be worth noting that the top marginal tax rate was once much higher than 38%. The Tax Policy Center has an easy-to-read chart of the top marginal tax rates in every year since the income tax was instituted in 1913. During that time, the top marginal rate has been as low as 7% (in 1913) and as high as 92% (from 1952-53.) It was 91% from 1954-63, and more recently, was 70% for the entire decade of the 1970’s. Regardless of the particular year or rate, however, the basic, underlying structure of American taxation was – and still is – progressive.

Who Pays More & Less

(Rob Lee)

It sounds like a relatively simple question: who pays more or less income taxes? That being said, we must careful to define what, exactly, we are trying to answer. The argument is often made that yes, higher income earners pay more in absolute terms (as shown above), but the poor and “middle class” (in whatever income range that is defined to be) pay more relative to their incomes. In other words, someone earning less money and paying, say, the 10% or 15% marginal tax rate misses that money more than someone earning more and paying  the 35% rate, because the latter person still has a lot left over. Of course, it is not clear that this is actually true. Presumably, someone earning several hundred thousand dollars a year has a vastly different lifestyle to support than someone making twenty or thirty, and it’s tough to imagine, even for them, a scenario where their taxed-away income is mere expendable excess. Several hundred thousand dollars could be the combined income of a married doctor and lawyer, each of whom only recently attained high incomes after years of repaying student loans and earning lower incomes in residence studies and internships. However, even if that argument is granted, the question of how the tax burden is weighted is not simply who misses their taxed-away income more. What we are ultimately attempting to answer is which group of people contributes most to the total amount of federal income taxes collected, in absolute terms.

That question is a lot simpler to answer. In fact, the TurboTax blog ran a post on how America pays taxes versus how other wealthy countries pay hints at the answer:

“A look at the data on tax distribution in the United States, for instance, reveals that high income individuals pay an enormously disproportionate amount of total income taxes in the country. The Tax Foundation’s Fiscal Facts report shows that the top 1% of income earners (1,410,710 people) pay 40.42% of all income taxes in the United States. The top 2.5% (5,642,839 people) pay 20.20% of total income taxes, while the top 5% (a combined 7,053,549 people) pay 60%. The top 10% as a whole pays 71.22%, while the bottom 50% of taxpayers account for only 2.89% of all income taxes.”

These numbers can be examined in even more depth. The 1,410,710 people who comprise the top 1% of income earners, for instance, earned $2,008,259 trillion – of which $450,926 billion went to federal income taxes. Overall, the Tax Foundation shows in this graph, the top 1% now pays more total income tax than the bottom 95%. The top 10% as a whole earned $4,227,839 trillion – of which $794,432 billion went to taxes. Of the $1,115,504 trillion of total income taxes collected, the top 10% paid nearly half. This data, updated in 2009, was calculated using income tax returns from 2007 and is the newest data available at time of writing.

It is important to keep in mind that the tax burden being weighted heavily toward high income earners is not a coincidence. Progressive taxation means that America’s income tax system is literally designed to produce such outcomes. Indeed, the Tax Foundation’s Scott Hodges cited, ”…an OECD study released last year showing that the U.S.—not France or Sweden—has the most progressive income tax system among OECD nations.”

The Takeaway

Contrary to general assumptions, low and middle income earners do not pay the bulk of federal income taxes in America. Because our income tax system is progressive, high income earners automatically pay a higher percentage of taxes on their already higher incomes. This has led to a scenario where the top 1% of income earners (and incoming earning couples) now pay more income taxes than the bottom 95% combined. While arguments can be made one way or the other about who should pay more or less, who does pay more or less is a subject about which there can be no confusion.

Infographic by Column Five Media.

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This is an IRS issue and impacts returns regardless of who sends them in
to the IRS. This is not a TurboTax issue.

If you have received an acknowledgement of your tax return from the IRS, then the IRS assures us they have received your return and are processing it.

Information on the status of your refund will be updated in “Where’s My
Refund” once your return processes. This is a temporary situation, and we expect to resolve the matter in a few days.

IRS expects the vast majority of tax refunds to continue to be issued
within the historical range of 10 to 21 days.

Also, please see additional information on this link:

The IRS has updated it’s Where’s My Refund site with additional FAQs: http://www.irs.gov/newsroom/article/0,,id=254102,00.html

Good question. In fact, it’s one of the most common questions we get at TurboTax. And no wonder. If you’re getting money back, you obviously want to know when it’ll be in your bank account.

While the IRS explicitly states it doesn’t guarantee a specific date for depositing a refund, the general rule of thumb for e-filed returns with direct deposit is this: if you e-file your return by noon Thursdays, you’ll see your refund deposit the following Friday.

If you e-filed between Jan. 15 and Jan. 21 and opted for direct deposit, the IRS says it should be in your bank account on Jan. 29. If you chose to get a paper check, that will be mailed Feb. 5.

If you want a specific answer, just go to Where’s My Refund?

You’ll need to provide some simple information from your tax return:

•  Your Social Security Number (or Individual Taxpayer Identification Number)

•  Your Filing Status

•  The exact dollar amount of your refund

E-filers can get their refund information 72 hours after the IRS acknowledges your return has been accepted.

So, if you e-file your return on Jan. 30 and you’re still waiting for your refund on Feb. 30, you know there’s a problem. Time to give the IRS a jingle. You can get your refund status information by calling 1-800-829-1954 or 1-800-829-4477.

What Are Tax Brackets

Here in the United states, we have a progressive tax system. As you earn more money, you have a higher tax rate. The amounts within the tax brackets are adjusted for inflation every year. Congress establishes the tax rates and right now the tax brackets are from 10%-35%.

Some people believe that tax brackets only apply to your income from an employer. That’s not true, it includes income from different sources. Tax brackets are based on your taxable income, which can be very different from your gross income, depending on your deductions and personal exemptions.

When you fill out your W-4, try to make it as accurate as possible so your withdrawals can cover your tax obligations.

How Tax Brackets Work

Some people think if they get a raise at a job or earn enough money that puts them in the next tax bracket, they’ll see a huge increase on their taxes. That’s not the case. Your income is not completely taxed at the new tax bracket you fall in. The additional income from a raise will be taxed at the new rate.

We’ll us an example to explain how the tax brackets work. Suppose you’re filing single and have a total of $39,000 in taxable income for 2009. Here’s how your taxes are calculated with the brackets:

• Your first $8350 will be taxed at 10%.
• From there, from $8351 to $33,950 of your taxable income will be taxed at 15%.
• The rest of your income ($5,050) will be taxed at 25%.

So even though you fall into the 25% tax bracket, you’re not paying 25% on all of your taxable income. You will be effectively taxed at a lower rate.

IRS Filing Requirements

If you’re a U.S. citizen, resident, or a resident of Puerto Rico and you meet filing requirements, you are required to file a income tax return.

IRS’ Publication 17 has some factors to check and see if you need to file a tax return.

• Gross Income: All your income including wages, tips, capital gains, tips, gambling winnings, and more should be included on your income tax form.
  • Single: $8,950
  • Married (filing separately): $3,500
  • Married (filing jointly): $17,900
  • Head of Household: $11,500
  • Qualifying widow(er): $14,400
    

    Tax Filing Requirements

• Filing Status: The five filing statuses are single, married (filing separately), married (filing jointly) , head of household, and qualifying widow(er) with dependent child. Your filing status have a bearing on the deductions and exemptions you can take.
• Age: If you’re 65 or older, you can have a higher gross income before you’re required to file taxes.
  • Single: $10,300
  • Married (filing jointly) one spouse 65 & older: $18,950
  • Married (filing jointly) both spouses 65 & older: $20,000
  • Head of Household: $12,850
  • Qualifying widow(er): $15,450
• Dependent: Children are generally reported on their parent(s)’ tax return. Some dependents over 18 may be required to file your taxes.

What exactly is your adjustable gross income?

Something that has many people stressed out with taxes is the terminology. Don’t worry. Your adjustable gross income is basically your entire gross income minus any allowable deductions. Some deductions include:

• Health Savings Account
• Moving Expenses
• Self-employed Health Insurance
• Alimony Paid
• Student Loan Interest
• Tuition and Fees

Your adjustable gross income is not the same as your taxable income.

What’s the difference between your adjusted gross income and taxable income?

After you have calculated your adjusted gross income (line 37 on the 1040), you are then allowed to either take a standard or itemized deduction. It would be wise to compare and see if the standard or itemized deduction is best for you. After you subtract that from your adjusted gross income, you now receive your taxable income amount (line 43 on the 1040).

From your taxable income, you can determine how much tax is due for the year. Later you can see if you underpaid( meaning you owe more tax) or overpaid (you will be receiving a refund).

Final Thoughts

How are you preparing this tax season?

Caption: DeusXFlorida

Whether you’re trying to make a little extra cash before the school year starts back up, or you’re just bored—summer jobs are a great way to put a little something in your pockets.  But just because the summer is void of tests and studying, doesn’t mean you get a free ride from every angle.  That summer job you have right now will still have to be reported come tax time.  Here are a few tips to help you be sure you’re in line with what the Tax Man expects:

1)  Tips are taxable

A tip is considered income, so you have to report it on your return.  Be sure to keep track of exactly how much you’re given.  You’ll report this on Form 4137, which TurboTax will help you fill out (so don’t worry about having to track the form down).

2)  Odd jobs aren’t exempt

Even if you’re just mowing a few of your neighbors’ lawns, you still have to report the money you receive for that service as income tax.  This type of income is considered self employment income, so be sure to report it correctly (using a Schedule C).   And good news! TurboTax will walk you through this process as well.

3)  If you make $400 or more from your odd job, you have to pay self-employment tax

You may be the entrepreneurial type and turn your lawn mowing gig into something a little more lucrative.  If you make over $400 from this, you’ll need to not only pay income tax on your earnings, but self-employment tax as well (this is what pays for Social Security and Medicare).  This tax will be figured on Form 1040, Schedule SE—surprise, surprise, TurboTax has you covered.

4)  Fill out a W-4 Form

This may be a no brainer, but fill out a W-4 no matter how trivial the job may seem.  If you have a boss, you should have tax withholdings.  Doing so will make sure the right amount of taxes are being taken out of each paycheck so you hopefully won’t have to pay when you file a return.

5)  Newspaper carriers have some unique rules when it comes to taxes

You must meet a few conditions to be considered a direct seller and therefore treated as self employed:

• You are in the business of delivering newspapers

• Your pay is directly related to sales instead of how many hours you worked

• You deliver under a written contract that specifies you are not treated as an employee for federal tax purposes.

6)  Most of the time, newspaper carriers that are under 18 aren’t regulated to self-employment tax

7)  If you’re in ROTC, subsistence allowances from advanced training are not taxable

The caveat to this is that active duty pay (like the pay you received while participating in a summer advanced camp) is taxable like any other income.  You’ll get a W-2 just like with any other job, so be on the lookout at the end of the year.

And there it is!  A few tips to keep in mind while earning a little extra money.  Pretty simple.  Now, one more bonus tip….try to relax a little, the summer is too short as it is.