Most people who were out of grade school in the 1980s remember hearing the word “gnarly.” While not an easy term to explain, the Urban Dictionary gives it a good shot:

“Gnarly is when you’ve gone beyond radical, beyond extreme. It’s balls-out danger, and/or perfection, and/or skill, or all of that combined.”

Merriam Webster also takes a stab at defining the term as “difficult, hairy, bad, nasty,” and, alternatively, as “cool and good.”

No doubt taxes can get gnarly… and not in the “cool” or “good” sense. Here is a countdown of the five of the gnarliest tax situations we face.

# 5 Gnarly Tax Situation  – Two Income Earners

Some other countries around the world tax individuals instead of households.

If we were to do that, it’d be a lot simpler.

Instead, here in the United States, you and your spouse’s tax liability is figured jointly. That is, if you are married filing jointly.

However, your employers calculate it separately. They have limited information to go on, which is your W-4 and your salary. In other words, your employer isn’t taking (and couldn’t take) your spouse’s income into consideration. How could he or she?

This can lead to under-withholding… and a gnarly tax bill each April.

Now, let’s add children to the mix.

If you qualify, your household can get a child care tax credit, a child credit and the EITC (Earned Income Tax Credit).

You have to fill out the forms correctly, however. If you don’t, you can be fined.

It’s not an easy task, which partially explains why most Americans use a tax preparer for help on this one, regardless of their income.

# 4 Gnarly Tax Situation – Multiple Streams of Income

This is similar to those who are married filing jointly yet are having taxes withheld by separate entities.

Let’s say that you have a full-time job and a side business, for example. The taxes that are withheld from your full-time job only cover those wages.

You’ll have to either pay estimated tax on your side income or up your withholding from your full-time job to cover the difference.

The more types of income you have, the more gnarly it gets.

There are also dividends, gifts, prizes, commission, etc. to figure in. If you are paid tips, you need to keep really good records every day you work in order to get it right.

If you really want to get gnarly, consider two-income earners who each have multiple jobs, side businesses, and other types of income such as tips.

[PHOTO NAME: 5 Gnarliest Tax Situations and how to tame the beast, big red question mark, not sure what to do, faceless person]

# 3 Gnarly Tax Situation – Completing a Form 1040, Schedule C

In completing a Schedule C, you are essentially completing a profit and loss statement for your business. Unless you are an accountant, it can get gnarly.

By far the biggest place folks get tripped up is in determining what qualifies as a business expense… and what doesn’t.

Many ordinary folks do not understand the intricacies of the tax laws. This results in a belief that they can claim deductions that they simply can’t.

Not only that, many business owners fail to keep receipts and good records. When audit time comes, it gets gnarly in a hurry.

And if you make a mistake?

You can be liable for the additional tax, plus interest and penalties (see number one, below).

Let’s say you do have qualified expenses. Do you know how to report them correctly?

For example, your supplies are reported on the Schedule C. Your equipment, however, is reported on form 4562.

Equipment would be your higher value items such as computers and printers… things that have a life longer than one year (let’s hope).

Paper and ink? Those are supplies.

The home office deduction is tricky as well. And don’t get me started on determining cost of goods sold.

# 2 – Alternative Minimum Tax (AMT)

It’s not pretty when the AMT catches you!

If you make over a certain amount of money, you have to figure your taxes two ways – once the “normal” way and twice the AMT way.

Then guess what?

You get to pay the higher of the two amounts.

The Alternative Minimum Tax was enacted in 1969 to keep high-income taxpayers from paying no income tax.

Problem was, the income levels weren’t indexed for inflation until 2013. As inflation rose each year, more and more Americans were being hit by the AMT. Now, many middle-class families are now in its crosshairs.

Thankfully, these limits were raised substantially for 2018. Here’s how 2017 compares with 2018:

For single or head of household filers, $70,300 is exempt. (In 2017, it was only $54,300… yikes!).

For married filing jointly filers, it is $109,400 (in 2017, it was only $84,500)

For married filing separately, it is $54,700 (only $42,250 in 2017)

What happens if you make more than these amounts? You’ll need to complete the 54 steps of the AMT Form 6251 to determine if you owe the AMT. Some of you will also have to complete the 57 steps of Form 8801 as well.

Sound gnarly? You bet it is!

# 1 – Penalties & Interest

It’s gnarly enough to realize you owe taxes. It’s worse getting slapped with additional fees on top of that.

When you make a mistake and underpay your taxes, penalties and interest accrue. These can make a small tax debt much bigger.

While penalties are limited to 25% of tax owed, interest is not. That clock doesn’t stop ticking until the statute of limitations runs out.

How to Keep Yourself from Getting Gnarly

The foregoing are only five of the many gnarly tax situations you can come across.

The solution for all of these?

Enlisting the help of a qualified Enrolled Agent (EA).

Your EA can prepare your tax return and help you break free if you are already tangled up in a gnarly tax situation.

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Jeffrey Schneider, EA, CTRS, NTPI Fellow has the knowledge and expertise to help you reach a favorable outcome with the IRS. He is the head honcho at SFS Tax & Accounting Services as well as the Enrolled Agent and Certified Tax Resolution Specialist for SFS Tax Problem Solutions.
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Now What? I Got A Tax Notice From The IRS. Help! Defining and deconstructing the scary and confusing letters that land in your mailbox. Jeff defines and deconstructs the scary and confusing letters in a fashion that mixes attention to detail with humor and an intricate clarification of what is what in the world of the IRS.

The book is available in paperback and ebook on https://Amazon.com
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For more on SFS Tax Problem Solutions, visit: http://sfstaxproblemsolutions.com/
For more on SFS Tax & Accounting Services, visit http://sfstaxacct.com/
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