The thousands of pages in the U.S. tax code get more confusing each year, but the big question on most Americans' minds remains very simple: How can I reduce my taxable income? With tax season is in full swing, make tax deductions and tax credits your best friends for the next few months. Many people probably don't realize how many expenses are tax deductible, and don't want to spend hundreds of dollars hiring a CPA to figure it out.
If you're a seasoned tax filer, you don't ever overlook tax deductions like mortgage interest, student loan interest, real estate property taxes, and state taxes. Still, plenty of little-known tax deductions hide deep in the tax code, tricking you into leaving tax refund money on the table.
This list of commonly overlooked personal tax deductions will help beginners and experts alike discover major savings this tax year.
1. Dependent parents. More and more often, middle-aged people take care of their aging parents, including paying some or all of their medical expenses. If you're providing more than 50 percent of your parents' financial support, and their expenses exceed 7.5 percent of your adjusted gross income, you may qualify for a big deduction.
2. Mortgage loan discount and origination fees. If you bought a house in 2010, make sure you check your Good Faith Statement and deduct any mortgage origination fees or discount points that you paid. The IRS considers all of these expenses prepaid mortgage interest, and mortgage interest is always deductible for primary residences.
3. Sales tax on a new vehicle. This deduction comes with a lot of restrictions and stipulations--buying a used car doesn't count, for example--but if you purchased a new car in 2010, you may be able to deduct the sales tax on the purchase, even if you don't itemize your deductions. Depending on your filing status (i.e. single, married filing jointly versus married filing separately) and income, your deduction might be a little lower, and if you make more than $135,000, this deduction is not applicable.
4. Home energy efficiency improvements. If you make qualifying energy-efficient home improvements to your primary residence, like installing doors, windows, a water heater, furnace, or air conditioner, you may be able to deduct up to $1,500 off your 2010 tax bill.
5. Mileage for volunteer work. If you travel a long way to volunteer for a charity, you can deduct the IRS-determined mileage allowance for your commute back and forth. While the reimbursement rate fell a bit for business expenses this year, fortunately the 14 cents per mile for charity-related travel held steady.
6. Childcare expenses when volunteering. If you paid a babysitter to watch the kids while you volunteered for your church or other non-profit organization, you can deduct that expense on your taxes.
7. Expenses for mentoring programs. Many volunteers for programs such as Big Brothers Big Sisters, Young Life, and youth groups end up spending a lot of their own funds on children by paying for meals and event tickets. You can't deduct the money you spent on yourself, but you can deduct the cash spent on the child.
8. Business meals and entertainment. If you're a small-business owner or a self-employed freelancer who takes prospective or current clients out often, you're incurring a great deal of expenses for meals and entertainment. Make sure you keep these expenses separate, because you can deduct 100 percent of the cost of entertainment and 50 percent of what you spend on meals (since you need to eat anyway).
9. Continuing education deductions. If you itemize your deductions, don't miss out on these miscellaneous itemized tax deductions: Subscriptions to professional publications, dues paid to professional associations, investment advisory fees, costs of a safety deposit box, and tax-preparation fees (even if you used online tax preparation software like TurboTax).
10. Jury duty pay. If you received jury duty pay, the IRS considers it like any other taxable income. But if you had to return jury duty compensation because you still had a salary from your employer while at jury duty, then you can deduct the pay from your tax return.
You don't have to be a CPA or a math whiz to figure out that many activities, tasks, and everyday situations can be money-saving tax deductions. But of course fine print can always get in the way, so if you're unsure about itemizing or taking certain deductions, consult a tax professional. The last thing you want to do is claim a deduction and pay it back later on during an audit.
Showing posts with label rates. Show all posts
Showing posts with label rates. Show all posts
Tuesday, February 22, 2011
Sunday, February 20, 2011
Parents taking proper tax credits save thousands in taxes
Parents who pay attention to their tax return can often recover thousands of dollars for everything from raising children to sending them to day care or college. Yet, taxpayers leave billions of unclaimed credits on the table, according to federal figures.
Maybe it's a lack of knowledge. Maybe it's intimidation from the rules and regulations that come in tax forms and publications. But tax software such as TurboTax or TaxAct, which are free on the IRS site (freefile.irs.gov) for people with an adjusted gross income of $58,000 or less and available in stores for others, will help you hunt for the credits that fit your situation and do the number crunching for you.
Whether you do taxes on paper or online, watch for these potential deals. And take advantage of them because many could be reduced in a couple of years as short-term tax laws expire. Here are ways to save money:
Child tax credit: Parents can cut their tax bill by as much as $1,000 a child, up to a total of $3,000. Children must be under age 17, and there are income requirements to meet. The credit starts to phase out when married couples' incomes top $110,000 and single parents' exceed $75,000. But parents still might qualify for some limited credit with incomes up to $130,000 for couples and $95,000 if single, said Terrence Rice, CPA. Typically, this credit reduces your regular taxes, but for some low-income families it is possible to get some money back from the government even if their income is too low to pay taxes.
Use Publication 972 and Form 8812 to qualify for a refund that exceeds what you owe in taxes.
Earned income tax credit: This credit is intended to help people who work but earn little. The amount of the credit is influenced by the number of children you have. For example, a couple with three children could have an income up to $48,362 and qualify, but a single person with no children would have to have an income under $13,460. The maximum credit with three children is $5,666, but if you are childless it's $457. To find out if you are eligible, use the table in IRS Publication 596.
Sending kids to college: The American Opportunity Tax Credit can take some of the sting out of paying college tuition and fees. You can get a credit of up to $2,500 per student per year for each of four years for college. To get the full benefit, income for a couple must be no more than $160,000; for singles, $80,000. But some credit is available for couples with income up to $180,000, or $90,000 for singles. The rules are covered in Publication 970.
Keep in mind that recent tax changes allow you to use the credit for each year of a four-year education up to the end of the 2010 tax year. Previously, the Hope Credit for college applied only to the first two years.
Rice notes that parents may be able to claim the credit if a grandparent pays a student's college costs directly to the college. In addition, if a student borrowed with student loans, either they or their parents can deduct the interest payments they make on the loans.
Adopted child: Recent tax changes have enhanced the credits available to parents who adopt children, said Rice. Parents can receive a credit for up to $13,170 for expenses, such as legal fees, incurred while adopting a child. In some cases, travel costs may also be covered if the adoption was done away from home. Parents adopting special needs children may be able to get the full $13,170 credit even if they did not spend that much. Use Form 8839.
Child care expenses: If you pay someone to care for a child under age 13 while you work, you can get a credit for up to 35 percent of the costs up to $3,000 per child or $6,000 for two children. This can cover care in your home as long as it's not provided by a spouse or one of your other children. The benefit can also extend to facilities such as day camps but not overnight camps. See Publication 503.
Moving for a job: If you had to move at least 50 miles for a new job, you can deduct your moving expenses. Job-seeking expenses are also deductible. Use Publication 521.
Insuring the kids: If you were self-employed in 2010 and bought health insurance for yourself and your family, you will be able to deduct the premiums you paid for children under 27, even if you don't claim the child as a dependent, said Rice. This is a result of health care overhaul. Dates matter, however. Rice notes the deduction is possible only for the portion paid from March 30 to the end of 2010.
Maybe it's a lack of knowledge. Maybe it's intimidation from the rules and regulations that come in tax forms and publications. But tax software such as TurboTax or TaxAct, which are free on the IRS site (freefile.irs.gov) for people with an adjusted gross income of $58,000 or less and available in stores for others, will help you hunt for the credits that fit your situation and do the number crunching for you.
Whether you do taxes on paper or online, watch for these potential deals. And take advantage of them because many could be reduced in a couple of years as short-term tax laws expire. Here are ways to save money:
Child tax credit: Parents can cut their tax bill by as much as $1,000 a child, up to a total of $3,000. Children must be under age 17, and there are income requirements to meet. The credit starts to phase out when married couples' incomes top $110,000 and single parents' exceed $75,000. But parents still might qualify for some limited credit with incomes up to $130,000 for couples and $95,000 if single, said Terrence Rice, CPA. Typically, this credit reduces your regular taxes, but for some low-income families it is possible to get some money back from the government even if their income is too low to pay taxes.
Use Publication 972 and Form 8812 to qualify for a refund that exceeds what you owe in taxes.
Earned income tax credit: This credit is intended to help people who work but earn little. The amount of the credit is influenced by the number of children you have. For example, a couple with three children could have an income up to $48,362 and qualify, but a single person with no children would have to have an income under $13,460. The maximum credit with three children is $5,666, but if you are childless it's $457. To find out if you are eligible, use the table in IRS Publication 596.
Sending kids to college: The American Opportunity Tax Credit can take some of the sting out of paying college tuition and fees. You can get a credit of up to $2,500 per student per year for each of four years for college. To get the full benefit, income for a couple must be no more than $160,000; for singles, $80,000. But some credit is available for couples with income up to $180,000, or $90,000 for singles. The rules are covered in Publication 970.
Keep in mind that recent tax changes allow you to use the credit for each year of a four-year education up to the end of the 2010 tax year. Previously, the Hope Credit for college applied only to the first two years.
Rice notes that parents may be able to claim the credit if a grandparent pays a student's college costs directly to the college. In addition, if a student borrowed with student loans, either they or their parents can deduct the interest payments they make on the loans.
Adopted child: Recent tax changes have enhanced the credits available to parents who adopt children, said Rice. Parents can receive a credit for up to $13,170 for expenses, such as legal fees, incurred while adopting a child. In some cases, travel costs may also be covered if the adoption was done away from home. Parents adopting special needs children may be able to get the full $13,170 credit even if they did not spend that much. Use Form 8839.
Child care expenses: If you pay someone to care for a child under age 13 while you work, you can get a credit for up to 35 percent of the costs up to $3,000 per child or $6,000 for two children. This can cover care in your home as long as it's not provided by a spouse or one of your other children. The benefit can also extend to facilities such as day camps but not overnight camps. See Publication 503.
Moving for a job: If you had to move at least 50 miles for a new job, you can deduct your moving expenses. Job-seeking expenses are also deductible. Use Publication 521.
Insuring the kids: If you were self-employed in 2010 and bought health insurance for yourself and your family, you will be able to deduct the premiums you paid for children under 27, even if you don't claim the child as a dependent, said Rice. This is a result of health care overhaul. Dates matter, however. Rice notes the deduction is possible only for the portion paid from March 30 to the end of 2010.
Sunday, February 13, 2011
Tasting Three Flavors of Tax Software
TAX-PREPARATION software usually makes an onerous task easier. It doesn’t make doing a tax return fun, but it does make it far less frustrating and time-consuming.
Tax-prep programs guide you through the minutiae of the tax law. That’s no small feat: reading the Internal Revenue Code may seem like trying to decode a cipher written solely for the benefit of lawyers and lobbyists. If deciding whether to use software is simple, picking among the three leading programs is tougher.
For people with straightforward finances — a salary and some investment income, a mortgage and common deductions — any of the leading ones should work. All three — TurboTax, H&R Block at Home and TaxAct — use a question-and-answer format to guide you through your return and then plug your responses into the appropriate places on the I.R.S.’s many forms.
Each has its advantages. TurboTax offers the best overall experience — the easiest and speediest — but, with nagging about buying additional software and services, it occasionally annoys. Block at Home is just as good at handling the basics and gives an unbeatable guarantee. TaxAct is the cheapest.
TurboTax can retrieve data from more than 250,000 employers, banks and investment companies, and Intuit, its maker, continues to add more. The most confusing pitch embedded in TurboTax is the one that pops up once you finish the federal section: “It says, ‘Would you like a professional preparer to look over your return?’ For a fee of $39.95, of course. Didn’t I buy the software so I don’t have to worry about that? Doesn’t this suggest that TurboTax doesn’t believe that I should be doing my own return?”
If you don’t want to pay extra, the program offers gratis guidance via pop-up boxes and links. Users can also pose questions online through TurboTax’s Live Community. Intuit staff members and TurboTax users provide the answers. It’s like a Facebook page for tax nerds — and a test of one’s belief in the wisdom of crowds. Would you take the home-office deduction because “Volvogirl” or “Texas Roger” explained it online?
Block at Home works just as well as TurboTax — in most cases. Most of its explanations are just as clear, and its interview process is just as efficient. If you have your paperwork ready and you’re a filer with common deductions, you can probably complete your return using either brand in less than two hours.
Block isn’t able to pull in as much financial information as TurboTax. It fails to grab statements from investment accounts. In theory, the program has that ability, and Block has links with the bigger companies.
When it’s time to file, Block does offer up a reminder of a difference between it and TurboTax: Block users are entitled to in-person audit support. A Block enrolled agent will advise you if you’re audited and accompany you if you have to appear at the I.R.S. It’s as if Block is kicking in an insurance policy at no extra charge.
TaxAct is the Wal-Mart of tax software; its virtue is price.
Prices for all three brands can vary, depending on where and when you buy. But in general, the online versions, where you prepare your return via a Web browser, are cheaper than the CD and downloadable ones, which you copy onto your computer. But the CD’s and downloadables allow completion of multiple returns.
At $34.99 in the store, TaxAct Premier Federal + State was less than half the price of TurboTax Premier, which cost $79.99. H&R Block at Home Premium was $59.99.
TaxAct even offers a free federal return online to anyone, regardless of income or age.
People who use TaxAct’s free service shouldn’t expect the same level of guidance that they’d get from the company’s paid offerings. For that, they have to upgrade, with the cost rising with the level of guidance.
But don’t discount the quality of TaxAct’s offerings.
Tax-prep programs guide you through the minutiae of the tax law. That’s no small feat: reading the Internal Revenue Code may seem like trying to decode a cipher written solely for the benefit of lawyers and lobbyists. If deciding whether to use software is simple, picking among the three leading programs is tougher.
For people with straightforward finances — a salary and some investment income, a mortgage and common deductions — any of the leading ones should work. All three — TurboTax, H&R Block at Home and TaxAct — use a question-and-answer format to guide you through your return and then plug your responses into the appropriate places on the I.R.S.’s many forms.
Each has its advantages. TurboTax offers the best overall experience — the easiest and speediest — but, with nagging about buying additional software and services, it occasionally annoys. Block at Home is just as good at handling the basics and gives an unbeatable guarantee. TaxAct is the cheapest.
TurboTax can retrieve data from more than 250,000 employers, banks and investment companies, and Intuit, its maker, continues to add more. The most confusing pitch embedded in TurboTax is the one that pops up once you finish the federal section: “It says, ‘Would you like a professional preparer to look over your return?’ For a fee of $39.95, of course. Didn’t I buy the software so I don’t have to worry about that? Doesn’t this suggest that TurboTax doesn’t believe that I should be doing my own return?”
If you don’t want to pay extra, the program offers gratis guidance via pop-up boxes and links. Users can also pose questions online through TurboTax’s Live Community. Intuit staff members and TurboTax users provide the answers. It’s like a Facebook page for tax nerds — and a test of one’s belief in the wisdom of crowds. Would you take the home-office deduction because “Volvogirl” or “Texas Roger” explained it online?
Block at Home works just as well as TurboTax — in most cases. Most of its explanations are just as clear, and its interview process is just as efficient. If you have your paperwork ready and you’re a filer with common deductions, you can probably complete your return using either brand in less than two hours.
Block isn’t able to pull in as much financial information as TurboTax. It fails to grab statements from investment accounts. In theory, the program has that ability, and Block has links with the bigger companies.
When it’s time to file, Block does offer up a reminder of a difference between it and TurboTax: Block users are entitled to in-person audit support. A Block enrolled agent will advise you if you’re audited and accompany you if you have to appear at the I.R.S. It’s as if Block is kicking in an insurance policy at no extra charge.
TaxAct is the Wal-Mart of tax software; its virtue is price.
Prices for all three brands can vary, depending on where and when you buy. But in general, the online versions, where you prepare your return via a Web browser, are cheaper than the CD and downloadable ones, which you copy onto your computer. But the CD’s and downloadables allow completion of multiple returns.
At $34.99 in the store, TaxAct Premier Federal + State was less than half the price of TurboTax Premier, which cost $79.99. H&R Block at Home Premium was $59.99.
TaxAct even offers a free federal return online to anyone, regardless of income or age.
People who use TaxAct’s free service shouldn’t expect the same level of guidance that they’d get from the company’s paid offerings. For that, they have to upgrade, with the cost rising with the level of guidance.
But don’t discount the quality of TaxAct’s offerings.
Wednesday, February 9, 2011
Top 10 Smartest Things You Can Do With Your Tax Refund
- Not get one at all – The money you loan the government interest-free, could be earning you interest somewhere else.
- Pay off/down your debt – The absolutely smartest thing you can do in your life is eliminate your debt.
- Build your emergency fund – Hint: Imagine you had 6 months of expenses saved up. Now imagine the economy tanking. How does it feel to be recession-proof?
- Grow your nest egg for retirement – Taking your retirement in your own hands instead of relying on social insecurity will make you look like a genius!
- Use it to pay 100% down on a reliable used car…if you need one – Buying a good used car can save you lots of money in terms of depreciation and interest.
- Prepare it yourself using Turbo Tax – We have NEVER been disappointed with this option. Now you can even do your Federal return for free online. For us – $50 versus WAY TOO MUCH $$ anywhere else. Way worth it!
- Give it to someone in need – If your financial situation is solid, why not give it to someone who is struggling if you can?
- Use it to help fund your kids college – It will be time for your kids to go to college before you know it. Wouldn’t it be nice to bless them with a nice education without the debt that usually comes with it?
- Use it to pay down your mortgage – If you have no debt, except for your mortgage, imagine how nice it would be to owe NO ONE!! Your income is COMPLETELY yours! What a feeling!
- Donate a portion of it.
Saturday, February 5, 2011
How To Do Your Taxes On The Cheap
It's that time of year again. Tax filing season. This year the feds are cutting you a small break: Due to a District of Columbia holiday followed by a weekend, personal tax returns are due three days later on April 18. (On the other hand, due to Congress' December tax changes, those who itemize their deductions can't begin to file until Feb. 14.)
But you can also do something yourself to make this filing season a little less painful. An array of computer-based programs can help you do your tax returns accurately--cheaply or even for free. Some 60% of individual taxpayers use a paid human preparer. As a result, according to an IRS study, the median income taxpayer shelled out $258 for tax prep in 2007.
But the majority of taxpayers, provided they've got the time, patience and computer savvy, can do tax prep themselves. Know that when it comes to taxes, do-it-yourself is not for everyone and can't be done the old-fashioned way--with blank copies of the actual forms and instructions, a pencil, a good eraser and maybe a calculator. Despite all the talk over the years of tax simplification, the truth is that pretty much the opposite has happened .(One reason not to do any but the simplest return by hand is that many of the numbers to be entered on your 1040 and its schedules depend on other numbers whose values can change as you complete the return. At a minimum you'll need some computer firepower to do all these cascading calculations and recalculations. (Paid preparers couldn't cope without software, either.) Form 6251, for calculating the dreaded alternative minimum tax, has 54 steps. Schedule D for capital gains and losses has 22 steps.
No wonder that according to the IRS' own studies, just 8% of taxpayers did their returns without benefit of a pro or software in 2008, down from 28% in 2000.
If do-it-yourself software is not for you and you're broke, one option--used by 3% of taxpayers in 2008--is to take advantage of the free human-based tax help out there. The IRS oversees two such initiatives, the Volunteer Income Tax Assistance Program and the Tax Counseling for the Elderly Program. The AARP foundation runs AARP Tax-Aide, with volunteers at 6,500 locations across the country.
In addition, many law schools and legal services organizations offer tax-help clinics; ask around. If you don't have a computer, use one at your local library andGoogle "free tax help" and your city. And don't forget to check with the librarians; it's possible tax help will be available in the same facility.
The three top sources for software tax prep areIntuit's TurboTax, H&R Block At Home (which used to be called TaxCut) and TaxACT. You can buy them as stand-alone disks, downloadable software, or as a Web-based program used with an Internet connection. There are more than a dozen other tax prep products with names like OnlinetaxPros.com, TaxSlayer, 1040NOW.NET and TaxSimple. Most of them require an Internet hook-up.
Pricing by a single vendor can vary, so it pays to look around. A stand-alone disk of TurboTax Deluxe, which allows you to activate the program for one state, and to electronically file one federal return, lists for $59.99. Does anybody pay that? When we checked, it was selling for $49.99 atCostco or Staples . Some vendors on Amazon.com charge just $41 (and usually with no sales tax or shipping charge). The online version from TurboTax with a state return is $36.95.
But if you have a brokerage or mutual fund account, check with your provider. At Vanguard, downloadable TurboTax Deluxe with a state return is free to Flagship Services and Asset Management Services Clients. Fidelity andTD Ameritrade also offer discounts to customers.
The Internal Revenue Service, which saves money every time a taxpayer files electronically rather than on hard paper, promotes a program called Free File Alliance that offers free tax prep computing from 19 providers. The main requirement is that the taxpayer has an adjusted gross income of $58,000 or less. Good candidates for free prep and filing include anyone who is able to file using the IRS Form 1040EZ.
Besides the income limitation, there are a number of other caveats. Many of the free tax prep vendors have age restrictions. Not every one operates in every state. If you need a particularly obscure form, you may be out of luck. Many, but not all, of the Free File Alliance participants will charge you to do a state tax return. Read the fine print.
Whatever your choice, keep good records of whatever you shell out for tax prep. Such costs are deductible--but with two catches. One, you can only benefit if you itemize and your unreimbursed employee expenses and certain other miscellaneous items (including the tax help) top 2% of your adjusted gross income. Two, you can't take the deduction for this year's costs until next year.
But you can also do something yourself to make this filing season a little less painful. An array of computer-based programs can help you do your tax returns accurately--cheaply or even for free. Some 60% of individual taxpayers use a paid human preparer. As a result, according to an IRS study, the median income taxpayer shelled out $258 for tax prep in 2007.
But the majority of taxpayers, provided they've got the time, patience and computer savvy, can do tax prep themselves. Know that when it comes to taxes, do-it-yourself is not for everyone and can't be done the old-fashioned way--with blank copies of the actual forms and instructions, a pencil, a good eraser and maybe a calculator. Despite all the talk over the years of tax simplification, the truth is that pretty much the opposite has happened .(One reason not to do any but the simplest return by hand is that many of the numbers to be entered on your 1040 and its schedules depend on other numbers whose values can change as you complete the return. At a minimum you'll need some computer firepower to do all these cascading calculations and recalculations. (Paid preparers couldn't cope without software, either.) Form 6251, for calculating the dreaded alternative minimum tax, has 54 steps. Schedule D for capital gains and losses has 22 steps.
No wonder that according to the IRS' own studies, just 8% of taxpayers did their returns without benefit of a pro or software in 2008, down from 28% in 2000.
If do-it-yourself software is not for you and you're broke, one option--used by 3% of taxpayers in 2008--is to take advantage of the free human-based tax help out there. The IRS oversees two such initiatives, the Volunteer Income Tax Assistance Program and the Tax Counseling for the Elderly Program. The AARP foundation runs AARP Tax-Aide, with volunteers at 6,500 locations across the country.
In addition, many law schools and legal services organizations offer tax-help clinics; ask around. If you don't have a computer, use one at your local library and
The three top sources for software tax prep are
Pricing by a single vendor can vary, so it pays to look around. A stand-alone disk of TurboTax Deluxe, which allows you to activate the program for one state, and to electronically file one federal return, lists for $59.99. Does anybody pay that? When we checked, it was selling for $49.99 at
But if you have a brokerage or mutual fund account, check with your provider. At Vanguard, downloadable TurboTax Deluxe with a state return is free to Flagship Services and Asset Management Services Clients. Fidelity and
The Internal Revenue Service, which saves money every time a taxpayer files electronically rather than on hard paper, promotes a program called Free File Alliance that offers free tax prep computing from 19 providers. The main requirement is that the taxpayer has an adjusted gross income of $58,000 or less. Good candidates for free prep and filing include anyone who is able to file using the IRS Form 1040EZ.
Besides the income limitation, there are a number of other caveats. Many of the free tax prep vendors have age restrictions. Not every one operates in every state. If you need a particularly obscure form, you may be out of luck. Many, but not all, of the Free File Alliance participants will charge you to do a state tax return. Read the fine print.
Whatever your choice, keep good records of whatever you shell out for tax prep. Such costs are deductible--but with two catches. One, you can only benefit if you itemize and your unreimbursed employee expenses and certain other miscellaneous items (including the tax help) top 2% of your adjusted gross income. Two, you can't take the deduction for this year's costs until next year.
Thursday, January 20, 2011
How to Prepare Now for the Tax Filing Deadline
The IRS officially began accepting returns for most taxpayers, and will allow all returns to be filed in just a few weeks. Although tax filing season has not officially began yet everyone, there are plenty of actions you can take now to help make preparing your return less stressful.
1. Breathe
So many taxpayers get stressed out just at the thought of preparing for tax season. Be sure to take a deep breath, and try not to get too worked up over your tax return. You have plenty of time before the April deadline, and this year you have until the 18th. By getting started now you are going to have a much less stressful tax season.
2. Gather Tax and Financial Documents
It is a good idea to put together a designated folder for your tax and financial documents. That way, when it comes time to prepare your actual return you will have all of your information already organized. Some items you will want to include in this folder ate W2 forms from employers, 1099 forms if you worked as an independent contractor or earned income from investments, receipts from charitable contributions, mortgage interest statements, vehicle registration bills, etc.
3. Get Copies of any Missing Materials
If you are missing any documents, then you will want to get copies as soon as possible. For example, you might need to print out copies of bank or credit card statements for deduction you intend to claim, but can't seem to find the receipt.
4. Toss (or Shred) Unnecessary Documents
You don't really need every single bank statement or pay stub in your tax folder. If you do want to keep all of these documents put them into a different file. That way you will not feel overloaded with paperwork when you sit down and attempt to prepare your return in a few weeks.
5. Be on the Lookout for your Income Statements
You should expect to receive W2 and 1099 forms some time this month. Be sure that you are on the lookout, so that you do not accidentally throw them into the trash with your junk mail. If you do not get your W2 by February then you will want to contact your employer to make sure it was sent to the correct address.
6. Find your Return from Last Year
Make sure that you include your most recent return at the front of your tax file. Unless you changed jobs, or made a major tax move like purchasing a home, then you should be able to use your old return as a guide for completing you new one.
7. Verify the Exact Amounts of Charitable Deductions
The IRS has been cracking down on charitable contributions over the past couple of years. Be sure to look over your receipts and make sure that you can substantiate the market value of your contributions. Additionally, if your contributions exceed $500 you will need to complete IRS Form 8283, and if any item is valued at over $5,000 then you must obtain a written appraisal. 8. Anticipate Errors
There are a few common errors that many taxpayers make on their returns.
9. Think About Hiring a Pro
If you have a complicated tax account, or simply do not want to hassle with preparing your own return then you should think about hiring a tax professional. Check out a few local tax preparation offices in your neighbor hood and make an appointment before they start getting busy.
1. Breathe
So many taxpayers get stressed out just at the thought of preparing for tax season. Be sure to take a deep breath, and try not to get too worked up over your tax return. You have plenty of time before the April deadline, and this year you have until the 18th. By getting started now you are going to have a much less stressful tax season.
2. Gather Tax and Financial Documents
It is a good idea to put together a designated folder for your tax and financial documents. That way, when it comes time to prepare your actual return you will have all of your information already organized. Some items you will want to include in this folder ate W2 forms from employers, 1099 forms if you worked as an independent contractor or earned income from investments, receipts from charitable contributions, mortgage interest statements, vehicle registration bills, etc.
3. Get Copies of any Missing Materials
If you are missing any documents, then you will want to get copies as soon as possible. For example, you might need to print out copies of bank or credit card statements for deduction you intend to claim, but can't seem to find the receipt.
4. Toss (or Shred) Unnecessary Documents
You don't really need every single bank statement or pay stub in your tax folder. If you do want to keep all of these documents put them into a different file. That way you will not feel overloaded with paperwork when you sit down and attempt to prepare your return in a few weeks.
5. Be on the Lookout for your Income Statements
You should expect to receive W2 and 1099 forms some time this month. Be sure that you are on the lookout, so that you do not accidentally throw them into the trash with your junk mail. If you do not get your W2 by February then you will want to contact your employer to make sure it was sent to the correct address.
6. Find your Return from Last Year
Make sure that you include your most recent return at the front of your tax file. Unless you changed jobs, or made a major tax move like purchasing a home, then you should be able to use your old return as a guide for completing you new one.
7. Verify the Exact Amounts of Charitable Deductions
The IRS has been cracking down on charitable contributions over the past couple of years. Be sure to look over your receipts and make sure that you can substantiate the market value of your contributions. Additionally, if your contributions exceed $500 you will need to complete IRS Form 8283, and if any item is valued at over $5,000 then you must obtain a written appraisal. 8. Anticipate Errors
There are a few common errors that many taxpayers make on their returns.
9. Think About Hiring a Pro
If you have a complicated tax account, or simply do not want to hassle with preparing your own return then you should think about hiring a tax professional. Check out a few local tax preparation offices in your neighbor hood and make an appointment before they start getting busy.
Tuesday, January 18, 2011
How Long to Keep Tax Records
This is a great time of the year to get rid of outdated files and to organize your records in preparation for filing your tax return in the spring. You should be receiving your year-end mutual fund and brokerage statements by the end of January, along with W-2 and 1099 tax forms reporting your income and interest for 2010.
Review your year-end statements to make sure they accurately reflect the monthly statements you received from your bank, broker and other financial institutions. Then you can toss the monthly statements. Keep those year-end statements in your tax files for at least three years after the due date of your return (or six years if you’re self-employed).
You should keep records of your stock and fund purchases for as long as you hold those investments, however. You’ll need to report the date, number of shares and price paid on Schedule D to establish your basis when you finally sell a stock or fund. You’ll only pay tax on the profits above the basis amount, or you can use a loss to offset investment gains and up to $3,000 per year of ordinary income. Also, hold on to year-end statements that show reinvested dividends and capital-gains distributions, so you don’t end up paying taxes on the same money twice when you sell the shares. It’s also a great time to declutter the rest of your financial files. Although it’s recommended that you keep your tax returns for at least six years, you may want to hold on to them forever, because they can provide clues about your income and investments and other tax information that might come in handy in the distant future. You can still weed out and toss supporting documents, such as canceled checks and old receipts, three years after the due date of your return (that’s usually how long the IRS has to audit your return, unless you’ve significantly underreported your income). If you have any self-employment income, keep your receipts for at least six years.
You may also want to hang on to receipts for major home improvements for at least three years after you sell your house. They may come in handy if you want to show potential buyers how much you’ve spent to upgrade the property, and you may be able to use certain home-improvement expenses to lower any tax bill you might have on your home-sale profits. You probably won’t pay taxes on the sale of your principal residence unless you’ve lived in it for less than two years, you rented out part of it, or your profit on the sale exceeded $250,000 if you’re single, $500,000 if you’re married.
Trash your ATM receipts and bank-deposit slips as soon as you match them up with your monthly statement. Ditch your pay stubs as soon as you receive your W-2 for the year. And you can also toss paper copies of your credit-card, utility, phone and cable bills as soon as the next month’s bill acknowledging your last payment arrives (unless you need to keep the bills for tax purposes -- if you deduct home-office expenses, for example). You may also want to hold on to your utility receipts if you plan to sell your house soon, so you can show prospective buyers how much your utilities tend to cost.
Any year that you make a nondeductible contributions to a traditional IRA, you must file Form 8606 to document those contributions. Then hold on to all of those 8606 forms until you withdraw all the money from your IRA, so you won’t end up overpaying your tax bill when you start to take out the money in retirement .And when you do decide to toss any of these papers, be sure to shred them so your garbage doesn’t become a treasure trove for identity thieves.
Review your year-end statements to make sure they accurately reflect the monthly statements you received from your bank, broker and other financial institutions. Then you can toss the monthly statements. Keep those year-end statements in your tax files for at least three years after the due date of your return (or six years if you’re self-employed).
You should keep records of your stock and fund purchases for as long as you hold those investments, however. You’ll need to report the date, number of shares and price paid on Schedule D to establish your basis when you finally sell a stock or fund. You’ll only pay tax on the profits above the basis amount, or you can use a loss to offset investment gains and up to $3,000 per year of ordinary income. Also, hold on to year-end statements that show reinvested dividends and capital-gains distributions, so you don’t end up paying taxes on the same money twice when you sell the shares. It’s also a great time to declutter the rest of your financial files. Although it’s recommended that you keep your tax returns for at least six years, you may want to hold on to them forever, because they can provide clues about your income and investments and other tax information that might come in handy in the distant future. You can still weed out and toss supporting documents, such as canceled checks and old receipts, three years after the due date of your return (that’s usually how long the IRS has to audit your return, unless you’ve significantly underreported your income). If you have any self-employment income, keep your receipts for at least six years.
You may also want to hang on to receipts for major home improvements for at least three years after you sell your house. They may come in handy if you want to show potential buyers how much you’ve spent to upgrade the property, and you may be able to use certain home-improvement expenses to lower any tax bill you might have on your home-sale profits. You probably won’t pay taxes on the sale of your principal residence unless you’ve lived in it for less than two years, you rented out part of it, or your profit on the sale exceeded $250,000 if you’re single, $500,000 if you’re married.
Trash your ATM receipts and bank-deposit slips as soon as you match them up with your monthly statement. Ditch your pay stubs as soon as you receive your W-2 for the year. And you can also toss paper copies of your credit-card, utility, phone and cable bills as soon as the next month’s bill acknowledging your last payment arrives (unless you need to keep the bills for tax purposes -- if you deduct home-office expenses, for example). You may also want to hold on to your utility receipts if you plan to sell your house soon, so you can show prospective buyers how much your utilities tend to cost.
Any year that you make a nondeductible contributions to a traditional IRA, you must file Form 8606 to document those contributions. Then hold on to all of those 8606 forms until you withdraw all the money from your IRA, so you won’t end up overpaying your tax bill when you start to take out the money in retirement .And when you do decide to toss any of these papers, be sure to shred them so your garbage doesn’t become a treasure trove for identity thieves.
Sunday, January 16, 2011
Real Estate ownership and taxes
Property values are at an all time low and many investors are taking advantage of this opportunity to purchase rental properties. Probably for the first time in history, investors can enjoy positive cash flow as well as anticipate a future increase in equity. If this is the year you become a landlord, you will want to pay attention to the tax rules governing this investment.
Your rental income and expenses are listed on your individual tax return on Schedule E, available for your perusal at www.irs.gov. The profit or loss from the activity is included in income and taxed at your ordinary income tax rate. It sounds pretty straightforward, but it can get tricky fast.
First of all, what is rental income? If a prospective tenant pays first and last month’s rent and a security deposit when moving into the property, not all of that is included in current year taxable income. Or is it? Here’s how it breaks down:
1. First and last month’s rent are included in the current year income even if the last month’s rent will be applied in a future year.
2. Advance rent is all included in income for the current year, regardless of what year the payments are for.
3. Non-refundable deposits are included in current year rent, even if a fee, for example, a non-refundable cleaning fee, won’t be used until the tenant moves out in a future year.
4. Security deposits need not be claimed as income if you intend to return the deposit to the tenant at the end of the lease term.
5. Barter is income. If, for example, as part of the rent, your tenant agrees to maintain the gardens and pool, you must show the value of these services as rental income. By the same token, you may also deduct the same amount as a rental expense. I know it’s a push, but the IRS loves to see us sharpening our pencils and doing extra paperwork.
6. Expenses paid by your tenant. See barter income above. Say you’re jet setting through Europe and the pipes in the rental spring a leak; your tenant pays the plumber then deducts it from his rent. You must include the full rent in income and write off the plumbing expense against it. Yes, again, it’s a push.
7. Lease cancellation. If your tenant pays you to cancel the lease, include the payment as rental income.
8. Option payments. If your tenant signs a lease with an option to buy, the option payments are generally rental income. But once the tenant exercises the right to buy the property, all payments received after the sale are considered part of the selling price.
9. Here’s a little tax break for you: If you rent out part of your personal residence for fewer than 15 days, you need not include the rent you receive in your income.
10. If you are renting space in your personal residence (including a vacation home) for more than 15 days, you must declare the income. But you should consult with your tax pro to determine how to properly allocate your rental expenses against the income you receive.
Make sure you keep all lease/rental agreements and tenant applications. When under audit, the IRS likes to look at these documents as part of the verification that this is indeed a rental property. Also keep all cancelled checks and credit card receipts for all rental expenses deducted on your tax return.
http://terrencericecpa.weebly.com/7. Lease cancellation. If your tenant pays you to cancel the lease, include the payment as rental income.
8. Option payments. If your tenant signs a lease with an option to buy, the option payments are generally rental income. But once the tenant exercises the right to buy the property, all payments received after the sale are considered part of the selling price.
9. Here’s a little tax break for you: If you rent out part of your personal residence for fewer than 15 days, you need not include the rent you receive in your income.
10. If you are renting space in your personal residence (including a vacation home) for more than 15 days, you must declare the income. But you should consult with your tax pro to determine how to properly allocate your rental expenses against the income you receive.
Make sure you keep all lease/rental agreements and tenant applications. When under audit, the IRS likes to look at these documents as part of the verification that this is indeed a rental property. Also keep all cancelled checks and credit card receipts for all rental expenses deducted on your tax return.
Your rental income and expenses are listed on your individual tax return on Schedule E, available for your perusal at www.irs.gov. The profit or loss from the activity is included in income and taxed at your ordinary income tax rate. It sounds pretty straightforward, but it can get tricky fast.
First of all, what is rental income? If a prospective tenant pays first and last month’s rent and a security deposit when moving into the property, not all of that is included in current year taxable income. Or is it? Here’s how it breaks down:
1. First and last month’s rent are included in the current year income even if the last month’s rent will be applied in a future year.
2. Advance rent is all included in income for the current year, regardless of what year the payments are for.
3. Non-refundable deposits are included in current year rent, even if a fee, for example, a non-refundable cleaning fee, won’t be used until the tenant moves out in a future year.
4. Security deposits need not be claimed as income if you intend to return the deposit to the tenant at the end of the lease term.
5. Barter is income. If, for example, as part of the rent, your tenant agrees to maintain the gardens and pool, you must show the value of these services as rental income. By the same token, you may also deduct the same amount as a rental expense. I know it’s a push, but the IRS loves to see us sharpening our pencils and doing extra paperwork.
6. Expenses paid by your tenant. See barter income above. Say you’re jet setting through Europe and the pipes in the rental spring a leak; your tenant pays the plumber then deducts it from his rent. You must include the full rent in income and write off the plumbing expense against it. Yes, again, it’s a push.
7. Lease cancellation. If your tenant pays you to cancel the lease, include the payment as rental income.
8. Option payments. If your tenant signs a lease with an option to buy, the option payments are generally rental income. But once the tenant exercises the right to buy the property, all payments received after the sale are considered part of the selling price.
9. Here’s a little tax break for you: If you rent out part of your personal residence for fewer than 15 days, you need not include the rent you receive in your income.
10. If you are renting space in your personal residence (including a vacation home) for more than 15 days, you must declare the income. But you should consult with your tax pro to determine how to properly allocate your rental expenses against the income you receive.
Make sure you keep all lease/rental agreements and tenant applications. When under audit, the IRS likes to look at these documents as part of the verification that this is indeed a rental property. Also keep all cancelled checks and credit card receipts for all rental expenses deducted on your tax return.
http://terrencericecpa.weebly.com/7. Lease cancellation. If your tenant pays you to cancel the lease, include the payment as rental income.
8. Option payments. If your tenant signs a lease with an option to buy, the option payments are generally rental income. But once the tenant exercises the right to buy the property, all payments received after the sale are considered part of the selling price.
9. Here’s a little tax break for you: If you rent out part of your personal residence for fewer than 15 days, you need not include the rent you receive in your income.
10. If you are renting space in your personal residence (including a vacation home) for more than 15 days, you must declare the income. But you should consult with your tax pro to determine how to properly allocate your rental expenses against the income you receive.
Make sure you keep all lease/rental agreements and tenant applications. When under audit, the IRS likes to look at these documents as part of the verification that this is indeed a rental property. Also keep all cancelled checks and credit card receipts for all rental expenses deducted on your tax return.
Thursday, January 13, 2011
No Wisconsin Estate Tax For 2011 and 2012
As a result of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, approved by Congress and signed into law by President Obama on December 17, 2010, there is no Wisconsin estate tax for deaths in 2011 and 2012 unless action is taken by the Wisconsin Legislature to impose an estate tax.
A federal estate tax is imposed on estates of $5,000,000 or more. The credit for state death taxes paid has been eliminated for deaths in 2011 and 2012, which would have been the basis for Wisconsin's estate tax. The Act allows a deduction for state death taxes paid.
On January 1, 2013, EGTRRA sunset provisions would again apply with federal or state legislative action necessary to eliminate the Wisconsin estate tax for 2013.
A federal estate tax is imposed on estates of $5,000,000 or more. The credit for state death taxes paid has been eliminated for deaths in 2011 and 2012, which would have been the basis for Wisconsin's estate tax. The Act allows a deduction for state death taxes paid.
On January 1, 2013, EGTRRA sunset provisions would again apply with federal or state legislative action necessary to eliminate the Wisconsin estate tax for 2013.
Tuesday, January 11, 2011
IRS Releases new 2011 Tax Brackets and other remaining inflation adjustments
The IRS has updated the tax brackets, personal exemption, standard deduction and several other tax items as part of its annual cost-of-living and inflation adjustments for 2011 (Rev. Proc. 2011-12).
Tax laws require the IRS to adjust the dollar amounts of dozens of tax provisions each year to account for inflation. The IRS updated most of the items - such as pension and retirement plan limits and the annual gift tax exclusion - in mid-October in IR-2010-108 and Rev. Proc 2010-40. But the IRS waited to release updates on several tax items in anticipation of legislation addressing the extension of the 2001 and 2003 tax cuts. Rev. Proc. 2011-12 covers these items.
The tax brackets increased modestly for 2011, reflecting relatively low inflation (See chart for 2011 and future new tax brackets). The new standard deduction increased $200 to $11,600 for married couples filing a joint return and increased $100 to $5,800 for single filers. The personal and dependent exemption increased $50 to $3,700.
| Individual tax bracket scenarios under current law | ||||
| Single | Joint | 2011-12 | 2013 | |
| Ordinary income tax brackets (based on 2011 brackets)* | $0 - $8,500 | $0 - $17,000 | 10% | 15% |
| $8,501 - $34,500 | $17,001 - $69,000 | 15% | 15% | |
| $34,501 - $83,600 | $69,001 - $139,350 | 25% | 28% | |
| $83,601 - $174,400 | $139,351 - $212,300 | 28% | 31% | |
| $174,401 - $379,150 | $212,301 - $379,150 | 33% | 36% | |
| Over $379,150 | Over $379,150 | 35% | 39.6% | |
| Capital gains top rate | 15%†| 23%‡** | ||
| Dividend top rate | 15%†| 43.4%§** | ||
| Interest income top rate | 35% | 43.4%** | ||
| * Brackets are adjusted for inflation every year and refer to taxable income †Capital gains and dividends in bottom two brackets have zero rate ‡ The top capital gains rate in 2013 would be 23.8% but 21.8% for property held at least five years** § Dividends would be taxed as ordinary income in 2013 up to the top rate of 39.6% (+3.8%) ** Includes new 3.8% Medicare tax on investment income | ||||
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