The year is almost half over. Now is the time to check in to see if your withholding is on track. Did you get a refund last year? If so, you are probably on track to get one this year as well. For most people, one tax year looks pretty much like the rest. Do you realize that the refund is your money and that you are giving the government an interest free loan?
Some people like the enforced savings. However, you can put the money in your bank account instead of Uncle Sam's. This is very easy to do. Simply ask your HR person for a new form W-4 to complete. Increase the number of exemptions you claim. How you get to the number is not important, so don't worry about the worksheet at the top of the form. Just know this: the higher the number, the less taxes they take out. If you had previously claimed 2 exemptions, claiming 4 will give you a take home pay raise.
The real key here is not to spend the extra money. Take the extra funds going to your checking account and have them automatically re-routed to a savings or money market account. If you don't see the extra money, you won't spend it. At the end of the year all the extra will be in your bank account. If you need it during the year it's available to you. You won't have to wait to file your tax return to get your money.
One caution here: this is a good strategy if nothing has changed for tax purposes between last year and this year. If there was a different tax event, then you need to run the numbers.
Remember, it's your money. Take care of it.
Tuesday, June 15, 2010
Monday, May 24, 2010
Organization Pays
Now that the spring tax filing season has officially passed (including the extended May 11 due date for many Massachusetts and Rhode Island residents, it's time to move to the next phase of the tax cycle.
I understand many of you are still feeling the pain of the tax filing experience, but now is the time to do things to make sure it is less painful next year. The key is organization. Put the tools and processes in place so you capture the information you need to complete your tax returns next year. This should be an ongoing process. One of the things that makes tax filing scary is the overwhelming amount of information you feel you need to go through. If you do this as the year progresses, by the time you get to next year all you have to do is summarize.
For those of you who are at least moderately technologically competent, an easy, but very effective tool is a software package such as Quicken or Quickbooks. But you have to keep up with it. At a minimum, this should be done on a monthly basis, but weekly is far better. Once you have captured all of your data in this type of program, you are only a few keystrokes away from preparing your tax summary.
If doing it on the computer is not your thing, there is another way. You will need manila folders. They should be labeled with the different types of income and expenses. When you get receipts you should put them in the appropriate folder. Once a month you should total all the receipts by category. By doing this often, it does not build up to the point where you neglect it because it has become too intimidating.
Why should I do this?, you ask. Simple. It's your money. The more organized you are, the less likely it is that you will miss valuable tax deductions. That's the bottom line. Saving tax dollars. Stay organized, ask questions. Your money matters.
I understand many of you are still feeling the pain of the tax filing experience, but now is the time to do things to make sure it is less painful next year. The key is organization. Put the tools and processes in place so you capture the information you need to complete your tax returns next year. This should be an ongoing process. One of the things that makes tax filing scary is the overwhelming amount of information you feel you need to go through. If you do this as the year progresses, by the time you get to next year all you have to do is summarize.
For those of you who are at least moderately technologically competent, an easy, but very effective tool is a software package such as Quicken or Quickbooks. But you have to keep up with it. At a minimum, this should be done on a monthly basis, but weekly is far better. Once you have captured all of your data in this type of program, you are only a few keystrokes away from preparing your tax summary.
If doing it on the computer is not your thing, there is another way. You will need manila folders. They should be labeled with the different types of income and expenses. When you get receipts you should put them in the appropriate folder. Once a month you should total all the receipts by category. By doing this often, it does not build up to the point where you neglect it because it has become too intimidating.
Why should I do this?, you ask. Simple. It's your money. The more organized you are, the less likely it is that you will miss valuable tax deductions. That's the bottom line. Saving tax dollars. Stay organized, ask questions. Your money matters.
Tuesday, April 27, 2010
I'm Baa...ack!!
Hello tax fans!
Sorry I've been away for a while, but I needed to rest and regroup after the April 15 deadline. There is an update to my status - I am no longer with the firm Braver PC. Right now I am on my own, but hope to find the next challenge in short order. In the meantime, I will still blog.
For those of you who have filed your 2009 tax returns, now is the time to start planning what your 2010 return will look like. For those of you waiting for the last minute...don't! It's way too stressful. Just get it done. If you need help, contact me.
Seriously, though, the best time to start planning for 2010 is now. I know the agony of this filing season is still fresh, but you can control a good deal of how your return will look next April. Stay tuned for 2010 planning tips.
Sorry I've been away for a while, but I needed to rest and regroup after the April 15 deadline. There is an update to my status - I am no longer with the firm Braver PC. Right now I am on my own, but hope to find the next challenge in short order. In the meantime, I will still blog.
For those of you who have filed your 2009 tax returns, now is the time to start planning what your 2010 return will look like. For those of you waiting for the last minute...don't! It's way too stressful. Just get it done. If you need help, contact me.
Seriously, though, the best time to start planning for 2010 is now. I know the agony of this filing season is still fresh, but you can control a good deal of how your return will look next April. Stay tuned for 2010 planning tips.
Thursday, April 8, 2010
The Homestretch
April 15 is just one week away. The end is in sight. Or is it? For many of our clients living within the 7 Massachusetts or 4 Rhode Island counties ravaged by the flood waters, April 15 has become just another date. For many, tax season will continue another 4 weeks until May 11, the new deadline set by the Internal Revenue Service for the flood victims.
The extension until May 11 covers not only individual tax returns, but all other entities as well. It also extends the time to make any payments due, such as extension or first quarter 2010 estimated tax payments. For anyone who lives in these places and owes a lot of money, here is a good break to either save the money in your account or to have time to find the money to pay with.
To those of us tax professionals, April 15 is still THE date. It is the date we are shooting for when the gate opens after the new year. It is still the date after which we can take a deep breath and relax and reconnect with our families and friends. And it is certainly the date by which we should thank our families and friends for their patience and tolerance and our co-workers and office staff for their tireless efforts. Thank you.
I hope I have helped some of you out there with some practical, plain tax talk. I encourage all to let me know if there are other things you want me to write about. I hope to post again by April 15 and then I am going on vacation.
Remember, it's your money. Watch it carefully. Ask questions. Be healthy and safe.
The extension until May 11 covers not only individual tax returns, but all other entities as well. It also extends the time to make any payments due, such as extension or first quarter 2010 estimated tax payments. For anyone who lives in these places and owes a lot of money, here is a good break to either save the money in your account or to have time to find the money to pay with.
To those of us tax professionals, April 15 is still THE date. It is the date we are shooting for when the gate opens after the new year. It is still the date after which we can take a deep breath and relax and reconnect with our families and friends. And it is certainly the date by which we should thank our families and friends for their patience and tolerance and our co-workers and office staff for their tireless efforts. Thank you.
I hope I have helped some of you out there with some practical, plain tax talk. I encourage all to let me know if there are other things you want me to write about. I hope to post again by April 15 and then I am going on vacation.
Remember, it's your money. Watch it carefully. Ask questions. Be healthy and safe.
Friday, April 2, 2010
Charitable Contributions of Property
It has come to my attention that enough people do not know about a very important rule concerning charitable contributions. I'm not talking about the garden-variety check to the local police department. I'm talking about major contributions of furniture and household goods or other property (not including stocks) with a fair market value of greater than $5,000.
These days, it is not uncommon for new retirees to want to downsize and move somewhere warmer or more scenic. As part of that move, they give away half a house full of furniture. When it comes to tax time they want to take a charitable contribution for the value of that furniture, say $10,000.
Get An Appraisal
The rule here is simple: if a grouping of the same kind of items (say furniture) has a value of greater than $5,000, you must attach an appraisal to your tax return in order to claim that deduction. If you do not have that appraisal, your deduction is limited to $5,000 and even then, you would have a tough time proving it if you got audited. Yes, the appraisal will cost you something, but it's better than losing a big deduction and the appraisal itself may be deductible.
Take Pictures
In addition to the appraisal, which would give you an itemized list of the items and the value for each, you should take pictures of the items. This is just an additional layer of proof. When you are claiming a bigger than normal deduction, it is even more important to dot your "i"s and cross your "t"s. Not that this will necessarily cause an audit and you certainly should not take a deduction to which you are otherwise entitled for fear of an audit, but it may generate an inquiry from the IRS simply asking you ro prove the deduction.
Be ready. Take pictures and get the items appraised by a licensed appraiser.
These days, it is not uncommon for new retirees to want to downsize and move somewhere warmer or more scenic. As part of that move, they give away half a house full of furniture. When it comes to tax time they want to take a charitable contribution for the value of that furniture, say $10,000.
Get An Appraisal
The rule here is simple: if a grouping of the same kind of items (say furniture) has a value of greater than $5,000, you must attach an appraisal to your tax return in order to claim that deduction. If you do not have that appraisal, your deduction is limited to $5,000 and even then, you would have a tough time proving it if you got audited. Yes, the appraisal will cost you something, but it's better than losing a big deduction and the appraisal itself may be deductible.
Take Pictures
In addition to the appraisal, which would give you an itemized list of the items and the value for each, you should take pictures of the items. This is just an additional layer of proof. When you are claiming a bigger than normal deduction, it is even more important to dot your "i"s and cross your "t"s. Not that this will necessarily cause an audit and you certainly should not take a deduction to which you are otherwise entitled for fear of an audit, but it may generate an inquiry from the IRS simply asking you ro prove the deduction.
Be ready. Take pictures and get the items appraised by a licensed appraiser.
Wednesday, March 31, 2010
FLOOD VICTIMS GET TAX EXTENSION!
The IRS has agreed to extend the April 15 tax filing deadline for all of Rhode Island and the following Massachusetts counties: Bristol, Essex, Middlesex, Norfolk, Plymouth, Suffolk and Worcester. If you live in any of these areas, you now have until May 11 to file and pay your taxes.
Saturday, March 27, 2010
Chest-Deep and Heading for the Homestretch
When I started this blog back at the beginning of February, I told myself I was going to keep it up at least 2-3 times a week during opportunity season. I maintained that pretty well until this week. I am now working 7 days a week and my family sees me for breakfast and a quick dinner. I have a graduate exam in Statistics coming up on April 12 and I still have 168 individual tax returns to get through by April 15. Let me do the math for you - that's 9 a day, every day.
The busier I get, with my head buried in the details, the more I struggle for a tax topic to write about. I know there are some of you out there reading every post. I hope that it's because you feel there is some information you can use. I'd really like your feedback. What are some of the tax issues or questions you have? Is there something about your return you don't understand? Please don't get me started on the Alternative Minimum Tax. I'm saving that diatribe for a later date.
I had an earlier post entitled Taxes Can Be Funny. I think it is so important for all of us to keep our sense of humor. Around here we are blessed to be around some very genuine, very funny people. It helps keep us all sane. One of the ways taxes can be funny is that sometimes clients can't or won't answer a direct question. Example: Q: "Did you refinance your mortgage?" Most of us can see this requires a simple yes or no answer. A: "I sent you the bank form". Here's another. Q: "Did you send your child to day camp or overnight camp"? A: "He's only 10". If you don't see the humor in these as much as I do, I apologize. Maybe my threshhold for funny has dropped along with my sleep hours. However, when this is the last piece of information you need before you can finish a return, it can be exasperating. If your tax person asks a direct question, please provide a direct answer to that question.
For all of you out there who skipped their minimum required distributions from your retirement plan in 2009, remember you have to take it again in 2010.
Take note, it's your money. The more you save in taxes, the more that's in your pocket. Let me know how I can help.
The busier I get, with my head buried in the details, the more I struggle for a tax topic to write about. I know there are some of you out there reading every post. I hope that it's because you feel there is some information you can use. I'd really like your feedback. What are some of the tax issues or questions you have? Is there something about your return you don't understand? Please don't get me started on the Alternative Minimum Tax. I'm saving that diatribe for a later date.
I had an earlier post entitled Taxes Can Be Funny. I think it is so important for all of us to keep our sense of humor. Around here we are blessed to be around some very genuine, very funny people. It helps keep us all sane. One of the ways taxes can be funny is that sometimes clients can't or won't answer a direct question. Example: Q: "Did you refinance your mortgage?" Most of us can see this requires a simple yes or no answer. A: "I sent you the bank form". Here's another. Q: "Did you send your child to day camp or overnight camp"? A: "He's only 10". If you don't see the humor in these as much as I do, I apologize. Maybe my threshhold for funny has dropped along with my sleep hours. However, when this is the last piece of information you need before you can finish a return, it can be exasperating. If your tax person asks a direct question, please provide a direct answer to that question.
For all of you out there who skipped their minimum required distributions from your retirement plan in 2009, remember you have to take it again in 2010.
Take note, it's your money. The more you save in taxes, the more that's in your pocket. Let me know how I can help.
Monday, March 22, 2010
Organization Counts
Are you a shoebox? No, not you personally. Your tax stuff. Do you just put all those receipts and little scraps of paper in a shoebox? It's truly not efficient and you are most likely missing out on some deductions. Here's why: 1) when it comes to tax time, you don't remember what half the scraps of paper mean; 2) the business receipts, which are supposed to document the person and event - don't; 3) you probably put half the receipts in a different shoebox which you then forgot about and which will resurface in 10 years when you clean out your closet.
Don't Be A Shoebox
I used to know someone so compulsive about recordkeeping that he would enter every last penny into Quicken. If I went to the ATM, my quicken report would just show "cash - miscellaneous $100". His Quicken report would show exactly how that $100 was spent, down to the penny. You don't need to be quite that bad. Quicken, or any other bookkeeping software that you will actually use, is a great start. If you are diligent, at the end of the year, you can print your tax report in about two minutes. If you are not the computer type, you can still be just as organized. It just takes a little time and effort on your part. Here's how: 1) get yourself a multipocket folder; 2) label each pocket with the different types of income and deductions you have; 3) before you put any slip of paper in any pocket, label it - make sure it has the date and amount - if it relates to a business meeting, it also needs the name of the person you met with and the business purpose of the meeting.
The Longer You Wait, The More Organized You Need To Be
The closer you get to April 15 before doing your own taxes or giving your information to a professional preparer, the more organized you need to be. No one has time to spare going through the shoebox on April 14. Spend your time wisely. Even if you only organize a little at a time, make sure you have it pulled together before actual return preparation starts. It's much more efficient if you don't have to stop and go find something else.
Remember, it's your money. If you miss out on deductions, it costs you. Shoeboxes are for shoes. It's time for an upgrade.
Don't Be A Shoebox
I used to know someone so compulsive about recordkeeping that he would enter every last penny into Quicken. If I went to the ATM, my quicken report would just show "cash - miscellaneous $100". His Quicken report would show exactly how that $100 was spent, down to the penny. You don't need to be quite that bad. Quicken, or any other bookkeeping software that you will actually use, is a great start. If you are diligent, at the end of the year, you can print your tax report in about two minutes. If you are not the computer type, you can still be just as organized. It just takes a little time and effort on your part. Here's how: 1) get yourself a multipocket folder; 2) label each pocket with the different types of income and deductions you have; 3) before you put any slip of paper in any pocket, label it - make sure it has the date and amount - if it relates to a business meeting, it also needs the name of the person you met with and the business purpose of the meeting.
The Longer You Wait, The More Organized You Need To Be
The closer you get to April 15 before doing your own taxes or giving your information to a professional preparer, the more organized you need to be. No one has time to spare going through the shoebox on April 14. Spend your time wisely. Even if you only organize a little at a time, make sure you have it pulled together before actual return preparation starts. It's much more efficient if you don't have to stop and go find something else.
Remember, it's your money. If you miss out on deductions, it costs you. Shoeboxes are for shoes. It's time for an upgrade.
Wednesday, March 17, 2010
March Madness
I love the NCAA men's basketball tournament. I just wish it didn't fall right in the heart of opportunity season. The NCAA has done a much better job at promoting itself than have we CPAs. If someone says 'March Madness' you think of the tournament, the excitement and the possible "Cinderellas". If someone says "tax season" you think of your poor, overworked tax person slaving away day and night. What's wrong with that picture? How about that CPA who stayed up all night and then found that big loophole? Where was some announcer going "Waaay to go baby"!! Where were the high fives and the chest bumps? Maybe it's because our deadline is in April and not March. Come look at our office - there's plenty of March Madness. We need to sell this stuff. Corporate tax returns were due March 15. Don't tell me that doesn't generate a lot of buzz around the water cooler??
Seriously, though, now that the corporate deadline has passed, the focus is all on the individual tax filing season. Except for those invested in many partnerships (especially hedge funds), most people have all the outside reporting they need to prepare their returns. So why haven't I heard from so many clients? People hate to think about their taxes. They procrastinate and find a myriad of other things to do until one day, like the groundhog coming out to look at his shadow, they know it's time. People have this kind of biological tax clock. They send me their information the same time every year and I'll bet they don't even know it.
OKAY PEOPLE, WAKE UP!!! How can you all possibly think that I can get all the work done if you all wait until the last minute? Please don't do this to your tax preparer. Put your tax information together and get it done now! I know we come through for you every year, but it doesn't get any easier. One upside is that the NCAA hasn't yet trademarked "April Madness"! Hey, now there's a thought....
Seriously, though, now that the corporate deadline has passed, the focus is all on the individual tax filing season. Except for those invested in many partnerships (especially hedge funds), most people have all the outside reporting they need to prepare their returns. So why haven't I heard from so many clients? People hate to think about their taxes. They procrastinate and find a myriad of other things to do until one day, like the groundhog coming out to look at his shadow, they know it's time. People have this kind of biological tax clock. They send me their information the same time every year and I'll bet they don't even know it.
OKAY PEOPLE, WAKE UP!!! How can you all possibly think that I can get all the work done if you all wait until the last minute? Please don't do this to your tax preparer. Put your tax information together and get it done now! I know we come through for you every year, but it doesn't get any easier. One upside is that the NCAA hasn't yet trademarked "April Madness"! Hey, now there's a thought....
Saturday, March 13, 2010
WAIST-DEEP AND PADDLING HARDER
Sorry, it's been a few days since my last blog. It is that time of year!! The incoming returns have gained a steady pace and keeping up is increasingly more challenging. The hours are longer (no kidding!), but the company is good. We are all trying to keep our sense of humor. I took time out Thursday night to attend a fundraiser for Gov. Deval Patrick. I told the organizers ahead of time that I had no funds to give, but they told me to come anyway. It was a small gathering and the Governor was nice enough to give everyone who wanted a one-on-one. Believe it or not, when I got my turn I did not talk about tax reform or how horrible Taxachusetts is. I took my shot at education reform for the gifted student - the one who is out-pacing the standard curriculum. Maybe then they won't all turn out to be tax preparers (just kidding!).
What surprises me is that there has been no major tax scandal making the headlines. It seems as if the IRS always waited until February or March to announce that some major star was under indictment for failure to pay their taxes. I just loved the scare tactic! It hasn't happened this year. Maybe we really do have a nicer, gentler IRS.
Mortgage Interest
My feeling is that people are getting this one wrong. Over the past few years, as interest rates dropped and then stayed low, many people have refinanced their mortgages. This is a good thing. We all want our monthly nut to be as low as possible. Be careful here. There is a trap for the unwary. The general rule is that you can deduct 100% of the mortgage interest on what is called acquisition indebtedness up to $1 million of debt. In its simplest form, acquisition indebtedness is the mortgage you take out when you buy your house. Once that amount is established, you cannot deduct the interest on a greater amount, unless you use the greater amount to improve your house.
Vacations are not deductible
Suppose, for example, that you purchased your modest $400,000 house and took out a $360,000 mortgage. Over the next period of years, you paid that $360,000 down to $300,000. When mortgage rates fell, you jumped at the chance to refinance. But you didn't just refinance the $300,000, you took an extra $20,000 to go on vacation. The bad news is that the interest on that extra $20,000 is not deductible. The good news is that you probably took the deduction anyway. Here's why: 1) you had no clue that some piece of mortgage interest might not be nondeductible; 2) the mortgage holder issued you a form 1098 reporting the full amount of interest you paid during theyear and you believed that was a good number to report on your taxes. I'm sure many preparers unknowingly do this wrong because we simply do not have the information to do it right. If all the mortgage holders were required (they currently are not) to report the ending balance along with the interest paid, then we would have a shot at seeing that you refinanced and for how much.
Home Equity Indebtedness
This is your second bite at the apple. There is a second rule that says you can deduct the interest on up to $100,000 of home equity indebtedness. Assuming you have sufficient equity in your home, this is a line of credit you can use for anything you want. It does not have to be used to improve your home. What makes it deductible is that it is secured by your home. If you want that vacation to be tax deductible, borrow from your home equity line. Actually, I'm not saying you should do that at all. It is just an example. You should save for your vacations, not go into debt for them. The point is that you could use that $100,000 for anything you needed, such as college tuition or catastrophic medical bills - and the interest is fully deductible.
Communication
Once again, it comes down to this. There has to be a dialogue. The preparer needs to know you refinanced and what the balances were. The preparer also needs to know if you are drawing on the home equity line. Have a conversation. Be proactive. Call me before you do something financial. Let's talk.
What surprises me is that there has been no major tax scandal making the headlines. It seems as if the IRS always waited until February or March to announce that some major star was under indictment for failure to pay their taxes. I just loved the scare tactic! It hasn't happened this year. Maybe we really do have a nicer, gentler IRS.
Mortgage Interest
My feeling is that people are getting this one wrong. Over the past few years, as interest rates dropped and then stayed low, many people have refinanced their mortgages. This is a good thing. We all want our monthly nut to be as low as possible. Be careful here. There is a trap for the unwary. The general rule is that you can deduct 100% of the mortgage interest on what is called acquisition indebtedness up to $1 million of debt. In its simplest form, acquisition indebtedness is the mortgage you take out when you buy your house. Once that amount is established, you cannot deduct the interest on a greater amount, unless you use the greater amount to improve your house.
Vacations are not deductible
Suppose, for example, that you purchased your modest $400,000 house and took out a $360,000 mortgage. Over the next period of years, you paid that $360,000 down to $300,000. When mortgage rates fell, you jumped at the chance to refinance. But you didn't just refinance the $300,000, you took an extra $20,000 to go on vacation. The bad news is that the interest on that extra $20,000 is not deductible. The good news is that you probably took the deduction anyway. Here's why: 1) you had no clue that some piece of mortgage interest might not be nondeductible; 2) the mortgage holder issued you a form 1098 reporting the full amount of interest you paid during theyear and you believed that was a good number to report on your taxes. I'm sure many preparers unknowingly do this wrong because we simply do not have the information to do it right. If all the mortgage holders were required (they currently are not) to report the ending balance along with the interest paid, then we would have a shot at seeing that you refinanced and for how much.
Home Equity Indebtedness
This is your second bite at the apple. There is a second rule that says you can deduct the interest on up to $100,000 of home equity indebtedness. Assuming you have sufficient equity in your home, this is a line of credit you can use for anything you want. It does not have to be used to improve your home. What makes it deductible is that it is secured by your home. If you want that vacation to be tax deductible, borrow from your home equity line. Actually, I'm not saying you should do that at all. It is just an example. You should save for your vacations, not go into debt for them. The point is that you could use that $100,000 for anything you needed, such as college tuition or catastrophic medical bills - and the interest is fully deductible.
Communication
Once again, it comes down to this. There has to be a dialogue. The preparer needs to know you refinanced and what the balances were. The preparer also needs to know if you are drawing on the home equity line. Have a conversation. Be proactive. Call me before you do something financial. Let's talk.
Monday, March 8, 2010
Can I Do It Myself? The Myth of Tax Simplification
This is a hard one. Remember the concept called "tax simplification"? It was probably inroduced about two decades ago. Don't kid yourself - it hasn't happened yet. For a lot of people, those mostly with a W-2 and a few 1099s, taxes are a simple matter. Everybody else has at least one matter in their tax lives which complicates the preparation of their tax returns. It doesn't matter whether it's a child in college, a new house, an old house that't been sold in a short sale, a new sole proprietorship or any one of a myriad things. Your taxes can't be done by hand any more.
Off-the-shelf Tax Prep Software??
I'm not going to slam these products because they are not really my competitors. For the next level of taxpayers, most of these do a credible job. If you have small complications, they can handle them...sometimes. People often ask me questions about the results they've gotten from using one of these products. As good as the programming might be, some of the results are just strange. If you don't know enough to recognize the strange result and the software doesn't know it's a strange result, you could severly overpay your taxes.
What About the Tax Prep Factories??
Sure, there are the guys that advertise on television and radio claiming 90% of their customers get refunds. Trust me here, it's not because those guys know anything special. Remember, at this time of year, they just put the numbers in the boxes. They didn't do anything to influence what those numbers were. The reason all those people get refunds is because their employers withheld too much in taxes. They could have done the returns themselves and still received refunds. Yes, these places have software that will make sure they don't miss most deductions or make math mistakes. They are not responsible for your refunds. You might ask whether these guys are better than the off-the-shelf software. If you don't have the time or the inclination to try it by yourself, then, yes, they probably are better.
How Do I Know When I Should Pay Someone??
I think what makes the most sense here is that you should start to ask a tax professional for help when there are simply things in your return you do not understand. Are you paying the alternative minimum tax? Should you be? Are you taking the proper credit for your child's education expense? Are you taking the proper deduction for items donated to charity? Are there? Is there? How do I? When can I? If you are asking yourself these questions, you should probably be asking them to a tax professional.
Remember, it's your money. Sometimes you have to spend it to make it. A good tax professional doesn't just put the numbers in the boxes. They make sure the numbers are working for you.
Off-the-shelf Tax Prep Software??
I'm not going to slam these products because they are not really my competitors. For the next level of taxpayers, most of these do a credible job. If you have small complications, they can handle them...sometimes. People often ask me questions about the results they've gotten from using one of these products. As good as the programming might be, some of the results are just strange. If you don't know enough to recognize the strange result and the software doesn't know it's a strange result, you could severly overpay your taxes.
What About the Tax Prep Factories??
Sure, there are the guys that advertise on television and radio claiming 90% of their customers get refunds. Trust me here, it's not because those guys know anything special. Remember, at this time of year, they just put the numbers in the boxes. They didn't do anything to influence what those numbers were. The reason all those people get refunds is because their employers withheld too much in taxes. They could have done the returns themselves and still received refunds. Yes, these places have software that will make sure they don't miss most deductions or make math mistakes. They are not responsible for your refunds. You might ask whether these guys are better than the off-the-shelf software. If you don't have the time or the inclination to try it by yourself, then, yes, they probably are better.
How Do I Know When I Should Pay Someone??
I think what makes the most sense here is that you should start to ask a tax professional for help when there are simply things in your return you do not understand. Are you paying the alternative minimum tax? Should you be? Are you taking the proper credit for your child's education expense? Are you taking the proper deduction for items donated to charity? Are there? Is there? How do I? When can I? If you are asking yourself these questions, you should probably be asking them to a tax professional.
Remember, it's your money. Sometimes you have to spend it to make it. A good tax professional doesn't just put the numbers in the boxes. They make sure the numbers are working for you.
Friday, March 5, 2010
Knee-deep and the Not-so-kiddie tax
We're progressing through opportunity season about the same as every other opportunity season. The tax information coming in the door has a regular flow to it. There are about three square inches where you can actually see the top of my desk.
Kiddie tax
If you haven't been keeping up with this one, you're in for a surprise this year. Not too long ago, the kiddie tax applied to children. No, really. It applied to your offspring who were under age 14. Let me back up a second. The "kiddie tax" as it is commonly called, is a misnomer. Actually, it's another tax on you. Here's the scheme: the parent transfers income producing assets to the child so the income earned gets taxed at the child's lower tax rate. Congress said, "wait a minute", we're missing out on all those tax dollars that could be taxed at the parents rate. They started with children under age 14 and said that for those children, the investment income (as opposed to any earned income) would get taxed at the parents higher rate.
That didn't go over too well with the general public, but we adjusted. Then they got greedy. The age was raised to those children under 18. Then under 19. Now, get this, they upped it again. The current rule is the kiddie tax applies to children (and we have to use that term very loosely) under age 24. Twenty four! That means they are out of college and (hopefully) have a job. But if they have investment income over $1900 for 2009, that piece gets taxed at mom and dad's tax rate. Not only that, but mom and dad now have to complete their return first, so we know the rate at which to tax junior's investment income.
Be careful. This one is easy to miss. If you are the child age 19-23 or you have a child is between age 19 and 23, this didn't impact you last year, but it does now.
There's also a tie-in here betwen the kiddie tax and the new education credit. Stay tuned.
Kiddie tax
If you haven't been keeping up with this one, you're in for a surprise this year. Not too long ago, the kiddie tax applied to children. No, really. It applied to your offspring who were under age 14. Let me back up a second. The "kiddie tax" as it is commonly called, is a misnomer. Actually, it's another tax on you. Here's the scheme: the parent transfers income producing assets to the child so the income earned gets taxed at the child's lower tax rate. Congress said, "wait a minute", we're missing out on all those tax dollars that could be taxed at the parents rate. They started with children under age 14 and said that for those children, the investment income (as opposed to any earned income) would get taxed at the parents higher rate.
That didn't go over too well with the general public, but we adjusted. Then they got greedy. The age was raised to those children under 18. Then under 19. Now, get this, they upped it again. The current rule is the kiddie tax applies to children (and we have to use that term very loosely) under age 24. Twenty four! That means they are out of college and (hopefully) have a job. But if they have investment income over $1900 for 2009, that piece gets taxed at mom and dad's tax rate. Not only that, but mom and dad now have to complete their return first, so we know the rate at which to tax junior's investment income.
Be careful. This one is easy to miss. If you are the child age 19-23 or you have a child is between age 19 and 23, this didn't impact you last year, but it does now.
There's also a tie-in here betwen the kiddie tax and the new education credit. Stay tuned.
Tuesday, March 2, 2010
Capital Idea
I suppose I haven't written about capital gains in a while because there haven't been many. After tax year 2008 when there were more losses realized in the stock market than in all of previously recorded history combined (that's not really true, but it feels that way), the questions mostly centered around "what am I going to do with all those losses"?
Capital Asset
Let's back up a second. The things that create capital gains and/or losses are capital assets. What is a capital asset? Many of you simply relate that to investments like stocks or mutual funds. Actually, it's much more than that. Simply, it is any property except: inventory, property held for sale to customers, a note or account receivable, depreciable business property, real property used in a business or a copyright, literary or musical composition held by the one who created it. Okay, enough for the tax jargon. For most people, this is just about everything they own. Your house, your car, your clothes, your bicycle. These are all capital assets. And, yes, if you sell any of them you should report the gain or loss on your tax return. There is a "gotcha" here: if you sell your house, its furnishings or your car at a gain, you have to report it and pay tax on it. However, if you sell these items at a loss, you can't take it unless the property was used for business purposes. Uncle Sam loves ya!
Capital Losses
You may be one of those people who took a big hit during tax year 2008 and have a pile of capital losses from the stock market. The rule is that you can offset these losses with future gains. If you don't have future gains, you can offset your other income up to $3,000 per year. If you're saying that the $3,000 per year will last you a lifetime, don't worry - you have a lifetime. These losses never expire until you do. You can take the $3,000 every year until you die. Clearly not the best scenario. There are trading strategies which are geared toward recognizing short term gains. These would be great for those with unused losses because the gain recognition is "free" until the losses are used up.
Capital Gains
If you dodged the debacle of 2008 and are recognizing capital gains that will be taxed, here's the scenario: Long term gains (the sale from those capital assets held greater than 1 year) are taxed at a preferential rate of 15%. Short term gains (anything held less than 1 year) are taxed at your ordinary rate. For those lucky folks who live in Taxachusetts like me, they get an extra whack. Our short term gains are taxed at 12% for state purposes. Don't necessarily let the tax tail wag the dog, but if you can hold long term, it is much better tax treatment all around.
Capital Idea
The stock market clearly has been a wild ride the past couple of years. For many people 2008 was a very rude awakening that you can't just throw a dart at a stock board and pick a winner. Everyone needs to pay much greater attention to their investments. This is especially important for those whose investing time horizon is short and will not allow them enough time to recover from a large downturn. Over time, the best place for your money is the stock market, but you have to be vigilant. If you don't have the time or knowledge to do it yourself, choose your investment advisor carefully. I know there have been enough crooked ones out there to scare off anybody. There are also many good ones. If you are a little bit leery, don't put your eggs in one basket. You can have multiple advisors, or you can give one a piece of your investable assets instead of all of them. Remember, it's your money and your future. Do it right.
Capital Asset
Let's back up a second. The things that create capital gains and/or losses are capital assets. What is a capital asset? Many of you simply relate that to investments like stocks or mutual funds. Actually, it's much more than that. Simply, it is any property except: inventory, property held for sale to customers, a note or account receivable, depreciable business property, real property used in a business or a copyright, literary or musical composition held by the one who created it. Okay, enough for the tax jargon. For most people, this is just about everything they own. Your house, your car, your clothes, your bicycle. These are all capital assets. And, yes, if you sell any of them you should report the gain or loss on your tax return. There is a "gotcha" here: if you sell your house, its furnishings or your car at a gain, you have to report it and pay tax on it. However, if you sell these items at a loss, you can't take it unless the property was used for business purposes. Uncle Sam loves ya!
Capital Losses
You may be one of those people who took a big hit during tax year 2008 and have a pile of capital losses from the stock market. The rule is that you can offset these losses with future gains. If you don't have future gains, you can offset your other income up to $3,000 per year. If you're saying that the $3,000 per year will last you a lifetime, don't worry - you have a lifetime. These losses never expire until you do. You can take the $3,000 every year until you die. Clearly not the best scenario. There are trading strategies which are geared toward recognizing short term gains. These would be great for those with unused losses because the gain recognition is "free" until the losses are used up.
Capital Gains
If you dodged the debacle of 2008 and are recognizing capital gains that will be taxed, here's the scenario: Long term gains (the sale from those capital assets held greater than 1 year) are taxed at a preferential rate of 15%. Short term gains (anything held less than 1 year) are taxed at your ordinary rate. For those lucky folks who live in Taxachusetts like me, they get an extra whack. Our short term gains are taxed at 12% for state purposes. Don't necessarily let the tax tail wag the dog, but if you can hold long term, it is much better tax treatment all around.
Capital Idea
The stock market clearly has been a wild ride the past couple of years. For many people 2008 was a very rude awakening that you can't just throw a dart at a stock board and pick a winner. Everyone needs to pay much greater attention to their investments. This is especially important for those whose investing time horizon is short and will not allow them enough time to recover from a large downturn. Over time, the best place for your money is the stock market, but you have to be vigilant. If you don't have the time or knowledge to do it yourself, choose your investment advisor carefully. I know there have been enough crooked ones out there to scare off anybody. There are also many good ones. If you are a little bit leery, don't put your eggs in one basket. You can have multiple advisors, or you can give one a piece of your investable assets instead of all of them. Remember, it's your money and your future. Do it right.
Thursday, February 25, 2010
To IRA or Not To IRA
That is the question. But it is a multi-part question. The first question is whether or not to make a contribution to an IRA. If you are under age 50, you can make a contribution of up to $5,000. If you are over age 50, you can make an additional $1,000 on top of that. Do you have the cash to contribute? These days, that is not an easy question for many people. If you have extra cash, then you should seriously consider making the contribution to your retirement. Remember, it does not have to be the entire $5,000. It can be any amount up to $5,000.
Why Contribute to a Retirement Account?
There are several very good reasons to make contributions to your retirement account:
1) You are going to want some fund to draw upon when you retire.
2) If social security is around, it will not provide an adequate standard of living when you stop working.
3) All funds in a retirement account grow tax deferred - that is, you don't pay tax on the earnings until you take the money out.
4) It saves on current income tax every year. The money you contribute would otherwise have been in an investment account earning interest or dividends which would be taxable now.
5) If you are eligible to contribute to a deductible IRA, it saves you on your tax return now.
What Kind of IRA do I Contribute to?
There are two basic kinds of IRA accounts: traditional and Roth. The traditional IRA can be divided into the deductible and nondeductible varieties. Anyone with earned income can contribute to a traditional IRA. Earned income is money you earn from working. It does not include investment income or rental income. If you are going to contribute $5,000 to an IRA, you need to have earned at least $5,000. If you are filing a joint tax return, the income you make can be used to make a contribution for your spouse. In other words, if your spouse does not work and you make at least $10,000, then you can contribute $5,000 to your IRA and $5,000 to your spouse's IRA. Not everyone can contribute to a Roth IRA. If your income is above a certain level, then you are disqualified from making a Roth IRA contribution.
Can I Deduct My IRA Contribution?
This simply refers to whether or not you can take a current deduction on your tax return for making the contribution to your traditional IRA. Whether or not you can deduct the contribution is a function of one major factor: Are either you or your spouse an active participant in another kind of retirement plan? This can be a 401(k), 403(b) or some other employer-sponsored defined contribution plan (defined contribution simply means that the amount you can put in is regulated). If the answer here is "yes", then there are very narrow income limits under which your IRA contribution will be deductible. Contributions to Roth IRAs are never deductible.
Why Would I Make a Nondeductible Contribution?
Here are a couple of reasons why this is a good idea:
1) It adds to your retirement nest egg.
2) If it's not deductible now, it's not taxable when you take it out. The government gets its money on one end or the other. If you can't deduct it now, that means you are paying tax on that money now. If you pay tax on it now, you don't have to pay tax on it later when you take the money out.
Why Contribute to a Roth IRA?
The biggest difference between a nondeductible traditional IRA and a Roth IRA is that there are no minimum required distributions from a Roth IRA at age 70-1/2. Let me say that another way: you..never..have..to..take..the..money..out!!! You can let it grow your entire life and if you don't need it, it can go to your kids.
Conclusion
It's your retirement. You want there to be as much for you to live on as possible. If you can possibly contribute to an IRA of either kind, you should do so.
I welcome comments and questions on this and all other topics on this blog.
Why Contribute to a Retirement Account?
There are several very good reasons to make contributions to your retirement account:
1) You are going to want some fund to draw upon when you retire.
2) If social security is around, it will not provide an adequate standard of living when you stop working.
3) All funds in a retirement account grow tax deferred - that is, you don't pay tax on the earnings until you take the money out.
4) It saves on current income tax every year. The money you contribute would otherwise have been in an investment account earning interest or dividends which would be taxable now.
5) If you are eligible to contribute to a deductible IRA, it saves you on your tax return now.
What Kind of IRA do I Contribute to?
There are two basic kinds of IRA accounts: traditional and Roth. The traditional IRA can be divided into the deductible and nondeductible varieties. Anyone with earned income can contribute to a traditional IRA. Earned income is money you earn from working. It does not include investment income or rental income. If you are going to contribute $5,000 to an IRA, you need to have earned at least $5,000. If you are filing a joint tax return, the income you make can be used to make a contribution for your spouse. In other words, if your spouse does not work and you make at least $10,000, then you can contribute $5,000 to your IRA and $5,000 to your spouse's IRA. Not everyone can contribute to a Roth IRA. If your income is above a certain level, then you are disqualified from making a Roth IRA contribution.
Can I Deduct My IRA Contribution?
This simply refers to whether or not you can take a current deduction on your tax return for making the contribution to your traditional IRA. Whether or not you can deduct the contribution is a function of one major factor: Are either you or your spouse an active participant in another kind of retirement plan? This can be a 401(k), 403(b) or some other employer-sponsored defined contribution plan (defined contribution simply means that the amount you can put in is regulated). If the answer here is "yes", then there are very narrow income limits under which your IRA contribution will be deductible. Contributions to Roth IRAs are never deductible.
Why Would I Make a Nondeductible Contribution?
Here are a couple of reasons why this is a good idea:
1) It adds to your retirement nest egg.
2) If it's not deductible now, it's not taxable when you take it out. The government gets its money on one end or the other. If you can't deduct it now, that means you are paying tax on that money now. If you pay tax on it now, you don't have to pay tax on it later when you take the money out.
Why Contribute to a Roth IRA?
The biggest difference between a nondeductible traditional IRA and a Roth IRA is that there are no minimum required distributions from a Roth IRA at age 70-1/2. Let me say that another way: you..never..have..to..take..the..money..out!!! You can let it grow your entire life and if you don't need it, it can go to your kids.
Conclusion
It's your retirement. You want there to be as much for you to live on as possible. If you can possibly contribute to an IRA of either kind, you should do so.
I welcome comments and questions on this and all other topics on this blog.
Tuesday, February 23, 2010
College Credit
Some of you struggling with tuition bills might already be familiar with the Hope credit and the Lifetime Learning credit. The American Recovery & Reinvestment Act modified the Hope credit for tax years 2009 and 2010 and called it the American Opportunity Credit (AOC). It's the new and improved model and it is better.
Comparison
Good for the first 4 years of post-high school AOC
Good for the first 2 years of post high school Hope
Credit up to $2,500 per year AOC
Credit up to $1,800 Hope
Credit for 100% of the first $2,000 and
25% of the next $2,000 AOC
Credit for 100% of the first $1,200 and
50% of the next $1,200 Hope
40% (up to $1,000) may be refundable AOC
No refundable portion Hope
Tuition and related expenses including course materials AOC
Tuition and related materials Hope
Phased out at AGI of $80,000 ($160,000 joint) AOC
Phased out at $50K (100K joint) Hope
As you can see, the American Opportunity credit gets you a bigger credit faster and more people will quallify since the income limit is higher. In some cases, the parents make too much money and it is worthwhile to see if the child can take the education credit. In this case, the parents cannot claim the dependency exemption for the student, but if the credit is worth more to the student, that is a good deal. In most cases, however, the student between ages 18 and 23 will not qualify for the refundable portion of the credit. They can use the credit to get their liability down to zero, but they will not get the $1,000 refundable part.
The American Opportunity Credit is only good for the first 4 years of post- high school. If you have a professional student, you can consider the Lifetime learning Credit. The bottom line is this: if you are paying tuition, you have options that will reduce your tax burden. You should explore all of the options to see which one gives you the best tax break.
Comparison
Good for the first 4 years of post-high school AOC
Good for the first 2 years of post high school Hope
Credit up to $2,500 per year AOC
Credit up to $1,800 Hope
Credit for 100% of the first $2,000 and
25% of the next $2,000 AOC
Credit for 100% of the first $1,200 and
50% of the next $1,200 Hope
40% (up to $1,000) may be refundable AOC
No refundable portion Hope
Tuition and related expenses including course materials AOC
Tuition and related materials Hope
Phased out at AGI of $80,000 ($160,000 joint) AOC
Phased out at $50K (100K joint) Hope
As you can see, the American Opportunity credit gets you a bigger credit faster and more people will quallify since the income limit is higher. In some cases, the parents make too much money and it is worthwhile to see if the child can take the education credit. In this case, the parents cannot claim the dependency exemption for the student, but if the credit is worth more to the student, that is a good deal. In most cases, however, the student between ages 18 and 23 will not qualify for the refundable portion of the credit. They can use the credit to get their liability down to zero, but they will not get the $1,000 refundable part.
The American Opportunity Credit is only good for the first 4 years of post- high school. If you have a professional student, you can consider the Lifetime learning Credit. The bottom line is this: if you are paying tuition, you have options that will reduce your tax burden. You should explore all of the options to see which one gives you the best tax break.
Thursday, February 18, 2010
1099 - Truth or Consequence
By now you should have received most, if not all of your forms 1099. These are the forms the banks and other financial institutions send you telling you how much income you need to report on your tax return. Are they correct? How do you know? Do you just trust them? You pay tax dollars depending upon how much income they tell you to report. Shouldn't you know if the numbers are right?
Match year-to-date information
These same financial institutions send you a statement every month (if you've gone green and don't get a mailing, that's great, but you need to look at them). Take the December statement and make sure the year to date number matches the form 1099. If you use Quicken or some other bookkeeping software, print your own year to date numbers and make sure they match the 1099s.
What if the number is wrong?
If the numbers do not agree with what you think they should be, call the financial institution and have them send you and the IRS a corrected 1099. Please do not ignore the fact that the numbers are different and put your number on the tax return. If you do, the IRS computer matching program will find you and send you a note asking you to explain the difference.
It's your money. Take a few extra minutes to get it right.
Match year-to-date information
These same financial institutions send you a statement every month (if you've gone green and don't get a mailing, that's great, but you need to look at them). Take the December statement and make sure the year to date number matches the form 1099. If you use Quicken or some other bookkeeping software, print your own year to date numbers and make sure they match the 1099s.
What if the number is wrong?
If the numbers do not agree with what you think they should be, call the financial institution and have them send you and the IRS a corrected 1099. Please do not ignore the fact that the numbers are different and put your number on the tax return. If you do, the IRS computer matching program will find you and send you a note asking you to explain the difference.
It's your money. Take a few extra minutes to get it right.
Tuesday, February 16, 2010
Ankle-deep
It's still early in the process and the returns have started to trickle in. As soon as Fidelity and Schwab send the majority of their 1099s, the deluge will start.
Filing Status
I was asked a question yesterday and it occurred to me that all this talk about tax rules, deductions and credits was a little premature. Before any return can be prepared, the threshhold decision to make is what is the filing status. For most people, especially single people, this is an easy question to answer. If you are single (with no children), your filing status is single. After that, it can get more complicated. If you are married, you can file a joint return with your spouse or you can file "married filing separately". Most married people don't even think about this one. They simply file married-joint.
Married - separate
There is an alternative. If you are legally married on December 31 (this is the critical date for this decision), you only have two filing choices - joint or separate. The tax tables were constructed to discourage married couples from filing separately. They reach a higher marginal tax rate at a much lower income level. You also lose the benefit of several deductions and credits. There are, however, non-tax reasons people consider filing separately. Couples considering divorce may want to separate their tax lives. One spouse may not trust that the other spouse is being honest in reporting their income. If you sign a joint return with your spouse, you become liable for their tax liability and their penalties if they get caught. There is an "innocent spouse" rule, but the spouse truly has to be innocent. There are actually cases, although they are in the vast minority, where, due to the relative income and deductions of each partner, the combined tax actually comes out lower by filing separately.
Head of household
This is the fourth filing status. It is available to a single (not married) person who provides a principal place of abode for a child or other dependent for at least half of the year. If you are divorced with a minor child you probably qualify for this filing status. It is a more favorable status than filing single.
December 31
When determining filing status, this is the only day of the year that counts. It doesn't matter what happened on the previous 364 days. If you are getting divorced, the divorce must be final under state law in the jurisdiction where you live. One note to those who have tied the knot early in the year. Although they have done much to eliminate the marriage penalty, it woould be a good idea to review the amount of withholding you are having taken out of your paychecks to make sure you are being covered.
Filing Status
I was asked a question yesterday and it occurred to me that all this talk about tax rules, deductions and credits was a little premature. Before any return can be prepared, the threshhold decision to make is what is the filing status. For most people, especially single people, this is an easy question to answer. If you are single (with no children), your filing status is single. After that, it can get more complicated. If you are married, you can file a joint return with your spouse or you can file "married filing separately". Most married people don't even think about this one. They simply file married-joint.
Married - separate
There is an alternative. If you are legally married on December 31 (this is the critical date for this decision), you only have two filing choices - joint or separate. The tax tables were constructed to discourage married couples from filing separately. They reach a higher marginal tax rate at a much lower income level. You also lose the benefit of several deductions and credits. There are, however, non-tax reasons people consider filing separately. Couples considering divorce may want to separate their tax lives. One spouse may not trust that the other spouse is being honest in reporting their income. If you sign a joint return with your spouse, you become liable for their tax liability and their penalties if they get caught. There is an "innocent spouse" rule, but the spouse truly has to be innocent. There are actually cases, although they are in the vast minority, where, due to the relative income and deductions of each partner, the combined tax actually comes out lower by filing separately.
Head of household
This is the fourth filing status. It is available to a single (not married) person who provides a principal place of abode for a child or other dependent for at least half of the year. If you are divorced with a minor child you probably qualify for this filing status. It is a more favorable status than filing single.
December 31
When determining filing status, this is the only day of the year that counts. It doesn't matter what happened on the previous 364 days. If you are getting divorced, the divorce must be final under state law in the jurisdiction where you live. One note to those who have tied the knot early in the year. Although they have done much to eliminate the marriage penalty, it woould be a good idea to review the amount of withholding you are having taken out of your paychecks to make sure you are being covered.
Sunday, February 14, 2010
Opportunity Season
At my firm we call this time of year "opportunity season". We do this mostly because we want to emphasize the opportunity to interact with our clients. They have to have their financials and their tax returns done. It give us the opportunity to have a face-to-face and perhaps, to cross-sell.
It sounds better than "Internal Revenue Service"
Remember a few years ago when you stopped making your tax checks out to the IRS? This was done mostly because the IRS and any dealings you had with them had such a negative connotation. The government thought it sounded nicer to make your checks payable to the US Treasury. That way, you might think you were actually helping your country instead of some agency you hated. Calling it "opportunity season" is not much different. How many people get the warm fuzzies when they hear the phrase "tax season"?
Real Opportunities
I understand the PR behind the switch. I also realize that the opportunities can be very positive. Here are some of the opportunities I see for this season. As an individual tax specialist, I don't routinely go out to clients' offices. Most of my interaction is over the phone or the internet.
Have a conversation with each client. Even if you have to make up a reason to call them, you should have live voice contact. Over the years, a lot of clients have gotten used to not hearing from their tax preparer. The client sends the information, you prepare the return and mail it to them. No interaction whatsoever. Everyone likes to feel special. A simple 30 second phone call can make all the difference. And no, email is not the same. For each of the taxpayers reading this, does your tax person do this?
If you have done something to save your client tax dollars, tell them. A lot of people think tax returns are a commodity. They are absolutely right. What we are selling is not the ability to put numbers in boxes, it is personal service. Yet, we are very bad at letting clients know exactly what we did that makes us different than H&R Block. Did you call you client last December and have them prepay their state income taxes? If so, you saved them tax dollars on their return. Tell them. This is a very simple example, but that doesn't matter.
Suppose you intentionally did not take a child as a dependent so the child could claim the education credit. The result was that you saved the family unit over $1,000 in taxes. The only thing the client will notice is that this child is no longer listed on page 1 as a dependent. Is that the call you want? Tell them what you did and let them know you are really looking out for them.
Who out there knows how much if anything their tax preparer saved them in taxes. Sure, you got the bill, but what did it buy you?
Absence makes the heart grow fonder
My wife used to joke that "opportunity season" was the opportunity for her never to see me for eight weeks. This was a true statement. I became like the guy in the Dunkin Donuts commercial who gets up at an obscenely early hour to go "make the donuts". I also came home very late. Again, there is an opportunity here. Did you ever leave your spouse or your kids a note on your way out telling them you love them and wishing them a good day? Don't just grumble that tax season sucks. You can take a minute and do something nice.
To all the clients and potential clients, this also the reason to get your information in early. Do you want me working on your taxes when my work week is 60 hours or when it balloons to 80 hours?
Other opportunities
While you have your clients' attention, schedule a post-opportunity season meeting. Tax saving opportunites can happen any time of year. It would be a good thing to check-in during the summer just to see what your client is thinking about.
Everyone at your office works hard this time of year. Tell them they are doing a good job and that you appreciate what they are doing. All too often we tend to hear it when there is a screw-up. A pat on the back goes a long way.
Final opportunity
For all the tax preparers, tell your clients you appreciate their business and ask them to refer a friend or colleague. For all the taxpaying individuals, tell your preparer you appreciate what they do for you. I used to have exactly one client who would take the time after they received their return to write me a thank you note. A small, but very powerful gesture. I felt truly appreciated. Wouldn't the world be a better place if we all felt that way?
It sounds better than "Internal Revenue Service"
Remember a few years ago when you stopped making your tax checks out to the IRS? This was done mostly because the IRS and any dealings you had with them had such a negative connotation. The government thought it sounded nicer to make your checks payable to the US Treasury. That way, you might think you were actually helping your country instead of some agency you hated. Calling it "opportunity season" is not much different. How many people get the warm fuzzies when they hear the phrase "tax season"?
Real Opportunities
I understand the PR behind the switch. I also realize that the opportunities can be very positive. Here are some of the opportunities I see for this season. As an individual tax specialist, I don't routinely go out to clients' offices. Most of my interaction is over the phone or the internet.
Have a conversation with each client. Even if you have to make up a reason to call them, you should have live voice contact. Over the years, a lot of clients have gotten used to not hearing from their tax preparer. The client sends the information, you prepare the return and mail it to them. No interaction whatsoever. Everyone likes to feel special. A simple 30 second phone call can make all the difference. And no, email is not the same. For each of the taxpayers reading this, does your tax person do this?
If you have done something to save your client tax dollars, tell them. A lot of people think tax returns are a commodity. They are absolutely right. What we are selling is not the ability to put numbers in boxes, it is personal service. Yet, we are very bad at letting clients know exactly what we did that makes us different than H&R Block. Did you call you client last December and have them prepay their state income taxes? If so, you saved them tax dollars on their return. Tell them. This is a very simple example, but that doesn't matter.
Suppose you intentionally did not take a child as a dependent so the child could claim the education credit. The result was that you saved the family unit over $1,000 in taxes. The only thing the client will notice is that this child is no longer listed on page 1 as a dependent. Is that the call you want? Tell them what you did and let them know you are really looking out for them.
Who out there knows how much if anything their tax preparer saved them in taxes. Sure, you got the bill, but what did it buy you?
Absence makes the heart grow fonder
My wife used to joke that "opportunity season" was the opportunity for her never to see me for eight weeks. This was a true statement. I became like the guy in the Dunkin Donuts commercial who gets up at an obscenely early hour to go "make the donuts". I also came home very late. Again, there is an opportunity here. Did you ever leave your spouse or your kids a note on your way out telling them you love them and wishing them a good day? Don't just grumble that tax season sucks. You can take a minute and do something nice.
To all the clients and potential clients, this also the reason to get your information in early. Do you want me working on your taxes when my work week is 60 hours or when it balloons to 80 hours?
Other opportunities
While you have your clients' attention, schedule a post-opportunity season meeting. Tax saving opportunites can happen any time of year. It would be a good thing to check-in during the summer just to see what your client is thinking about.
Everyone at your office works hard this time of year. Tell them they are doing a good job and that you appreciate what they are doing. All too often we tend to hear it when there is a screw-up. A pat on the back goes a long way.
Final opportunity
For all the tax preparers, tell your clients you appreciate their business and ask them to refer a friend or colleague. For all the taxpaying individuals, tell your preparer you appreciate what they do for you. I used to have exactly one client who would take the time after they received their return to write me a thank you note. A small, but very powerful gesture. I felt truly appreciated. Wouldn't the world be a better place if we all felt that way?
Saturday, February 13, 2010
Alternative Motor Vehicle Credit
This is an update to my blog on the hybrid vehicle credit. That one should have included this information. The credit is not simply for hybrid cars, although that's what people generally think. The credit also includes advanced lean burn technology vehicles, qualified alternative fuel vehicles, qualified fuel cell vehicles and qualified plug-in electric drive vehiicles. The credt for any of these is taken on form 8910.
Advanced lean burn technology vehicles
This has something to do with the way the internal combustion works, but I don't begin to understand it. Your dealer can tell you whether the car qualifies as such. Right now, the only companies making cars that qualify under this section are Audi, BMW, Mercedes and Volkswagen.
Qualified alternative fuel vehicles
These are vehicles fueled solely by compressed natural gas, liquefied natural gas, liquefied petroleum gas, hydrogen, any liquid at least 85% methanol, or a mixture of any of these and a petroleum based fuel.
Certification
The dealer can tell you whether your car qualifies and which credit it qualifies for. For certain models, there is a credit available for only a limited number of cars. For certain credits, a different amount is available as a credit for different model cars. You must own the car (leases do not count) and the original use of the car must have begun with you.
Advanced lean burn technology vehicles
This has something to do with the way the internal combustion works, but I don't begin to understand it. Your dealer can tell you whether the car qualifies as such. Right now, the only companies making cars that qualify under this section are Audi, BMW, Mercedes and Volkswagen.
Qualified alternative fuel vehicles
These are vehicles fueled solely by compressed natural gas, liquefied natural gas, liquefied petroleum gas, hydrogen, any liquid at least 85% methanol, or a mixture of any of these and a petroleum based fuel.
Certification
The dealer can tell you whether your car qualifies and which credit it qualifies for. For certain models, there is a credit available for only a limited number of cars. For certain credits, a different amount is available as a credit for different model cars. You must own the car (leases do not count) and the original use of the car must have begun with you.
Friday, February 12, 2010
Practical Tax Season Tips
Now that tax season is truly upon us, I thought I'd share some practical tips on preparing and filing your returns correctly.
1) Make sure the payor named on your 1099 matches the entry you make on your return. Especially these days when some banks disappear and new ones take their place, don't just proforma what the entry was last year.
2) Make sure you sign and date your return before mailing.
3) If you receive a 1099 that you think is wrong, call the payor to get it corrected. If you just enter the amount you think is right and it is different from what is reported, you will generate a notice from the IRS.
4) Double-check for all the credits to which you are entitled. This year there is a new credit called the Making Work Pay Credit. If either spouse works and the couple makes less than $150,000, you get this credit. Single people making less than $75,000 get this credit.
5) Don't procrastinate - organize and prepare early.
6) If you owe money and don't have it, attach form 9465 and ask the IRS for a payment plan. For amounts less than $25,000 these are routinely granted.
7) If you have questions or need some forms, go to the IRS website: http://www.irs.gov/
8) There are a lot of scammers this time of year. Please note that the IRS wil NEVER send you an email.
9) Ask all the tax bloggers questions. We have boatloads of information and we want you to get it right.
10) Last, but not least - if you have a significant other in the tax preparation business, please be patient with them and tell them you love them. They don't really want to be working those horrendous hours, but it's what they do... and they miss you, too.
1) Make sure the payor named on your 1099 matches the entry you make on your return. Especially these days when some banks disappear and new ones take their place, don't just proforma what the entry was last year.
2) Make sure you sign and date your return before mailing.
3) If you receive a 1099 that you think is wrong, call the payor to get it corrected. If you just enter the amount you think is right and it is different from what is reported, you will generate a notice from the IRS.
4) Double-check for all the credits to which you are entitled. This year there is a new credit called the Making Work Pay Credit. If either spouse works and the couple makes less than $150,000, you get this credit. Single people making less than $75,000 get this credit.
5) Don't procrastinate - organize and prepare early.
6) If you owe money and don't have it, attach form 9465 and ask the IRS for a payment plan. For amounts less than $25,000 these are routinely granted.
7) If you have questions or need some forms, go to the IRS website: http://www.irs.gov/
8) There are a lot of scammers this time of year. Please note that the IRS wil NEVER send you an email.
9) Ask all the tax bloggers questions. We have boatloads of information and we want you to get it right.
10) Last, but not least - if you have a significant other in the tax preparation business, please be patient with them and tell them you love them. They don't really want to be working those horrendous hours, but it's what they do... and they miss you, too.
Wednesday, February 10, 2010
Interstate Employees
The snow is coming to New England this afternoon. Actually it's hitting a lot of the east coast. This seems like the perfect time to give a great tax tip to those employees who live in one state and work in another state. The rule about which state(s) get to tax you is pretty simple. If you live in a state, they get to tax everything no matter where you earn it. OK, you say, but then if I work in another state, they get to tax it too? Well, yes. The state where you actually do the work gets to tax the income earned in their state. No way! That would be double taxation! Yes it would. That's why the state you live in gives you a credit for the taxes you pay to the other state. That eliminates the double taxation issue. But that's not what this entry is really about.
APPORTION YOUR INCOME
Suppose, for example, that you live in a state like New Hampshire, where there is no personal income tax on wages. If you work in Massachusetts, you would simply pay Massachusetts tax on the income earned in Massachusetts. If you are a full-time employee, your W-2 will most likely show all of your income earned in Massachusetts. Let's suppose you have clients that you service in New Hampshire, Vermont and Maine. Or, like today, since the blizzard is coming, you decide to work from home. At the end of the year, you would add up all of the days you worked outside of Massachusetts and come up with a percentage of days you worked outside Massachusetts. Very simply, you would then apply this percentage to your wages and exclude that amount of income from your Massachusetts taxes. This also works really well if you live in Connecticut or New Jersey and work in New York. You need to keep a calendar to track your days, but you could save hundreds of dollars in state taxes.
APPORTION YOUR INCOME
Suppose, for example, that you live in a state like New Hampshire, where there is no personal income tax on wages. If you work in Massachusetts, you would simply pay Massachusetts tax on the income earned in Massachusetts. If you are a full-time employee, your W-2 will most likely show all of your income earned in Massachusetts. Let's suppose you have clients that you service in New Hampshire, Vermont and Maine. Or, like today, since the blizzard is coming, you decide to work from home. At the end of the year, you would add up all of the days you worked outside of Massachusetts and come up with a percentage of days you worked outside Massachusetts. Very simply, you would then apply this percentage to your wages and exclude that amount of income from your Massachusetts taxes. This also works really well if you live in Connecticut or New Jersey and work in New York. You need to keep a calendar to track your days, but you could save hundreds of dollars in state taxes.
Monday, February 8, 2010
Who Is A Dependent?
You may have thought this was a simple question. Of course, you say, my kids are my dependents. You are probably right, but it happens to be more complex than that. The correct answer may depend upon how old your kids are and how much money they make. You may even have dependents who are not your kids.
QUALIFYING CHILD
In one of the tax acts a couple of years ago , the test for a dependent was split into two categories: "qualifying child" and "qualifying relative". In order for a person to be a "qualifying child", they must pass all 4 of the following tests: 1) relationship (to the taxpayer) - a) son, daughter, grandchild; b) brother, sister or child of the brother or sister. This also insludes adopted or foster children. 2) age - they must be younger than the taxpayer. 3) principal place of abode - they must have lived with you for at least half the year. 4) support - the child must not have provided more than half of their own support.
QUALIFYING RELATIVE
If the child fails the qualifying child test, they may still be a dependent if they pass all 4 tests to be a qualifying relative. 1) relationship - this is the same as the one above, but also includes: father, mother or grandmother; neice, nephew; aunt, uncle; all in-laws; any other individual that was amember of the taxpayer's household;
2) gross income - the individual cannot have earned more than $3,650; 3) support - the taxpayer must have furnished over one-half of the individual's support for the year; 4) dependency - the individual must not be a qualifying child of the taxpayer or any other taxpayer.
Clear as mud? Just follow the tests above for the child first. Then if you fail that test move to the relative test. Please note: in order to take a dependency exemption for any person on your tax return, that person must have a social security number.
QUALIFYING CHILD
In one of the tax acts a couple of years ago , the test for a dependent was split into two categories: "qualifying child" and "qualifying relative". In order for a person to be a "qualifying child", they must pass all 4 of the following tests: 1) relationship (to the taxpayer) - a) son, daughter, grandchild; b) brother, sister or child of the brother or sister. This also insludes adopted or foster children. 2) age - they must be younger than the taxpayer. 3) principal place of abode - they must have lived with you for at least half the year. 4) support - the child must not have provided more than half of their own support.
QUALIFYING RELATIVE
If the child fails the qualifying child test, they may still be a dependent if they pass all 4 tests to be a qualifying relative. 1) relationship - this is the same as the one above, but also includes: father, mother or grandmother; neice, nephew; aunt, uncle; all in-laws; any other individual that was amember of the taxpayer's household;
2) gross income - the individual cannot have earned more than $3,650; 3) support - the taxpayer must have furnished over one-half of the individual's support for the year; 4) dependency - the individual must not be a qualifying child of the taxpayer or any other taxpayer.
Clear as mud? Just follow the tests above for the child first. Then if you fail that test move to the relative test. Please note: in order to take a dependency exemption for any person on your tax return, that person must have a social security number.
Saturday, February 6, 2010
Making Work Pay Credit
Yes, it's Saturday morning and I'm in the office. This is the onset of the 6-day workweeks. It lasts about a month and then we go to the 7-day workweeks. No, I'm not looking for sympathy. This is just the winter/spring life of a tax guy.
Now that filing season is officially underway, there's been a lot of talk about this new credit. The credit is $400 for working individuals and $800 for working couples. The credit is actually calculated at 6.2% of earned income up to the $400 credit per individual, but will begin to phase out at $75,000 of modified AGI for a single individual and $150,000 of modified AGI for a married couple. Please note that for a married couple, only one spouse needs to work and they will receive the full $800 credit as long as the total earned income is at least $12,904.
Those individuals receiving certain retirement benefits such as social security, supplemental security income, railroad retirement or veterans benefits should already have received a $250 check from the government (not from the IRS) and their credit will be reduced by that payment.
OK, this is supposed to be taxes in plain English. Did everyone understand the above? Bottom line - if you worked last year and made at least $6,452 ($12,904 for a joint return) in earned income, you will get a $400 credit ($800 for a joint return) as long as your total income did not exceed $75,000 ($150,000 for a joint return) and you did not receive social security benefits.
Now that filing season is officially underway, there's been a lot of talk about this new credit. The credit is $400 for working individuals and $800 for working couples. The credit is actually calculated at 6.2% of earned income up to the $400 credit per individual, but will begin to phase out at $75,000 of modified AGI for a single individual and $150,000 of modified AGI for a married couple. Please note that for a married couple, only one spouse needs to work and they will receive the full $800 credit as long as the total earned income is at least $12,904.
Those individuals receiving certain retirement benefits such as social security, supplemental security income, railroad retirement or veterans benefits should already have received a $250 check from the government (not from the IRS) and their credit will be reduced by that payment.
OK, this is supposed to be taxes in plain English. Did everyone understand the above? Bottom line - if you worked last year and made at least $6,452 ($12,904 for a joint return) in earned income, you will get a $400 credit ($800 for a joint return) as long as your total income did not exceed $75,000 ($150,000 for a joint return) and you did not receive social security benefits.
Friday, February 5, 2010
What You Can Do Now
OK, it's the first week of February and the light bulb has lit up. You realize you have to deal with your taxes, but know you didn't plan for them. You ignored them for about an entire year - since the last time you went through this ritual you hate. Your first thought is probably, "oh ___!!" After that, you need to understand what you can do now to minimize your tax liability.
CASH BASIS TAXPAYERS ARE SCREWED, RIGHT?
No. But your options are very limited at this point in time. All individuals (with very few exceptions) are cash basis taxpayers. That means you recognize income when you get the money and you get a deduction when the cash goes out. The big exception to this rule is that the government allows you to make contributions to your IRA until April 15. If you have a profit sharing plan and put your return on extension, you have until October 15 to make your retirement contribution. If your income falls into a certain range, you will also get a tax credit for making this contribution. That's really huge - a deduction and a credit for the same dollars! You can contribute up to $5,000 to your IRA ($6,000 if you are at least age 50). Remember that the government is subsidizing the deductible contribution. The $5,000 doesn't really cost you $5,000 because it is reducing your tax liability.
CASH IS TIGHT, I JUST CAN'T DO THAN NOW
If you don't have the cash, here are some things to think about. Things happen during the year for which you already spent the cash. Now, see if you can use any of them to your tax advantage.
Remember, even if you think you might owe taxes, prepare early. Find out what the damage is, see if you can mitigate it with any of the above and then plan for taking care of it. Don't wait for the surprise on April 15.
CASH BASIS TAXPAYERS ARE SCREWED, RIGHT?
No. But your options are very limited at this point in time. All individuals (with very few exceptions) are cash basis taxpayers. That means you recognize income when you get the money and you get a deduction when the cash goes out. The big exception to this rule is that the government allows you to make contributions to your IRA until April 15. If you have a profit sharing plan and put your return on extension, you have until October 15 to make your retirement contribution. If your income falls into a certain range, you will also get a tax credit for making this contribution. That's really huge - a deduction and a credit for the same dollars! You can contribute up to $5,000 to your IRA ($6,000 if you are at least age 50). Remember that the government is subsidizing the deductible contribution. The $5,000 doesn't really cost you $5,000 because it is reducing your tax liability.
CASH IS TIGHT, I JUST CAN'T DO THAN NOW
If you don't have the cash, here are some things to think about. Things happen during the year for which you already spent the cash. Now, see if you can use any of them to your tax advantage.
- Did you replace your hot water heater? Think energy credit.
- Did you replace windows or exterior doors? Think energy credit.
- Did you look for a new job? Think job hunting deductions.
- Did you start your own business? Think home office deduction.
- Do you have a child in college? Think education credit - for you OR the student.
Remember, even if you think you might owe taxes, prepare early. Find out what the damage is, see if you can mitigate it with any of the above and then plan for taking care of it. Don't wait for the surprise on April 15.
Thursday, February 4, 2010
Taxes Can Be Funny
Actually, no one thinks taxes are funny. But, if all I did here was spout tax code, you'd all be pretty bored and you would never read my blog. I want to provide helpful information in a way ordinary people can understand. Most people hate this time of year. Just the thought of doing their taxes can make most people want to wash the cat or clean the toilet instead. Anything except their taxes. I just want to do my little part to help ease the burden.
Actually, sometimes taxes can be funny, in a wierd sort of way. Remember Leona Helmsley? She had gabillions (yes, that's a technical tax term), but thought she was above the law and didn't need to pay taxes. Or Richard whatshisname from the first Survivor show? He won a million dollars on worldwide television and then thought he didn't have to pay tax on it. Now that's funny!!
It's funny when it's someone else's tax problem. It is a voluntary system, but we all have to volunteer. Since we have to do it anyway, I hope I can relieve the stress level just a little.
Stay tuned.
Actually, sometimes taxes can be funny, in a wierd sort of way. Remember Leona Helmsley? She had gabillions (yes, that's a technical tax term), but thought she was above the law and didn't need to pay taxes. Or Richard whatshisname from the first Survivor show? He won a million dollars on worldwide television and then thought he didn't have to pay tax on it. Now that's funny!!
It's funny when it's someone else's tax problem. It is a voluntary system, but we all have to volunteer. Since we have to do it anyway, I hope I can relieve the stress level just a little.
Stay tuned.
Hybrid Vehicle Tax Credit
Was anyone angry when a Japanese car manufacturer became the number one selling car maker in America? A lot of us thought that the US car manufacturers simply weren't making a product which could compete in the global marketplace. Nobody is smiling when people get hurt and killed when a car malfunctions. There are many now who are simply looking for a car they can trust. If you can do that and go green and get a tax credit, you get the best of all worlds.
There are still many US-made cars which qualify for the tax credit. The following is a non-inclusive list of 2010 model year hybrid vehicles which qualify for the tax credit. Ford makes the Escape and Fusion, although for the full credit these need to be bought before April 1, 2010. There is also the Chevy Malibu, Silverado and Tahoe. GMC has the Sierra and Yukon models which also qualify. I have not listed the foreign manufacturers, but many have hybrid vehicles which qualify. If you wan to know, you can call the dealer or visit the IRS web site at http://www.irs.gov/ .
In order to qualify for the credit, the car must be purchased new and must be placed in service prior to December 31, 2010. If you lease a car, you are not eligible to take the credit. Unlike many other credits and deductions, there is no income limit on this one. Anyone, regardless if earnings, can take this credit if they otherwise qualify. If your Toyota now makes you nervous or you want to move into a hybrid vehicle, remember there is tax money available.
Most of all, drive responsibly. No cell phone and no texting. Distracted drivers now cause more accidents than drunk drivers. We can all do our part to make it safer on the roads.
There are still many US-made cars which qualify for the tax credit. The following is a non-inclusive list of 2010 model year hybrid vehicles which qualify for the tax credit. Ford makes the Escape and Fusion, although for the full credit these need to be bought before April 1, 2010. There is also the Chevy Malibu, Silverado and Tahoe. GMC has the Sierra and Yukon models which also qualify. I have not listed the foreign manufacturers, but many have hybrid vehicles which qualify. If you wan to know, you can call the dealer or visit the IRS web site at http://www.irs.gov/ .
In order to qualify for the credit, the car must be purchased new and must be placed in service prior to December 31, 2010. If you lease a car, you are not eligible to take the credit. Unlike many other credits and deductions, there is no income limit on this one. Anyone, regardless if earnings, can take this credit if they otherwise qualify. If your Toyota now makes you nervous or you want to move into a hybrid vehicle, remember there is tax money available.
Most of all, drive responsibly. No cell phone and no texting. Distracted drivers now cause more accidents than drunk drivers. We can all do our part to make it safer on the roads.
Wednesday, February 3, 2010
Prepare early...file??
The forms 1099 are on their way. The annual rite of passage into tax season. You have already received some of them, and except for some brokerage houses, the rest should be arriving very shortly. If you did a tax projection for yourself prior to the end of 2009 and you know you are getting a refund, file early. It's your money. Get it back as soon as you can. If you have no idea whether you are getting a refund, prepare early. Don't be afraid that you might owe money and let that paralyze you. It's better to find out now than early or mid-April. If you find out now that you owe Uncle Sam and Uncle Arnold or Uncle Deval or any of the other 41 Uncles who run states with income taxes, then you have about 10 weeks to save for it. You don't want to get the surprise of owing tax dollars just prior to midnight on April 15 when there's nothing you can do about it.
WATCH OUT FOR PENALTIES
You can't decide at the last minute to file an extension because you owe the money, but don't have it. Please remember that an extension is just an extension of time to file, NOT an extension of time to pay. If you think you owe it, the government wants it by April 15. In fact, if you owe it, there's no good reason to give it to them any sooner than that. If you owe it and don't pay it, the government can charge you both penalties and interest. If you owe taxes with your return and you simply do not have the money and you have no way of getting the money on time, file the return on time anyway. There are penalties for late filing and for late payment. By filing on time, even without the money, you can avoid the late payment penalties. You can also ask the government for a payment plan. depending upon the amount you owe, you can attach a form requesting the payment plan. Otherwise, you can contact the IRS and they can help you set up a plan. With some states you can even request the payment plan on-line.
WHAT TO DO NOW
If you need forms or assistance preparing the returns, you should try the IRS website: http://www.irs.gov/
It has all the forms and instructions you need. For now, assemble all of your information, making sure you have all items of income and expense accounted for. All items of income should be reported, even those for which you do not get an official reporting form. Make sure you take all the deductions and credits to which you are entitled. See my top ten tax tips for some items you don't want to forget.
WATCH OUT FOR PENALTIES
You can't decide at the last minute to file an extension because you owe the money, but don't have it. Please remember that an extension is just an extension of time to file, NOT an extension of time to pay. If you think you owe it, the government wants it by April 15. In fact, if you owe it, there's no good reason to give it to them any sooner than that. If you owe it and don't pay it, the government can charge you both penalties and interest. If you owe taxes with your return and you simply do not have the money and you have no way of getting the money on time, file the return on time anyway. There are penalties for late filing and for late payment. By filing on time, even without the money, you can avoid the late payment penalties. You can also ask the government for a payment plan. depending upon the amount you owe, you can attach a form requesting the payment plan. Otherwise, you can contact the IRS and they can help you set up a plan. With some states you can even request the payment plan on-line.
WHAT TO DO NOW
If you need forms or assistance preparing the returns, you should try the IRS website: http://www.irs.gov/
It has all the forms and instructions you need. For now, assemble all of your information, making sure you have all items of income and expense accounted for. All items of income should be reported, even those for which you do not get an official reporting form. Make sure you take all the deductions and credits to which you are entitled. See my top ten tax tips for some items you don't want to forget.
Tuesday, February 2, 2010
Refunds are good??
I hear it every year. Don't you? People love to brag about their big tax refund. Sure, it sounds good. Then you need to stop and think about it for a minute. Do you realize that you have just given the government an interest free loan for the past year? Your employer took taxes out every paycheck and sent them to the government. The government used them for the bailout and then waited for you to file your return to give you back what you overpaid. There's a better way. Have less taken out from each paycheck. Have the extra automatically transferred to a savings or money market account. That way, you get to keep your extra money. If you don't need it along the way, great. If you do, you don't have to wait a year to get it back.
I understand some people like to save at the bank of Uncle Sam, but he pays even less than your neighborhood bank. You should control your refund. All you need to do is fill out a new form W-4. The higher number of exemptions you claim, the less tax dollars that get taken out. Just don't take out so much that you end up underpaid. Figure it this way. If your refund last year was $1,000, chances are this year it will be about the same. For most people, one tax year looks very much like another. If nothing different happened, your refund for this year is likely to be close to what it was last year. That $1,000 refund is about $20 per week. You don't even have to change the number of exemptions. Simply complete the new W-4 and ask your employer to take out $20 less per week. Then go to your bank and set up an automatic transfer from your checking account to your savings account. You should also know that you can fill out a new form W-4 as many times as you want. There is no annual limit. If what you're doing isn't working, change it.
Remember, it's your money. Especially in these tough times, you need to watch it very carefully.
I understand some people like to save at the bank of Uncle Sam, but he pays even less than your neighborhood bank. You should control your refund. All you need to do is fill out a new form W-4. The higher number of exemptions you claim, the less tax dollars that get taken out. Just don't take out so much that you end up underpaid. Figure it this way. If your refund last year was $1,000, chances are this year it will be about the same. For most people, one tax year looks very much like another. If nothing different happened, your refund for this year is likely to be close to what it was last year. That $1,000 refund is about $20 per week. You don't even have to change the number of exemptions. Simply complete the new W-4 and ask your employer to take out $20 less per week. Then go to your bank and set up an automatic transfer from your checking account to your savings account. You should also know that you can fill out a new form W-4 as many times as you want. There is no annual limit. If what you're doing isn't working, change it.
Remember, it's your money. Especially in these tough times, you need to watch it very carefully.
Monday, February 1, 2010
Hello Tax Fans!
Okay, so you're not really a tax fan. I get it. You just want some information about what's happening for the next 10 weeks. That's why I created this blog. I wanted to share some tax information you could actually read and understand and I wanted you to be able to ask me questions.
I'm going to start you off with my top 10 tax tips for individual taxes. I'll talk about each of them and more in the days to come.
What’s the Buz…
Here’s the Buz on…Individual Taxes
Buz Aaron’s Top 10 Tax Tips
1. Make retirement contributions – IRA, 401(k), SEP-IRA, Profit Sharing
2. Tuition credits – make sure the right family member takes them
3. Deduct job hunting expenses
4. Take a home office deduction
5. Clean your closets – donate clothing and household goods to charity
6. Challenge your property tax assessment
7. Other credits – first-time homebuyer, retirement savings, energy
8. Convert your traditional IRA to a Roth IRA
9. Have taxes withheld on unemployment benefits
10. Deductions for nonitemizers; sales tax on new car, real estate taxes
Bonus tip…
11. Plan your refund – adjust withholding on form W-4
Okay, so you're not really a tax fan. I get it. You just want some information about what's happening for the next 10 weeks. That's why I created this blog. I wanted to share some tax information you could actually read and understand and I wanted you to be able to ask me questions.
I'm going to start you off with my top 10 tax tips for individual taxes. I'll talk about each of them and more in the days to come.
What’s the Buz…
Here’s the Buz on…Individual Taxes
Buz Aaron’s Top 10 Tax Tips
1. Make retirement contributions – IRA, 401(k), SEP-IRA, Profit Sharing
2. Tuition credits – make sure the right family member takes them
3. Deduct job hunting expenses
4. Take a home office deduction
5. Clean your closets – donate clothing and household goods to charity
6. Challenge your property tax assessment
7. Other credits – first-time homebuyer, retirement savings, energy
8. Convert your traditional IRA to a Roth IRA
9. Have taxes withheld on unemployment benefits
10. Deductions for nonitemizers; sales tax on new car, real estate taxes
Bonus tip…
11. Plan your refund – adjust withholding on form W-4
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