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Divorce and Taxable Income

April 29, 2011 By

If you have been divorced, you know that there are a lot more things to think about than heartache, pointing fingers, and whose is whose when you divide your assets. You have to consider (and reconsider) all kinds of issues such as legal status, paperwork, ownership, and yes, taxes as well.

What is included in your taxable income? If you have been divorced, your financial situation has probably changed. You may receive or pay alimony and/or child support. If you do, do you know how that will affect your tax return this year?

If you receive alimony payments, they are considered a part of your total income and therefore taxable. However, federal income tax is not taken out of your alimony payments initially, so you may need to adjust taxes taken from your other income sources to avoid a tax debt surprise on your return. It is important that you include your alimony as taxable income because the IRS imposes a penalty for not filing it correctly. Furthermore, filing your taxes becomes more complicated when you receive alimony; you have to use the long form, IRS Form 1040 and report your alimony income on line 11.

If you make alimony payments, those payments are not a complete loss – they are tax deductible provided that you have your ex-spouse’s Social Security number for verification. If you do no have this information, the IRS may not allow this deduction or impose a penalty. To claim this deduction, you will use IRS Form 1040 and subtract it from your income on line 31.

Some divorce decrees call for both alimony and child support and state the specific amount for each. In these cases, child support is not considered income and is therefore not taxable. The party paying cannot claim the child support as tax deductible, either.

Divorce can be a distressing, complicated, and messy but with these tax questions explained, you can at least slowly start to adjust to the tremendous changes with a little less hassle.

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Have You Paid What You Owe IRS? Check the Status of Your Refund

April 28, 2011 By

Once you are done paying the money you owe IRS and are due to receive a refund, you have quite a number of options to check the present status of the money that’s coming to you. When finding out about the status of your refund via e-file, you shall receive the information you need 72 hours after the IRS has confirmed that it has obtained your return. If you check the status of your refund by filing a paper return, you shall receive a notification from the IRS in about three to four weeks after they receive your mail.

When establishing the status of your refund, you are required to have your federal tax return with you. To obtain your refund information you must indicate:

  1. Your Social Security number or your Taxpayer identification number.
  2. Your filing status indicating whether you are single, married or married filing joint return, head of household, filing separate return or qualifying widow(er).
  3. The exact refund amount that is shown on your tax return.

Once you have provided this personal information, you could receive some responses such as:

  1. The direct deposit date of your refund or the exact mailing date.
  2. Confirmation that your tax return was received successfully and is being processed.
  3. A notice explaining that the IRS was unable to deliver your refund because you may have provided a wrong address. If this happens, you can change or make corrections to your address online by using Where’s My Refund?

Personalized information in Where’s My Refund? also contains links to tailored information concerning the specific situation you are in. The links provide you with guidelines on how to solve the problems concerning your refund. Where’s My Refund? is also available to taxpayers who are visually impaired.

If you are not able to access the internet, you have the option of checking your refund status by calling the IRS hotline number. This is available in English and Spanish as well. When you call the number, you will be requested to give your Social security number or that of your spouse, the exact amount shown on your tax return, and the filing status too.

The IRS also has a Smartphone application, IRS2Go, which enables taxpayers to check their tax refund status by the touch of a button. Apple users can download this application from the Apple App Store and Android users can get it from the Android Marketplace.

Thanks to technology, we can check the status of our tax refund in the comfort of our own homes at our fingertips.

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Don’t Understand IRS Tax Terms?

April 27, 2011 By

It can be a really daunting task when it comes to learning tax “lingo;” one of the hardest things about taxes is understanding the jargon used. There is no need to be stressed about it though. You can manage to learn and grasp the tax language.

1. Credits: These are much similar to the credits you get at a local store. Once you have computed your tax bill, you can use the credit to reduce the total amount on the check you will write to Uncle Sam. Credits are generally better than deductions because they directly subtract the amount of tax you are required to pay as opposed to reducing the total some of taxed income.

2. Progressive Taxation: This is a method whereby as earning levels increase, so do the rates of taxes.

3. Adjusted Gross Income (AGI): This refers to all earnings that you receive during one whole year. It includes wages, dividends, and interest.

4. Deductions: These refer to the costs that the IRS allows you to subtract from your AGI so that you may calculate your total taxable income. Generally, the lower your income, the lower the amount of tax bills you have to pay.

5. Standard Deduction: This refers to a fixed amount that the tax payer can subtract from his/her earnings. It is determined by the status of the individual’s filing position. Due to fluctuation in inflation, the rates change each year. This method eradicates the necessity to itemize specific deductions.

6. Exemption: This is the total sum from which you subtract your earnings to reveal everyone who counts (or depends) on your income such as your spouse, children, or relatives (such as parents).

7. Withholding: This is a system whereby taxes are deducted from earnings before you receive your paycheck.

8. Taxable Income: This refers to your total income, trimmed down by all permissible deductions and exemptions. It is what you use to determine how much tax you need to pay.

9. Voluntary Compliance: This is a system where individuals report their income, file their tax return, and pay their tax debt on time.

10. Itemized Deductions: These are costs that can be subtracted from your AGI to assist you in getting a lesser amount of your income on which you must in calculating your tax bill. They include mortgage interest, medical expenses, casualty, theft loss, gambling losses, and charitable contributions. Some of these deductions must meet the IRS regulations before they are claimed, so check to make sure they fall under their guidelines.

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Tax Assistance – Know Your Tax Documents

April 26, 2011 By

There is that specific point in the year when your mailbox becomes piled up with all sorts of documents concerning taxes. If you dread opening these documents because you do not understand all the jargon involved, the following will provide tax assistance information that explains the “gist” of your tax documents.

Form W-2

This form represents your Wage and Tax Statement. It is utilized by your employer to record any wages or reimbursements that you received during the course of the year. The form contains your employer’s fundamental information as well as yours. This includes name, tax identification, and address. Starting with box one, the total amount of wages paid to you will be recorded. Box two will display the amount of income tax suspended from your wages. Boxes three and five contain the amount of earnings focused on Social Security and Medicare. Those amounts are filled in boxes four and six correspondingly.

Box seven will contain the amount of tip income that you reported to your employer. If you failed to include the tip income, your employer fills in the amount in box eight.

Box nine contains the amounts of your Earned Income Tax Credit if you asked to have your employer pay it to you.

Box ten carries the cost of any care services offered to you. Box 11 contains the value given out to you from your employer’s non-qualified reimbursement plan. Delayed reimbursement plans are recorded in box 12. Box 13 contains three boxes, one of which will be checked off if you took part in your employer’s retirement arrangement, if you are a recipient of third-party sick pay, or if you are a legal employee.

Finally, Box 14 is meant for reporting anything else that cannot be recorded in other parts of the form.

Form W-2G

This form is used to record revenue and withholdings in relation to gambling. This is in the event that you have won above $600. Whatever sum of your winnings that has been withheld from your taxes will also be recorded in this form. The form may also help you in establishing your net income for the year.

Form 1099 Series

This is actually a series of forms that include: cancellation of debt, dividends and distributions, proceeds from broker and barter exchange, interest income, payments from the government, social security benefits, and pension income among others.

Form 1098 series

This is another series of forms. The difference between the 1099 series and the 1098 series is that the 1099 series embodies revenue you need to record on your federal income tax return. The form 1098 on the other hand corresponds to the costs you paid or gained that could cause tax deductions or credits. They include mortgage interest statement, student loan interest, tuition statements, and charitable contributions or donations of vehicles, airplanes and boats.

These documents are not there to make your life difficult. If you want, you can separate the forms concerning income from those of expenses. Understanding these different forms can help you greatly in being well prepared during tax season.

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Tax Help on Understanding Early Distributions

April 25, 2011 By

In the past two years, more taxpayers have had to go through the trouble of digging into their savings to pay their bills. This also includes using their retirement savings. Taking out money before retirement is not a really good idea because when Tax Day arrives, you may be a little bit troubled. The reason for this is – whatever amount you withdraw before you retire will be considered as Early Distributions. Most of the time, they are subject to an extra 10% withdrawal tax, plus the income tax on that amount as well.

Luckily, this rule has some exceptions. You will be exempt from paying the early withdrawal fine if you are; disabled, a recipient of a deceased participant, having uncompensated medical costs, receiving distributions in the form of a pension, having distributions that do not exceed your medical insurance expenses or your costs for qualified higher education, having a distribution that came as result of an IRS tax levy, or using distributions to build, buy or renovate a house. There are many more exemptions that you can find out with some research or with the help of a tax professional. If you are not eligible for an exemption, you will say so and pay an early withdrawal penalty of 10%. This will be done on Form 1040.

You may also be required to file Federal Form 5329, if you want to claim an excemption. However, if you are not eligible for an exemption, you do not need to file Form 5329.

Remember that you will also be considered as having already carried out an Early Distribution if you do not put together your tax-free rollovers in before the deadline. To make a rollover, the safest way to do so is to formulate an administrative rollover. What this implies is that you should permit your administrator to roll the plan right out to another administrator.

Retirement plans can be quite risky. Therefore, if it wise to consult with a tax investment professional before you decide to take out money from this account or reorganize it. Even though you may confidently believe you know perfectly well what you are getting yourself into, it never hurts to get all the information you can before making such a big and dicey decision. The moment you make an early distribution, make sure that the transaction has been documented in a proper manner to ensure all records are in order. Also, confirm with your tax expert to ensure that the details in your paperwork are accurate and reflect the exact figures and events. Sometimes, there may be some false figures in the documents that contradict what actually transpired, and you do not want to find yourself in such a situation, because trouble with the IRS is no trifling matter.

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If There’s Something Phishy About Your IRS Tax Problem

April 22, 2011 By

Don’t let the authority of the Internal Revenue Service scare you into giving someone all your money. Many scammers prey on this fear that many taxpayers have of the IRS and use their reputation as a powerful and intimidating institution that take people’s money. Although the IRS does have authority, power, and may be a little scary to you, they would not take money from you that is not legally due.

Every year, the taxpayers report scams to the IRS. People receive phone calls, e-mails, faxes, and other forms of notice which say they are from the IRS. However, many of these communications are not from the IRS and are actually from scammers. People will fraudulently use the IRS name and logo in order to seem believable and then ask for personal information, bank account information, and identification information. Do not let these fake communications fool you.

This practice is known as phishing, and the aim is to get the receiver to reveal information which will allow the scammer to commit identity theft or directly take your money.

The IRS is well aware that these practices occur and has published a list of red flags to help you identify a scam before becoming a victim. Furthermore, the IRS never initiates communications with taxpayers through e-mail, and will therefore never send a message about your tax account. If someone sends you an e-mail indicating they are from the IRS or telling you to go to an IRS website, do not reply, open attachments, or click links provided through the e-mail. Attachments could contain malicious code and links could lead you to a site asking you for information which will lead to identity theft. If you have already received an e-mail and responded or clicked on a link, go to the IRS website and enter the term “identity theft” into the keyword search box for further information. Furthermore, if you receive other forms of communication like a phone call, fax, or letter from someone who claims to be an IRS employee and you are suspicious, you can call 1-800-829-1040 to ask the IRS if they have a legitimate need to contact you and report any phony correspondences. If you have a legitimate IRS problem, you will be able to openly work it out with the IRS and will never have to release passwords and certain secret access information.

If you think you have encountered a scheme, you can report it on the IRS tax website. More details about how to report phishing schemes are available under the keyword search “phishing.”

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You Have the Right to Remain Silent – Even for an IRS Audit

April 21, 2011 By

The Internal Revenue Service is scary, and they know it. Reports of abuse of power have come from ill-treated taxpayers have come through the IRS for years. However, you do have rights with the IRS, and dealing with tax problems does not have to be a fearful endeavor. Here is a declaration of your rights which matter when faced with an IRS audit.

You do have the right not to meet with the IRS at all. You cannot refuse to cooperate with no repercussions, but you can conduct your correspondence through the mail. If you are to be audited, ask for a correspondence audit so you can avoid having to take off work and endure the stress of an in-person meeting where you might say something you should not. If you do meet with the IRS, you have the right to record any of these meetings to ensure that you are not mistreated and the rules are not changed. If you would like to exercise this right, you simply have to notify the IRS ten days in advance that you wish to record it.

You also have the right to eliminate penalties if you can show that you acted in good faith and not in a way intended to avoid the IRS. Along the lines of the negotiation process, you have the right to make an installment agreement with the IRS. Even though they want their money now (and they want all of it), you have the right to pay it on terms that are less of a burden on you. In order to negotiate an Installment Agreement, you will need IRS Form 433-A, the Financial Statement which asks you for your income, expenses, assets, and liabilities, and helps you figure out how much you realistically can pay.

You also have the right to challenge IRS notices. The Government Accounting Office has released statistics revealing that up to 48 percent of IRS notices are “incorrect or incomplete”. However, there is no incentive for the IRS to clean up their act because most taxpayers just hand over a check. Instead of doing that, if you think your notice falls within that 48 percent, you can challenge the notice.

You also can appeal any decision made by the IRS. Just as in any other legal case, you can argue your side again if you do not believe that the outcome was fair. Your appeal rights last for 30 days after the initial decision of an audit, although you may actually have to wait a year or so before coming before a judge. When deciding whether or not it is worth the stress, keep in mind that IRS statistics show that 64% of cases on appeal turn out in the taxpayer’s favor.
If you choose to exercise your right to take the IRS to court, you can represent yourself or use Taxpayer Advocate Service. If you choose to represent yourself, make sure you are aware of the associated risks. The IRS may easily trip you up and the penalty for losing may be very harsh. No matter how much you read, the IRS knows more about the Internal Revenue Code than you do. Because of these associated risks, you may want to get a tax attorney or use the Taxpayer Advocate Service to aid you in your case.

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Do You Ever Wonder Where Your IRS Tax Money Goes?

April 20, 2011 By

Shoppers who are cautious always need to know what they are making payments for. It is for this reason, that some Washington D.C. thinkers and members of Congress are putting forward a proposal requesting Uncle Sam to give taxpayers an itemized receipt once they file their IRS taxes.

Majority of the taxpayers, claim that they never receive any information on where their taxes go. This consequently leads to misguided beliefs concerning how we can best seal the national budget gap. For instance, recent research found that Americans hold the belief that a quarter of the total of federal spending is dedicated to foreign aid. However, an itemized receipt would depict that only 0.6 percent of the income of a normal middle class family goes to foreign aid.

It is argued however, that breaking out individual tax contributions would help correct this kind of spending delusion. A receipt would not provide any solutions. Instead, it would suggest hard numbers on governmental plans, which most people perceive to be abstract. This should make it much simpler for legislators and taxpayers to discuss tax expenditure and budget cuts that are required to effectively cut down the federal deficit.

Third Way has invented a calculator which gives taxpayers an idea as to where their taxes end up. This concept convinced a group of lawmakers to establish a law that would generate a taxpayer receipt. This is how advocates of taxpayer receipts explain the process:

Once you have filed your taxes, you would obtain an itemized receipt by e-mail or by regular mail, depending on what method you used to file your taxes.

The single-page manuscript would contain major issues like Social Security, defense, and interest on the debt. It could also provide taxpayers a link to a website they could search for more information concerning federal expenditure.

When it comes to the cost of this receipt program, it is approximated that the IRS would end up spending up to $15 million to mail the receipts; the price of receipts sent by e-mail would be insignificant. The cost of website maintenance would also be very low. The payoff however, would cause less uncertainty concerning the federal budget.

Having read this information, are you interested in obtaining a receipt depicting how each and every penny of your taxes is spent? If it also showed that most of your taxes were used in a government program that you fully supported, would this receipt play a part in changing your position of thought on cuts to the program?

Do not be left in an empty pool of information. Keep track of the latest tax tips and news and make your decision.

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Is It Time to Hire a Tax Lawyer?

April 19, 2011 By

If you are in trouble with the IRS, there are several important factors to consider before choosing representation. Consider the level of involvement of the IRS in your issue thus far.

If the IRS is going to audit you because they believe your taxes were fraudulently filed, a tax lawyer will be able to advise you on what to do to avoid severe penalties of up to 75% of taxes you owe. If you owe taxes and paying them will create severe hardship for you, you may be able to enter into an Offer in Compromise agreement with the IRS which will allow you to pay less than your full debt. Although you can get an Offer in Compromise without representation, a tax attorney will be able to increase your offer’s chance for acceptance. In the event that your offer is not accepted, your attorney can advise you on your other options.

You may have a lien placed on your assets or your wages may be garnished because of failure to pay your taxes. With a lien or wage garnishment, the IRS attempts to gain back the value of the taxes you have yet to pay. A tax attorney can help you by getting the lien or wage garnishment removed. If the IRS has already audited your tax returns and determined they were fraudulently filed, a tax attorney can help you get the resulting penalties removed.

To find the best tax lawyer for your needs, do your research. Many attorneys offer free consultations, which is a great opportunity to assess whether you are compatible with that tax lawyer. It may also help to ask others who have had tax problems, and it is essential to make sure they have experience, the proper education, and are a member of the state bar.

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Apple and the IRS Tax Holiday

April 18, 2011 By

A tax holiday for big corporations may mean that some of them come back to the United States with their money. Even if corporations are headquartered in the U.S., they are not necessarily holding all of their money here. In fact, they are probably not holding their money here because it is expensive.

Unlike personal tax rules, corporations are able to keep their money in offshore accounts without having to pay taxes on it until they want to bring it back into the country. Many corporations take advantage of this because the U.S. has the second highest corporate tax rate in the world. However, it would be pretty cool if we could have that money here at home and in the revenue stream rather than sitting in an account guarded by gun-wielding guards and locks the size of a car. In order to incentivize bringing those bucks back into the States, some government figures have proposed a tax holiday, a period during which big companies can repatriate their money without having to pay the same high amounts of IRS taxes.

This idea has come up in conversations in what seems like a whisper, with the loudest whispers coming from Rep. Eric Cantor (R-VA) and Sen. Orrin Hatch (R-UT). However, it is not endorsed by Treasury Secretary Timothy Geithner.

However, big name companies like Apple, Microsoft, and Pfizer have been looking around for beneficial tax venues – i.e. countries with more lax tax policies like Ireland. Since the political climate in the U.S. and the financial climate in Ireland are shifting, some of these companies might be considering coming back home.

How do we know this? Well, last fall, Apple’s Steve Jobs said his company was waiting for “one or more unique strategic opportunities” before making the move. Apple, a traditionally politically cautious company, has also signed on with Fierce, Isakowitz and Blalock in Washington, DC., a lobbying firm that is rumored to plan to try to make the new leaders in Congress think about their financial and privacy concerns. Read: Apple wants to pay less taxes and will not bring their money back into this country until they can.

While tax reform is certainly under way, it is very unclear what is going to happen with both individual and corporate taxation. A lot of new and proposed policy focuses on getting back lost revenue and closing loopholes. Corporate taxation, though is a little more unclear, and corporations whose leverage might just stay in other countries seem to have different ideas about what is best for U.S. tax policy.

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