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Know Your Filing Status before Filing Federal Income Taxes

March 30, 2012 By

The first step to consider in one’s endeavors of filing federal income tax is to determine filing status. Generally, filing status can be categorized as follows: Head of Household, Married Filing Jointly, Qualifying Widow (or Widower) with Dependent Child, Single and Married Filing Separately. The main advantage of establishing tax filing status is that one gets to know the necessary requirements needed when filing federal income tax returns. Additional benefits include determination of one’s eligibility for deductions and credits, determination of standard deductions, and determination of the correct amount of tax payable.

Some individuals may be eligible or qualified to more than one of the filing statuses. The IRS has eight important facts concerning filing status that every tax payer should be familiar with, in order to select the best filing status based on their situation.

  • If you qualify for more than one status, then select that which offers you the least tax obligation.
  • Married couples have the option of separately filing their tax returns. Therefore, each individual person would fall in the category Married Filing Separately if desired.
  • An individual’s marital status as of the last day of that year would determine their marital status for the whole year.
  • If an individual’s spouse passes away and he/she does not remarry during that year, then he/she is qualified to file for a joint tax return with the deceased spouse for that year.
  • Persons who are legally separated as per the requirements of the state law, divorced, or unmarried qualify for Single filing category.
  • An individual is eligible to select Qualifying Widow (or widower) with Dependent Child category if their spouse passed away in the previous year; they have a child that is a direct dependent, haven’t remarried, and certainly meet other requirements.
  • A married couple filing a joint tax return together would qualify for the category or filing status called Married Filing Jointly.
  • Unmarried taxpayers generally fall under the filing status of Head of Household

Additional information pertaining to the determination of an individual’s filing status can be obtained from IRS Publication 501, Exemptions, Standard Deduction, and Filing Information which is readily available on the IRS website or by calling 800-TAX-FORM (800-829-3676). One can also make use of the Interactive Tax Assistant (ITA), a resourceful tax law tool on the website of the IRS that guides one through various questions and providing appropriate answers to questions on tax law, to know his or her filing status.

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Exemptions and Dependents to Lower your IRS Tax Payments

March 29, 2012 By

There are tax rules in existence, which in one way or another, affect every individual filing for income tax return, as stipulated by the federal laws, although there is great difference in filing individual income tax returns. These rules clearly state cases of exemptions and dependents. IRS tax payments can be greatly lowered if individuals seek to exploit the exemptions and number of dependents when filing their tax returns. Some of the facts that most taxpayers are not aware of concerning exemptions and dependents include:

        i.            An individual’s taxable income can be reduced by use of exemptions. Generally, two categories of exemptions apply. One, dependents’ exemptions, and two, personal exemptions. Each of these exemptions, when well used, can reduce an individual’s tax return by $3,700.

      ii.            Dependents’ exemptions. A qualifying child or relative is a dependent. A person can secure exemption on all their dependents. The only requirement for this rule is to list the dependent’s Social Security number.

    iii.            As a dependent you might not claim for an exemption. A personal is not eligible to claim his/her personal exemption when filing personal tax returns when another person, say a parent, has already claimed them as dependents.

    iv.            A spouse is not a dependent.When filing a joint tax return, a taxpayer is qualified to claim an exemption for himself/herself and one for the spouse as well. But when filing separately, one can only claim an exemption for their spouse if they have no net income, are not another taxpayer’s dependents and they are not filing a joint tax return.

      v.            Not everyone qualifies to be a dependent. Generally, persons who can be claimed as dependents must be citizens of the U.S., resident aliens in the U.S., or resident of Mexico or Canada for some portion of a year. Luckily, there is in place an exception for adopted children. Also, a person is not allowed to claim a person who is married as their dependent if such a person files a joint tax return.

    vi.            A person may be required to file their personal tax return despite being dependent of another person. A number of factors are considered before one qualifies to file tax returns. Some of these factors include amount of income, one’s marital status and taxes owed.

Additional and helpful information can be obtained on IRS Publication 501, which is available on the official IRS website. This publication explains more on dependents and exemptions. Also, one can get help by calling 800-TAX-FORM (800-829-3676), or by using the ITA tool on the IRS website.

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Factors to Consider When Choosing a Tax Attorney for Tax Help

March 28, 2012 By

When filing tax returns, it is advisable to seek the help and guidance of professionals. The IRS usually advises taxpayers to seek the help of tax professionals when filing tax returns so that they do it efficiently and effectively. The IRS further emphasizes that the taxpayer should, at all times, be responsible for what is filed, even when done by a tax expert. Thus, choosing a tax preparer should be done with utmost care, with someone you can trust.

The IRS requires taxpayers, especially those who seek help from tax experts, to make sure that the professionals sign the tax returns, and also enter their PTIN- Preparer Tax Identification Numbers.

The most important factors to consider when choosing a tax preparer (tax expert) are:

        i.            Qualifications of the preparer. All tax preparers are supposed to be in possession of PTIN, as per the new regulations. Besides having a PTIN, it is important to enquire that they are affiliated to a professional association and that whether they regularly attend educational classes. The IRS is also putting in place test requirements to ensure that tax preparers are qualified and meet all competency requirements.

      ii.            History of the preparer. Here, one should check to see if the preparer has any questionable history, especially in connection with BBB (Better Business Bureau). Further, the taxpayer should check the status of the expert’s license and establish whether and disciplinary actions have been dealt out to him/her. The IRS Office of Enrollment can be contacted to enquire about enrolled agents.

    iii.            The taxpayer should find out whether the taxpayer has an electronic filing system in place. Usually, paid preparers who handle more than ten clients’ returns handle the filing process electronically. With the advancement of technology, it is paramount to choose a preparer who has IRS e-file system.

    iv.            Provide necessary receipts and records required to prepare tax returns. Normally, reputable preparers ask a number of questions so that they can be able to accurately determine an individual’s total income, and their qualifications for deductions, expenses, and other key necessities. It is a violation of the rules of the IRS e-file system to use a preparer that files returns electronically before receiving his/her Form W-2.

      v.            The tax preparer chosen should always be available for consultation. It is important to choose a tax preparer that is available for consultation, even after the date of submission of returns is due, just in case issues to do with tax returns emerge later on .

    vi.            A blank tax return form should never be signed. One should avoid any preparer that requires him/her to put your signature on a blank return.

  vii.            The preparer should sign and include his/her PTIN in the form. The law requires that any paid preparer signs and put his/her PTIN in the return form. The responsibility of the contents of the form lies in the taxpayer’s hands and not the preparer. The taxpayer must also obtain a copy of the return from the preparer.

  1. Before signing the return, it is important for the taxpayer to carefully review it. He/she must go through the returns and ask questions where there is doubt; it is important to understand the contents of the return before signing it.

    ix.            Enquire about the service fee of the preparer. Preparers who charge their fee based on a fraction of the refunds should be avoided. Similarly, those who boast that they can get larger refunds should also be avoided. Any refund from the IRS should be deposited into the taxpayer’s account and not the preparer’s.

      x.            Abusive or suspected tax preparers should be reported to IRS. They can be reported to the IRS by filling out Form 14157.

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The Revolutionary IRS E-File

March 27, 2012 By

According to the Internal Revenue Service, e-file is still the best method to get quick refunds and ensure precise tax returns. With more than a billion proceeds processed so far, IRS e-file or electronic transmission system has transformed the manner in which IRS processed tax returns and made quick refunding possible. E-file is the best way through which taxpayers can file returns accurately and get their refunds securely and promptly. Ever since its inception, e-file has proven to be a reliable and secure way of filing a tax return. IRS has paid tax return preparers and software vendors who use the most up-to-date encryption expertise to make sure the system is not just safe but also releases an electronic acknowledgement on whether the return has been by IRS and either accepted or rejected.

The easiest way of receiving a refund after a successful tax return file is via direct deposit, which usually takes less than 10 days. For taxpayers making tax payments, one can file via e-file and schedule the payment on the April tax deadline. Those paying by check can e-file their details then send a payment voucher by email. Ways of e-filing tax returns include:

  • Via a tax return preparer – some tax return preparers offer free services
  • Through the IRS Free File – this offers free electronic filing and tax preparation
  • Through self-preparation software – most software products are free to use

IRS encourages taxpayers to use tax return preparers who offer IRS e-file services since IRS has introduced new laws from the beginning of this year. All preparers who file more than 10 returns for clients must file electronically. Taxpayers should use paid preparers who sign the returns they set up and enter their Preparer Tax Identification Numbers (PTINs) as is required by law. However, despite the fact that preparers sign returns, the taxpayers are, by law, the ones accountable for the correctness of their returns, of which the preparer hands a copy to them.

When the taxpayer uses software to file their returns, it is wise and advisable to use a self-select PIN method on the return. If using a paid preparer, the taxpayer can use either the practitioner PIN method or the self-select PIN method. The above are electronic filing PIN methods or e-signature, which are temporary PINs used by the IRS to verify a taxpayer’s identity when using the e-filing system. The electronic forms of IRS are free and have no income restrictions.

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Filing a Late Return

March 23, 2012 By

The IRS provides an opportunity to taxpayers to file tax returns months or even years after the required deadline. Such delayed returns do come with various consequences, but they can also enable a taxpayer access to various tax related benefits.

What Happens when You Do Not File

If you do not file a return in a given year, the IRS generates a substitute return based on the information that they have from third party sources. Since a copy of Forms W-2, K-1, and 1099, among other tax documents, are sent to the IRS, they are able to come up with a substitute return with these. However, the IRS does not include reliefs that you may be entitled to. Once the IRS generates the substitute return and determines your tax liability, they commence the collection process to recover the taxes due.

Why You May Need to File a Late Return

There are various reasons as to why you may need to file a tax return for past tax periods:

  • Not Required to File – If you are not required to file a tax return because of the threshold of your income, you can still file such a return to claim various tax reliefs. You can file returns for as far back as three years. Such a return does not attract any penalties as filing a return was not required in the first place. The taxpayer can in such a case get refunds for various reliefs that were unclaimed over the period.
  • Claiming Tax Reliefs - If a substitute tax return was used and you were denied various reliefs that you were entitled to, you can file a late return to claim such tax benefits.
  • Mitigate Losses – The penalty for not filing a return is usually much higher than that of filing late. Furthermore, the later you file, the higher the penalties charged and interests in case there is some outstanding taxes. Therefore, to mitigate on the losses that would arise from further delays or from not filing, it may be wise to file sooner than later.
  • Social Security Benefits – For those who are self employed, they will need to file a return in order to get the Social Security benefit. This is because the Social Security Administration gets its information of Social Security for self employed income from the IRS. Therefore, to access such funds, one may be required to file a return, even though this is done late.
  • Accesses to Credits – If you are looking to take a mortgage, business loan and many other loan types, your financier may require you to provide evidence of having filed your returns. Therefore, in such a case, you may have to file a late return so as to access such credit
  • Apply for Education Federal Aid – Various federal educational grants and reliefs require one to have filed a tax return. Therefore, if you wish to apply for such aid and did not file a return in a given year, you may have to file a late return so as to qualify.

Filing the Late Return

For you to file a late return, you will need to access the required Form 1040 and fill out the information of your financial transactions for the year that you are filing for. You may need to collect the various tax documentation such as pay-stubs, W-2, 1099 forms, bank statement for the said year so as to recreate the late return. It may be advisable to seek the help of a professional when filing a late return. Filing late may attract penalty charges that are debited onto your tax account. If you owe taxes, the IRS will also include this and charge interest.

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How to Defer Taxes Using Your Real Estate Property

March 22, 2012 By

Do you own real estate property? Well, real estate can be an ideal way of deferring your taxes. There are various tax deferral opportunities that the tax system provides property owners. Some of these opportunities are explained below:

1031 Exchange

The 1031 asset exchange is named after Section 1031 of the IRS codes that provides for this exchange. Under the exchange, a taxpayer is allowed to use the proceeds of the sale of an asset to purchase a similar asset of the same of higher value without paying capital gain taxes. The most common asset that is exchanged under 1031 exchange is real estate. By exchanging your property for a more expensive one, you may get to increase your income from the property and yet avoid paying taxes on sale of initial property. For your trade-off to qualify under the 1031 exchange, it must meet the following requirements:

  • The asset must be of the same or higher value and must be of the same type such as real estate for real estate or machinery for machinery.
  • For you to use the 1031 exchange, the new property must be of commercial purposes such as for rental as opposed to being for personal use.
  • The sales proceeds of the first property need to be held by a qualifying intermediate until the proceeds are used for purchase of the new property.
  • The person making the exchange must furnish the qualifying intermediate with a list of properties that he or she is considering to buy under the exchange within 40 days of the sale of the first property.
  • The purchase of the new property must be done within 180 days from the time of sale of the initial property, or within 180 from the time a tax return is due, whichever comes first

Depreciation

The depreciation on real estate property is tax deductible. This means that a portion of the value of the property is deductible every year as depreciation and such a deduction goes towards tax savings. However, on sale of the property, the depreciation charged will be added to the capital gain so as to determine the capital gains tax.

Home Equity Loan

Another way of deferring taxes using your home is by taking a home equity loan. A home equity loan or mortgage refinancing is taking a loan against the equity portion of your house. This equity portion is the difference between the market value of your house and the outstanding house loan. Interest on the home equity loan is tax deductible.

Saving on Sale of Personal Residence

Capital gains from one’s personal residence are not taxable up to a cap of $250,000 for single filers and $500,000 for those who file jointly. To qualify as a personal residence, the taxpayer must have lived in the house for a specified amount of time within the tax year that one is claiming relief.

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How to Adjust Your Tax Withholdings

March 21, 2012 By

The amount of withheld tax by your employer every payday determines whether you get a refund check from the IRS at tax time or whether you will owe Uncle Sam. The tax information that you give your employer is used to determine the amount of taxes to be withheld. If the information is accurate, you should either get a very low refund check or have to pay very little taxes when filing a return. There are people who choose to have their employers withhold more than is required so as to have a higher refund check during tax time. However, such a move simply means that you will be advancing the tax authority with an interest free loan. Another reason that causes taxpayers to have a huge variance in their withheld taxes is if their tax situation changes and they do not update their employers. Certain changes such as getting married, buying a house, divorcing and getting a child can have a huge impact on your taxes. You therefore, may need to adjust your withholdings to reflect the correct changes. If you are seeking to adjust your withholding tax, here is what to do:

Get a Form W-4 from your Employer to Make Changes

The easiest way of adjusting your tax withholding is by requesting for a W-4 form from your employer and providing the updated information about your tax factors. The W-4 form is filled by employees when they join a workplace. The W-4 contains information such as one’s marital status, filing status, children, mortgages, and student loan repayment. From the information that a taxpayer provides on the W-4 form, the employer is able to make the corresponding withholding. Therefore, if any of the information changes, the wrong taxes will be withheld unless an adjustment is made. If you are receiving a high refund or find that you owe taxes at year end, then you may need to review information on your W-4 and provide a new W-4 form with the updated information to your employer.

Determine Your Own Withholding

You can also determine the amount of taxes that your employer with withhold every payday. To do this, you can use the withholding tax calculator available on the IRS website. The calculator will require you to input various details about yourself. The calculator will then provide suggested withholding amount based on information provided and based on the frequency of your pay. You can then forward the amount arrived at by the calculator to your employer as the amount to be withheld from your salary or wages.

Make Updates When Tax Circumstances Change

Finally, to ensure that your withholding is updated on time and reflects the correct tax factors, ensure that you update your employer with information of any changes that may affect your taxes. If you take a mortgage, start investing in a private retirement fund, get married or get divorced, this will affect your withholding and therefore, the earlier you update such information, the more accurate your tax withholdings will be.

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Options for Paying IRS Taxes

March 20, 2012 By

The IRS provides a wide range of options that a taxpayer can use to pay their taxes. The option you use will depend on the amount of taxes that are due, your financial situation, and your preferences. These options are:

  • Withholding – If you are an employee, then the primary way that you pay income tax is through withholdings. Your employer withholds a portion of your pay every paycheck and remits the funds to the IRS under payroll taxes. To determine the amount of taxes to withhold, your employer uses the W-4 form that you filled when getting employed. If too much or too little taxes are being withheld, you can fill out a new Form W-4 with the updated information and submit the same to your employer.
  • Installment Tax – For those who are self employed, you will need to pay installment taxes within the year. Once you have prepared your final taxes, you can then pay the balance taxes by the tax deadline. If your installment taxes are significantly lower than the actual taxes due, you may be penalized for the underpayment.
  • Pay Taxes by Tax Deadline – By April of every year, each qualifying taxpayer is expected to prepare their returns based on their previous year financial numbers. If on preparing the returns you discover that you owe taxes, then you will need to pay these taxes by the April tax deadline. You can pay such due taxes by writing a check to the IRS and attaching it to a paper return. There are also bank transfer options available to facilitate the payment of such taxes.
  • Pay by Credit Card or Other Credit Option – If you do not have available cash and want to clear the balance before the deadline, you may pay using your credit card. The IRS has subcontracted various private institutions to facilitate the collection of taxes through credit cards. You can use any of these companies to pay by credit card. You can also seek other credit facilities such as payday loans or bank loan to raise funds to clear the due taxes.
  • Request for the 120 Day Extension – If you do not have funds by the tax deadline but you will be getting finances to pay the due taxes within 120 days from the deadline, you can call the IRS and request for an extension. The IRS is at liberty to make such an extension on case by case basis and no penalties are charged in such a case. However, the IRS will charge interest for the days delayed.
  • Online Payment Agreement (OPA) – If your tax dues are large and you want to pay them over a period of time, you can request the IRS to set up an installment payment plan. If you owe below $25,000, then you can set up an Online Payment Agreement which is guaranteed and you can set it up on the IRS website or by calling the toll free IRS number. However, installments will need to be paid off within 5 years. Interest and penalties for late payments will also be charged back to the due taxes. This installment plan does not come with any financial disclosures to the IRS and you get to determine the amount to pay monthly as long as the taxes are paid within the 5 year limit.
  • IRS Repayment Plan – If you owe over $25,000, then you will need to apply for an installment repayment plan. To do this, you will need to file Form 433F, “Collection Information Statement Form” and provide your financial details such as your assets, bank statements, and other personal details. The information makes it easy for the IRS to place a lien against your assets. Once you apply for the installment plan, the IRS determines the amount to be paid per month based on your financial situation.
  • Financial Hardship Options – If you are in a financial hardship and are not able to pay the full amount of taxes due, you can seek for relief options. An Offer in Compromise is a waiver of part of the due taxes for a taxpayer who is in a financial hardship. The offer is granted at the discretion of the IRS upon application by the taxpayer. Another option available for someone who is unable to pay the taxes is a Partial Payment Installment Agreement.
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Get Your IRS Refunds Faster this Year

March 19, 2012 By

The tax season is now in full swing and taxpayers who have filed their tax returns are steadily receiving their refunds. Over the past years, the IRS has continued to improve their systems and processes so as to provide refunds in a much faster way. Depending on the mode of filing and the choice that a taxpayer makes for receiving the refunds, the IRS can release the refunds within 7 days. Below are some tips you can apply this tax season so as to receive your refund in a much faster way:

Counter Check for Mistakes before Filing

Once you file a tax return, the IRS uses their system to counter-check entries to confirm that no errors have been made. If there are any unresolved errors, the IRS either rejects the return of requests for additional information. Therefore, careless mistakes can cause a delay in your returns, as you may have to serve the IRS with more information before accessing your refunds. To ensure that you do not get any such delays, ensure that you carefully prepare your return and counter check for errors.

E-File

Another way of speeding your refunds is by filing electronically. The IRS has over the recent years, actively marketed and pushed e-filing to replace paper filing. This has been quite successful because as today, over 70% of returns are made electronically. One of the incentives that the IRS provides for use of the e-filing is by speeding the tax refunds of those who file electronically. Therefore, to enjoy this incentive, you can file electronically and therefore, speed up your refunds.

Direct Deposit

The IRS endeavors to process the tax refunds within 7 days for all taxpayers who file electronically and who elect the direct deposit option of receiving refunds. This ideally is the fastest way of getting your refund. Therefore, ensure that you select the direct deposit option and provide your bank account details in your tax return form so as to get your refunds at the earliest time possible.

Delays for Some Tax Reliefs

Not all taxpayers can file electronically. If you are claiming certain tax benefits and reliefs that require support documentation, you may have to file paper returns. This will consequently delay your refund check. The reliefs that require support documentation include the Adoption Credit. Besides tax reliefs that will require attachments, there are also reliefs that the IRS deems sensitive and they may choose to manually check the returns of all taxpayers who claim such reliefs. For example, in 2011, the IRS chose to manually review the returns for taxpayers who had claimed the 2008 First Time Homeowners Credit and who were repaying the credit starting in 2010.

Track Refunds with Mobile Phones

Though tracking your refund will not speed it up, it will manage your eager anticipation. The IRS, in 2011, introduced a free mobile application that tracks the progress of your refunds. The application, IRS2GO is available both for IPhones and Android phones and can be downloaded free from the Apple App-Store for iPhones or from the Android Market Place.

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