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Important Tips to Remember when Preparing For Tax Filing

April 30, 2012 By

E-filing has been around for some time now, and though it has made work easier, it does not do it all. Whether you use Free File, tax software or choose to seek professional help in tax filing, you definitely have some pre-filling preparation to do. The first step is to collect all your tax documents, which include the following:

  1. The previous year’s Federal tax return
  2. Social Security numbers for yourself and all your dependents, including your spouse’s.
  3. W-2 statements for salaries, tips, wages and even pensions, collectible at the end of January from all employers.
  4. The PIN (personal identification number) you used for e-filing the previous year or your AGI (adjusted gross income) for identity verification.
  5. 1099s for state tax refunds, dividends, interests, retirement plan distributions and other payments. Unfortunately, the 1099 issuers also have till the end of January to give them out.
  6. 1098s for the interest paid on mortgage, though just like the W-2s, they come late and may require you to wait. But you can use your closing statement if you bought your house the year before.
  7. K-1s from estates, trusts, partnerships, and S corporations.

In case you itemize deductions, you will certainly need receipts and records for the following in order to fill Schedule A:

  1. All taxes you paid, like real estate taxes, state taxes, local income taxes, and personal property taxes.
  2. General medical and dental expenses, including everything from drugs, hospital bills, to dental care costs, plus the medical insurance premiums, so long as they are not covered by your employer in pre-tax payments.
  3. All charity contributions, be it as cash, other assets or credit cards.
  4. Work-related costs, inclusive of money spent looking for a new job.
  5. Theft and possible casualty losses.
  6. Investment-related expenses and even gambling losses.

For small business owners, these are the documentation and receipts needed to fill Schedule C:

  1. Income statements
  2. Health insurance payments (self-employed of course)
  3. Size of home and the size of space occupied by a home office (if it’s a home business)
  4. Clear details on the business usage of your car.
  5. Self-employed pension plan contributions.

Additionally, you need to give answers for certain questions whether you choose to hire a tax professional or if you do the filing alone. For instance, did your marital status change in the last year? Or, are you supporting anyone else who is not living with you? These are some of the pertinent questions one needs to know.

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The IRS Saves Millions on E-Filed Tax Returns

April 27, 2012 By

Since the introduction of e-filing, it is seems that the IRS is now breathing easy, collecting millions of dollars in cost savings. According to a Government Accountability Office (GAO) study released in March 2011, in 2009 alone, the IRS processed nearly 95.5 million e-filed individual tax returns which is roughly 2/3 of all the filed returns that year. This study focused on ways to improve electronic tax filing and it surely came out with the obvious fruits the IRS is experiencing, thanks to e-filing.

By estimation, the GAO reported that the IRS saves up to $3.10 on each e-filed tax return! This amount is actually enough to guarantee you a sweet, though small, cup of coffee in some areas. Now do the math for the overall amount of money the IRS saved on the over 95 million tax returns.

As it is, the precise price for processing a paper tax return is estimated at $3.29. In comparison, the e-filed Form 1040 only costs 19 cents to process. The difference is a lion’s share (or should we say, the IRS’s share?) and this is what the agency gets for embracing technology.

It is further estimated that if all the tax returns of 2009 had been processed electronically, the Internal Revenue Service would have proudly saved about $148 million in costs of processing for that single year!

As the IRS expands and improves its services by incorporating e-processing, the government seems to broaden its smile. Uncle Sam now has seen his savings rise steadily over the years. This new development was not only noted and recorded by GAO, but also another government agency whose comment on the benefits of electronic tax filing came a year earlier.

The Treasury Inspector General for Tax Administration (TIGTA) also examined the efforts the IRS had shown in the pursuit of modernizing paper tax return processing. The TIGTA report for September 2009 noted that relevant IRS data from 2008 stated that the agency losses only 35 cents in processing e-filed tax returns compared to the $2.87 for paper-filed tax return. This brings a difference of $2.52, which means the IRS has seen an increase of 58 cents in savings per return via e-filing in one year. For that reason, brace yourselves taxpayers, e-filing will be the one way for all.

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Evading Taxes by Turning Down Pay Doesn’t Work.

April 26, 2012 By

Many people think that tax law only follows cash, meaning with no income, you have no tax burden. People even go to the extent of turning down pay and bonuses just to evade taxes. Well, this could only make sense in the layman’s world but in the world of tax law, it is a different ball game. Even if a bonus is announced in December, and you choose to turn it down before it is paid, the taxman notes it as a constructive receipt taxable.

Executives have tried to navigate this tricky topic by repaying their bonuses. Some are motivated by pressure from shareholders or the public or even as a result of regulatory concerns. Sometimes they are even required by law to do so but there’s a tax effect.

There are certain options one can consider in trying to pay back bonuses in order to lower tax burden. However, there are a number of critical factors you must consider before making that step.

  1. Understand the reason for repayment

Before starting the repayment, inquire if it is a voluntary step or it is motivated by other underlying factors. A repayment fuelled by shame, altruism, or patriotism could seem admirable, but may only give you an uncertain tax outlook. Better an executive repaying a bonus as a consequent of a court order, or for any regulatory reasons though he or she is not guaranteed a “good” tax position.

With a tax professional by your side however, you ought to consider tough issues like whether or not the giveback occurs in the same year as the pay. Other questions you must answer include: Do you only repay your net check with the payroll deductions already made when you return a bonus?

  1. Amend Previous Year Tax Returns

This is only allowed if you are correcting a mistake, and often a pay back is no “mistake”.

  1. Business Expense Deduction

If your repay is motivated by regulatory concerns, you can claim a business expense deduction but only as a miscellaneous itemized deduction.

  1. Salary Reduction an Option?

The company could agree to lower the executive’s present salary to effect the repay.

  1. Section 1341 Provision

This section, though tricky, allows you to claim a deduction if you included the income in the previous year since you had an unrestricted right to it, but realized a year later you did not and you have to give it back.

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Tax Help – IRS Assistance Available in Spanish!

April 25, 2012 By

Understanding tax information can be tough, but it can be tougher if it is not in your first language. Fortunately, the IRS is kind enough to offer a variety of products and services in Spanish to cater to Spanish speakers. Below are 10 ways through which one can obtain tax help in Spanish:

  1. Get answers 24/7 on www.irs.gov/espanol. There is tons of relevant information at this website for both individuals and businesses all day, every day. Get links to tax information like identity theft, disaster relief, and tax scams warnings.
  2. Understand e-file. The IRS e-file is safe, easy to use, and saves time. The e-file has safely and securely processed over 1 billion returns and has made it easier to pay up owed tax by immediate filing thus beating the deadline. Best  of all, you can get tax refund in just 10 days thanks to e-file and direct deposit.
  3. Know all you need about Free File. With online forms and brand name tax software, Free File has made life easier. Free File does all the hard work.  What more, it is free prepare and e-file your tax return with Free File. Earners of $57,000 and less can use free tax software available through a partnership with manufacturers.
  4. Access tax forms and publications. Tax forms and publications are accessible in Spanish from the IRS website 24 hours a day, every day of the week.
  5. Be informed at the Centro Multimediático (Multimedia Center). YouTube Video tax tips, and podcasts covering a range of IRS topics are available in Spanish and English.
  6. Welcome to the Spanish Newsroom. The IRS posts announcements and information on tax laws that may affect you. You only need to type in the search keywords “Noticias en Espanol” to keep up to date.
  7. Use TeleTax. The TeleTax is an automated toll-free telephone service providing important pre-recorded messages on tax topics like refund information. There is a list with over 125 TeleTax topics in Spanish and English in Form 1040, 1040A, or 1040EZ.
  8. Telephone Assistance. Get toll-free telephone assistance in Spanish by dialing 800-829-1040 (the IRS customer care line) and press number 8.
  9. Multilingual services. The IRS Taxpayers Assistance Centers offer multilingual services in over 150 different languages, Spanish included, through Over-the-Phone Interpreter or bilingual employees. Get TAC details at through the Contact My Local Office link.
  10. Be a follower. Get the latest tax information and tips in Spanish by following the agency on Twitter@IRSenEspanol.
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IRS Tax Tips for the Self Employed

April 24, 2012 By

There is nothing as great as being your own boss when it comes to work, as there are various benefits that go with it. By definition, a self-employed (SE) individual is anyone working for himself or herself, an independent contractor, or a sole proprietor in trade or business.

Self-employed individuals are also taxed by the IRS though there are different circumstances for that. Here are the six key points you need to know about self-employment taxes and self-employment in general:

  1. In general, if you are self-employed you are liable to paying self-employment tax and even income tax. The former is a Social Security and Medicare tax specifically for individuals who are self-employed. It is more like the Medicare and Social Security taxes deducted from most wage earners’ pay. This tax is filed in a Form 1040 Schedule SE and you can even deduct from your self-employment tax the equivalent of an employer’s portion.
  2. Self-employment is and can be inclusive of additional work aside from one’s regular full-time business activities, like part-time jobs done at home or to supplement your regular job.
  3. With the same Form 1040, as a self-employed individual you can file an IRS Schedule C covering Profit or Loss from Business. Or, you can file Schedule C-EZ – Net Profit from Business.
  4. You can also claim business expense deductions covering the general costs of running your business. These are the costs you need not capitalize or even include in the costs of the business goods sold, but not deductible in the present year.
  5. If you are self-employed, with or without a full-time or part-time job, you may need to make estimated tax payments. This is also applicable if your employer deducts taxes from your wages.
  6. For the self-employed, a business expense should be ordinary and necessary to qualify as a deductible. By definition, the ordinary expense is that which is common and acceptable in your line of business. A necessary expense on the other hand is helpful, useful and appropriate for your business. However, it needs not be indispensable to be termed necessary.

The IRS has more useful information on its Self-employment Tax Center, Tax Guide for Small Business and several publications outlining critical SE tax information. Before venturing into a business of your own, be sure to go through this vital information. This will enable you handle tax headaches better.

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Changes that Might Affect Your Tax Status for 2011

April 23, 2012 By

The tax season for 2011 is over but you have up to October 15, 2012 to file your tax return for the 2011 tax year if you filed for an extension. In case your tax return is not filed yet, here is your opportunity to catch up on the new developments for the 2011 tax season:

  1. There is no Making Work Pay Credit available for taxpayers in 2011, as it was in 2009 and 2010, meaning you do not have a Schedule M to file or an additional credit for 2011.
  2. There is a payroll tax break of 2% for employees. Therefore, those who receive W-2 forms pay FICA contributions of 4.2% for Social Security taxes down from 6.2% for 2011 and 2012. Furthermore, the same payroll tax cut is available for self-employed taxpayers who will receive the benefit once they file their federal income tax return in a form of an adjustment of the Self-Employment (SE) tax due. Therefore, if you are self-employed, your SE tax will be 10.4%, lower from 12.4%.
  3. There is a new form to fill now, the federal form 1099-K, also known as the “Merchant Card and Third Party Network Payments”. All taxpayers with credit card merchant accounts, or Paypal, or any account of the like and still meet the requirements; will receive this form from the relevant service provider.
  4. Your healthcare benefits may appear on your W-2 form so do not panic when you see it. Employers with over 250 employees on payroll are required to quote the amount of health care benefits they pay for every employee on the W-2 forms starting 2012, though some are already doing it for 2011. You can view the value of your health benefits in Box 12, code DD and rest assured it does not alter your taxable income.
  5. Be ready to pay slightly more for personal exemptions as it is $3,700 for 2011 higher than $3,650 for 2010.
  6. There are now more details concerning certain stocks bought or exchanged on your 1099-B. The form has new boxes now for the date of stock purchase, the coat or basis and whether you had a short or long term gain or loss, among other details.
  7. The year 2011 has seen a slight boost in the AMT exemption to $74,450, $48,450 and $37,225 for taxpayers filling jointly, single taxpayers alongside head of households, and married couples respectively.

If you have any more questions, you may have to check with your tax professional.

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The IRS Tax Calendar for Business Owners and the Self-Employed

April 20, 2012 By

Preparing and filing taxes as a small business owner or as a self-employed individual is much more complicated that filing for employees. For the most part, employers pay taxes on behalf of their employees and prepare all the numbers in the W-2 forms and this leaves the employee with very little work to do when filing returns. On the other hand, business owners and self-employed individuals will have to prepare their own accounts, understand and claim all their qualifying tax credits and deductions, and remit their own taxes within required times throughout the year. To assist the self-employed and business owners meet these tax requirements, the IRS provides a tax calendar that indicates the dates for various tax payments and that provides various tax tips.

Where to Access the Tax Calendar

The IRS distributes manual calendars to taxpayers through their agents, but these manual calendars usually run out early in the year – and the IRS does not reprint further copies. Therefore, for most of the business owners who never get to access this hard copy calendar from the IRS, you can download a copy in either English or Spanish from the IRS website. The calendar is in PDF format and you can therefore, print it and pin it at your working desk or at a place of your convenience.

IRS Calendar Connector

If you are more technology frenzy or do not like working with clutter and paperwork, then the IRS has a better option for you. You can download the IRS Calendar Connector free from the IRS website. This software pops up reminders of tax dates within reasonable time and alerts you once the deadlines arrive. You can also display the calendar to view all the tax dates from the software. The software automatically updates any new dates onto the calendar and adjusts for any changes made by the IRS. You also get to be alerted of various tax related news and information from the IRS that may affect your taxes. This software is customizable and you can set the reminder period you want for tax dates and the type of tax reminders you want – payroll taxes, excise taxes, or other specific taxes.

Microsoft Outlook Utility

The IRS also provides a further service for Microsoft Outlook users. As opposed to having the IRS Calendar Connector provide updates of the tax dates, you can download the Outlook version. This utility automatically updates your Outlook to include the various tax dates. You will therefore have the various dates indicated on your Outlook calendar and you will get reminders of tax dates in the same way that you get other reminders on Outlook. This Utility is available for Microsoft Outlook 2003, Microsoft Outlook 2007 and for iCal.

Hopefully, this pool of three IRS Tax Calendar utilities will be of help to you as you be better prepared and organized with your taxes.

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Records You Need to Keep for Your Tax Preparation

April 19, 2012 By

Tax season is over, and all you want to do is relax and never think of taxes again… That is, until next April. However, starting to prepare now for your 2012 returns will greatly help you in the future, especially if you missed out on certain deductions for 2011 from lack of supporting documentation. The ease and success of your tax filing exercise has a lot to do with your paperwork. Proper filing and record keeping will greatly reduce your work and stress during tax season. There are various records that you should keep well so as to have an easy tax returns season. These records are:

  • W-2s and 1099 Forms – The W-2 forms are mailed by your employer and they contain details of the amount of money you earned in salaries, wages and employment benefits and the amount of taxes that the employer withheld. The 1099 Forms are sent by various financial institutions including your stockbroker, investment firm, and mutual funds manager. The forms show the interests and dividends that you made from your investments. These forms are mailed by the second week of February and you should receive these forms by latest early March. If you miss out on any of these forms, you can always call the financial institution and request for a copy.
  • K-1s – The K-1 forms are sent from a partnership, S-Corp or fiduciary if you are an owner or shareholder of these business entities. The forms show the share of profits that you earned in a given year. These forms should also be received by early March. However, a partnership or S-corporation may apply for an extension and in this case, you may not receive the forms until September. In such a case, it is best to also request for an extension in filing your returns until the October deadline.
  • Previous Year’s Tax Returns – The previous year’s tax return is an important document to guide you in filing your current returns. The returns helps you know the reliefs you claimed in the previous year, the incomes you indicated and this can speed up your process of filing.
  • Accounting Records for Businesses and Self-Employed – If you are a small business owner or are self-employed, you will need a schedule of your incomes and business expenses that you incurred within the year. If you received 1099 MISC from the businesses that you consulted for, you will need the forms to prepare your returns. If you already prepare various financial accounting and final accounts for your business, you can use these accounting records to prepare your tax return.
  • Records of Sale of Assets and Investments – If you sold an asset such as a rental house or stocks, you will need both the records of purchase and sale of the asset. This will enable you calculate the capital gains from the asset. However, for the sale of your principal residence, the taxes are handled differently from those of other assets. As for sale of stocks, stockbrokers are now required to maintain a valuation basis of your stocks to assist in calculating capital gain taxes. This new requirement will now reduce the work of determining the capital gains with regards to stocks.
  • Gambling Wins and Losses – You are required to include any gambling wins as part of your income and pay taxes against such wins. If you had wins and losses within the year, you can balance the wins and losses them off and pay taxes on the net.
  • Receipts for State and Local Taxes Paid – You may be entitled for a relief against taxes paid to state and local authorities. This may include receipts that show payment of sales tax or payment of property taxes.
  • Acknowledgment of Charity Contributions – When you make a contribution to a charity whether in cash or non-cash items, you should receive an acknowledgment of the donations from the organization. This acknowledgment is what you will use to claim tax deduction against the donation.
  • Receipts of Medical Expenses – If you made any medical payments  out-of-pocket, such as payments for medical operation, weight loss programs, medical seminars of conditions that affect you or your spouse or dependents, smoking cessation medication, or other qualifying medical expense, you will need the receipts of such expenses to claim for the tax deduction.
  • Receipts for Education Expenses – If you are claiming any of the educational tax reliefs for yourself or your dependent, you will need the various receipts such as receipts for tuition, books and equipment, travel, computers, and maintenance costs.
  • Other Documentation  – Other documentation that you may need for your tax preparation include adoption documentation and receipts for claiming the Adoption Credit, mileage records for medical, charity or business related travel, child day care provider receipts to claim Child Care Credit, records of alimony paid, mortgage interest documentation, and student loan repayment records.
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Do You Know Your Rights and Responsibilities as a Taxpayer?

April 18, 2012 By

For most people, paying taxes is just part of life. Few people know their rights as far as taxes are concerned. However, the tax system is actually a form of social contract between the government (tax authority) and its citizens (the taxpayers). The taxpayers have a primary responsibility to pay taxes and the government has a responsibility to provide services to its citizens. This forms the framework of the relationship between the tax collector and the taxpayer. The law breaks down these rights and responsibility further. According to the federal law, taxpayer has 10 rights and 5 responsibilities towards their taxes. However, the majority of the taxpayers are unaware of these rights and responsibilities according to the 2011 National Taxpayer Advocate report by Nina Olson. In her report, she notes that although these rights and duties have been in the law for about 14 years now, the awareness is still low and therefore, many taxpayers have not been able to take advantages of such rights. The following are these rights and responsibilities as held in the U.S Federal laws:

The 10 Rights of Taxpayers

  • Assistance – Every taxpayer has a right to get assistance from the IRS in case they have tax related needs.
  • Information – The IRS and other tax authorities have an obligation to inform taxpayers of any tax matter that affects them in a form of media that is reasonably accessible to the taxpayer.
  • Heard – Every taxpayer has a right to be heard. The IRS’s toll free number, the IRS website, and other contact points to the tax administrators are therefore, a right to the taxpayer.
  • Appeal – In case of an audit or any determination by the tax authorities, the taxpayer has a right to appeal such decisions and determinations. The IRS has a chamber that handles appeals and this is a separate wing from those who handle the actual audits and investigations. Besides this, taxpayers have a right to further appeal disagreements with tax authorities in a tax court to the level of the Court of Appeal.
  • Pay Only the Due Amount – The taxpayer has a right to only pay the tax bill that is rightfully due and not pay any amount in excess of this due amount.
  • Privacy – The taxpayer has a right to privacy. The IRS cannot forward information about your tax records or any other information they hold about you to other parties, including government agents.
  • Certainty – It is the responsibility of the tax authority to ensure that tax matters are not ambiguous or uncertain. This is a huge task for the IRS as the tax law is very complex and it is their responsibility to simplify it to the level that it is easily understood by all taxpayers.
  • Confidentiality – The IRS has a duty to handle all matters regarding taxpayers in a confidential manner.
  • Fair Taxation – The IRS and the law makers have a responsibility to ensure that the whole tax system remains fair, equitable and just to all taxpayers. This is yet, another complex responsibility for the tax authorities and the law makers. Given the complexity of the tax system, the issue of just and fairness continues to be a sensitive one.
  • Representation – Every taxpayer has a right to be represented by a tax professional when dealing with the tax authority whether it is in an audit, audit appeal, or tax court case.

The 5 Duties of the Taxpayer

Below are the 5 responsibilities of the taxpayer:

  • Pay Taxes – Every taxpayer has an obligation to pay due taxes within the required time.
  • Honesty – The taxpayer has a duty to provide information that is truthful to the best of his or her knowledge.
  • Cooperate – Every taxpayer has a responsibility to cooperate with the tax authority by providing information, allowing for audits and investigations, and answering questions asked by tax authorities within the requested time frame.
  • Maintaining Tax Records – Taxpayers have a responsibility to keep the supporting documentation and records for tax entries in their return. The records should be kept at least for 3 years, although for cases of under reporting or fraud, records may be required for extended periods.
  • Provide Information – The taxpayer also has a duty to reveal and provide any tax related information requested by the tax authority within the required time.

Hopefully, now that you are more informed about your rights and responsibilities as a taxpayer, you will have reasonable expectations from your relationship with the tax authorities.

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But Nobody Pays That: Why do the Wealthy Pay Less Taxes?

April 17, 2012 By

Do you ever wonder how the infamous 1% get away with paying almost nothing in Federal Income Taxes? What kind of tax breaks do the wealthy exploit to negate their what-would-be-hefty tax bill? Pulitzer Prize winning business reporter, David Kocieniewsk dedicates his investigative reporting to exposing the secrets of the ways in which the wealthy, including Corporate America, exploit the loopholes United States tax laws in order to skirt their tax responsibilities. To see the body of investigative journalism that earned Kocieniewsk his Pulitzer for explanatory jounalism, click on the following link:

But Nobody Pays That

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