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Tax Tips to Apply as the Year Goes By

September 28, 2011 By

Most taxpayers wait until March and April of any given year to rush through tax process and file in good time. There are few taxpayers who plan their taxes and make tax decisions throughout the year in a bid to save on their tax bills or have an easier tax filing time. However, proper and early planning can save you lots of tax money and can help you avoid any problems with Uncle Sam. There are several things that you can do within a tax year to improve on your taxes. Some of these tips are provided below:

  • Review Your Estimated Taxes – Estimate taxes are taxes paid by self-employed and business people whose incomes do not undergo withholdings. The taxpayer pays the income taxes within a tax year in installments, as he or she makes the incomes. Once the audited accounts are complied at year’s end, the taxpayer just pays the remaining balance of taxes before the April tax deadline. Proper estimation of these installment taxes ensures that you do not pay a lot at once during tax time or you do not expect much in refunds.

 

  • Review and Adjust Withholding Taxes – For the employed taxpayers, the employer withholds taxes monthly and remits the same to the IRS. If a taxpayer makes major life-changing moves (like getting married or having a child) that affect their taxes significantly, it is advisable to make withholding tax adjustments to ensure that withheld taxes are close to the actual taxes owed. This way, the taxes due at tax time are close to what has been withheld over the year.

 

  • File Tax Records Properly – Another important task as the year goes by is to ensure that all documentation that has a tax bearing is filed in a tax file. This includes the payment stubs, dividend distribution statements, home improvement receipts, donation acknowledgments, tips schedule, medical travel expense receipts, and any other payment records for supporting tax entries. Proper filing makes it easier to prepare taxes and also provides help in case of an IRS audit.

 

  • Plan and Give out in Donations – You can also plan to make donations within a given tax year so as to qualify for tax deductions from the donations. However, for the donations to qualify for deductions, they must be made to qualifying tax-exempt organizations, which you can check on the IRS website. You will also need to keep proper records of such donations so as to claim deductions appropriately.

 

  • Make Retirement Contributions and Qualifying Insurance – There are other tax credits and tax deductions related payments towards life insurance and retirement contributions that you can also plan to make within the year. There are various life insurance and retirement fund contribution accounts including 401k accounts, traditional IRAs, and Roth IRAs, each with a different tax implication. Therefore, you need to consider these various tax implications before deciding on an account.

 

  • Make Qualifying Energy Improvement Purchases – The current tax code allows for a tax credit for various energy improvement purchases. This includes qualifying energy-saving house installations and various energy saving cars.

 

  • Get Professional Help – Finally, depending on the extent of the tax changes that will affect your tax year and the complexity of your taxes, you may consider hiring the services of a professional tax preparer to help you through the process.
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Groupon and Tax Relief?

April 12, 2011 By

Lots of social coupon sites have been popping up lately – and gaining popularity as a great way to save money. Usually, they work by getting people to sign up for local coupon alerts, and then they make money by offering consumers deals ahead of time for certain amounts. For example you may be able to buy a pass for a $125 facial treatment at a spa for $50, take it to the spa, and reap the benefits. However, these coupons say up front that taxes may apply; you may not get tax relief. In some places, when you take your coupon to the register, they’ll tell you that you still owe a few bucks in taxes. So how do you know if that $50 value really means you pay $50?

Two of the most popular social coupon sites are Groupon and Living Social. These sites do not collect taxes at the point of purchase. They also tell you that the coupons do not include taxes unless the merchant says otherwise. In addition, in the Merchant Self-Service Agreement on Groupon, it states the merchant “shall be responsible for paying all sales and use taxes related to the goods and services described in the offer.” However, resolution of what that actually means is likely to end up in court, says Veranda Smith, interim executive director of a group representing state tax officials, the Federation of Tax Administrators.

So why is this such a big deal? Well, the tax administrators in California, Florida, and Illinois (states with some of the highest populations in the U.S.) said that they want a piece of the face value of the coupon. What they mean is, from the merchant they want their percentage of the $125 actual value of that facial, not of the mere $50 you paid. However, this is contrary to the policy that applies if a merchant actually creates their own coupons. If Applebee’s says you can get two meals for $20 which would normally cost $35, then Applebee’s only pays taxes on the $20 you paid. Since sales tax rates in some cities like Chicago and Los Angeles have reached a whopping 9.75%, this policy can make a huge difference.

Many states differ in their reaction to these types of social coupon discounts, too. For example, Texas usually embraces the discounts and only collects sales tax on the $50 that changes hands, not the $125 that might have without the coupon. However, even Texas’s coupon-friendly policy does not encompass Groupon-style rates. If the merchant in Texas allows you to cover the tax with your Groupon, he’ll end up paying some of the tax bill out of pocket. Some states have not yet come to a public opinion, such as New York.
While these decisions are still fresh, there is a legal battle brewing over the policies that should apply to social coupon discounts.

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Don’t Miss Your Chinese Drywall Damage Deduction for Some Tax Relief

April 11, 2011 By

The IRS has added damage caused from Chinese drywall to this year’s list of deductible casualty losses. The list also includes damage from tornadoes, hurricanes, blizzards, and other disasters. Typically, a disaster is required to be “sudden,” but Congress recognized the argument that problems caused from Chinese drywall were certainly unexpected and unusual.

Many people complained of getting nosebleeds, headaches, itchy eyes, and itchy skin while in their houses, all symptoms which were eventually traced back to Chinese-made drywall. The drywall contained sulfur and emitted foul-smelling fumes. The chemical also corroded electrical equipment and pipes, which caused a lot of damage. The sulfur fumes even caused damage to appliances and air conditioning units.

This problem effected people in at least 42 states, the District of Columbia, American Samoa, and Puerto Rico. The U.S. Consumer Product Safety Commission and state and local authorities received many complaints from these varying geographical areas reporting negative health symptoms and damage to their property which they believed was related to the drywall.

Because of these severe issues, many consumers decided to make costly repairs to their homes. Since this is recognized as a disaster for tax purposes, those repairs to damaged infrastructure and appliances are likely tax deductible. After some advocacy efforts in court and Congress, the widespread claims of problems resulting from Chinese drywall fumes received enough attention to be tested. The Environmental Protection Agency and other federal agencies collected and tested samples of the culprit drywall and determined it to be a legitimate cause of the reported health and property problems.

For this particular issue, the IRS has created safe harbor time tables and guidelines for claiming the deductions.

In addition to this tax relief measure, Congress has instituted policies covering many other disasters, which are not required to be “natural disasters”. Relief for expenses due Chinese drywall damages can ease the burden of your overall tax bill in addition to natural disasters and some other less dramatic incidents that do not happen on a large scale. These incidents include home burglaries, car accidents, or even vandalism to property.

Many of these deductions are often overlooked, meaning many taxpayers miss out on money that they could receive in an effort to ease the financial burden of having to fix a problem caused be an event out of their control. It is important to remember that deductions are available for more than just natural disasters that get a lot of attention in the news media, so check to see if any of your expenses qualify as a deduction from your tax bill.

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Worthless Stocks are Worth a Federal Income Tax Write Off

April 6, 2011 By

If you choose to invest in stocks to build wealth, you may be able to reap the benefits in the form of taxes, even if your stock has become worthless in today’s unstable market. If your shares lost all of their value before you were able to sell them, you might be able to claim them as worthless stock on your tax return. For your stock to be classified as “worthless”, it must have zero value. You are not necessarily due this tax break simply because the company whose stock you hold went bankrupt, because the stock is not trading, or because the stock is only worth a few pennies.

However, if your stock is truly worthless, you can write it in on your federal income tax return as a capital asset sold on the last day of the tax year. The IRS may require some documentation to show that the stock is truly worthless; the documentation must show that there is no hope that you, the investor, will get any return for your holdings. You will also have to show a reasonable date when the stock became worthless. You will report this loss on line 1 or line 8 of Schedule D. Which line you use depends on whether it was short-term or a long-term holding. If it became worthless during that tax year, you will treat it as if you sold it on the last day of that year, which may affect how you classify it.

You will use part I for a short-term stock and part II for a long-term stock. In columns (c) and (d), you will write “worthless”. In column (f), you will write your loss, which is generally your basis in the stock. In the end, your “worthless” stock could be of some worth to you after all, at least when it comes to a tax write off!

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Self Employed Tax Relief and Tips for Freelancers

March 29, 2011 By

Are you self-employed? Are you a freelancer or someone who owns their own business? Here are some tips and strategies to guide the taxpayer who is in need of self-employed tax relief. Every taxpayer could always use ways to help save money when it comes to paying out to the IRS during the time for filing those tax returns.

You, the taxpayer, are responsible and in control of your taxes through how much income you generate when you are self- employed. The advantage to this is also the reductions towards paying the IRS with any losses you have from business, rental properties, and freelancing. One good way of reduction is shifting taxable income into non-taxable income and take advantage of tax credits for those who are self-employed.

All freelance writers (or freelance employment regardless if it is article-writing or decoding Visual Basic or any type of work done for a company) are sole proprietors. This means that freelancers are self- employed through means of contracting their skills. All income and expenses related to self-employment can be done with the 1040 Schedule C. Then there is the 1099-MISC (Miscellaneous) form that is needed as well. This form is similar to a W-2 form for a self employed taxpayer. The biggest tip here is that on the schedule C form line 1, your total income must be greater or equal to that reported on your 1099- MISC form. If the Schedule C form is less than the reported wages on the 1099-MISC, the IRS will issue an audit. Be sure to report all wages whether or not you receive a 1099 form to fill out.

A freelancer also has the added expenses of high speed internet, computers and other various business related expenses that can be used for tax deductions and tax relief, provided that these items are strictly for use towards your business as a freelancer. Check the IRS website at: http://www.irs.gov/businesses/small/selfemployed/index.html for more information.

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Who Benefits from the IRS Payroll Tax Holiday?

March 24, 2011 By

For 2011, the checks that are issued for tax return processing may be a little larger than usual. If that is the case when you receive yours, it is not in error. There is a new benefit called Payroll Tax Holiday. This is a one-time tax break that was issued by “The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.” Payroll taxes will still be incurred; they will just be set at a lower rate for this tax season than normal.

Employer IRS payroll tax contributions on the federal level will not change and will maintain the 6.2% rate. On the other hand, employees will benefit from a reprieve. The contributions due by employees will be reduced 2%. That is, whereas the normal 6.2% Social Security contribution would apply on income levels up to $106,000, these individuals will only be subject to a 4.2% Social Security taxation. Keep in mind that Medicare contributions, which are not subject to a wage cap, will not be affected by the Payroll Tax Holiday.

This is beneficial to those in the middle and upper income level taxpayers. Those who earn $50,000 would be eligible to the 2% savings of $1,000. A jointly filed married couple earning $100,000 would receive their 2% savings of $2,000.

However, lower income taxpayers do not reap the benefits since the Payroll Tax Holiday was implemented in lieu of the Making Work Pay Credit. Because this credit was a fixed $400 for taxpayers filing separately and $800 for couple that are married, the full credit was given to lower income taxpayers regardless of whether they earned even very small amounts. Since the Payroll Tax Holiday works via a percentage, the resulting check is naturally lower for families whose income is lower.

Individuals who are self employed experience a break as well, by way of the Payroll Tax Holiday. Whereas they would normally be required to pay 12.4% in self-employment tax, they will only have to relinquish 10.4% of their earnings for Fiscal Year of 2010.

Clearly, the Payroll Tax Holiday is a nice benefit for most every taxpayer—although, alas, it is only temporary.

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Make Sure to Make Work Pay with Your 2011 IRS Tax Return

March 23, 2011 By

Many taxpayers are eligible for the Making Work Pay tax credit on their 2010 tax returns. This credit is based on your earned income for 2010. When filing your taxes, it is important to consider several factors to be sure that you receive the total portion of the credit for which you are eligible.

The credit is available for up to $400 for individual taxpayers, and up to $800 for taxpayers who are married filing jointly. This IRS tax credit is refundable. Many workers have already seen the benefit of the Making Work Pay tax credit in their paychecks, which is reflected in lower federal employee tax withholdings.

Taxpayers whose adjusted gross income in 2010 was over $95,000 as an individual or $190,000 married filing jointly are not eligible for the credit. Furthermore, taxpayers who can be claimed on someone else’s return as a dependent cannot claim the credit. Also, taxpayers who are nonresident aliens or do not have a social security number cannot claim the credit.

How you file for the Making Work Pay tax credit depends on which form you file for your federal income tax return. If you file a 1040 or 1040A, you will claim the credit on Schedule M. By using Schedule M, you will be able to determine whether you have already received the full benefit of the credit through the abovementioned deductions of federal withholdings from your paycheck. If not, you may be due the full amount or a portion of the amount.

If you file using 1040-EZ, use Line 8 which is on the back of the form. You will also be able to determine whether you have already received the full benefit of the credit through lowered federal deductions on your paychecks and to figure the remaining amount due. It may be beneficial to get tax help to correctly claim the credit.

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Filing Medical Deductions and IRS Tax Tips

March 11, 2011 By

Many people suffer from high medical costs. The IRS allows taxpayers to deduct medical expenses as long as the total amount of medical expenses are more than 7.5 % of their total AGI (Adjusted Gross Income). Unfortunately, many taxpayers are probably unaware of IRS tax deductions for medical expenses. If a taxpayer adds the total of their family’s (which includes self, spouse, children, and any close relative) medical bills they can add up fairly quickly, totaling that 7.5%.

IRS tax deductions pertaining to medical deductions also include dental expenses as well. As unfortunate as the event is, funeral expenses paid out-of-pocket or medical bills paid out-of-pocket for a deceased family member during the past year can be claimed as tax deductions. Though it is tragic, try not to overlook these deductions because a loved or close member of the family has recently passed away; it helps the family with finances when the taxpayer owes less money through these approved tax deductions.

These are some other commonly over-looked medical deductibles that can be claimed on IRS tax deductions:

  • Travel expenses can be deducted; the amount of mileage to and from medical appointments for 2010 is 16.5 cents.
  • Uninsured medical equipment is also tax deductible. Such items may be diabetic supplies, glasses, hearing aids, or other medical approved deductibles, such as laser vision corrections.
  • For those who are admitted into an alcohol or drug-related rehabilitation program, the incurred expenses towards being admitted and/or other rehabilitation related costs are also deductible.
  • Health-conscious taxpayers who quit smoking and use smoking cessation aids or devices, or weight-loss related surgery (due to medical health problems certified by an approved physician) may also be approved for medical tax deductions.

Checking with www.irs.gov will give you the full information towards IRS tax deductions for medical expenses.

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First Time Homebuyer Credit on Your Federal Income Tax Return

March 4, 2011 By

The first time homebuyer credit is available for both first time homebuyers and for long-time residents purchasing a new home. To qualify for the credit, the taxpayer must have been at least 18 years old when he or she bought the home (or at least one person in a married couple filing jointly must be 18), and not another taxpayer’s dependent.

The maximum credits are $8,000 for married first-time homebuyers, $4,000 for single for first-time homebuyers, $6,500 for married long-time resident homebuyers, and $3,250 for single long-time resident homebuyers. Taxpayers who wish to claim the credit must file a paper return using Form 5405, First-Time Homebuyer Credit and Repayment of the Credit and provide supporting documentation. The supporting documentation must include a properly executed settlement statement, a dated certificate of occupancy for new homes, or the retail sales contract for mobile homes when there is no settlement statement.

To claim the first-time homebuyer credit on your federal income tax return, the taxpayer or married taxpayers must not have jointly or separately owned a home within the past three years. To be considered a long-time resident homebuyer, the person or couple claiming the credit must have lived in the same principal residence for five of the previous eight years. These years are counted from the date of purchase. The taxpayer must have purchased or entered into a binding contract to purchase the home on or before April 30, 2010. If they entered into a contract by this date, they must have closed the deal by September 30, 2010.

Long-time residents must attach documentation covering the abovementioned five year period including Form 1098, Mortgage Interest Statement. Members of the military and some federal employees have one extra year to buy a principal residence in the U.S. More information is available on the IRS website at www.irs.gov/recovery.

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Refunds for those who did Not File a 2007 Federal Income Tax Return

March 2, 2011 By

The IRS has announced that nearly 1.1 million people who did not file Federal Income Taxes in 2007 could be entitled to refunds adding up to $1.1 billion! There is a catch: in order to collect this refund, you must file a return for 2007 no later than Monday, April 18, 2011 so do not delay in filing!

Some who did not file in 2007 may have done so because their income was too small to require filing even though they had withholdings from their wages. IRS tax law allows most taxpayers with a 3-year period where they can claim a refund in cases like these, where returns are not filed. However, once these 3 years pass, the money goes back to the U.S. Treasury, so do not miss out on this opportunity! There is no penalty to file a late return which qualifies for a refund, so do not fear filing for 2007. However, if you have not filed returns for 2008 and 2009, the IRS may hold your refund check and it will be applied to any debt owed to them. Furthermore, it may also be used to pay other debts, such as unpaid child support or past-due student loans.

Additionally, by failing to file in 2007, many low-income workers may not have claimed the Earned Income Tax Credit (EITC), which could help them get some more money from the IRS.

You can find prior year tax forms and instructions on the Forms and Publications page of IRS.gov or by calling 1-800-TAX-FORM (1-800-829-3676). Also, if you are missing your Forms W-2, 1098, 1099, or 5498 for 2007, 2008, or 2009, you should request copies from your employer, bank, or other payer. If you have difficulty finding these documents, you can request free transcripts by ordering online or calling 1-800-908-9946 or by filing Form 4506-T.

Refer to the chart below (from IRS Publications) for the potential refunds for 2007:

Do not delay! Get your refund now if this applies to you!

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