The IRS estimates that the average taxpayer takes more than 21 hours to do their return from gathering the information to completing the tax return. Particularly with the introduction of new tax laws, the average tax payer is not aware of many new deductions that are now available. An experienced accountant should be able to take advantage of every possible deduction. Remember, the tax preparer’s fee is deductible. There are many common mistakes made by taxpayers that you need to pay attention to:
Tip 1: Check Your Math
The IRS indicated that 20 percent of those filing paper returns include computation errors. When completing your tax return, it is important to double check your math.
Tip 2: Organize and Attach Necessary Backup Paperwork
If the IRS cannot verify the information you provide, it makes its own adjustments to the amount you owe. Failing to have the necessary backup paperwork could also lead to an audit.
The most important paperwork for you to have available includes W-2s, other forms that show taxes withheld during the year, and receipts for itemized deductions and charitable donations. Make sure to attach to your tax return your W-2, other forms that show taxes withheld during the year, and any other applicable schedules.
Regarding charitable donations, note that if the donation is over $250 you must have a letter from the charity showing you made the specified monetary donation. Also, if you receive a gift thanking you for the donation (like a tote bag or a mug), you can only deduct the amount you donated that exceeds the value of the item. For example, if you donated $250, and you received a $50 gift in return, then you can only deduct $200.
Tip 3: Report All of Your Income
Failing to report income can lead to the payment of interest and penalties. Note, you must report all income, even if you didn't receive a 1099 form for work you performed. Penalties for unreported income can be very high. In addition to having to pay taxes on the unreported amount, interest will be about 6 percent per year and you could incur penalties of up to 20 percent.
Tip 4: Itemize for Deductions
Kiplinger reports that 46 million people itemize their deductions and claim approximately $1 trillion in deductions. The taxpayers (85 million) who take the standard deduction claim half that amount. A good tax preparer will calculate your income tax both ways (applying the standard deduction and itemizing deductions) to alert you to which method works in your favor.
Tip 5: Unemployment and Deductions
To help the 15 million people who are currently unemployed in this country, new tax laws have been enacted. A professional tax preparer should be aware of the new laws that can benefit you.
For example, the first $2,400 in unemployment benefits is tax free.
If you have been searching for a job in your field, job hunting deductions may be available to you such as employment agency fees, resume preparation, traveling for interviews, and postage for mailing out job applications and resumes.
These expenses may be available to you as long as the total of your miscellaneous itemized tax deductions exceed 2 percent of your adjusted gross income.
Note that expenses incurred while looking for your first job are not deductible; however, moving expenses could be. For example, if you had to move 50 miles for your first job in 2009, you can deduct your moving expenses, using the mileage reimbursement of 24 cents a mile for driving your car to your new home, plus parking costs and tolls paid driving there.
Tip 6: First Time Home Buyer Credit
In an effort to boost home sales, the stimulus package includes an expanded first time home buyer credit and a credit for long-time home owners in an amount up to $6,500. The IRS estimates that approximately 1.4 million buyers took advantage of the first-time home buyer tax credit.
Tip 7: Common Mistakes To Guard Against
Make sure your social security number is entered correctly. An incorrect social security number will prevent your return from being processed and delays you refund.
Sign and date your return. If you are filing a joint return, both people need to sign and date the return. If you use a tax preparer, make sure the preparer does the same.
Friday, February 26, 2010
Wednesday, February 24, 2010
Eight Facts about the New Vehicle Sales and Excise Tax Deduction
If you bought a new vehicle in 2009, you may be entitled to a special tax deduction for the sales and excise taxes on your purchase.
Here are eight important facts the Internal Revenue Service wants you to know about this deduction:
1. State and local sales and excise taxes paid on up to $49,500 of the purchase price of each qualifying vehicle are deductible.
2. Qualified motor vehicles generally include new cars, light trucks, motor homes and motorcycles.
3. To qualify for the deduction, the new cars, light trucks and motorcycles must weigh 8,500 pounds or less. New motor homes are not subject to the weight limit.
4. Purchases must occur after Feb. 16, 2009, and before Jan. 1, 2010.
5. Purchases made in states without a sales tax — such as Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon — may also qualify for the deduction. Taxpayers in these states may be entitled to deduct other qualifying fees or taxes imposed by the state or local government. The fees or taxes that qualify must be assessed on the purchase of the vehicle and must be based on the vehicle’s sales price or as a per unit fee.
6. This deduction can be taken regardless of whether the buyers itemize their deductions or choose the standard deduction. Taxpayers who do not itemize will add this additional amount to the standard deduction on their 2009 tax return.
7. The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.
8. Taxpayers who do not itemize must complete Schedule L, Standard Deduction for Certain Filers to claim the deduction.
Here are eight important facts the Internal Revenue Service wants you to know about this deduction:
1. State and local sales and excise taxes paid on up to $49,500 of the purchase price of each qualifying vehicle are deductible.
2. Qualified motor vehicles generally include new cars, light trucks, motor homes and motorcycles.
3. To qualify for the deduction, the new cars, light trucks and motorcycles must weigh 8,500 pounds or less. New motor homes are not subject to the weight limit.
4. Purchases must occur after Feb. 16, 2009, and before Jan. 1, 2010.
5. Purchases made in states without a sales tax — such as Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon — may also qualify for the deduction. Taxpayers in these states may be entitled to deduct other qualifying fees or taxes imposed by the state or local government. The fees or taxes that qualify must be assessed on the purchase of the vehicle and must be based on the vehicle’s sales price or as a per unit fee.
6. This deduction can be taken regardless of whether the buyers itemize their deductions or choose the standard deduction. Taxpayers who do not itemize will add this additional amount to the standard deduction on their 2009 tax return.
7. The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.
8. Taxpayers who do not itemize must complete Schedule L, Standard Deduction for Certain Filers to claim the deduction.
Tuesday, February 23, 2010
Is this Income Taxable?
While most income you receive is generally considered taxable, there are some situations when certain types of income are partially taxed or not taxed at all.
To ensure taxpayers are familiar with the difference between taxable and non-taxable income, the Internal Revenue Service offers these common examples of items that are not included in your income:
* Adoption Expense Reimbursements for qualifying expenses
* Child support payments
* Gifts, bequests and inheritances
* Workers' compensation benefits
* Meals and Lodging for the convenience of your employer
* Compensatory Damages awarded for physical injury or physical sickness
* Welfare Benefits
* Cash Rebates from a dealer or manufacturer
Some income may be taxable under certain circumstances, but not taxable in other situations. Examples of items that may or may not be included in your income are:
* Life Insurance If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds, which were paid to you because of the insured person’s death, are not taxable unless the policy was turned over to you for a price.
* Scholarship or Fellowship Grant If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.
* Non-cash Income Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.
All other items—including income such as wages, salaries and tips—must be included in your income unless it is specifically excluded by law.
These examples are not all-inclusive. For more information, see Publication 525, Taxable and Nontaxable Income, which can be obtained at IRS.gov or by calling the IRS at 800-TAX-FORM (800-829-3676).
To ensure taxpayers are familiar with the difference between taxable and non-taxable income, the Internal Revenue Service offers these common examples of items that are not included in your income:
* Adoption Expense Reimbursements for qualifying expenses
* Child support payments
* Gifts, bequests and inheritances
* Workers' compensation benefits
* Meals and Lodging for the convenience of your employer
* Compensatory Damages awarded for physical injury or physical sickness
* Welfare Benefits
* Cash Rebates from a dealer or manufacturer
Some income may be taxable under certain circumstances, but not taxable in other situations. Examples of items that may or may not be included in your income are:
* Life Insurance If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds, which were paid to you because of the insured person’s death, are not taxable unless the policy was turned over to you for a price.
* Scholarship or Fellowship Grant If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.
* Non-cash Income Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.
All other items—including income such as wages, salaries and tips—must be included in your income unless it is specifically excluded by law.
These examples are not all-inclusive. For more information, see Publication 525, Taxable and Nontaxable Income, which can be obtained at IRS.gov or by calling the IRS at 800-TAX-FORM (800-829-3676).
Monday, February 22, 2010
Five Tax Changes for 2009
As you get ready to prepare your 2009 tax return, the Internal Revenue Service wants to make sure you have all the details about tax law changes that may impact your tax return.
Here are the top five changes that may show up on your 2009 return.
1. The American Recovery and Reinvestment Act
ARRA provides several tax provisions that affect tax year 2009 individual tax returns due April 15, 2010. The recovery law provides tax incentives for first-time homebuyers, people who purchased new cars, those that made their homes more energy efficient, parents and students paying for college, and people who received unemployment compensation.
2. IRA Deduction Expanded
You may be able to take an IRA deduction if you were covered by a retirement plan and your 2009 modified adjusted gross income is less than $65,000 or $109,000 if you are married filing a joint return.
3. Standard Deduction Increased for Most Taxpayers
The 2009 basic standard deductions all increased. They are:
* $11,400 for married couples filing a joint return and qualifying widows and widowers
* $5,700 for singles and married individuals filing separate returns
* $8,350 for heads of household
Taxpayers can now claim an additional standard deduction based on the state or local sales or excise taxes paid on the purchase of most new motor vehicles purchased after February 16, 2009. You can also increase your standard deduction by the state or local real estate taxes paid during the year or net disaster losses suffered from a federally declared disaster.
4. 2009 Standard Mileage Rates
The standard mileage rates changed for 2009. The standard mileage rates for business use of a vehicle:
* 55 cents per mile
The standard mileage rates for the cost of operating a vehicle for medical reasons or a deductible move:
* 24 cents per mile
The standard mileage rate for using a car to provide services to charitable organizations remains at 14 cents per mile.
5. Kiddie Tax Change
The amount of taxable investment income a child can have without it being subject to tax at the parent's rate has increased to $1,900 for 2009.
For more information about these and other changes for tax year 2009, visit IRS.gov.
Here are the top five changes that may show up on your 2009 return.
1. The American Recovery and Reinvestment Act
ARRA provides several tax provisions that affect tax year 2009 individual tax returns due April 15, 2010. The recovery law provides tax incentives for first-time homebuyers, people who purchased new cars, those that made their homes more energy efficient, parents and students paying for college, and people who received unemployment compensation.
2. IRA Deduction Expanded
You may be able to take an IRA deduction if you were covered by a retirement plan and your 2009 modified adjusted gross income is less than $65,000 or $109,000 if you are married filing a joint return.
3. Standard Deduction Increased for Most Taxpayers
The 2009 basic standard deductions all increased. They are:
* $11,400 for married couples filing a joint return and qualifying widows and widowers
* $5,700 for singles and married individuals filing separate returns
* $8,350 for heads of household
Taxpayers can now claim an additional standard deduction based on the state or local sales or excise taxes paid on the purchase of most new motor vehicles purchased after February 16, 2009. You can also increase your standard deduction by the state or local real estate taxes paid during the year or net disaster losses suffered from a federally declared disaster.
4. 2009 Standard Mileage Rates
The standard mileage rates changed for 2009. The standard mileage rates for business use of a vehicle:
* 55 cents per mile
The standard mileage rates for the cost of operating a vehicle for medical reasons or a deductible move:
* 24 cents per mile
The standard mileage rate for using a car to provide services to charitable organizations remains at 14 cents per mile.
5. Kiddie Tax Change
The amount of taxable investment income a child can have without it being subject to tax at the parent's rate has increased to $1,900 for 2009.
For more information about these and other changes for tax year 2009, visit IRS.gov.
Friday, February 19, 2010
Be Sure to Know Whether You Qualify for the Earned Income Tax Credit
The Earned Income Tax Credit, commonly referred to as EITC, can be a financial boost for working people adversely impacted by hard economic times. However, one in four eligible taxpayers could miss out on the credit because they don’t check it out. Here are the top 10 things the Internal Revenue Service wants you to know about this valuable credit, which has been making the lives of working people a little easier for 35 years.
1. Just because you didn’t qualify last year, doesn’t mean you won’t this year. As your financial, marital or parental situations change from year-to-year, you should review the EITC eligibility rules to determine whether you qualify.
2. If you qualify, it could be worth up to $5,657 this year. EITC not only reduces the federal tax you owe, but could result in a refund. The amount of your EITC is based on the amount of your earned income and whether or not there are qualifying children in your household. New EITC provisions mean more money for larger families.
3. If you qualify, you must file a federal income tax return and specifically claim the credit in order to get it – even if you are not otherwise required to file.
4. Your filing status cannot be Married Filing Separately.
5. You must have a valid Social Security Number. You, your spouse – if filing a joint return – and any qualifying child listed on Schedule EIC must have a valid SSN issued by the Social Security Administration.
6. You must have earned income. You have earned income if you work for someone who pays you wages, you are self-employed, you have income from farming, or – in some cases – you receive disability income.
7. Married couples and single people without kids may qualify. If you do not have qualifying children, you must also meet the age and residency requirements as well as dependency rules.
8. Special rules apply to members of the U.S. Armed Forces in combat zones. Members of the military can elect to include their nontaxable combat pay in earned income for the EITC. If you make this election, the combat pay remains nontaxable.
9. It’s easy to determine whether you qualify. The EITC Assistant, an interactive tool available on IRS.gov, removes the guesswork from eligibility rules. Just answer a few simple questions to find out if you qualify and estimate the amount of your EITC.
10. Free help is available at volunteer assistance sites and IRS Taxpayer Assistance Centers to help you prepare and claim your EITC. If you are preparing your taxes electronically, the software program you use will figure the credit for you. If you qualify for the credit you may also be eligible for Free File. You can access Free File at IRS.gov.
For more information about the EITC, see IRS Publication 596, Earned Income Credit. This publication – available in both English and Spanish – can be downloaded from IRS.gov or ordered by calling 800-TAX-FORM (800-829-3676).
1. Just because you didn’t qualify last year, doesn’t mean you won’t this year. As your financial, marital or parental situations change from year-to-year, you should review the EITC eligibility rules to determine whether you qualify.
2. If you qualify, it could be worth up to $5,657 this year. EITC not only reduces the federal tax you owe, but could result in a refund. The amount of your EITC is based on the amount of your earned income and whether or not there are qualifying children in your household. New EITC provisions mean more money for larger families.
3. If you qualify, you must file a federal income tax return and specifically claim the credit in order to get it – even if you are not otherwise required to file.
4. Your filing status cannot be Married Filing Separately.
5. You must have a valid Social Security Number. You, your spouse – if filing a joint return – and any qualifying child listed on Schedule EIC must have a valid SSN issued by the Social Security Administration.
6. You must have earned income. You have earned income if you work for someone who pays you wages, you are self-employed, you have income from farming, or – in some cases – you receive disability income.
7. Married couples and single people without kids may qualify. If you do not have qualifying children, you must also meet the age and residency requirements as well as dependency rules.
8. Special rules apply to members of the U.S. Armed Forces in combat zones. Members of the military can elect to include their nontaxable combat pay in earned income for the EITC. If you make this election, the combat pay remains nontaxable.
9. It’s easy to determine whether you qualify. The EITC Assistant, an interactive tool available on IRS.gov, removes the guesswork from eligibility rules. Just answer a few simple questions to find out if you qualify and estimate the amount of your EITC.
10. Free help is available at volunteer assistance sites and IRS Taxpayer Assistance Centers to help you prepare and claim your EITC. If you are preparing your taxes electronically, the software program you use will figure the credit for you. If you qualify for the credit you may also be eligible for Free File. You can access Free File at IRS.gov.
For more information about the EITC, see IRS Publication 596, Earned Income Credit. This publication – available in both English and Spanish – can be downloaded from IRS.gov or ordered by calling 800-TAX-FORM (800-829-3676).
Wednesday, February 17, 2010
Get Your Refund Faster - Choose Direct Deposit
If you want to get your refund as quickly as possible, just tell the IRS to deposit your refund directly into your bank account. By choosing Direct Deposit, you can get your refund much sooner than if you chose to have a paper check mailed to you.
Here are the main reasons 73 million taxpayers chose Direct Deposit in 2009:
1. Security Thousands of paper checks are returned to the IRS by the U.S. Post Office every year as undeliverable mail. Direct Deposit eliminates the possibility you won’t receive your check and prevents your refund from being stolen.
2. Convenience The money goes directly into your bank account. You won’t have to make a special trip to the bank to deposit the money yourself.
3. Ease When you’re preparing your return, simply follow the instructions on your return. Make sure you enter the correct bank account and bank routing numbers on your tax form and you’ll receive your refund quicker than ever.
4. Options You can also deposit your refund into multiple accounts. With the split refund option, taxpayers can divide their refunds among as many as three checking or savings accounts and up to three different U.S. financial institutions. Use IRS Form 8888, Direct Deposit of Refund to More Than One Account, to divide your refund among different accounts. A word of caution: some financial institutions do not allow a joint refund to be deposited into an individual account. Check with your bank or other financial institution to make sure your Direct Deposit will be accepted.
For more information about direct deposit of your tax refund and the split refund option, check the instructions for your tax form. Helpful tips are also available in IRS Publication 17, Your Federal Income Tax. To get a copy of Publication 17 or Form 8888, visit the Forms and Publications section of IRS.gov, or call 800-TAX-FORM (800-829-3676).
Here are the main reasons 73 million taxpayers chose Direct Deposit in 2009:
1. Security Thousands of paper checks are returned to the IRS by the U.S. Post Office every year as undeliverable mail. Direct Deposit eliminates the possibility you won’t receive your check and prevents your refund from being stolen.
2. Convenience The money goes directly into your bank account. You won’t have to make a special trip to the bank to deposit the money yourself.
3. Ease When you’re preparing your return, simply follow the instructions on your return. Make sure you enter the correct bank account and bank routing numbers on your tax form and you’ll receive your refund quicker than ever.
4. Options You can also deposit your refund into multiple accounts. With the split refund option, taxpayers can divide their refunds among as many as three checking or savings accounts and up to three different U.S. financial institutions. Use IRS Form 8888, Direct Deposit of Refund to More Than One Account, to divide your refund among different accounts. A word of caution: some financial institutions do not allow a joint refund to be deposited into an individual account. Check with your bank or other financial institution to make sure your Direct Deposit will be accepted.
For more information about direct deposit of your tax refund and the split refund option, check the instructions for your tax form. Helpful tips are also available in IRS Publication 17, Your Federal Income Tax. To get a copy of Publication 17 or Form 8888, visit the Forms and Publications section of IRS.gov, or call 800-TAX-FORM (800-829-3676).
Monday, February 15, 2010
IRS releases rules on $6,500 tax credit for repeat homebuyers
The IRS has released new information for existing homeowners who bought a new home and wish to claim the $6,500 tax credit. Read the accompanying press release. The relevant form you'll need to file is Form 5405. (Editor's note: This is a pdf file.)
Be aware that you must show proof you owned and occupied your prior home for five consecutive years. In addition, if you claim the credit and flip the new house, the IRS will retroactively come after you for the $6,500. You must stay in the new home a minimum of three years, during which it must be owner-occupied as your primary residence.
The clarification of the rules surrounding this credit may provide a temporary booster shot by creating another incentive for people to buy -- just as the $8,000 first-time homebuyer credit did.
All of this begs the question of when the housing market is going to recover. The new Case-Shiller Index shows the bottom is upon us in most markets across the country. But when do we get back to where we were when home values were at their peak two or three years ago? The latest guess is 2022, according to a Los Angeles Times analysis.
That's 12 years from now. Of course, no one knows what the future holds. But Clark has said that he expects our nation could spend seven to 12 years working our way out of the funk, so that dovetails very nicely with this new info.
This does not mean seven to 12 years of daily doom and gloom. Rather, we'll have a continuing drag effect on our economy with bumps in the road -- such as unemployment and budget deficits -- for up to a dozen years.
---From Clark Howard's Blog
Be aware that you must show proof you owned and occupied your prior home for five consecutive years. In addition, if you claim the credit and flip the new house, the IRS will retroactively come after you for the $6,500. You must stay in the new home a minimum of three years, during which it must be owner-occupied as your primary residence.
The clarification of the rules surrounding this credit may provide a temporary booster shot by creating another incentive for people to buy -- just as the $8,000 first-time homebuyer credit did.
All of this begs the question of when the housing market is going to recover. The new Case-Shiller Index shows the bottom is upon us in most markets across the country. But when do we get back to where we were when home values were at their peak two or three years ago? The latest guess is 2022, according to a Los Angeles Times analysis.
That's 12 years from now. Of course, no one knows what the future holds. But Clark has said that he expects our nation could spend seven to 12 years working our way out of the funk, so that dovetails very nicely with this new info.
This does not mean seven to 12 years of daily doom and gloom. Rather, we'll have a continuing drag effect on our economy with bumps in the road -- such as unemployment and budget deficits -- for up to a dozen years.
---From Clark Howard's Blog
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