Monday, June 29, 2009
Last week, a new article was posted to the Tax Relief Blog, explaining how taxpayers in debt to the IRS can get a federal lien released. Although it can be scary getting a lien notice in the mail, there are plenty of options for taking care of it.
Validate or Appeal
If the IRS has issued a lien against your property, then it is likely due to an IRS back tax liability. Essentially, there is no way to release the lien until the tax debt is resolved. There are a number of ways you can go about doing so, but before you even think about paying the debt, you will want to make absolutely sure that you owe the full amount they are citing you for. If the total amount is incorrect, or the lien was filed improperly, then you can appeal it. To appeal a federal tax lien, you can request a collection due process hearing with the office of appeals. If you lose your appeal, you still have 30 days to have your case reviewed for proper jurisdiction. However, if it turns out that the liability amount is correct, then you are going to need to resolve it to get the lien released.
Pay in Full
If you have the financial ability to pay off your IRS debt, without suffering in other financial aspects of your life, then it can be a great way to quickly and easily release your tax lien. However, determining the exact amount needed to fully pay off your tax debts can often be difficult.
Offer in Compromise
In some cases, the IRS will allow you to settle your debt through a reduced lump sum payment to the IRS. The program is known as an Offer in Compromise (OIC). In order to qualify for an OIC, you will need to prove to the IRS that you truly cannot afford to pay your all of your tax liability. However, unless you are trained on how this process works, you should hire a tax lawyer or a tax professional to negotiate with the IRS on your behalf.
Installment Agreement
If you cannot afford to make a one time payment to the IRS, then you can negotiate an Installment Agreement, which will allow you to pay back all or part of your tax liability to the IRS in monthly payments. Depending on how much you owe the IRS, you might qualify for a Streamlined Installment Agreement, which has an easier approval process. Unfortunately, the federal tax lien will not be released merely by entering into an Installment Agreement. Rather, the lien will remain in place until the tax debt is paid in full.
To read the rest of this article, be sure to head over to the Tax Relief Blog.
While Democrats and Republicans continue to argue on the future of health care in this country, private insurers who are worried about going bankrupt if the country nationalized health care. Check out the following article from USA Today.com discussing how a U.S. health care company is planning to run commercials attacking the idea of taxing health care.
Much of the TV advertising on health care so far has focused on the controversial public, or government-run insurance program that Democrats say would compete with private insurers and Republicans say would drive them out of business. One labor union will begin airing ads in two states Tuesday that deal with an equally explosive issue: Taxing health benefits.
The Laborers' International Union of North America will run the ads at least through Thursday in North Dakota and Montana, according to spokesman Jacob Hay. In a demonstration of the fine line labor is walking on this issue, the ads first praise Congress for taking up the health care debate but then criticize an idea that could be included in one draft of the legislation to tax health care premiums.
"Finally, Congress is working to fix health care," the ad's narrator says as upbeat music plays in the background. Then, the tone of the music shifts to the ominous: "But the U.S. Senate is working on a plan that could cost middle class Americans more money. This plan would tax your health insurance benefits. So working families would pay even higher taxes than they do now."
Labor unions have been among the biggest supporters of revamping the health care system, but they have also opposed the tax provision -- an idea President Obama also opposed during last year's campaign. Since then, White House officials continue to leave the door open to some form of a tax on health benefits. They did so again over the weekend, the Associated Press reports.
The ads are running in the home states of the two most important senators on the issue, Senate Finance Chairman Max Baucus, D-Mont., and Senate Budget Committee Chairman Kent Conrad, D-N.D. Both men have said they are open to the idea of taxing at least a portion of health benefits -- possibly by taxing only those with the most expensive insurance plans. Specifics have not yet been released.
Wednesday, June 24, 2009
Are you already worried about trying to save for your children’s future education related expenses? In today’s economy, millions of taxpayers are struggling to pay their bills let alone save up for future bills. It may seem overwhelming to be thinking about a day when you will have to help your child earn their diploma, but by preparing early you can avoid expensive loans twenty years down the road.
It is a common misconception that only very wealthy families can save for their children’s future. In fact, there are multiple educational savings plans that were made especially for middle-class and low-income households. To help those of you looking to get a head start on the process, please enjoy the following article on tax friendly ways to save for your children's education.
1. Coverdell Education Savings Account
If you are looking for a way to avoid taxes and fees when you withdrawal your child's education money in the future, then a Coverdell Education Savings Account (ESA) is the way to go. It allows you to contribute $2,000 per year until the beneficiary is 18 years of age. Although the contributions are not tax-deductible, the distribution cash will become tax-free when withdrawn in the future. However, the funds must be used only for school expenses. For more information on opening a Coverdell ESA check out this page on IRS.gov.
2. 529 College Savings Plan
529 programs are among the popular ways for parents to save for their children’s future educations. While the specific details will vary depending on the state you reside in, there are two general types of 529 plans to choose from. The most popular is known as a College Savings Plan, and it will allow you to select between various investment options. You will not be taxed on the returns from your investments, and can use the money later on to pay for books, tuition, etc.
3. 529 Prepaid Tuition Plan
The second type of 529 plan (the Prepaid Tuition Plan) is commonly called the “early bird special.” It works a bit like rent control, allowing you to pre-purchase tuition now based on today’s prices. The tuition fees will then be locked in place until your child is old enough to utilize them. This plan is especially beneficial in today’s economy, but be sure to check with your local laws before making any investments.
4. Savings Bonds
There are special bonds called Savings Bonds for Education, which work quite well when invested in early enough. If a taxpayer passes income qualifications, they can put money in to the bond and it will be tax-free when used later for educational expenses. A great benefit to educational savings bonds is that the funds can be withdrawn by the parents in the event of a financial emergency.
5. Tax Credits
If your child is already a little bit older, and you have little or no money saved up, then do not give up. There are several credits, deductions, and tax advantages that your child may still be eligible for, both before and after enrollment. The front-runner this year is the American Opportunity Tax Credit, which has been extended and improved by the Obama administration. Other credits include the lifetime learning credit, classroom expenses deduction, and deductions for higher education tuition and fees.
If you need help choosing the right choice, you can always enlist the help of a knowledgeable tax professional. You will also want to avoid taking advantage of more then plan with out first verifying the legality of such a choice. Unfortunately, the IRS will rarely allow a taxpayer to claim more than one large educational plan on their tax return.
Tuesday, June 16, 2009
From the Wall Street Journal:
A tax credit currently limited to certain first-time homebuyers would expand dramatically under legislation introduced by U.S. Sen. Johnny Isakson, R-Ga.
Under the legislation, any buyer of a home - not just first-time home buyers - would be eligible for a tax credit worth 10% of the purchase price up to $15,000.
A tax credit passed into law earlier this year is worth only $8,000 and is limited to individuals and couples making no more than $75,000 and $150,000 respectively.
The legislation, which Isakson introduced Wednesday, quickly attracted co-sponsors from both parties, including Senate Banking Committee Chairman Christopher Dodd, D-Conn.
A beefed-up tax credit has strong backing from business and industry groups. The Business Roundtable earlier this week launched a campaign recommending the key changes to the credit that are proposed in the legislation. The National Association of Home Builders and the National Association of Realtors have also pushed for an expanded tax credit.
Still, the measure faces an uphill climb in Congress because of its price tag, which is likely to be high. Lawmakers would also have to justify assisting high earners purchase a home.
"One of the biggest problems facing the American people today is an illiquid housing market, a decline in their equity, a decline in their net worth and a depression in the housing market that we are obligated to correct if we possibly can," Isakson said in a press release.
The legislation would extend the tax credit, which expires Dec. 1, by one year from the date of enactment. Homebuyers would be able to claim the credit on their 2009 tax return for purchases made in 2010.
Last week Roni Deutch, CEO of the Roni Deutch Tax Center, had an article published on WomenEntrepreneur.com explaining what taxpayers can do about IRS tax debts. You can check out a section of her article below, or read the full text at Do You Owe the IRS?
1. Fully pay. This may seem obvious, but the easiest way to resolve an IRS debt is simply to pay it in full. Consider selling a rarely used car or recreational vehicle in order to satisfy the IRS. While this is inconvenient and unpleasant, consider the alternative: IRS collections hounding you day and night, putting liens and levies on everything you own. Doing without a luxury item sounds a lot more appealing, don't you think?
2. Offer in compromise. If you can't pay off your entire tax debt, you might qualify for an offer in compromise (resolving the entire debt for less than is owed). Why would the IRS accept less than what is owed? Well, think of it the way a business owner might: Collection activities cost money. If you can get a lump-sum payment for as much as you can ever hope to collect, even if it's less than the total, there is a benefit in cutting your losses. While this is an excellent way to resolve a tax debt without destroying your finances, it is very difficult to qualify.
Monday, June 08, 2009
If you thought keeping up with one tax return a year was tough, four estimated quarterly tax payments might seem overwhelming. However, by breaking the process down in to easy steps you will see that quarterly payments are not nearly as intimidating as they seem. To help anyone wondering if they should to make a payment please consider the following answers to the most common questions about estimated quarterly tax payments.
Who needs to make estimated quarterly tax payments?
According to the IRS, “in most cases, you must make estimated tax payments if you expect
to owe at least $1,000 in tax for 2009 (after subtracting your withholding and credits) and you expect your withholding and credits to be less than the smaller of:
- 90% of the tax to be shown on your current year’s tax return, or
- 100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)”
So basically, if you have any income over $1,000 that has not had federal taxes withheld then you will need to make quarterly payments. This applies to any source of revenue, from self-employment earnings to interest and dividend payments.
When are they due?
Some first-time quarterly taxpayers may get a little confused, because the "quarterly" payments are not divided in to exact quarters. While the reason for this is unclear, just be sure to put the exact dates in bold letters on your calendar. That way you can avoid being hit with a late penalty.
For income earned Jan. 1—March 31, due by April 15
For income earned April 1—May 31, due by June 15
For income earned June 1—August 31, due by September 15
For income earned Sept. 1—Dec. 31, due by January 15
These are the due dates for quarterly payments, but do not forget you also have the option of making monthly payments. Some prefer the monthly option because the payments are much smaller and more manageable.
How do I calculate an Estimated Tax Payment?
Although it seems complicated at first glance, estimated quarterly tax payments are not all that difficult to calculate, and the whole process should take no more than an hour or two. To complete the calculations, you will need: last year’s tax return, a calculator, a pen, and piece of paper. There are a couple of ways to calculate how much you owe, and for more details you can download IRS Form 1040-ES, but the details below explain one of the simplest methods.
Discover your average tax rate by pulling out last year’s tax return. To do so, divide your income tax from last year (should be line 43 on an average 1040) by your adjusted gross income from last year (line 37). You then multiply this number by your total income for this quarter. If you are a self-employed individual, you will need to add additional costs for Medicare and social security, usually about 15.5%. For more details on calculating your payment, we highly recommend you seek advice from a professional tax preparer.
How do I make the payments?
Estimated quarterly tax payments, once estimated, are very simple to make. One way is to write a check for the amount and send it to the IRS along with a 1040-ES voucher form. You also have the option to make payments quickly online through the electronic federal payment system. Check out https://www.eftps.gov/eftps/ for more information.
Tuesday, June 02, 2009
Last week Roni Deutch Tax CEO Offer Roni Deutch posted helpful new article for anyone thinking about purchasing a new vehicle. We have included a snippet of the entry below, but be sure to check out The Tax Lady Blog for the full text.
Local Tax Deductions
One of the biggest incentives to buy a new vehicle is the federal tax law that allows you to deduct both local and state taxes paid. However, you must make the purchase between February 16 and December 31, 2009. Although the savings begin to phase out with more expensive car purchases, this deduction can easily save you thousands of dollars come April 2010. To qualify, single taxpayers need to have an adjusted gross income of less than $125,000, and for joint taxpayers, the cap is $250,000.
Plug-In Hybrids
If you are looking to get a new fuel-efficient vehicle, then you may want to consider waiting for one of the new plug-ins due to be out later this year. There are lots of advantages to buying plug-in hybrids, especially ones that can run entirely on their batter power without using any fuel. However, there are also specific tax benefits that have become law during the Obama administration. For the first 250,000 plug-ins sold, owners will receive a tax credit ranging between $2,500 and $7,500. After those first cars are sold, the credits will still be available but in reduced amounts.
Sales Tax & Registration
When buying a car for the first time, many buyers will make the mistake of assuming that the price tag on the car is the exact amount they are going to pay. This is untrue. Although the price listed on the vehicle will be your main expense, sales tax and registration can easily increase your total costs by a few thousand dollars. When you are estimating the type of car you can afford, be sure to add in your local sales tax and registration! That way you can avoid potential surprises when you go to sign the purchase documents.
Business Expenses
If you are going to be using the car you purchase for your business or primarily as a business vehicle, then you may be able to benefit from additional tax deductions for purchasing and maintaining the vehicle. However, be sure to check with an accountant or tax professional before taking any of these deductions, as the IRS can be very strict about vehicle related expenses.
State and Local Incentives
If you have been eyeing a certain vehicle but are not sure it is in your budget, then make sure you to check your state and local tax laws. Although most federal hybrid credits began phasing-out already, there are still numerous states that are offering tax incentives to purchase a hybrid or eco-friendly vehicle.
According to their newest press release, the IRS has published the “spring 2009 issue of the Statistics of Income Bulletin, which features information on high-income individual income tax returns filed for tax year 2006.”
For tax year 2006, taxpayers filed nearly 4.1 million returns with adjusted gross income of $200,000 or more, up from 3.6 million returns in the prior year. These high-income returns represent almost 3.0 percent of all returns filed for 2006.
The Statistics of Income (SOI) Division produces the SOI Bulletin on a quarterly basis. Articles included in the publication provide the most recent data available from various tax and information returns filed by U.S. taxpayers. This issue of the SOI Bulletin also includes articles on the following subjects:
- Foreign Earned Income Exclusion: In tax year 2006, about 335,000 U.S. taxpayers living abroad reported approximately $36.7 billion in foreign-earned income and claimed nearly $18.4 billion in exclusions from income.
- Possessions Tax Credit: For tax year 2005, 102 U.S. corporations claimed the possessions tax credit for income derived from business operations in U.S. possessions. The total credit claimed was just less than $1 billion. Most corporations that claimed a possessions tax credit did so for operations in Puerto Rico, and those corporations claimed more than 98 percent of the total credit amount.
- Qualified Zone Academy Credit: Financial institutions claimed total tax credits of $135 million under the Qualified Zone Academy Bond program in tax year 2005, up from $117 million in 2004.
- Filings of Individual Income Tax Returns: Taxpayers filed 143.0 million individual income tax returns for tax year 2007, an increase of 3.3 percent from the 138.4 million returns filed for 2006. Adjusted gross income increased 6.9 percent from 2006 to $8.5 trillion for 2007, and taxable income rose 6.8 percent to $5.9 trillion. The alternative minimum tax increased 8.6 percent to $20.9 billion, while total income tax rose 6.5 percent to $1.1 trillion.
The Statistics of Income Bulletin is available at IRS.gov. Copies of the Statistics of Income Bulletin are available from the Superintendent of Documents, U.S. Government Printing Office, P.O. Box 371954, Pittsburgh, PA 15250-7954. The annual subscription rate is $53 ($74.20 foreign), single issues cost $39 ($48.75 foreign).
Tuesday, May 26, 2009
The war on tobacco—through cigarette taxes in particular—is almost as old as the concept of taxation in general. However, the history of taxes on tobacco products in America is particularly interesting, as the battle itself intrudes on what many feel is a civil right – the right to smoke. To help some of our readers better understand cigarette taxes and how they began, we have put together the following short history of cigarettes taxes in America.
The Beginning
In 1492, Columbus discovered what he described as a "dried leaf" to be given as gifts, and later thrown away. 26 years later, in 1518 Juan De Grijalva landed in Yucatan, and there he found the natives were smoking tobacco in cigarette form. By 1531, Tobacco was being cultivated in Europe and shipped across the world.
Tobacco Taxation Begins
As with any profitable crop, the government saw money to be made in taxing tobacco products. In 1794, under Alexander Hamilton’s tax package, the United States Congress passed the first Federal excise tax on tobacco products. From the beginning, the tax was fought and debated. However, by1880 tobacco taxes accounted for 31% of total federal tax receipts.
Civil War Taxes
To increase federal revenue during the Civil War cigars and cigarettes were singled out for additional taxation. While these taxes were meant to be temporary, they actually went up in 1865, 1866, and 1875. They did go back down for only a short time before being increased again during the Spanish-American War in 1922.
State Cigarette Taxation
In 1921, the State of Iowa made history by becoming the first State to collect taxes on cigarettes just for their state. By 1950, 40 States and the District of Columbia were also collecting State taxes on the sale of cigarettes.
Federal & State Cigarette Taxes
Although the very first U.S. cigarette excise tax was imposed to pay for the Civil War, over time it has become a solid source of state and federal revenue. In 2007 alone, the federal government collected over $7 billion dollars from cigarette related taxes, and all the states in the country combined collected an incredible $21 billion.
Current Cigarette Tax Increases
Over the past decade the average tax rate levied on cigarettes has increased nearly 200%, and our country’s recent financial troubles have led to dozens of new tax proposals on both the state and federal levels that include cigarette tax hikes. As of April 1, the Federal excise tax increased from $0.39 to $1.01 per pack as part of Presidents Obama’s State Children’s Health Insurance Plan.
In addition to Federal tax increases, dozens of states and local governments are also considering additional taxes on tobacco products. In San Francisco the mayor is considering an additional $0.33 tax per pack to pay for the cost of cleaning up cigarette butts. On the other side of the country, states like Arkansas and Kentucky have doubled their average taxes on cigarettes, and many other governments agencies are looking to follow suit.
Friday, May 22, 2009
When times get tough, you start hearing more about bankruptcy. Deciding to file for bankruptcy is a difficult choice with financial implications for years to come. Many people do not fully understand how filing for bankruptcy can affect their tax situation. Some people believe that filing for bankruptcy will discharge all tax debts. That is not necessarily true. Depending upon the type of bankruptcy you file for and the type of tax debt you have, bankruptcy may or may not help.
Regardless of what type of bankruptcy you file for, you must continue to file all tax returns and pay all assessed taxes on time. If you file late, without an extension, or miss filing altogether, your bankruptcy case can be dismissed, or the court may opt to change the chapter filing. Of course, how your taxes must be filed vary by chapter filing. Below are some guidelines for the most common types of bankruptcy filings, Chapter 7 and Chapter 13. Regardless of the chapter, please be sure to speak with a bankruptcy attorney before filing, as each case is different.
Chapter 7
In a Chapter 7 bankruptcy filing, you are liquidating all non-exempt assets to pay off creditors. All funds are put into a bankruptcy estate, which is a separate taxable entity. This means that you still file your standard 1040 returns as required, and the trustee of the bankruptcy estate must file a separate 1041 return for all assets in the estate. If you are appointed as the trustee (the “debtor-in-possession”) that means you must file two different tax returns for each year required.
To add yet another wrinkle, if you are married and your spouse is jointly filing for bankruptcy with you, even if the bankruptcy estates are jointly administered, they are still treated as two separate taxable entities. With two separate 1041 forms required for each tax years.
Tax debts may or may not be discharged in a bankruptcy case. Recent tax debts are not discharged under Chapter 7 filing. Neither are the following tax debts (including the interest tacked on):
- taxes entitled to eighth priority
- taxes for which no return was filed
- taxes for which a return was filed late
- taxes for which a fraudulent return was filed
- taxes that you willfully attempted to evade or defeat
If the case is dismissed, you must file tax returns as though the bankruptcy filing never happened. This means sending 1040X Amended Returns to replace the returns filed on behalf of the bankruptcy estate. Include all items of income, deductions and credits that were reported by the bankruptcy estate on its returns, but not included on debtor’s personal returns.
Depending upon your specific situation, you may elect to end your tax year. This creates two short tax years in the calendar year you petition for bankruptcy. So, if you file your petition on June 3, 2009, you have one tax year that runs from January 1, 2009 to June 2, 2009. The second shortened tax year runs from June 3, 2009 to December 31, 2009. This allows your federal income tax liability for the first short tax year to be an allowable claim against the bankruptcy estate as a claim arising before the filing. Any portion not subject to discharge under the bankruptcy code can be collected from the bankruptcy estate. Without this election, no part of your tax liability can be collected from the bankruptcy estate, and will be your burden come tax time.
Chapter 13
In a chapter 13 bankruptcy filing, individuals with regular income enter into a repayment plan with their creditors. Generally you keep your assets, but make payments to the bankruptcy trustee, who is appointed by the court. Chapter 13 filing can discharge recent debts, criminal fines and debts incurred by fraud. You must file all tax returns for any tax period ending within 4 years of the bankruptcy filing date or you risk case dismissal or converting to chapter 7.
In a chapter 13 bankruptcy, the court creates a bankruptcy trust account. This is not considered a separate tax entity, and you should continue to file normal tax returns. Do not include any cancelled debt at “income”. Any losses, credits or basis in property that has been reduced because of cancelled debt needs to be included on your return. Do not include interest earned on amounts held by the bankruptcy trust account prior to distribution to the creditors as income on the debtor’s return. That interest is only available to the trustee and not taxable to the trustee.
Tax debt may be discharged if you receive a broad chapter 13 discharge. However, the following are exclusions to broad discharge.
- all priority tax claims are not discharged and must be paid in full
- withholding taxes for which you are liable are not discharged
- taxes for which no return was filed are not discharged
- taxes for which a return was filed late prior to bankruptcy filing are not discharged
- taxes for which a fraudulent return was filed are not discharged
- taxes the debtor willfully tried to evade or defeat are not discharged