Tuesday, November 11, 2008
According to their newest press release, the IRS is making adjustments to more then three dozen tax benefits for the tax 2009 tax year. Due to inflation adjustments personal exemptions and standard deductions will change and are likely to affect virtually every single taxpayer. According to the release, “key changes affecting 2009 returns, filed by most taxpayers in early 2010, include the following:
- The value of each personal and dependency exemption, available to most taxpayers, is $3,650, up $150 from 2008.
- The new standard deduction is $11,400 for married couples filing a joint return (up $500), $5,700 for singles and married individuals filing separately (up $250) and $8,350 for heads of household (up $350). Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
- Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $67,900, up from $65,100 in 2008.
- The maximum earned income tax credit for low and moderate income workers and working families with two or more children is $5,028, up from $4,824. The income limit for the credit for joint return filers with two or more children is $43,415, up from $41,646.
- The annual gift exclusion rises to $13,000, up from $12,000 in 2008.”
Tuesday, November 04, 2008
If you are self-employed, then you know how confusing preparing and filing your tax returns can be. With so many deductions and rules it is easy to miss out on tax advantages for you and your business. The tax system is very confusing even for single wage earning taxpayers, and when you throw in quarterly payments and deductible expenses filing a return can seem impossible. To help the readers of our blog we have gathered the following list of 10 tax tips for self-employed individuals.
1. Bookkeeping Software
When you are self-employed it can be easy to lose track of all your bills, invoices, checks, and receipts amongst your other business related documents. To keep on track with your bookkeeping I would suggest trying bookkeeping software like QuickBooks.
2. Keep Good Records
In addition to investing in bookkeeping software, you will also need to keep all of your receipts and other tax-related documents together. If you do not already have one, purchase a filing cabinet and designate certain folders for tax receipts and papers so you can stay prepared.
3. Business Expenses
Remember while you are making your day-to-day purchases to keep any business-related receipts. These expenses are tax deductible, and even the small meetings with colleagues at coffee shops add up! Also, taking the time to add up these receipts once or twice a month will save you a lot of time later on.
4. Quarterly Payment Reminders
Missing a quarterly payment or being late can result in a hefty fee, so being on time is crucial. By setting reminders for all four of your payments in advance you can avoid any fines and feel good about making timely payments.
5. Home Office Deduction
If you have a home office in your house or apartment, you may qualify for a home office deduction. As long as you have no other stationary place where you do business and the office is used exclusively and on a regular basis for business, you should qualify. However, the rules around this deduction can be tricky. So, if you are worry-prone, then you should probably seek advice from a professional.
6. Check in with the IRS
From time to time, check in with the IRS website to make sure you're taking advantage of all the self-employed tax breaks you can. Also, check the guidelines and rules and make sure you're doing everything correctly and legally. Having a financial advisor should be enough, but doing some of your own investigating never hurts.
7. Employ the Family
When hiring more employees, consider hiring a family member or two. This way you get to deduct their medical expenses as well as providing a valuable service to your family by keeping them employed!
8. Child Care
You can deduct childcare costs for your children, as you are self-employed and may need some help. This is an important deduction that too many self employed individuals miss out on, so make sure you take advantage of it if need be!
9. Retirement Plans
Setting up a retirement plan is not only good tax-wise, but also a great idea for saving towards your future. The SEP IRA retirement plan is designed especially for the self-employed, and taking advantage of these special programs can be very beneficial both now and later!
10. Income Deferral
Depending on your situation, income deferral may or may not be advantageous for you. If you have made a lot of revenue already this year and expect slower business next year, it may be a great idea. On the other hand, if you expect next year’s revenue to be fairly similar then there may not be any reason to defer any income.
Wednesday, October 29, 2008
With just days before the country votes for the next President, Sen. John McCain is attempting to differentiate himself and his economic policies from those of the Bush administration. According to the Associated Press, McCain “promised to pivot from President Bush's economic policies and impose strict controls on government spending that would spur investor confidence and the stock market's recovery.”
"I will protect your savings and retirement accounts and get this stock market rising again," claimed McCain. "We both disagree with President Bush on economic policies. My approach is to get spending under control. The difference between us is he thinks taxes have been too low, and I think that spending has been too high."
"A stronger economy with greater investor confidence would help turn the stock market around," said Tucker Bounds, a McCain spokesman. "That would help drive up stock prices and the market recover."
"I will create millions of jobs through tax cuts that spur economic growth," continued McCain. "The difference between myself and Sen. Obama is my plan will create jobs, it's a difference of millions of jobs in America. My approach will lead to rising stock market prices, a stabilized housing market, economic growth and millions of new jobs."
According to their newest press release, the IRS is “looking for taxpayers who are missing more than 279,000 economic stimulus checks totaling about $163 million and more than 104,000 regular refund checks totaling about $103 million that were returned by the U.S. Postal Service due to mailing address errors”.
“People across the country are missing tax refunds and stimulus checks. We want to get this money into the hands of taxpayers where it belongs,” said IRS Commissioner Doug Shulman. “We are committed to making the process as easy as possible for taxpayers to update their addresses with the IRS and get their checks.”
All a taxpayer has to do is update his or her address once. The IRS will then send out all checks due.
Stimulus Checks:
It is crucial that taxpayers who may be due a stimulus check update their addresses with the IRS by Nov. 28, 2008. By law, economic stimulus checks must be sent out by Dec. 31 of this year. The undeliverable economic stimulus checks average $583.
The “Where’s My Stimulus Payment?" tool on this Web site is the quickest and easiest way for a taxpayer to check the status of a stimulus check and receive instructions on how to update his or her address. Taxpayers without Internet access should call 1-866-234-2942.
Regular Refunds:
The regular refund checks that were returned to the IRS average $988. These checks are resent as soon as taxpayers update their address.
Taxpayers can update their addresses with the “Where’s My Refund?” tool on {the IRS’} web site. It enables taxpayers to check the status of their refunds. A taxpayer must submit his or her social security number, filing status and amount of refund shown on their 2007 return. The tool will provide the status of their refund and in some cases provide instructions on how to resolve delivery problems.
Taxpayers checking on a refund over the phone will be given instructions on how to update their addresses. Taxpayers can access a telephone version of “Where’s My Refund?” by calling 1-800-829-1954.
Unsure?
Taxpayers not sure of which type of check they may be due should check on a potential economic stimulus check first because of the looming deadline.”
Monday, October 20, 2008
Since most people have their tax returns prepared by a specialist, they usually do not feel it necessary to educate themselves on tax issues. However, this can result in grossly inaccurate returns, and can even lead to IRS fees and penalties. While many tax myths have been dispelled in recent years, there is still a lot of confusion out there. Below, please find my attempt to speed-up the learning process with my top 10 common misconceptions about taxes.
1. Working and non-working students are exempt
Although there are tax credits and breaks for students, no student is truly exempt unless they did not make enough money to need to file.
2. All married taxpayers need to file jointly
Although you do need to claim that you are married in your return, you can file as married filing separately. There are several reasons why you would choose to file jointly or not, and you might be surprised to learn that one filing status could benefit you more than the other.
3. Early filers have a higher chance of an audit
If you file the first day possible, it will not raise or lower your chances of audit whatsoever. The IRS does have a few red flags that can lead to an audit, but filing early is not on the list.
4. It is okay to write off any and all business expenses
Many new business owners make the mistake of writing off every business meal and every business outing they possibly can. In reality, you are only allowed to deduct 50% of business-related meals and entertainment expenses.
5. You do not need to file if taxes were withheld from your paycheck
Although taxes may have been deducted from your paycheck, you still need to file a return before the tax deadline. You may have income from other sources that did not have taxes withheld. In addition, a return acts as the vehicle to get some of the taxes withheld back in the form of a refund.
6. You only need to try and reduce your tax liability if you are rich
People of all incomes should take pains to claim all available deductions and credits. If you make an average income then every dollar saved means so much more! The misconception that tax deductions were made for the very wealthy is one of the oldest and most incorrect myths about taxes.
7. You cannot claim an adult, working child as a dependent
Even if your child is over 18, working full time, and in school, you can still claim them as a dependent as long as you are providing over half of their financial support.
8. You only need to file if you owe the IRS additional money
It is always a good idea to file, as you never know if you will have your returns evaluated later. More importantly, you can only receive special rebates like last years stimulus check if you file.
9. Only parents living with you can be claimed as dependents
Just like with children, as long as your making a large contribution to their support, your parents do not need to live with you to be your dependent. This is confusing to many taxpayers, and if you are not sure if your elder parent qualifies or not then you should seek advice from a professional.
10. You should not file your return until you can afford to pay
Actually, deciding not to file on time or to get an extension when you are low on cash is the worst possible choice. The IRS wants their money in any way they can, and will work out a payment plan with you. You also want to file on time even if you will owe because the failure to file could lead to a big IRS penalty.
Wednesday, October 15, 2008
A few weeks ago, the IRS announced a new credit for first-time homebuyers. However, recently, there has been a lot of confusion lately about who qualifies for it and how to take advantage of the credit on your next tax return. To help out confused taxpayers, the National Association of Home Builders has launched a new website, FederalHousingTaxCredit.com. In one section of the site they have posted a list FAQs on the new credit. Below are some of the answers, but you can read the full list by clicking here.
1. Who is eligible to claim the $7,500 tax credit?
First time homebuyers purchasing any kind of home—new or resale—are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after April 9, 2008 and before July 1, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs.
2. What is the definition of a first-time homebuyer?
The law defines "first-time homebuyer" as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time homebuyer tax credit. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time homebuyer.
3. How do I claim the tax credit? Do I need to complete a form or application?
Participating in the tax credit program is easy. You claim the tax credit on your federal income tax return. No other applications or forms are required. No pre-approval is necessary; however, prospective homebuyers will want to be sure they qualify for the credit under the income limits and first-time homebuyer tests.
4. What types of homes will qualify for the tax credit?
Any home purchased by an eligible first-time homebuyer will qualify for the credit, provided that the home will be used as a principal residence and the buyer has not owned a home in the previous three years. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats.
5. Instead of buying a new home from a home builder, I have hired a contractor to construct a home on a lot that I already own. Do I still qualify for the tax credit?
Yes. For the purposes of the homebuyer tax credit, a principal residence that is constructed by the homeowner is treated by the tax code as having been "purchased" on the date the owner first occupies the house. In this situation, the date of first occupancy must be on or after April 9, 2008 and before July 1, 2009.
In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date.
6. What is "modified adjusted gross income"?
Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine "adjusted gross income" or AGI. AGI is total income for a year minus certain deductions (known as "adjustments" or "above-the-line deductions"), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.
To determine modified adjusted gross income (MAGI), add to AGI certain amounts such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education costs.
7. If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
Possibly. It depends on your income. Partial credits of less than $7,500 are available for some taxpayers whose MAGI exceeds the phaseout limits. The credit becomes totally unavailable for individual taxpayers with a modified adjusted gross income of more than $95,000 and for married taxpayers filing joint returns with an AGI of more than $170,000.
8. Can you give me an example of how the partial tax credit is determined?
Just as an example, assume that a married couple has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $7,500 by 0.5. The result is $3,750.
Here’s another example: assume that an individual homebuyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds $75,000 by $13,000. Dividing $13,000 by $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $7,500 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,625.
Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for information relating to your specific circumstances.
9. Does the credit amount differ based on tax filing status?
No. The credit is in general equal to $7,500 for a qualified home purchase, whether the homebuyer files taxes as a single or married taxpayer. However, if a household files their taxes as "married filing separately" (in effect, filing two returns), then the credit of $7,500 is claimed as a $3,750 credit on each of the two returns.
10. Are there any circumstances for which buyers whose incomes are at or below the $75,000 limit for singles or the $150,000 limit for married taxpayers might not be able to claim the full $7,500 tax credit?
In general, the tax credit is equal to 10% of the qualified home purchase price, but the credit amount is capped or limited at $7,500. For most first-time homebuyers, this means the credit will equal $7,500. For homebuyers purchasing a home priced less than $75,000, the credit will equal 10% of the purchase price.
According to their newest press release, “the Internal Revenue Service has announced in Revenue Ruling 2008-47 that interest rates for the calendar quarter beginning Oct. 1, 2008 will increase by one percentage point.
The new rates are:
- Six (6) percent for overpayments [five (5) in the case of a corporation];
- Six (6) percent for underpayments;
- Eight (8) percent for large corporate underpayments; and
- Three and one-half (3.5) percent for the portion of a corporate overpayment exceeding $10,000.
Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.
The interest rates announced today are computed from the federal short-term rate based on daily compounding determined during July 2008.”
Tuesday, October 07, 2008
Paying taxes is not fun for anyone, but when you are a college student taxes can be quite confusing. Nearly all colleges around the country have begun their winter semesters in the past few weeks. To help the students who read this blog we have complied the following list of tax tips for college students so that you can make sure you are making the most of your taxes this semester.
1. Always File
A lot of college students do not work full time, or at all, while in school and therefore are not technically required to file a tax return. However, it is smart to always file a return, regardless of your income, as it is better to be safe then sorry and you might even qualify for a refund.
2. Get Help
Getting help on your taxes is nothing to be ashamed of. The IRS website has answers to hundreds of questions, and has special sections to help taxpayers filing a return for the first time. Also, you may want to hire a tax professional or accountant if you do not think you can prepare your return on your own.
3. Tax Credits
The government has dozens of tax credits designed to help college students; you just have to find them. By going to the IRS website, you can easily find a list of credits available to students as wells as the information that you will need to find out if you are eligible or not.
4. Check the Numbers
No matter what strategy you use to file your taxes, be sure to check all the numbers before you send it in. You would be surprised at how many people send in tax returns with an incorrect social security number or address.
5. Start Early
Waiting until the last minute to file is not always the best idea for a student. If you want to take full advantage of available deductions then you should prepare your return early. This way you will have ample time to sort out any problems or incorrect data. The IRS has representatives available to help you, but they can be a little bit harder to get a hold of towards the end of tax season.
6. E-File Cautiously
Filing online is an easy and quick way of doing your taxes, but take care not to rush the process too much. It is a good idea to print out your tax forms and fill them out on paper first. Then you can double, or even triple check your math to ensure it is 100% correct.
7. Locate Yourself
If you are going to school out of state and live with your parents during breaks, then you should take extra time to verify which location qualifies as your home. This is important because both states want your tax dollars, and only one can have them. Make sure you are paying the right one!
8. Beware of the EZ Route
Filing a 1040EZ may be “easy”, but it can also get you into trouble if it is not the right form for you. Before filing a 1040EZ you should check to see if your parent claims you as a dependent, as you cannot use this form if another taxpayer claims you as a dependent.
9. Loan Deductions
If you received any student loans in the past year then make sure to look into student loan interest deductions. Instructions on how to deduct these expenses as well as whether you qualify can be found on IRS Form 1040 as well as IRS.gov.
10. Make a Copy
After all is said and done, checked and double-checked, make a copy of all your documents and forms before sending them in. Although highly unlikely, if the government does not receive all of your information or claims you did not send it then you will be glad you kept an extra copy. Additionally, you can also use your completed return as a guide for next year!
Thursday, October 02, 2008
Every day it seems there is something in the news about Wall Street and the Federal buyout plan, but taxpayers around the country are confused about this complicated legislation and how it will impact their daily lives. Fortunately, the financial experts at CNN.com have gathered the following list of common questions about the bailouts and provided informative answers.
1. Why did lawmakers reject the bill?
Many lawmakers, especially on the Republican side of the House, had voiced concerns about the $700 billion cost to U.S. taxpayers, arguing that ordinary citizens were being asked to foot the bill to clean up a mess created on Wall Street. Fortune magazine's Washington bureau chief Nina Easton said that many lawmakers, facing re-election in November, feared a backlash among voters if they backed they plan.
"This legislation is giving us a choice between bankrupting our children and bankrupting a few of these big financial institutions on Wall Street that made bad decisions," said Republican Congressman John Culberson. Other Republican free market advocates argued that the bill would have been a blow against economic freedom.
On the Democratic side, there were concerns that the bill did not provide enough protection for taxpayers. Others said the legislation had been rushed through without due consideration. "Like the Iraq war and Patriot Act, this bill is fueled by fear and haste," said Democrat Lloyd Doggett.
2. What are the consequences?
Ahead of the vote, backers of the bailout plan had argued that urgent action was necessary to underpin the foundations of the entire U.S. economy. Billionaire Warren Buffett said that failure to agree a plan would leave the U.S. facing the "biggest financial meltdown in American history." In a televised address, U.S. President George W. Bush said that without immediate action by Congress, "American could slip into a financial panic and a distressing scenario could unfold."
But the immediate consequences were felt most sharply in the financial markets, already badly bruised by weeks of heavy losses. Approximately $1.2 trillion had been wiped off the market value of U.S. stocks by the close of Monday trading with the Dow Jones index suffering its worst ever points loss, losing 778 points -- a seven percent slide.
3. What are the international consequences?
International financial institutions have been hurt as badly as those in the U.S. by the credit crisis and banks and stock markets all over the world face fresh pain because of the failure of the rescue plan. UK Prime Minister Gordon Brown, who last week urged the U.S. to take "decisive action" to stem economic losses," described the result of Monday's vote as "very disappointing."
Belgium's Dexia on Tuesday became the latest bank to be bailed out by government funding with the governments of Belgium, the Netherlands and Luxembourg injecting $9.2 billion into the business to keep it afloat. The move came just two days after the same countries pumped $16.4 billion into failing insurance company Fortis. Iceland's government has also nationalized the country's third largest bank, Glitnir. Ireland's government said Tuesday it would guarantee all deposits in Irish banks following a massive fall in the value of banking stocks.
In Asia, the Bank of Japan pumped another 2 trillion yen ($19.23 billion) into money markets Tuesday as share prices across the continent fell heavily in response to losses on Wall Street. Central banks in the U.S., Europe and Asia have injected hundreds of billions into markets in recent weeks in an effort to boost liquidity and encourage trading. In Moscow, Russian stock exchanges were suspended for several hours after shares had plummeted. Key indices in Europe were mixed.
4. What happens next?
Treasury Secretary Henry Paulson says he will continue to work with congressional leaders to draft a plan acceptable to lawmakers and members of the House will likely be asked to vote again before the end of the week -- possibly on an amended plan including more protection for taxpayers' money. Those who voted against the plan can expect to be courted intensely in coming days.
White House spokesman Tony Fratto said: "We think the mechanisms in this plan were the best to deal with the crisis that we are facing. The core of this plan we think will solve the problem; it was big enough and substantial enough in terms of what we were trying to do... So this plan really needs to get done to give the Treasury Secretary the tools he needs to prevent our economy from slipping... The facts are that America's credit system is broken and it will be broken until we take the steps to fix it."
5. How does this affect the banks?
The financial landscape has already been radically transformed by the collapse in U.S. house prices and the subsequent credit crunch with investment bank Lehmans Brothers going bankrupt, Merrill Lynch being bought out by Bank of America and the U.S. government intervening to prop up mortgage lenders Fannie May and Freddie Mac and insurance giant AIG.
The failure of the bailout plan will only undermine confidence in the banking system further, pushing more banks into trouble as customers withdraw their money. "They have to pass some sort of bill otherwise soon it's going to get down to the point where people actually take money out of the bank and put it in their mattress," trader Wayne Carson told CNN.
6. How does this affect the rest of us?
The credit crunch has already affected the entire economy with "Main Street" already feeling the squeeze from rising fuel prices, rising food prices and rising unemployment. Many economists fear the U.S. is heading for recession. With banks unable or unwilling to lend to each other until the credit crisis eases up, many companies may be unable to borrow the money they need to pay their weekly bills, including salaries. The likely consequence is further job losses.
"This is not about suits on Wall Street making their salaries, this is about financial institutions who loan money to your bank so that you can get a loan or you can buy a car or you can get a mortgage or you can get a credit card... this is our financial system that is freezing up," said CNN senior business correspondent Ali Velshi.
7. Should I panic?
"Panic probably doesn't help us out very much but a recession really indicates that jobs ends up being lost," said Velshi. "Right now we've lost 605,000 jobs (in the U.S.) this year and economists expect that to continue. Unemployment will continue to grow, home prices will continue to drop and consumer credit will get tighter.
(Federal Reserve Chairman) Ben Bernanke said if we don't pass this plan we may go into a deep recession. We've already heard from some economists who think we are already in a recession and that it could get deeper.... What he should have said is that if we don't pass this plan we may go into a deep recession but we may go into a deep recession anyway... This is not going to be a solution to a recession, this is a solution to a very particular financial crisis that we are under going right now."