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Tax Filing Goofs: Most common taxpayer mistakes

2008-02-02T18:29:00.000-08:00

Tax Goofs that you can avoid!
Between now and April 15th, millions of Americans will scramble to pull together receipts, bank statements and a host of other documents in order to complete their annual tax returns on time.

Yet even the most organized among us can overlook important tax details in the rush to complete our tax returns. And these mistakes can turn out to be costly. That's why it's important to be wary of common filing mistakes:

Year after year, the IRS sees Americans committing the same sorts of mistakes on their returns. Many of these errors are easy to avoid; some are more complicated. Avoiding mistakes can make tax time less stressful and help ensure more savings on taxes.

The biggest reason that people receive letters from the IRS is human error. Each year, more than 1 million letters are sent to people because they failed to sign their returns.

Claiming the wrong filing status
To file single or married. Your marital status is determined as of Dec. 31. Anything before that date really doesn't matter for tax purposes. You file either jointly or married filing separately. You may qualify for "head of household," but you have to satisfy all the requirements. You don't qualify just because you consider yourself the head of your household.

Claiming the wrong status could kill your eligibility for the child tax credit, the earned-income credit and exemptions for dependents. Check out the instructions for Form 1040 for detailed information to help you select your correct filing status.

Omitting or using wrong Social Security numbers
The Social Security numbers you list for your dependents, the earned-income credit and the child tax credit must match your dependent's Social Security cards. Otherwise, the IRS computers will reject your credits and deductions.

Failing to sign and date the return
This one is easy. If you don't sign the return, you haven't filed. Both spouses must sign a joint return. If you haven't filed, you're going to be subject to all kinds of penalties, not to mention interest on any amounts not paid in full.

The only reason not to sign the return is if the numbers on it would constitute perjury. Do you think the IRS wouldn't notice?

Losing receipts
No receipt means no deduction.
Receipts can mean deductions and tax savings. So, hunt down all those charitable organizations to which you contributed and make them give you a receipt for the donation. If you made more than one donation, get a receipt for each one. The receipt needs the date, the amount, the name of the charity.

Overpay your Taxes
On average, taxpayers overpay Uncle Sam each year by about $400 per return due to missed tax breaks and savings incentives. It may, therefore, make sense to seek the assistance of a tax professional to ensure you claim every tax break you're entitled to receive. In addition, most tax preparers e-file returns to the IRS, which is another safety net to ensure the accuracy of your return and reduce the time it takes for you to receive any refund you're due.

Failing to report domestic workers
If you pay $1,500 or more in 2007 (or $1,600 in 2008) to any one household employee, you're going to have to withhold, and match, both Social Security (6.2%) and Medicare (1.45%) taxes. You must file Schedule H to compute and report the liability.

You'll owe federal unemployment taxes if you pay wages of $1,000 or more in any calendar quarter to household employees. You may also owe state employment and disability taxes.

If you pay certain related parties, or employees under age 18 who qualify, you may escape liability. See Publication 926 for details.

Failing to report all income
You can't avoid reporting all of your income just because you don't get a W-2 form or a 1099. Not all income is reported on 1099s. That doesn't excuse you from having to pay tax on it. The fact that there's no reporting to the IRS doesn't prevent the agency from auditing your receipts and reconciling your bank deposits with your reported income.

Unreported income can lead to civil and criminal sanctions.

Making Simple Errors
According to the Internal Revenue Service, numerical errors (such as miscalculations or typographical errors) and incorrect Social Security numbers are the two most common mistakes on tax returns. These simple errors often lead to delays, notices from the IRS and other problems that can be avoided by taking a few minutes to double-check all the numbers. Here are a few key points to pay attention to:

Check that the correct marital status and number of exemptions is entered.

Make sure the correct Social Security number is entered and that each Social Security number corresponds with the respective taxpayer and any dependents.

Verify all income that is reported. Make sure the total amount is entered and that numbers aren't transposed.

Double-check calculations to ensure that refund amounts are entered accurately. If a tax payment is due, be sure to enter the correct amount in the proper place and attach a check to the return.

Finally, sign and date the return, affix the correct postage and mail by midnight on April 15th to avoid any penalties.

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2008-01-10T09:07:00.001-08:00

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Military OneSource now offers the TaxCut Basic Online® Program by H&R Block – free to active duty, Guard, and Reserve servicemembers and their families. Servicemembers and their families can get a jumpstart preparing and filing their federal and state 2006 income taxes with this easy-to-use program.

Last year, in a similar program, more than 327,000 claims were filed. The program is simple to use and allows for easy transfer of 2005 tax information. Military OneSource tax consultants are available 24/7 by phone at 1-800-730-3802 and by e-mail at TaxCut@militaryonesource.com to help with personal tax-related questions and financial planning. The site also offers responses to frequently asked questions and specialized guidance for those families whose servicemember is deployed.

Those who used TurboTax® online through Military OneSource last year to prepare and file their 2005 taxes can access those records on-line in the column “Working on My Return.” They can also request a free transcript of their 2005 tax return from the IRS. Because of privacy reasons, these records were not maintained by Military OneSource.

Military OneSource consultants provide expert advice on planning, issues specific to servicemembers and families, as well as sound ways to use the refund.

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What is your average tax rate ?

2007-12-29T16:15:00.000-08:00

It's your total tax liability divided by your total income

Knowing your income tax rate can help you calculate your tax liability for unexpected income, retirement planning or investment income

Estimate your average tax rate, your current tax bracket, and your marginal tax rate for the tax year.

So the big bonus knocked you into the 33% tax bracket? Well, if it's any consolation, you don't have to pay the 33% tax rate on all your income. That's because you're only taxed at the 33% rate on income beyond a certain threshold — $160,850 for a single filer in 2007.

Those who are married, filing jointly don't reach the 33% mark until $195,850. Income up to that point is taxed at the lower rates of 10%, 15%, 25% and 28%. So your average tax rate is actually much lower than the highest rate you pay.

Say, you're single and have taxable income of $175,000 in 2007. And let's say your gross income was $200,000. Well, your income up to $7,825 is taxed at 10%. From $7,826 to $31,850 is taxed at 15%. From $31,851 up to $77,100, it's taxed at 25%. From $77,101 to $160,850, the rate is 28%. And you'll pay 33% on the remaining $14,150. (The top rate, 35%, kicks in at $349,701 for singles.) In this case, your average tax rate (the proportion of gross income you'll pay in taxes) is about 21.9%.

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What's Your Filing Status? Single, Joint or Head of Household

2007-12-29T15:10:00.000-08:00

WHAT'S YOUR TAX filing status?

Seems like a simple question. But simple just isn't in the IRS's vocabulary. Your status can depend upon when you married, when your spouse died or who else lives in your home. A mistake can be costly. So, here's what you need to know.

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Frequently Asked Questions - 2.2 Filing Status

You do not qualify for the head of household filing status because you and your spouse have not lived apart for the last 6 months of the taxable year and

Single
If you are unmarried as of Dec. 31, you generally must file as a single person for that year. Why? Because your marital status at year end applies for the entire tax year. Naturally, there are some exceptions. See Qualifying Widow/Widower and Head of Household, below.

Joint
If you are married at year end, you can file a joint return with your spouse. Alternatively, you can file under married filing separate status, which requires preparing two 1040s (one for each spouse) instead of just one joint 1040.

If you lived apart from your spouse for the last six months of the year, you may also qualify for head of household status, as explained later.

When a spouse dies during the year, the surviving spouse can generally still file a joint return with his or her deceased mate for that year.

Qualifying Widow/Widower
If your spouse dies, you may be able to continue using the favorable joint-return tax brackets for up to two years after the year of death. During those years, you must remain single and also pay over half the cost of maintaining a home for a dependent child. After the two years are up, you may qualify for head of household status.

Head of Household

Generally you must be single to file as a head of household (HOH). However, a common — and expensive — error is filing as a single taxpayer when you actually qualify as a HOH. As a head of household, you are entitled to more generous tax brackets and a bigger standard deduction. Plus various other tax rules are much more favorable for HOH filers than for singles.

Say you are single and have an unmarried child or grandchild who lives with you for over half the year and doesn't support himself or herself. If you pay over half the cost of maintaining your home, you should probably be filing as a HOH.

If you are single and can claim your parent as a dependent, you can probably file as a head of household too. In this case, you are an HOH if you pay over half the cost of maintaining your dependent parent's home, whether or not your parent actually lives with you.

Finally, you can generally file as an HOH if you are single and pay over half the cost of maintaining the principal home for yourself and another relative who: (1) lives with you over half the year, and (2) can be claimed as your dependent.

You may also qualify if you were still married at year end and lived with your child but apart from your spouse for at least the last half of the year. This is the so-called abandoned spouse rule. It's the only exception to the general rule that you must be single to be an HOH.

Married Filing Separate
Married individuals are not required to file joint returns. They can choose to file separate 1040s, with each return listing that spouse's share of the couple's income and deductions. In some cases, this can pay off.

For example, say your husband has relatively low income but high medical expenses, while you have low expenses but high income. The medical expense deduction is limited to the amount in excess of 7.5% of the taxpayer's adjusted gross income (AGI). If you file jointly, your high joint AGI wipes out any chance for a medical expense deduction. But if your husband files separately, his low AGI may permit a substantial write-off. (If one of you itemizes deductions, you both must.)

Unfortunately, there are several problems with filing separately. Under the laws of some states, a married couple's income is deemed to be split 50/50, regardless of which spouse actually earns the dough. The same 50/50 income split must then be used if the spouses file separate 1040s. In some states, expenses are also generally considered to be split 50/50. In other words, the laws of your state may effectively disallow any hoped-for advantages from filing separate federal returns.

In addition, married filing separate status precludes eligibility for various federal tax breaks — including the Roth IRA conversion privilege, the college education tax credits, the college loan interest write-off, the child and dependent care tax credit and the adoption tax credit. You are also each limited to a $1,500 net capital loss deduction (vs. the normal $3,000 limit) and will probably have to file separate state income tax returns as well.

All in all, filing separately is rarely a good idea — unless you are estranged from your spouse. In this case, a separate return can make sense, because it shields you from any liability for your spouse's federal income tax misdeeds. So if you are separated and have any doubts about your spouse's tax situation, you should strongly consider filing separately.

Common Tax Credits: Federal

2007-12-29T14:42:00.000-08:00

Common Tax Credits

After you determine your income tax liability you may be able to reduce that liability by claiming one or more tax credits. Most personal tax credits are allowed to the full extent of your regular tax liability and alternative minimum tax. But, it is important to note that they do not create a refund if they exceed your tax liability. Nonrefundable credits include the child tax credit, dependent care credit, adoption credit, education credits, retirement savings credit, credit for the elderly and disabled, mortgage interest credit, and D.C. first-time homebuyer credit. Refundable credits include the additional child tax credit, the earned income credit, and the health coverage credit. If the credit exceeds your tax liability, you will receive a refund for the excess.

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Topics

Child Tax Credit for Children Under Age 17
Child and Dependent Care Credit
The Adoption Credit
Credit for Federal Telephone Excise Tax
Residential Energy Tax Credits
Tax Credit for Hybrid Vehicles

Child Tax Credit for Children Under Age 17

For 2006, you generally may claim a tax credit of $1,000 for each qualifying child who is under age 17 at the end of 2006. To figure the exact amount of your credit, however, you must complete the "Child Tax Credit Worksheet" in the IRS instructions to Form 1040 or 1040A to determine if the credit is limited by your tax liability. Even if the credit does exceed your tax liability, part or all of the credit may be refundable as an additional credit on Form 8812 if your earned income for 2006 exceeds $11,300 or you have three or more children.

The credit may also be limited if your adjusted gross income (AGI) exceeds the $55,000, $75,000, or $110,000 phase-out threshold for your filing status. If your AGI exceeds the threshold, the IRS instructions direct you to the worksheet in Publication 972, where the phase-out rules and other credit limitations are applied.

Child and Dependent Care Credit

Did you hire someone to care for your children or other dependents while you work? If so, you may qualify for a tax credit for the expenses. You may claim the credit even if you work part time. The credit is generally available to the extent you have earnings from employment. If your employer has a plan qualifying you for tax-free child care, and if you are covered, you may be unable to claim a tax credit.

The credit is claimed on Form 2441 if you file Form 1040, or on Form 1040A, Schedule 2. The size of the credit depends on the amount of your care expenses, number of dependents, and income. Depending on your adjusted gross income, the credit is 20% to 35% of up to $3,000 of care expenses for one dependent and up to $6,000 of expenses for two or more dependents. The minimum credit percentage of 20% applies if your adjusted gross income exceeds $43,000.

The Adoption Credit

A tax credit of up to $10,960 may be available on your 2006 return for the qualifying costs of adopting a child under age 18, or a person who is physically and mentally incapable of self-care. The credit is phased out ratably for those with modified adjusted gross income between $164,410 and $204,410.

The credit is claimed on Form 8839. If you paid qualifying adoption costs in 2006 but the adoption was not final at the end of the year, the credit may not be claimed on your 2006 return.

If your employer pays your adoption expenses through a qualifying plan, this money can be excluded from your income, subject to rules similar to that of the credit. If you receive employer adoption benefits that are less than your qualifying adoption expenses, you may be able to claim the credit on Form 8839.

Credit for Federal Telephone Excise Tax

Taxpayers can obtain a refund of federal excise tax paid on long-distance service, including interest, billed to them after February 28, 2003 and before August 1, 2006. Individuals and Schedule C filers can claim the refund based on actual excise tax payments or an IRS-created safe harbor. Either way, the refund must be claimed on a 2006 tax return. Those with income below the threshold requiring them to file a tax return can use Form 1040 EZ-T to claim the refund.

Residential Energy Tax Credits

The Energy Policy Act of 2005 created a number of limited tax credits for individuals who make energy savings improvements to their homes in 2006 or 2007. The residential energy credits are claimed on Form 5695, which must be attached to Form 1040.

The maximum credit for all eligible improvements combined over both 2006 and 2007 is $500, of which no more than $200 can be for windows, but there are also separate caps on the credit for specific improvements. The increase in the basis of the residence due to the improvement is reduced by the amount of the credit.

To qualify, a component must meet or exceed the criteria established by the 2000 International Energy Conservation Code (including supplements). Specific information regarding materials and equipment that qualify for the credit can be found at www.energystar.gov. Remember to obtain the manufacturer's certification of the item at the time of purchase.

Tax Credit for Hybrid Vehicles

The alternative motor vehicle credit includes credits for hybrid vehicles purchased after 2005. The alternative motor vehicle credit replaces the deduction for hybrid vehicles that applied before 2006.

The amount of the credit depends on the vehicle's fuel economy and the projected lifetime fuel savings. The maximum hybrid vehicle credit under the law is $3,400, but thus far, the highest certification has been $3,150.

How to qualify for the hybrid credit: Only the original purchaser of a new qualifying hybrid vehicle may claim the hybrid vehicle credit. If you lease a qualifying vehicle, only the leasing company (and not you) may claim the credit. The vehicle must be placed in service after December 31, 2005, and purchased on or before December 31, 2010. It must be used predominantly within the United States.

Hybrid credit is subject to phaseout on a manufacturer-by-manufacturer basis.

Once a manufacturer sells its 60,000th hybrid vehicle after 2005 (all models), the tax credit for any of that manufacturer's certified hybrids is reduced as follows: For the second and third calendar quarters after the quarter in which the 60,000th qualifying vehicle is sold, you may claim 50% of the credit. For the fourth and fifth calendar quarters, you may claim 25% of the credit; no credit is allowed after the fifth quarter.

The credit for qualifying vehicles is claimed on Form 8910.

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2007-12-29T13:56:00.000-08:00

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What are Health Savings Accounts HSAs

2007-12-23T16:45:00.000-08:00

Health Savings Accounts (HSAs) were created by the Medicare bill on December 8, 2003 and are designed to help individuals save for future qualified medical and retiree health expenses on a tax-free basis.

A Health Savings Account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a High Deductible Health Plan (HDHP). The funds contributed to the account are not subject to federal income tax at the time of deposit. Funds may be used to pay for qualified medical expenses at any time without federal tax liability. Withdrawals for non-medical expenses are treated very similarly to those in an IRA account in that they may provide tax advantages if taken after retirement age, and they incur penalties if taken earlier.

A Health Savings Account is an alternative to traditional health insurance; it is a savings product that offers a different way for consumers to pay for their health care. HSAs enable you to pay for current health expenses and save for future qualified medical and retiree health expenses on a tax-free basis.

You must be covered by a High Deductible Health Plan (HDHP) to be able to take advantage of HSAs. An HDHP generally costs less than what traditional health care coverage costs, so the money that you save on insurance can therefore be put into the Health Savings Account.

You own and you control the money in your HSA. Decisions on how to spend the money are made by you without relying on a third party or a health insurer. You will also decide what types of investments to make with the money in the account in order to make it grow.

What Is a “High Deductible Health Plan” (HDHP)?
You must have an HDHP if you want to open an HSA. Sometimes referred to as a “catastrophic” health insurance plan, an HDHP is an inexpensive health insurance plan that generally doesn’t pay for the first several thousand dollars of health care expenses (i.e., your “deductible”) but will generally cover you after that . Of course, your HSA is available to help you pay for the expenses your plan does not cover.

For 2005, in order to qualify to open an HSA, your HDHP minimum deductible must be at least $1,000 (self-only coverage) or $2,000 (family coverage). For 2006, the amounts increase to $1,050 and $2,100, respectively. The annual out-of-pocket (including deductibles and co-pays) for 2005 cannot exceed $5,100 (self-only coverage) or $10,200 (family coverage). For 2006, these amounts increase to $5,250 and $10,500, respectively. HDHPs can have first dollar coverage (no deductible) for preventive care and apply higher out-of-pocket limits (and co pays & coinsurance) for non-network services.

All About HSAs

Tax Calculator - Federal Tax Tools and Calculators

2007-12-23T16:30:00.000-08:00

Federal Tax Calculator

Understand the tax issues surrounding your job and make sure you're getting all the job-related deductions you deserve.

As they say there is nothing more certain than death and taxes. Unfortunately, without planning the annual tax liability can be very uncertain.

Use the following calculator to help determine your average and marginal tax rates.

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Taxes Top things to know

2007-12-23T16:17:00.000-08:00

1. If you get a big refund each year, you're having too much withheld from your paycheck.

In effect, you're giving the government an interest-free loan.

2. If you have too little withheld, you may be charged an underpayment penalty.

You must pay 90 percent of what you owe for the tax year by the end of that year or an amount equal to 100 percent of your tax liability for the previous tax year, whichever is smaller.

3. Not every dollar of your taxable income is taxed at the same rate.

That's because portions of your earned income fall into different brackets, which are assigned different tax rates. Generally speaking, the first dollar you make will be taxed at a lower rate than your last dollar. Your marginal tax rate is the tax bracket at which the highest (or last) portion of your income is taxed.

4. Your combined tax bracket determines how much tax you'll owe on income from investments such as CDs and money market funds.

Your combined bracket is the sum of your top (or marginal) federal tax rate and your top state income tax rate. It may be less if you itemize deductions since you will be able to deduct your state income tax on your federal return.

5. If you file your return by April 15, but don't pay the tax you owe, you may receive a late payment penalty.

The same goes if you file for an extension. An extension only allows you to file your return after the due date. But full payment is still required by April 15. If you make a partial payment by then, you may be charged interest on the amount outstanding.

6. You can reduce your chances of being audited.

One of the best ways is to fill out your return completely, correctly, and on time every year.

7. You should pay estimated taxes if you're self-employed; expect hefty investment income or profits from a property sale; or if you don't have enough taxes withheld to cover the taxes you'll owe on non-wage-related income.

Retirees should also consider paying them if they haven't opted for voluntary withholding on their pension or IRA payments. Estimated taxes are due four times a year (April 15, June 15, Sept. 15, and Jan. 15).

8. Your adjusted gross income (AGI) is your total income minus certain "above the line" deductions such as deductible IRA contributions, alimony payments, or health savings account contributions.

Your AGI primarily determines whether or not you're eligible for tax breaks. Almost every break, be it a deduction, exemption, or a credit, has its own AGI limit.

9. Your taxable income is your AGI minus exemptions and deductions.

The less your taxable income, the less in taxes you'll owe. That's why it's in your best interest to take advantage of tax breaks where you can.

10. A credit is better than a deduction.

A credit is a dollar-for-dollar reduction of the taxes you owe. A $100 credit means you pay $100 less in taxes. A deduction reduces the taxes you owe by a percent of every dollar you're allowed to deduct.

You calculate the worth of your deduction by multiplying your marginal (or top) tax rate by the amount of the deduction. If you're in the 25 percent tax bracket, a $100 deduction means you'll pay $25 less in taxes (0.25 times $100).

State tax forms, state tax publications download state Tax Forms

2007-12-23T16:11:00.000-08:00

State Tax Forms

Get a list of state tax forms and state tax publicattions that can be viewed online or downloaded.

Federal tax forms, federal tax publications IRS Forms

2007-12-23T16:05:00.000-08:00

Federal Tax Forms and Publications

Federal Forms:
Visit the Internal Revenue Service Web site, where you can download federal forms and instructions or search for a specific form.

Publications:
You can also go to the IRS Web site to download or search for specific publications. The publications listed below are located on the IRS Web site and require Adobe Acrobat Reader to view. Visit the Adobe Web Site to install the latest version of Acrobat Reader.

Click a publication to view it online

Publication 1 Your Rights As a Taxpayer
Publication 3 Armed Forces' Tax Guide
Taxable income for students
Publication 15 Circular E, Employer's Tax Guide
Publication 15A Employer's Supplemental Tax Guide
Publication 17 Your Federal Income Tax
Publication 51 Circular A, Agricultural Employer's Tax Guide
Publication 54 Tax Guide for U.S. Citizens and Resident Aliens Abroad
Publication 80 Circular SS - Federal Tax Guide for Employers in the U.S. Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands
Publication 225 Farmer's Tax Guide
Publication 334 Tax Guide for Small Business
Publication 463 Travel, Entertainment, Gift, and Car Expenses
Publication 501 Exemptions, Standard Deduction, and Filing Information
Publication 502 Medical and Dental Expenses
Publication 503 Child and Dependent Care Expenses
Publication 504 Divorced or Separated Individuals
Publication 505 Tax Withholding and Estimated Tax
Publication 970 Tax Benefits for Work-Related Education
Publication 509 Tax Calendars for 2008
Publication 510 Excise Taxes for 2007
Publication 513 Tax Information for Visitors to the U.S.
Publication 514 Foreign Tax Credit for Individuals
Publication 515 Withholding of Tax on Nonresident Aliens and Foreign Corporations
Publication 516 U.S. Government Civilian Employees Stationed Abroad
Publication 517 Social Security and Other Information for Members of the Clergy & Religious Workers
Publication 519 U.S. Tax Guide for Aliens
Publication 521 Moving Expenses
Publication 523 Selling Your Home
Publication 524 Credit for the Elderly or the Disabled
Publication 525 Taxable and Nontaxable Income
Publication 526 Charitable Contributions
Publication 527 Residential Rental Property (Including Rental of Vacation Homes)
Publication 529 Miscellaneous Deductions
Publication 530 Tax Information for First-Time Homeowners
Publication 531 Reporting Tip Income
Publication 535 Business Expenses
Publication 536 Net Operating Losses
Publication 537 Installment Sales
Publication 538 Accounting Periods and Methods
Publication 541 Partnerships
Publication 542 Corporations
Publication 544 Sales and other Dispositions of Assets
Publication 547 Casualties, Disasters, and Thefts
Publication 550 Investment Income and Expenses (Including Capital Gains and Losses)
Publication 552 Recordkeeping for Individuals
Publication 553 Highlights of 2007 Tax Changes
Publication 554 Older Americans' Tax Guide
Publication 555 Community Property
Publication 556 Examination of Returns, Appeal Rights, and Claims for Refund
Publication 557 Tax-Exempt Status for Your Organization
Publication 559 Survivors, Executors and Administrators
Publication 564 Mutual Fund Distributions
Publication 570 Tax Guide for Individuals With Income from U.S. Possessions
Publication 571 Tax-Sheltered Annuity Programs for Employees of Public Schools and Certain Tax-Exempt Organizations
Publication 575 Pension and Annuity Income
Publication 583 Starting a Business and Keeping Records
Publication 587 Business Use of Your Home (Including Use by Day-Care Providers)
Publication 590 Individual Retirement Arrangements (IRAs)(Including SEP-IRAs and SIMPLE IRAs)
Publication 593 Tax Highlights for U.S. Citizens and Residents Going Abroad
Publication 595 Tax Highlights for Commercial Fishermen
Publication 596 Earned Income Credit
Publication 598 Tax on Unrelated Business Income of Exempt Organizations
Publication 600 Optional State Sales Tax Tables
Publication 721 Tax Guide to U.S. Civil Service Retirement Benefits
Publication 901 U.S. Tax Treaties
Publication 907 Tax Highlights for Persons With Disabilities
Publication 915 Social Security and Equivalent Railroad Retirement Benefits
Publication 919 How Do I Adjust My Tax Withholding?
Publication 925 Passive Activity and At-Risk Rules
Publication 926 Household Employers Tax Guide
Publication 929 Tax Rules for Children and Dependents
Publication 936 Home Mortgage Interest Deduction
Publication 939 General Rule for Pensions and Annuities
Publication 946 How to Depreciate Property
Publication 950 Introduction to Estate and Gift Taxes
Publication 954 Tax Incentives for Empowerment Zones and Other Distressed Communities
Publication 957 Reporting Back Pay and Special Wage Payments to the Social Security Administration
Publication 967 The IRS Will Figure Your Tax
Publication 969 Medical Savings Accounts
Publication 970 Tax Benefits for Higher Education
Publication 1212 List of Original Issue Discount Instruments
Publication 1542 Per Diem Rates
Publication 1544 Reporting Cash Payments of Over $10,000

Common Tax Credits

2007-12-11T16:18:00.000-08:00

Common Tax Credits

After you determine your income tax liability you may be able to reduce that liability by claiming one or more tax credits. Most personal tax credits are allowed to the full extent of your regular tax liability and alternative minimum tax. But, it is important to note that they do not create a refund if they exceed your tax liability.

Nonrefundable credits include the child tax credit, dependent care credit, adoption credit, education credits, retirement savings credit, credit for the elderly and disabled, mortgage interest credit, and D.C. first-time homebuyer credit. Refundable credits include the additional child tax credit, the earned income credit, and the health coverage credit. If the credit exceeds your tax liability, you will receive a refund for the excess.

Child Tax Credit for Children Under Age 17
Child and Dependent Care Credit
The Adoption Credit
Credit for Federal Telephone Excise Tax
Residential Energy Tax Credits
Tax Credit for Hybrid Vehicles

The Alternative Minimum Tax : AMT Guide

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The Alternative Minimum Tax -- Not Just for the Wealthy
When first proposed, the Alternative Minimum Tax (AMT) was designed as a tax for "the wealthy." Yet today, more and more people find themselves liable for the tax due to growing incomes and targeted applicability.

AMT - a fallback tax for those wily taxpayers with big incomes and numerous deductibles. But because the AMT has been adjusted for inflation only twice in 30 years, it is now encroaching upon the middle class.

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The mechanics of the AMT are complex. But a general understanding of how the tax works can help you avoid it and even use it to your advantage.

The AMT truly functions as an "alternative" tax system. It has its own set of rates and rules for deductions, which are more restrictive than the regular rules. It operates in parallel with the regular income tax system in that if you're already paying at least as much under the "regular" income tax as you would under AMT, you don't have to pay it. But if your regular tax falls below this minimum, you have to make up the difference by paying the alternative minimum tax.

AMT can be triggered by a number of different variables. Although those with higher incomes are more susceptible to the tax, many other factors such as the amount of your exemptions or deductions can also prompt the tax. Even commonplace items such as a deduction for state income tax or interest on a second mortgage can set off the AMT. To find out if you are subject to the AMT, fill out the worksheets provided with the instructions to Form 1040 or complete Form 6251, Alternative Minimum Tax -- Individuals.

AMT rates start at 26%, rising to 28% at higher income levels. This compares with regular federal tax rates, which start at 10% and step up to 35%. Although the AMT rates may appear to cap out at a lower rate than regular taxes, the AMT calculation allows significantly fewer deductions, making for a potentially bigger bottom-line tax bite. Unlike regular taxes, you cannot claim exemptions for yourself or other dependents, nor may you claim the standard deduction. You also cannot deduct state and local tax, property tax, and a number of other itemized deductions, including your home-equity loan interest, if the loan proceeds are not used for home improvements. Accordingly, the more exemptions and deductions you normally claim, the more likely it is that you'll have an AMT liability.

On the positive side, AMT does allow you to apply a special AMT exemption -- $62,550 for joint filers and $42,500 for singles in 2006 -- designed to prevent the AMT from applying to taxpayers with modest incomes. This exemption is reduced by 25 cents for each dollar of AMT taxable income above $112,500 for singles ($150,000 for couples). There's also an "AMT credit" that allows you to claim a credit on your tax return in future years for some of the extra taxes you paid under the AMT. However, you can only use the AMT credit in a year when you're not paying the AMT. To apply for the credit, you'll need to fill in yet another form, Form 8801, to see if you are eligible.

AMT Red Flags
Certain circumstances and tax items are likely to trigger the AMT:

If your gross income is above $100,000.
If you have large numbers of personal exemptions.
If you have significant itemized deductions for state and local taxes, home equity loan interest, deductible medical expenses, or other miscellaneous deductions.
If you exercised incentive stock options (ISOs) during the year.
If you had a large capital gain.
If you own a business, rental properties, partnership interests, or S corporation stock.

If any of the above apply to you, you should complete the AMT worksheet when preparing your taxes. If you don't, rest assured that the IRS will. And if they find that you owe AMT, they'll add penalties and interest. Worse yet, not paying your AMT liability may trigger an IRS audit.

Avoiding the AMT

Because large one-time gains and big deductions that trigger the AMT are sometimes controllable, you may be able to avoid or minimize the impact of the AMT by planning ahead. Here are some practical suggestions.

Time your capital gains. You may be able to delay an asset sale until after the end of the year, or spread a gain over a number of years by using an installment sale. If you're looking to liquidate an investment with a long-term gain, you should review your AMT consequences and determine what impact such a sale might have.

Time your deductible expenses. When possible, time payments of state and local taxes, home-equity loan interest (if the loan proceeds are not used for home improvements), and other miscellaneous itemized deductions to fall in years when you won't face the AMT. Since they are not AMT deductible, they will go unused in a year when you pay the AMT. The same holds true for medical deductions, which face stricter deduction rules for the AMT.

Look before you exercise. Exercising ISOs is a red flag for triggering the AMT. The AMT on ISO proceeds can be significant. Because ISO tax issues are complex, you should consult with your tax advisor before exercising ISOs.

AMT Red Flags: Incentive Stock Options
When you exercise an incentive stock option, you must report an adjustment for AMT purposes. The adjustment equals the difference between the exercise price and the fair market price.

EXAMPLE: You exercise an incentive stock option to purchase 1000 shares of your company's stock at $20 per share when the stock is trading at $50 per share. For AMT purposes, you must report an adjustment of $30,000 ([$50-$20] x 1000).

Tax Checklist : What you really need to do your taxes

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What you really need to do your taxesThis checklist can be your personal guide to compiling and organizing your tax documents. It can save you time and remind you which tax documents you've gathered throughout the year.

How many times have you asked yourself, "Have I got EVERYTHING to do my taxes?" Probably too many times.

While the tax laws may change from year to year, the basic information you need to do your return or take to your tax preparer doesn't change that much from year to year.

What may change is what you can DO with the information.

You will need W-2 forms, 1098 forms to document the interest you pay on your mortgage, receipts for your charitable donations and documentation on any property taxes you pay.

If you have a lot of investments, you'll want trade information so you or your tax preparer can calculate taxes due on capital gains and dividends.

Here's a reference of all the data you might need and who should have it or keep track of it. And start organizing the collection and organizing of all this material.

Taxpayer's checklist for tax year 2008
Information you need	Where to get the data
PERSONAL DATA
Social Security numbers (including spouse and children)	These are required to qualify for exemptions.
Your child-care provider's tax ID or Social Security number	This is critical to qualify for child care credits.
EMPLOYMENT & INCOME DATA
W-2 forms for this year	These come from your employer.
Partnership and trust income	Data for these should come from an accountant or financial institution.
Pensions and annuities	Data should come from the financial institution, insurance company selling the annuity or pension fund.
Social Security Railroad Retirement Benefits	You will need Form RRB 1099 or Form RRB 1042S for nonresident alien recipients of Railroad Retirement benefits.
Alimony received	Tax information should come from your ex-spouse or his representative. Your former spouse will want your Social Security number to be able to deduct any alimony payments.
Jury duty pay	Data should come from the court clerk.
Gambling and lottery winnings	This data should come from the casino or lottery authority. Use Form W-2G.
Prizes and awards	Data should come from the award givers. Use Form 1099-MISC.
Scholarships and fellowships	Data should come from the administrators of these programs. Use Form 1099-MISC.
State and local income-tax refunds	Data should come from the taxing authorities.
HOMEOWNER/RENTER DATA
Residential address(es) for this year	This is your responsibility.
Mortgage interest	Your lender will send you this data on Form 1098.
Sale of your home or other real estate	Your lender or closing agent should send you Form1099-S.
Second-mortgage interest paid	Your lender will send you this data on Form 1098.
Real-estate taxes paid	Your county clerk or lender should send you this data.
Rent paid during tax year	You need to generate this data.
Moving expenses	If your expenses are reimbursed by an employer, the employer will furnish you with data on the moving costs they paid for.
FINANCIAL ASSETS
Interest-income statements	Financial institutions will provide this data on Form 1099-INT & Form 1099-OID.
Dividend-income statements	This will come on Form 1099-DIV from the company paying the dividends.
Proceeds from broker transactions	Your brokers should furnish this data on Form 1099-B.
Tax refunds and unemployment compensation	The issuing agencies should send this information on Form 1099G.
Miscellaneous income including contract or freelance work or rent	This should come from whoever distributes the income on Form 1099-MISC.
Retirement-plan distribution	Whoever sends out your pension checks should send you this data on Form 1099-R.
FINANCIAL LIABILITIES
Auto loans and leases Including account numbers and car value -- if the vehicle is used for business	You can get this data from the lender or leasing company.
Student loan interest paid	The lender should furnish this data on Form 1098-E.
Early withdrawal penalties on CDs and other time deposits	Financial institutions should provide this data.
AUTOMOBILES
Personal-property tax information	This data should come from the state or local taxing authority.
DEDUCTIBLE EXPENSES
Gifts to charity	This data should come from the charity, you also have new responsibilities for 2007. You will need a bank record (such as a canceled check, a bank copy of a canceled check, or a bank statement containing the name of the charity, the date, and the amount) or a written communication from the charity. The written communication must include the name of the charity, date of the contribution and the amount of the contribution.
Unreimbursed expenses for volunteer work	You will need to keep your own records for this. Remember, you can deduct any driving expenses for volunteer or charitable work at the rate of 14 cents a mile.
Unreimbursed expenses related to your job	You will need to maintain this data.
Travel expenses, entertainment, uniforms, union dues, subscriptions and investment expenses	Your broker will furnish some data. Travel, phone and other related expenses are your responsibility to track.
Job-hunting expenses	You will need to keep and maintain this data.
Education expenses	You will need to keep this data. But if you qualify for Hope or Lifetime credits or other college deductions, the college involved will send you the data on the qualifying expenses you've paid.
Child-care expenses	You will need to keep this data.
Medical savings accounts	The institution handling the account will be able to generate any data.
Adoption expenses	You will need to track this data and be able to document these expenses.
Alimony paid	You or the authority disbursing funds will need to keep this data. To deduct this expense, you will need the recipient's Social Security number.
Sales-tax expenses	If you expect to claim a sales tax deduction on your 2007 tax return, you will need receipts for expenses. Or you can fill out a worksheet that the IRS provides to help estimate sales tax expenses.
Tax-return-preparation expenses and fees	Your preparer can furnish this data to you.
SELF-EMPLOYMENT DATA
K-1s on all partnerships	The partnership management should generate this data.
Receipts or documentation for business-related expenses	This is data you should keep and track.
Farm income	You or an accountant should tack this information. You will need to prepare Schedule F.
DEDUCTION DOCUMENTS
Federal, state and local estimated taxes paid for current year, including estimated tax vouchers, cancelled checks & other payment records	You must keep copies of this data and track it.
IRA, Keogh & other retirement plan contributions	You can get this information from your financial institutions.
Medical expenses	You must track this data.
CASUALTY OR THEFT LOSSES
Other miscellaneous deductions	You will need to file Form 4684.

Tax Calendar : Important dates for taxpayers

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Important dates for taxpayers

Here's when you need to file what to meet Internal Revenue Service requirements.

Use this calendar to make sure you file your tax returns any extensions on time. For more information, check IRS Publication 509.

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December 31, 2007

Deduction deadline. The last date to make payments that can be deducted from your 2007 return.

Keogh plan deadline. The last date to establish a Keogh plan so you can deduct a Keogh plan contribution on your 2007 return.

January 15, 2008

Fourth quarter estimated tax payment. Your fourth-quarter estimated tax payment (using form 1040-ES) for 2007 is due. You may delay making this payment until Jan. 31 if you file your 2007 return (Form 1040) and pay any tax due by January 31, 2008.

Farmers and fishermen. Make estimated 2007 payments in full with using Form 1040-ES. If you do not pay your estimated tax by Jan. 15, you must file your 2007 return and pay any tax due by March 3, 2008, to avoid an estimated tax penalty

January 31, 2008

W-2, 1098 and 1099 forms. These forms should have arrived. Issuers are required to send them out by Jan. 31. If you don't get them, contact the issuer.

Tax information you send to others. If you are required to issue Form W-2 or Form 1099 to anyone such as an employee, a household employee or an independent contractor, mail the forms by this date.

Tax return due. If you missed your fourth quarter estimated tax deadline on January 15, you can still avoid a penalty if you file your tax return by this date and pay any tax due.

February 15, 2008

File new W-4 forms. If you were exempt from income tax withholding for 2007, you must file a new Form W-4 by today to continue your exemption for 2007.

March 3, 2008

Farmers and fishermen. If you did not make estimated tax payments for 2007, you can avoid penalties by filing your tax return and paying any tax due.

March 17, 2008

Corporations. File a 2007 calendar year income tax return (Form 1120 or 1120-A) and pay any tax due. You can apply for an automatic 6-month extension with Form 7004. If you file for extension, you must also make an estimated tax payment.

S corporations. File a 2007 calendar year tax return (Form 1120S) and pay any tax due. Send each shareholder a copy of Schedule K-1 (Form 1120S) or a substitute Schedule K-1. You can apply for an automatic 6-month extension with Form 7004, but you must pay any tax due.

S corporation election. File Form 2553 to choose to be treated as an S corporation beginning with calendar year 2007. If Form 2553 is filed late, S treatment will begin with calendar year 2008.

Electing large partnerships. Provide each partner with a copy of Schedule K-1 (Form 1065-B). This due date is effective for the first March 15 following the close of the partnership's tax year and applies even if the partnership seeks an extension of time.

April 15, 2008

Tax return due. Your 2007 income tax return is due, unless you file for an extension until Oct. 15, 2008.

File for extension. If you want an automatic extension of time to file your 2007 tax return, file Form 4868. Filing the form gives you until Oct. 15, 2008 to file your return. To avoid a penalty, however, be sure to pay any tax that was due on April 15.

Individual Retirement Accounts or Roth IRAs. This is the deadline for making contributions to IRAs or Roth IRAs for tax year 2007.

Estimated tax payment. Your first-quarter estimated tax payment for 2008 is due.

State tax returns. If you are required to file a state tax return, it is probably due -- but check with your state to be certain. Many states automatically extend the filing time for those who have filed for a federal extension.

Household employers. If you paid cash wages of $1,500 or more in 2007 to a household employee, file Schedule H (Form 1040) with your income tax return and report any employment taxes by April 15, 2008.

June 16, 2008

Filing deadline. If you're a United States citizen or resident alien living and working (or on military duty) outside the U.S. and Puerto Rico, file Form 1040 and pay any tax, interest and penalties due. You can file for an extension until Oct. 15, 2008.

Estimated taxes due. Your second-quarter estimated tax payment (using form 1040-ES) for 2008 is due.

September 17, 2008

Estimated tax due. Your third-quarter estimated tax payment (using form 1040-ES) for 2008 is due.

October 15, 2008

Income tax return due. Your 2007 income tax return is due if you filed an extension request using Form 4868.

December 31, 2008

Deduction deadline. The last date to make payments that can be deducted from your 2007 return.

Keogh plan deadline. The last date to establish a Keogh plan so you can deduct a Keogh plan contribution on your 2008 return.

Free Federal Tax Filing

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Top Free Tax Preparation Programs

The Free File program is designed to encourage more taxpayers to file electronic returns, which are cheaper for the IRS to process. Filing electronically also offers advantages to taxpayers by catching common errors and speeding refunds. Taxpayers who file electronically generally get their refunds more quickly than those who file paper returns.

IRS expects more then half of the returns filed this year to arrive electronically, including those sent through the free filing program.

Free File lets taxpayers avoid the cost of buying sophisticated tax preparation software and fees charged for electronic tax filing

Comparing prices isn't as simple as you might think. Each program offers various levels of sophistication, online and CD options, rebates and bundled packages.

There are many free tax filing options available with varying eligibility requirments.

Free File
Free File is the fast, easy, and free way to file your federal income taxes

Free tax preparation and e-filing if your adjusted gross income is $56,000 or less in 2008

You can prepare your taxes and electronically file your return for free using one of the IRS Free File websites.

The IRS has teamed up with software companies to make tax preparation free or low-cost for most Americans. You must begin at the IRS Free File page

if you go directly to the company's website, you won't qualify for the free service.

1] TurboTax Free File : TurboTax Free Edition

Do your taxes for FREE with TurboTax Online Free Edition

Intuit, the creators of TurboTax, have agreed to provide you the ability to file your 2007 income tax online free of charge

If you don't need much guidance for your simple return, choose TurboTax Free Edition.

TurboTax asks you easy-to-understand questions and places your answers onto IRS-approved forms. Then double-checks your return for errors and helps you maximize your refund by finding deductions and credits you may have overlooked. And when you e-file with TurboTax you’ll get your refund faster!

TurboTax is the #1 rated, best-selling tax software year after year. It’s the most trusted in the United States. When it comes to tax time, you can count on the accuracy and ease of use of TurboTax. E-filing is possible with TurboTax and you can get free e-filing with TurboTax Online products. Start now and save. TurboTax promo codes and coupons are not needed. Current prices are reflected on the TurboTax website.

2] H&R Block TaxCut Free File program H&R Block Free Tax Program

Get simple, FREE* federal online tax preparation with TaxCut Free File from H&R Block. You qualify if you have an Adjusted Gross Income (AGI) of $52,000 or less and are 50 years of age or under. Plus, with TaxCut there are no forms to select, and e-file is included

Online tax services allow you to securely prepare your IRS returns from any computer with a Web browser. This option may suit you if you need to access your data from multiple computers, want an accountant to be able to log in to check the numbers, or don't want to bother installing software. Installed applications such as Intuit TurboTax and H&R Block TaxCut may be a better choice if you have a complex financial situation or are filing multiple returns for several members of your household.

Cnet has reviwed three of the 19 services that enable free e-filing if you gross less than $52,000 or serve in the military. You can try any of these tools at no cost until you're ready to file (see chart below). Each offers help with life changes, such as a move or a divorce. They also include assistance with new credits for long-distance telephone tax, the purchase of a hybrid car, household energy improvements, and Hurricane Katrina-related items. In our tests, both TaxCut and TurboTax Online gave us identical federal and state refunds. TaxAct, by contrast, calculated the same federal refund in the end. Initially, however, its state refund was $242 higher than the others, so we had to do some cautious backtracking to check our entries.

Intuit TurboTax Online is the most expensive, which could be worthwhile if you need to grapple with multiple deductions and investments. It walked us through entering Schedule C expenses separately, whereas its rivals left us wondering how to categorize office supplies and fees for telephone and Internet service.

About Free File
Free File is a free federal income tax preparation and electronic filing program for eligible taxpayers, developed through a partnership between the Internal Revenue Service (IRS) and the Free File Alliance LLC, a group of private sector tax software companies. You may access free commercial online tax preparation and electronic filing services through the IRS website. Eligible taxpayers may prepare and file their federal income tax returns using commercial online software provided by the Free File Alliance companies

Free File is an IRS program that lets taxpayer use tax preparation software for free or at a discount. There are 19 Free File partners, including H&R Block's TaxCut software. You must meet certain criteria to be eligible for Free File software, and you must begin your Free File tax return at the IRS.gov Web site. You can find a list of all IRS Free File partners and an summary of my unbiased reviews at Free Tax Software.

Before, fees had been charged not just for preparing and filing state tax returns but for such services as password resets, live help or telephone technical support, professional tax-return reviews, audit protection, amended returns and consultations.

Who's Eligible
Many companies offering FOF have eligibility requirements based on income, age or military service. Yet some make their service available to everyone, and that includes the three industry leaders mentioned above.

Free filing for state income tax returns is another matter. You may have to pay extra to do your state tax return through these services, although if you look carefully you may find that you qualify for free state filing, too.

Most taxpayers are eligible to e-file their federal and state tax returns, but a handful of states do not support e-filing.

How It Works
These companies have developed web-based applications that allow you to prepare your tax return without downloading software. All you need is a browser (like the one you're using to view this page) capable of establishing a secure connection. You'll work through a series of screens similar to the ones you would see if you bought a software package, but in this case the software is running on a remote computer. You can save your work partway through preparing a return and come back to it later if you find that you can't complete it in a single session.

Companies that offer this service have to show they've complied with strict standards for privacy and security for the information you transmit. It seems fair to say that there is still a remote chance something will go wrong, exposing your finances to someone who should not see this information. It's happened in the past, and there is no way to be sure it will never happen again. Realistically, though, this is like the risk of injury when driving a car: always present, but small enough to be acceptable. Unless you're unusually sensitive to this issue, there's no reason to hesitate if you find online return preparation and filing to be convenient and cost-effective.

To take advantage of the free offers, taxpayers must go through the IRS site. Taxpayers who go directly to a preparer's Web site may be charged a fee

What's the Catch?
These sites hope to benefit by offering premium services for an additional charge. These may include state filing, online help to answer your tax questions, or importing numbers from your prior year's return. Depending on your situation, these added services may be worthwhile. Note that in some cases you get to buy these services at a discount from the amount you would pay if you didn't go through the IRS Free File Home Page.

What to Avoid : Tax Scams

Watch Out for Instant Cash Back!

What is a RAL?

If you've seen ads on buses, subway trains, and television and heard them on the radio, you know about “fast cash”, "instant tax refunds"or Refund Anticipation Loans (RALs). Instant cash back can sound like a great idea, especially if you're trying to make ends meet, but these are not refunds, they are loans. You can end up paying more than half your cash, just to borrow your own refund money.

How It Works

Paid tax preparers file your forms electronically and will offer you the tax return on the spot. These businesses make money because they know you want your refund fast and you’ll pay higher fees to get it.

If you're offered an opportunity to get your refund even faster through a refund anticipation loan, or RAL, say no. Every year countless taxpayers pay ridiculously inflated fees for these loans. When you file electronically, you're already likely to receive your refund within a couple of weeks after filing.

Last year, Intuit limited free tax preparation and filing to taxpayers under age 21 or over 62, filers eligible for the earned income tax credit, and members of the military.

Intuit changed its policy because the Free File program has strayed from its original mission of helping low-income taxpayers. Some tax preparers were using the program "as a customer acquisition opportunity," and applied much broader criteria.

The free offer does create "some financial risk" for Intuit, but the company hopes many filers will pay for additional services, such as a state tax return, Miller says.

Intuit has the option of changing its mind. The program allows participants to revise their criteria during the tax season.

Ratings and Reviews of Tax Preparation Software and Services

Anyone who has ever been audited knows too, how important accuracy and good advice is in preparing your business (or personal) tax returns. Therefore, if you aren't comfortable preparing your business' taxes yourself, don't be shy, hire a good accountant (preferably one using the same accounting software you use!). If however, you like being in control (like some of the folks at this company!), there is very good software on the market to help you file your business tax forms.

A few things to remember if you are going to "go it alone"....

If you plan to do your accounting and tax reporting, we recommend that you choose your accounting and tax preparation software from the same manufacturer. This will cut down on incompatibilities and smooth the "tech support" process if you do run into trouble.

Make sure your software includes all the forms you need for the type of company you are operating - sole proprietorship, partnership, LLC, "C" corporation or "S" corporation (or non-profit organization).

Software updates are critical in tax software. Make sure that your tax software has an easy way for you to update the software (trust us, you'll do it more than once!) - especially with all the tax code changes that have been occurring over the past couple of years!

Integration with your accounting program is critical. If you are not using software from the same manufacturer, make sure that your tax software is compatible with your accounting system's software for quick importing of company data. How? One of the best ways is to go to the tax preparation company's web site and check out their FAQ on importing data from your accounting program. Does it look easy? Are there too many steps? Do you have to reformat anything? Make sure you're comfortable with the process before you purchase the software!