Posts Tagged taxable income

Itemizing – Schedule A

Getting the Most out of Itemizing your deductions.

             Itemizing is an incredibly easy theory to understand, yet the strategies behind it all can be intricate and countless.

Free Quicken Online automatically categorizes your expenses.

The rule for when to itemize is simple = you do it if the total of your itemized deductions is greater than your standard deduction.

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Tags: Charity, Deductions, income taxes, Itemized Deductions, married couples, personal exemption, reduce taxable income, Schedule A Itemized Deductions, standard deduction, tax deductions, taxable income, Taxes, taxpayers

A brief overview of the alternative minimum tax (AMT).

Snoopy at the typewriter          The Alternative Minimum Tax (or AMT) is an extra tax some people have to pay on top of their regular income tax. Okay that sounds pretty messed up, doesn’t it?

          In recent years, the AMT has been under increased attention. Why? Well, put simply, because the AMT is not cataloged or set up for inflation, thus because of recent tax cuts, an increasing number of middle-income taxpayers have been finding themselves subject to this tax. Until recently, the AMT affected less than 1% of all individual taxpayers. However, since the year 2000, the AMT has steadily grown, hitting roughly 3% of all taxpayers in 2005.  Moreover, if left unchanged, the AMT will penalize nearly 20% of taxpayers by 2010. Almost 95% of all married filing joint couples. 

          The number of taxpayers affected by the Alternative Minimum Tax (AMT) is expected to exceed 30 million in 2010. Now that is really messed up. 

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Tags: AMT, federal income tax, History, taxable income, Taxes

Six End of Year Tax Tips

          Since the New Year starts at the end of next week, you’ve got just a couple more days to take some steps to reduce your 2008 taxes. These tactics will lower your realized income so that you can reduce your overall tax bill come spring. Not all of these steps are going to work for all people, but in general, here are the 6 big end-of-the-year tax trimming ideas:

Give to Charity. If you have a favorite charity, giving money (backed by a receipt or canceled check) is considered a deductible item to reduce your taxable income. You can also deduct the fair market value of donated items you own, such as a used car or stuff around the house.

Maximize Your Retirement Account. If you can afford it, there’s no better way to reduce your tax bill than by contributing as much as you can into your retirement account. Yes I reaze the market is crazy, this is still a good idea for your taxes.

Sell Your Losers. If you own stocks and have ridden the highs and lows of the stock market, selling your losers and donating your winners can help offset some of Uncle Sam’s bite. If your once high-soaring stock decided to head south for the winter, consider selling it now to qualify for capital losses (you can always purchase it back, but not before 30 days). With this method, you can deduct up to $3,000 in losses from your gross income.

Donate Your Winners. With losers come some winners; that’s the hope at least. If you’re so fortunate, you can donate a portion of your appreciated assets to charity. You would avoid capital gains and be able to deduct the full amount of the donation. If you purchased stock worth $1,000 and it’s now priced at $1,500, you can avoid the capital gains of $500 (if you chose to sell it) and deduct the entire $1,500 from your income. By avoiding taxes and maximizing your tax deduction, it’s almost like the government is matching your donation – well, almost.

Leverage Your Home. If you’re a homeowner, you have several options to make additional deductions. If you have a property tax bill due in early 2009, consider paying it in 2008 to increase your deductions. You can also pay your January ‘09 mortgage, with the interest paid counting toward beefing up your deductions.

Get Organized. Knowing your options means knowing how much you’ve spent, donated, and earned. Mint.com or some sort of software like Quicken products (what I recommend most Quicken Online – Web-based Money Management) can help you organize your transactions and simplify your end of year tax planning. You can also view reports by category for the entire year.

Reducing your taxes is all about being smart with what you do with your money. Knowing where you stand is the first step in determining where you’re going.

 

Be sure to catch my entry at The Carnival of Personal Finance #184:  this is my first PF carnival. 

           Also please be sure to catch my guest post tomorrow over at Living Almost Large.

           Later this week I’ll also have a guest post over at $aving to Invest.

 

 

 This is the last “tax” post until after the holidays. I’ll have a Holiday post later this week.

Tags: Deductions, fair market value of donated items, new year, tax deduction, taxable income, Taxes

Top tax savers

Still searching for that last-minute eureka on your 1040? Perhaps you’ll find it here. Trim your taxable income with these strategies, and don’t miss frequently overlooked deductions.

Look for losses. If you took a hit in the market in 2007 or even if you switched investments within a fund family at a loss, you can spin the pain into tax gold. First you must use losses to offset capital gains. Then you can deduct another $3,000 worth against ordinary income. What’s left carries over to later tax years. So make sure you don’t have any leftover losses from, say, a bad bet on GM in 2005.

Pad your retirement. You can fund an IRA for 2007 until April 15 (the max is $4,000; $5,000 if you were 50 as of Jan. 1). And don’t assume you earn too much to write it off. Even if you and your spouse have retirement plans at work, you can deduct part of your contribution if your modified adjusted gross income (AGI) is below $103,000. For a full deduction, your modified AGI must be $83,000 or less.

Itemize. Some 63% of taxpayers don’t itemize – at their financial peril. A 2002 Government Accountability Office report found that filers who should have itemized but didn’t paid $438 extra on average.

 

Are you stuck paying the AMT?

Honest answer? Probably not. Designed to ensure that the super-wealthy don’t get away with paying nothing, this parallel tax system increasingly snags middle- and upper-middle-income families because Congress never indexed the AMT to inflation; as incomes rise over time, so does the number of people stuck paying tax under the AMT.

Late last year Congress passed a “patch” that exempts more income from the AMT, but the levy will still trap some 3.5 million filers this year, according to the Tax Policy Center. If you use tax software, click yes on the window that pops up asking if you want an update. That will make sure you have the correct AMT rules.

While the AMT snare is hard to escape, a very tiny portion of affluent AMT payers might be able to avoid the tax by electing to take smaller deductions where it’s allowed. If you take the smaller standard deduction instead of itemizing or if you deduct state sales taxes instead of higher state income taxes, you may simultaneously raise your ordinary tax bill and lower your AMT enough to tip the balance in favor of regular taxes. This complicated strategy, though, is best done by an accountant.

Chances are there’s nothing you can do for 2007, but consider making an appointment with a pro to see if you can skirt the AMT at least every other year.

 

How to avoid an audit 

Find a four-leaf clover and steer clear of black cats: To some extent, being hit with an audit is just bad luck. Even if you don’t do anything to raise an IRS computer’s eyebrows, you could end up being plucked at random. Nobody outside the IRS knows for sure how the nonrandom returns are identified – and the agency isn’t telling. But most tax experts agree that having outsize deductions is one red flag.

Martin Kaplan, author of “What the IRS Doesn’t Want You to Know” and a C.P.A. with 35 years of experience handling audits, says that writing off more than 25% of your income would likely get your return marked for review. And while the IRS used to look hard at the home-office deduction, the emphasis these days seems to be on people reporting small business losses on Schedule C, says Frederick Daily, author of Stand Up to the IRS.

That said, as long as you have backup, you should claim what you are due, even if doing so might raise the likelihood of your being audited. While tax evasion is bad, tax avoidance is perfectly legal. An audit certainly won’t be pleasant, but it should be bearable and affordable if you have the proper paperwork to make your case.

Don’t want to hear from the IRS at all? Go back and check your numbers. Even TurboTax and Tax Cut can’t stop you from keying in the wrong digits. These simple mistakes won’t lead to an audit, but they could trigger an “assessment notice” – in other words, a bill.

 

What if you can’t file on time?

Good news: You can have a six-month extension. Bad news: You still have to pay your taxes by April 15. File Form 4868 (download a copy from irs.gov or your tax prep program will provide one), and use last year’s return to estimate what you owe or let your tax software do it for you. It’s better to overestimate and get a refund later; if you’re under by more than 10%, you’ll owe interest of 7% on the amount you underpaid by, plus a penalty of up to 25% of the underpayment.  

 

Can’t pay what you owe?

First make sure you’ve done everything you can to lower your tax bill. If that doesn’t help, you’ll have to pay up.

You can raise the dough any number of ways, including shaking down your first cousin or selling your least-favorite yacht. You can also qualify for an installment plan if you can prove to the IRS that you don’t have sufficient assets or income to pay now. You’ll be charged a $105 setup fee ($52 if you okay a direct transfer from your bank) and a variable interest rate on the balance (7% now).

Otherwise, use the lowest-rate loan you can. Tapping a home-equity line of credit may be the best deal. But you also have the option of paying by credit card through Officialpayments.com or Pay1040.com. Both hit you with a “convenience fee” equal to 2.49% of your tax bill, and then you’ll have to eat the interest charges. Wherever you get the money, pay off the debt as quickly as you can.

Be smarter about taxes next year.

Stop missing out on easy money Label a folder “2009 taxes,” and throughout the year file receipts for anything that might qualify as a deduction.

Bring home more cash If you got a refund this year, you lent money to the government interest-free. Better to owe a bit. Adjust your withholding so less of your paycheck goes to the IRS. (Go to irs.gov and search for “withholding calculator” to figure out the right number of exemptions.) Then arrange to have that bump in take-home pay go directly into a money-market fund. That way the interest earned is yours, not the IRS’.

Look up your tax bracket Knowing what you pay on every extra dollar you earn can make you a more tax-savvy investor. After you file, find the tax-rate tables at irs.gov (search for “tax rate” and pick the first result) and see what bracket your taxable income (line 43 of your 1040) puts you in. Armed with that, you can judge whether you’re better off investing in tax-free municipal bonds or taxable bonds. To do the math, divide the muni yield by 1 minus your bracket, expressed as a decimal (or 0.72 if you’re in the 28% bracket). The recent triple-A-rated five-year muni yield of 3.1%, for example, is the same as earning a taxable 4.3% if you’re in the 28% bracket. Compared with five-year Treasury yields of 2.9%, it’s a clear winner. 

 

Tags: Audits, Deductions, middle income families, Review, taxable income, Taxes, Withholdings

A compromise. . .

“A compromise is the art of dividing a cake in such a way that everyone believes that he has got the biggest piece.”

- Dr. Ludwig Erhard

            I recently read the above and gave a great deal of thought to this.

With the study recently done by the Government Accountability Office, in any given year at least 60% of U.S. corporations surveyed paid no federal income tax, for the years of the study, 1998 to 2005. This reported by TAXGIRL in her post More Than Half of US Companies Pay No Income Tax. This is very interesting.

            The nation has been screaming for a fair tax system throughout history. (Remember the Boston tea Party?) Sooner or later there will be a revolt again, and studies like this are going to help incite such a thing.

            Where am I going with this? No where really. It just seems that more of us should think about what is going on. Our cost on, everything have gone up, we work and we pay our taxes. There is a system in place that mandates that corporations pay income tax. They have their rules and then there are rules that govern us, the working people of this country.

            Any business has the ability that if it has a good year, it can offset its taxable income from losses it faced in a bad year. NOL allows a company to deduct losses generated in previous years, in a current year. However, an individual is not allowed to carry forward federal income tax losses. In other words, if an individual has a bad year, the loss is wiped clean.

            I’m not suggesting a revolt by any means but how is this fair? If you earn income pay your taxes. A big advertising scheme by a lot of different folks is one announcing the complexity of the IRC (Internal Revenue Code). Does it really need to be so complex? I think not. However I don’t agree with the flat rate tax either. Too much goes on in life.

            I have clients that still rent. If they decide to buy a home (and they are planning for such) it would be imposable if there was a flat tax. So there needs to be cuts for this and that. Relief for different situations. If one entity is allowed to do something, so should we all.

            One of the biggest reasons I got into tax preparation was my desire to level the playing field somewhat. What I mean by this, is everyone deserves a fair share but not everyone knows how to get there. Corporate America (and around the world) gets breaks that would just make a person tax payer want to picket, something. There are a lot of rules and slides on rules that can help with your preparation and lower your tax bill. But with politics dictating that middle America pays the majority of the taxes then I say we need to change things.

            Corporate America has the biggest piece of the cake, we should have ours, you should have yours.

 

 

 

 

 

 

Tags: compromise, Deductions, federal income tax, History, Opinions, taxable income, Taxes

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