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Taxes

Use Your Car For Business And Get A Tax Break

If you're an entrepreneur or a freelancer, chances are you already realize how every small expense can add up over the course of a year. Though seemingly insignificant on their own, each stamp and every ream of office paper is an expense that comes out of your bottom line. What you might not know is that many of these expenses can be written off of your tax bill. This is especially important when it comes to transportation expenses.

With gas prices hovering near $3 and $4 per gallon, those work-related trips and errands can take a huge bite out of your income. However, reporting your transportation expenses to the IRS can lower your tax bill. Here's a quick and easy guide that will help you write off transportation expenses as you prepare for tax day.

Who Can Write Off Transportation Expenses?

Typically, deductions for transportation expenses are claimed by people who own their own business or work from their homes. For example, if you are a freelance computer programmer and you travel to meet a client, you can deduct the cost of your round-trip transportation for those meetings.
Keep in mind that your commute from home to your place of work is not tax deductible and transportation expenses incurred while traveling away from home overnight is covered by another section of the U.S tax code.
You have two options for claiming your car and truck expenses. You can use the standard mileage rate to calculate your business miles or you can submit your actual expenses. Here's a brief overview of these two options.

Using The Standard Mileage Rate

The standard mileage rate as set by the IRS allows you to calculate your business miles for the year and deduct them as one lump sum. In addition to covering gas and other related expenses, this lump sum should theoretically also cover the cost of maintaining your vehicle for your business. You are also allowed to deduct parking fees and tolls on top of your mileage.
In 2011, the standard mileage rate was 51.0 cents per mile from January 1 through June 30 and 55.5 cents per mile from July 1 through December 31.

How To Keep Track Of Your Business Miles

You will need to keep records of your business travel. Bankrate.com suggests that drivers keep a pocket calendar or day book with the following information:

Date
Origin
Destination
Business purpose
Total miles
Gas
Parking fees
Tolls

Using Actual Expenses

The other method to use when deducting your business travel expenses is by keeping track of your actual car or truck expenses. According to the Internal Revenue Service, these expenses include:

Depreciation
Lease payments
Registration
Garage rental
Licenses
Repairs
Gas
Oil
Tires
Insurance
Parking fees
Tolls

If your vehicle is used for both personal and business purposes, you must divide your expenses accordingly. For example, if 16,000 out of the 20,000 miles you put on your car last year were business miles and 4,000 were personal miles, you can only deduct 80 percent of your expenses.

How To Keep Track Of Your Actual Expenses

Bankrate.com suggests keeping track of your expenses as you spend rather than trying to recall all of your expenses over the course of a year during tax time. Put all your receipts in a common area. You can use something as simple as a shoebox or as sophisticated as scanning them onto a computer program. In the beginning of the new year, you should start sorting through these receipts and inputting the information into a spreadsheet.

Which Method Should You Choose?

It's a good idea to crunch the numbers both ways to see which will give you the largest tax benefit. This is especially true if this is your first time claiming this expense or if you have recently purchased a new vehicle.
TurboTax advises that, "Generally, the more economical the vehicle is to operate, the more likely it is that the standard mileage rate will give you the bigger deduction. Conversely, the higher the operating costs, such as gas, repairs, tires, etc., the more beneficial the actual cost method is likely to be."

Other Important Considerations

If you're using the tax write-off as an excuse to buy a new Lexus, keep in mind that $11,060 is the maximum depreciation write-off for a new car that costs more than $15,300, assuming that it is used 100 percent for business purposes. This limit is higher for SUVs.
It is also important to note that when you opt for the actual expenses method, you are locked into that method for future years. However, if you take the standard mileage rate deduction, you can switch to actual expenses method at a later time.
Whatever option you choose, be sure to keep careful records of your business expenses over the course of the year. This will come in handy in the event that you are audited. It will also allow you to confidently claim this deduction.

How To Take Advantage Of Energy Tax Credits For Home Improvements

Many homeowners have worked hard to make energy efficient improvements to their homes. Fortunately for them, there are several key tax credits which are available to help offset the cost and promote the use of “green” products.

The American Recovery and Reinvestment Act established two categories for home energy tax relief: the Nonbusiness Energy Property Credit and the Residential Energy Efficient Property Credit.

Nonbusiness Energy Property Credit

The Nonbusiness Energy Property Credit is aimed at several smaller energy efficient home improvements, most of which do not require a significant change to the infrastructure of the home.
According to ENERGY STAR, the joint program between the Environmental Protection Agency and the U.S. Department of Energy which helps consumer make energy efficient choices, eligible improvements qualify for a tax credit equal to 10 percent of the purchase cost up to $500. Some items have a set credit amount ranging from $50 to $300.
The following is a list of eligible improvements under the Nonbusiness Energy Property Credit.

Biomass Stoves

Biomass stoves burn fuel made from agricultural crops and trees, wood and wood waste, plants, grasses, residues and fiber. They are used primarily to help heat a home or for water heating. They must carry a thermal efficiency rating of at least 75 percent to qualify for a $300 tax credit.

Heating, Venting and Air Conditioning (HVAC)

Advanced Main Air Circulating Fans: These fans blow hot air from your furnace through a duct system spread throughout your house. This improves your heating efficiency. The fans can use no more than two percent of the furnace’s total energy and are eligible for a $50 tax credit.
Air Source Heat Pumps: These pumps are an alternative to furnaces and air conditioners in moderate climates. The pumps move heat rather than generate heat. They can provide up to four times the amount of energy it costs to run them. These pumps are eligible for a $300 tax credit.
Central Air Conditioning (CAC): Some central air units are eligible for a $300 tax credit. When purchasing a unit, be sure to search the manufacturer’s website or ask the HVAC contractor if the equipment you are installing qualifies.
Gas, Propane Or Oil Hot Water Boilers: These heating units use water circulated throughout a system of baseboard heating units, radiators or in-floor radiant heating tubes. Eligible units qualify for a tax credit of $150.
Natural Gas, Propane or Oil Furnace: These furnaces use fuel and air to create heat. Eligible units qualify for a tax credit of $150.

Insulation

Several types of insulation qualify for a tax credit equal to 10 percent of the purchase cost, up to $500. Both bulk insulations as well as some products that reduce air leaks qualify. Be sure to check for a Manufacturers’ Certification Statement on items such as weather stripping, spray foam in a can and caulk designed to tighten seals and house wraps. It’s important to note, however, that the credit to does not extend to installation costs.

Roofs (Metal and Asphalt)

The use of certain metal and asphalt roofing products help reflect more of the sun’s rays. This can lower the roof’s surface temperature by up to 100 degrees which decreases the amount of heat transferred into your home. The materials must meet ENERGY STAR requirements and are eligible for a tax credit equal to 10 percent of the cost, up to $500.

Water Heaters

Qualified gas, oil and propane water heaters, and electric heat pump water heaters are eligible for a $300 tax credit.

Windows, Doors and Skylights

Installing energy efficient windows, doors and skylights can reduce your energy bills and allow you to qualify for a tax credit. The products must be ENERGY STAR rated. It’s important to note that you do not need to replace all the windows or doors in your home to qualify. Eligible products qualify for a tax credit of 10 percent of the cost, up to $500. Windows are capped at $200.

Residential Energy Efficient Property Credit

The Residential Energy Efficient Property Credit offers tax credits on large scale, significant and more expensive energy modifications to your home. The following improvements can earn a homeowner a tax credit of 30 percent of the purchase price with no cap. These improvements can be made on new or existing structures in principal or secondary homes. Rental units do not qualify.

Geothermal Heat Pumps

Among the most efficient and comfortable heating and cooling technologies available, geothermal heat pumps use the earth’s natural heat from the ground instead of the outside air to generate heat. These pumps can be used for heating, air conditioning and to heat water.

Small Wind Turbines (Residential)

Also known as wind mills, these small turbines collect energy from the wind and convert it into electricity that can be used within a home. The tax credit for small wind turbines also includes installation costs.

Solar Energy Systems

Solar Water Heaters: These water heaters utilize the sun’s thermal energy to heat water. In order to qualify for the tax credit, the system must produce at least half of its energy from the sun. The unit must also be used to heat water for the residence, not a swimming pool or hot tub.

Solar Panels (Photovoltaic Systems): These panels, usually installed on a roof, capture light energy from the sun and convert it directly into electricity. To qualify for the tax credit, the system must provide electricity for the home and meet all applicable fire and electrical codes.

Fuel Cells: These qualify for a tax credit of 30 percent of the purchase cost up to $500 per .5kW of power capacity. This alternative power source utilizes hydrogen and offers a cleaner, more-efficient alternative to gas and oil. The tax credit is only available for principal residences, and does include installation costs.
The biggest question surrounding many of these tax breaks is whether or not the initial investment, which can be costly, pays off in the long run. There is the obvious advantage of energy conservation, but do these improvements lower your bills and how long does it take to recoup the investment cost?
The answer is multifaceted and depends primarily on the modifications made. A homeowner would need to research the estimated per year saving due to the improvements coupled with the tax credits to know if it’s worth the investment. Some modifications with lower upfront costs will payoff quicker; more substantial and costly upgrades may take years to recoup your initial investment.
In the long run, the benefits of these upgrades are more than just financial. The conservation of natural resources and energy will reduce the carbon footprint left on the earth, making it a better place to live for the generations to come.

The Tax Value Of Charitable Donations

A few days before Christmas 2011, a self-employed executive recruiter in Virginia called her financial adviser seeking tips to lower her tax bill. She had a good year, with net revenue of about $400,000.

“The first question I asked her was how much she had given to charity,” the financial adviser said. “There was this long pause. Then she said, ‘Well, I haven’t given anything to charity yet this year.’ My first reaction was sadness. Why would someone who made so much money give none of it to charity? And my second reaction was surprise. Why didn’t her accountant advise her that giving to charity is a great way to lower your taxable income?”
It’s true that charitable contributions can help lower your taxable income and your tax bill. However, there are important things you need to know:

Most, But Not All, Charitable Contributions Are Tax Deductible

If you give to a charitable organization recognized by the Internal Revenue Service, chances are the donation is tax deductible. Gifts to churches and other religious organizations, tax-exempt educational organizations, hospitals and certain medical research organizations and governmental organizations are tax deductible.
But some gifts that might seem tax deductible may not be. Gifts to needy individuals, foreign charities, politicians and some political organizations, professional associations, labor unions and chambers of commerce are not tax deductible.
If you want to make sure that your donation will be tax deductible, ask your potential charities if they’ve received their 501(c)(3) tax-exempt status from the IRS. Keep in mind that churches and other religious organizations are not required to have that status for your donation to be deductible.

To Get Credit For Your Donations, You’ll Have To Itemize Your Deductions

Unless you opt for the standard deduction, you must file IRS Form 1040 and itemize your deductions on Schedule A if you want to deduct what you give from your taxable income.

A Contribution To A Qualified Charity Is Deductible In The Year In Which It Is Paid

Putting the check in the mail to the charity constitutes payment. A contribution made on a credit card is deductible in the year it is charged to your card, even if payment to the credit card company isn’t made until the next year.

Some Cash Gifts Require Written Confirmations

If you give a cash gift of $250 or more, you will need a written confirmation from the charity. The document must include the name of the charitable organization, the date of your contribution and the amount your contribution. A canceled check or credit card statement is not enough proof for the IRS.

There Are Deductions Limits

There are limits to how much you can deduct, but those limits are very high. For example, if you make a cash contribution to a public charity, the deduction is limited to 50 percent of your annual income. So if you have an adjusted gross income of $100,000 per year, you can give as much as $50,000 that year. For property contributions, the limit is 30 percent of your adjusted gross income. For appreciated capital gains assets, the limit is 20 percent of your adjusted gross income.

The Benefits Of Charitable Giving Increase With Income

The tax laws are set up so that wealthy people have more incentive to give to charity. For example, if you are in the 25-percent tax bracket, the actual cost of a $100 donation is $75 -- $100 less the $25 tax savings. If you’re in the 35-percent tax bracket, the actual cost of that $100 gift is $65.

Non-Cash Gifts Have Quality Requirements

If you donate clothes, furniture or some other non-cash gifts, it usually must be in "good condition or better," or the IRS will not allow you to deduct it. (The rules are different, for example, if you’re donating a vehicle or boat to a charity.) The amount of the deduction is equal to the items’ fair market value, which is what you could reasonably receive if you sold it.
Remember that you must have a receipt to claim a deduction for a non-cash gift. And if your total deduction for all non-cash contributions for the year is more than $500, you must complete and attach IRS Form 8283 to your return. If you’re donating an item or a group of similar items valued at more than $5,000, you must also complete Form 8283 Section B, which requires an appraisal by a qualified appraiser. These forms are available at http://www.irs.gov or by calling (800) TAX-FORM (800-829-3676).
So now that you’re an expert on charitable giving, how can you get the most bang for your buck?
Financial advisers and accountants say look no further than Neighborhood Assistance Program (NAP) organizations, which help impoverished people by providing food, education, job training, housing assistance, health care and other services. The size of the NAP tax credit you receive depends on where you live. For example, if you live in Missouri and you donate $3,000 to a NAP-eligible organization, you can receive a Missouri NAP tax credit of 50 percent, or $1,500; an IRS tax deduction of about 34 percent of the amount, or $1,020; and a Missouri tax rate deduction of $187.50. That means you just donated $3,000 to a charity you love, and your total after-tax cost is $292.50.
Know the cliché "it’s better to give than to receive?" It's true, say financial advisers. When it comes to taxes and you’re giving to charity, you can give and receive. What’s not to like about that?

The Rules Of The IRS Gift Tax

Complicated -- that's how the Internal Revenue Service describes the tax code regulating the gift tax. It is often misunderstood because this particular tax burden falls on the person doing the giving, not the person who receives the gift.

The gift tax was created so that taxpayers wouldn't give away all of their wealth while they were alive as a way to avoid estate taxes after they were gone.
Before you panic, the IRS says that most gifts you'll give, for whatever reason, will not be subject to the gift tax. Those that are taxed, however, can be heavily taxed.

What's A Gift?

The IRS considers something a gift if you give it away forever and the recipient doesn't give you anything of equivalent value in return. Cash, securities, real estate and jewelry are all examples of things that can be gifted.
Also, if you sell something for less than its fair market value, it can be considered a gift by the IRS. The same is true for an interest-free or reduced-interest loan you make to someone.

How Much To Give?

The IRS allows an annual gift tax exclusion of $13,000. That means each calendar year you are allowed to give another person $13,000 worth of gifts without paying any extra taxes. There is no limit to the number of individuals you can gift to. If you and your spouse are gifting together, you can make that $26,000 to each individual. The amount of the gifts given beyond those exclusions can be subject to a tax rate between 18 and 35 percent.
There is however, a lifetime gift ceiling. The tax code for 2011 says you can give away $5 million in cash or items during the course of your life before the excess will be subject to the gift tax. That tax rate is 35 percent in 2011.

Unified Credit

Your tax liability on gift amounts above your annual exclusion or your lifetime ceiling can be reduced by using the unified credit. It's called unified because it is one amount that can be applied against gift or estate taxes. For 2011, the unified credit was $1,730,000 per taxpayer in their lifetime. Subtracting taxes owed from the credit reduces the amount of the credit available to you in later years. The IRS changes the unified credit amount annually.

Give As Much As You Like Tax Free In These Situations

There are some gifts that don't count against your annual or lifetime ceilings. You can give as much as you want to your spouse, if he or she is a U.S. citizen.
You're also allowed to give unlimited gifts to charitable organizations or political organizations that are recognized by the IRS.
You can pay someone else's medical bills as a gift, as long as the payments are made directly to a health care provider.
You can also cover someone's tuition, as long as those payments are made directly to the educational institution.

Why Gift?

So why should you give your wealth away while you're still alive?
Your heirs can thank you in person and you'll be able to see what they are doing with their inheritance.
From a tax perspective, you have removed that asset from what your eventual estate will be worth. Gifting is a strategy for reducing exposure to the estate tax by keeping the value of the estate lower.
But giving away assets also reduces how much money you have as you age. And no one knows how many years or how expensive the rest of your life will be.

Is A Gift Taxable Income?

If you are on the receiving end of a gift, you don't have to report it as income or pay any income taxes on it. Gift taxes are paid by the giver.

Report Your Gifts

If you are giving gifts that exceed the annual exclusion, or you and your spouse have decided to combine your exclusions or you have surpassed your lifetime gift ceiling of $5 million, you will need to report any additional gifts you are giving each year to the IRS using Form 709.

Using Gifts In Estate Planning

Giving away assets can be one part of prudent estate planning. However, the IRS is very clear about how complex the gift and estate tax codes are. Therefore, it encourages taxpayers to seek professional help with these issues. The agency suggests seeking the advice of an attorney, a CPA or both. And it emphasizes that those professionals should have "considerable" experience working in the areas of gifts, estates and wills.
Knowing the basics of how gifts are taxed can help you and your family members make prudent financial decisions. Remember that the gift and estate tax codes changes frequently, so what you know this year might not hold true for the next. Therefore, you might want to get professional advice to help keep you up to date.

Standard Or Itemized Deductions: Which Should You Take?

When it comes to making deductions at tax time, taxpayers have two options: standard or itemized deductions. The standard deduction is a set amount every taxpayer is entitled to take, regardless of actual deductions or expenditures incurred throughout the year. Itemized deductions, on the other hand, are the actual deductions and expenses used for personal or business purposes during the tax year. Itemizing deductions is a more time-consuming process because the taxpayer is required to list expenses line-by-line and provide evidence (receipts or invoices) that the expense was actually incurred. However, itemizing your deductions is worthwhile if it results in significant tax savings.

What Is The Standard Deduction?

The standard deduction, as its name suggests, is a set amount any taxpayer may deduct from his or her taxable income without demonstrating evidence. For 2011 tax returns (to be filed in April 2012), the standard deduction for a single taxpayer is $5,800. For married taxpayers filing jointly, the standard deduction is $11,600.
Taxpayers over the age of 65 and those who are blind are eligible for higher standard deductions. See the IRS website for the additional information on these types of deductions.
The standard deduction tends to fluctuate from year to year, historically rising each year to keep pace with inflation.

What Is An Itemized Deduction?

An itemized deduction is a single expense incurred throughout the tax year that is eligible to be excluded from your total taxable income. The following are examples of deductible items:

Mortgage loan interest
Charitable donations (Red Cross, tithing, nonprofit organizations, including clothing, furniture and other items which may be deducted based on value).
Qualified medical expenses (unreimbursed expenses exceeding 7.5 percent of the taxpayer's Adjustable Gross Income, or AGI, including prescription drugs, medical supplies, glasses or contact lenses, office visit fees, chiropractor visits, lab work and other similar expenses)
Business travel expenses
State and local taxes (amounts paid the previous tax year)
Health insurance premiums not paid by an employer or through a pre-tax program

It's important to note that in previous tax years, no receipt was required for charitable donations of $250 or less. However, the IRS now requires receipts for all charitable contributions of any dollar amount. Taxpayers giving to qualified charitable organizations throughout the year should keep track of donations and obtain receipts whenever possible.

Miscellaneous Deductions

Miscellaneous expenses also qualify as itemized deductions. These items are those that don't fall within the other categories outlined above, including professional association dues, business insurance premiums, supplies required for work, tuition for employment-related continuing education, and other professional expenses.
In order for a taxpayer to utilize miscellaneous deductions, the total of all miscellaneous deductions must be equal to or greater than 2 percent of the tax payer's Adjustable Gross Income. For example, if a taxpayer earns $50,000 per year, miscellaneous deductions must be $1,000 or more. If the total of all miscellaneous items doesn't meet this threshold, the taxpayer is still able to itemize other deductions, excluding miscellaneous expenses.

When The Standard Deduction Makes Sense

The standard deduction is often the simplest and most logical way to complete a tax return. For taxpayers holding traditional employment and who don't make significant contributions to charity or incur out of pocket work-related expenses, the standard deduction is often greater than actual expenditures that they could itemize. In this case, taking the standard deduction will reduce the overall amount of taxes paid, thus saving the taxpayer money.
However, many taxpayers miss additional tax savings by taking the standard deduction. Those with mortgages or home equity loans are eligible to deduct the amount of interest paid on those loans throughout the tax year. Often, this amount alone is enough to exceed the standard deduction, making it worthwhile to itemize.
Individuals or married couples who are self-employed, who make significant charitable contributions or incur significant work-related expenses may also benefit from itemizing deductions.

Why Itemize?

Itemizing deductions makes sense for individuals who incur expenses greater than the amount of the standard deduction allowed in a given tax year. Filling out Schedule A with a list of possible deductions is the simplest way to determine if itemizing or taking the standard deduction makes sense. Ideally, taxpayers should opt for the method that allows them to take a larger deduction to avoid paying unnecessary taxes.
Itemizing makes sense for most individuals who are self-employed, because those taxpayers are able to deduct business expenses and possibly a portion of a home mortgage payment and utilities if they use their home for business purposes. (the deduction equal to the proportion of the home used solely and exclusively for conducting business, or the percentage of the home's square footage dedicated to business use).
Every taxpayer should evaluate his or her deductions to determine if the standard deduction or itemized deductions make more sense each tax year.
For many taxpayers, taking the standard deduction is the simplest way to file taxes. But with the variety of deductions available, some taxpayers are missing additional savings by not itemizing their deductions. A simple calculation using Schedule A can determine if itemizing deductions will lower an individual's taxes in a given year.

A Tax Guide To Payroll Withholding

Employers typically withhold money from employee paychecks and use it to make tax payments to the IRS in each employee's name. However, employees can opt to have additional funds withheld from their paychecks. The theory for additional withholding is that the over-payment in taxes will result in a tax refund check or it will make sure that the employee does not owe a significant amount of money to the IRS when tax season rolls around. Opinions are divided on whether asking your employer to withhold additional funds is a sound financial decision. Here's a look at some of the pros and cons of withholding too much or too little from your paycheck.

Withholding 101

The amount of money withheld from an individual's paycheck is dependent upon a number of factors. These include:

Filing status (married filing jointly, married filing separately, single)
Number of dependents claimed
Head of household status
Child care credits and expenses

Employees must supply this information to their employer via an IRS Form W-4, which is used to calculate how much tax should be withheld by the company. Employees can also opt to specify a dollar amount above and beyond the calculated tax estimate that should be withheld from paychecks. This strategy is used by some tax payers in order to get a larger tax refund on April 15 of the following year.

Why Withhold?

To Save Money: Some individuals choose to use withholding as a savings strategy. They believe that withholding additional funds will result in a large refund check that can be used to pay off debt, make large purchases or fund a vacation.
For some tax payers, this is an easy way to save money. Some people have a hard time committing to savings if they have easy access to their funds through a savings account. When additional money is withheld from paychecks, however, there's no way to access it until taxes are filed and a refund is issued.
To Avoid A Large Tax Bill During Tax Season: According to personal tax software maker Intuit, many people also withhold additional funds because they are trying to avoid a tax bill during tax season. If they withhold the right amount of funds for their paycheck, then they will not have to pay a significant tax bill when they file their taxes. In fact, they might even get a refund for overpaying.

The Case Against Withholding

On the other hand, some tax experts say tweaking your withholding amount isn't a wise idea. Essentially, taxpayers that withhold additional funds are giving the federal government an interest-free loan. Even if you've withheld twice as much as you actually owe, you won't receive an additional dime in interest from the IRS when tax time rolls around.
Rather than allow the government to utilize your hard-earned money as an interest-free loan, some financial experts say it's better to have the additional money automatically transferred to a savings or investment account. This way, your money can earn interest throughout the year.
In an article for MSN's Money Central, Jeff Schnepper points out that there's a psychological benefit most people get from knowing they have a big refund check coming from the IRS each year. However, he recommends decreasing withholding to the specific amount you'll owe the IRS each year. This will allow you to earn interest on your money instead of getting it back interest-free from the IRS after tax season.

Extenuating Circumstances

Making the choice to withhold additional funds isn't a cut-and-dry exercise. According to Fairmark.com, some taxpayers have other circumstances that might make it worthwhile to opt for additional withholding. Income from a business, investments, capital gains or stock dividends can change the way you look at your withholding situation.
Each of these circumstances could mean a taxpayer should be making quarterly estimated tax payments to the IRS. If these types of income are supplemented by standard W-2 employment, however, it's possible to choose additional withholding to compensate for other sources of income. This helps taxpayers avoid the hassle of making quarterly estimated payments and it can reduce the likelihood of having to pay a penalty for under-payment.
If using this strategy, Fairmark advises using the additional withholding option to specify a certain dollar amount. Simply increasing allowances is ambiguous in terms of how much it will actually affect the amount withheld. Therefore, taxpayers who know how much investment or business income they will incur throughout the year should specify an accurate amount to withhold that will cover the additional taxes due.
It's always advisable to seek the counsel of an accountant or other tax expert when business income comes into play. There are various ways to handle tax payments in these situations, and a certified public accountant can offer the best advice for each individual's financial situation.
So should you withhold additional funds this year? If you have additional income from a personal business or investment portfolio, additional employer withholding lifts the burden of having to pay quarterly estimated tax payments and can decrease the risk of under-payment penalties. Alternatively, using additional withholding as a forced savings account can be useful for those who have difficulty saving. However, for many people, additional withholding does little more than provide the government with an interest-free loan.

12 Common Tax Return Scams To Avoid

Did you know that if you worked at all this year the federal government probably owes you money? Yeah, the IRS doesn't want you to know this, but you're probably eligible for tax credits or rebates. But you need to file a form and submit personal information.

No, you don't. This type of scam is one that the Internal Revenue Service asked people, especially in the South and Midwest, to look out for in 2011. In this particular scam, some unscrupulous tax preparer or a person who passes himself off as a tax preparer convinces a victim that she is missing out on a rebate or tax credit to which she is really not entitled. Most tax preparers are honest and provide a good service, but some will charge taxpayers for bogus advice.
This type of crook perpetrates just one tax-related scam. Unfortunately, there are many others. The IRS releases an annual list of the 12 most common tax scams by taxpayers and preparers. There are so many scams that one year's list often looks much different than the year before and the year after. The following is the 2011 list from the IRS.

1. Hiding Income Offshore

Taxpayers try often to evade income taxes by hiding income in offshore banks and brokerage accounts or by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or insurance plans.

2. Identity Theft And Phishing

Identity theft is self-explanatory. Thieves can use someone else's personal information to file a fraudulent tax return and collect a refund. Anyone who believes his or her personal information has been stolen and used for tax purposes should immediately contact the IRS Identity Protection Specialized Unit at 1 (800) 908-4490.
Phishing, which is one of the most common tax scams, often occurs during tax season and involves crooks trying to pass themselves off as IRS agents or tax preparers to trick others into giving them personal and financial information. Phishing often involves the use of phony e-mails, websites and even social media accounts. Information about a suspicious e-mail or an IRS Web site that does not begin with http://www.irs.gov should be forwarded to the IRS at phishing@irs.gov.

3.Preparer Fraud

This is the scam that invites taxpayers to surrender their personal information or file a fraudulent form. These scammers also often charge way too much for filing legitimate returns and will demand a portion of their clients' refunds. Taxpayers should choose carefully when hiring a tax preparer. Make sure yours has a preparer tax identification number.

4.Filing False Or Misleading Forms

The IRS exposes scams in which people file false or fraudulent tax forms to substantiate fraudulent returns and ill-gotten tax refunds. For instance, phony information on a Form 1099 Original Issue Discount (OID) document can be used to claim false withholding credits to legitimize erroneous refund claims.

5.Making Frivolous Arguments

This covers a lot of scams that the IRS calls "outlandish claims." One claim is that paying taxes is voluntary. Another is that the 16th Amendment to the Constitution was never ratified. Others include the argument that wages are not income and the argument that the Form 1040 violates the Fifth Amendment right against self-incrimination. These arguments have been tested in court and dismissed.

6.Nontaxable Social Security Benefits With Exaggerated Withholding Credit

Some taxpayers report nontaxable Social Security benefits with excessive withholding. When they do this, it results in no income reported to the IRS on the tax return. Often both the withholding amount and the reported income are incorrect. This can result in a $5,000 penalty.

7.Abuse of Charitable Organizations And Deductions

This scam takes two forms. In one, the scammer moves assets or income to a supposedly tax-exempt organization, but retains control over those assets. The better known scam involves taxpayers exaggerating or overvaluing what they donate to charities.

8.Abusive Retirement Plans

The IRS reported that it often sees abuse of Individual Retirement Accounts (IRSs), particularly Roth IRAs, where people will move properties or common stock to a Roth at way below their true value to circumvent the annual contribution limit.

9.Disguised Corporate Ownership

This scam involves a scammer setting up a shell company to disguise the true ownership or the nature of his finances. This is essentially money laundering to under-report income or to avoid filing a tax return.

10.Zero Wages

Employers file W-2 forms to verify an individual's income from wages. A dishonest employee then claims the original form was wrong and files a "corrected" W-2 form (Form 4852), reducing or zeroing the amount he earned. Filing this form fraudulently may result in a $5,000 penalty.

11.Misuse Of Trusts

Many trusts offer excellent tax benefits, but many illegally hide assets from creditors, including the IRS. The IRS says this has become an increasingly popular tax scam, and it is investigating many suspicious trusts.

12.Fuel Tax Credit Scams

Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But others wrongly claim it, and they face a $5,000 penalty.
When it comes to scams, there are no winners. Scammers are often caught and face fines or jail time. The rest of us are often left paying higher taxes to make up for the revenue shortfall every year.

A Guide To Federal Estate Taxes

The IRS makes it clear from the start that navigating federal estate tax liability is no easy task. On its website, the agency tells you, "The laws on Estate and Gift Taxes are considered to be some of the most complicated in the Internal Revenue Code."

If it's that complicated, what can the average taxpayer do to understand what he or she is worth and minimize how much of the estate being left to family, friends and organizations will be reduced by taxes?
The place to begin is the magic number of $5 million.
The federal tax code for 2011 allows individuals to directly pass on an estate worth $5 million or less without incurring federal estate taxes. The IRS says that means only the wealthiest 2 percent of Americans will be affected by this tax. But what is considered to be part of the estate and who places a value on it to arrive at one side or the other of the $5 million mark?

What You're Worth

Just about everything you leave behind, from homes to stocks to bank account balances to ownership in business ventures is included in what the IRS calls your "gross estate." Your assets are calculated at fair market value, meaning what they'd be worth right now if they were sold on the open market. It doesn't matter how much or how little you paid for your house. The IRS will calculate its value to your estate based on what it could be sold for today.
The next step is to subtract from your "gross estate" things like mortgage balances, debts you left behind, funeral expenses and donations you'd like to make to charitable organizations. If you are married at the time of your death and the surviving spouse is a U.S. citizen, you can take advantage of the unlimited marital deduction and subtract as much as you want out of your estate to go to that person tax-free.
What's left behind after those things are subtracted is called your "taxable estate."
The IRS will then take a look back at gifts you've been making since 1977. The IRS allows you to give up to $13,000 a year to an individual, or $26,000 if the gift is from a married couple, without incurring gift taxes. You can give away $1 million in your lifetime without paying any estate tax. Over that threshold, the IRS will do the math and compute a gift tax on your gifts back to 1977.
In the end, the estate will be taxed 35 percent of the amount that is over $5 million.

Keeping Up With The Code

The tax code isn't set in stone. The exemption amounts that will apply to estates in 2011 are different from those that will apply in 2012, when the $5 million gets a little boost for inflation. But in 2013, the $5 million exemption is scheduled to drop back to $1 million and the rate of taxation on estates will increase to 55 percent. If you're dealing with an estate that was initiated in 2010, the U.S. Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act eliminated the estate tax all together. The bottom line is that the rules continue to change.

Avoiding Estate Taxes

Spend It: The simplest way to avoid paying estate taxes is to spend the majority of the estate while you're still alive. That can be risky since you don't know how long you will live and how much money you'll need to live on.

Give It: You can gift your estate while you're still alive. Make sure to follow the IRS gift limits to reduce your total estate value. You can also leave everything to your surviving spouse, if the spouse if a U.S. citizen, without tax penalty. But that could inflate your spouse's estate.

Will It: You can leave specific instructions in your will for your executor to donate part of your estate to charitable organizations to bring it under the threshold of the estate tax. This gives you the opportunity to designate where your money would go, instead of paying it to the government.

Trust It: There are advanced estate planning techniques involving trusts that can be put in place while you are alive or after your death. Income on trusts is reported and is taxed. Setting up a trust is something that requires professional help.

The State Of Your Affairs

In addition to federal estate taxes, your estate may also be subjected to state taxes. The rules on this vary widely from state-to-state. Consult an estate planning professional for information about your individual state.
Your first step in preparing your estate should be getting educated on the tax code. Read up on the tax law and consult a professional to advise you on structuring your assets for the best tax outcome for you and your heirs.

3 Tax Planning Strategies For Tax Season

It’s a painful realization that the most wonderful time of the year is soon followed by the most-dreaded time of year.

If tax time is typically something you dread, the below steps should make it easier to manage. These tips will help you to get a start on your 2011 taxes and to implement a better system to make your 2012 tax information even more of a breeze to pull together.

Rounding Up The Paperwork

Collecting your receipts and other relevant financial information for tax preparation is the activity that usually takes the most time. In this step, you’ll be pulling together all of your records for income statements, bank statements and receipts. If the majority of your information is available online, your task might be easier because you can copy and paste the relevant information onto a single document.
Separate all items into “income” and “expenses” documents. Don’t forget that “income” includes gambling winnings and interest earned on your bank accounts and investments. Even if you don’t typically itemize your deductions, it’s worth rounding up potential write-offs for the “expenses” category. Don’t overlook small items, such as charitable contributions and uncompensated business travel, including gas mileage and meals. Tax payers commonly overlook the same potential income tax deductions, according to Fivecentenickel.com.
Whether you do your taxes on your own or someone prepares them for you, organize your paperwork the same way. Get a binder and print out your “income” and “expenses” documents and store your receipts along with the documents. You’ll also want to include your retirement savings, mortgage and property tax statements.

For Next Year

Create a system that helps you to track all of your income and expenses more thoroughly. This can be as simple as an excel spreadsheet that you use to track your expenses over the year. You can also use a software or web-based program such as Mint or Freshbooks.

Should You Do It Yourself Or Outsource It?

If you are up to the task of preparing and filing your taxes, there are several online and software based programs available to assist you. Turbo Tax, H&R Block and TaxACT are a few of the most popular programs available. (For discounts on TurboTax tax preparation, check out these TurboTax Coupons. For discounts on H&R Block tax preparation, check out these H&R Block Coupons.)
If you’ve decided that you want a professional to do your taxes, keep in mind that you will still need to make the effort to properly gather and organize your tax documents. Not only will this probably save your accountant time (and you money), it will allow your accountant to be sure that all your bases are covered.
If you don’t have someone to help you prepare your taxes already, take some time to interview a few accountants before making your final decision. You want to make sure that you get someone you trust to prepare your taxes since there are financial and legal repercussions for incomplete or inaccurate tax reporting. The pool of income tax preparers includes CPAs, tax attorneys, Enrolled Agents and national tax services such as H&R Block. Keep in mind that there are benefits and drawbacksto using each of these services so make sure to do your research ahead of time.

For Next Year

Are you too strapped for time to interview multiple tax preparers this year? Make time next year by starting now. Ask friends and family for their recommendations and don’t settle on the first person you interview. After all, the right tax preparer could make a difference between thousands of dollars in unclaimed expenses over time.

Don’t Neglect Your Retirement Savings

One of the more benevolent qualities of the Internal Revenue Service during tax time is that you are allowed to make a retirement contribution to an IRA before Tax Day and have it count toward your previous year's taxes. This can help offset some of your tax burden for the year.
If you are under 50, you can contribute a maximum of $5,000 to a traditional and/or Roth IRA. If you are over 50, the limit is $6,000. For more information on these rules, visit the IRS website here.

For Next Year

It’s in your best interest to make regular contributions toward a retirement savings rather than one large lump sum because of dollar cost averaging. If you’re not already doing it, set up an automatic weekly or monthly payment to fund your IRA.
Paying taxes is one of the few constants in life. Rather than gritting your teeth and complaining, take the opportunity now to make the process a little smoother next year (and every year after). And if you still hate it, turn on a little music, fix yourself a snack and remind yourself that this “wonderful” time only comes around once a year.

8 Types Of Non-Taxable Income

It’s almost time for tax season. Everyone knows that your earned wages will be taxed by the IRS. What many people do not realize is that there are numerous sources of income that are not taxed by the federal government. If you can increase your income from these sources, then you will reduce your overall tax burden. But what are these sources and how can you take advantage of them.

Here are eight sources of income that are not taxable under the federal tax code.

Interest Earned From Tax Exempt Municipal Bonds

As the name suggests, interest earned from tax exempt municipal bonds is not subject to federal taxes. In fact, many states also give state tax exemption if the bonds were issued in the state in which you file your taxes. This tax exemption applies to both individual tax exempt municipal bonds and to shares in tax exempt municipal bond funds.
Be aware that there are taxable municipal bonds that do not benefit from federal or state tax exemption. Make sure that you pay close attention to the tax status of any municipal bond or municipal bond fund that you purchase.

Income From The Sale Of Your Primary Residence

If you sell your primary residence for a profit and pass the IRS tests for home use and ownership, then a portion of your income for the sale will be tax exempt. To pass the tests, you need to prove that you have owned your home for at least two of the past five years. You also need to prove that it is your primacy place of residence.
If you can do this, then you can exclude up to $250,000 of capital gains from you taxable income. If you file jointly with your spouse, you can exclude up to $500,000. If you don’t meet the two year test, you may be able to get a partial tax exemption for the income earned from the sale.

Life Insurance Money

It is not pleasant to think about, but if a loved one dies and you are the beneficiary of their life insurance policy, you will generally not have to pay any taxes on the life insurance money that you receive. You should note that there are some exceptions to this rule. You should consult with the IRS or a tax specialist for further information about when life insurance disbarments can be taxed.

Non-Taxable Gifts

A gift is exactly what it sounds like. According to the IRS, a gift is any transfer to an individual that the individual does not fully pay for. Some gifts are taxable. However, a good many are not. For example, in 2011, you can give a person up to $13,000 without any party being taxed. Other types of gifts that can qualify for tax exempt status include tuition or medical expenses that you pay on behalf of someone else, gifts to your spouse, and gifts to a political organization. You should speak with a tax expert before giving a gift to make sure that you take full advantage of the potential tax benefit.

Employer Fringe Benefits

There are numerous fringe benefits that employers give to their employees. Some companies offer their employees subsidies for public transportation. This can include subway cards, bus passes or cab fares. Additionally, some companies also offer parking subsidies to their employees that drive to work. As long as these subsides are not valued more than $230, you can receive these subsidies tax free. Other tax free fringe benefits include free gym membership, use of a company car and employee discounts.

Child Support

If you are the parent with custody of the child, you do not have to report child support payments to the IRS. You should note that spousal support is not necessarily tax exempt.

Foster Care Payments

If you take care of foster children, you will receive payments from the state to help with expenses. Since these payments are made by a state agency or tax-exempt organization, you do not have to report them to the IRS.

Personal Injury Awards

If you have been issued financial awards because of a personal injury suit, you might not have to pay taxes on the money awarded. You should speak with a tax professional to determine whether you need to report the funds you received from a personal injury suit.
When tax season rolls around, many people focus on the financial items that they are required to report. However, we could all benefit from taking a closer look at the income that we don’t need to report. If you can take advantage of these sources of tax free income, you will be able to save money during tax time.

Understanding The Alternative Minimum Tax

There is nothing worse than finding out that you have to pay more taxes. However, if you take advantage of certain kinds of tax exemptions and deductions, you may be subject to the alternative minimum tax which will effectively increase your annual tax payment to Uncle Sam. But what is the alternative minimum tax and how can you find out if you will have to pay it? This article will walk you through everything you need to know about the alternative minimum tax.

What Is The Alternative Minimum Tax?

The Alternative Minimum Tax (AMT) is a tax that was created by Congress to make sure that wealthy individuals and people with creative accountants paid their fair share of federal income taxes. Before, the creation of the AMT, some people with strong tax code prowess were taking advantage of certain tax exemptions and deductions in order to substantially reduce the amount of federal income taxes that they paid. The AMT was created in order to remedy this phenomenon.

How The AMT Works

The AMT functions just like the federal income tax system. It has its own forms, rules and tax brackets. However, the rules of the AMT were created specifically to erase many of the tax loopholes found in the standard federal tax code.
If you are subject to the AMT, you may have to fill out and file a separate set of tax returns. This is in addition to filling out the standard federal tax forms. In the process of filling out both returns, you will calculate your federal income tax under both systems.
After you have calculated the amount of taxes that you must pay under both tax systems, you will be required to pay the higher tax bill. Since the AMT system was created to close tax loopholes in the standard system, the tax bill associated with it will likely be higher than the standard federal tax bill.

Who Might Have To Pay The AMT

There is an income exemption associated with the AMT. This means that if your income falls under a certain amount, you will not be subject to it. The exemption amounts tend to increase every year. For 2011, if your individual income is less than $48,450 or your joint income is less than $74, 450, then you will not be subject to the AMT.
However, if your income is above these levels, you might find yourself subject to the AMT if

You made substantial deductions for your state income taxes.
You made substantial deductions for dependent exemptions. This could apply to you if you have a lot of children.
You made substantial deductions for interest on a home equity loan that is used for purposes other than home improvements.
You earned substantial investment income from certain municipal bonds.
You exercised “deep in the money” incentive stock options.

However, since there is no test for the AMT, if you made any large deductions on your federal income taxes, it might be a wise decision to ask a professional if you could be subject to the AMT. You can also use the IRS’s AMT Assistant which is available here. Don’t assume that the AMT only applies to wealthy individuals and tax experts.

How To Avoid Or Reduce Your Exposure To The AMT

Although the AMT was created to be difficult to get out of, there are a few things you can do to reduce or eliminate your exposure to it.

Reduce Or Eliminate Your Investments In Municipal Private Activity Bonds: Most municipal bonds are exempt from both federal income taxes and the AMT. However, the interest from municipal bonds that are used to fund private activities such as sports arenas, hospitals and housing projects (to name a few) are fully taxable under AMT. You can reduce your exposure to AMT by reducing or eliminating your investments in these types of bonds. Keep in mind that your interest dividends from bond funds or mutual funds that hold private activity bonds will also be subject to the AMT.
Don’t Take Out A Home Equity Loan For Anything Other Than Home Improvements: The AMT will not allow you to deduct any interest on the loan unless the loan proceeds are used for home improvements. Avoid using your home equity line for non-home improvement purposes.
Decrease Your AMT Taxable Income For The Year: It might sound counterintuitive, but finding ways to slash your income that could be taxed under the AMT will help you reduce your exposure to the AMT. Consider deferring a year-end bonus into the next year. If you have some poorly performing investments, sell those at a loss to reduce your taxable income. You may want to consult a tax adviser for others ways to decrease your chances of being subject to the AMT.

More and more people are finding themselves victims of the alternative minimum tax. If you think you might be subject to the AMT this year, the best thing that you can do is to plan ahead. Speak with a tax planner about how to lessen or eliminate your exposure to it. This will help to save you grief and, if you’re lucky, money.

5 Tips To Avoid An IRS Tax Audit

Tax season is fast approaching and one thing is certain: nobody likes paying taxes. However, paying taxes is a walk on the beach compared to getting audited by the IRS. What is an IRS audit? If the IRS suspects that you have not filed your taxes correctly, either purposefully or mistakenly, they might decide to take a close look at your tax returns. Additionally, the IRS has a computer program that randomly selects tax returns to closely examine. This close examination is called an IRS audit.

Unless you willfully cheated on your taxes, the only punishment you will face (other than having to possibly pay more taxes) is having to deal with the IRS. This can involve a lot of annoying questions and correspondences. Who wants to deal with that?
There is no way to avoid getting randomly selected for an audit. However, there are ways to avoid raising any red flags which might lead to a full blow IRS audit. Here are five red flags you should know about to help reduce your chances of being audited.

1. File Your Taxes In Full And On Time

The easiest way to avoid arousing the IRS’s suspicions is to fill out all of the appropriate forms in full and to file your taxes on time. Missing the tax deadline or sending incomplete returns are clear signs that you don’t have your act together or that you are trying to hide something. The best way to avoid this red flag is to prepare ahead of time for tax season. Make sure that you have all of your pay stubs and W-2s, bank account and investment statements and other important tax documentation organized well ahead of the April tax deadline. Keeping good records will help you to do this. Also make sure that you are aware what tax forms you need to fill out. If you are unsure, consult a tax professional.

2. Don’t Make Math Errors

Another surefire red flag is making math mistakes. They are easy to make and even easier to overlook. Double check all of your addition and subtraction before submitting your return. Have a friend or family member take a look as well. While math errors rarely result in full blown audits, it’s worth it to take the time to double check your math so you don’t have to deal with the IRS at all.

3. Beware Of Crooked Or Incompetent Tax Preparers

If someone else prepares your taxes, then you are trusting them to submit your returns according to the letter of the law. However, not every tax preparer is created equal. Some are not sufficiently qualified. Others have no moral qualms about bending or breaking tax laws to reduce your taxes or get you a larger return. Make sure that you do a thorough background check on your tax preparer if you use one. Beware of promises of large returns. If you suspect that your preparer is doing something illegal, you should report her to the IRS and find a new preparer immediately. Remember that the IRS will hold you responsible for fines and penalties that result from inaccurate or illegal reporting on your report, no matter who filled it out.

4. Report Your Assets Held In Foreign Countries

Everyone has heard about Swiss bank accounts. But if you have one or hold financial assets in a foreign country, you need to report those holdings to the IRS. The federal government has taken a recent interest in cracking down on people who do not report offshore assets. In fact, several foreign financial institutions have recently disclosed the identities of American account holders to the US government. If your name pops up on one of these disclosures, you can almost guarantee that you will be audited and you might also face significant fines and penalties. The bottom line is, disclose your offshore accounts.

5. Follow The Rules For The Home-Buyer Tax Credit

If you purchase a house, then you might be eligible for the home-buyer tax credit. This credit can result in thousands of dollars in tax savings. Because of this large tax savings, the IRS is very concerned about people who try to inappropriately claim this credit. If you claim the home-buyer credit, make sure that you submit all of the appropriate paperwork. If you submit incomplete paperwork, you will increase your chances of audit.
Also, note that the IRS has ways to find out if you did something to void the tax credit. This includes selling your home shortly after you bought it. If you claim the home-buyer tax credit and then sell your home within three years of the purchase date, you will also increase your chances of being audited.
Getting audited is a drag. Although there is no foolproof way to avoid an audit, there are things you can do to reduce your chances of being audited. Remember these red flags when submitting your taxes in April.

5 Tax Tips To Consider After Losing Your Job

Imagine that the unthinkable has just happened. After putting in 15 years with the same company, your job position is eliminated and you are let go. For many, this nightmare has become a reality as more and more companies look to cut costs in response to a souring national economy.

When you have just lost your job, taxes are probably the last thing that you want to think about. However, there are some important tax issues that are associated with the loss of a job that you need to know about.
Here are five important tax issues associated with losing your job.

Severance Pay And Unemployment Insurance Payments Are Taxable

If you receive a severance package from your employer, the full amount of the package will be taxed. The same goes for any money that you receive for unused vacation and sick time. You employer is supposed to withhold federal and state taxes from these payments and this should appear on your W-2. However, to avoid getting dinged at tax time, make sure that you confirm that these taxes have been taken out.
Unemployment insurance benefits that you receive from the state are also taxable. However, taxes are not automatically removed from these payments. You can avoid having to worry about this at tax time if you file a petition with your state to request that taxes are taken out before you receive your unemployment check. The appropriate form is called a W-4V.

Distributions From Your Retirement Plan Are Taxable, But Rollovers Are Not

If you decide to take a distribution from your 401k or IRA to help cover your living expenses until you find a new job, the money that you take out will be fully taxed unless you have a Roth 401k or a Roth IRA. Keep in mind that the standard rules about early withdrawals still apply. Expect to pay a 10 percent penalty if you take a distribution before you are 59 ½ years old.
Alternatively, you can roll your 401k from your previous employer into an IRA tax free as long as you don’t take any distributions.

You May Be Able To Deduct Some Of The Expenses Incurred While Looking For A New Job

The IRS will allow you to deduct certain expenses associated with finding a new job. For example, if you pay an employment agency a fee to place you in a new job, you can deduct the cost of that fee. You can do the same for costs associated with resume preparation and travel expenses for job searching and interviews.
Additionally, if you find a new job that requires you to move, you may be able to deduct the moving costs you incur. There are certain requirements pertaining to the distance moved and the timing of the move that you will have to meet in order to qualify for the deduction. You can reference IRS publication 521 for more information about deducting moving expenses.

You May Be Able To Sell Some Investments Without Paying Taxes On The Capital Gains

If you own investments that you want to sell to help cover your living expenses while you are unemployed, you might not have to pay taxes on the money you receive from the sold investment. If your taxable income is less than $34,500 or your joint taxable income is less than $69,000, you will not have to pay taxes on the money you earn from your sold investments.

You May Be Eligible For Certain Tax Credits

If your income drops significantly as a result of your job loss, you may be eligible for certain beneficial tax credits. Some of these include:

The Earned Income Tax Credit: If your earned income falls below a predetermined amount, you can qualify for the earned income tax credit. This tax credit reduces the amount of taxes that you owe. If the credit is larger than your tax liability, you can receive a refund check from the federal government for the difference. Note that unemployment benefits do not count as part of your earned income so you do not have to include them in your calculation.
Education Tax Credit: If you think that you need to go back to school to get a new job, you might be able to benefit from education tax credits that will help you reduce your education expenses. Credits such as the American Opportunity Credit and the Lifetime Learning Credit can help to ease the financial burden of college education. Keep in mind that there are income requirements that you must meet in order to benefit from these credits.

Losing your job is tough enough. Don’t make your situation worse by missing out on important tax benefits associated with job loss. Given the current state of the national economy, you will need all the help you can get.

Unclaimed Money And How To Find It

There’s a lot of unclaimed money floating around out there--more than $32 billion worth according to the National Association of Unclaimed Property Administrators (NAUPA). Where does it all come from and how did it get separated from its rightful owners?

Unclaimed money originates from many sources including stocks, dividends checks, lottery winnings, life insurance proceeds and even bank accounts that have been forgotten. The majority of this money gets separated from its owner for one simple reason, says Jim Hammond, who has more than 20 years of experience in recovering unclaimed property for individuals.“Most of the time you get in trouble because you didn’t change an address.”

The Letter Of The Law

Individual states have laws that outline what companies must do when they find themselves holding onto someone else's money. After a set amount of time (it differs from state to state), unclaimed assets must be escheated, which means turned over to the state's treasurer.
The SEC has its own set of rules for companies that have lost contact with shareholders. They are required to search for owners or their heirs. Some businesses will do that in-house and others will hire firms that specialize in unclaimed property recovery. After a certain amount of time, if those companies are unable to make any connections, those assets are also turned over to individual states.

Are You Owed Money?

Since each state maintains a database of unclaimed property, that is a great place to begin a search of what might be coming to you. Start at NAUPA's website and select a state where you or your relatives have lived. Don't forget to search by all the names you have used, both maiden and married.
If you find property that belongs to you, the NAUPA site offers information on how to claim it.
If you think you might have missed a tax refund check, the IRS allows you to check on undelivered refunds.
If you think that you may be owed a pension, the Pension Benefit Guaranty Corporation has its own website where you can search for that.

What About Banks?

Searching for abandoned bank accounts and items lost in safe deposit boxes can be more complicated because of bank mergers. According to Hammond, you have to start at the beginning by searching for the original bank that held the account and follow the trail of merger(s) to the new bank.

The Middleman

What if you receive a phone call that there's an asset that belongs to you and for a fee it will be recovered? Can you believe it?
Large corporations, mutual fund companies and bank transfer agents do outsource this research work. When you get the call, your options include waiting it out until the property reverts to the state. This can take years. Or you can let the company handle it for you and simply pay the fee.
Be careful, Hammond said. "You don't want to be in the position of someone trying to sell you your own money, but there is value there. Figure out the value of the service they're offering, and then negotiate."
And be wary of anyone who requires you to pay anything up front.

Don't Lose Your Money

So how do you make sure you don't lose out on what's coming to you?
"It is better off to keep the property yours, than to have to get it back," Hammond said. He recommends that consumers:

Make a list of everything you own.
Be a responsible shareholder. Answer all mailings and make sure you maintain contact with companies you own stock in at least once a year. That keeps your address current in their files.
If you own stock in a company that merges with another, take steps to have your shares transferred correctly.
Ask the IRS for a copy of your transcript which will detail taxable income reported under your Social Security Number, which could reveal dividends you aren't monitoring.
Encourage older relatives to be careful with record keeping to make the job of settling their estates easier.
Remember that stock certificates are a thing of the past; if you find one in Aunt Martha's safety deposit box be sure to ask the company involved if she had others.
Be mindful of insurance policies that were owned with mutual companies that have since gone public. Your premiums may have made you a shareholder.
Make it a point every six months to visit websites with unclaimed property databases. States can be years behind in recording assets.

No matter how organized you are, you may be surprised by an unclaimed property search. Who knows what is waiting out there for you?

Tips On How To Lower Your Property Taxes

The taxes you pay on your house -- property taxes -- rank high on the list of the most hated taxes, and that has a lot to do with the fact that they rarely, if ever, go down.

Before we see why, let’s figure out how your city or county determines what you pay. It’s actually a very simple thing to do. Your city places a value on your house, called the assessed value. That value, say $200,000, is multiplied by the tax rate in your city, say $1.20 per $1,000 of value. When you do the math, you’ll see that your annual tax bill comes to $2,400. Of course, if you live in states such as New York, New Jersey, Illinois or New Hampshire, your property tax rate might be much higher.
To make matters worse, the National Taxpayers Union estimates that cities and counties have placed too high a value on as many as 60% of all houses and commercial buildings. Is your house one of them? If it is, there is something you can do about it.

Question The Details

First, find out what your city or county knows -- or thinks it knows -- about your house. Sometimes this information is on the city’s website. Sometimes it’s on a property tax card that you can ask to see at city hall. Either way, it can be very enlightening.
You can have a property assessor come to your home with the goal of lowering your house's assessed value. But this isn't as common as you'd hope. Assessors rarely, if ever, enter the houses on which they place values. The information they use often is based on the house’s original plans, old building permits, educated guesses and street-side observations.
If your property tax card is accurate, your house still may be overvalued. To determine that, go to your city’s website or to city hall and find the assessed value for similar houses on your street and in your neighborhood. Also compare the heated square footage, the number of bedrooms and bathrooms and the size of the lots. Check to see if other, similar houses have amenities and features that yours does not have, such as oversized garages, swimming pools or enclosed porches. It also might help to walk your neighborhood and pay close attention to houses that are similar to yours. As you gather this information, it may become clear that your house is or is not valued fairly compared with similar houses.

Hire Your Own Appraiser

If it’s not clear why your taxes are higher than your neighbors, you may want to hire an appraiser, who not only will appraise your house but will estimate the value of similar houses in your neighborhood. This may cost as much as $500, but at least you'll have peace of mind about whether your city has accurately valued your house.
If you or an appraiser determines the city has not done a good job, you can appeal to a real estate assessment board. Some have hearings that allow you to present your evidence, which may include having your appraiser testify. Some require homeowners to mail information to them. Only about 2% or 3% of homeowners take this step, but about 30% of them have the values of their houses lowered, so it might be worth your while to appeal.
While hiring an appraiser can result in the lowering of your assessed value, there is also the risk of backfire. For example, some assessors have told me it’s almost never a good idea to ask them to come to your house. Unless your house hasn’t been updated since the 1950s, the assessors who’ve been invited into houses say they almost always discover multiple upgrades that cause them to raise the value of your house. They also may realize that you didn’t get the necessary building permits for past improvements made to your house.
If you decide to do it anyway, make sure you’re with the assessor at all times. While he’s taking note of the new granite counters in the kitchen or the new built-in bookcase in the den that you forgot he would see, you can make sure he also sees the sagging roof and other deficiencies that might lower your house’s value. If an assessor is in your house, you can deny him access to certain rooms, but if you do, many cities have a policy that allows him to automatically assign the highest assessed value possible for the property.

Don't Upgrade

This tip may seem too obvious to mention, but if you’re intent on keeping your tax bill down, don’t build. Any project that causes a contractor to get a building permit will cause the assessed value of your house to rise. That’s because the folks in the building permit office will send a copy of the permit to the assessor’s office, which might prompt a visit from an assessor. Either way, it will cause an increase in the assessed value.
Just about everyone wants a beautiful house, and just about no one wants to pay high property taxes. It can seem impossible to balance these two things.
But never assume your tax bill is set in stone. Now you know there are things you can do about it.

What You Need To Know About The Supplemental Property Tax

Many people have never heard of the supplemental property tax that was passed by the California State Legislature in 1983. However, if you are a resident of the state of California, then this law could have a significant tax impact on you. Additionally, if you live in California and plan to sell your house, you are legally obligated to explicitly disclose the possible imposition of supplemental property taxes to potential buyers. Therefore, every California resident should become familiar with how this supplemental property tax works. This will prevent unpleasant tax surprises down the road.

Origins Of The Tax

In 1983, the state of California passed The Supplemental Real Property Tax Law. This law created the supplemental property tax which is a tax on the purchase of new property or on new construction to residential property. If you buy a house or perform construction work on your house, you may be subject to the supplemental property tax. You should note that this supplemental tax is in addition to the standard property taxes that you are required to pay if you own property.

Do You Need To Worry About The Tax?

Do you live in California?

If your answer is yes, then you might be subjected to the supplemental property tax.

Have you purchased a house or engaged in home construction post 1983?

If your answer is yes, then you might be subjected to the supplemental property tax.

How The Tax Works

If you answered yes to both of the questions listed above, then you should learn how the supplemental property tax works.

If You Buy A New Home

The county that you live in will send the county assessor to appraise the value of your new house. If the assessor determines that the new assessed value of your house is greater than the previous assessed value, then you will have to pay the supplemental property tax.
On the other hand, if the assessor finds that the assessed value of the house has decreased, you will be issued a tax refund. Note that it is relatively unlikely that the assessor will determine that the assessed value has fallen. Therefore, you should expect to pay the supplemental property tax if you purchase a new house.

If You Do Construction On Your Home

Once the construction is completed, your county will send the county assessor to do a new appraisal of your house. If the assessor finds that the performed construction adds to the value of the house, then your assessed value will increase and you will have to pay the supplemental property tax.
Since people do not generally engage in residential construction that will decrease the value of their home, it is extremely unlikely that the assessed value of your house will fall after the completion of construction. Therefore, you should also expect to pay the supplemental property tax if you engage in construction on your home.

Tax Structure

Unlike standard property taxes, which must be paid every year, the supplemental property tax is a one-time tax. Therefore, once you pay the tax, you will not be subjected to further supplemental taxes unless you buy a new house or do additional home construction.
According to the Los Angeles County Property Tax Portal, the dollar amount of the supplemental property taxes is prorated based on the number of months left in the year after the purchase date or the completed construction date. Depending on when this date occurs, you will receive one or two supplemental tax bills.
If this date occurs between January 1^st and May 31^st, you will be issued two supplemental tax bills. One is for the remainder of the year and the other is for the fiscal year that follows.
If this date occurs between June 1^st and December 31^st, you will receive one supplemental tax bill that covers the fiscal year following the sale or construction completion date.

How To Avoid Paying The Supplemental Property Tax

For those determined to avoid paying this tax, there are a few strategies that you can pursue.

Assessment Appeal

If you believe that the county assessor incorrectly appraised the value of your house, you can file an assessment appeal. However, this will require you to file a lot of paperwork and go to an administrative hearing to plead your case to a board of supervisors. If the board of supervisors rejects your appeal, you might be able to challenge the rejection in court.
This process will cost you a lot of time and, possibly, a lot of money. Therefore, it might not be worth filing an appeal unless you have a rock solid case. You should speak to a property tax attorney before going down this path.

Homeowners’ Exemption

Certain residential properties might be eligible for a homeowners’ tax exemption. For example, if you are the owner of your home and it is your principal place of residence, you can qualify for this exemption. If you are granted an exemption, there is a decent chance that you will not be subject to supplemental property taxes. However, if you purchase a secondary or vacation home or do construction to either type of home, you will likely have to pay the supplemental property tax.
So if you live in California and are planning on buying a house or doing residential construction, you should expect to receive a bill for supplemental property tax. The best way to avoid this tax is to apply for a homeowners’ tax exemption. However, there are restrictions to qualifying for this exemption. Keep this information in mind the next time you are on the market for a house or are planning construction work on your home.

2011 Income Tax Tips

With tax season quickly approaching, many taxpayers are scrambling to figure out which tax deductions and tax credits they might be eligible to claim for the previous tax year. The common goal is to pay as little in taxes as possible. The following is a list of the most common tax deductions and credits for the 2011 tax year. Check them out before filing your taxes to maximize your tax savings for 2011.

Common Tax Deductions For 2011

Mortgage Interest: This is one of the best deductions to take. If you have a mortgage on your primary residential property, you can deduct the total amount of interest that you pay on your mortgage for 2011. Because mortgage interest payments can be substantial, taking this deduction can reduce your taxable income by thousands of dollars.

Contributions To Retirement Accounts: If you have an Individual Retirement Account (IRA), you can deduct all or a portion of your total contributions to the account. The actual amount you will be allowed to deduct will depend on the size of your contribution and the size of your income. It is important to note that you can continue to contribute to your IRA until the April tax deadline and all contributions will count towards your 2011 tax return.

Charitable Donations: You can deduct the value of most charitable donations that you made in 2011. In order to qualify for the deduction, the money or non-cash item must be donated to a charitable organization that is recognized by the IRS. Note that you will need to keep receipts from your donations as proof that money or non-cash items were actually donated. There are also special requirements for non-cash donations.

Education Expenses: There are several deductions available for the costs of higher education. For example, if you took out a loan to pay for your or a qualified dependent’s (e.g. your child) college education, you may be eligible to deduct the interest you pay on the loan. There is also a deduction available for the costs of tuition and fees paid to an undergraduate or graduate institution.

State Income Or Sales Tax: Uncle Sam allows you to deduct the amount of money you had to pay to your state for income or sales taxes. Note that you have to choose one of the two types of taxes to deduct. For many people, deducting the amount of state income taxes paid will yield a better tax benefit. However, if you live in a state with no income tax, deducting the state sales tax is the only option.

Common Tax Credits For 2011

Earned Income Tax Credit: The earned income tax credit (EITC) was created to help relieve the tax burden of working individuals and especially those with children. To qualify for the credit, you must meet income requirements. These requirements change based on your marital status and number of children. For example, if you made less than $40,964, have two qualifying children and did not file your taxes with a spouse, you are eligible for the EITC. For 2011, the maximum amount of the credit ranges from $464 for individuals with no qualifying children to $5,751 for individuals with three or more qualifying children.

Education Tax Credits: The American Opportunity Tax Credit (AOTC) and The Lifetime Learning Credit (LLC) are two tax credits that you can take advantage of if you pay for the costs of college education. The AOTC allows for a tax credit of up to $2,500 per year for study at an undergraduate institution for up to four years of study. The LLC allows for a tax credit for up to $2,000 per year for the costs of study at an undergraduate or graduate school. There is no limit on the number of years that this credit can be claimed. Note that both tax credits have income requirements that must be met.

Energy Tax Credits For Home Improvements: If you made energy efficient improvements to your home, you may be able to qualify for a tax credit. The Nonbusiness Energy Property Credit (NEPC) and The Residential Energy Efficient Property Credit (REEPC) are two such credits. The NEPC is geared towards minor home improvements (e.g. adding a biomass stove) while the REEPC is tailored for major improvements (e.g. putting solar panels on your roof).

Child Tax Credit: If you have children, you can claim up to $1,000 per qualifying child. To qualify, your child must be under the age of 17, have lived with you for more than half of the year, be claimed by you as a dependent and be a US citizen, US national or US resident alien. Note that there are income requirements that must be met in order to claim this credit.

Child And Dependent Care Credit: If you pay for the costs of childcare for your child or a qualified dependent, you may qualify for this credit if you work or are actively looking for work. Generally, the child must be under the age of 13 in order to qualify. The credit can be up to 35 percent of the total childcare expense. The actual amount will depend on your income.

Adoption Tax Credit: If you adopted a child in 2011, you may be able to claim this credit to help offset the costs of the adoption. The maximum amount of the credit is $13,360. This credit is refundable which means you might receive a tax refund if your tax liability is smaller than the amount of the credit. There are income requirements that you must meet to qualify.
Before you sit down to do your taxes this year, make sure that you are up to speed on these tax credits and deductions. They could end up saving you thousands of dollars.

A Comparison Of Online Income Tax Preparation Services

W-2 forms and other tax documents have been showing up in your mailbox since January and April 15 will be here before you know it, but there’s still plenty of time to do your taxes, especially if you plan to do them online.

There have been internet-based versions of tax prep services for years, but they have never been more popular than they are now. But don’t mistake popular with enjoyable. We are talking about taxes, after all. However, these services can save you a lot of time and aggravation.
The best and most popular services let users save partially finished returns and finish them over multiple sessions. They are convenient, and they remember your data from year to year, saving your information on the tax-prep site and giving you a head start on the process after you input data the first time.
After you choose a tax-prep package, you'll need to decide which version you want to use. Your choices range from the 1040EZ to the more expensive premium versions. Keep in mind that even if you’re doing your business’ taxes, you may not need a premium version. It’s also important to note that all of the best online packages are relatively inexpensive, at least compared to the cost of hiring a tax preparer.
The following reviews, presented in alphabetical order, are from tax expert Kathy Yakal. The prices listed here are retail prices, but Amazon and other e-retailers often offer better prices.

CompleteTax Online

CompleteTax has some of the best guidance available on tax preparation sites. It also does a good job of exploring tax topics.
Pros

CCH is a great parent company
It offers users help in all facets
It’s thorough and comprehensive

Cons

The interface looks old
The review process leaves a lot to be desired
The customer service is expensive
Self-employed customers must buy the premium product

Bottom Line: CompleteTax is good, but it would be a lot better if it improved its user interface and offered better integrated guidance.
Price: $29.95

H&R Block At Home Premium

H&R Block At Home Premium Online competes well with TurboTax and its other competitors, and its Best of Both option is particularly impressive, providing great support at a great price. (For discounts on H&R Block tax preparation, check out theseH&R Block Coupons.)
Pros

It provides excellent advice from two trusted sources: H&R Block and The Tax Institute
The user interface is simple and fast. What more do you want?
It provides targeted help

Cons

Users need to be aware that its final review doesn't always work correctly
Its help is not as comprehensive and thorough as some of its rivals
It isn’t cheap

Bottom Line: H&R Block At Home Premium makes it easy to complete your 1040 and the accompanying forms and schedules, and its user interface and targeted help is impressive, but its post-prep review is lacking.
Price: $64.99

TaxSlayer.com Premium Edition

TaxSlayer.com's Premium Edition offers free live tax advice, priority support, prior year comparisons and tax audit assistance, and you only pay if you’re completely satisfied.
Pros

Users like it’s simple, attractive interface
It’s good at catching errors in process
It has a Spanish version
It is inexpensive

Cons

It doesn't provide much guidance
It provides few hyperlinked help files than its competitors
It doesn't always do a good job of documenting entries
It needs a navigational list
The return review forces users to find a related page manually

Bottom Line: TaxSlayer.com Premium does a lot of things right. It offers a well-designed interface and good support for forms and schedules. But it doesn't provide the guidance needed for such a complex operation, and other attributes, like the return review, don't compete well with other services.
Price: $19.95 for federal and $7.95 for state.

TaxACT Online Ultimate Bundle

TaxACT is a great buy for the 2011 tax filing year. It supports all IRS forms, including and especially the 1040 form, and it offers unlimited professional help for only $7.95 extra.
Pros

It is a great deal
It’s fast
It provides thorough guidance throughout
It offers an excellent free version
It provides a well-reasoned walk-through of tax return

Cons

There is no prepaid audit help
It depends on IRS instructions, which are not always clear

Bottom Line: TaxACT’s free version supports the same set of IRS forms and schedules as its inexpensive paid edition, but it is incomplete.
Price: $21.95.

TurboTax Premier Online Edition

TurboTax has stiff competition, and it is expensive, but it does everything right and users love its combination of financial topics, guidance, navigational tools and interface excellence. (For discounts on TurboTax tax preparation, check out theseTurboTax Coupons.)
Pros

Updated mobile offerings
Free phone support and online chat with tax professionals
It is fast
Its user interface and navigational system is impressive

Cons

It costs more than all of its competitors

Bottom line: TurboTax has at least a slight edge over its toughest competitors and is the product that its competitors are working to beat.
Price: $89.95.
Keeps these pros and cons in mind the next time you are on the market for an online tax preparer. They will help you to make the best decision on your tax preparation.

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Who Can Write Off Transportation Expenses?

Using The Standard Mileage Rate

How To Keep Track Of Your Business Miles

Using Actual Expenses

How To Keep Track Of Your Actual Expenses

Which Method Should You Choose?

Other Important Considerations

Nonbusiness Energy Property Credit

Biomass Stoves

Heating, Venting and Air Conditioning (HVAC)

Insulation

Roofs (Metal and Asphalt)

Water Heaters

Windows, Doors and Skylights

Residential Energy Efficient Property Credit

Geothermal Heat Pumps

Small Wind Turbines (Residential)

Solar Energy Systems

Most, But Not All, Charitable Contributions Are Tax Deductible

To Get Credit For Your Donations, You’ll Have To Itemize Your Deductions

A Contribution To A Qualified Charity Is Deductible In The Year In Which It Is Paid

Some Cash Gifts Require Written Confirmations

There Are Deductions Limits

The Benefits Of Charitable Giving Increase With Income

Non-Cash Gifts Have Quality Requirements

What's A Gift?

How Much To Give?

Unified Credit

Give As Much As You Like Tax Free In These Situations

Why Gift?

Is A Gift Taxable Income?

Report Your Gifts

Using Gifts In Estate Planning

What Is The Standard Deduction?

What Is An Itemized Deduction?

Miscellaneous Deductions

When The Standard Deduction Makes Sense

Why Itemize?

Withholding 101

Why Withhold?

The Case Against Withholding

Extenuating Circumstances

1. Hiding Income Offshore

2. Identity Theft And Phishing

3.Preparer Fraud

4.Filing False Or Misleading Forms

5.Making Frivolous Arguments

6.Nontaxable Social Security Benefits With Exaggerated Withholding Credit

7.Abuse of Charitable Organizations And Deductions

8.Abusive Retirement Plans

9.Disguised Corporate Ownership

10.Zero Wages

11.Misuse Of Trusts

12.Fuel Tax Credit Scams

What You're Worth

Keeping Up With The Code

Avoiding Estate Taxes

The State Of Your Affairs

Rounding Up The Paperwork

For Next Year

Should You Do It Yourself Or Outsource It?

For Next Year

Don’t Neglect Your Retirement Savings

For Next Year

Interest Earned From Tax Exempt Municipal Bonds

Income From The Sale Of Your Primary Residence

Life Insurance Money

Non-Taxable Gifts

Employer Fringe Benefits

Child Support

Foster Care Payments

Personal Injury Awards

What Is The Alternative Minimum Tax?

How The AMT Works

Who Might Have To Pay The AMT

How To Avoid Or Reduce Your Exposure To The AMT

1. File Your Taxes In Full And On Time

2. Don’t Make Math Errors