Congress continues to make changes in the tax code in response to the housing crisis. A key change helps millions of homesellers who owe more on their mortgages than their dwellings are worth. These sellers have negative equity — a condition known colloquially as being upside down or underwater. Legislation that went on the books at the start of 2007 significantly benefits some upside downers and does absolutely nothing for others.
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There have been lots of changes in the tax rules. Many of them are mandated by indexing — government lingo for annual adjustments to reflect inflation. What follows are the highlights of several changes that might influence your tax planning.
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The Internal Revenue Code authorizes deductions for individuals who use their cars for business, moving, medical or charitable purposes. They can choose to write off their actual expenses or use what are known as the optional standard mileage rates.
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You are allowed a bad-debt deduction if you have made a loan that becomes worthless, provided a bona fide loan exists. The IRS often challenges write-offs when loans to family members sour, though not always successfully.
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The Internal Revenue Code authorizes two ways for small businesses to write off of their outlays for such purchases of equipment as computers and file cabinets.
One is the "standard" route — recovering the cost through depreciation deductions over a period of years. Or they can opt for the frequently-overlooked tactic of "expensing" and deduct a specified amount of equipment in the year of purchase, assuming that is more advantageous.
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Over the years, a number of my columns have included quotations about our tax system. Those columns prompted many of you to submit your own favorites. Here are some of them:
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What are the chances that your 1040 form will be bounced by IRS computers for an audit? Here are some of the items that increase the likelihood of your return drawing the agency’s attention.
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Internal Revenue Code changes have averaged one-per-day over the past eight years — with 500 revisions in 2008 alone. Who’s counting? Nina Olson, the National Taxpayer Advocate, announced the statistics in her annual report to Congress. An independent organization within the IRS, the Taxpayer Advocate Service helps taxpayers resolve complaints with the agency when problems cannot be resolved through normal channels.
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A profit on the sale of your house or condominium qualifies for an “exclusion” from taxes of up to $250,000 in profit on home sales for single filers and up to $500,000 for married couples filing jointly. But anyone with a gain greater than the exclusion cap of $250,000 or $500,000 is stuck with taxes on the excess.
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It is not too late to recalculate your taxes if you recheck last April's Form 1040 and discover you overlooked some business write-offs or other tax breaks. There is still plenty of time, in most instances, to redo your return. Here are some reminders on when you can or cannot change your mind after the due date.
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Congress divides bitterly on hot-button issues, such as abortion and same-sex marriages. But our lawmakers always display bipartisan support for proposals to make filling out returns much easier. As you would suppose, hardly any of these proposals for simplification of our Byzantine Internal Revenue Code become law, because these efforts end up — just like previous ones — tangled up in politics. As for the ones that are enacted, most of them tend to add to complexity rather than reduce it.
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Estate planning is important for individuals who own sizable amounts of property. But uncertainty surrounding the estate tax makes it difficult for them to choose and implement strategies to reduce the tax.
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Businesses struggling with the economic downturn benefit from targeted tax relief provisions in the American Recovery and Reinvestment Act of 2009, the economic stimulus legislation signed into law by President Obama in February. An important provision helps small businesses that suffer what are known as NOLs — short for net operating losses — when their expenses exceed receipts. The new tax incentive increases the carryback period for 2008 losses from two years to three, four, or five years.
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The law empowers and encourages the Internal Revenue Service to make life decidedly disagreeable for people who intentionally fail to file their returns at tax time. The key federal statute is the Internal Revenue Code, which authorizes the imposition of severe sanctions, both criminal and civil, on those who fail to comply with our “voluntary” system.
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To get the IRS to waive a late-filing penalty, you have to convince the agency that the delay was “due to reasonable cause and not due to willful neglect.” Is there reasonable cause that excuses a penalty when you rely on an attorney or accountant to make a timely filing? No, according to a decision by the Supreme Court.
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Amidst all the partisan squabbling over the size of President Obama’s economic stimulus package and the role of tax cuts therein, there was, at least, bi-partisan agreement on the need to address the Alternative Minimum Tax. The snag is that the cost of an AMT fix becomes more expensive every year. And so, just a few months after the historic inauguration, AMT reform already appears to be DOA.
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This year, the deadline for filing Form 1040 is Wednesday, April 15. Miss the deadline and you could get nicked for a sizable, nondeductible penalty. In most cases, the penalty is five percent of the balance due (the amount that remains unpaid after subtractions for taxes previously paid through withholdings from wages during 2008 and payments of estimated payments) for each month, or portion of a month, that a 1040 is late.
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A mistake on your return may mean some time-consuming correspondence that delays your refund check. Worse yet, an error may mean that your return winds up in the audit pile, leaving you to justify your deductions or other facts and figures.
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Many of you who are about to file returns for 2008 want advice on whether to claim the no-questions-asked standard deduction or to itemize on for outlays like mortgage interest and charitable contributions. Itemizing pays off only when total itemized deductions surpass the standard deduction that you would be entitled to claim anyway.
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Julian Block
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The “marriage penalty” (or, depending on one’s point of view, “sin subsidy”) is a quirk in the tax code that enrages lots of couples. The penalty compels them to pay greater taxes on their combined incomes than they would as two unmarried single individuals who live together and report exactly the same incomes.
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Investors now benefit from super-low tax rates on dividends. President Bush’s tax code revisions included a dramatic drop in the tax rates for dividends for all investors — to less than half the top rate for ordinary income. Previously, the rates for dividends were the same as the rates for wages, pensions and other types of ordinary income.
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President Bush’s tax packages included a decrease in the top rates for long-term capital gains from sales of assets such as individual stocks, bonds and shares of mutual funds owned more than 12 months. The rates dropped from 20 percent to 15 percent for individuals in the four highest income tax brackets and from 10 percent to zero percent — down from 5 percent before 2008 — for those in the two lowest brackets.
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On the interminable campaign trail, then-Senator Barack Obama repeatedly said he wanted to cut taxes for low- and middle-income families and boost them for high-income families. “No family making less than $250,000 will see their taxes increase,” he stated. Now-President Obama is clearly committed to making permanent George W. Bush’s tax cuts for families with annual incomes under $250,000 and single households with annual incomes under $200,000. He has been equally adamant about his support for repeal of tax cuts for people in the two top income tax brackets
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There’s lots of uncertainty about who will be helped and who will be hurt by the tax package that President Barack Obama will send to a Democratic-controlled House and Senate. Still, there is no doubt that he wants them to approve tax code amendments requiring wealthier Americans to shell out more for taxes.
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Income taxes are such a pervasive and everyday part of our financial lives — and such a central issue in presidential campaigns — that they seem to have been around forever. They have not. Their debut is relatively recent.
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The Social Security Administration says that about 11 million workers are going to be dunned for an additional $297.60 in Social Security taxes during 2009. Those payroll taxes also are matched by their employers.
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Those of you who are of a certain age or are familiar with the Twentieth Amendment to the Constitution know that U.S. presidential inaugurations did not always take place on Jan. 20. Presidents used to take their oaths of office on March 4.
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Stay on top of the deadlines for filing federal tax returns and the due dates for making payments. Overlook just one, and you might be smacked with a sizable, nondeductible penalty.
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When securities markets swoon and apprehensive investors bail out of their holdings, they console themselves with deductions for capital losses at Form 1040 time. But it's important for investors to be aware that long-standing rules limit their write-offs for losses on sales or redemptions of shares of individual stocks, bonds, mutual fund shares or ETFs, exchanged-traded-funds that trade throughout the day like stocks.
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When 1040 time rolls around, most individuals who itemize their deductions need no reminder to claim their donations to charities. But you also are entitled to deduct out-of-pocket expenses incurred when you volunteer to help raise money or perform other chores for your favorite philanthropy.
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The tax code authorizes deductions for individuals who use their cars for business, moving, medical or charitable purposes. They can choose to write off their actual expenses or use what are known as the optional standard mileage rates.
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Ordinarily, deductible business expenses include payments to settle disputes, whether the payments are made to satisfy judgments or as out-of-court settlements. But an outlay is allowable only if the argument arose from a business-related activity, as opposed to a personal matter.
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Q. A company in which I own stock declared a 50-percent stock split, an action increasing the number of my shares from 200 to 300. I plan to keep 150 of the post-split shares and sell the other 150. The original investment cost me $3,000. How do I figure my cost for the shares I sell?
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Many of my readers have asked about Internal Revenue Service audits. In particular, you want to know whether it is worthwhile to fight back when you disagree with an IRS examiner who insists that more taxes are due than the amount listed on your Form 1040, and that the extra tab should be augmented by interest charges and maybe even penalties.
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Q. We filed a joint return and took the standard deduction for persons who do not itemize. Now we find it would have been to our advantage to itemize our outlays for real estate taxes, state income taxes and the like. According to a friend, we are not stuck with the standard deduction. Is that true?
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The Internal Revenue Code severely limits deductions for medical expenses that are not covered by insurance or otherwise reimbursed. The big hurdle is that Code Section 213 allows write-offs for unreimbursed outlays only to the extent that their total in any one year surpasses 7.5 percent of adjusted gross income. AGI is the amount listed on the last line of page 1 of the 1040 form after all reportable income is offset by certain deductions like alimony payments and contributions to traditional IRAs, but before itemizing for expenditures like real estate taxes and charitable contributions and listing dependency exemptions.
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Two chores that most people will gladly put off are writing a will and keeping it up to date to reflect changed circumstances. However, when you do get around to writing and revising your will, consider carefully when you select or replace an executor -- the legal term for the person who is the key figure in the settlement of your estate.
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Some kinds of deductions always trouble the tax takers. For instance, baleful bureaucrats become suspicious and demand a detailed accounting when business travelers journey to meetings or conventions at plush resorts or exotic locales and (gasp!) decide to combine work with play and take their spouses along.
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Your investment holdings could well include an asset that has dropped in value since you bought it. Maybe you want to sell it, claim a capital loss and start over with something else. Or maybe you have great hopes for this investment and, though you would like to take the loss, you would really hate to part with your old friend. Should you sell your property to your spouse or your child?
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Internal Revenue Code Section 121 authorizes an "exclusion" -- escape from income taxes -- for profits from home sales. The exclusion is as much as $500,000 for married couples who file joint returns and $250,000 for single filers and couples who file separate returns. What happens when the gain is greater than the exclusion ceiling of $500,000 or $250,000? The excess is taxed as a long-term capital gain at a maximum rate of 15 percent, plus applicable state taxes.
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Just because you can back up every item on your return, don't think you can forget about an audit. Those relentless IRS computers may bounce your return for any number of reasons, including pure chance. If you face an audit, here are some tips on how to make the experience less traumatic and less costly.
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Q. The tax refund check I received from the IRS is less than the amount I claimed on my return. There was no explanation accompanying the check. Should I cash the check?
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The breakup of a marriage forces a couple to deal with many complex financial problems. In negotiating an agreement, the couple's main concerns might be alimony, child custody, and child support arrangements. However, they might also have to deal with dependency exemptions for children, joint liability on joint returns, legal fees and transfers of property.
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If some friends ask you to serve as a director of their corporation, be aware that becoming a director can have its perils. Whether you take a director's seat for money, power, prestige or just to be obliging, you assume certain responsibilities when you accept the position.
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Q. Do I need to worry about a late-filing penalty if I turned my records over to a return preparer who filed my Form 1040 after the due date?
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This is not the year for procrastinators. It's a year for fast action and, for some, smart planning.
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As you file your tax return, do you wonder whether you're likely to get audited?
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Individuals who travel for business reasons can deduct their actual car expenses. The list of deductible items includes gas, oil, tires, repairs, license tags, registration fees, insurance, garage rent, lease payments and depreciation. As an alternative to writing off actual expenses, you may be able to use a standard mileage rate that is adjusted each year to account for inflation and gas prices. The advantage of the optional standard rate is that it eliminates the extra burden of tracking actual costs; records need to be kept only of business miles driven for the year in question. Just to be clear, the IRS definition of "cars" includes vans, pickups and panel trucks.
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As part of its unending quest for tax fairness, Congress keeps overhauling the Internal Revenue Code. One of the sneakier consequences of those efforts was evisceration of a long-standing break for outstanding American writers, scientists and other individuals who receive prizes and awards that honor their accomplishments.
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For most people, the deadline for filing Form 1040 is Tuesday, April 15. Miss the deadline and you could get slapped with a substantial, nondeductible penalty. Generally, the penalty is 5 percent of the balance due (the amount that remains unpaid after subtractions for taxes previously paid through withholdings from wages during 2007 and payments of estimated payments) for each month, or portion of a month, that a 1040 is late.
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Q. My daughter receives child support payments from her former husband. What are the tax rules?
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Married couples need no reminder that they benefit from filing joint returns when one mate earns all or considerably more of the taxable income.
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Q. Can we file jointly and also claim an itemized deduction on Form 1040's Schedule A for mortgage interest and real estate taxes on our home when I am the only one who reports income and the home is held in the name of my wife only?
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Each year, there's an increase in the maximum amount of wages subject to FICA, Federal Insurance Contribution Act taxes. FICA taxes are better known as Social Security taxes. These payroll taxes also are matched by employers.
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Do you plan to file a paper return? Will you use an IRS forms package that includes a peel-off label with your name and address? Before you place the label in the name-and-address block of the return, check that the name and address are correct and make any necessary corrections on the label. If you have an apartment number that is not shown on the label, write it in.
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Q. Is it all right to include what I spend for lottery tickets with my itemized deductions for state taxes or charitable contributions on Schedule A of Form 1040?
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There is a special filing break for some widows and widowers. They may be entitled to the benefit of joint return rates for two years after their mate dies.
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Judging by e-mails from readers who are about to file returns for 2007, many filers want advice on whether to claim the standard deduction or to itemize on for outlays like real estate taxes. Itemizing pays off only when total itemized deductions surpass the standard deduction that you're entitled to claim anyway.
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Medical expenses are allowable only to the extent that they exceed 7.5 percent of adjusted gross income, the figure on the last line on the first page of the 1040 form. But the tax code allows freelancers, consultants and other self-employed persons to deduct 100 percent of what they spend on medical insurance premiums (including qualifying long-term coverage) for themselves and their spouses and dependents.
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The Social Security Administration announced that about 12 million workers are going to pay as much as an additional $279 in Social Security taxes during 2008. Those payroll taxes also are matched by their employers.
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Make sure to stay on top of the deadlines for filing federal tax returns and the due dates for making payments. Miss just one, and the IRS might exact a sizable, nondeductible penalty based on the agency's current interest rate for back taxes.
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A chance remark on a column about year-round tax savings has prompted a few skeptical if not downright cynical responses.
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The Internal Revenue Service's arsenal includes some tricky rules that can upset the plans of individuals who intend to make end-of-year payments to move deductions into 2007 because they are more advantageous this year than next. Contrary to what people scrambling for last-minute breaks prefer to believe, dating your checks "Dec. 31" does not automatically entitle you to claim the expenses for 2007, instead of 2008.
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Time is running out on your opportunities to save taxes for 2007. Here are some tips to guide you in your search for steps to take by Dec. 31.
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Tax planning involves a good deal more than just knowing which items are deductible. In plotting your moves, remember that timing the payments for your deductibles also has a bearing on the size of your tax bill. Advancing or postponing those payments by only a day at the end of the year can save you a bundle for this and future years.
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The Internal Revenue Service strictly limits what itemizers are able to claim on Form 1040's Schedule A for miscellaneous expenses. This wide-ranging category includes return-preparation charges, fees charged by financial planners, and unreimbursed employee business expenses, such as union and professional association dues.
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The Internal Revenue Service imposes several restrictions on deductions for investment-related expenses, such as subscriptions to publications that track the ups and downs of the stock market, rental costs of safe deposit boxes holding securities, and fees charged by financial planners and other advisers.
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It pays to spend a few hours plotting how to pick and carry out your end-of-year strategies. You'll be pleasantly surprised to find out how many perfectly legal opportunities you have to trim taxes for 2007 and even gain a head start for 2008.
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There are valuable tax breaks for volunteer workers who perform chores for religious institutions and other charitable organizations. Individuals who itemize their deductions on Form 1040's Schedule A can write off what they spend to cover unreimbursed out-of-pocket outlays.
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A good many of you might have to do some careful calculations to determine whether to base end-of-year strategies on claiming the standard deduction or on itemizing. When is itemizing for outlays like state and local taxes worthwhile? Only when total itemized deductions surpass the standard deduction that you are entitled to claim anyway.
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Generally, the tax code prohibits any deduction for a loss on the sale of a principal residence. But it authorizes several exceptions.
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In a package of proposals aimed at easing foreclosure worries for homeowners having trouble making their mortgage payments, President Bush called last week on Congress to temporarily make some borrowers exempt from a little-known tax that kicks debtors when they're down.
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Usually, the Internal Revenue Service does not challenge medical deductions if you are able to prove that the expenses are doctor-ordered. But as many taxpayers have learned the expensive way, doctors' recommendations are not automatic guarantees that the write-offs pass muster.
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Speak up if you receive a letter from the Internal Revenue Service notifying you that an appointment has been scheduled to audit the identical items that the agency examined in either of the two preceding years. Actually, you'll be helping the IRS, which wants to stop repetitive audits that waste time and money for all concerned and to cut down on complaints from taxpayers about being hauled in for an examination on the same issue year after year.
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The complicated "kiddie tax" rules drastically restrict the ability of higher-bracket parents and grandparents to shift investment income from themselves to their lower-bracket children and grandchildren by gifts of cash, stocks, mutual fund shares, real estate, money and other income-generating assets. Starting next year, revised rules further curtail opportunities for families to shelter investment income.
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There has been an inexorable increase in the number of homeowners struggling to meet their mortgage payments. They are unable find the funds to cover big boosts in monthly payments on loans taken out at low introductory rates and now reset at sharply higher ones.
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My daughter, Veronica, a director of curriculum development, is excited about a major freelance project she'll do in addition to her regular job. It will mean more money but, she also realizes, more taxes, including possibly having to make quarterly estimated tax payments.
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The tax laws authorize immediate relief for persons whose property is damaged or destroyed by natural disasters, such as the April 15 northeaster. But this relief is only for those who suffer serious property damage. What follows are answers to the most-often-asked questions by disaster victims.
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The tax code authorizes a big break for home sellers. There is an exclusion, meaning escape from taxes, of as much as $500,000 for married couples filing jointly and $250,000 for those who file single returns or are married and file separate returns for profit on the sale of a principal residence or main home. To qualify, sellers must own and use the property as a principal residence for at least two years out of the prior five years that end on the sale date.
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An increasing number of individuals run afoul of the AMT, short for alternative minimum tax, mostly because it disallows state and local income and property taxes, whether on income or on year-round residences, second homes or other kinds of real or personal property.
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Individuals who itemize on Schedule A of the 1040 form are allowed to deduct real estate and personal property taxes. But those write-offs come with strings attached on which ones qualify, when they are deductible and how much is allowable.
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Stop before you drop a check to the Internal Revenue Service into the mail. Follow these tips to protect your bank account and save yourself the aggravation of trying to track down a misplaced payment.
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Question: I am an architect and moonlight as a freelance writer. I went to a get-together with some of my fellow writers. There was no speaker; it was more of a social event. While I see it as networking with my professional colleagues, and most of the talk was about work-related issues, writing is only a part-time activity for me. Can I take a business-expense deduction for the cost of getting there on Schedule C (Profit or Loss From Business) of Form 1040? How about my cash contribution to the refreshments for the group?
Answer: It is immaterial that you are a part-time freelancer. Your writing endeavors do not have to be full-time for this kind of event to qualify. You are entitled to claim the entire cost of round-trip travel between your home and the party's site. For travel by bus, train or taxi, just keep track of your fares and claim them as business expenses; for auto travel, you can claim actual expenses or a standard mileage allowance.
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Question: Who is right? I have office furniture and machines that I no longer use in my business as a consultant. Over the years, I claimed depreciation deductions on Form 1040's Schedule C (Profit or Loss From Business) that have reduced my tax basis in the equipment to zero. My tax adviser says that I can donate these items to a charitable organization and take a contribution deduction for their current market value. However, my mother-in-law insists that I am not entitled to any deduction because I fully depreciated them.
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Question: I am a self-employed freelance writer who traveled from my New York home to Chicago to attend a writers' conference. I'm pretty sure that I'm entitled to claim some deductions, but what sorts of expenses can I deduct, and can I deduct them totally?
Answer: You get to deduct 100 percent of what you spend for the attendance fee, tapes of sessions and the like, plus travel between your home and Chicago, and expenditures for hotels. There's a limitation, though, for meals not covered by the attendance fee, including both what you eat en route and food consumed while you're in Chicago: Deduct only 50 percent of those expenditures.
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Question: I am a self-employed writer and have authored fiction and nonfiction books. Presently, I am represented by two agents --- one for nonfiction and another for fiction. Under my agenting contracts, each gets a percentage of my earnings.
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Anna Escobedo Cabral knows what it is like to be poor. The 47-year-old treasurer of the United States grew up in San Bernardino, Calif. The eldest of five children, Cabral said her dad moved from job to job -- picking up garbage, working in the laundry room at a mental institution, toiling as a fry cook and finally as a chef.
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Only a few weeks into the tax-filing season, the Internal Revenue Service says consumer returns are already riddled with errors as the result of a new and tricky telephone-tax refund.
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Question: We filed jointly and then divorced. Now my former husband threatens to disavow our joint return and file a separate return. Can he get away with forcing me to pay more taxes?
Answer: Relax. It is too late now for him to switch from filing jointly to separately.
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Question. My divorce decree freed me from my ex-husband's obligations. But I continue to use a physician who also treated my ex-husband before our split, and I consider myself obligated to take care of his unpaid bills. If I pay these bills, do I provide him with an undeserved tax break?
Answer. Not at all. Medical expenses that were incurred by your ex-husband while married to you are deductible by you, though you make the payments after you divorce him and even if you have since remarried and are filing jointly with another husband. Ex-husbands, deserving or undeserving, get no tax break for medical expenses paid by ex-wives.
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Question. My daughter receives child-support payments from her former husband. What are the tax rules?
Answer. She does not have to report them, and he cannot deduct them.
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Question. The main income sources for my husband and me are our salaries. I just began a new job that pays a good deal more. How does that affect our taxes?
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To cut down on arithmetic errors, the Internal Revenue Service allows rounding off figures to the nearest whole dollar, provided you do so for all entries on your return and accompanying schedules like Schedule A for itemized deductions. This means that you drop amounts under 50 cents and increase amounts between 50 and 99 cents to the next dollar. For instance, $115.32 becomes $115.00 and $115.50 becomes $116.00.
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Did you know that the tax code allows you to claim tax deductions for household damage caused by thefts, vandalism, fires, floods, hurricanes and others kinds of casualties? But the law imposes several restrictions.
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It's important to stay on top of the deadlines for filing federal returns and the due dates for making payments. Overlook just one, and you might incur a severe, nondeductible penalty.
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The tax laws allow deductions for casualty and theft losses. But the rules twist and turn on who can claim losses and how much is allowable.
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Estate planning is important for the steadily mushrooming number of individuals whose homes and other assets have been swelled by decades of inflation. But it is difficult for individuals who own sizable amounts of property to choose and implement strategies to reduce taxes on their estates.
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Many of you might have to do some precise calculations before you are able to determine whether to base year-end strategies on claiming the standard deduction or on itemizing. The test for when itemizing is worth the record keeping: Only when total itemized deductions surpass the standard deduction that you are entitled to claim anyway.
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Eye the calendar carefully if you intend to claim deductions for medical expenditures that are not covered by insurance, reimbursed by your employer or otherwise satisfied. Your tax strategy depends on the amount of medical payments that you have already made and how much you expect to report as AGI, short for adjusted gross income, the figure listed on the last line of page one of the 1040 form.
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Investors who want to maximize deferral possibilities generally should avail themselves of traditional IRAs and other tax-deferred retirement plans to hold taxable bond funds or equity funds whose managers trade frequently, incurring short-term gains (top tax rate of 35 percent for interest and short-term gains). Consistent with that approach, investors ought to use taxable accounts mostly to hold shares of mutual funds that generate dividends and long-term capital gains (top tax rate of 15 percent).
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Planning to buy a new home around year's end? Try to wrap things up by Dec. 31. The reward for meeting that deadline is a deduction for this year if you have to finance the purchase with a mortgage loan on which you pay "points."
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Most employees can do little to control when they report their salaries. According to what are known as the "constructive-receipt" rules for reporting income, you are considered to have received your salary as soon as it is made subject to your control or set aside for you. It is immaterial that you choose not to take it. Therefore, paychecks that arrive in Dec. count as taxable income this year.
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Life insurance can protect your dependents in case of your premature death and provide liquidity to your estate. At some point, though, you may have accumulated sufficient liquid assets so that an existing life insurance policy no longer is necessary.
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In summertime the living may be easy. But for working parents, it's far from cheap.
Each year after school lets out, millions of children attend thousands of summer camps so their parents can have day care. The cost can easily run into the thousands of dollars.
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Do small investors ever get a free lunch on Wall Street?
The answer is actually yes, although we'll have to wait until 2008, 2009 and 2010. Thanks to a new tax law, we won't have to pay federal income taxes on stock dividends and long-term capital gains those years, provided we stay at least within the 15 percent tax bracket.
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Q. The Internal Revenue Service wants to audit my return. At the time I filed it, I lived in a different state. Must I return to that state for the examination?
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Surveys repeatedly show that taxpayers do not know a whole lot about fundamental terms and concepts. Our national unawareness prompted these observations in an article titled "Form 1040 - What's a Form 1040?" that appeared in the New York Times on April 11, 1993, just several days before the annual filing deadline: "The country is suffering from a massive case of tax illiteracy that goes beyond the inherent complexity of the system and cuts across every economic and educational stratum."
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The law makes it difficult to deduct medical expenses not covered by insurance or otherwise satisfied. Those expenditures are allowable only to the extent that their total in any one year exceeds 7.5 percent of adjusted gross income.
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Recent law changes include valuable breaks for a wide range of small businesses. What follows are the highlights of several good-news provisions.
Health Insurance Deductions for the Self-Employed. Self-employed individuals can deduct 100% of their payments of medical insurance premiums for themselves and their spouses and dependents.
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The expense of moving is no small matter these days. But if the move is job-related and not covered by your employer, you can get some of its cost back through reduced taxes - provided you meet the tests set by the IRS.
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Not everyone needs to file a federal income tax return. Many students, seniors and low-wage workers simply don't earn enough to have to file.
As the federal filing deadline nears, the thought of being able to skip that chore might come as a relief.
But you might want to file anyway - even if you don't have to.
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Dan Schuessler didn't plan to run a small business. He has a full-time job at Intel. But the 28-year-old found a good deal on shoes one day and was convinced that he could resell them at a profit on eBay.
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A reader reminds me of a potential pitfall of IRA conversions.
Q: I've read a few articles, including yours, about the benefits of converting a traditional IRA to a Roth IRA. I did this last year (converted just enough to stay in the 15 percent tax bracket) but now it seems I'll be paying a penalty because of not making estimated tax payments.
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Enough time has passed that most of us have mercifully recovered from the mind-numbing task of filling out and filing our federal income tax returns.
Now, I'm going to commit what seems like the ultimate act of mental cruelty by asking you to dig out the return you already filed and take another look.
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When a marriage is on the rocks, most Americans know they need a good divorce lawyer. Far fewer know they also need good tax counsel.
Many people assume a divorce is a tax-free event. Under Federal tax law [Code Section 1041], they are technically right - the splitting up of assets is tax free. But all too often, the trap has been baited for future tax liabilities.
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When you buy bonds in today's low-interest-rate environment, every bit of interest is important to you.
So beware of buying municipal bonds that you believe are tax free when in fact they are subject to the alternative minimum tax (AMT).
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Despite recent reports of abusive tax shelters, some shelters have the explicit approval of the federal government. They not only permit you to cut your taxes, they also serve a purpose that Washington deems worthwhile.
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Year-end holidays may have you thinking about contributing to your favorite causes. With some savvy planning, you can enjoy substantial tax savings?so you can do well while doing good.
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Are you one of the 97 million people who buy and sell items on eBay? If so, you had better know how to report your activities on your return.
No matter how much you make, you must report income. But if your selling is a full- or part-time business, you can also claim losses and some expenses.
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You Can Still Rescue Big Deductions. A lack of records proving your business expenses when an IRS auditor asks for them need not be fatal to those deductions.
If you can show that the expenses must have been incurred, they may remain deductible under the "Cohan rule" named after the famous Broadway producer George M. Cohan and the case in which he was able to deduct his expenses although he had not kept records to prove them.
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As with estate planning, there are important, and often complicated, tax issues that need to be handled in the wake of the death of a spouse. In this section we will look at:
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How can anybody keep up? In the past year alone, our tax code grew by more than 5,000 pages, with major congressional legislation revamping the bankruptcy process and offering tax incentives to conserve energy and tax relief to hurricane victims.
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The IRS allows deductions for household goods, homes and other kinds of property lost or damaged because of burglaries and vandalism. Ditto for casualty losses, provided they are caused by identifiable events that are "sudden, unexpected or unusual," such as fires, floods and hurricanes.
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Q. Do I get the full exemption for a child born late in 2005?
A. Yes, even if your child was not on the scene until Dec. 31. This is also true even when a child lives only for a moment. Whether a child is born alive depends on state law. There must be proof of a live birth shown by an official document, such as a birth certificate. Back in 1973, the Internal Revenue Service came out with a ruling that barred an exemption for a stillborn child (Revenue Ruling 73-156.)
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Our tax laws are usually spelled out precisely; it's real-life situations that don't always fall conveniently into place. For instance, there is a mile-wide definition of income that entitles the Internal Revenue Service to share in "all income from whatever source derived," including payments that are "compensation for services." On the other hand, the term "income" doesn't include gifts.
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As a general rule, you have to pay taxes on all of your income -- whether from wages, investments, or other sources. However, the money you receive from certain sources does not count as taxable income. What follows is a list of some forms of income that entirely or partially sidestep taxes.
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You have lots of company if you think continuous changes in the tax laws make your Form 1040 too complicated to handle without the help of a paid preparer. According to IRS estimates, more than half of all taxpayers (more than two thirds of those who file the 1040 form, the more complicated long form) hire someone to handle the annual chore.
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Q. I thought that I had paid my taxes, and I've received a notice from the Internal Revenue Service saying I owe more. How can that be?
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Are you one of those taxpayers who think of the Internal Revenue Service as an insatiable beast that feasts on all of their income? Take heart. As a general rule, the law does authorize the Internal Revenue to cut itself in for a share of each dollar of your income, whether from earnings, investments, or what have you. But you should be aware that no taxes are due on a lot of the income that people receive. Knowing the more common exceptions may help to ease the tax bite when filing time rolls around. Here are reminders on some forms of income that completely or partly escape taxes.
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In general, you are taxed on income from jobs, savings, investments and most other sources. There, are, however, exceptions; counting them as income will cost you valuable dollars. Here are some items that remain beyond the reach of the Internal Revenue Service.
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Many refund delays, time-consuming correspondence and audits are triggered by taxpayer carelessness. Here are some IRS reminders about items to check in advance of filing your return, along with some steps to take afterward.
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Many millions of people needlessly overpay their taxes year after year, with the feds getting wealthier as a result. Here are some IRS-blessed ways to make sure you lose no more to taxes than legally required.
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Before your business is operating, your expenses aren't deductible. Therefore, when you start a new business, don't hesitate. Go into operation as quickly as possible.
The "best case" for expenses incurred before you're in business is an election to amortize such costs over no less than 60 months. This election must be made on the company's first tax return.
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You might be contacted by the IRS if:
Income reported on your tax return doesn't match the amounts that are reported on 1099 and W-2 forms.
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Are you one of those taxpayers who think of the Internal Revenue Service as an insatiable beast that feasts on all of their income? Take heart. As a general rule, the law does authorize the Internal Revenue to cut itself in for a share of each dollar of your income, whether from earnings, investments, or what have you. But you should be aware that no taxes are due on a lot of the income that people receive. Knowing the more common exceptions may help to ease the tax bite when filing time rolls around. Here are reminders on some forms of income that completely or partly escape taxes.
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