1. File electronically. You are less likely to make mistakes - if there are inaccuracies, the form will not be accepted. And if you are owed a refund, typically you will receive your refund much quicker than filing the old fashioned way.
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Best time to give investments to a child or grandchild: A child age 14 or older may pay as little as 5% tax on long-term capital gain assets (such as stock shares)-compared with the 15% maximum. So giving such assets to a child to cash in may slash the family's tax bill on them. Snag: If the child hopes to obtain college financial aid, giving assets to him/her may cause a loss in eligibility for aid that exceeds any taxes saved. Timing: Give the assets after his second semester of the junior year of college-after the final college financial aid form has been filed.
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You may lose your deductions for genuine gifts to charity if you fail to meet IRS documentation requirements. Key rules...
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The cost of long-term care is going through the roof. The average cost of a stay in a nursing home now exceeds $74,000 a year. Even in-home care can be very expensive.
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Worthless securities and bad debts. These are deductible in the year they go bad-but you can file an amended return to deduct them seven years back, instead of only the normal three years.
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Make a bequest to charity through life insurance. Leaving a bequest to charity through your will reduces your estate's assets and leaves less for heirs-which may be costly to them if the bequest is made after a period of poor investment returns.
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You can still reduce your 2003 tax bill even though the year is over. To get as large a refund as you can, use these smart tax-saving filing ideas...
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The IRS has special rules for hobby collectibles such as antiques, photographs, artworks, coins and stamps. Long-term gains on items held more than one year are taxed up to 28% instead of the normal 15%. Expenses are deductible against hobby income, such as from sales of items in the collection, but a net loss cannot be deducted. Important: Gain is calculated from your "basis" in an item-its cost to you for tax purposes. If you bought the item, its basis is the price you paid for it plus any other amounts spent on restoring it.
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From work or investments - through family members - after retiring outside the US - many Americans have income earned abroad.
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Inflation might be around 3% per year on average, but that's certainly not true for health insurance. In 2004, employer-sponsored health insurance premiums rose by 11.2%, the fourth straight year of double-digit increases, and this streak likely will be extended.
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The best charitable gifts are of appreciated long-term capital gains property, such as stock shares or collectibles. That's because you get a deduction for their full value while avoiding ever paying capital gains tax on their appreciation (such as if you sold them and then donated the cash proceeds).
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The market for historic buildings has heated up. This is partly because of the "new markets credit" created by the federal Community Renewal Tax Relief Act of 2000, intended to encourage development in low-income communities. This credit, when combined with federal and state credits for rehabilitating historic structures - plus the potential for capital appreciation - makes investments in historic properties highly attractive.
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Marrying creates a tax situation that can either increase or decrease taxes significantly.
Marital status on the last day of the year applies for tax purposes for the entire year. This means that late-in-the-year marriage can have a retroactive effect - changing tax bracket rates and available deductions for the entire year.
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Hurricane Dennis, Hurricane Emily, and more on the way. Blizzards, floods, tornadoes, mudslides, and wildfires. Catastrophes of this kind prompt the federal government to declare the hardest-hit parts of the country "disaster areas" - places that qualify for federal assistance under the Disaster Relief and Emergency Assistance Act.
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Will the federal estate tax be repealed?
Will the estate tax exemption be increased?
Will the estate tax exemption be rolled back from today's $1.5 million to the $1 million level specified under prior law?
In truth, nobody knows. Even if Congress passes a "permanent" change tomorrow, a future Congress can enact yet another change in the federal estate tax law.
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The cost of education keeps going up faster than the rate of inflation, but Congress has created new tax breaks to help with education expenses.
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Holding assets - such as bank accounts, securities, or real estate - jointly is common, especially among married couples. Joint ownership also may be used by cohabitants and elderly individuals who want a younger person to be able to pay bills, handle investments, etc.
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Many parents want to help their children buy a house, start a business, or meet some other need for cash. Sometimes, a loan is more practical than an outright gift.
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The alternative minimum tax (AMT) sets a big trap for those who exercise incentive stock options (ISOs) to buy stock shares at a discount.
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The alternative minimum tax (AMT) increases the tax bills of a growing number of taxpayers every year - often as a costly surprise.
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How to make a Freedom of Information Act request most effectively.
Suppose you believe that the IRS agent assigned to your case has reached the wrong conclusion and you want to know what information he/she has in the case file. The IRS, by law, must provide an audited taxpayer with all the information in his file, with the exception of matters related to a criminal investigation. This information will help you formulate a defense when challenging the auditor's conclusion at the Appeals Division, since you will get a good idea of what the agent knows for a fact and what he can only assume. Strategy: Wait until the agent has closed the case before making your Freedom of Information Act request. Reason: Making the request sooner might inspire the agent to embellish the workpapers or spend extra time on your case.
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Tax law allows nondeductible contributions to regular IRAs. Earnings won't be taxed until the money is withdrawn, which generally occurs in retirement when the owner is in a lower tax bracket.
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As baby boomers age, so do their parents. In many cases, middle-aged children will help support parents or other elderly loved ones - and those costs can be extensive.
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If you're self-employed or run your own company, you have considerable leeway in setting your business travel plans. With some forethought - and a great deal of diligent record keeping - you can legitimately convert leisure travel costs into tax-deductible business expenses.
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When an IRA has more than one beneficiary, the general rule is that the life expectancy of the oldest determines the schedule of minimum required annual distributions for all - the IRA balance must be paid out over that person's life expectancy.
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For the millions of disabled taxpayers in the country, the tax law provides financial assistance through special deductions, exclusions, and credits. The taxation of benefits received by disabled persons, however, is inconsistent and confusing.
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Tip reporting is now an enforcement priority of the IRS, so both businesses and individuals alike should take extra care to ensure that tips are reported properly.
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More than 61 million Americans filed their personal tax returns electronically last year. More will do so this year - and you may want to join them, if you haven't already.
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The use of exchange-traded funds (ETFs) is soaring. Just five years ago, there were only about 35 ETFs. Now, there are more than 300, representing many types of securities, so investors can put together a diversified portfolio of ETFs. Or, ETFs may be used to fill out a portfolio that includes other, more traditional investments.
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Pitfall of running a cash business. Countless business owners operate without keeping any records whatsoever, even canceled checks - because they simply don't use checking accounts. Contractors who deal exclusively in cash are the worst offenders. If they are audited by the IRS, the IRS will reconstruct gross income by contacting customers, then charge tax on that income, plus interest and penalties. Safest: It's your responsibility to substantiate business expenses with receipts and canceled checks. Exception: The IRS generally allows reasonable estimates of materials and labor costs, but not other costs, such as rent, office expenses, insurance, and telephone, which usually can be substantiated.
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College savings plans, such as Coverdell Education Savings Accounts (ESAs), 529 plans, and Uniform Transfers to Minors Act (UTMA) accounts, all offer tax-favored treatment for college savings. But a study released in 2004 shows that they actually can do more harm than good.
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Not only do states have different income tax rates, they also have different rules for taxing capital gains. If you move to:
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Your IRA may wind up being one of your largest assets, if not the largest. You probably won't accumulate a huge amount from $4,000 or $4,500 annual contributions (the current limits, depending on your age).
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There's no way to guarantee that your return will escape IRS scrutiny. But whether you operate your business as a sole proprietorship, limited liability company, or S or C corporation, there are steps you can take to sharply cut the risk of an audit.
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It's now possible to use mediation in tax disputes with the IRS to speed resolution at lower cost. But while mediation may be helpful in many cases, it's not always a good idea.
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The $14.5 billion in tax breaks from the new energy law will mainly benefit corporations, but home owners and car buyers can save hundreds to thousands of dollars, too. The catch is that you need to spend the money soon.
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When a stock becomes worthless, you can claim your entire purchase price as a loss for tax purposes. Report the loss on Schedule D as if you sold the stock on December 31 of the year it became worthless. If a stock became worthless and you did not report it at the time, you will have to file an amended return to claim the loss in a later year.
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Families paying for special education may now be able to deduct as a medical expense the cost of having learning-disabled children educated in a special program within a regular school, according to a recent IRS private letter ruling. Many people believe that costs such as tuition are deductible medical expenses only when a child attends a special education school. Private letter rulings are not general IRS policy, so this decision may not apply to all cases. Consult your tax adviser.
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Mutual fund tax saver: Many funds have tax loss carry-forwards that can be used to offset their future capital gains, reports fund tracker Don Philips. Ordinarily, investors must pay tax on these gains each year, even if they don't sell their shares. If your fund has losses carried forward, you might not have to pay tax on net gains for years. To check a fund's tax losses, go to www.morningstar.com, search for the fund by the ticker symbol, then click "Tax Analysis." A minus symbol denotes a loss.
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Fighting the IRS in court can be daunting, yet some people do prevail. Here are the most important recent taxpayer victories...CHARITABLE CONTRIBUTIONS.
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Be sure to claim child tax credits when preparing your taxes. Many families don't know that they may be eligible for thousands of dollars in tax credits and/or refunds. The federal Child and Dependent Care Credit can be worth up to $2,100 per year. The Child Tax Credit can be worth $1,000 per child per year. Families earning less than $35,458 annually also may be eligible for the Earned Income Tax Credit. This credit is worth up to $4,300 this year.
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Monies received in a medical malpractice case are tax-free, while awards for wrongful termination or other civil actions are taxable. Legal fees to obtain a personal injury award are not deductible. Legal fees in a workplace action are deductible.
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To claim tax deductions for the care of elderly parents or other relatives, you must be able to claim them as dependents.
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Consumers must pay sales tax on Internet purchases, says tax expert Bob Scharin. States require you to total all the sales tax that you avoided during the calendar year when you ordered on-line and then pay that tax (referred to as "use tax") when filing your state income tax return. Keep a record of your receipts.
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Tax benefits of cash-value life insurance: Once you have built up enough value in a policy, you can withdraw your premiums tax-free. When you die, your heirs don't pay income tax on the years of tax-deferred growth. If the policy on your life is owned by your children or a life insurance trust, it should be free from estate taxes as well.
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There's no place like home under the tax code. If you own a home - even a vacation home - and rent it out each year, you can claim all kinds of tax breaks. Here's a rundown:
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Best child-care tax break is a flexible-spending account (FSA) through your employer. The alternative - the 20% child-care credit - does not save as much money. Even if you are in the 15% tax bracket, money that goes through an FSA avoids the 7.65% Social Security and Medicare tax, for a total saving of 22.65% - and the tax savings comes every month.
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Limit your tax hit on a big windfall - such as a lump-sum early retirement payment - with a deferral agreement, in which the company pays out the money to you over a period of time. Many companies will agree to this.
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Taxes are not due on April 15 if you have the IRS do the calculations for you. Send in your return with all relevant figures properly recorded but leave blanks in the spaces to show your tax bill for the year and to reconcile it with withholding. The IRS then will take at least 30 days - possibly longer - to figure your tax and tell you what you owe. When you get the bill, you have an additional 30 days to pay it without interest or penalties.
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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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