CPA Rockvile

Oops! H&R Block screws up

Eric L. Bach, CPA - Professional Tax Preparer - Rockville, MDA tax-preparation software glitch caused more than 600,000 returns to be filed incorrectly, delaying refunds by as much as six weeks, the IRS says.

H&R Block, the nation’s largest tax preparer, confirmed that its software failed to fill out a mandatory field on Form 8863, which is used to claim educational credits.  The IRS would not say what percentage of the roughly 600,000 faulty returns came from H&R Block, but the company received thousands of complaints on its Facebook page and on Twitter.  An Internet search did not yield similar complaints against other tax preparers.

The snafu is affecting about 10% of the 6.6 million tax returns containing Form 8863, IRS spokeswoman Michelle Eldridge says.  Those taxpayers may have to wait six more weeks before they receive their refunds, she says, adding that the IRS is hoping to reduce that wait time.

H&R Block confirms there is an issue with tax returns filed before Feb. 22 because the IRS changed the way it processes some of the yes or no questions on the form.  While in previous years, leaving a field blank to indicate “No” on certain questions was acceptable, the IRS is now requiring preparers to enter an “N.”  As a result, H&R Block says, it is working with the IRS to clear these errors, but the company would not give details on how it is correcting returns or exactly how long taxpayers will have to wait for their refunds. The IRS says it is able to keep processing these returns now that it is aware of the system-wide error, but that affected taxpayers will still face delays because of extra steps needed to correct the issue.

The error is creating delays for taxpayers who, following the fiscal-cliff deal, already had to wait an extra two weeks before filing their returns, many of whom were counting on their refunds to pay their bills.

Leslee Napier, a 26-year old nursing student in Princeton, Ind., prepared her return with H&R Block on Jan. 24 so that it would be one of the first returns accepted on Feb. 14, when the IRS began processing forms for education credits.  But weeks after her return was supposed to be accepted, the “Where’s My Refund” tool on IRS.gov said her return was still being processed. It wasn’t until more than three weeks after her return was supposed to be accepted that an IRS agent told Napier her return was being held because of issues with Form 8863 and that it might be four more weeks before she receives her refund.  “I was worried all this time that I did something wrong or that I was being audited,” says Napier, who is waiting on her refund to pay off a $600 line of credit she opened with H&R Block in December to get her through the holidays.  Meanwhile, interest charges are piling up, she says, and she is waiting to catch up on bills and buy new clothes for her 2-year-old daughter.

For students, the delays come at a time when many are facing state deadlines for applying for financial aid: the Free Application for Federal Student Aid, the form for applying for federal financial aid, requires tax information.  Elizabeth Havens, a student in South Carolina, says she took a copy of her return to her school so that she could move ahead with her financial aid application while she waits for IRS approval.

Students still waiting on their returns to be processed can manually enter their financial data on the FAFSA and then return to update the information once their returns have been accepted, according to the IRS.

Maybe you should look for a BETTER tax professional.

Posted in CPA Rockvile

Don’t miss out on these Tax credits and deductions

Eric L. Bach, CPA - Rockville, MDThe IRS expects that 75 percent of all 2012 returns will be entitled to a refund, so if you haven’t started preparing your taxes yet, time to get on it: There is no reason to wait for April 15 to roll around to get that money back from Uncle Sam.  And remember: If you do not file your return by the due date, you may have to pay penalties and interest.  Even if you can’t meet the deadline, you can file for an extension, which will give you until October 15 to file your 2012 tax returns.

UPDATES for 2012:

  • The IRS is providing taxpayers whose incomes are $57,000 or less with “Free File“,  available through IRS.gov, where a number of tax software companies make their products available for free.  Additionally, some states are offering similar options.  Electronic e-filing is available to all taxpayers, regardless of income.
  • Mailing your return: If you are filing a paper return, you may be mailing it to a different address this year because the IRS has changed the filing location for several areas.  See Where To File for a list of IRS addresses.
  • Exemption amount: $3,800 from $3,700 in 2011.
  • Standard deduction: For married couples filing a joint return, the standard deduction is $11,900 for 2012.  For single individuals and married couples filing separate returns, it is $5,950 and for heads of household it increases by $200 to $8,700 for 2012.
  • Tax-bracket thresholds increase for each filing status.  For a married couple filing a joint return, for example, the taxable-income threshold separating the 15% bracket from the 25% bracket is $70,700, up from $69,000 in 2011.
  • Estate and gift tax: The exclusion amount for 2012 is $5,120,000.  The exclusion for gifts to a spouse who is not a citizen of the United States increases to $139,000 for 2012.
  • Itemized deductions and personal exemptions: The itemized deduction limitation and personal exemption phase-out rules were repealed for 2011 and 2012, which means taxpayers can deduct the full amount of their itemized deductions and personal exemptions in 2012.  These limitations ($250,000 for individuals and $300,000 for joint filers) will go back into effect for tax year 2013

Get ALL your Credits:

Tax credits are the best tax deal going, because they reduce your taxes dollar for dollar, instead of being calculated based on your tax bracket.

Earned Income Tax Credit (EITC) is a refundable credit for low and moderate income workers and working families.  The 2012 income limit for the EITC is under $50,270 for joint filers and under $45,060 for singles and the maximum credit is $5,891.  The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.  Use Schedule 8812 to figure your additional child tax credit for 2012.  (Details are in IRS Publication 596 — PDF)

Child Tax Credit is up to $1,000 for each qualifying child who was under the age of 17 at the end of 2012.  This credit can be claimed in addition to the credit for child and dependent care expenses, but phases out for married couples that earn more than $110,000 and single filers who earn more than $75,000.  In an IRS-esque type move, taxpayers should use Schedule 8812 (instead of Form 8812) to figure the additional child tax credit.  (Details are in IRS Publication 972 — PDF)

Child and Dependent Care Credit is available if you pay someone to care for a dependent under age 13, so that you can work or look for a job.  The credit is 20 to 35% of your child-care expenses up to $6,000 (the size of your credit depends on your income). This credit will be reduced significantly next year.  (Details are in IRS Publication 503 — PDF)

Retirement Savings Contributions Credit is designed to help low and moderateincome workers save for retirement. Individuals with incomes of up to $28,750, head of households with $43,125 and married couples with joint incomes of up to $57,500 may qualify for a credit of up to $1,000 per person.  (Details are in Form 8880 — PDF)

Energy and Appliance Tax Credit If you made any energy-efficiency improvements to your home in 2012, you may be eligible for a tax credit of 10 percent for the cost, up to a maximum of $500.  Approved improvements include new windows, insulation, high efficiency furnaces, water heaters and air conditioning, among many.  Be sure to keep your receipts and manufacturer certification.  (See which Energy Star items qualify for the tax deduction and use IRS Form 5695)

Adoption Tax Credit in 2012 has reverted to being nonrefundable, with a maximum amount (dollar limitation) of $12,650 per child from $13,360 in 2011.  The income limit on the adoption credit is based on your modified adjusted gross income (MAGI).  For tax year 2012, the MAGI phase out begins at $189,710 and ends at $229,710.  (IRS Topic 607)

College Costs

American Opportunity Tax Credit:
For tax year 2012, students can claim a $2,500 “higher education tax credit” for the first four years of college.  The credit is based on 100 percent of the first $2,000 of tuition and related expenses, including books, paid during the tax year, plus 25 percent of the next $2,000 of tuition and related expenses paid during the tax year (subject to income phase-outs starting at $80,000 for singles and $160,000 for joint filers).

Lifetime learning credit: The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.

Tuition and fee deductions: Every family can deduct up to $4,000 of college tuition and fees in 2012, subject to income limitations.  If your modified AGI is between $65,001 and $80,000 for singles or between $130,001 and $160,000 for joint filers, you are entitled to a reduced deduction of up to $2,000.  (IRS Publication 970)

Student loan interest deduction: The $2,500 maximum deduction for interest paid on student loans begins to phase out for a married taxpayers filing a joint returns at $125,000 and phases out completely at $155,000, an increase of $5,000 from the phase out limits for tax year 2011.  For single taxpayers, the phase out ranges remain at the 2011 levels.

Itemized Deductions:
Nearly two out of three taxpayers take the standard deduction rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.  You may be leaving money on the table.  If your deductible expenses exceed the 2012 standard deduction limits above, be sure you itemize and grab these write-offs.

Miscellaneous deductions: These are deductible if they total more than 2 percent of your adjusted gross income.  They include tax-preparation fees, job-hunting expenses, business car expenses, and professional dues.

Sales tax: You can deduct sales tax paid in 2012 if the amount was greater than the state and local income taxes you paid.  In other words, you get to choose: Write off your sales taxes or write off your income taxes.  If you didn’t keep your sales-tax receipts, use the IRS’s sales tax deduction estimator.  Even if you claim the sales tax amount from the IRS tables, you can add in tax paid on vehicles or boats purchased during the year, except to the extent the sales tax rate on them is more than the general sales tax rate.  If you live in a state with a high income tax, like California or New York, you will probably be better off claiming your state and local income taxes rather than sales taxes.  If you live in a state with no income tax, like Florida, Texas, or Washington, be sure to take the sales tax deduction when you itemize.

Medical expenses: This one is hard to claim, because the bar is so high to qualify. You can only deduct the portion of your 2012 medical expenses that exceed 7.5 percent of your adjusted gross income.

Mileage: Deducting miles driven for work or other purposes can be a huge tax break and save you significant money.  The 2012 rate for business use of your car remains 55.5 cents a mile; medical and moving is 23 cents per mile; and charitable use is 14 cents per mile.

Mortgage insurance deduction: Borrowers with AGI’s up to $100,000 may be able to treat qualified mortgage insurance as home mortgage interest, which means that 100 percent of 2011 premiums may be deductible.  The insurance contract had to be issued after 2006 and deductions are phased out in 10 percent increments for homeowners with AGI’s between $100,001 and $109,000.  (IRS Publication 936)

Classroom deduction for teachers: K-12 educators who work at least 900 hours during the school year can claim an above-the-line deduction of up to $250 ($500 if married filing joint and both spouses are educators, but not more than $250 each) for any un-reimbursed expenses (books, supplies, computer equipment (including related software and services), other equipment, and supplementary materials) used in the classroom.  (IRS Topic 458)

IRA/Roth Conversion

When you contribute to an individual retirement account, you help fund a future goal while lowering your current tax bill.  In other words, socking cash in an IRA is like saving with help from your Uncle Sam.

You have until tax filing to contribute up the lesser of your taxable compensation for the year or $5,000 to a 2012 IRA ($6,000 if you are 50 or older).  If you are self-employed, have a Keogh or SEP-IRA, and have filed for an extension to October 15, you can wait until then to put 2012 money into those accounts.

Even if you’re covered by a retirement plan at work, you can deduct some or all of your IRA contribution.  The 2012 IRA limits for modified AGI as follows:

  • More than $92,000 but less than $112,000 for a married couple filing a joint return or a qualifying widow(er)
  • More than $58,000 but less than $68,000 for a single individual or head of household, or
  • Less than $10,000 for a married individual filing a separate return.

For married couples filing a joint return, in which the spouse who makes the IRA contribution is not an active participant in an employer-sponsored retirement plan but the other spouse is a participant, the deduction is phased out if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000 in 2012.

Charitable donations from IRA’s: Taxpayers aged 70 1/2 or older can make direct tax-free transfers of up to $100,000 from IRAs to qualified charities.  The transfers can satisfy minimum required distributions without increasing adjusted gross income.

Roth IRAs

Roth IRAs allow taxpayers to invest money for future retirement needs.  Unlike a traditional IRA, there is no current tax deduction available for contributions to a Roth and all funds within the Roth IRA compound tax-free and all withdrawals from the account are also tax-free.  To qualify to contribute to a Roth, your income must fall within the Modified Adjusted Gross Income (MAGI) limits. The 2012 limit for 2012 is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000.  For single taxpayers, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000 in 2011.

Roth conversion: If you converted or rolled over an amount to a Roth IRA in 2010 and did not elect to report the taxable amount on your 2010 return, you generally must report half of it on your 2011 return and the rest on your 2012 return.  (See Publication 575 for details)

Posted in CPA Rockvile

Prepare to pay if you don’t file – Ghost Returns

Eric L. Bach CPA - Rockville, MDWHEN confronted by a letter from the Internal Revenue Service, some people look at is as though they’ve seen a ghost.  BOO!

And when they open certain letters, a few people do see a ghost — or, more accurately, the ghost of a tax return.

When the IRS detects that a person had reportable income but did not file a return, even after much cajoling, it steps in and does the job itself.  Based on what it knows, the agency prepares what it calls a “substitute for return”, a Form 1040 (the generic tax return).  It lists income, calculates the tax due, adds interest and a penalty for failing to file, and sends the recalcitrant taxpayer a bill based on its efforts.

In one way, that may be a relief to procrastinators who just didn’t get around to filing, perhaps for years.  But it often comes at a VERY high price.

Substitute returns are really no substitute for ones that taxpayers could have filed themselves.  That’s because the IRS uses data from only the income side when it creates such a return, which means that it doesn’t include all kinds of items that might offset that income, according to Julian Block, a tax lawyer in Larchmont, N.Y.

The IRS works from W-2 reports of wages paid, filed by employers, and reports of payments to self-employed people from companies that used their services.  The agency also uses reports from financial institutions about interest and dividends paid and reports from brokers about assets sold.  All these things are taxable income.

For self-employed people, in particular, there is often a big disparity between payments received and taxable income, because much of what they receive goes for supplies or salaries or other expenses.  But the IRS will know only the gross payment, and will plug that figure into its return.  It does not even know about the original cost of assets that were reported sold.

In other words, the IRS does not include many of the deductions to which a non-filer may be entitled.  But this doesn’t mean that the IRS is being mean or vengeful or evil.

The IRS is candid that it does not even look for deductions.  In a fact sheet in what it calls the “tax gap” series on its Web site, the IRS warns that a substitute return it prepares is a “basic” one that “will not include any of your additional exemptions or expenses.”

The IRS investigates about a million “non-filer situations” a year.  But it does not prepare a substitute return for everyone that it believes failed to file.  People in the underground economy do not leave a trail that can contribute to such a return, tax experts have been noted as saying.  If those people are caught, they may not get an official printout in the mail.  A visit from someone who dangles handcuffs from a belt is more likely.  And the IRS substitute is not used when a taxpayer has filed a return but the agency believes that he or she failed to report some income.  It has other methods for resolving those issues — often an audit… just what we all have time for!

A taxpayer prompted to action by a substitute return can file the return that he or she should have filed in the first place, and the IRS will adjust the taxpayer’s account accordingly.  The next step, in which taxpayers can claim their exemptions and deductions, can sharply cut the amount due or even yield a refund.  Many nonfilers wouldn’t owe large amounts if their returns were done properly. The IRS fact sheet says its research shows that such failures “could simply be due to procrastination”, as stated by Mr. Eric Bach, CPA.

ONCE a ghost return appears in the mail, simply avoiding it isn’t a viable option. The IRS will send reminders.  If there is no response, it will start collection efforts, based on its calculations.

“The worst thing a taxpayer can do, is not file a return and then continue to ignore the repeated letters from the IRS”, Mr. Bach said.

But taxpayers sometimes do just that, provoked by “fear, paralysis, and denial”, as Mr. Bach has stated it.  “The most important point to remember is that the substitute returns only reflect the income and some some expense information such as mortgage interest because they are required to be reported to the IRS.  These returns are not final.  When the actual return is filed, it supercedes the ‘ghost return’.  This is very important to remember because the actual return will include your itemized deductions that may substantially reduce the IRS’ original assessment.”  In essence, Mr. Bach’s point is, file your returns as quickly as possible if a “ghost return” has been filed to, not only reduce your tax debt and possibly eliminate it, but also to minimize penalties.

Unpleasant as it may be to file  a tax return, and paying the bill to begin with… filing may prove much more appealing than the alternatives.

 

Posted in CPA Rockvile

Who really benefits from the “Safety Net”

A new analysis from the Center on Budget and Policy Priorities underscores that the poor are no longer the primary beneficiaries of the government safety net.  Terms like entitlements, government benefits, and safety net often conjure images of tax dollars sliding from the hands of the wealthy into the pockets of the poor.  But as reported by The New York Times, Saturday, that image is badly outdated.  Benefits are now flow primarily to the middle class.

Eric L. Bach - CPA - Rockville, MD

The center’s study found that the poorest American households, the bottom fifth, received just 32 cents of every dollar of government benefits distributed in 2010.  The finding is broadly consistent with the data reported Sunday that the poorest households received 36 percent of benefits in 2007, down from 54 percent in 1979, numbers that came from a study published last year by the Congressional Budget Office.

While the findings are not directly comparable because of differences in methodology, the new study suggests that the recent recession did not cause any significant increase in the share of benefits flowing to the poor, as might once have been expected.  The study found that older people received slightly more than half of government benefits, while the non-elderly with disabilities  received an additional 20 percent.  These benefits are not means tested, but rather, better-paid workers get more in Social Security.

Furthermore, the study notes that politicians have shifted benefits away from the “jobless poor,” through reductions in traditional welfare, and increased benefits for working families, for example through tax credits.  The government also also expanded elegibility for benefit programs.

“The safety net became much more work-based,” wrote Arloc Sherman and his collaborators at the center, a left-leaning research group.  “In addition, the U.S. population is aging, which raises the share of benefits going to seniors and people with disabilities.”

Another finding of the study is that the distribution of benefits no longer aligns with the demography of poverty.  African-Americans, who make up 22 percent of the poor, receive 14 percent of government benefits, close to their 12 percent population share.  White non-Hispanics, who make up 42 percent of the poor, receive 69 percent of government benefits… again, much closer to their 64 percent population share.

Posted in CPA Rockvile

Make a point of filing your taxes early

Eric L. Bach CPA - RockvilleEric L. Bach & Associates – Yes, filing your taxes can be trying and extremely annoying… therefor we like to put the whole ordeal off until the last possible moment.  Other than getting your refund sooner or having more time to gather up the funds to pay your tax bill, there is another good reason to get your taxes done early: identity theft.  Simply, this is when someone gets your Social Security number or other identifying information and forges a tax return in your name to get a refund.

It’s understandable that many people don’t want to deal with the IRS because it can be a very trying experience.  But, just imagine how frustrated you would be if you found out someone had filed a false tax return using information stolen from you.  Identity thieves will often submit their fake returns early in the filing season before the victim finishes their real return.

Tax refund identity theft is a growing problem.  In 2010, the IRS was able to identify and remove almost 49,000 returns seeking fraudulent refunds.  Last year, it removed 262,000 fraudulent returns.  The IRS is taking every step they can to try to combat this problem.  If you suspect you are a victim of identity theft, contact the IRS Identity Protection Specialized Unit at 800-908-4490.  You will then be asked to complete IRS Form 14039, the identity-theft affidavit.  Also, remember that the IRS will not contact you by email to request any personal or financial information.  If you get any such message, delete immediately.  Do not, however, dismiss IRS notices you receive in the mail that indicate that more than one tax return was filed for you.

Posted in CPA Rockvile

Tax Day is pushed back again

Tax Preparation - Rockville, MDFor the second year in a row, the IRS is giving taxpayers two extra days to get their taxes turned in this year.  While Tax Day typically falls on April 15, the IRS announced Wednesday that it is pushing back this year’s filing deadline to Tuesday, April 17.

The extension was granted because April 15 falls on a Sunday this year, and Monday is Emancipation Day, a holiday in Washington D.C. that celebrates the freeing of slaves in the district.  Last year, Tax Day was extended until April 18, also thanks to Emancipation Day.

The IRS will also begin accepting returns submitted online through the agency’s e-filing system, which the IRS says is the fastest, most accurate filing option for taxpayers, on January 17.

If you are requesting an extension, you have until Oct. 15 to file your 2011 tax return, the agency said.

The IRS said it expects to receive more than 144 million individual tax returns this year, with the majority projected to be submitted by the new April 17 deadline.

Posted in CPA Rockvile

Dealing with annoying co-workers

Eric L. Bach CPA - Rockville, MDUnless you’re ridiculously lucky or have extreme tolerance, you’ve probably had your share of annoying co-workers over the years.  Here are the six most common types and how to deal with them:

1. The interrupter: Whenever you’re talking with a coworker, this is the person who always finds a way to interject themselves.  They answers your questions to other people, they turn the conversation around to focus on them, and you can’t have one private conversation without them ending up in it.

The solution: There’s only one way to make it stop.  Tell it like it is.  The next time this happens, say something like, “Actually, I really wanted to get Jane’s input on this. Would you give us a minute?”  If they don’t back off, say it again: “Thanks. Actually, I really want to talk to Jane about it.”  Say it nicely, but be firm.  Think about it as though you are talking to a 5-year old.

2. The know-it-all: This is the person that has an opinion about everything and loves to tell you how you can do YOUR job better.

The solution: Let it roll right off your back.  The more you ignore this person and don’t let them get to you, the better.  When they offer an unsolicited opinion, say, “Thanks, I’ll think about that.”  And if you find yourself getting frustrated, comfort yourself with the knowledge that this person is more than likely considered obnoxious by many; you’re definitely not the only one annoyed.

3. The slacker: You’re working away and she’s playing on Facebook or online shopping.  Every day.  It’s obvious to you and your other co-workers that she’s not pulling her weight, but for some reason your boss doesn’t do anything about it.

The solution: Try to ignore it.  Sure, it’s possible your boss is letting her get away with it, but it’s also possible your boss is addressing it behind the scenes; you probably wouldn’t know about it if that was the case.  Either way, the answer for you is the same: If it’s not affecting your work, it’s really not your business.  If it does affect your ability to do your job (because you have to take on her work, or you’re dependent on her work in order to do your own job), then raise it with your boss from that perspective, keeping the focus on how it affects your productivity.

4. The grumpy guy: The grump exudes negativity.  Suggestions, new practices, the new guy down the hall – he hates them all and he makes sure people know it.

The solution: Have a sense of humor.  Try to see this person as your own office Eeyore.  If that doesn’t help, remember that this person is miserable.  Happy people don’t behave that way, and remembering that might make dealing with him somewhat easier.  He may actually be dealing with other things at home contributing to his mood.

5. The speakerphone lover: For some reason, this co-worker always plays back her voicemail messages on speakerphone … or worse, has whole conversations on speakerphone, with an utter disregard for how annoying it is to those around her.

The solution: Be straightforward.  Say something like, “Hey Meredith, would you mind taking your phone off speaker? It makes it hard to concentrate.”

6. The blabbermouth: The blabbermouth goes on and on and on.  They’re especially talented at roping you into long conversations that never end when you’re on deadline or trying to make a phone call.

The solution: Be assertive, and don’t let the blabbermouth have so much power over how you spend your time.  Speak up! Say, “Sorry, but I’m on deadline and I’ve got to finish something up.”  If they continue talking, be even more direct: “I need to stop talking and get back to work.”

In fact, with most types of annoying co-workers, the solution is simply to be straightforward and assertive.  Not angry, not hostile, just direct – but that’s something that can make people anxious, so it’s important to know that it’s really okay to speak up for yourself in a matter-of-fact, professional way.  And if that fails, just be glad you don’t live with these people.

What to learn from your 2010 Return

Eric L. Bach & Associates, Rockville, MDSo your 2010 taxes are done, or they should be if you didn’t file an extension.  But, as we all know, nothing is certain except death and taxes, so you might as well start planning for next year.  While you actually have your 2010 tax forms and documents handy, this is the perfect time to analyze last year’s finances and use those insights to lower your taxes in 2011.   The sooner you get started, the more you can save.  Here are 5 easy steps that you can follow to start your saving:

1. Avoid a Big Tax Refund

You think it’s fantastic when you get a tax refund, right?  Wrong.  A refund is really just the return of a year-long, interest-free loan that you graciously extended to that thrifty spender known as Uncle Sam.  Even with interest rates in the toilet, earning some money is better than none at all, right?

You can do much smarter things with that money, like putting it into a retirement plan or a college savings fund, or maybe paying down outstanding debt.  So if you will be receiving a 2010 refund of more than a few thousand dollars and you’re an employee, adjust your withholding at work.  If you’re self-employed, lower your quarterly estimated tax payments accordingly.

2. Save More in Your Retirement Plan

If you are not maxing out your employer-sponsored, tax-deferred retirement plan, you’re missing out on the single best opportunity to save on taxes.  The idea of saving more may be difficult, especially as the costs of gas and food are soaring.  But if you can squeeze just an extra 1 or 2 percent out of your paycheck and pour that cash into the plan, you’ll reduce your taxable income and your 2011 tax bill.

Doing so might also bring your income under certain thresholds that will let you qualify for bigger tax breaks you’d otherwise miss — such as personal exemptions, itemized deductions, an Individual Retirement Account, the Child Tax Credit, the Child and Dependent Care Credit, and the American Opportunity Tax Credit.

3. Look into Muni Bonds and Funds

If you have money in interest-paying bank accounts, CDs, money market funds, or taxable bonds or bond funds, you could be adding to your tax liability.  High-income taxpayers need to be especially concerned, since their tax liability could rise with the 2012 expiration of the Bush-era tax cuts.  You may want to consider moving some of those taxable savings and investments into tax-free municipal bond funds. (Yes, those same bonds that Meredith Whitney trash-talked on “60 Minutes.”) Since that time, investors have been bailing out of municipal bonds, fearing that states, towns and municipalities could default on their obligations.  That exodus has forced prices down and yields up.

4. Lower Your Mutual Fund Taxes

Now that stock and bond markets have recovered from their bear-market lows, be on the lookout for mutual fund taxable distributions.  A distribution is one of the most aggravating features of a managed mutual fund: You are on the hook for capital gains on the fund’s investments as well as the fund’s tax liability.  You may even be taxed on gains the fund incurred before you owned it!  One way to limit the damage before you invest is to ask the fund company if it will be making a distribution soon.  If the answer is “yes,” hold off buying until afterward.  Or you might invest in funds with low turnover ratios, such as index funds, since they’ll be less likely to throw off taxable distributions.  A turnover ratio below 10 percent is generally tax-efficient.

5. Keep Better Tax Records

Organizing your tax records might not only lower your tax liability, it could help you get rid of the tax-filing headache sooner.  Create a file called “Taxes 2011” and throughout the year toss all your paperwork into it: business receipts; bank, brokerage, and mutual fund statements; W-2s; 1099s; property tax bills; and mortgage interest statements.  Also keep track of your purchase price, commission, and sales price for any investment transactions in 2011.  You’ll be much happier come April 2012.

And while you’re in the organizing groove, now is the perfect time to purge your files of unnecessary statements and documents.  Get ready to shred!

Posted in CPA Rockvile

Tax excuses NOT to use

CPA RockvilleAmericans have tried just about everything to get out of paying their taxes but very few ever work.  The IRS recently released its annual The Truth About Frivolous Tax Arguments report, which outlines not only the most popular arguments people have presented over the years to avoid paying their taxes, but also the policy statements and inevitable tax court decisions the government has used to debunk them.  “Anyone who contemplates arguing on legal grounds against paying their fair share of taxes should first read the 84-page document,” the IRS said in a statement.

Taxpayers’ contentions have run the gamut over the years.  Whether you’re arguing that you don’t have to pay your taxes based on moral grounds or because only “employees” of the government are subject to federal income tax, though, it’s likely to cost you a significant amount of time and a decent sum of money.

Back in 2006, Congress increased the penalty for frivolous tax returns to $5,000 from $500.  The penalty is applied when a person submits a tax return and any portion of the submission is based on a position the IRS identifies as frivolous.  Filers typically present forms that indicate they have no income or tax liability, also known as a “zero return.”  Their reasons for not paying usually come up in tax court when the filers try to contest an audit or lien.

Contention: Taxpayers can refuse to pay income taxes on religious or moral grounds.

The IRS says taxpayers have frequently used the First Amendment to argue that they don’t have to pay taxes because it is against their moral or religious beliefs, since it says that “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.”  The Supreme Court has frequently asserted that saying your religious beliefs are in conflict with the payment of taxes provides no basis for refusing to pay, though.

Contention: Paying taxes violates the Fifth Amendment.

The Fifth Amendment to the Constitution says a person shall not be “deprived of life, liberty, or property, without due process of law.”  This might sound like a sound argument if the law hadn’t already decided it is well within the government’s rights to charge residents to live here.  According to the IRS, the Supreme Court stated in Brushaber v. Union Pacific R.R., 240 U.S. 1, 24 (1916), that “it is … well settled that [the Fifth Amendment] is not a limitation upon the taxing power conferred upon Congress by the Constitution.”

Contention: Taxes are a form of servitude in violation of the 13th Amendment.

Residents have argued that paying taxes is a form of servitude, which is problematic, since the 13th Amendment prohibits slavery (as well as the imposition of involuntary servitude).  Courts have consistently found that paying taxes is not considered forced servitude, though, calling the claim “clearly unsubstantial and without merit,” as well as “far-fetched and frivolous.”

Keep in mind that the IRS does have payment plans available for taxpayers who find themselves significantly impaired financially.  In fact, the IRS recently made changes to its lien system, the main way the agency penalizes people who can’t pay their taxes on time.

Posted in CPA Rockvile

How to Claim the Making Work Pay Credit

CPA - Rockville, MDThis year, the IRS wants a Schedule M filled out if you file a long Form 1040 or the slightly shorter Form 1040A.  Taxpayers who can file the shortest return, 1040EZ, will simply use a work sheet on the back of that form.  Calculations made on Schedule M will help taxpayers determine whether they received the full credit in their paychecks or are due more money from the credit.  Once you complete Schedule M, you’ll transfer the dollar figure you come up with on line 11 of that document to either line 63 of Form 1040 or line 40 of Form 1040A.  Form 1040EZ filers will take their work sheet calculation and enter it on the EZ’s line 8.

All these lines on the various tax returns are in the section that records all your tax payments. This includes withholding amounts from your W-2s, certain 1099s and any estimated tax payments you made.  Essentially, at filing time the credit is treated as additional withholding that can increase your refund or reduce any tax you might owe.

Because the Making Work Pay credit was in effect for all of 2010, there shouldn’t be as much filing confusion as there was at this time last year.  Also, retirees didn’t receive a special payment last year, so they don’t have to file the form this year.  But there still could be some issues with claiming the credit, especially for higher income earners.  The Making Work Pay amount is reduced for joint filers whose modified adjusted gross income, or MAGI, is between $150,000 and $190,000.  Single taxpayers whose MAGI is more than $75,000, but less than $95,000, also won’t get the full credit amount.  If your adjusted income is greater than the maximum for your filing status, then you won’t get any of the credit.  Also, the Making Work Pay tax credit is not available to nonresident alien workers or to individuals who can be claimed as a dependent on someone else’s tax return.

Posted in CPA Rockvile

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