Posts Tagged ‘tax refund’

Make a point of filing your taxes early

Posted on: February 8th, 2012 by

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.

What to learn from your 2010 Return

Posted on: April 19th, 2011 by

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!

Cutting Taxes Throughout the Year

Posted on: May 18th, 2010 by

Charitable Contributions - CPA Rockville - Financial PlanningIf you managed to claim every possible tax break on your 2009 return, give yourself a hand.  That’s no reason to stop there though;  there is so much more you can be doing to rack even bigger savings throughout the year with the help of thoughtful tax planning.  For example, if you got a big tax refund this year, it means that you’re having too much tax taken out of your paycheck every payday.  You can file a new W-4 form with your employer to ensure that you get more of your money when you earn it.

If you plan on making charitable contributions in 2010, put away your checkbook. Consider giving appreciated stocks or mutual fund shares that you’ve owned for more than one year instead of cash.  Your charitable contribution deduction is the fair market value of the securities on the date of gift, not the amount  you paid for the asset, and you will never have to pay tax on the profit.  Don’t donate stocks or fund shares that lost money though.  You will be better off, in the long run, selling the asset, claiming the loss on your taxes, and then donating the cash to charity.  You get to use it as two deductions then.

Also, if you plan on doing charitable work, keep track of what you spend while you are doing it.  Whether it be stamps to mail letters, ingredients to make food for the homeless, or even the number of miles you drive for the charity work, it is all deductible as a charitable contribution.  The total can be added into your charitable deductions next year, cutting your tax bill even more.

*With regard to charitable donations/contributions, make sure you keep careful records of them for your CPA so you can qualify for the full deduction amount without any red flags being raised.

Possible Solutions for an Unexpected Tax Bill

Posted on: April 14th, 2010 by

IRS Debt - Accountant - Rockville, MDFor many people, April is tax refund time; but for others, it brings about very unpleasant thoughts.  What would you do if your accountant called you to tell you the results of your processed return and it turns out you owe thousands of dollars you don’t have?  Or if you did your own return, how many times can you re-run the numbers?  There are possible options you can use to help pay your tax bill.  One option available is paying with one or more of your credit cards.  This may not be the best option, however, given how high the interest rates are on credit cards.  Also, when you pay your taxes with your credit card, you will incur a 2.25-3.93% convenience depending on the third-party company you use.

Another option is to obtain a bank loan.  Banks and credit unions offer loans to help consolidate debt secured by your property, but this option may or may not be much better than putting the money on your credit card.  A debt consolidation loan may charge between 6-21% APR depending on your credit rating.  If you currently have good credit and this tax debacle is a one time thing though, your credit score might be better off if you take out the loan versus racking up a credit card balance with a high interest rate.

Unexpectedly owing money to the IRS, in my humble opinion, definitely counts as an emergency situation.  You may want to consider using your savings, your emergency fund to pay off the debt.  If you can afford to pay it off from savings, it is best to do so and not incur any further penalties or interest.  Any good accountant would tell you the same thing.

There is also the option of selling off investments.  But the problem with selling off investments in an emergency situation is that you may have to take a loss.  But, if you speak to your accountant about this, there are two positive things that may come of it.  The first being that your tax bill is paid off and you are not accruing interest and penalties furthering your debt.  The second being that if you have to sell at a loss up to $3000, you can use this to offset any gains from selling appreciated investments in the same year.  This will minimize next year’s tax bill.  Any losses over $3000 can be carried over to the following year.

You can also contact the IRS about setting up an installment agreement.  You will still face penalties and interest while you are paying off the debt, and you’ll need to make the payments in full and on time every month.  There is also a fee to setting up the plan, as well as a fee to reinstate the plan if you fail to meet your obligations.  One reason you may not want to go this route though is that the government can still file a a Notice of Federal Tax Lien on your property until your debt is paid off, making moving or using your equity near impossible.

The last option is taking out a home equity line of credit if you own a home.  Borrowing against your equity is an attractive option because interest rates tend to be low and the interest may be tax deductible.  The problem is, if you fail to make payments on the loan, you risk losing your house.  The extra interest you may pay by putting it on your credit card may be worth not putting your home at risk.

Don’t feel alone if you fall into this category of owing money to the IRS.  Many people find themselves in this position every year, and every year accountants help their clients try to work things out.  Weigh out all of your options, sit down with a professional, and determine the most suitable option for your position.  But don’t stick your head in the sand like an ostrich and think the problem will just go away; the IRS will eventually come knocking.

Refund Anticipation Loans, Ripoff?

Posted on: April 14th, 2010 by

Tax Preparer - RALS - Rockville, MDRefund Anticipation Loans (RALs) or instant refunds are short term loans offered on the basis of your tax refund.  This is when a tax preparer offers you a payout somewhat smaller than your actual refund, but makes it available immediately so you don’t have to wait for the IRS to mail you a check or deposit the funds into your account.  The preparer/bank will then take the entirety of your refund.  To get the loan, you’ll be asked to pay an origination fee in addition to your electronic filing fee.  If you choose to accept the loan, you will receive a check immediately minus the filing fee, origination fee and other fees associated with preparing both your tax return and RAL.  While the fees may seem small in comparison to the value of the refund, with the today’s electronic filing and direct depositing, the shelf life of the loan is incredibly small.  If you can hold off and wait the 7-10 days the IRS estimates for direct deposit refunds, you would be getting the entire refund and not wasting all those fees.  The preparer/bank, in essence, is getting an almost 100% return on the loan.  A reliable and reputable tax preparer generally will not even consider offering these types of loans unless you are in dire straits.  It is irresponsible financial advice to the client.  So beware; If a preparer offers you one of these out of the blue, I suggest running in the other direction and seeking out a new accountant.

Where’s My Tax Refund?

Posted on: April 5th, 2010 by

Tax Refund - Rockville, MDSince 2003, taxpayers have been able to use the IRS’ “Where’s My Refund?” web page to track down refunds directly from their own computer.  Exactly when you will need to use this service, however, depends on when and how you filed your return as well as how you asked to have your refund issued to you.  If you e-file and ask for direct deposit, the IRS says that it should take no more than 3 weeks to receive your refund.  If you paper filed your return and asked for your check to be mailed to you, it could take up to 8 weeks.

To get started you will need your Social Security number, the filing status entered on your return, and the exact amount you are expecting.  (You can always call your CPA for the exact amount if you don’t recall)  Joint return filers should enter the name and tax ID number of the spouse first shown on the return.  Once you submit, the program should let you know exactly where your refund is.

If you still would prefer to make a phone call though, you can call their special automated toll-free number: (800) 829-1954.  You will need the same information that the online system requires.

CPA Rockville – How to Spend Your Tax Refund

Posted on: March 25th, 2010 by

CPA Rockville – Its tax refund time!  For many people, this is largest chunk of change, outside of a paycheck, that they will get all year.  Before the economy took a turn, this was the money people would use to splurge on a vacation, a new pair of shoes, or a very small meal for a very large price.  But now, even though we are told the economy is beginning to recover, we must be practical with this money.

Rockville CPA - Tax RefundFirst, you should consider re-building or building your emergency fund.  If the last two years have taught us anything, its that unexpected things can happen: job loss, loss of income from investments, or unexpected expenses popping up at an inconvenient time.  It is generally a good rule of thumb to keep 3-6 months of expenses tucked away in a secure place to give you the financial wiggle room that would prevent you from scrambling to stay afloat.

Second, if you already have an emergency fund, you should consider repaying high interest debts.  Credit cards are prime candidates.  By applying your refund to these debts, you are eliminating additional amounts spent on interest in the future.  The money that would have gone to principal and interest payments each month could then be invested for your future.

Third, and finally, if you have your emergency fund set up and have made a dent in your credit card/high-interest debt, you should think about investing your refund.  If you don’t already have a diversified portfolio, it is a good idea to think about building one.  Making a plan with a financial planner in Rockville and discussing your retirement is a good way to begin.

CPA Rockville – How To Get Your Refund Faster

Posted on: March 22nd, 2010 by

CPA RockvilleCPA Rockville - Tax RefundWant your tax refund faster?  File your federal return online and have the refund direct deposited into your bank account.  The Internal Revenue Service has promised to get refunds out to those who electronically file their taxes online in as few as 10 days.  For those who choose to mail their return in, refunds are expected to take four to six weeks.

For those filers taking advantage of the expanded home buyer tax credits, however, paper forms must still be filed because Congress has required documentation to claim them.  Under the program, buyers who have owned their current homes at least five years would be eligible, subject to income limits, for tax credits of up to $6,500.  First time home buyers or people who haven’t owned homes in the previous three years could receive up to $8,000.

Taxpayers can file their returns electronically whether they use a paid tax preparer/CPA in Rockville, Maryland or do it themselves.  For families and individuals making less than $57,000, the IRS offers Free File computer software programs that help taxpayers prepare their returns at no charge.  Those making more than $57,000 can still file their returns online at no cost, they just won’t get the additional free help.