Preparing The Right Tax Form Can Save You Time And Money

Posted on August 18, 2010 by admin
Preparing The Right Tax Form Can Save You Time And Money

If you’re preparing your federal taxes yourself, you’ve no doubt encountered the myriad of tax forms that are out there. From form 1040EZ to 706-A, it is a confusing mix of numbers and letter.

But those numbers and letters have a specific purpose depending on your situation and needs. If you are a single adult, married, have children, own a business, recently purchased a house, have a limited income or gotten rich on several investments, there is a form that is made for your situation.

Determining which form you needs may be as simple as visiting the website of the Internal Revenue Service. All of the forms produced by the IRS area available on their website for download and many can even be filled out online, reducing paperwork. For online filing, the IRS can send a confirmation email for your records.

To determine which federal tax form you need, assess your situation. The most basic tax form is the 1040EZ, a single page form that is available to taxpayers whose total income in under $100,000 and their interest income is under $1,500. In addition, filers of the 1040EZ form must be under 65, have income only from wages, interest or unemployment compensation, do not have any adjustments to their income and are single or married and filing jointly.

If you have adjustments to your income, you may want to use the next level of form, the 1040A, most often referred to as the short form. Users of the 1040A can adjust their income for penalties for early withdrawal of their savings, IRA contributions, interest on student loans and jury duty pay submitted through your employer. Users of 1040A can also claim tax credits for child and dependant care, elderly and disabled care, education, retirement savings and earned income tax credit.

The 1040A form cannot be used for itemized deductions, however, so those who wish to itemize their deductions can use form 1040. Any taxpayer can use the 1040 form, though some may have to consult a tax professional because of its longer format. Users of 1040 are required to have an income of $100,000 or more and plan on itemizing deductions such as interest on their mortgage or charitable donations. Also, the 1040 form is used by those with income from a business, rental property, farm, trust or partnership; income from foreign wages, the selling of property, bonds or mutual funds, or need to claim adjustments to their income for moving expenses, health savings accounts, tuition and fees.

If you file your taxes using special tax preparation software, you are required to use federal tax form 1040PC. The form is created by the software and comprised of symbols and type that computers at the IRS will interpret and translate into your tax return.

If you have made an error on forms 1040EZ, 1040A or 1040, you may file form 1040X, the Amended U.S. Individual Tax Return form, to make corrections. In the case of a tax refund, form 1040X must be filled out within three years of the original filing or within two years of the date the original tax was paid. If the correction is based on a worthless security or a bad debt, form 1040X must be filled out within seven years of the filing of the original tax form.

Homeowners may want to make themselves familiar with form 1098, the Mortgage Interest Statement, which is used to report interest the taxpayer has paid on their mortgage. This interest is usually tax deductible.

Form 1099-R is used by taxpayers to report redemptions from qualified retirement accounts. This form is sent to the taxpayer by the financial institution with which they have made investments and must be mailed by February 15 of the year that follows the year in which the retirement account was redeemed. On these forms, an amount in Box 5 may indicate that the account in question has funds available that has been previously taxed before being deposited into the account.

Finally, form 1099 is submitted by taxpayers to report income that comes from sources other than wages, salaries and tips. This form is sometimes referred to as an “information return” and must be submitted by the taxpayer for each transaction in three copies for the payer, payee and IRS. An example of form 1099 use is payment to independent contractors, and a business must submit a form 1099 for each contractor who is paid $600 or more for the past year. Because of this requirement, many businesses end up submitting hundreds and thousands of for 1099 each year, so the IRS requires those who have to submit 250 or more 1099s to do so electronically.

There are hundreds of other IRS federal tax forms that are designed to meet the unique needs of students, business owners, homeowners, retirees and independent workers, among others. Take the time to consult with a tax professional to find out which forms are suited to your needs.

Preparing The Right Tax Form Can Save You Time And Money
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Preparation Is The Key To Maximizing Your Tax Refund

Posted on August 18, 2010 by admin
Preparation Is The Key To Maximizing Your Tax Refund

Like most things in life, preparation is the key to success, and filing your federal income tax is no exception. By preparing your file, doing your research and reading up on the latest changes to the tax codes, you can not only lower the amount you owe but actually maximize your chances for a refund.

You’ve no doubt seen the news reports showing frenzied tax filers rushing to the post office at midnight on April 15 to meet the IRS deadline.

Chances are these people didn’t successfully prepare for the tax process and are no doubt missing out on the maximum number of deductions they were allowed and, in turn, not getting the refund they could have received.

Planning your federal tax return carefully will not only help you avoid that last minute rush, but give you the time to review your return to make sure you’re getting the biggest refund possible.

According to a consumer credit professional, planning your tax return carefully can help avoid costly mistakes. Taxed that go unpaid, they said, can permit the IRS to place a lien on your property and other assets, and that unpaid tax liens can stay on your credit report for as many as 15 years and that tax liens that are paid can stay on your credit report for seven years.

So it’s important to begin your tax preparation as soon as the tax season (January to April 15) begins. Amasses all of your important paperwork as soon as possible: your W-2 forms, your receipts, your past tax forms for reference, etc. Having all of this material readily available will save you hours of frantic searching.

Next, familiarize yourself with the current tax laws. Since the laws can change each year, your allowable deductions may change as well, so do your research and study the available books and other material available online to find out the newest rules.

Assess your current situation. Have there been any major changes in your life? Major changes could mean new possible deductions that were not available to you in the past. Or you may qualify for an increased deduction in some areas. Some areas of deductions you may wish to look at closely include charitable donations (including clothes and household items that you have donated), state and local sales taxes, disaster deductions or theft deductions (damage by floods, earthquakes, ice storms or burglary that is not covered by insurance), education expenses (job training programs and classes to improve your work skills), expenses related to a job search, real estate (mortgage interest, a refinanced loan, or the sale of a house, etc.), medical expenses and, yes, even expenses related to tax preparation.

Consult with a qualified tax professional to make sure you are getting the most deductions you are qualified to receive. Don’t take it for granted that you know what you are able to deduct. There are a number of semi-obscure areas that are eligible for deductions.

But before you list any deductions, make sure you have the paperwork to back it up. Keep the receipt to the big-ticket items that you have purchased over the past year: appliances that meet energy efficient requirements (and are eligible for a tax credit), improvements to your home such as new windows and doors that are also energy efficient. Tax credits are even available on certain models of cars that meet U.S. energy standards.

Finally, here are some simple steps to get the most from your tax refund:

  1. File as soon as possible. The soon you start the filing process, the more time you will have to make sure everything is correct and all of the possible deductions have been applied. And filing early means you will get your refund that much quicker.
  2. Double-check your work. By double-checking your work, you not only ensure that you have applied for as many deductions and credits as you can, but you can fix any mistakes and avoid the possibility of an audit. If possible, have your spouse, a friend or a tax expert double-check your work.
  3. Use tax software. By using the latest version of the available tax software, you can be assured you are getting the maximum deductions and the maximum refund. Many of the tax software programs on the market also provide free online help as well, so help is just a phone call or an email away.
  4. Consult a tax professional. It may be a source of pride to know that you completed your tax form yourself, but for complicated forms, it might be better to leave it to the professionals. A professional tax preparer can find the deductions that you might have missed, as well as the errors you might have made. If you are preparing the taxes for your business, you make want to seek the help of a professional well versed in the tax laws concerning your business.
Preparation Is The Key To Maximizing Your Tax Refund
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Preparation For Surviving The Tax Audit

Posted on August 18, 2010 by admin
Preparation For Surviving The Tax Audit

Even the most careful taxpayer can sometimes make mistakes on their tax forms that can lead to an audit. A misplace number or accidentally omitted information can result in a notification from the Internal Revenue Services that your return is being audited.

But getting a note or call from the IRS is not necessarily reason for panic. Preparation is the key to surviving an IRS audit and even if you haven’t been called for an audit, there are steps you can take now to minimize the process should it occur.

First, there are certain items and factors that could raise a red flag with the IRS and lead to an audit. Making large charitable deductions, listing excessive itemized deductions or listing large business expenses can contribute to the likelihood of an audit, as will concealment of cash payments, overly complex business transactions or investment transactions, tax shelter losses or prior tax problems or audits.

If you find yourself in any of these scenarios and are called for an audit, prepare yourself. Go over the details of your tax filing several times to try and determine the cause for the confusion. If you have a tax professional, consult with them as well. A certified public account or a tax attorney may be a good resource to consider and most have experience with the auditing process and the tax laws.

Next, begin assembling the paperwork and records that pertain to the issue under investigation. Do not bring paperwork that is not related to the matter to be discussed, since that information could trigger a further investigation. Ten days before the interview, send written notice to the IRS that you will be recording the interview on audiotape (video taping is not permitted).

Occasionally, the audit may take place in your office or place of business. If this occurs, instruct your employees not to discuss business-related matters with the IRS agents and if they are asked questions by the IRS agent, instruct them to refer all inquires to you. If you are asked by an IRS agent about a matter not listed in the notice you were sent, you can refuse to answer unless they file a formal request.

And while it may seem to be a case of negative thinking, begin considering the possible settlements you are willing to make. Depending on the severity of the tax infraction, you may be required to pay cash penalty: The IRS imposes a 20 percent penalty on any tax underpayment connected to over or under evaluation of property, disregard for IRS rules or a substantial understatement of your tax liability. A 75 percent is imposed for more serious tax-related infractions associated with the categories listed above that the IRS has determined is fraud-related.

The IRS may request the interest due for violations of fraud, failure to file on time undervaluation of property. In cases such as this, they will impose an interest rate on the money owed from the due date of your return until it is paid.

Finally, in the most serious cases of tax evasion and fraud, the violator may be tried and convicted, as well as assessed fines and forced to forfeit their assets.

The key to avoiding an audit later is to maintain accurate records today. Compiling an accurate and easily accessible collection of records of all important transactions will come in handy should you ever find yourself across the table at an IRS audit. Those records will be your first line of defense in the case of an audit.

You should maintain a file of at least three years of records and tax returns. These files should include checkbook stubs, receipts from purchases throughout those years, bills from services you have performed, as well as paperwork related to investments, etc. In addition, keep a journal of deductible items, noting the date on which they occurred, and track the cost basis for your property.

If you employ a tax professional, either a tax attorney or a CPA, make sure they keep accurate records of your transactions, investments, expenditures and assets as well. They should keep abreast of when certain tax forms are due (not all tax forms are due on April 15) and should get them in on time to avoid running afoul of the IRS.

While an audit can be an aggravating ordeal, it is less likely than it once was for middle-income taxpayers. Although the IRS has increased the number of audits it conducts, they have turned their attention to those on the upper end of the tax bracket. Since 2001, audits of those earning more than $100,000 have doubled.

By maintaining accurate tax records, taxpayers who find themselves audited by the Internal Revenue Service will be well prepared for the process. Begin your defense now by amassing the proper resources (federal tax records, receipts, bills, etc.) and avoid problems down the line.

Preparation For Surviving The Tax Audit
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