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Individual Retirement Accounts

Ramblin Randall — Wed, 10 Mar 2010 14:38:00 GMT

A pathway to retirement and tax savings for many taxpayers is an Individual Retirement Account (IRA).

Everyone under 70 ½ by the end of the tax year who has taxable compensation can contribute to an IRA. Compensation for IRA purposes includes:

Wages, salaries, etc
Commissions
Self-employment income
Taxable alimony and separate maintenance

There are many options for where to an open IRA, from your local bank to an investment broker and includes many investment options as well, such as certificates of deposit, stocks, bonds and more.

Unique to traditional IRA's is the ability to make and designate a contribution for the prior tax year as long as the contribution is made before the tax filing deadline - usually April 15. If eligible, a contribution to a traditional IRA may be deductible on your tax return, helping to reduce your tax liability.

The most that can be contributed to a traditional or Roth IRA for a taxpayer is the smaller of:

Your taxable compensation
$5,000 for 2009 ($6,000 for 2009 if 50 or older)

Distributions from a traditional IRA are taxable. This is one of the primary differences between a traditional and a Roth IRA. With a Roth IRA, qualified distributions are not taxable. Likewise, Roth contributions are not tax deductible.

For more information about Individual Retirement Accounts (IRA's), review IRS Publication 590, Individual Retirement Arrangements or discuss your situation with your Tax Professional and/or see Liberty Tax Service's Tax Tips.

Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.

Making Work Pay credit one part of the stimulus bill

Tax Ranger — Fri, 05 Mar 2010 15:00:00 GMT

The various provisions in last year's economic stimulus bill will command the attention of many tax preparers this filing season, and the Internal Revenue Service is working to provide people with the information they will need to know.

For example, a recent announcement on the IRS Web site offered some pointers on the Making Work Pay Tax Credit, which was one of the provisions in the stimulus bill aimed at lowering the average worker's tax bill somewhat.

The IRS notes that the Making Work Pay provision offers a refundable tax credit of up to $400 for individuals and $800 to married couples filing jointly. Typically, the credit has been handled by employers on a worker's automated withholdings.

Some taxpayers will find that they are able to claim any remaining Making Work Pay funds that they may have not used yet.

The IRS also noted that last year, the credit was spread out over nine months, while for 2010, it will be spread out over 12 months. With that in mind, some workers may see a slight change in the amount of their paychecks. The IRS went on to remind people to be sure to verify whether sufficient taxes are being withheld from their pay to avoid any unexpected costs at filing time.

For more on calculating the Making Work Pay Tax Credit, visit this calculator provided by Liberty Tax Service.

Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.

Policies for dependents explained under tax code

Tax Ranger — Fri, 05 Mar 2010 14:00:00 GMT

One common way for families to lower their tax burden at filing season is through deductions for children and other dependents. With that in mind, the Internal Revenue Service is offering some guidance on the regulations regarding dependents under the tax code.

According to the IRS, even a person who is claimed by somebody else as a dependent may be required to file a tax return under certain circumstances. Such factors would depend on the amount of earned or unearned income from the tax year, along with other things like one's marital status.

Also, people who are claimed as dependents by another person cannot claim a personal exemption on their own tax return.

The IRS adds that a person's spouse cannot be considered their dependent. Instead, when filing jointly, both spouses are entitled to claim one exemption, while those filing separate returns can claim the exemption for their spouse only if the spouse had no gross income and was not reported as another person's dependent.

Finally, people who are claimed as dependents must be U.S. citizens, resident aliens or U.S. nationals, although there are some exceptions under the tax code for adopted children. Dependents can also be residents of Canada or Mexico.

Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.

Accuracy can help minimize chance of an audit

Tax Ranger — Thu, 04 Mar 2010 21:24:22 GMT

One common, but usually unfounded, concern that taxpayers share during any given filing season is the fear that they could end up facing an audit from the Internal Revenue Service.

Fortunately, audits only affect a minute percentage of taxpayers, although there are generally considered to be some red flags that can help increase a person's chances of facing one.

For example, a recent Boston Globe article noted that there is a degree of randomness to the process of deciding whether to audit a taxpayer, while adding that 1.4 million tax returns were examined for the fiscal year that ended on September 30, 2009.

That said, the Globe also pointed out that some factors that tend to increase the risk of an audit include W-2 and 1099 forms that are inconsistent with one's tax return, deductions associated with a home office - especially if they are not properly documented - and having a high income or international bank accounts.

Given the general complexity of the tax code, it makes sense for people to consult with a skilled tax preparer to ensure that their returns are as accurate as possible and to also be sure that they are taking advantage of the full range of credits and deductions that may be available to them.

Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.

IRS offers guidance on bankruptcy filings

Tax Ranger — Wed, 03 Mar 2010 21:22:02 GMT

The economy has seriously damaged the personal finances of millions of Americans, and some of them may be reminded of that situation this filing season as they consult with their tax preparer on Internal Revenue Service policies regarding bankruptcy.

According to the IRS, people who file for bankruptcy will find that their tax obligations will vary depending on the chapter under which they file.

Typically, people who have a debt cancelled, such as a credit card or mortgage balance, must report that forgiven amount to the IRS as income, which can result in unforeseen tax obligations in some cases. However, the IRS notes that debts cancelled as part of a bankruptcy proceeding are not seen as income under the tax code.

While the recession is widely seen as clearing up, people may be surprised to know how common bankruptcy filings have been in the past year.

The American Bankruptcy Institute recently highlighted data showing that in 2009, 1.47 million people filed for bankruptcy, marking a 32 percent increase over the figure recorded in 2008. During this same period, business bankruptcies also posted a substantial gain.

Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.

Time running out for those with unclaimed 2006 refunds

Tax Ranger — Wed, 03 Mar 2010 20:00:08 GMT

People who are thinking about skipping out on their obligation to file a return this year may want to reconsider, especially when weighing the size of the returns they may be passing up.

According to a recent announcement from the Internal Revenue Service, nearly $1.3 billion in unclaimed refunds from the 2006 filing season are still waiting to be distributed to an estimated 1.4 million taxpayers who never ended up filling out returns.

The IRS noted that people must file a return for the 2006 tax year by April 15, 2010 and that the average unclaimed refund stands at $604. If a return is not filed in order to claim a refund within three years, that money ends up as the property of the United States Treasury.

Another thing for taxpayers to remember is that their returns from 2006 will end up being held or applied to balances owed if they also failed to file returns for 2007 or 2008.

In late 2009, the IRS announced that the penalty for failing to file an income tax return had increased somewhat. For those who file more than 60 days after the due date, including extensions, the penalty is now either $135 or 100 percent of the unpaid tax, whichever is smaller.

Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.

Home office work can be a mixed bag from a tax perspective

Tax Ranger — Wed, 03 Mar 2010 19:57:34 GMT

People who have home offices can often take advantage of a variety of deductions when filing season comes around. However, it makes sense to talk to a knowledgeable tax preparer since there may also be some unforeseen expenses, notes a recent media report.

An article by Bankrate.com warned that one thing to watch out for with home office deductions is depreciation benefits, since these can result in an additional tax burden for people when they decide to later sell their house.

The financial Web site noted that even people who do not claim depreciation of a home office may find themselves on the hook under certain circumstances for taxes when the property is sold.

Still, those who maintain a home office can take advantage of a number of deductions associated with the cost of doing business, from purchasing supplies to maintaining phone lines and computer lines. However, certain rules also apply for example to computers that are used for both personal and business purposes.

According to the Internal Revenue Service, the self employment tax rate is 15.3 percent, with 12.4 percent going to Social Security and 2.9 percent for Medicare.

Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.

IRS offers guidance on Social Security benefits

Tax Ranger — Tue, 02 Mar 2010 21:14:26 GMT

Even though a person has stopped working full time, it doesn't mean that they have fewer details to pay attention to at tax filing time. For example, those who are receiving Social Security benefits are advised to consult with a tax preparer to help maximize their returns.

According to a recent reminder from the Internal Revenue Service, the amount of Social Security benefits considered to be taxable will depend heavily on an individual's income and marital status. For example, those who depended on Social Security benefits as their primary income in the past tax year will typically find that those funds are not taxable and may not even need to file a return.

However, those who work part time or have other sources of income will find their earnings taxable beyond a certain base level in any given year.

The IRS notes that for 2009, that base amount was $32,000 for married couples who file jointly, and $25,000 for individuals.

To determine whether they have a tax obligation, people can compare the sum of one-half of their Social Security benefits with all of their income from the previous tax year.

Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.