Tax Help - Are You Sure That 2004 Return Is Correct?

Can you even begin to imagine $1.2 billion dollars of money that the IRS is trying to give away? And we're not talking about the Stimulus Package monies.





Believe it or not, that's how much money the IRS is holding for taxpayers who need to file their 2004 taxes.



And now you ask, "how on earth do I get a piece of that action?". Well, it's really very simple.

To receive a chunk of this billion dollar overflow, you just need to file your delinquent 2004 tax return.

But don't forget that there's a three-year deadline for refunds. Taxpayers have three years from the original due date to file a return and ask the IRS for a refund. This statute of limitations on refunds is written directly into our tax code, section 6511 if you want to look it up. The long and the short of it is this: if you haven't filed for 2004, you should do so by April 15th, 2008. That's the final, final deadline before your refund vanishes into the government's coffers.

This 3-year deadline also applies to amended returns as well. Perhaps you forgot to take a deduction or a tax credit? The IRS will send out your extra refund from any corrections to your return, but only if the amendment is filed within this same three-year period.

It only makes sense to this preparer pull out that 2004 return and review it for additions or corrections, amend the return if necessary and got for a chunk of that change.

• Additional resources to help you prepare a 2004 return:
  Filing back taxes
  Getting documents from the IRS
  2004 federal tax forms from IRS.gov

Tax Help - IRS Providing Assistance for the Stimulus Payments

IRS Sets March 29 as “Super Saturday” to Help Retirees, Veterans and Low-Income Workers Receive Economic Stimulus Payments

WASHINGTON — The Internal Revenue Service and scores of its partners nationwide will open hundreds of locations on Super Saturday, March 29, in an effort to reach those Americans who are eligible for the economic stimulus payment but who normally are not required to file an income tax return.

Approximately 320 IRS offices will be open on Super Saturday to prepare the simple Form 1040A for people who are filing a return solely to receive their stimulus payment. IRS partners such as AARP, United Way of America and dozens of others also are making special efforts on Super Saturday to reach out to those who normally are not required to file a tax return.

“We don’t want any Americans to miss out on their economic stimulus payment. For millions of Americans, filing a tax return is not routine. Their income is either too low or not taxable. But this year, filing a 2007 tax return is the only way to receive an economic stimulus payment. Super Saturday is one way the IRS and its partners are working to ensure everyone eligible receives a stimulus payment,” said IRS Commissioner Doug Shulman.

Super Saturday, part of an extensive outreach effort by the IRS, is a one-day event for which Americans can plan in advance. It also highlights the need for all taxpayers to file as soon as possible to avoid the April 15 rush.

Millions of Americans who do not pay federal income taxes may be eligible for a $300 payment ($600 for married couples) if they have at least $3,000 in qualifying income. Qualifying income is defined as any combination of earned income such as wages, nontaxable combat pay and certain benefits from Social Security, Veterans Affairs and Railroad Retirement. Many households also will be eligible for an additional $300 for each qualifying child younger than 17.

The IRS this week is mailing 20.5 million Social Security and Veterans Affairs recipients a Package 1040A-3 that contains all the information they need to file a return immediately. Railroad Retirement recipients, low-income individuals and military personnel with nontaxable combat pay also can use the package if they need to file solely to receive the payment.

The 320 IRS offices are located in all 50 states and the District of Columbia. Operating hours will be 9 a.m. to 3 p.m., although some may be open longer. IRS employees will help prepare the Form 1040A returns for low-income workers, retirees, disabled veterans and others. IRS field assistance personnel also will visit nursing homes and similar locations to prepare returns.

A list of IRS offices and partner sites providing assistance on Super Saturday is available at http://www.irs.gov/ or by calling the IRS Hotline, 1-800-906-9887, for free assistance locations. If taxpayers have economic stimulus questions on March 29, they can call 1-866-234-2942. These phone services are available on March 29 between 9 a.m. and 3 p.m. local time. (Alaska and Hawaii service is based on Pacific Time Zone.)

IRS partners are actively involved in reaching out to these people to help them receive their payments. Many are using innovative techniques to ensure eligible recipients who normally are not required to file a tax return receive the payment they are due. Here is just a brief sampling of partner activities and the complete list is still evolving:

• 
  
  Sweetwater, Fla.: Miami-Dade County Mayor Carlos Alvarez will conduct a press conference at City of Sweetwater's Jorge Mas Canosa Youth Center free tax preparation site staffed by Florida International University students.


• 
  
  Baltimore, Md.: Baltimore Commission on Disability will help prepare returns for people with disabilities and others;


• 
  
  Houston, Texas: Ripley Neighborhood Center will prepare returns for Social Security recipients and veterans;


• 
  
  Manning, S.C.: Antioch Baptist Church will host a tax preparation day for Form 1040A filers;


• 
  
  Boston, Mass.: Mayor Thomas Menino will open 10 locations throughout the city to prepare Form 1040A returns;


• 
  
  Aurora, Col.: IRS partners printed Economic Stimulus Payment information in Vietnamese and will be available at two locations to assist the Vietnamese community;


• 
  
  Fresno, Calif.: Hispanic Internal Revenue Employees (HIRE) chapter members have volunteered to prepare returns at the Fresno Veteran’s Hospital and the Aging Adult Center.
  

Starting in May, the IRS will issue economic stimulus payments of up to $600 ($1,200 for married couples) plus additional payments of $300 for each for qualifying child. Most Americans don’t need to do anything more than file their tax returns as they normally do. The maximum payments will begin to phase out at $75,000 in adjusted gross income ($150,000 for married couples).

The IRS encourages everyone who is required to file a tax return to do so prior to the April 15 deadline to enable the agency to process the return and to calculate stimulus payment eligibility and amounts. Taxpayers who already have filed a tax return can calculate their potential payment amounts by visiting http://www.irs.gov/.

The IRS reminds taxpayers that they can get their stimulus payments faster by using direct deposit when they file their tax return.

In addition, the IRS urges taxpayers to file electronically. For people who normally are not required to file a tax return, the IRS and the Free File Alliance have a special program set up to allow for free electronic filing. For those with computer access, IRS Free File –Economic Stimulus Payment is available at IRS.gov.

Also, people should be wary of unsolicited e-mail or telephone calls from anyone claiming to be from the IRS. Don't click on any links. Instead, forward the email to phishing@irs.gov, and then delete it. Use the same email address to report unsolicited telephone calls. The only official IRS

Web site is located at http://www.irs.gov/.

Related Items:
Super Saturday Locations for March 29
Economic Stimulus Payment Information Center

Tax Debt Help - It's Time to Pay the Man!

It's once again time to get out those checkbooks, credit cards and other payment options for paying your tax debt to Uncle Sam.

Kay Bell, freelance writer for BizRate and Don't Mess With Taxes provides a plain and simple approach to knowing how to get Uncle Sam paid off.

"If this year's tax filing deadline will be a pay day from you to the IRS and you're caught short of cash, the IRS will work with you. They give you several payment options.

Most of all, even if you can't pay your tax bill, go ahead and file your return on time. This way you'll avoid the IRS's failure-to-file penalty of 5 percent per month (up to a maximum of 25 percent) of your balance due. You'll still face the failure-to-pay penalty each month your bill is outstanding, but it's only 0.5 percent of the amount you owe.

Paying with plastic

Now take a look at what you owe.

Some taxpayers find they can pay part or all of their tax bill by putting it on a credit card. The IRS has awarded contracts to two companies to accept credit card charges: Official Payments and Link2Gov. Both accept payments from electronic as well as paper filers, either via phone or the Internet. They take American Express, Discover, MasterCard or VISA.

Credit card tax payment processors

Link2Gov Corp.
(888) PAY1040(888) 729-1040
Pay1040.com

Official Payments Corp.
(800) 2PAYTAX(800) 272-9829
Officialpayments.com

Remember, however, that while this may get you off the hook with Uncle Sam, it will cost you in other ways. Each company has its own fee schedule (generally 2.49 percent of your tax bill or a minimum $1) connected with charged payments.

And if you don't pay off your credit card in full, you'll start racking up interest charges on your account. In some cases, however, your credit card interest charges might come to less than IRS penalties and interest you'd owe if you don't pay on time. So before you decide to pay with plastic, run the numbers so that you don't pay anyone, neither Uncle Sam nor your credit card company, any more than necessary.

Installment plans

If your tax bill is too large for a credit card, the IRS is willing to take monthly payments. You even get to pick your monthly payment amount and the day it will be due.

In fact, if you've previously filed (and paid) taxes on time, your tax bill is less than $10,000 and you convince the IRS that you can't come up with that much all at once, the agency can't turn down your request. Your installment plan, however, must pay off the due tax in at least three years. To get the program going, attach Form 9465, Installment Agreement Request, to the front of your tax return.

Financially strapped taxpayers also have the option of using an installment plan to make partial payments of tax liability. The IRS had previously allowed partial installment payments but stopped the practice in 1998 when an IRS attorney raised questions about the IRS's authority to accept such payments without statutory authority. Congress officially granted the IRS the power to resume partial payment installment agreements as part of the American Jobs Creation Act of 2004.

While the IRS argued for legislative reinstatement of the partial-payment option, approval is not automatic. Taxpayers who request a partial-payment installment agreement must provide detailed financial information, including data on equity assets, that the IRS will verify. Plus, the IRS will review the arrangement every two years to determine whether the taxpayer's financial status has changed, and if it has improved, the amount of installment payments could increase or the agreement could be terminated.

Regardless of whether you pay your tax bill in full or partially via an installment agreement, keep in mind that paying over time, even to Uncle Sam, will cost you more. The IRS charges a one-time fee of $105 unless you make arrangements to have your installment payments made via direct debit from your bank account.

The fee drops to $52 for direct debit agreements. Some lower income taxpayers might be able to pay a reduced fee of $43, which was the previous user fee for all installment agreement applicants. The rate increase took effect in 2007.

You'll be billed for any fee with your first payment. Plus, penalties and interest continue to accrue to your unpaid tax bill. The IRS may also file a federal tax lien against you, which will be released when you pay off your installment loan.

If you want to apply for an installment arrangement, the IRS now accepts online applications.
Let's make a dealWhat if you can't pay off your tax bill, in whole or part, in three years or five years or ...? Then it may be time to negotiate.

The IRS might be willing to accept an offer in compromise, or an OIC; a lump-sum payment you offer to make that is less than the total amount of tax you owe. In these cases, the agency hopes to get some taxpayer money sooner than it would after years of costly collection efforts.

The key here is that the amount must reasonably reflect your ability to pay. It's not merely haggling to get your tax bill reduced. In fact, the IRS is stepping up its efforts to weed out those taxpayers who use the offer-in-compromise route merely to delay paying their bills. Since Nov. 1, 2003, any taxpayer making a reduced payment offer has had to include a $150 application fee with the request. The agency hopes this means that it will hear only from folks who truly need the negotiated bill.

The IRS will review your financial situation and future income potential to determine whether your offer is appropriate. Be warned, however. Uncle Sam says this program was designed only for extreme cases and very few filers will qualify for the program under the terms they would like. If you believe your situation does indeed meet the requirements, you need to file two forms:

Form 656, Offer in Compromise, and Form 433-A, Collection Information Statement.

You must also submit the $150 application fee along with Form 656-A, Offer in Compromise Application Fee Instructions and Certification. (The fee is waived for filers who have little or no income. They can claim a poverty exception when they file Form 656-A.) If you don't send this form along with your fee, the IRS will return your offer application "without further consideration." If you submit everything as required, and the IRS determines you do not meet the qualifications and rejects your offer, you are out $150. But if the agency accepts your offer, your fee will go toward your new payment amount.

Then the IRS wants even more upfront. Your offer must include a 20 percent payment for lump sum cash payment offers or your first installment payment if you're seeking a periodic payment plan.

Regardless of which tax bill-payment method you choose, make your decision now. Delay will only compound your financial and tax debt problems. And try to pay something. By sending in any amount when you file your return, at least you'll ultimately reduce your interest and penalty charges."

Additional Resources:

Kay Bell who is a freelance writer for "Don't Mess With Taxes" and also writes for BizRate. Check out her blog!

Tax Debt Help - "Why We Do The Things We Do"

Doing taxes year round gives me the opportunity to see just what kind of situations most folks put themselves into by not filing timely.

One of the most common reasons most folks won't file a return are those dreaded 1099s. Whether it is a 1099-Misc or a 1099-R.

The 1099-Misc is pretty straight-forward and easy to understand, there's been no tax taken out and 90% of the recipients haven't saved or made estimated payments. The biggest thing to worry about in this case is the self-employment tax, which is actually paying into your Social Security account. So in reality, you are just paying yourself.

Last but not least are those 1099-R withdrawals. The IRS wants folks to save for their retirement and they give you tax credits for doing so. But with the economy being such as it is and folks loosing their jobs, it's understandable that sometimes the only place to go for help out of debt is to cash in on those 401K or IRAs. This is where you can really get into trouble and accumulate a large amount of tax debt.

Number one, if you don't have federal and state withheld at the time of withdrawal then you have to account for that at filing.

Number two, the IRS imposes a 10% penalty for early withdrawal and that too can be sizable if you have made a partial or total withdrawal.

Let's look at a worse case scenario.

Say you withdraw only a portion of the balance.....$20,000. No tax is deducted at the time of withdrawal.

Come time to file here's what you can expect:

• You are looking at 15-25% tax rate depending on your bracket. This could be anywhere from $3,000 to 5,000 in tax on Federal alone.




• Now you've got to calculate the State tax. If your State has a rate of 7.5%, then your having to pay an additional $1,500.




• And to top it all off, you have to calculate the IRS 10% penalty of $2,000.

Now let me show you just how much of that $20,000 you are actually getting to help pay off those debts you need to pay.

• $20,000 Withdrawal amount


• - 5,000 Federal tax due @ 25% tax rate


• - 1,500 State tax due @ 7.5% rate


• - 2,000 10% penalty to the IRS

Of the $20,000 that you withdrew, you have lost 57.5% or $11,500 of your withdrawal after tax and penalty.

To compound the situation, if you fail to file a return for 3 years, then you're looking at a failure to file penalty along with interest accruing for that three year period. We won't even do the math on that one.

So is it really worth making that withdrawal when you're going to loose over 50% of what you've worked so hard to save. There are two things that you can be sure of....."death and taxes" and they both can be devastating.

Like I always say, "it's better to be proactive than reactive"!

Tax Help - A Little Planning Goes A Long Way!

Tax Planning Strategies for Retirees

A little planning ahead can go a long way to keeping your taxes as low as possible in retirement. In order to plan ahead properly, you'll need to understand how your retirement income will be taxed. Based on that, you can choose the right strategies to keep your tax bill as low as possible.

How Retirement Income is Taxed

Retirees often receive income from a variety of sources, including Social Security benefits, and distributions from pensions, annuities, IRAs and other retirement plans. We'll take a quick look at how income from various retirement plans are taxed, and then look at basic tax strategies.

Social Security Benefits

Your Social Security benefits may be completely tax-free or partially tax-free, depending on your total income.

Figuring out how much of your benefits will be included as taxable income involves some math.

For planning purposes, you should have an idea of whether your retirement income will cause some of your Social Security benefits to be taxed.

Pension and Annuity Income

Your pension or annuity may be fully or partially taxable. If all contributions to the pension were tax-deferred, then your distribution will be fully taxable. If you contributed some after-tax dollars to fund your plan, then you have some cost basis in the plan contract. Part of your distributions will be a tax-free recovery of your cost basis, and the remainder will be taxable income. Publication 575, Pension and Annuity Income, provides comprehensive information about figuring the taxable amount.

Pension and annuity income is reported to you using Form 1099-R. Your plan administrator should calculate the taxable portion of your pension distribution. For planning purposes, you will want to contact your plan administrator to find out what your pension payments will be, and what part of the payments will be considered taxable income.

401(k) Distributions

Distributions from your employer's 401(k) plan are fully taxable since the contributions excluded from your taxable income. Distributions from Roth 401(k) accounts are treated the same as Roth IRA distributions.

IRA Distributions

Distributions from your individual retirement account may be fully taxable, partially taxable, or completely tax-free depending on the type of IRA you have.

If you have a deductible Traditional IRA, your distributions will be fully taxable. You contributed funds using tax-deductible dollars, and tax is deferred on both the contributions and the earnings until they are withdrawn.

If you have any basis in a non-deductible Traditional IRA, your distributions will be partially taxable. A portion of your distribution represents a return of your non-deductible investment, and that portion is recovered tax-free.

Distributions from Roth IRAs are completely tax free as long as you meet two basic requirements. Your first Roth IRA contribution was made at least five years prior to any distribution, and the funds are distributed after you reach age 59 and a half. (For more information, see Are Roth Distributions Taxable? in Publication 590.

Required Minimum Distributions

Taxpayers must begin withdrawing funds from their 401(k) and Traditional IRA plans once the taxpayer reaches age 70 and a half. Distributions must start "by April 1 of the year following the year in which you reach age 70½," which is called the required beginning date. For more information, see When Must You Withdraw Assets? in Publication 590.

Roth IRAs and designated Roth 401(k) accounts are not subject to the minimum required distribution rules.

The minimum amount that must be distributed is your account balance divided by the life expectancy figures published by the IRS in Publication 590. You can use Web-based calculators to estimate your minimum distribution, such as this RMD calculator from accounting publisher CCH.

Plan to withdraw at least the minimum amount required from your IRA and 401(k) accounts.

Tax Strategies

Retirees have more control over their tax situation, since they can decide how much they need to withdraw from various retirement plans. Retirees can keep their taxes as low as possible by using these time-tested strategies.

Taking full advantage of the standard deduction or itemized deductions and personal exemptions. Together, your standard deduction or itemized deductions and your personal exemptions represents how much income will be tax-free. Retirees can coordinate taxable distributions with their mortgage payments, real estate taxes, and medical expenses.
Accelerate retirement distributions when you have excess deductions. If your standard deduction will exceed your taxable income, consider withdrawing more retirement funds than you need. By accelerating income when you have a zero or low tax rates, you'll avoid potentially paying more taxes in a future year.

Plan to take the Credit for the Elderly. There's a special tax credit for taxpayers age 65 or older. But qualifying for the credit takes careful planning. Your adjusted gross income fall beneath certain limits.

Maximize tax-free income. Taxpayers can exclude up to $250,000 in capital gains from selling a main home (up to $500,000 if married). Also, interest earned from municipal bonds is exempt from tax.

Defer retirement plan distributions until needed. Keeping your taxable distributions to a minimum will push more income to future tax years.

Social Security Benefits

Taxable Portion of Social Security

Social Security benefits may be non-taxable or partially taxable, depending on your total income from other sources. Use the "Social Security Benefits Worksheet" in the Instructions for Form 1040 (PDF), page 28, to calculate your taxable amount. Social Security benefits are reported on Form 1040 Line 20 or Form 1040A Line 14.

Social Security is Only Source of Income

"If the only income you received during the tax year was your social security or equivalent railroad retirement benefits, your benefits are probably not taxable and you probably will not have to file a tax return," according to the IRS.

Social Security benefits are taxed depending on your total income from all sources.

Here's how to calculate how much of your Social Security benefits is taxable.
Provisional IncomeProvisional income is your total worldwide income, including tax-exempt income, plus half of your Social Security benefits.

Taxable Social Security Benefits

If your provisional income is below the base amounts for your filing status, then your Social Security benefits are completely non-taxable.

If you provisional income is between the base amount and the additional amount, then half of your Social Security benefits over the base amount are taxable.

If your provisional income is over the additional amount, then 85% of your Social Security benefits over the additional amount plus $4,500 (or $6,000 if Married Filing Jointly) are taxable.

The taxable portion of your Social Security benefits cannot exceed 85% of your total benefits.

Essential Tax Resources

You may need to rely on the following information from the IRS regarding the tax treatment of your Social Security Benefits:

Social Security and Equivalent Railroad Retirement Benefits (Tax Topic 423)

Social Security and Equivalent Railroad Retirement Benefits (Publication 915)

Tax Help - Let's Stimulate Combat Pay

Combat Pay Can Count Toward Economic Stimulus Payment Eligibility

WASHINGTON — Military personnel serving in combat zones have the option of including their nontaxable combat pay on their 2007 or 2008 income tax returns if it helps their eligibility for the 2008 economic stimulus payments.

To receive the stimulus payment this year, combat zone personnel or their spouses must file a 2007 income tax return by Oct. 15. Otherwise, they can claim the economic stimulus payment on next year’s income tax return.

“The last thing we want our troops in Iraq or other war zones to worry about are their tax returns. But we do want the troops, and their families stateside, to know they may qualify for the economic stimulus payment,” said Linda E. Stiff, Acting Commissioner of the Internal Revenue Service.

Starting in May, the IRS will issue economic stimulus payments of up to $600 ($1,200 for married couples) plus a $300 payment for each qualifying child younger than 17. The payments are based on 2007 income tax returns. The payments for individuals will begin to phase out starting at $75,000 in adjusted gross income ($150,000 for married couples).

Even individuals and families who normally do not file a tax return because they have no filing requirement may qualify for an economic stimulus payment. They may be eligible for the minimum payment of $300 ($600 for married couples) plus the $300 for each qualifying child younger than 17.

People must have at least $3,000 in qualifying income to get a payment. Qualifying income is defined as any combination of earned income (such as wages or taxable income from self-employment), nontaxable combat pay and certain benefits from Social Security, Veterans Affairs and Railroad Retirement.

Military personnel who normally would not file an income tax return because their 2007 income is not taxable can file a simple Form 1040A with the IRS if they want to receive the economic stimulus payment. They should report their nontaxable combat pay on Line 40b of the Form 1040A to show at least $3,000 in qualifying income. The Department of Defense lists the amount of excluded combat pay, along with the designation, “Code Q,” in Box 12 of Forms W-2.

If a military person is serving in a combat zone, his or her normal tax filing requirement is extended until at least 180 days after leaving a combat zone. However, spouses or others with a power of attorney can prepare and file a 2007 income tax return on their behalf so that the stimulus payment is received this year.

The IRS has developed Package 1040A-3, an 8-page publication containing tax tips, a sample Form 1040A and a blank Form 1040A. The package, available at http://www.irs.gov/, contains everything needed to file the return immediately.

To ensure that a stimulus payment will be received in 2008, the return must be filed by Oct. 15 to allow sufficient time for processing.

There are a number of special tax code provisions that apply to members of the military serving in combat zones. They include:

All military pay earned by enlisted personnel or warrant officers is excluded from gross income;
Monthly pay of up to $6,867.60 earned by commissioned officers is excluded from 2007 gross income.

All military pay earned by enlisted personnel hospitalized because of injuries sustained in a combat zone is excluded from gross income during the period of hospitalization. The exclusion is limited to two years after the date of the termination of combatant activities in the combat zone.
Commissioned officers hospitalized because of injuries sustained in a combat zone have a monthly maximum exclusion of $6,867.60 for 2007 and have the same two-year limitation.
Military personnel who miss a tax filing deadline because they are in a combat zone have 180 days after they leave that combat zone to file a tax return, if they have taxable income.

All the provisions also apply to members of the Reserves and the National Guard.

The IRS reminds filers that they can get their stimulus payments faster by using direct deposit when they file their tax return.

In addition, the IRS urges people to file electronically. For people who normally are not required to file a tax return, the IRS and the Free File Alliance have a special program set up to allow for free electronic filing. For those with computer access, IRS Free File –Economic Stimulus Payment is available at IRS.gov.

Related Items: Economic Stimulus Payment Information Center

Tax Help - "Hey Business Owners! Have You Forgotten Something?"

Many business people pay more tax than needed because they miss deductions they might have taken. Here are some common business deductions for which you might be eligible. These deductions are presented as possibilities which you might want to explore. You may not be eligible for all of these deductions or a deduction may have restrictions on it. If you think you may be eligible for one or more of these deductions, check with your tax advisor for more information.

Carrying Charges

Carrying charges are fees and interest on property. Some carrying charges may be deductible if they are not capitalized (counted as long-term expenditures).
Research and Experimental Costs Costs of research and experimentation may be deductible if you choose not to list them as capital (long-term) expenses.

There are many restrictions and qualifications relating to this deduction.

Circulation Costs

If you have a publishing business, you may be eligible to deduct costs for circulating a newspaper, magazine, or other periodical. This deduction does not apply to land or property.
Environmental Cleanup CostsYou may be eligible to deduct costs for cleanup of environmental spills or other incidents, up to January 1, 2008. These costs are considered as “Other Deductions.”

Business Startup and Organization Costs

You may be eligible to deduct some of your business startup costs up to $5,000 and organizational costs up to $5,000 (for expenses after October 22, 2004). If your startup or organizational costs exceeded $50,000, your deduction may be limited.

Disability Access Costs

If you make improvements or remodel your business facility to accommodate customers and employees, you may be eligible for a deduction for these expenses. The annual limit for these deductions is $15,000.

Note that this list is provided as a reminder of possible deductions. For more details on these deductions, see IRS Publication 535.

Small Business Tax Deductions - Top 10 Tax Deductions F...Income Tax Deductions - Small
Business Tax Business Ded...Income Tax Deductions - Small Business Tax Business Ded...Business Expenses as Tax Deductions IndexBusiness Expenses and Deductions for Freelance Design B...

Alicia Hansen, writer for the Tax Foundation wrote a "very interesting" Easter tax article that I want to share with you. I love it when writers associate holidays with taxing issues, and this is one of the best that I have read in a while. Enjoy!

How Much Sales Tax Does the Easter Bunny Pay?
Posted on March 21, 2008 by Alicia Hansen

Everyone knows that the Easter Bunny delivers Easter baskets to children every year. However, much remains unknown about the mysterious rabbet: his whereabouts the rest of the year, where he purchases his supplies, the source of his funding, etc. Since we focus on taxes here at the Tax Foundation, we decided, despite the lack of reliable data, to delve into the tax angle of this story and speculate on how much the Easter Bunny pays in sales taxes.

We will assume that he shops mainly at grocery stores, convenience stores, and drugstores. If he were human he would most likely not have to pay sales taxes because he would have an exemption as a nonprofit entity. However, to the best of our knowledge, no state has granted tax-exempt status to a rabbit, so we'll assume that he pays sales taxes on his purchases.

We limited our analysis to one state for the sake of simplicity. We chose Iowa for two reasons. First, Iowa was home to the ridiculous pumpkin tax, which stipulated that pumpkins that were intended to be carved but not eaten would be taxed and pumpkins that were purchased for cooking were not taxable. We blogged about this and the story made the rounds of the internet.

Finally Iowa lawmakers came to their senses and did away with the tax discrepancy. As we were calculating the Easter Bunny's tax bill, it occurred to us that the same sort of policy could be applied to Easter eggs: A state could tax eggs that ware bought for consumption but exempt eggs that were bought solely to be dyed or hunted on Easter but not eaten. Of course this sounds absurd, but it would be just as logical as the pumpkin tax. Luckily, we know of no state that has imposed an Easter egg tax, so the Easter Bunny does not have to pay sales taxes on the eggs he buys for dying unless he purchases them in a state that does not exempt groceries from the sales tax.

The second reason we chose Iowa is that the state has adopted the Streamlined Sales Tax Project's definition of candy, which is taxable in Iowa even though most food is not. One of the changes is that food containing flour is not considered candy anymore, even if most rational people would argue otherwise. For example, classic Milky Way bars, which contain flour, are tax-exempt, while Milky Way Midnight (dark chocolate) bars are taxed because they do not contain flour. This obviously creates technical difficulties for retailers and confusion for consumers.

Imagine the frustration this causes the Easter bunny, who purchases vast quantities of candy and other items in many different cities and states and must take into account all the different sales tax rates and regulations when determining his budget each spring.

Remembering each state's rate and which items it applies to is hard enough, but remembering the differences among cities is even harder. In Iowa, as in many other states, local jurisdictions are allowed to levy local-option sales taxes and/or school infrastructure local-option sales taxes.

The statewide rate is 5%, and cities may add another 1-2% on top of that. Assuming that the Easter Bunny is a bargain hunter and hops from city to city to get the best deal, he must travel with a chart listing the sales tax rate in each city. He probably prints this chart from the Iowa Department of Revenue website and this list of which items are taxed and consults them every time he takes an item off the shelf, which probably wastes time.

The chart below shows the basic items in a typical Easter basket, not counting small toys or additional candy that parents may add. For the sake of simplicity we assume that every basket he delivers contains the same items. The total per-basket tax bill of 42 cents is not all that important; the thing to consider is whether it should be this complicated for a renowned, hardworking, generous rabbit who brings so much joy to children to figure out how much sales tax he owes. If it's that hard for the Easter Bunny, imagine how hard it must be for humans.

(Click here if you're having trouble viewing this chart.)

How Much Sales Tax Does the Easter Bunny Pay?
Easter Bunny's Iowa Sales Tax Bill for One Easter Basket

Item & Amt per Basket Price (a) Price per Basket City Tax (5% Plus Local) Tax per Basket
Basket $1.99 $1.99 West Burlington 7% $0.14
Easter grass, 1/2 pkg 2 for $3.00 $0.75 Farnhamville 5.5% $0.04
4 plastic eggs $5 - 24 eggs $0.84 Moorland 6% $0.05
Jelly beans to fill plastic eggs, 1/4 package
$2.00 pkg $0.50 Yarmouth 7% $0.04
Hershey's Whoppers Mini Robin's Eggs malted milk ballsto fill plastic eggs, 1/3 package
2 pks $3.00 $0.50 Kingston 7% exempt- they contain flour
Chocolate rabbit $2.50 $2.50 Adair 6% $0.15
3 dyed eggs(Easter Bunny mixes his own plant-based dyes; no commercial dyes were purchased, only plain eggs)
2 dz $3.00 $0.38 Sperry 7% exempt (food)

Total $7.46 $0.42

(a) Prices were found at ShopLocal.com.

Tax Help - Adding Insult to Injury for State Business Taxes

Did you know that some states impose "business taxes?" For example, Connecticut has a $250 state business tax (some state lawmakers have suggested repeal of this tax).

Now Michigan has imposed a new business tax (MBT) that is increasing tax rates for some small businesses over 300 percent. Business advocacy groups, like the National Federation for Independent Business ( {NFIB), and the Michigan Business and Professional Organization (MBPO) are working to repeal this new business tax.

If your state has a general business tax like these, I'm sure you will hear about it. But you might want to check with your state Secretary of State, and keep up with state business advocacy groups too.

Tax Help - Stimulus for Businesses

Business Incentives Included in Economic Stimulus Package

Business owners will be one of the recipients of the economic stimulus package now being sent to President Bush for signature. Businesses will receive "incentives, including a doubling to $250,000 from $125,000 in the amount of expenses businesses can immediately write off," said the New York Times .

The stimulus plan will allow small businesses to deduct more property and equipment expenses this year, lowering their taxable income. It is hoped that this plan will provide incentives to small businesses to increase spending and investment.

In other words, the government wants you to spend more money on equipment for your business, up to the $250,000 limit, to stimulate the economy.

Tax Help - Capital Gains & Dividend Taxes

Capital Gains & Dividend Taxes

The taxation of dividends and capital gains is one of the most controversial issues in public finance. Relatively high effective tax rates on capital income, particularly that emanating from the corporate sector, have the potential to discourage investment and impede economic growth.

Corporations must pay corporate income taxes on profits before they distribute dividends to shareholders, and shareholders pay an additional, individual-level tax on those amounts.

Imposing two layers of taxation on corporate income can result in a total tax rate on capital income from corporations that is substantially higher than the rate on other types of income. In recent years, policymakers have become concerned about the economic damage caused by relatively high effective tax rates on capital income, and in 2003 the tax rate on capital gains and dividend income was lowered to 15 percent.

Related Blog Entries

Capital Gains Taxes and Inflation, by Curtis S. Dubay, July 31, 2007

New Tax Foundation Primer on Investment Income Taxation, by Alicia Hansen, July 17, 2007

Tax Court Rules Lottery Winnings Are Not Capital Gains, by Alicia Hansen, November 14, 2006

Growing AMT Wiping Out Capital Gains and Dividend Tax Reductions, by Andrew Chamberlain, July 24, 2006

Feldstein: Taxes on Investment Income Are High and Distortionary, by Andrew Chamberlain, June 21, 2006

Tax Debt Help - Tax Relief for Cancelled Debt & Mortgage Relief

People who have lost their homes through foreclosure or who have restructured their mortgage loans may qualify for tax relief under a new tax law, the Mortgage Forgiveness Debt Relief Act of 2007.

Highlights of Mortgage Debt Relief

Exclude up to $2 million of debt forgiven or canceled by a mortgage lender on a main home.
Both mortgage restrucuring and foreclosures qualify

Available for the years 2007, 2008, or 2009.

Claim the tax relief using IRS Form 982 (PDF)

What is Canceled Debt Income?Anytime a lender cancels, or forgives, your debt, that is considered income to the debtor. The tax laws considers this income, and the debtor is taxed on forgiven debt unless an exception applies.

Canceled Debt That is TaxableAnytime a lender cancels or forgives debt, that is usually a taxable event. "Generally, if a debt you owe is canceled or forgiven, other than as a gift or bequest, you must include the canceled amount in your income." (Source: Publication 525)

Debt forgiveness is reported by the lender using Form 1099-C, Cancellation of Debt. Individuals report the forgiven debt on their Form 1040, Line 21 as other income.

The tax laws provide several exceptions to the tax treatment of forgiven debts. Tax-free treatment of mortgage debt is the most generous and easiest to calculate.

Mortgage Restructuring and ForeclosuresIndividuals who lost their homes through foreclosure will not have to pay income tax on the amount of mortgage debt that was forgiven or canceled. Tax-free treatment is also available to people who restructured their mortgages loans for a lower balance.

The tax-free exclusion applies to canceled mortgage debt of up to $2 million (or $1 million is married and filing a separate return). There are additional details to consider to qualify for this tax exclusion. The house must have been used as a main home, which means it was the principal place of residence for the debtor. Also, the debt must have been used to buy, build, or make substantial improvements to the residence.

Some mortgage debt won't qualify for this tax-free exclusion and will be considered taxable income. Mortgage loans that don't qualify include home equity loans where the proceeds were not used to buy, build, or improve the residence. Also, mortgages for second houses and rental properties do not qualify for the exclusion. However, some or all of this debt might qualify for other exclusions.

The IRS explains the tax break this way: "Taxpayers can exclude up to $2 million of debt forgiven on their principal residence. The limit is $1 million for a married person filing a separate return. This provision applies to debt forgiven in 2007, 2008 or 2009. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure qualify for this relief." (Source: IRS.gov)

Individuals who qualify for this tax relief will need to use Form 982 to report the canceled debt.
Other Exclusions for Canceled DebtsBesides the provision for mortgages on main homes, the tax code provides other ways that canceled debt can be tax-free. Canceled debts do not need to be included in taxable income if the debt was canceled in a bankruptcy case, if the individual is insolvent, or if the canceled debt was intended as a gift. Certain business or farm property may also qualify for tax-free treatment.

The insolvency exclusion is particularly relevant, as it will likely apply to borrowers with home equity loans or mortgages on second homes and rental properties.

This insolvency provision will prove helpful to individuals who don't otherwise qualify for the mortgage debt relief. To be considered insolvent, the person's liabilities must exceed the fair market value of their assets. This is will be especially true of borrowers who's properties have dropped in value and who now must restructure their loans or surrender their properties through foreclosure.

You are insolvent when, and to the extent, your liabilities exceed the fair market value of your assets. Determine your liabilities and the fair market value of your assets immediately before the cancellation of your debt to determine whether or not you are insolvent and the amount by which you are insolvent. (Source: Publication 908)

Tax Help - What Will the Stimulus really "Stimulate"

As the tax year nears an end, the one thing that has stuck out in my mind is how excited folks are to be getting some "free" money from the Stimulus Package.

In my mind I'm trying to figure out just what this freebie package is really going to help. What are you going to be spending your free money on? And just how are we supposedly going to help boost our economy as the legislators predict.

Consider these scenarios and you decide for yourself.

• If you spend your money on clothing then you're sending more money over to China, Mexico and the Middle Eastern countries.


• If you spend your money in Walmart, Target or any of the other chain merchants, then you're again sending more money over to other countries.


• If you buy new furniture.....well, there you go again sending more money overseas.

Any way you look at it, a large percentage of the stimulus money will be going overseas whether we want to think about it or not.

How many folks do you know that will actually put that money in savings and let it grow or even hold on to it for any period of time? My guess is that a large majority will just plain blow it as soon as they get it in the mail.

Here's a thought for those politicians who want to "stimulate" something:

• lower the price of gas at the pumps and you might see more folks traveling and spending that money within this country


• take that money and spend it on improving our education system


• or helping the homeless

There are a millon ways to boost the economy but the one boost that would benefit this country more is to make Americans feel less of a strain on a daily basis at the pumps or in the grocery store rather than a one-shot deal. It makes me think that it's just another way of pulling the wool over our eyes or passifying us for a short time.

We've been told that this will be treated as a tax credit on our returns for next year, but I remember in 2001 when we got the "advance" on our refunds and it had to be deducted from refunds. Trust me, I remember all those folks coming in to have their returns prepared and not realizing that it had to be "paid back" and how mad they were when they left.

It's hard to imagine how the Federal government can just "give away" $185 billon in free money. My rule of thumb is that "nothing comes free" and "anything that sounds good isn't necessarily good".

Of course, this is solely my opinion and you know what they say about opinions!

Tax Debt Help - What's Up With Those Penalties?

“Is there a penalty for not filing even if you have a refund coming?”

If you haven't filed a return with the IRS within three years – you will lose your refund.

And that is your penalty and it can be very costly depending on how much refund you were to get.

Normally, penalties are based on the balance due. When there isn’t one, 0×25% is still 0.

However, when you don’t file, IRS may not know that you have a refund coming. If they prepare a substitute tax return for you it will be based on single, no dependents and no deductions.

This can be especially rough if you sold stocks at a loss. IRS doesn’t know how much you paid for the stock. They only get the report that you sold the securities. You could get hit with a bill for thousands of dollars.

So, not filing when you have a refund due may not generate any immediate penalties – you’re the only one getting hurt.

Remember, there are no tax deductions for donations to IRS.

Tax Debt Help - Wage Garnishments

Wage garnishments are taken by the IRS in order to recover back taxes from individuals. Given adequate notice, this government agency can levy your wages to pay off what you owe without your permission. By law, wage garnishment rules allow the IRS to take all but $3.83 an hour from your wages.

That amount is not enough for anyone to live on and can leave you with next to nothing to pay for necessities like bills, rent/mortgage, and food for your family. The rules of wage garnishment are clear and precise, and you should seek out professionals who understand these rules.

It would be well worth your time to familiarize yourself with the Wage Garnishment Rules as published by the IRS. After reading through the rules, you will better understand how important it is to get the best professional help available. When seeking help, ask questions such as expertise and of course, check with your Better Business Bureau for any complaints that might have been filed.

The resolution of tax debt is a fast-growing industry, especially with the increasing number of non-filers. Hiring a firm of this type can relieve you of your tax burdens quickly so that you can move on with your life and get back on track financially.

As I always say, “It is always best to be proactive than reactive!”

Tax Help - $1.2 Billon Waiting for Those Who Have Not Filed

IRS Has $1.2 Billion for People Who Have Not Filed a 2004 Tax Return

WASHINGTON — Unclaimed refunds totaling approximately $1.2 billion are awaiting about 1.3 million people who failed to file a federal income tax return for 2004, the Internal Revenue Service announced today. However, to collect the money, a return for 2004 must be filed with an IRS office no later than Tuesday, April 15, 2008.

Those due a refund who did not file a 2004 tax return could collect even more money by also filing a 2007 tax return to claim the economic stimulus payment. To receive a payment, taxpayers must have a valid Social Security number, $3,000 of qualifying income and file a 2007 federal tax return. Millions of retirees, disabled veterans and low-wage workers who usually are exempt from filing a tax return must do so this year in order to receive the stimulus payment. Eligible people will receive up to $600 ($1,200 for married couples), and parents will receive an additional $300 for each eligible child younger than 17.

The IRS estimates that half of those who could claim refunds for tax year 2004 would receive more than $552. In some cases, individuals had taxes withheld from their wages, or made payments against their taxes out of self-employed earnings, but had too little income to require filing a tax return. Some taxpayers may also be eligible for the refundable Earned Income Tax Credit.

In cases where a return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund. If no return is filed to claim the refund within three years, the money becomes property of the U.S. Treasury. For 2004 returns, the window closes on April 15, 2008. The law requires that the return be properly addressed, postmarked and mailed by that date. There is no penalty assessed by the IRS for filing a late return qualifying for a refund.

“Time is getting short for claiming the tax refund you may be entitled to,” said acting IRS Commissioner Linda E. Stiff. “But you can’t get it unless you file the tax return. Don't take a chance on losing your tax refund. And this year, remember that you need to file a 2007 tax return in order to receive an economic stimulus payment.”

The IRS reminds taxpayers seeking a 2004 refund that their checks will be held if they have not filed tax returns for 2005 or 2006. In addition, the refund will be applied to any amounts still owed to the IRS and may be used to satisfy unpaid child support or past due federal debts such as student loans.

By failing to file a return, individuals stand to lose more than refunds of taxes withheld or paid during 2004. Many low-income workers may not have claimed the Earned Income Tax Credit (EITC). Although eligible taxpayers may get a refund when their EITC is more than what they owe in tax, those who file returns more than three years late would be able only to apply it toward the taxes they owe (if any). They would not be able to receive a refund if the credit exceeded their tax.

Generally, unmarried individuals qualified for the EITC if in 2004 they earned less than $34,458 and had more than one qualifying child living with them, earned less than $30,338 with one qualifying child, or earned less than $11,490 and had no qualifying child. Limits are slightly higher for married individuals filing jointly.

Current and prior year tax forms and instructions are available on the Forms and Publications page of the IRS Web site at IRS.gov or by calling 1-800-TAX-FORM (1-800-829-3676). Information about the Earned Income Tax Credit and how to claim it is also available on the IRS Web site, IRS.gov. Taxpayers who need help also can call the toll-free IRS help line at 1-800-829-1040.

A state-by-state breakdown of estimates for individuals who failed to file a 2004 return with a refund due is attached.

Related Item: Economic Stimulus Payments Information Center

Tax Help - Stimulus Package Payment Schedule

IRS Announces Economic Stimulus Payment Schedules, Provides Online Payment Calculator

WASHINGTON — The Internal Revenue Service announced today that it will begin sending more than 130 million economic stimulus payments starting May 2. The initial round of weekly payments will be completed by early July.

The IRS also announced the availability of a new online calculator on IRS.gov to help people determine the amount of their stimulus payments.

Stimulus payments will be made by direct deposit to people who choose to receive their 2007 income tax refunds through direct deposit. All others will receive their economic stimulus payments in the form of a paper check.

“To receive an economic stimulus payment, people just need to file their tax returns as they usually do,” said IRS Acting Commissioner Linda E. Stiff. “The payments will be automatic for the vast majority of taxpayers. Some lower-income workers and recipients of certain Social Security and veterans benefits who don’t normally need to file a tax return will need to do so in order to receive a stimulus payment. IRS.gov has all the information people need to help them obtain a stimulus payment.”

Stimulus payments will be sent out in the order of the last two digits of the Social Security number used on the tax return.

Because the IRS will use the Social Security number to determine when checks are mailed, taxpayers may receive their checks at different times than their neighbors or other family members. On a jointly filed return, the first Social Security number listed will determine the mail-out time.

The IRS expects to make about 34 million payments within the first three weeks after the payment schedule begins May 2. With more than 130 million households expected to receive stimulus payments, more than 25 percent of the payments will be made in the first three weeks.

Taxpayers who choose direct deposit on their federal income tax returns can expect to receive their economic stimulus payments between May 2 and May 16 provided their returns were received and processed by April 15, 2008. For taxpayers who did not choose direct deposit on their tax return but whose returns were processed by April 15, the paper checks will be in the mail starting May 16, with the initial mailings completed by around July 11.

The IRS is also announcing today the availability of an on-line calculator on IRS.gov to help taxpayers determine if they are eligible to receive an economic stimulus payment and if they are, how much they can expect. Anyone who has prepared a 2007 income tax return can use the calculator. It will ask taxpayers a series of questions, so they should have their 2007 tax returns handy. After answering the questions, the calculator will provide the projected dollar value of the payment.

Below are the schedules for economic stimulus payments related to tax returns processed by April 15, 2008.

Stimulus Payment Schedule for Tax Returns
Received and Processed by April 15



Direct Deposit Payments

If the last two digits of your Social Security number are:

Your economic stimulus payment deposit should be sent to your bank account by:

00 – 20 May 2

21 – 75 May 9

76 – 99 May 16

Paper Check

If the last two digits of your Social Security number are:
Your check should be in the mail by:

00 – 09 May 16

10 – 18 May 23

19 – 25 May 30

26 – 38 June 6

39 – 51 June 13

52 – 63 June 20

64 – 75 June 27

76 – 87 July 4

88 – 99 July 11

A small percentage of tax returns will require additional time to process and to compute a stimulus payment amount. For these returns, stimulus payments may not be issued in accordance with the schedule above, even if the tax return was processed by April 15.

All or part of an economic stimulus payment may be applied to back taxes or certain other debts of the taxpayer, such as delinquent child support and student loans. In such cases, the IRS will send a letter to the taxpayer explaining the offset.

To accommodate people whose tax returns are processed after April 15, the IRS will continue sending weekly payments. People who file tax returns after April 15 and receive a refund can expect to receive their economic stimulus payments in about two weeks after receiving their tax refunds, but not before the date they would have received their payment if the return had been processed by April 15. To ensure taxpayers receive their stimulus payment this year, they must file a tax return by Oct. 15.

Two bureaus of the Treasury Department are involved in making the payments. The IRS will calculate the amount of each economic stimulus payment based on the tax year 2007 income tax returns it receives. The IRS will then forward the information to the Financial Management Service (FMS), which is the bureau of the Treasury Department that makes federal payments such as Social Security benefits, federal income tax refunds and, now, economic stimulus payments.

The IRS reminds taxpayers that they can get their stimulus payments faster by using direct deposit when they file their tax return.

In addition, the IRS urges taxpayers to file electronically. For people who normally don’t need to file a tax return, the IRS and Free File Alliance have a special program set up to allow for free electronic filing.

Tax Help - Low-Income Workers

IRS Encourages Organizations on Outreach to Low-Income Workers

WASHINGTON — As part of a national outreach effort, the Internal Revenue Service today encouraged nonprofits, charities and other community groups to reach out to low-income Americans who may not realize they are eligible for the 2008 economic stimulus payment.

Workers who normally do not file a tax return because their income is too low but who have at least $3,000 in wages, tips or salary or other qualifying income may be eligible for an economic stimulus payment. However, they must file a 2007 income tax return in order to receive a payment.

The IRS encouraged government and nongovernmental organizations, especially churches and charities that work with low-income Americans to help spread the word to individuals and families. Because it lacks name and address information for many low-wage workers, the IRS is unable to contact everyone who may be eligible.

"Many people who don't normally file a tax return may not realize they need to take an extra step this year to receive an economic stimulus payment," said Acting IRS Commissioner Linda E. Stiff. "We are encouraging groups across the country to help us get out the word that low-income workers and others need to file a tax return in order to receive a stimulus payment."

"Some low-income taxpayers may never have filed a tax return before yet qualify for an economic stimulus payment," added National Taxpayer Advocate Nina E. Olson. "Community-based organizations can play a vital role in spreading the word about the steps people must take to receive their payment. Part of that message should be to seek help from reputable sources and avoid Internet solicitations."

Generally, workers who earn less than $8,750 if single, $11,250 if a single parent or $17,500 if married are not required to file a tax return. This year, however, they should file a simple tax return if they had at least $3,000 in qualifying income which is defined as earned income, nontaxable combat pay or certain Social Security, Veterans Affairs or Railroad Retirement benefits. It also can be a mix of pay and benefits.

The IRS will mail 20.5 million information packages to Social Security and Veterans Affairs recipients, starting next week. In all, more than 130 million individuals and couples may be eligible for an economic stimulus payment of up to $600 ($1,200 for married couples.). Some households may qualify for an additional $300 for each eligible child younger than 17.

People who normally do not file a tax return may be eligible for the minimum payment of $300 ($600 for married couples) plus the additional $300 per eligible child. There are some caveats: People must have at least $3,000 in qualified income, valid Social Security numbers for themselves and their qualifying children and cannot be a dependent or be eligible to be claimed as a dependent on someone else’s tax return.

Organizations with interest in providing information to Americans who may be eligible for these payments can go to IRS.gov for materials and marketing tools to help spread the word.

An IRS.gov Web page, Economic Stimulus Payments: Marketing Products for Partners, has one-page flyers, envelope stuffers and more information that can be downloaded. Also available is the Package 1040A-3, a 8-page package containing everything low-wage workers need to file a tax form immediately.

The IRS also is working with a number of key national organizations such as AARP, National Community Tax Coalition/Center for Economic Progress, National Council on Aging, Center for Budget and Policy Priorities, National Disability Institute, United Way of America, Catholic Charities, Disabled American Veterans and others.

In addition, the IRS is reaching out to small business employers and employees across the nation with the help of organizations such as the United States Chamber of Commerce, the National Federation of Independent Business and the National Association for the Self-Employed.

Starting in May, the IRS will begin issuing economic stimulus payments based on the 2007 tax returns being filed this spring. Filers who have bank accounts can receive their stimulus payments faster by using direct deposit.

Free help is available. For those with computer access, IRS Free File –Economic Stimulus Payment is available at IRS.gov. People can use IRS Free File to prepare returns and submit them electronically for free.

People also can print out Package 1040A-3 (pdf), the 8-page publication containing tips for completing a return, a sample Form 1040A and a blank Form 1040A, which people can complete and mail to the IRS.

There are also thousands of free tax preparation sites staffed by volunteers nationwide. And, there are more than 400 IRS Taxpayer Assistance Centers nationwide.

Related Items:

Economic Stimulus Payment Information Central
Economic Stimulus Payment: Information for Low-Income Individuals

Tax Debt Help - Interest Rate Falls

Interest Rate for Tax Underpayments Drops to 6%

The Internal Revenue Service has lowered the interest rate charged on balances owed to the agency to 6%. IRS interest rates fluctuate quarterly, and the 6% rate applies beginning on April 1, 2008. Previously, the interest rate for the first quarter of 2008 was 7%, and prior to that the interest rate was 8%.

Individuals who have outstanding balances with the IRS pay penalties and interest on the balance due. Besides interest, the IRS charges a late payment penalty of half a percent per month (0.5%) on any outstanding balance. If tax returns have not been filed, a penalty of 5% per month up to a maximum of 25% is assessed on the tax owed. Thus, people who are filing a return and want to figure out a payment plan can use a standard loan calculator to calculate how much their monthly payments could be, but will need to use a annual rate of 12% to calculate their payments (6% for the interest and another 6% for the late payment penalty).

This drop in interest rates by the IRS might make it easier for individuals facing balances to set up a more affordable payment plan. However, it would be wise to compare the effective rate on a payment plan (12%) to other lending possibilities to make sure they are paying the least amount of finance charges.

More information: Interest Rates Drop for the Second Quarter of 2008

Tax Help - Should I report my inherited house?

Jimmy R. in Alaska writes, "My sister and I inherited a house in 2004 from my uncle. Neither of us have ever lived in the house, nor have we rented it out. We sold the house in 2007 for $10K less that the FMV upon the death of my uncle. Do we need to report the sale to on our tax returns? Can we claim the loss?"

My first response is.............REPORT EVERYTHING!!!

Since neither of you have never lived in it, for you, the house was never a personal residence. Essentially, in your hands, it became investment property.

You must certainly report the sale. Report the sale on Schedule D.

For purchase date, since you have the property for more than a year, use the date of death. And for purchase price, use the value at date of death. PLUS….

You paid property taxes, insurance and utilities on the house all these years. You protected your investment. Did you take deductions for the property taxes? If you didn’t, then add them to the value at date of death. If you did, skip that. But add in all the other costs you were never able to deduct – insurance, utilities, gardener, etc. Hopefully, you have receipts?

Don’t forget to add all the commissions and selling costs to the cost of the house. Those will all reduce your profits, too.

Also, be sure you put a copy of the appraisal at date of death into your tax file and your sister’s, just in case you’re audited.

So your loss may be more than just the $10,000.

Tax Help - Stimulus Paks to Social Security & Veteran Recipients

Special Economic Stimulus Payment Packages Go to Social Security, Veterans Recipients

WASHINGTON — Starting next week, the Internal Revenue Service will mail special information packages to 20.5 million recipients of Social Security or Veterans Affairs benefits to help them get their 2008 economic stimulus payment.

The 10-page tax package contains everything the recipients will need to file a 2007 tax form immediately. Each package contains an informational notice, tips for completing Form 1040A, a sample Form 1040A and an actual Form 1040A for the filer to complete.

The package is specially designed for people who may qualify for an economic stimulus payment but who normally aren’t required to file a tax return.

“We want to put everything right at the fingertips of the people who need this information the most,” said Linda E. Stiff, Acting IRS Commissioner. “In some cases, seniors and others in this group haven’t needed to file a tax return for years or even decades. To help them get a stimulus payment, we’re doing everything we can to make this as easy as possible. These packages mean many people will just need a pen and a stamp, and the IRS will do the rest.”

Under the Economic Stimulus Act of 2008, people may be eligible for the minimum payment of $300 ($600 for married couples) even if they do not normally file a tax return. There also is an additional payment of $300 for people with eligible children younger than 17. However, people must file an income tax return in order to receive the payment.

People who don’t normally need to file also can use Free File – Economic Stimulus Payment, which is available at IRS.gov. Several Free File software providers are making their products available for the simplified filing of a tax return.

“These stimulus payments have the potential to help people in real need and stimulate our economy,” said Tom Nelson, AARP’s Chief Operating Officer. “The IRS, through efforts like this, is doing a great job of informing people that they might be eligible for a stimulus payment, offering step-by-step guidance on how they can apply, and what scams they need to avoid.”

To qualify for the minimum economic stimulus payment, people must have at least $3,000 in any combination of qualifying income from retirement, disability or survivors’ benefits from the Social Security Administration; disability compensation, disability pension or survivors’ benefits from the Department of Veterans Affairs; Tier 1 benefits from Railroad Retirement, certain combat pay and earned income from wages, salaries, tips or net earnings from self-employment that are includible in taxable income.

The mailing list of 20.5 million names represents Social Security and Veterans Affairs benefit recipients who did not file a tax return in 2006, allowing the IRS to directly target the special package to people likely to qualify for a stimulus payment but who may not otherwise file a tax return this year. The mailing, called Package 1040A-3, is separate from more than 130 million other economic stimulus letters (Notice 1377) being sent this month to taxpayers who filed tax returns in 2006.

Generally, the special mailing does not include low-wage workers without a filing requirement who could qualify for economic stimulus payments. The IRS is working with numerous community, governmental organizations and charitable groups to reach low-income workers and their families. People in this category also need to fill out a tax form, preferably a simple Form 1040A.

With so many people potentially unaware of the stimulus payments, Stiff encouraged people to reach out to help their friends and family members. “We don’t want anyone to fall through the cracks,” Stiff said. “People can help friends and family members by making them aware of the payments or helping fill out the forms. These forms are very simple. In just a few minutes you can complete the entire process by filling in just a few lines.”

A sample Form 1040A is included in the tax package and is available at IRS.gov. People need to complete the lines for the mailing label and provide a Social Security number; the filing status (single or married) and exemptions (children younger than 17 and their Social Security numbers).

People with earned income must complete Line 7 to report their 2007 annual income. Recipients of Social Security, VA and Railroad Retirement payments must complete Line 14a of Form 1040A to report their 2007 annual benefits. Certain recipients should have a Form SSA-1099 or Form RRB-1099 with that information. Or, people can multiply their 2007 monthly benefit by the number of months the payment was received for 2007 to estimate their annual benefit amount.

The IRS encourages recipients to complete the direct deposit information on the Form 1040A if they have bank accounts. Direct deposit will be the easiest and fastest way to receive a payment. The IRS also encourages people to file their income tax return as soon as possible. The IRS will begin issuing economic stimulus payments starting in May.

The IRS reminds taxpayers it does not gather information for stimulus payments over the telephone, and it does not send unsolicited e-mail to taxpayers about tax account matters. If taxpayers receive an unsolicited e-mail from someone claiming to be from the IRS, don't click on any links. People should forward it to phishing@irs.gov, and then delete it. The only official IRS Web site .

To be eligible for economic stimulus payments, people must have valid Social Security numbers, have at least $3,000 in qualifying income and not be a dependent or eligible to be a dependent on someone else’s income tax return.

For taxpayers who normally file an income tax return, the maximum stimulus payment is $600 ($1,200 for married couples), amounts that will phase out starting with adjusted gross income of $75,000 ($150,000 for married couples). For taxpayers who file a 2007 income tax return, the amount of the economic stimulus payment will be calculated automatically by the IRS.

Related Items:

Package 1040A-3
Free File - Economic Stimulus Payment
Economic Stimulus Payment Information Center

Tax Help - Figuring Out Those W-4 Allowances

If you're being claimed as a dependent by someone else, working more than 1 job or receiving unearned income, the number of allowances you may claim when filing your W-4 will be affected. Generally, if you're single, work 1 job, and no one can claim you as a dependent, you can claim Single with 1 allowance. The status (Single or Married) is indicated on line 3 of Form W-4. The number of allowances you claim is entered on line 5.

Am I exempt from withholding?

You can claim exemption from withholding if you didn't have a federal income tax liability last year and don't expect to have one this year. You can't claim exemption from withholding if:



you can be claimed as a dependent by another person.

your total income is expected to be more than $900 and is expected to include more than $300 of unearned income (for example, interest and dividends).

Note: Being a student doesn't automatically qualify you to be exempt from withholding. You still must meet the other requirements. If you meet the requirements to file exempt, simply write the word "exempt" on line 7 of Form W-4 and file it with your employer.

Someone Claims You as a Dependent

Your parents or someone else can claim you as a dependent if you didn't provide more than half your support for the year. If someone else will claim you as a dependent, then you're not entitled to claim an allowance on line A of the personal allowances worksheet on Form W-4.


Withholding When Working More Than 1 Job

If you're working more than 1 part-time job or a full-time job and a part-time job, you may need to compensate for the extra job by altering your withholding. Tax is withheld from your income from any job based only on the income from that job. The income from the part-time job is commonly low enough that the amount withheld will not be enough to cover the tax on that income. If this is the case,be sure to increase your withholdings at your primary job to compensate.

If you have more than one job or you're married and both you and your spouse are working, complete the Two Earner/Multiple Jobs Worksheet on page 2 of Form W-4 to compute what to claim for each job. This can help you avoid a balance due at tax time.

Income Other Than Wages

Perhaps you receive a taxable scholarship, income from investments your grandmother gave you, you won a prize, or you're doing some self-employment work on the side. Your tax liability will include all of these items, so you should factor that in when completing your W-4. For example: You determine that claiming 1 allowance will cover the money you earn from your wages, but some extra income is going to add $200 to your tax liability. The simplest way to compensate for that extra income is have an additional amount withheld from each paycheck. You get paid every other week, and $200 over 26 weeks makes an additional $8 each pay period. Enter $8 on line 6 to cover the tax on that extra income.

The worksheets provided with Form W-4 are designed to help you compute the exact amount of withholding you require. Be sure to use them to verify you are on the right track with your withholding. Check with a tax professional for help with your W-4 if you have questions.