Direct Deposit Puts Your Money In Your Pocket...Faster

Don’t wait around for a paper check. Have your federal tax refund deposited directly into your bank account. Choosing Direct Deposit is a secure and convenient way to get your money in your pocket faster.

Here are the main reasons 66 million taxpayers chose Direct Deposit in 2008:

1. Direct Deposit is secure. There is no chance for a check to get lost in the mail. Thousands of checks are returned to the IRS by the US Post Office every year as undeliverable mail. Direct Deposit eliminates the possibility you won’t receive your check and prevents your refund from being stolen.

2. Direct Deposit is convenient. The money goes directly into your bank account. You won’t have
to make a special trip to the bank to deposit the money yourself.

3. Direct Deposit is easy. When you’re preparing your return, simply follow the instructions for “refund” on your return. Just make sure you entered the correct bank account and bank routing numbers on your tax form and you’ll receive your refund quicker than ever.

4. Direct Deposit offers options. You can also electronically direct your refund to multiple accounts. With the "split refund" option, taxpayers can divide their refunds among as many as three checking or savings accounts and three different U.S. financial institutions. A word of caution — some financial institutions do not allow a joint refund to be deposited into an individual account. Check with your bank or other financial institution to make sure your direct deposit will be accepted.

For more information about direct deposit of your tax refund and the split refund option, check the instructions for your tax form.

This and other helpful tips are available in IRS Publication 17, Your Federal Income Tax. To get a copy, visit the Forms and Publications section of the IRS Web site, IRS.gov, or call 800-TAX-FORM (800-829-3676).

E-file
Publication 17, Your Federal Income Tax (PDF 2,085K)
1040 Central
Form 8888

Pub 17 Now Available Online

The IRS has placed its comprehensive tax guide for individuals on IRS.gov, updating it for tax year 2008. The updated on-line version of IRS Publication 17, “Your Federal Income Tax,” contains more than 900 interactive links.

Publication 17 has been updated with important changes for 2008, including information on the new recovery rebate credit, new first-time-homebuyer credit, and an additional standard deduction for real estate taxes. It has been published annually by the IRS for more than 65 years and has been available on the IRS Web site since 1996.

As in prior years, the publication provides information on how to file an individual tax return, what to include as income, how to calculate capital gains and losses, how IRAs and other expenses can affect how much income to report, whether to take the standard deduction or itemize, and how to figure taxes and credits.

Publication 17 is available on line, however, those who do not have access to the Internet can call 1-800-829-3676 to request a free copy from the IRS. Printed copies will be available in January 2009.

Ten Basic Tax Terms Everyone Should Know!

Knowledge is power and I truly believe that everyone should have power over their own financial and tax well-being. Here are list of basic terms that I believe every taxpayer should know.

1. AGI -- Adjusted gross income, or AGI, is all the income you receive over the course of the year such as wages, interest, dividends and capital gains minus items, such as contributions to a qualified IRA, some business expenses, moving costs and alimony payments. The adjusted gross income is the first step in calculating your final federal income tax bill.

2. Credits -- Tax credits are much like credits you get from a store. After you calculate your tax bill, you can use the credit to reduce the amount of the check you must write to Uncle Sam. Tax credits are more valuable than deductions because they directly cut the amount of tax you owe, rather than reducing the amount of taxed income. A $200 credit, for example, will turn a $1,000 tax bill into only $800. A few could even give you a refund you weren't expecting.

3. Deductions -- Deductions are expenses that the Internal Revenue Service allows you to subtract from your AGI to arrive at your taxable income. In most cases, the lower your income, the lower your tax bill. If, for example, a single filer has income of $38,000 and $8,000 in deductions, then he would pay taxes only on $30,000. The IRS offers all filers a standard deduction amount (more on this later). Some other deductions, such as student loan interest, moving expenses, deductible IRA contributions and alimony payments, are also listed directly on Form 1040A or long Form 1040. The term is most commonly associated with the itemized deductions (more on this later, too) that are claimed by taxpayers who file Schedule A.

4. Standard deduction -- This is a fixed dollar amount that a taxpayer can subtract from his or her income. The standard deduction is available to all filers and is determined by the taxpayer's filing status. The amounts change each year because of inflation adjustments; you can find the current standard deduction levels listed on each of the three individual tax forms. This deduction method is used by most taxpayers and eliminates the need for them to itemize actual deductions such as medical expenses, charitable contributions or state and local taxes.

5. Itemized deductions -- These are expenses that can be deducted from your AGI to help you reach a smaller income amount upon which you must calculate your tax bill. Itemized deductions include medical expenses, other taxes (state, local and property tax), mortgage interest, charitable contributions, casualty and theft losses, unreimbursed employee expenses and miscellaneous deductions, such as gambling losses. Some itemized deductions must meet IRS limits before they can be claimed. When you itemize, you must file Form 1040 and detail your deductions on Schedule A.

6. Exemption -- This is an amount that the IRS lets you subtract from your income to reflect all the people who count on your income. Exemptions can be claimed for yourself, your spouse and your dependents. The IRS allows a set amount for each exemption and, as with deductions, this total is subtracted from your adjusted gross income to come up with your final, lower earnings amount upon which you must figure your tax bill. Your personal exemption amount is in addition to any deductions, either standard or itemized, that you claim.

7. Progressive taxation -- This is the system in which higher tax rates are applied as income levels increase. The U.S. tax system uses progressive taxation with tax brackets starting at 10 percent and rising to 35 percent for the wealthiest taxpayers.

8. Taxable income -- Your overall, or gross, income reduced by all allowable adjustments, deductions and exemptions. It is the final amount of income you use to figure just how much tax you owe.

9. Voluntary compliance -- This describes the philosophy upon which our tax system is based: that U.S. taxpayers voluntarily comply with the tax laws and report their income and other tax items honestly.

10. Withholding -- Also known as pay-as-you-earn taxation, this method enables taxes to be taken out of your wages or other income as you earn it and before you receive your paycheck. These withheld taxes are deposited in an IRS account and you are credited for the amount when you file your return. In some cases, taxes also may be withheld from other income such as dividends and interest.

For more related reading:

Publication 17

Are Your Children A Bargaining Tool for Tax Custody Issues?

Single parenting has become more prevalent in today’s society and with it comes more challenges in preparing taxes.

When a couple divorces, in most cases the divorce decree will contain very clear instructions as to how the finances will be handled including, but not limited to, who will claim the children on their taxes. When a couple has never been married, the lines are not as clear and sometimes it becomes a race between who files their taxes first. The following contains information that will help you in this situation prepare for the tax filing season.

When I was divorced in 1979, the divorce decree clearly stated that I retained fully and sole custody of my daughter. At that time, there was no stipulation on who would or would not claim our daughter. The second year of my divorce, my ex-husband jumped the gun and filed claiming my daughter and so did I. The IRS disallowed my dependency exemption and I had to fight tooth and nail to win my case with the IRS, which I did.

Over the last thirty years, the tax laws on dependency have changed drastically.
My scenario is not the case for members of my family, who I will call John and Jane for this writing. John and Jane were never married and they have two children. According to the official language of their custody agreement, Jane has primary physical custody of the children; however, according to the actual arrangement of time, they are basically equal. On a 14-night rotation, Jane has the children eight nights and John has the children six nights; however, John works from home and has been keeping the girls after school during times when Jane was supposed to be responsible for their care. Jane, feeling that being the primary physical custodian givers her permission to do whatever she wants, has been claiming both children even though John pays child support every month on time. There is no written agreement. John and Jane cannot talk rationally about this situation and agree on what should be fair to both parties. Jane basically claims the children without ever giving her actions a second thought.

John came to me and we examined the law and contacted the IRS for further clarification and input. According to Publication 17, pages 27-33 under “Personal Exemptions and Dependents” there are two main tests that must be considered, the relationship test and the residency test. John enrolled in his school district and has been for the past three years.

According to Publication 17, after one determines that a child can be claimed because of their relationship to the taxpayer and it is determined that the residency test has been passed, the next step is to determine the amount of time spent in each home. The IRS states that any time there is a child who spends equal amounts of time in both homes, the taxpayer with the highest adjustable gross income is the person who is legally eligible to claim the child. Additionally, upon speaking with a representative from the IRS, I found upon speaking with a representative from the IRS, I found out that they will actually compare the exact amount of hours – they will go down to the very minutes if necessary-to determine if there has been any false reporting or a misunderstanding of the current law in place. Jane was wrong to file her tax return without asking for permission from John. The best case scenario would be that each person would claim a child; however, that is not what happened in this instance and in probably 80% of these situations.

The outcome is that John will file and claim one of the children and he will allow the IRS to sort out whatever issues need to be sorted. There is one thing to be careful of when child support is concerned. Depending upon what state a person lives in, the amount of the tax refund may directly affect the amount of child support that will be paid.

Here are some tips that should be followed in order to educate and protect yourself and your ability to claim a child on your tax return:

1. Have a written agreement commitment as to how the income taxes will be handled. Having a written agreement makes it clear as to how things will be handled should the two parties not be able to agree on this issue at a later date.

2. Make an appointment with the office who handles your child support case. This should be a free service. The officer of the court will take all of your information and the other parent’s and let you know how much each party is responsible for and whether the tax refund has any bearing on the child support amount. Some states have a child support calculator on their state’s website that allows the taxpayer to figure out their support amount without going in to the state office.

Once the evaluation is completed, I would recommend a letter be sent to the other party by certified mail informing him or her of the intentions to file and claim the child(ren).
Once those steps have been taken, I believe you will be clear to move forward in claiming the children for tax purposes.

Should the other party choose to claim the children anyway, the IRS will step in and will want to see all available documentation concerning actual hours the children were with each parent. John if very fortunate in that he has kept very detailed records concerning the time he has spent with his children, including all extra time. Should the IRS come knocking on his door, we have him prepared.

These situations are never pleasant for anyone and the more prepared everyone is on the front end, the less hassle there will be on the back end. We cannot control the actions of anyone, yet you can make sure that you are aware of the law and your rights concerning this type of filing.