Tax Advice: How to Avoid Getting Audited
IRS audits for high income households are on the rise, and WSJ's Tom Herman has some advices for us. To be honest, producing accurate tax returns is a growing pain now. My last year's tax return adds up to 45 pages, and I couldn't do it without professional help.
"Pressured by Congress to collect more money, the Internal Revenue Service has been busy boosting its audits, particularly among high-income earners. It's forcing taxpayers to be increasingly vigilant in order to avoid waving red flags in front of the tax man. Audits of taxpayers with income of $100,000 or more rose 18% to about 258,000 last year from a year earlier, the highest level in more than a decade, and audits of people with income of $1 million and higher jumped 33%. ... The IRS is also improving its weaponry for seeking out targets. It recently updated its top-secret computerized scoring systems that help it target which returns are ripe for an audit. Tax officials are careful not to divulge their formulas. But they say ..." Full StoryShould You Perform Roth IRA Conversion AFTER Retirement?
Fairmark brought a good case about when to convert your IRA to Roth IRA for several tax benefits even after you retire. Among them, you can reap extra tax-advantaged growth provided by Roth IRA, avoid required distributions in IRA and potentially save on tax. Still, one needs to carefully evaluate his tax brackets and time the conversion well to take the full advantage.
"Many people believe it doesn't make sense to convert a traditional IRA to a Roth IRA late in life. In reality, many retirees have a longer life expectancy than you might expect. What's more, a partial or complete conversion can provide significant tax savings even if the owner of the IRA has only a very short life expectancy. The benefits aren't present in all cases, so careful analysis is required to determine whether a rollover makes sense, how much to roll over, and when. As explained below, in most cases the rollover will make sense if all of the following are true: - You'll take only qualified distributions from your Roth IRA, so that all your withdrawals are free from taxes and penalties. - You'll ..." Full StoryShould Bill Gates Oppose of Estate Tax Repeal?
While I can understand where Mr. Gates and Mr. Buffett come from, should they, arguably the best two capitalists of our generation, believe they, or their desginated agents, can spend more effectively than the government?
"Microsoft Corp. Chairman Bill Gates told a Senate panel today that he opposes a repeal of the federal estate tax. Tax-cut legislation enacted in 2001 reduced the estate tax rate and provided for 10 years of increasing exemptions. For 2007, the top estate tax rate is 45% and the exemption is $2 million. Under the law, the tax is fully repealed in 2010 but will be revived in 2011 with a top rate of 55% and an exemption of $1 million. Pending legislation proposes making the full repeal permanent. Gates’s father, Bill Gates Sr., has launched a public campaign in opposition to such a repeal along with other financial beacons such as Warren Buffett. Asked Wednesday by Sen. Bernie Sanders of Vermont, “How are you ..." Full StoryUnpaid Tax Per Household: $2,680
Isn't it a surprisingly high number? It is estimated that the tax gap, or the difference between what taxpayers owe and what they pay, is $300 billion, or $2,680 per household now.
But is there any quick fix? Our tax system is too complicated to allow effective enforcement. There is probably no way we can close this gap.
"Think of the uses of $300 billion, the annual gap between what taxpayers owe and what they pay. It would more than cover the federal deficit for a year or the extra money President Bush wants in 2007 and 2008 for Iraq and Afghanistan. It would pay for the $125 billion that Congress has agreed to spend on Hurricane Katrina relief, with enough left for three years worth of federal education programs. Such are the dreams of lawmakers pressing the Internal Revenue Service to get more aggressive about reducing what is known throughout Washington as "the tax gap." ..." Full StoryFunniest Tax Writeoff (Attempts)
Bankrate compiled some super-funny attempts to write off more expenses. Of the 9 stories, I love the following the best:
"This one was so outlandish that Dittrick actually faxed us the two-page itemized receipt to prove it: "We live in an Amish community here, and we had an Amish guy who tried to take a deduction for his buggy with velvet interior, the whole works. It was tricked out. He was legitimately Amish, but with all the accoutrements on this buggy, when they're supposed to live the simple life, it was absolutely hilarious," she says. How pimped out was his ride? According to the receipt, this baby came equipped with dash lights, kick plates, tinted windshield, speedometer, hydraulic brakes and dimmer switches. The standard buggy costs $2,675; this pimped-out version ran $3,545. "He could deduct the buggy, of course, since it was used for business ..." Full StoryA Quick $30 Refund You Shouldn't Overlook
This is probably the easiest $30 (or $40, or $50, or $60) tax refund you can get. Don't miss it!
"The refund, available this year only, came about after court decisions found the excise tax, first levied in 1898 to fund the Spanish-American War, should no longer apply to telephone service as it's billed today. Taxpayers can claim a refund based on the 3% excise tax they paid on long-distance calls from March 2003 through July 2006. You can add up all that federal excise tax you paid based on your old phone records, or you can take the easy route by taking a standard refund amount, based on the number of personal exemptions you claim. If you claim one exemption, you can claim a $30 refund; two exemptions, $40; three exemptions, $50; and four exemptions, $60. On Form 1040, you claim the refund on ..." Full StoryWhat's Your Marginal Tax Rate?
Two Bosten University economists claimed that almost everyone in this country is having the same marginal tax rate of 40%. It is probably true: the poorer has to pay
My marginal tax rate? It is about 46%, including my PRC marginal income tax rate of 45% and the Medicare tax.
"We have a national flat tax, albeit one with bumps and potholes. ... In a study for the National Bureau of Economic Research, Boston University economists Laurence J. Kotlikoff and David Rapson have found that our all-in marginal tax rate is 40%, give or take a bit. Yes, you read that right: 40%. ... Most workers will pay about that much on each dollar of income when all taxes -- federal and state income taxes, sales taxes, taxes for benefit programs, etc. -- are considered. As a consequence, a 30-year-old couple earning only $20,000 a year has a marginal tax rate of 42.5%, while a 45-year-old couple earning $500,000 pays at 43.2%. There are some exceptions: A 30-year-old couple earning $50,000 a year, for instance ..." Full StoryTax Reminder: Telephone Excise Tax Refund
Good to keep in mind you may get $30 or more refund from what the government illegally charged you in the last four years.
"There's one new perk that's available to just about everyone: The telephone excise tax refund. Taxpayers can figure their refund by using their telephone bills to calculate how much they paid in eligible excise tax between Feb. 28, 2003 and Aug. 1, 2006. Or, taxpayers can claim a standard refund based on the number of personal exemptions they've paid ($30 for one exemption, $40 for two, $50 for three and $60 for four or more). If you claim the actual amount of tax you paid, you'll need to file Form 8913. Otherwise, you can claim your refund on Form 1040. Taxpayers who aren't required to file a tax return can claim their telephone excise tax refund by using the new Form 1040EZ-T to claim a ..." Full StoryTaxpayers May Direct Refund To Three Accounts
Yes, it is good to have the flexibility of sending your tax refunds to three accounts, and you may use it to defeat your spending habits so you can save more for retirement. However, it is a bit over-engineering for me.
By the way, the split-refund function is not implemented in major tax softwares like TurnoTax and H&R Block's TaxCut.
"For the first time, taxpayers can arrange to have their refunds deposited in up to three accounts, including an individual retirement account. The IRS has offered direct deposit for years, but it was limited to one account. Most taxpayers had their refunds deposited into checking. "When you put money into a checking account," says U.S. Treasurer Anna Escobedo Cabral, "sometimes, it disappears very quickly." Cabral, who has tried to promote financial literacy, hopes the initiative will encourage more Americans to save their refunds. Taxpayers can choose to have their refunds deposited not only into IRAs but also into health savings accounts and education savings accounts. If you're really serious about saving, you can have your entire refund deposited in an IRA. But if you need ..." Full StoryAverage Size of Tax Refund (1995 - 2005)
Do you know the average tax refund is over $2,000 for the last five tax years? Some quick adjustment of your W-4 form may allow you to touch the refund earlier.
"1995 $1,263 1996 $1,335 1997 $1,402 1998 $1,601 1999 $1,698 2000 $1,802 2001 $2,043 2002 $2,033 2003 $2,126 2004 $2,171 2005 $2,264 " Full StoryWhy You Shouldn't File Your Tax Early
WSJ tax columnist Tom Herman discussed why some recent changes in IRS regulations may bring confusion in investment income reporting, and you'd better to wait for your brokerage firms to sort it out before filing your return.
"Major financial-services companies are struggling to avoid what some fear could be an unusually severe recurrence of a problem that has bedeviled investors the past three years. The issue is 1099 forms, those statements that banks, brokerage houses and mutual funds send out to account holders around the end of January. Since 2004, millions of taxpayers have received revised 1099 forms -- typically in late February, March and even April -- restating information, such as dividends, that was reported on their initial 1099s. This year, some financial executives worry that things may get even worse, thanks in part to a recent tax-law change. Seeking to minimize the problem, a few firms have asked the Internal Revenue Service for more time to mail out their 1099 ..." Full StoryHow Will Democrats Resolve the AMT Issue?
It is in both parties' best interest to extend the AMT relief, but given Democrats' preelection commitment of better fiscal discipline, it will be hard battle to find where to cut budget or raise taxes to offset the loss of AMT revenue.
"Without congressional action, an estimated 23.4 million taxpayers will face the AMT in 2007. The most likely outcome, according to tax lobbyists and congressional aides, is a temporary one-year fix that will keep the number of AMT taxpayers at roughly the current level. This task will be complicated by fiscal austerity pledges made by incoming House Speaker Nancy Pelosi (D., Calif.) and key Senate Democrats. They are promising to tighten federal budget rules so that the cost of any tax relief must be offset by corresponding spending cuts or by other tax increases. If such budget rules were in place, the $30 billion cost of AMT relief for one year would have to be offset by spending cuts or new taxes, such as anti-tax-shelter measures ..." Full StoryIRS May Simplify Form 1040 By 2009
Is this an irony? Yes, you can simplify Form 1040, but not at the expense of creating yet another new schedule. Isn't it apparent that the root cause of the dozens of hours every taxpayer needs to spend every year is the complicated tax system, not the complicated tax forms?
"The IRS plans changes to Form 1040, which most taxpayers use to report their federal taxes, the agency said Tuesday. Taxpayers could begin using a revised form as soon as the 2009 tax filing season, said IRS senior spokesman Terry Lemons. "What we are shooting for is a form that is simpler and easier to use for taxpayers," said Lemons, confirming mentions of the anticipated revision in a recent Government Accountability Office audit and a report by Tax Analysts, a non-profit organization that tracks tax issues. As envisioned by the IRS, an as-yet-undetermined number of less-frequently used lines dealing with adjustments to income, credits, taxes and payments would be removed from the cover page of Form 1040 and relocated to a new Schedule O. That ..." Full StoryWhat About A Custodial Account For My Kid?
Janet Bodnar's nice column at Kiplinger's Personal Finane reminds me that a custodial account under the name of my 4-year old can mean an easy $500 annual tax savings. Plus, I love the fact that this can easily lead to many father/son discussions over the next decade and a personal-finance smart kid. (I will leave it to my kid to decide if he wants to start a personal finance blog, though.)
"With a custodial account, Gus's family would also qualify for tax breaks. In both 2006 and 2007, the first $850 of a child's investment earnings is tax-free, and the next $850 is taxed at the child's rate. Any earnings above that are taxed at the parent's rate until the child turns 18. But that's a lot of tax-advantaged income before the parent's rate kicks in. If Gus prefers to keep control rather than enjoy tax breaks, he could save in his own name and decide what to do with the money later. In both 2006 and 2007, for example, it's possible to give an individual up to $12,000 (or $24,000 if a spouse joins in the gift) without incurring a gift tax. But as one ..." Full StoryIt Takes Money To Collect Money
Interesting report from USA Today. Before that, I didn't know IRS is piloting its private collection activities. However, from a controller's perspective, I cannot make sense of why it takes $61.2 million to build the infrastructure.
"The IRS could lose money or break even in the first phase of its program to turn some tax debts over to private collection agencies, newly released agency data show. Fiscal projections in a Government Accountability Office report show the IRS expects to collect $55.8 million to $92 million in the recently started first phase of the private collection effort. The report shows the IRS estimates initial program costs at nearly $61.2 million — which raises the possibility the agency could lose money by the scheduled December 2008 conclusion of the program's initial phase. However, the IRS data also project collection revenue of $1.4 billion, dwarfing federal costs of nearly $77.6 million, during a 10-year span of private collections. The data offer one of the ..." Full StoryIs Giving by Wealthy Immune to Tax Changes?
I seriously doubt the conclusion of the study. If you only measure people by lip service, it is not hard to imagine the wealthy guys will not admit they may second guess their charitable efforts if tax breaks are gone.
For those who are interested, a worthy accompanying reading is the featured article Charity Is Selfish, The economic case against philanthropy at Slate.
"The researchers at the Center on Philanthropy at Indiana University, underwritten by Bank of America Corp., distributed 30,000 surveys between June and September in neighborhoods where the average household had liquid assets of $3 million or more. Responses from 945 were used in the analysis. The survey, designed as a nationally representative random sample, defined high-net-worth households as those with incomes of greater than $200,000 or assets over $1 million. Such homes represent 3.1% of U.S. households, the researchers said. The results are at odds with several stereotypes about how and why rich people give to charity. Patrick Rooney, director of research at the center, said previous research has shown that giving declines generally when the value of tax deductions on the donation declines. But ..." Full StoryClean Fuel Car Models Eligible For Tax Credit
IRS published the list of hybrid car models that are eligible for various amounts of tax credit. This is good for consumers who have a passion for energy conservation and certainly good for the Big Three in Detriot who are in big trouble.
Full text of the IRS article can be found here.
"Model Year 2007 Chevrolet Silverado 2WD Hybrid Pickup Truck — $250 Chevrolet Silverado 4WD Hybrid Pickup Truck — $650 Ford Escape Hybrid 2WD — $2,600 Ford Escape Hybrid 4WD — $1,950 GMC Sierra 2WD Hybrid Pickup Truck — $250 GMC Sierra 4WD Hybrid Pickup Truck — $650 Lexus GS 450h — $775† Lexus RX 400h 2WD and 4WD— $1,100† Mercury Mariner 4WD Hybrid — $1,950 Saturn Vue Green Line — $650 Toyota Camry Hybrid — $1,300† Toyota Prius — $1,575† Toyota Highlander Hybrid 2WD and 4WD — $1,300† Model Year 2006 Chevrolet Silverado 2WD Hybrid Pickup Truck — $250 Chevrolet Silverado 4WD Hybrid Pickup Truck — $650 Ford Escape Hybrid (Front) 2WD — $2,600 Ford Escape Hybrid 4WD — $1,950 GMC Sierra 2WD Hybrid Pickup ..." Full StoryFamily Business Owners: Get Creative On Tax-Free Compensation
One best-kept tax secret for family business owners: you can start a long list of benefits in your family business and buy these essential benefits tax-free.
"Use your health coverage. Health and hospitalization insurance premiums paid by your current or former employer are tax-free -- a huge benefit. Let's say your health insurance premiums come to $280 a month or $3,360 a year (for an HMO policy for a family of four with a $1,500 deductible). If you're in the 25% tax bracket and have to pick up the bill, the real cost to you would be $4,480. That's $3,360 for the premiums and $1,120 for additional income taxes because you'll be paying for the coverage in after-tax dollars. Having your company pick up the cost helps both of you. It doesn't have to pay the salary necessary to get you even. It gets to write off the full cost of ..." Full StoryHow Long It Takes To Receive Tax Refund
This is why you'd better choose to file your tax return electronically if you are entitled to a tax refund: you can get your money much sooner.
"Are you expecting a tax refund from the Internal Revenue Service this year? If you file a complete and accurate paper tax return, your refund should be issued in about six to eight weeks from the date the IRS receives your return. If you file your return electronically, your refund should be issued in about half that time — even faster when you choose direct deposit. You can check on the status of your refund seven days after you e-filed your return or four to six weeks after mailing your return. There are several ways to check the status of your refund. To use these applications, you will your Social Security, your filing status and the amount of the refund. • Where's My Refund: The ..." Full StoryHow To Amend Your Tax Return
It is probably working to your advantage to timely amend your tax return even if it means you have to pay more tax than your original filing is for. Here is IRS's tips about amending your tax return.
"You’ve discovered an error after your tax return has been filed. What should you do? You may need to amend your return. The IRS usually corrects math errors or requests missing forms -- such as W-2s or schedules. In these instances, do not amend your return. However, do file an amended return if any of the following were reported incorrectly: • Your filing status • Your total income • Your deductions or credits Use Form 1040X, Amended U.S. Individual Income Tax Return, to correct a previously filed Form 1040, 1040A, 1040EZ or electronically-filed return. Be sure to enter the year of the return you are amending at the top of Form 1040X. If you are amending more than one tax return, use a separate 1040X ..." Full Story