Tax Tips

Pay taxes online

Instead of writing a check to the U.S. Treasury and mailing it, use an online payment option to simplify the payment process. Your choices:

  • Sign up for EFTPS.gov. This free option lets you transfer funds from your bank account to the government. You can schedule tax payments in advance of the payment date.
  • Charge taxes to a major credit or debit card. The government doesn’t charge you for using this payment method, but the IRS-approved service provider does. Find costs at www.irs.gov/uac/Pay-Taxes-by-Credit-or-Debit-Card.
Real Estate Professionals: Track Your Activities

To be treated as a real estate professional so that you can deduct your losses from rental real estate despite the limitation of the passive activity loss (PAL) rules, you must meet 2 requirements:

  • Perform more than 750 hours of services during the taxable year in real property trades or businesses in which you materially participate.
  • More than one half of the personal services performed in trades or businesses by you during such taxable year are performed in real property trades or businesses in which you materially participate.

The tax law does not impose any specific recordkeeping rule to qualify as a real estate professional, but a good record is vital. Ideally, according to the Tax Court, “this would be a contemporaneous log or record showing with particularity the amount of time devoted to the rental real estate activity.” Without a good record, you may not convince the IRS or a court of your status.

Sales Tax Holiday for Back-to-School Purchases

If you are getting your child ready now to return to school, you may be able to save sales tax on clothing, school supplies, or other items. Check with your state on whether there is any state sales tax holiday and what it applies to. Find links to your state here (www.taxadmin.org/fta/rate/sales_holiday.html).

High-Income Taxpayer Category Growing

According to the latest statistics, about 3% of all filers are considered to be high-income taxpayers (having adjusted gross income of $200,000 or more). There were nearly 4.3 million such taxpayers reporting this income on 2012 income tax returns.

Source: Statistics of Income Bulletin, Spring 2013 (www.irs.gov/uac/Newsroom/Spring-2013-Statistics-of-Income-Bulletin-Now-Available)

Do Midyear Tax Planning Now

Assess where you stand, taxwise, so you can take actions to favorably impact your tax picture for the year. Possibilities for you:

  • Increasing your retirement plan contributions to lower your taxable income if you can afford to do this.
  • Increasing or decreasing wage withholding and/or estimated tax payments to better match your tax payments with what your tax bill will be.
  • Improving your record keeping for tax-related items, such as charitable contributions.

Not sure what to do? Discuss your personal tax situation with a knowledgeable tax advisor. The sooner you do so, the more actions that will be open to you in order to achieve desired tax results.

What to do with an IRS letter

If you receive a letter from the IRS saying that you made a mistake on your tax return and owe taxes, don’t throw it away. The letter is a correspondence audit and you need to deal with it. Here are three actions you can take after reading it carefully:

  1. If you agree with the IRS position, send in the stated payment and you’re done.
  2. If you don’t agree, contact the IRS (there’s a phone number on the letter). Discuss your objections; you may be able to resolve the matter quickly and close your case.
  3. If you don’t understand the problem, think you won’t be able to deal with the IRS on your own, or are too busy to handle the matter, then contact a tax professional.
Go Mobile to Track Your Refund

Use the IRS’s app—IRS2go—to track your refund and more. The app lets you:

  • Get the latest tax news
  • Watch IRS videos on YouTube
  • Get your tax records

The app is available in English and Spanish. Download the app from the iTunes store for iPhones or from Google Play for Androids.

Housekeeping for your old tax records

After April 15, you may want to weed out old papers you no longer need. Toss what you don’t need, but be sure to keep:

  • Copies of old tax returns, along with proof of filing, forever
  • Returns filed for the 6 previous years, along with supporting materials
  • Information you may need in the future, such as proof of capital improvements to your home
Put Your Tax Refund to Good Use

Sure, you can take a vacation or pay down your credit card debt. But you can also choose to use the money in other ways, including savings and certain investments, and do so directly (with no funds passing into your hands). Some options even offer tax benefits. Arrange for a direct deposit of some or all of your refund check into:

  • Checking or savings account
  • Coverdell education savings account (ESA)
  • Health savings account (HSA)
  • IRA
  • Roth IRA
  • U.S. savings bonds through Treasury Direct (the cap on this option is $5,000, and transfers must be made in multiples of $50)

You can split the refund in as many as 3 ways. Use Form 8888, Allocation of Refund, to tell the government where to send your money.

Check the numbers
  1. $57,000. This the maximum amount of adjusted gross income you can have to use Free File (www.irs.gov/uac/Free-File:-Do-Your-Federal-Taxes-for-Free), which enables you to complete your return and file it with the IRS electronically at no cost.
  2. This is the number of years you have to submit a refund claim in most cases. Thus, April 15, 2013, is the deadline for filing for a refund of 2009 taxes.
  3. $2,200. This is the average earned income tax credit claimed by eligible taxpayers last year. For 2012, the maximum credit ranges from $475 for a taxpayer with no qualifying child to $5,891 for those with 3 or more qualifying children.
  4. 3%. This is the penalty rate you’ll owe on underpayments of estimated taxes for 2012.
  5. The number of other languages (besides English) that the IRS supports. These include Chinese, Korean, Russian, Spanish, and Vietnamese. And American Sign Language is used on IRS videos.
Adjust your wage withholding for 2013?

If you do nothing, your employer will continue to withhold federal income taxes based on the information you’ve already provided (your filing status, withholding allowances, etc.). But you may want to make a change if:

  • Your family has changed. You can reduce withholding and increase your take-home pay if you have a new baby or expect one in 2013.
  • Your residence has changed. If you bought a home recently or expect to buy one very soon, you’ll likely have deductions for mortgage interest and real estate taxes that can lower your tax bill. If you are selling soon, the opposite strategy may apply if you plan to rent after the sale.
  • Your income has changed. You’ll increase withholding if your spouse has returned to work but reduce it if your spouse left the job market.
  • You expect to owe the new 3.8% net investment income tax. Technically, this is an additional Medicare tax, but you can cover this obligation by extra income tax withholding.

Complete a new Form W-4, Employee’s Withholding Allowance Certificate, and give it to your employer; it is not filed with the IRS.

Apps for taxes

Your smartphone and tablet can be helpful tax tools with the right apps. Here are some apps that may be helpful (some are free, others have a cost):

  • Form 4868 Extension enables you to file for an extension of time to file your federal income tax return.
  • iDonatedIt helps record items (including photos) donated to charity.
  • IRS2go lets you track your federal tax refund.
  • Shoeboxed helps you organize receipts.
  • TaxCaster Mobile helps you estimate your taxes for the year.
Why and How to Become a Whistleblower

While no one likes to be a tattler, reporting incidents of suspected tax fraud can be both patriotic (because it saves the federal government money) and monetarily rewarding (because you may be entitled to receive up to 30% of what the government recovers because of your tip). Here’s what to do:

  • Complete IRS Form 211, Application for Award for Original Information, to describe the fraud and the information you have about it. This form must be signed under penalty of perjury.
  • Mail the form to the IRS Whistleblower Office at 1111 Constitution Ave., NW, Washington, DC 20224.
  • Wait. The process can take several years. Payments of awards are not made until after the taxes, penalties, interest, additions to tax, and additional amounts that are finally determined to be owed to the IRS have been collected.

In some but not all cases, if you believe you were denied the award to which you are entitled, you can appeal the IRS decision to the U.S. Tax Court. You have 30 days to file an appeal from the date on which the IRS makes its final determination about the award.

There’s an App for That!

Record keeping has never been simpler now that there are apps on smartphones and tablets for this purpose. You can use apps to track:

  • Business meals and entertainment costs. Snap a photo of the expense receipt and archive it.
  • Business mileage on your personal vehicle. You can also use a mileage app to track driving for charitable, medical, or moving purposes.
  • Charitable contributions. Take photos of property donations, such as used clothing. Then tie them to apps for this purpose.

Check the apps available for your mobile device. Note: The cost, if any, for the app is tax deductible!

Rebates, Discounts, and Couponing for Tax-Free Income

The savings you reap by taking advantage of promotional activities, including coupons, sales, discounts, and rebates, is money in your pocket without generating any tax liability. The savings are viewed as a reduction in the purchase price of the items or services so they are not taxable. Thus, the free airline ticket you receive by redeeming frequent flyer miles is not taxable to you.

Caution: If you receive “free gifts” (cash or items) for opening a financial account, the gifts are taxable.

Who should claim the education credit: parent or student?

The tax law provides flexibility in allowing families to decide whether the parent who pays tuition should take the tax credit or let the student claim it. The reason why this becomes an important choice is because of the modified adjusted gross income limits that apply for the American Opportunity credit and the lifetime learning credit. These limits may preclude high-income parents from taking the credit. The credit isn’t lost to the family if:

  • The parent waives the dependency exemption for the child.
  • The child has sufficient income (e.g., from investments or earnings) to have tax liability that the credit can offset.

Note: If the child with investment income subject to the kiddie tax claims the American Opportunity credit because the parent waives it, no portion of the credit is refundable.

Use social media to stay up on taxes

The IRS and JKLasser provide you with access to tax information and help through social media. Here are some easy links for you:

IRS

YouTube: www.youtube.com/user/irsvideos

Twitter: @IRSnews

App: IRS2Go is available for the iPhone or iTouch and the Android.

JKLasser

YouTube: www.youtube.com (search JKLasser)

Twitter: @jklasser

Facebook: www.facebook.com/JKLasserTax

There’s an app for that!

Simplify your tax record keeping and do other tax chores by using an app for your smartphone to:

  • Track mileage for business, medical, moving, or charitable purposes
  • Record business receipts, including travel and entertainment costs
  • Photograph charitable donation of goods and figure their value

Note: If the app isn’t free (some apps are), the cost is tax deductible!

Form W’s that you should know about

If you have a job, you’ve completed a Form W-4 to tell your employer your withholding allowances. But there are other W’s to know about:

  • Form W-7A—if you are adopting a child from abroad, you can obtain a taxpayer identification number for the child with this form. It is necessary to have such a number if you want to claim the adoption credit.
  • Form W-9—if you are an independent contractor, the party for whom you provide services will ask you to complete this form. This will enable the party to issue a Form 1099-MISC if payments to you exceed $600 during the year.

Form W-10—if you use a day care provider, get taxpayer identification information on this form. Keep the form with your tax records.

Avoid late payment penalties

If you can’t pay the taxes you owe by April 17 but you think you can do it by October 15, you may be able to avoid all late payment penalties. This option applies if the taxes are no more than $50,000 and you were:

  • Unemployed at least 30 consecutive days during 2011 or in 2012 up to April 17.
  • Self-employed individuals who experienced a 25% or greater reduction in business income in 2011 due to the economy.

File Form 1127-A to seek this penalty relief. Income limits apply.

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Tax Glossary

Carryback

A tax technique for receiving a refund of back taxes by applying a deduction or credit from a current tax year to a prior tax year. For example, a business net operating loss may be carried back for two years.

More terms