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Tax Tips

Don't let your money fly out of your wallet like this! Here are some tax tips to help keep your money where it belongs!

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	4. IRS Warns of e-Mail Scam about Tax Refunds -------------------------------------------------------------------------------- The Internal Revenue Service recently issued a consumer alert about an Internet scam in which consumers receive an e-mail informing them of a tax refund. The e-mail, which claims to be from the IRS, directs the consumer to a link that requests personal information, such as Social Security number and credit card information. The IRS does not ask for personal identifying or financial information via unsolicited e-mail. Additionally, taxpayers do not have to complete a special form to obtain a refund. For more information, read the whole story "IRS Warns of e-Mail Scam about Tax Refunds" in the Newsroom section of the IRS.gov Web site. Back to Top

	Ten Tax-Savvy Steps If you think your tax bill is chiseled in stone at the end of the year, think again. It's true that many money-saving options evaporate by January 1 On New Years Day, your options to defer income or accelerate deductions become much more limited. But there is a lot you can do to make the tax-filing season cheaper and easier. Some strategies can help you lower your taxes, sometimes by thousands of dollars. Some save time and money when you are preparing your tax return. Other strategies help you avoid costly penalties and interest for both federal and state taxes. All in all, the 10 steps will lower your blood pressure while keeping money in your pocket. � 1. Contribute to Retirement Accounts � 2. Make a Last-Minute Estimated Payment � 3. Organize your Records � 4. Find the Right Forms � 5. Itemize � 6. Consider a Home Office Deduction � 7. Provide Dependent Taxpayer IDs on Your Return � 8. File and Pay on Time � 9. File Electronically � 10. Decide if You Need Help 1. Contribute to Retirement Accounts If you haven't already funded your retirement account, do so by April 15. That's the deadline for any kind of IRA, deductible or not. If you have a Keogh or SEP, though, and you get an extension, you can wait until your extension deadline to put money into those accounts. Making a deductible contribution will help you lower your tax bill this year. Plus, your contributions will compound tax-deferred. It's hard to find a better deal. If you put away $3,000 a year for 20 years in an investment with a 10 percent return, your $60,000 contribution will grow to $189,000. The same investment in a taxable account would grow to only $136,000. To qualify for the full annual IRA deduction in 2003, you must either 1) not be eligible to participate in a company retirement plan, or 2) have adjusted gross income of less than $50,000 for singles, or $70,000 for married couples filing jointly. If you are not eligible for a company plan but your spouse is, your traditional IRA contribution is fully deductible only if your combined gross income is less than $160,000. In 2004, the maximum IRA contribution you can make is $3,000 ($3,500 if you'll be age 50 or older by the end of the year), and self-employed persons saw an increase in the maximum annual addition to SEPs and Keoghs to $40,000. A non-deductible Roth IRA contribution also can be valuable, because you pay no taxes when you eventually withdraw the money. With enough time, your investment will outpace even the traditional IRA. To contribute the full $3,000 to a Roth IRA, you must earn less than $95,000 a year if you are single or $150,000 a year if you are married. Savings: Your savings will vary. If you are in the 25 percent tax bracket and make a deductible IRA contribution of $3,000, you will save $750 in taxes the first year. Over time you will save thousands, depending on your contribution, income tax bracket, and number of years you keep the money invested. See Roth or Traditional IRAs: Which is Better? 2. Make a Last-Minute Estimated Payment If you didn't pay enough to the Feds during the year, you may have a big tax bill staring you in the face on April 15th. What's worse is that you also may face significant interest and penalties. How could that happen? Withholding on your paycheck may be out of whack or you may have received a big gain from selling stock. According to IRS rules, you must pay 100 percent of last year's tax liability or 90 percent of this year's. If you made more than $150,000, you have to pay more than that 110 percent of last year's tax liability. If your tax payments were a bit light, you may be stuck. You can erase any penalties and interest for the fourth quarter by making an estimated payment by January 15. The IRS, however, will assume that you should have made estimated payments all year long. If so, you will be charged some penalties and interest for earlier quarters, if you did not send any estimated payments in back then. But if your income windfall arrived in the fall, you can file Form 2210 Underpayment of Estimated Tax, to avoid extra charges. A note of caution: try not to pay too much. It's better to owe the government a little rather than to expect a refund. After all, the IRS charges around 6 percent interest on underpayments, which is better than the average credit card. But the IRS doesn't give you a dime when it borrows your money. Savings: Interest and penalties on tax underpayments. 3. Organize your Records Good organization may not cut your taxes. But there are other rewards, and some of them are financial. For many, the biggest hassle at tax time is getting all of the documentation together. This includes last year's tax forms, this year's W-2s and 1099s, receipts, and so on. If you really want to make tax season go smoothly, use a program like Quicken throughout the year so you have easy access to all the information you need. Weary of clients who dump piles of paper into grocery bags, tax preparers are the first to urge people to get their records in order. Yes, you can pay them to sort through the debris, but there are much better uses for their time. How do you get started? � Keep all the information that comes in the mail in January, such as W-2s, 1099s, and mortgage interest statements. Be careful not to throw any tax-related documents out even if they don't look very important. � Collect receipts and information that you have piled up during the year. � Group similar documents together; putting them in different file folders if there are enough papers. � Enter the amounts from all these documents into a computer program like Quicken for quick totals and make a printout for your tax preparer. � Make sure you know the price you paid for any stocks or funds you have sold. If you don't, call your broker before you start to use TurboTax or before you see your tax preparer. Know the details on income from rental properties. And don't assume that your tax-free municipal bonds are completely free of taxes. Having this type of information at your fingertips will save you another trip through your files - or your piles. Savings: $300 to $400 with your tax preparer and hours of your time right off the bat. Plus, you're likely to sail through an audit - with fewer assessments and penalties - if you have documentation on hand. 4. Find the Right Forms You won't find all of them at the post office and library. Instead, you can go right to the source online. View and download a large catalog of forms and publications at the Internal Revenue Service's Web site or have them sent to you by mail. You can search for documents by number or date back to 1992. The IRS will also send you to a private site that lists state government sites where you can pick up state forms and publications. Savings: Hours of your time and the hassle of running around town. 5. Itemize It's easier to take the standard deduction, but you may save a bundle if you itemize, especially if you are self-employed, own a home, or live in a high-tax area. It's worth the bother when your qualified expenses add up to more than the 2004 standard deduction of $4,850 for singles and $9,700 for married couples filing jointly. See The Standard Deduction. Many deductions are well known, such as ones for mortgage interest and charitable gifts. Taxpayers, however, sometimes overlook miscellaneous expenses, which are deductible if they tally up to more than 2 percent of adjusted gross income when they are combined. These deductions include tax preparation fees, job-hunting expenses, business car expenses, and professional dues. See Miscellaneous Deductions and Miscellaneous Deductions Checklist. You can also deduct the portion of medical expenses that exceeds 7.5 percent of your adjusted gross income. See Qualified Medical Expenses. Savings: Possibly thousands of dollars. 6. Consider a Home Office Deduction The rules were loosened in 1999 so that people who did not qualify for the home office deduction in previous years can now take the deduction. People who have no fixed location for their businesses can claim a home office deduction if they use the space for administrative or management activities. Doctors, for example, who consult at various hospitals or plumbers who make house calls can now qualify. As always, you must use the space exclusively for business. Many taxpayers have avoided the home office deduction because it has been regarded as a red flag for an audit. If you legitimately qualify for the deduction, however, there should be no problem. You are entitled to write off expenses - such as rent, utilities, insurance, and housekeeping - associated with the portion of your home where you exclusively conduct business. A middle-class taxpayer who uses a home office and pays $1,000 a month for a two-bedroom apartment could easily save $1,000 in taxes a year. People in higher tax brackets with greater expenses can save even more. See Home Office Deduction for Telecommuters. There is a tax trap here, however. If you own your home, you may have to pay taxes on part of the capital gains when you sell. It pays to run the numbers before taking the deduction. Savings: A typical deduction easily can run into thousands of dollars. 7. Provide Dependent Taxpayer IDs on Your Return On your return, plug in Taxpayer Identification Numbers â��? usually Social Security Numbers - for your children and other dependents. Otherwise, the IRS can deny the personal exemption of $3,050 for each dependent and the $600 child tax credit for each child under age 17. Be especially careful if you are divorced. Only one of you can claim your children as dependents, and the IRS has been checking closely lately to make sure spouses aren't both using their children as a deduction. Of course, if you make enough money, the benefits disappear anyway. The 2004 phase-out range for the personal exemption begins at $214,050 for married couples filing jointly and $178,350 for heads of households. See The Personal and Dependent Exemptions. The child tax credit begins to phase out at $110,000 for married couples filing jointly and at $75,000 for heads of households. After you have a baby, be sure to file for a Social Security card right away so that you have the number at tax time. Savings: Hundreds, possibly thousands of dollars, depending on the number of dependents and your income. 8. File and Pay on Time Actually, you only need to pay on time. The IRS doesn't really care when you file -- that is, as long as you fill out extension Form 4868. If you later decide to file after August 15th, then you will need to file Form 2688 to extend the filing deadline to October 15th. See Filing an Extension. If you still owe money after Tax Day, the IRS will charge you around 6 percent annual interest as well as a half percent penalty per month. If you didn't bother to extend, the IRS also will slap you with a steep late filing penalty of 5 percent a month, which tops out at 25 percent. Savings: Interest and penalties. 9. File Electronically Electronic filing works best if you expect a refund. Because the IRS processes electronic returns faster than paper ones, you can expect to get your refund three to six weeks earlier. If you have all your documents in order, go ahead and file electronically in mid-January using software like one of the TurboTax programs. If you have your refund deposited directly into your bank account, you will wait even less time. There are other advantages besides a fast refund. The IRS checks your return to make sure that it is complete, which increases your chances of filing an accurate return. Less than 1 percent of electronic returns have errors, compared with 20 percent of paper returns. The IRS also acknowledges that it received your return -- a courtesy you don't get even if you send your paper return by certified mail. That means you protect yourself from the interest and penalties that accrue if your paper return gets lost. If you owe money, you can file electronically and then wait until April 15 to send in a check along with form 1040-V. You also may be able to pay with a credit card, or you may use direct debit. But expect to pay a credit card service charge of as much as 2.5 percent. With direct debit, you may delay the debiting of your bank account until April 15. Savings: Peace of mind. 10. Decide if You Need Help Hiring a Tax Professional more often than not saves you money in the end and provides you with a lower tax bill or a larger refund!

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