Read these 10 Taxes Overview Tips tips to make your life smarter, better, faster and wiser. Each tip is approved by our Editors and created by expert writers so great we call them Gurus. LifeTips is the place to go when you need to know about Taxes tips and hundreds of other topics.
Start now to begin next year's record keeping. It will save you time, frustration, and money. Here are some suggestions to follow:
Even though you may not be a tax professional, staying current with the IRS tax laws is a good idea. This is especially true if you own and operate a business. There are a variety of ways to keep current with what is happening with the IRS and how the tax laws affect you.
To prepare for the final income tax return filing of your return, there is a process that happens. Hopefully, to ease your year-end frustrations, your income tax process has been yearlong. You have been maintaining the appropriate logs, recording your expenses and income properly, and doing monthly bank reconciliations. If not, it is never too early to start for next tax year. First, you receive your income documents before January 31, 2007. Regardless of whether you work as an employee or are self-employed, there is a January 31, 2007 deadline for issuing these documents to you. If you do not receive them by this date, call the IRS. They can help you obtain this form.
Employees will receive a form W-2. Known as Withholding Allowance, these tax forms will be mailed to you by your employer. And, if you worked for more than one employer, you will have more than one W-2 to file along with your 2006 income tax return. You will send the Federal copy of your W-2 along with your 2006 income tax return. If you are self-employed, you will receive the IRS Form 1099 for various reasons. The only time you will receive these forms, however, is when an entity or individual paid you any money during 2006. These income reporting tax forms need to be mailed to you by anyone who paid you money and did not withhold any income taxes. For instance, your client will send you a 1099-MISC for the job you completed that cost them $2,000. If you are not self-employed, you may also receive a 1099. For instance, your bank will mail you a 1099-I for interest paid on your savings account. If you received any dividends from your stock, you will receive a 1099.
The first step, therefore, in your income tax return filing process will involve gathering all your tax documents together. Have all your income documents ready. Get all your receipts, cancelled checks, and bank statements together. You want to verify the amounts you paid to see what expenses you can claim and possibly deduct on your income tax return. Go through your checkbook for 2006 and be sure you catch everything that you paid and can deduct. Hopefully, you included an explanation for applicable expenses. That makes it easier come tax time.
Secondly, get a hold of any tax forms, publications, schedules, and instructions you need in order to file your income tax. These can usually be obtained from the IRS via various methods (online, in person, local sites).
Third, fill in your income tax return. Or, take it to a tax preparer for double-checking and submission.
Fourth, double-check your return for mathematical errors, or missing information. Be sure every applicable line has something on it.
Fifth, sign and date your return. If filing jointly, be sure your spouse has signed the tax return. Last, if mailing your return, attach all documents. This includes your W-2. Staple them. Do not use a paper clip or leave them unattached. Do not forget to include your tax payment, if you owe any 2006 taxes. Put in envelope, attach postage, and mail.
H&R Block Tip: If filing electronically, have all the information available to transfer over into your e-file return. Find a computer. Find a suitable service provider who charges a reasonable fee (or free). Then, the software will take you step-by-step into the income tax return filing process. Then...take a deep breath and relax.
If you have an outstanding delinquent income tax balance due, the IRS offers the following programs that fall under what is known as ‘tax resolution'. There are certain requirements for each.
Installment Arrangement. You can pay your delinquent tax bill (including penalties and interest) in installments. Form 9465 (Installment Agreement Request) needs to be filled out by you and attached to your income tax return. The same procedure as that with your non-delinquent taxes applies. (See section tax tip section on Installment Agreements).
Offer in compromise. This method has the IRS and you settling your income tax debt at less than the original amount. It is known as a mutually beneficial payment agreement. Here, the IRS figures that it is better to get something than nothing. You can usually pay in a lump sum or installments. This method, however, takes awhile in order for the IRS to complete the process. And, it can be time-consuming for you. You cannot simply call the IRS and ask for this arrangement. You need to request this arrangement by:
Abatement . This IRS tax resolution method has taxpayers arranging with the IRS to repay their delinquent tax liability, but not the involved penalties and interest. Here, also you must have a good reason for not being able to pay the entire amount. A good reason would be: death in the family, loss of income, illness, or incarceration – for instance. You can request an abatement by using Form 843 (Claim for Refund and Request for Abatement).
Bankruptcy . If you have more creditors than you can handle, and the IRS is just one of them, you can apply for bankruptcy. When you do this, the IRS must stop all further collection efforts. Seeing your attorney is the best bet for this method.
What does the cash-basis accounting method mean? This means that you report (deduct) your expenses in the year you paid them. It also means that you report your income in the year you actually receive it. Individual taxpayers use the cash basis accounting method while reporting their income taxes.
What is a barter income? Do I report it? Barter income is when you receive something (service or property) instead of cash as payment of a debt owed to you. It also includes you performing a service for someone else in exchange for receiving something other than cash. In technical lingo, it is an exchange of property or services. No cash is involved. For instance, you do some graphic designing for someone in exchange for free advertisement in his or her publication. Both you and the other person involved in the barter exchange must agree upon a favorable value for the services exchanged. This value must be reported on Form 1099 (Proceeds from Broker and Barter Exchange Transactions). Yes, you report this income on your federal income tax return.
I owe my landscaper money and gave her a note instead of cash. Can I deduct that? No. Only when you actually pay cash for an expense can you deduct it. Also, your payment must be made within the current tax year – January 1 to December 31, 2007.
How long do I need to keep my records? 3 years is the general timeframe for keeping your records. This is because the IRS generally has three years from the date you file your original income tax return to audit it. It is recommended to keep for longer than this, however, since other situations may arise. For instance, if you are suspected of tax fraud, there is no limit on the amount of time the IRS can go back to investigate your records (statute of limitations). If you own real property, keep any tax documents relating to the basis of the property for as long as you own the property. This applies for any property you own, actually. Keep the associated records for as long as you own the property. If you own any IRAs, mutual fund accounts, or stocks, keep the transaction records/documents associated with them for as long as you own the items. This includes contributions and distributions, dividend reinvestment, and stock purchases.
Every year you can be certain that the news will cover tax day. It is always a newsworthy feature about how many taxpayers are hustling to get to the post office by midnight. Cameras show lines of cars with drivers/taxpayers waiting to drop off their income tax return. Will they make the midnight deadline? At home, last minute filers are hopping onto their computer to file their income tax return electronically. They need to have it submitted by midnight. Will
they make it? This is tax day.
It is April 16, 2007 – tax day – what do you need to do if you have not filed your 2006 income tax return yet? Thousands of taxpayers wait for this day and hustle. Most importantly: You need to get your 2006 income tax return postmarked no later than midnight (local time) on April 16, 2007.
No matter what method of income tax filing you choose for your 2006 income tax return, it must be postmarked by this due date (if the paper return was mailed). Many taxpayers send their paper income tax return via certified or registered mail to be certain of this postmark.
Other taxpayers simply run up to the post office by midnight to drop off their return. In fact, throughout the United States, you will find so many taxpayers running to the post office before midnight that there are ‘tax day parties'. A local nonprofit will set up tables, sell postage stamps, and give out free coffee to last minute tax filers. It makes a stressful and hectic time of the year must easier to deal with.
Your local community may have developed ‘tax return drop off sites' throughout the area. Some may be set up at libraries, community centers, or fire stations. These are just some examples of known occurrences on tax day. Check with your local Chamber of Commerce to
see if they are aware of any sites available.
With all the hustle and bustle of tax season, it is easy to take tax preparers for granted. They are there to help us, but they work long, arduous hours in the process. Some suggestions to help ease their day are: Have your tax records organized. This cannot be over-emphasized. It will not only save you time and money, but it will save your tax preparer some time. This, in turn, saves them from billing you for the time it takes for them (or their office staff) to organize your tax records. You may read about the taxpayer who simply takes in a bag full of receipts to their tax preparer. It happens more frequently than you realize. Keep your scheduled appointment. By showing up on time for your tax preparer appointment, you will have more time to go over your needs, records, and any other necessary information. Plus, it shows respect. Be prepared to answer a questionnaire. Your tax preparer will probably have a questionnaire they need to go over with you. It helps them get more information about your income tax situation. Treat them fairly. Do not simply throw your records at them and demand they deal with it. Not many people actually love the income tax preparation process, but that is no reason to treat your tax preparer rudely. Thank them for their help. By expressing an honest appreciation for what they do, it will brighten their day. It is not easy being a tax preparer. Give them a small token of appreciation. No tax preparer would balk at a simple apple, stress reducer ball, or an eraser. Leave them with a smile. A pleasant exchange of information ending in a smile will ease any tax preparer's hectic day.
If you used telephone long distance or bundled services from February 28, 2003 to July 31, 2006, you may qualify for a one-time only refund of any federal excise tax paid you paid when using these services. This refund is available only for the 2006 income tax year. You can request a refund using either the actual amount or a standard deduction amount.
Actual amount: To claim a refund for the actual amount you paid for the federal excise tax applicable to you, you need to: 1) Find all your bills from that time period (42 months worth, to be exact). 2) Calculate the refund amount on Form 8913. 3) Put the calculated figure on the proper line of your 2006 Form 1040. a. Form 1040 – Line 71 b. Form 1040A – Line 42 c. Form 1040EZ – Line 9 4) Attach Form 8913 to your 2006 Form 1040. 5) Submit to IRS.
Standard Amount: Here is the breakdown for the standard amount you can take: If you claimed one exemption, the standard refund amount is $30. If you claimed two exemptions, it is $40. For three exemptions, it is $50. And, For four or more exemptions, the refund amount is $60. This is the maximum amount you can receive for this one-time only refund. The above information is applicable to individual taxpayers only. If you own a business, other procedures are involved in claiming your refund. You need to check the IRS website for more information.
Nonfilers: If you find that you do not need to file a regular 2006 income tax return, you still may request this one-time telephone refund. You simply need to use the new IRS Form 1040EZ-T to do this – if you want the standard refund amount. You can pick up paper copies of Form 1040EZ-T the same way you would all the other IRS forms – online (IRS.gov), by phone, or at local locations. You can file this form via paper or electronically. If you want the actual refund amount, you need fill out and attach Form 8913 to Form 1040EZ-T.
When you are unable to pay your taxes in full, you may ask the IRS for an installment plan. You can request this plan either via the phone or by submitting a tax form (Form 9465). There is a $43 fee for this service. This amount will be deducted from your first payment. If you decide to start the process via phone, simply call the IRS at 800-829-1040. You will need your social security number (or taxpayer identification number), what tax year you are calling about, and what type of tax form you filed (for instance, 1040, 1040A, or 1040EZ). Let the IRS representative know what monthly payment figure you can afford, and they will update your records with the figure. The representative will then tell you when your first installment payment is due.
The IRS will give you options for payment (such as through mail or a direct debit). Then, they will send you the needed paperwork. Be sure to complete and fill this out promptly. Once you are set up in the system, you can change your method of payment through the IRS website. If you do not want to call the IRS, you can also submit Form 9465 (Installment Agreement Request) along with your 2006 Form 1040, 1040A, or 1040EZ. Also include a check for an amount you can afford. The IRS will then review your information and decide if they agree with your proposal. You will receive an IRS Notice of their determination. Remember that even though you may enter into an installment arrangement with the IRS, you will be assessed interest on your unpaid tax liability.
Every tax year finds new tax events and laws that affect taxpayers. This year is no different. Here is one of the most important as far as many taxpayers will be concerned: Split Refund Option .
2006 is the first year that taxpayers can receive their refunds via direct deposit into more than one financial institution account. Known as ‘New Split Refund Option', this option allows taxpayers to divide (split) their tax refund into their bank, mutual fund, brokerage firms, or credit unions. Taxpayers are allowed to do this for up to three accounts.
Tax Form 8888 – Direct Deposit of Refund to More Than One Account. The IRS also wants taxpayers to know that there have been improvements made for the 2006 tax year regarding the Free File e-filing program. This program is found on the IRS website. Taxpayers do not have to be concerned about the variety of offerings from partners (such as Refund Anticipation Loans), since they have been removed from the site. In previous years, taxpayers had to muddle through offers from service providers prior to submitting their tax returns. (This is improved website feature is considered a 2006 tax year law event.)
|Jennifer Mathes, Ph.D.|