Managing Tax is Like Solving a Big, Mysterious Jigsaw Puzzle

For a simple man like me, it’s impossible to understand the entire tax code. If I do it, I would solve the biggest mystery on earth. Instead, I can opt to pay a person to look after my problems, who has already solved it.

However, I don’t want a person with superficial knowledge, nor would you like to have such an attorney. Hence, before you select anyone to take care of your finances, make sure you research about their background and their expertise.

They Have the Appropriate License and Qualification

No other person in the world can take care of your tax issues except for a tax debt attorney, simply because they have the required license and qualification. Besides, finding such people is not an issue. You can find many of them on the web, ready to serve you. Before you hire them, however, check what kind of license the attorney has.

You Will Have a Paid Representative

If you hire a tax debt attorney, you don’t have to bother about those irritating tax debt calls from IRS. They will directly contact your attorney, if they anything to inform you. In most cases, the attorney contacts them and clarifies major issues before they call you up.

You Will Save Money

Most tax attorneys have dealt with your kind of situation in past, and they are well-versed with the situation. They know how to talk to IRS officials and get a discounted tax debt repayment plan. If you hire an attorney, you won’t have to pay as much as your total debt amount. Doing it yourself is too time-consuming as well. Hence, hand over the task to profession and move on.

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Finding the status of your refund is comparatively an easy task these days. Not many people would believe me when I say IRS has made it easier for people to know the tax refund status.

Log on to the official website of IRS through any search engine, and find for a link on the home page that talks about tax refund status. Most people would come searching for this status during this period. Hence, this link would be in bold or highlighted, or something that makes it noticeable instantly. Clicking on this link would direct you to a refund check page.

Before you starting filling the form required to know the status, get the copy of the tax return you had filed early this year. The website would ask you some information like your social security number, tax refund amount, filing date, etc.

Fill up all the required details and submit the form. Few seconds after submitting, the screen would display the refund status. If you had filed the tax return correctly, it would display the proposed date of issue of check. If they met with any problems while sending you tax refund checks, the website would inform you about it and the probable solutions to it. If, however, there was some problem while filing the return, you wouldn’t get the returns anytime soon.

However, before you run to seek professional tax refund advice, or smash the computer screen, take a deep breath. It may be a technical error from their side. Though IRS is not human, it still makes errors.

If the screen shows up the same tax refund status every time, wait for some more days before you contact a tax lawyer for tax refund advice. IRS usually sends a written notice to people who have made errors while filing the return.

If you receive a huge tax refund check, there is nothing to be happy about. Instead, there is something terribly wrong with the way you pay your taxes. You get big refund only when you have overpaid on some thing. And there is nothing clever with doing this. You are simply lending your money to IRS for few months, that’s it. So, make sure you pay it wisely next year.

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Not their mistake, I must say. They do what we demand. We, as readers, don’t like talking or reading about tax, hence they don’t write about it, and we remain uneducated about tax, all the time.

Here is a pledge: I would write regular posts on tax to explain my readers the importance of knowing about it, and make them knowledgeable enough to file their own taxes effortlessly. Before we start, let me tell you, taxes just have big and difficult names. However, it’s very easy to understand what they mean.

Let’s start with capital gain tax rate. Heard about it? No?

What is Capital Gain?

Money earned though investment is known as capital gain. In other words, capital gain is gaining from your capital. I told you, it’s all very simple.

What is Capital Investment?

Another simple term. Capital Investment is an investment product in, in order to achieve capital gains. It could be anything from stocks, bonds, mutual funds to property, fine arts, and any thing you could earn profits from. It would, however, not include wages, interest, and dividends, as they are income, not investments.

How to Calculate Capital Gains?

As simple as calculating normal profits on your investment. You don’t have to have any capital gain tax rate calculator or contact a financial consultant to do so. Here’s the formula:

Capital Gains = Sell Price – (Cost Price + Trading Costs)

Here, trading costs would include expenses given as commission or brokerage. You would, however, not have any space to mention these costs details in form 1040 schedule D. Hence, you will need to include everything under one category ‘Cost Basis’. This form would have space to detail out all your capital gains, which eventually totals up as net profit. Tax is charged on this amount.

But How Much Capital Gain Tax Rate Is Charged?

This depends on how long you had held the investment. If an investment is sold before a year of purchase, the profit earned on it is termed as short term capital gain. Taxes on this profit would be charged according to the tax bracket the investor is in.

If the investment is liquidated anytime after a year of purchase, it is termed as long term capital gains. Taxes charged on this income are usually lower than their current tax bracket. If you are in tax bracket of 10% and 15%, you will have to pay 5% on long term capital income. And if you are in 25% to 35%, you will have to pay 15%.

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1.    Do not throw away receipts:

Throwing away receipts means throwing money. Yes, most if your business related expenses are deductible, but only if you have the receipts of purchase. Moreover, a job-related expense, not reimbursed by the employer is deductible too.

2.    Be well-versed with tax:

Majority of us lose lots of money paying huge tax because we don’t know various ways to dupe IRS legally. And trust me, it’s not difficult at all. Once you start learning about it, you will enjoy it. These tax saving tips for 2010, however, wouldn’t be useful if you are not interested to actively participate in it.

3.    Investments:

By making few minor modifications in your investment strategies you can save a considerable amount every year. Avoid short term capital gains as you pay more on tax than you actually earn through these gains. Make use of various tax free investments, which eventually save more money that you earn through high-returns investment.

Retirement investment too is one of the best tax saving tips for 2010. You can simply open an IRA or a 401k account, and deposit investment products in it, up to a limit.

4.    Donate to charitable organizations:

I know donating money is painful sometimes. But fret not because you can now reduce your taxable income by donating furniture, clothes, and many other such items. So, instead if throwing the old ones away, you can use them as deductions. And don’t worry about the traveling and carriage costs, they are deductible too.

5.    Gifts and Kids:

Instead of simply giving money to your children, you can use it as tax benefit. If have reached your retirement age and intend to give away your fortune as inheritance, don’t do it. Instead, give some amount as gift every year, which would save lots on inheritance tax.

If you kids are above 14 years of age and you are still giving them pocket money, stop it now. Instead, give them salary, which they can use as pocket money, and you can use as deduction.

These are very simple yet very effective tax saving tips for 2010. And there are numerous other that we might not know as individuals. Hence, if you think you are paying too much on tax, it’s wise to consult a tax attorney.

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Numerous people today are using online tax filing method, mainly due to couple of reasons. First, if you do it online, you have a record of your returns always stored in your desktop. You can, at any time, check your previous year’s records, and keep a track of your finances efficiently. So, everything you need to have an effective tax record would be just a click away. You don’t really have to waste numerous hours digging up your house for these documents.

Let’s face it. If you file your taxes manually, it’s pretty complicated, irritating, and not convenient at all. However, using tax preparation software and filing it online makes it a hassle free process. You wouldn’t get confused any where in the process as the software will guide you efficiently. The complicated calculations too would be done by the online application. Online tax filing applications come with an error-check facility that eliminates any chances of errors in your form. It’s important to send your return file without errors, as you can even be penalized if your file seems to be fraudulent.

Compared to manual paperwork, online tax filing can be easy, quick, accurate, and cost-efficient. It saves lots of time and money as you don’t have to stand in long queues, pay postage money, manage various documents, and so on.

Moreover, if you qualify for free online tax filing program introduced by IRS, you don’t have to pay a penny to file your returns. To qualify for such plan, you have to be less than 51 years of age and you Adjusted Gross Income (AGI) should be less than $57,000. Even if you don’t qualify for it, there are several other companies that may help you in online tax filing at affordable fees.

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Having fully worked on taxable income lets now focus on various tax credits which reduces tax. In fact this element is what almost all tax planners focus on because tax credits can be easily manipulated to one’s benefit. There are various tax credits like tax credit for college expenses, for retirement saving, and for adopting children.

The maximum tax credits are for adoption and college expenses. It is not possible for everyone to adopt a child but one can always take advantage of the college expenses credit. There are broadly two types of education-related tax credits namely the hope credit and the lifetime learning credit. Students in their first two years of college can take advantage of the Hope Credit. Anyone taking college classes is eligible for the Lifetime Learning Credit irrespective of whether the classes are related to your career or not.

If you earn less than a certain amount then you are eligible for the Earned Income Credit (EIC). The EIC is credited to your account as a payment and hence often results in a tax refund even under the situation of zero total tax.

Take advantage of the stimulus programme

There are lot other temporary tax breaks that the Obama administrations has introduced to help the economy that you can take advantage of. For instance the cash for clunkers program. The program is long over however still you can avail some benefits from the program. On the purchase of one or more new cars, motorcycles or SUVs before Dec. 31 you can get the deduction on sales tax up to a total cost of $49,500. Couples and singles with adjusted gross income of above $250,000 and $125,000 respectively are eligible for this deduction.

Another tax credit introduced this year is the homebuyer credit. This credit expired on Nov. 30 however there has been an extension under which if you sign a binding contract before May 1, 2010 and settle on the home before July 1 you are still eligible for the credit. This credit has two versions-for first time house owner in the last three years there is a credit of 10% of the purchase price, up to $8,000 and for existing home owners who buy a new home there is a credit of up to a maximum of $6,500.Couples with modified adjusted gross income of maximum $225,000 and singles earning up to $125,000 are eligible for this credit. This is a refundable credit and hence reduces taxes dollar for dollar. If the credit is more than the amount of taxes paid then you get back the difference.

There is also a credit for those who are looking at refurnishing or upgrading their homes. If you go for certain energy-efficient improvements options for windows, furnaces and air conditioners, you can avail an additional 30% of the purchase price up to $1,500 as a tax credit for 2009.  You can claim the credit for 2009 by installing and making the payment for the improvement by the end of the year. In 2010 also the credit is available but in total $1,500 can be claimed over both years. Just make sure that the products that you buy are eligible for the credit. You can check that either from the manufacturer’s certification or the consumer guide at the Alliance to Save Energy Web site.

Other important tips

Always remember that except in the situation of dire necessity never go in for early withdrawals from an IRA or 401(k) retirement plan. The amount withdrawn from an IRA or 401(k) retirement plan is very much taxable and also you will have to pay additional taxes for the early withdrawal.

Also it is advisable to increase withholding so that at the end of the year the burden of taxation is considerably reduced. No doubt every month this will reduce your pay checks but at the end of year when you file your taxes you will get bigger refund.

Read more at: Tips To Save Your Tax Bill – Part II

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Another way to reduce your tax bill is by playing around with deductions. Income on which tax is calculated is called the taxable income. It is calculated by reducing deductions and exemptions from AGI. Standard deduction can be taken by almost everyone. However you can play around with your expenses and itemize deductions.

Deductions can be of various kinds. The most common deductions are for health care expenses, state and local taxes, personal property taxes, mortgage interest, charity, job-related expenses, tax preparation fees, and investment-related expenses. We suggest that one should keep track of these itemized expenses either using a spreadsheet or personal finance program to enable quick comparison of your itemized expenses with your standard deduction. Also always take the higher of your standard deduction or your itemized deduction. Mortgage interest, state taxes, and gifts to charity are currently the three biggest deductions.

Standard deduction and personal exemptions also depends on your filing status and the number of dependents you have. Hence if you are married and have children who are dependent on you don’t forget to mention that in your tax filing and get an increased standard deduction and personal exemptions.

Timing your expenses

Like tax credits one can lower their tax bill by proper timing of expenses. We are not suggesting to with hold expenses to save taxes. But if the expense is not a necessity then we suggest to time it rightly to get the maximum tax benefit. Take for instance those expensive dental implants which are not covered by insurance that you always wanted to do. Should you get it done now or wait until January. Unreimbursed medical expenses that are more than 7.5% of adjustable gross income are deductible for tax purposes. So if you are past that limit in 2009 then go ahead and get those implants or a full-body scan done which your insurance doesn’t cover.

Timing of expenses can go a long way in saving on your tax bill. Like for instance the American Opportunity Credit which is $2,500 per undergraduate student in 2009 and $2,500 in 2010 given that the student has qualified undergraduate education expenses of $4,000 for each year. So if your child has taken the fall semester off, or went to a cheap college in the fall that didn’t cost you a full $4,000 in bills then we suggest that you prepay spring 2010 tuition fees before Dec. 31 so as to be eligible for the full 2009 break.

Read more at: Tips To Save Your Tax Bill – Part I

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The basics first

The age old tax saving rules still applies. This is the time to make charities and invest in tax saving investments. Also we suggest that you give a thought to the kind of accounts for your retirement savings. Until you file your taxes you can fund an individual retirement account for 2009. Before the year end you will however have to declare how much you want to put in the company’s 401(k) plan in 2010 and whether you want to invest the money in a traditional pre tax 401(k) or in a Roth.

Another important question that pops up at this time is whether to prepay state and local income and real estate taxes in December or wait until January? An easy answer would be to pay by year’s end and get the deduction on your federal return earlier. This is applicable if you are not subject to alternative minimum tax. But if you are subject to the alternative minimum tax by which the benefit of the state and local tax deduction is denied then we suggest that you consult a taxation expert to decide. Also many people are postponing deductions for the fear that the marginal tax rates will increase in 2010 and hence a deduction would be worth more next year. There could also be a possibility that the top marginal tax rates could be increased but deductions may be only allowed against a lower rate.

Reduce your Income

It doesn’t take a rocket scientist to understand that the amount of tax you pay is directly related to your Adjusted Gross Income (AGI). Adjusted Gross Income also determines lot of other things like your tax rate and tax credits. Outside of taxes also Adjusted Gross Income impacts your financial life with banks, mortgage lenders and college financial aid programs all asking you your Adjusted Gross Income. Hence it can be said that Adjusted Gross Income is the starting point of all your financial planning.

So what exactly is Adjusted Gross Income? Adjusted Gross Income is simply the sum of your income from all your sources minus any adjustments. Higher your income higher would be your Adjusted Gross Income and hence higher the taxes you would pay and vice versa. But can the Adjusted Gross Income be reduced given your current earning. The answer is yes. By contributing money to a 401(K) or similar retirement plan you can reduce your Adjusted Gross Income and hence reduce your tax bill.

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