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Your Taxes?
If you have a simple tax return, filling it out yourself may be easier than you think. IRS instruction booklets are available for every form you may need to complete, and a tax preparation assistance line is staffed by IRS personnel throughout the year. Tax software programs like Kiplinger’s Tax Cut, MacIn Tax and Turbo Tax make the process relatively painless—even for complex returns. If you don’t have the time, patience, knowledge, or desire to struggle through tax forms yourself, there are professionals who will be more than happy to handle the work for you--for a price.
Tax Preparers, like those employed by H&R Block, are generally the least expensive source of tax preparation assistance. They provide a needed service for taxpayers that have fairly simple and straightforward returns to prepare and who do not want to pay a lot of money for the service.
Enrolled Agents generally go through longer, more sophisticated training than preparers (and, therefore, charge more) because they must successfully complete IRS-administered tests. Enrolled Agents are permitted to represent you before the IRS in case of an audit, where a preparer who is not also an Enrolled Agent, CPA, or attorney cannot.
Certified Public Accountants are credentialed professionals that have undergone extensive training and examination. Fees for their services can be fairly high. That’s why it’s important to know when you need the services of a CPA and when you would do just as well hiring a preparer. A CPA is valuable for people who must complete some of the more complicated tax forms (for home businesses, partnerships, and rental property), or for those who had some event during the year that would have a major effect on their taxes (retirement, purchase or sale of property).
Remember, YOU are responsible!
Prepare to Prepare
No matter who does your taxes, you have to gather together the materials. Keeping organized, complete, accurate records can make all the difference in reducing the headaches of tax preparation—and audits.
The secret is to collect records all year round so they are all in one place when you need them. Tax preparation software can help but a simple manila folder or envelope will do. Keep a list of all the documentation you need and check it off when you collect it.
¨ W2’s
¨ 1099’s (bank interest, investment interest, retirement fund
distributions, miscellaneous Income)
¨ Business sales receipts
¨ State tax refunds (if itemized the previous year)
¨ Written logs (e.g.: mileage)
¨ Business expenses
¨ Moving expenses
¨ 1098, real estate escrow papers, property tax bills
¨ Car registration
¨ Medical expenses
Keep your tax records for a minimum of 3 years from the date the return was filed (includes a late filing or extension date). There is a 3-year statute of limitations on tax audits and assessments. However, if the IRS suspects that income was not reported, they can go back 6 years. If there is suspicion of fraud, they can go back forever!
You should, however, keep all the records for things you continue to own such as stocks and bonds, automobiles, home purchase (and improvements), and expensive personal property such as jewelry and electronics equipment.
Choosing a Filing Status
Each filing status has its own tax rates. As a general rule, you pay the lowest tax by filing jointly or as a qualified widow(er), next comes head of household and single. Married filing separately pay taxes at the highest rate.
Most people who aren’t married file as single. Couples living together still must file as single.
A married couple filing jointly completes one tax return with combined financial information. You are considered married if you got married by or were still married as of December 31. A couple legally separated under a divorce decree may not file jointly. A large number of couples pay higher total taxes when they are married verses when they were single.
A married couple filing separately files two separate tax returns. Most couples would pay more taxes if they filed this way. It can be useful for couples who have large differences between their two incomes and can claim more itemized deductions by filing separately. If one spouse has a number of deductions--such as medical bills--that have a percent of AGI limitation, filing separately could be an advantage. Additionally, filing separately may allow you to claim the full benefit of exemptions that would be phased out at a higher income level. However, there are many items you can’t claim when filing separately—such as most of the tax credits. If you are not sure which would be most advantageous, you should complete your return both ways.
You may file as head of household if you are married but you did not live with your spouse for the last 6 months of the year and you are filing a separate return. You must have paid more than half the cost of keeping up a home in which you lived and a dependent lived with you for more than half the year. Unmarried children do not need to be dependents.
This filing status would benefit you if you were a widow(er) for the entire tax year and had a dependent child living with you for the full year. You must have paid more than half of the cost of maintaining your home. This is only available for two years after the death of your spouse. For example, to file as a QW for the 2000 tax year, your spouse would have died in 1998 or 1999 and you did not remarry in 2000.
Figuring Personal and
Dependent Exemptions
You may take one exemption for yourself and one for your spouse (unless one of you is being claimed as a dependent by someone else). The personal exemption amount for 2000 is $2,800. Personal exemptions begin to be whittled away at $193,400.
You can claim an exemption for a dependent if you provided more than half of his support and this person passes the 5 dependency tests. You must list a Social Security number for every dependent.
Member of your household or relative. Your dependent must live with you the entire year as a member of your household unless they are related to you by blood or marriage. A member of your household who was born or died during the year qualifies.
Married person. If the dependent and the dependent’s spouse file a joint return in order to get a refund of all tax withheld, you may be able to claim them if all other tests are met.
Citizen or resident. The dependent must be one of the following: a U.S. citizen or U.S. Resident Alien, a resident of Canada or Mexico, or your adopted child who isn’t a U.S. citizen but lived with you all year in a foreign country.
Income. The dependent’s gross income must be less than $2,800 unless he was under the age of 19, or was a student under the age of 24.
Support. You must have provided over half of the dependent’s support in 2000. Support includes food, a place to live, clothing, medical and dental care and education.
Who Must File?
If you are under 65 years of age:
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Filing Status |
Gross Income |
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Single |
$ 7,200 |
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Head of Household |
$ 9,250 |
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Married Filing Jointly |
$12,950 |
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Qualified Widow(er) |
$ 7,200 |
If you are over 65 years of age:
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Filing Status |
Gross Income |
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Single |
$ 8,300 |
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Head of Household |
$10,350 |
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Married Filing Jointly |
$14,650 |
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Qualified Widow(er) |
$11,000 |
Income Tax Calculation Summary
<Adjustments to Income>
Adjusted Gross Income (AGI)
<Deductions>
<Exemptions>
Tax Due on Taxable Income
<Credits>
+Other Taxes
<Payments>
TAX DUE OR REFUND
Income and Adjustments
Income Terms
This is the income you receive on which taxes are due before you take any deductions, credits or exemptions. This includes wages and salary, interest and dividends, tips, alimony, pension payments, rent you collect, royalties and any other money you receive from working or investing. All income is taxable—earned and unearned, domestic and foreign, legal and illegal.
Exceptions to reportable income:
¨ Insurance settlements
¨ Gifts and inheritances
¨ Interest from tax-exempt municipal bonds
¨ Reimbursement of health insurance claims
¨ Garage sale proceeds
¨ Taxpayer’s contribution to pension/annuity
¨ Welfare, Workmen’s Comp and part of Social Security
¨ Part of scholarships and fellowship grants
Adjusted Gross Income (AGI)
AGI is your total gross income minus:
¨ IRA, SEP, Keough, and Medical Savings Accounts deductions
¨ Moving expenses
¨ Student loan interest
¨ Penalties on early withdrawal of savings
Deductions
Deductions lower your tax liability by your marginal tax rate. The lower your tax rate the less money you save from each deduction. If you have $1,000 worth of mortgage deductions and pay taxes at a 50% rate the value of the deduction is $500. If you pay at a 30% rate it is only worth $300.
The standard deduction is a part of your income on which you don’t have to pay taxes. The 2000 standard deduction for a single person is $4,400 and $7,350 for a married couple filing jointly. While everyone qualifies for it, the value of deductions begins to phase out at an AGI of over $128,950 for singles and over $193,400 for a married couple filing jointly.
If you are 65 or older, you can increase your standard deduction by $1,100 if you are single or head of household and $850 if you are married filing jointly or a qualified widower. If you are blind you are entitled to an extra $1,100 if single and $850 if married.
If your individual deductions total more than your standard deduction, it makes sense to itemize those deductions on Schedule A.
Medical Expenses. You can deduct unreimbursed medical expenses that exceed 7.5 percent of your AGI. Most expenses for doctors, dentists, health care premiums and prescription drugs are deductible. Cosmetic surgery, athletic club fees, and weight loss programs are not deductible.
State, Local and Foreign Taxes. Taxes you have paid to your state, locality or a foreign government are deductible. These include income and property taxes, personal property taxes (such as car registration), and state disability insurance.
Interest Expenses. Home mortgage interest, points on a mortgage (loan origination fee) and investment interest are deductible. Consumer interest paid on credit cards, personal loans or car loans is not deductible.
Charitable Contributions. You can deduct contributions made to qualified charities in cash, securities, real estate or physical property. If you do volunteer work for a qualified charity, you can deduct your unreimbursed expenses (such as mileage).
Casualty and Theft Losses. You may qualify for a deduction if you have suffered a major property loss due to damage or theft and are not reimbursed by an insurance policy. Damage loss must be a result of a sudden, destructive force. In case of a theft, you must have filed a stolen property report with the police. These loses must exceed 10% of your AGI and you can only deduct the amount over $100.
Miscellaneous Expenses. You can deduct the amount over 2% of your AGI of the following expenses:
¨ Dues and subscriptions to professional organizations and publications
¨ Uniforms and work clothes necessary to perform your job
¨ Job-hunting expenses (in the same line of work)
¨ Equipment required by your employer
¨ Home office expenses
¨ Job-related education expenses
¨ Investment and tax advice expenses
¨ Legal fees for collecting and producing taxable income, keeping a job or obtaining tax advice
¨ Business travel and entertainment expenses not reimbursed by your employer
¨ Trust administration fees
¨ Cost of safe deposit box
¨ Gambling losses (100%, take on line 27)
Tax Rates
This is calculated by subtracting all your personal exemptions and either the standard deduction or your itemized deductions from AGI. Taxable income is the income you pay taxes on.
The government charges you different rates for different parts of your income. You generally pay less tax on your first dollars of earnings and more tax on your last earnings. Your marginal rate is the rate you pay on the last dollars you earn.
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Singles Taxable Income |
Married Filing Jointly Taxable Income |
Federal Tax Rate (Bracket) |
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<= $26,250 |
<= $43,850 |
15% |
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$26,251-$63,550 |
$43,851-$105,950 |
28% |
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$63,551-$132,600 |
$105,951-$161,450 |
31% |
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$132,601-$288,350 |
$161,451-$288,350 |
36% |
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> $288,151 |
> 288,150 |
39.6% |
If you are single and your taxable income in 1999 totals $34,000, you pay federal tax at the rate of 15% on the first $25,750 of taxable income and 28% on income from $25,750 up to $34,000--for a marginal tax rate of 28%
Tax Credits and Payments
The best tax saving device is a tax credit which lowers your tax bill by one dollar for every dollar of credit you receive. If you receive a $1,000 credit, you can take $1,000 directly off of the taxes you owe.
If you hire someone to take care of your children so that you can work, you’re entitled to a credit that could be worth several hundred dollars. Your child must be under 13, or a dependant of any age that is physically or mentally handicapped. This credit is worth $2,400 for one child and $4,800 for 2 or more children. The value of the credit decreases as income increases, but it does not get phased out completely. This can not be combined with a Medical Savings Account deduction. You need to file Form 2441.
This credit could amount to as much as $1,125 if you are married and both you and your spouse are 65 or over, or if both of you are disabled at any age. For single taxpayers, the maximum credit is $750. Unfortunately, due to income requirements most taxpayers can’t claim this credit. File Schedule R.
Every child under 17 that you can claim as a dependent is worth a $500 credit. Your dependent must be one of the following: your son, daughter, adopted child, stepchild, foster child, grandchild, great-grandchild, great great grandchild. The child must be a U.S. citizen or resident. The credit begins getting whittled away at $75,000 for a single, and $110,000 for joint returns.
You cannot take the Hope and Lifetime Learning Credits in the same year. Both credits are claimed on Form 8863. The IRS can check on whether you are entitled to receive the credit since educational institutions are now required to issue FORM 1098-T to the student.
These are “refundable credits”—they put cash in your pocket even if you don’t owe tax.
This is when you have 3 or more kids and the regular Child Tax Credit exceeds your tax. You will need to complete Form 8812 to claim the additional credits.
This credit is designed to assist low-income taxpayers. You can even get this credit if it exceeds your taxes due or if you don’t owe any tax. To qualify, your earned income must be less than the following amounts: $27,413 if you have one child, $31,152 if you have two or more children, $10,380 if you don’t have any children, are at least 25 (but under 65) and are not being claimed as a dependent by someone else. This credit is worth $353 if you have no children, $2,353 if you have one child and $3,888 if you have 2 or more children. File Schedule EIC to get this credit.
Household Employee Tax. If a household employee is paid more than $1,200 in one year, it is the responsibility of the employer to pay their social security and medicare taxes. Schedule H.
Alternative Minimum Tax. Normally triggered by incentive stock options (ISO’s). Form 6251.
Tax on IRA’s, Other Retirement Plans and MSA’s. Normally triggered by early distributions of IRA’s. Form 5329.
Other Tax Issues
If you are unable to complete your taxes by April 15, complete Form 4868 and file it with the IRS by April 15. This will give you an automatic four-month extension. However, you still must pay at least 90% of the tax due by April 15th--or the IRS will fine you 1/2 of 1% per month of the taxes you owe.
When you file a Form 4868 with the IRS, the state of California will automatically grant a six-month extension as well. You may need to include a copy of your federal return as well as a copy of Form 4868 with your state return. If you still need or want more time, you can request a second extension from the IRS by filing Form 2688. You must file this form by August 15 and must state "good cause" for needing more time. The second extension is granted at the discretion of the IRS.
Even if you can't pay the tax you owe, you should still file a return. It is a crime to not file a tax return if taxes are owed. According to the IRS a "willful failure to file" a tax return is a misdemeanor that can get you up to a year in jail and a $25,000 fine for each year of non-filing. Interestingly, there is no criminal penalty if you file but don’t pay the taxes you owe. You will still owe interest and penalties, but you can't be criminally fined or sent to jail.
Installment Agreement. Pay as much as you can when you file and complete Form 9465, Installment Agreement Request. The IRS requires that you pay your debt in 36 months. (The California Franchise Tax Board will give you 24 months.) To qualify, you must have filed and paid your taxes on time for the last 5 years, and not previously have asked for an extension.
Hardship. If you are facing a temporary financial hardship such as unemployment or a disability, the IRS may grant a temporary forbearance and suspend collection activity for up to 12 months. File Form 433A, Collection Information Statement for Individuals.
Offer in Compromise. An Offer in Compromise is when the IRS agrees to settle unpaid tax accounts for less than the full amount of the balance due. This would be an option if you can show the IRS that it is unlikely they will able to collect the debt in full. If you are unemployed or disabled or the debt is well beyond your ability to pay.) The amount you offer must reflect your maximum ability to pay, and take into account all your assets and future income. You must file Form 656, Offer in Compromise, and Form 433A, Collection Information Statement for Individuals.
Tax Resources
On the Web
TaxCut, H&R Block
TaxSaver, Microsoft
TaxAct, 2nd Story Software
Books
The Ernst and Young Tax Guide
Taxes for Dummies, Eric Tyson & David Silverman
It's Not What You Make--It's What You Keep, Julian Block
J.K. Lasser's Year-Round Tax Strategies, David DeJong & Ann Gray Jakabcin
Stand Up to the IRS, Frederick W. Daily
By Phone
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IRS |
FTB |
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Tax Help |
800-829-1040 |
800-852-5711x5 |
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Tax Forms |
800-TAX-FORM |
800-338-0505 |
|
Recorded Answers |
800-829-4477 |
800-338-0505 |
In Person
VITA
One-on-one help is available free of charge from the IRS. Call 1-800-829-1040 for eligibility guidelines and the VITA location near you.
Just simply stop into an IRS office near you!