“The Baby Boomer Generation”

Tax Debt Help – Your Taxes A-Z

January 8, 2008 at 6:41 pm (Deductions, humor, IRS, tax advocacy, tax debt help, tax help, Uncategorized) (Deductions, effectur, tax advocacy, tax debt help, terminology)

As a subscriber to Kay Bell’s blog site, “Don’t Mess With Taxes”, I have found this list of A-Z tax terminology that is absolutely great and wanted to share it with everyone. You go Kay……………..

Above-the-line deduction — This special group of deductions is a great time and money saver for many taxpayers. Not only do you get to deduct things such as alimony paid, some college costs and some financial account penalties you paid, you don’t have to mess with Schedule A and itemizing to claim them. Technically, they are adjustments to your income. They help reduce your total earnings to the amount upon which you ultimately figure your tax bill — your adjusted gross income. The lower your AGI, the less tax you should owe. And the name? These dozen or so deductions are at the bottom of Page 1 of the long Form 1040, just above that page’s last line, so they are literally “above the line.”B

Basis – Before something can be taxed, you (and the Internal Revenue Service) must know its basis, or what it’s worth. Basis, which also is sometimes referred to as “cost basis,” comes into tax play when you sell an asset and you must determine if you owe any taxes on it. You get to adjust the asset’s basis, taking into account, for example, improvements and depreciation in the case of real property or transaction fees and previously paid taxes in the case of stocks or mutual funds. Figuring your correct basis is critical. Mess it up and you’ll come up with a basis that’s too low, and that means a bigger tax bill than necessary. C

Casualty loss — No one ever wants to suffer damage to their property. When it does happen, you might be able to at least get a bit of tax help from Uncle Sam. It doesn’t matter whether your loss is caused by a natural disaster, such as a hurricane, earthquake or flood, or at the hands of a thief or vandal. They all count as casualty losses as long as they’re sudden, unexpected or unusual. By itemizing your taxes, you might be able to write off a portion of your damage amount on your taxes.

Doing your taxes is not as easy as ABC, but these alphabetical tips could make the process less difficult and save you some money, too. Check out these D, E and F tax opportunities to take or pitfalls to avoid.

Dividends – These investment earnings are a great way to save for retirement or come up with a little extra spending money. The bad news: Dividends are taxable income. The good news: Thanks to a legislative change a few years ago, they are now taxed at a lower rate. In cases where the dividend payments meet IRS guidelines, they are taxed at 15 percent (or possibly just 5 percent for some lower-income investors) instead of your ordinary tax rate, which could be as high as 35 percent. When you get your account’s year-end tax statement, it will tell you whether any dividends qualify for the lower 15 percent rate.

Enrolled agent – If this is the year you decide to hand your taxes over to a professional preparer, one of your choices is an enrolled agent. This type of tax pro has a long history; the first enrolled agents started helping taxpayers claim legitimate losses they suffered in the Civil War. Today, they also can help you file your routine return and, more importantly, are officially authorized “agents” who can appear in your place to resolve a dispute with the IRS. Some other tax professionals can accompany you to IRS meetings to counsel you and help explain your tax issues, but EAs can go to these sessions in your place.

Filing status — Picking the proper filing status could make the difference between owing the IRS or getting a nice tax refund. When you fill out your return, you must choose from one of five filing status options: single, married filing jointly, married filing separately, head of household or qualifying widow or widower. Each one helps determine your standard deduction amount, as well as what additional tax deductions or credits you might be able to claim. Some filers might find they meet the requirements for more than one filing status. In that case, look over exactly what each offers and make sure you pick the one that gives you the best, least-costly, tax return.

Doing your taxes is not as easy as ABC, but these alphabetical tips could make the process less difficult and save you some money, too. Check out these G, H and I tax opportunities to take or pitfalls to avoid.

Gains — When you sell an asset and make money on it (after first determining your correct basis that we talked about earlier), you have a gain to report to the IRS. This profit is generally referred to as a capital gain. But just how much in taxes you owe depends on the type of capital gain you recognize, either long term or short term. And the tax laws reward sellers who hold onto their property for a longer period of time. When you sell an asset you owned for more than a year, even just a year and a day is fine, any profit on its sale is a long-term capital gain and is taxed at a more favorable rate: 15 percent for most taxpayers. By contrast, gain on assets you own for a year or less before selling will be taxed at ordinary tax rates, which could go as high as 35 percent. So if you have a choice on when to sell an asset, your patience could pay off at tax time.

Hobby — You really enjoy taking photographs and are good enough that you’ve socked away some extra spending money by accepting a small fee for snapping shots at your neighbor’s family reunion or a co-worker’s wedding. But beware, that money is taxable income — unless you can find a way to whittle down your net take. One way to do this is turn your hobby into a job. When you make your hobby into a legitimate income-producing effort, tax breaks follow.

IRA — Most of us have some form of this popular type of retirement savings plan. You can open a traditional individual retirement account, favored by some people because they then can deduct their contributions from their taxes. They will, however, have to pay taxes on the IRA money when they take it out at retirement. Other savers opt for a Roth IRA. You can’t deduct contributions to a Roth account, but when you make qualified withdrawals from your account, the money won’t be taxed. Each type of account has eligibility requirements, primarily based on income and age. With most IRAs, you have until April 15 (or the next business day if the 15th falls on a weekend or holiday) to pick an account and put your money in it so that it counts toward last year’s taxes.

Doing your taxes is not as easy as ABC, but these alphabetical tips could make the process less difficult and save you some money, too. Check out these J, K and L tax opportunities to take or pitfalls to avoid.

Jacuzzi – Are you still working with a physical therapist to recover from that compound fracture you suffered on the slopes of Aspen? Did your orthopedic surgeon prescribe a whirlpool bath to help that process along? Then you might be able to write off the cost of your new Jacuzzi. Taking all the medical deductions you are entitled to is important since you must come up with an amount that’s more than 7.5 percent of your adjusted gross income before the expenses are of any tax use.

Kiddie tax — This tax is officially known as the “Tax for Children Under Age 18 Who Have Investment Income of More Than $1,700.” It’s no wonder, then, that it’s usually referred to as the “kiddie tax.” This provision was created to keep parents from sheltering large amounts of income by putting financial accounts in the names, and lower tax brackets, of their kids. This used to be a relatively easy tax-saving technique, but in 2006 the law was changed. Now when investment accounts are held by someone younger than 18 and the earnings exceed the annual limit, adjusted each year for inflation, the young account owner must pay taxes at his or her parents’ higher tax rate. This is usually is taken care of by the parents adding the child’s income to the adult filing, which could produce other problems by pushing up the parental income level. In some instances, an investment plan for your children still might be good idea. Just make sure you understand all the tax implications of your youngster’s assets.

Las Vegas winnings – When you can no longer fight off the lure of Sin City’s casinos, just remember that the IRS will share in any of your good gambling luck. Gambling winnings, as well as the value of any prizes you win, are taxable. If your jackpot is big enough, the casino or horse track or lottery agent will take the taxes out first. You’ll also get an official tax statement; so will Uncle Sam, so don’t try to pretend at tax time that you didn’t pocket the winnings. Of course, there’s no way for the IRS to track all off-the-book wagers, such as the friendly office pool. Still, you’re supposed to report, and pay taxes on, all gambling winnings regardless of the source. (And knows you will faithfully comply.) The one bit of good news here is that you can subtract your losing bets from your windfall to lessen the tax bite just a bit.

Mortgage interest — This is probably the most well-known tax break: You can deduct the interest you pay on your home’s mortgage. Interest on a second mortgage or home equity loan or line of credit is generally deductible, too. The interest deduction is just one of many tax advantages afforded homeowners, and it is taken into consideration every day by prospective buyers trying to figure just how much house they can afford. Owning a house is not the only way to cut your taxes. Most homeowners also get a break when they sell their primary residence; up to $250,000 in profit (double that for married couples who file jointly) is exempt from taxation.

Nontaxable income — When you slog through your taxes, it sure seems like the IRS is taking a bite of every last penny you have. That’s not quite true. While the federal government does collect a lot from most of us, there actually is income that isn’t taxed. Senior citizens relying solely on Social Security income, for example, don’t have to pay on those benefits. Of course, if they’re supplementing it with other income, a portion of Social Security might be taxable. Other money that’s not federally taxed includes child support, gifts, bequests and inheritances, most life insurance proceeds, workers’ compensation payments, insurance and other reimbursements for casualty losses and certain Roth IRA distributions.

Offer in compromise – Most of us, however, find that the bulk of our income is taxable; sometimes, way too taxable. And occasionally, we find that we can’t handle the tax bill we face on April 15. If you find yourself in this position, don’t panic. You do have payment options, including an offer in compromise. This is a lump sum tax payment that you offer to pay; it’s less than the total amount of tax you owe, but in some cases the IRS will accept your offer in order to get some money from you sooner rather than more after years of costly collection efforts. The key here is to make a reasonable offer. There is a process the agency follows, and despite what those late-night cable TV commercials say, you can’t walk away from thousands in tax debt for mere pennies.

Payroll taxes – When you collect the bulk of your income via a regular check from your employer, payroll taxes are collected before you ever get your money. These amounts, subtracted from your earnings via withholding, include federal and state income taxes, as well as payments to the Social Security and Medicare systems. Your employer is required by law to collect payroll taxes and send the money to the federal government where it’s held in the appropriate accounts in your name. You get the details each year on your W-2 statement. But you also have a responsibility to ensure that the correct amount is withheld from your checks. Too much withholding means Uncle Sam gets free use of your money all year; too little, and you’ll owe at filing time. So check your withholding amount and adjust it if necessary.

Qualifying widow or widower — When you lose a spouse, taxes are not going to be among the first things that you worry about. However, there is a special filing status for widows or widowers who meet certain IRS guidelines, and it could help make the first couple of tax returns after your loss less costly. Tax law allows you to file a joint return for the tax year in which your spouse passed away. Then, for two years following the year that your spouse died, you might be eligible to file as a qualifying widow or widower if you are supporting a dependent child. If you meet the requirements to use this filing status, you’ll be able to use the same tax considerations given married joint filers, such as the largest possible standard deduction amount.

Rollover — When you leave your job, in addition to packing up your desk, you’ll probably want to take your company retirement savings account along with you, too. But be careful how you take possession of the account, or it could cost you. Although legally you can have your company give you the account in a lump sum, you must deposit the full amount into another qualified retirement account within 60 days or pay taxes on it. The easiest move, both from tax and administrative standpoints, is to directly roll over your company 401(k) into another qualified retirement plan. That way, you won’t lose any of the money’s tax-deferred earning power, you won’t owe the IRS anything and, most importantly, you won’t be tempted to spend your nest egg on something you don’t really need.

Standard deduction – Most people choose to claim the standard deduction amount when they file their taxes. It’s easy; the amount is right on your return near the line where it should be entered and there are no receipts to keep track of or threshold amounts to meet as is the case when you itemize your deductions. But don’t automatically take the easy, standard deduction route. Compare your standard versus itemized deduction amounts and take the one that’s larger. It will get you a smaller tax bill or a bigger refund.

Temple — If you gave to your temple, synagogue, church, mosque or other house of worship, it could help cut your tax bill. Religious organizations are generally classified as IRS-approved groups, meaning your donations to them are deductible as charitable contributions, as long as you choose to itemize rather than take the just-examined standard deduction. And don’t shortchange yourself when totaling your generosity. Remember to tally up the value of any goods you donated last year. Just make sure the items met the new tax rules requiring that they be in good or better condition or you could lose the deduction.

Unearned income – You’ve decided to venture into the investing world, putting your hard-earned salary to work producing more cash. But the added money you make from savings accounts, stocks and bonds, certificates of deposit or mutual funds have tax implications. As your nest egg grows, so do your taxes. The IRS calls these investment earnings unearned income and, in most cases, it is taxable. You might, however, get a bit of a break. Some earnings are taxed at a lower rate, typically 15 percent, than applied to your ordinary earned income (wages, tips, salaries, etc.), which could be taxed at a level as high as 35 percent. Just what type of unearned income you collect and where to report it will be detailed in the various 1099 forms you should get each January or early February. And while you’ll probably have to fill out a few more tax forms and run additional computations, it should pay off in a smaller tax bite into your unearned income.

Voluntary compliance – Since you’re visiting to get information on how to file and reduce your tax bill, it’s a pretty good bet that you’re committed to this basic tenet of the U.S. tax system. Basically, this is the philosophy upon which our tax system is based: that U.S. taxpayers voluntarily comply with the tax laws and report their income and other tax items honestly. Of course, if you try to shirk this duty, the IRS will try to “encourage” you to file, usually by sending you a notice alerting you to a mistake on your return or a balance you owe. If you choose to ignore IRS nudging, you’ll get slapped with penalties and interest charges, or worse, for unfiled forms or unpaid taxes.

“W” — This, of course, is the nickname for President George W. Bush, who has made revamping the U.S. tax code a key goal of his administration. During his tenure, W and Congress have tweaked existing laws: lowering tax rates, increasing some credits, easing the marriage penalty, lessening the tax bite on some investments and even reinstating the sales tax deduction, a welcome break for residents of states with no income taxes to write off. But the major changes the president sought will take a little longer to make, especially in light of the midterm election and subsequent Democratic takeover of Capitol Hill. And while the Presidential Advisory Panel on Federal Tax Reform presented recommendations in November 2005 on ways to restructure the tax code, the panel’s more controversial changes — such as eliminating the deductions for mortgage interest and property taxes — have met with political and public resistance.

Xerox copies — Did you make hundreds of Xerox copies of your resume as you searched for a new job? Uncle Sam might be able to help you defray that copying cost. In order to claim any job-hunting expenses, you must look for a position within your current field. You can’t ask the IRS to help you go from software programmer to songwriter, although a good deal of creativity is required for both. Your career change costs also will have to be pretty substantial; they are included as part of miscellaneous deductions, meaning all these expenses must total more than 2 percent of your adjusted gross income before you can claim them. To help you reach that threshold, you also can count employment agency fees, want-ad placement costs and even out-of-town job-hunting trips. Just be sure to save your receipts.

Youngsters – Children can add a lot to your life, and at tax time you can actually put a dollar sign on your youngsters’ value. There are many tax joys of parenthood, from the child tax credit to write-offs for some care costs to help paying for school, from kindergarten through college. Plus, every son or daughter is an added exemption on your tax return. But if you have a really large family, you might end up owing the alternative minimum tax. This parallel tax system was created to make sure wealthy taxpayers paid their fair share. Now, however, since the AMT does not take inflation into account, it is snaring more middle-income taxpayers, some of them because they legitimately claim a large number of personal deductions for children.

And finally, we have reached the end of our tax alphabet with:

Zilch — If you didn’t take all the legitimate tax breaks that you’re eligible for, this could be the amount you have left after paying your taxes. But here’s hoping that these alphabetical tips mean that zilch is the amount that the IRS will get from you this tax-filing season.

S. Raines, Sr. Financial Advisor/Tax Preparer

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