Well, it’s that time of year again – tax time! No one likes to deal with this necessary evil, so some of us put off filing until the last minute because we are disorganized or know we owe money. The lucky ones are excited to get their tax return completed because they know they’re getting a refund! That’s like getting vacation money or an extra paycheck. But is it the smartest thing to let the Internal Revenue Service hold your money until you get your refund?
Here are some tax tips and IRS news that will make this year less taxing for you:
1. Refund from the IRS: It may not be the best strategy for you get a large refund back every year. You can’t make any interest by letting the IRS use your money during the year. Instead, take that additional money and put it into an interest-bearing savings account. The interest rates are usually low, but something is always better than nothing.
The important thing to ask yourself is, “Can I take that money and set it aside without touching it?” Some of us can’t, so letting the IRS hold it until the following tax season, may be your only way to not spend it.
2. The AMT may hit you this year! Late last year, Congress approved a one-year patch for the Alternative Minimum Tax (AMT), approving a one-year patch on December 19. This “short-term fix” could delay around $40 billion of refunds to as many as 17 million taxpayers!
You may not have heard of the dreaded AMT before, so allow me to educate you. The AMT was originally created in 1969 to target “super-rich” families who used deductions to avoid paying taxes altogether. Unfortunately, the law has stayed on the books without being adjusted for inflation.
By late last year, the law was threatening nearly 25 million middle-class taxpayers. This is an increase of 21 million taxpayers since 2006. The AMT patch helps taxpayers with incomes between $75,000 and $200,000 who might otherwise have seen their taxes spike by an average of $2,000.
However, since the House of Representatives dragged its feet getting the legislation passed, the IRS wasn’t able to re-program its computers in time for the launch of tax season. It’s going to take the IRS until mid-February to update their systems in order to comply with the AMT patch. Taxpayers who use the forms listed below, will not be able to file their taxes until the changes have been made. Even if your refund may be held up, there’s no need for you to delay your appointment with your tax preparer.
- Form 8863 for Education Credits
- Form 5695 for Residential Energy Credits
- Form 1040As for Child and Dependent Care Expenses or a Schedule 2
- Form 8396 for Mortgage Interest Credit
- Form 8859 for District of Columbia First Time Homebuyer Credit
3. More Tax Rebates Available! Finally some good news! You may not know most tax filers will get a rebate this year! Congressional leaders announced a deal with the White House on an economic stimulus package that will give single tax payers a rebate of up to $600 and couples up to $1,200 – plus an extra $300 per child. However, the rebate is equal to the taxes paid. If you didn’t pay $600 or $1,200, you won’t get that much back. The minimum you can receive back is $300 for singles and $600 for couples. However, the rebate amount can be decreased according to your income. Singles lose $50 for every $1,000 above $75,000 and couples lose $50 for every $1,000 above $150,000.
4. Are you at risk for a random audit? The IRS has reintroduced the controversial practice of random audits, targeting thousands of taxpayers nationwide. This comes in response to allegations from the Government Accounting Office (GAO) that many sole proprietors’ (individuals who own their own businesses) under-report their income.
The first random audits began in October 2007, targeting approximately 13,000 income tax returns from the previous year including a wide range of income categories and 5,000 Sub-Chapter S Corporations (a type of corporation with limited shareholders and different tax rates). The IRS’s primary targets are taxpayers who file a “Schedule C” (business expenses) or “Schedule F” (farming expenses) with their federal tax return.
To minimize your risk of being targeted or penalized by a random IRS audit, be careful to:
- Document all company vehicle expenses
- Document all meal and entertainment expenses defined as business-related
- Verify that all home-office deductions are in compliance with current regulations
5. Crackdowns on Charitable Giving. In 2006, the IRS was getting tough on charitable contributions used as tax deductions through the Pension Protection Act of 2006. Now the rules are getting even tighter for donations of clothing and household items. Previously, donations up to $500 in value didn’t have to be documented. Those deductions of $499 or less added up to $9 billion nationwide!
Now, items donated with a value of less than $500 must be in good used condition or better. However, the IRS has issued no guidelines for what will be considered “acceptable proof” of such condition. Tax professionals predict that these kinds of deductions will decline.
If you donate items worth more than $500 in any condition, make sure to attach a qualified appraisal to your 2007 tax return.
6. Ways to Keep Your Taxes Lower. One of the best ways to minimize your tax bite is to maximize your retirement contributions. Whether you contribute to an IRA or a 401(k), you are lowering your tax liability. However, there are maximum contributions you can make each year:
- 2007 IRA: Under age 50 = $4,000; over age 50 = $5,000
- 2008 IRA: Under age 50 = $5,000; over age 50 = $6,000
- 2007-08 401(k): Taxpayers under age 50 = $15,500; over age 50 = $20,500
If you didn’t contribute the full amount by the end of December, don’t worry! You can still fund the amount you claim on your 2007 tax return as late as April 15.
Here are some other ways to decrease your tax liability:
- Create a home office if you do not have another office elsewhere
- Contribute to a 529 college funding plan for your child, niece, nephew, etc.
- If you bought a house in 2007, pay PMI insurance on your house. Your monthly payment will be higher, but the money you pay for your PMI insurance is tax-deductible.
- Keep track of your mileage. Here is a breakdown of how much you can claim for different types of driving:
- Business: 2007 – 49 cents per mile; 2008 – 51 cents per mile
- Medical: 2007 – 20 cents per mile; 2008 – 19 cents per mile
- Moving: 2007 – 18 cents per mile; 2008 – 19 cents per mile
- Charitable: 2007 – 14 cents per mile; 2008 – 14 cents per mile
7. Ask a Professional. If you’re not sure about a particular tax tip, talk to your accountant. They can get you on the right track. As we say at our office: It’s not what you earn, it’s what you keep!