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© 1996 Frank E. Fogg - All Rights Reserved
Nobody likes to pay tax. Yet taxes are a daily occurrence in our lives. Taxes are paid at the Federal, State and Local levels on income. Most areas impose a sales tax on purchases. Real estate and personal property taxes are applied to homeowners. Businesses pay payroll, real estate, sales and franchise taxes. The United States Tax Code is a vast labyrinth of rules and regulations that has evolved over the years. Although it is quite intricate, it is designed so that all will share in the tax burden. Personal income taxes accounted for about 1/3 of the Federal Government's income in 1992. Social Security, Medicare and unemployment taxes were about another 1/3 of 1992 income. The combination of personal income taxes, Social Security tax, Medicare and unemployment taxes provided about $900 billion in 1992(1). For 1992, about 1/3 of the U.S. Government spending was for Social Security, Medicare and other retirement programs. Another 1/4 was spent for national defense. Social programs and community development accounted for another 1/4 of cash outlays(1).
There are a number of professional tax preparers in the United States. Professional groups include Tax Preparation services, Certified Public Accountants and Enrolled Agents. There are advantages to having these professionals prepare your tax return. Most professional tax preparers regularly attend classes and seminars to learn about the latest tax law changes. They are familiar with how the forms are to be prepared and what forms are required for each situation. Tax planning services are also offered in which recommendations are made to reduce future tax liabilities. Many tax preparers now offer electronic filing. Once a return is prepared, a computerized version is transmitted to the Internal Revenue Service via a telephone link. Electronic filing decreases the time it takes to process a return and improves its accuracy, so a refund is issued much sooner. Several factors should be considered when selecting an organization to deal with tax matters:
Tax preparers are subject to special rules in the United State Tax Code. These rules are designed to protect the taxpayer from unscrupulous practices by professional tax preparers. Penalties can be accessed to the tax preparer by the Internal Revenue Service for violations of the rules. Tax preparers cannot divulge your personal information, tax return or refund status to other parties without your permission. A copy of your return must be supplied by the preparer. Fees based on results are prohibited, therefore the preparation charge is not based on the amount of the refund. The preparer must not substantially understate the amount of tax liability.
Organized recordkeeping can help reduce the amount of tax liability for the year. Well organized records can help to uncover deductions that would otherwise be overlooked. Recordkeeping is required to support income and deductions. The length of time to keep records varies with the type of record.
Records can be organized by using a personal computer. There are a number of checkbook accounting programs available to record income and expenses. The programs operate much like a checkbook. The information from the check is recorded in the computer program. Most of these programs also offer features that allow credit card information to be tracked. The information that is entered is totaled and summarized in monthly and yearly reports. There are additional beneficial features of personal accounting software. Budgets can be prepared at the beginning of the year. Performance using the budget figures can be measured throughout the year. In some programs home assets are organized. This is an advantage in case of fire or other disaster in providing proof of insured items and cost. Computer based spreadsheet programs are another useful tool in organizing personal records. Spreadsheets programs use a large grid similar to graph paper. Each block or "cell" may contain a number, text or a calculation formula. Information is entered into the various cells. The calculation formulas sum the information to provide subtotals and totals. Many of the popular spreadsheet programs also provide financial functions that are useful in analyzing loan and mortgage interest.
There may come a time when an amended income tax return is necessary or desirable. An amended income tax return may be filed up to 3 years after the due date of the original return(2). It is used to change the original tax return when new information or errors are discovered or a change in filing status or exemptions is desired. Use Form 1040-X to change the original return. The information from the original return is presented first. The changes are listed. Finally the corrected figures and shown. Space is provided on Form 1040-X to provide an explanation of the changes that are made. Attach the corrected Form 1040 return and all supporting forms and schedules related to the change. An amended return can also be filed when the wrong tax form was originally used. For example, Form 1040-EZ was originally filed but Form 1040 was required because more than $ 400 in interest income was received.
New rules apply to charitable contributions beginning in 1994. For many contributions, the organization must provide written documentation to the taxpayer confirming the contribution. Another new rule concerns benefits received. If anything is received in return for a charitable contribution such as a dinner, prize or other item, the amount of the deduction allowed is reduced by the value of the item received.
Taxpayers may also claim a deduction for non cash items donated to charities. Non cash contributions may include gifts of personal property and appreciated assets. This type of donation can be subject to abuse so the Internal Revenue Service will closely scrutinize this deduction. There are several things that must be done to protect your deduction when making non cash contributions of more than $ 500. Schedule an independent appraisal of the item prior to making the donation. This will prove the fair market value of the item and help with deciding to proceed with the donation.. The appraiser should complete Part III of Form 8283 for you when the appraisal has been completed. For donated items with lesser value such as used clothing or old furniture, a trip to the local surplus store to compare prices of items similar to the donated property will be sufficient. Get a written confirmation from the charity for your donation. The charity should acknowledge receipt of your donation by completing Part IV of Form 8283.
The time donated to a charitable cause is not deductible. Out of pocket expenses and mileage related to performing work or donating services to the charity are deductible expenses.
Expenses for your car may be deductible. There are four major categories of automobile expense that are deductible:
Automobile expense for tax purposes can be computed based on actual expenses or on mileage. When using either method it is imperative to keep a mileage log for all miles driven during the year. The totals from the log will be used to figure your deduction when your return is prepared. Mileage logs are readily available at most office supply stores for several dollars. Some expenses are used in calculating your deduction when either method is used. Parking and tolls costs are included using either method. Most taxpayers will use the standard mileage rates to compute their deduction. Self employed individuals may want to consider using the actual expenses in arriving at a deduction. The deductible expenses are:
When a vehicle is used for both business and personal use the percentage of business use is multiplied by the expenses to arrive at the proper deduction. The percentage of business use is derived from the miles driven for business divided by all miles driven.
Estimated tax payments can be made to reduce year end tax liability and penalties associated with underpayment of tax. The amount to pay is calculated on Form 1040-ES. The payments are divided into four equal amounts over the course of the tax year. Everybody does not need to make estimated tax payments. If a refund is expected or if the tax due at the end of the year is less than $ 500 then no penalty will apply. Estimated tax should be calculated and paid when the expected tax due will be greater than $ 500. Some of the situations that may cause this include:
If estimated tax payments were required and not made then several options are available to handle the discrepancy. The return can be filed with no computation for tax liabilities. The Internal Revenue Service will calculate the amount due. Alternately, the penalty due can be determined by filing Form 2210 with the return. The taxpayer can also request a waiver of the penalty. The circumstances that may allow waiving the penalty include underpayments due to disaster, retirement and changes in the tax law and the underpayments were due to reasonable cause. Estimated taxes must be paid when the year end tax liability is expected to exceed $ 500. The best way to avoid paying the penalties is to use the Safe Harbor method to calculate estimated tax payments for the coming year.
Most taxpayers have put aside money for the future. There are several strategies that can reduce the amount of income tax that is paid on the interest received for these investments.
Self-employed individuals should also investigate the IRA-SEP retirement plan. These plans are simple to start and allow you to contribute up to $22,500 per year based on your earnings from self-employment. An IRA account may be established at most banks. Many mutual funds also offer an IRA option as well. A few companies allow investors to purchase their stock through an IRA arrangement too.
Buying a home is the largest purchase most Americans will make. There are several important strategies to use in planning for the eventual sale of the home.
The Internal Revenue Service has a number of publications to assist you. These are available at no charge. Contact your regional forms ordering center and ask for the publication you want. 1 Your Rights as a Taxpayer 17 Your Federal Income Tax 334 Tax Guide for Small Business 463 Travel, Entertainment, and Gift Expenses 501 Exemptions, Standard Deduction, and Filing Information 502 Medical and Dental Expenses 505 Tax Withholding and Estimated Tax 508 Educational Expenses 521 Moving Expenses 523 Selling Your Home 525 Taxable and Nontaxable Income 527 Residential Rental Property 529 Miscellaneous Deductions 550 Investment Income and Expenses 554 Tax Information for Older Americans 575 Pension and Annuity Income 586 Earned Income Credit 590 Individual Retirement Arrangements (IRAs) 910 Guide to Free Tax Services 917 Business Use of a Car 929 Tax Rules for Children and Dependents 936 Home Mortgage Interest Deduction Footnotes: 1)1993 Form 1040EZ instruction booklet. 2)Form 1040X may be filed up to 7 years after the due date of the original return when the correction is based on bad debt or worthless securities.
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