Tis the Season to Save . . . On Taxes!
Everyone hates paying taxes. We all accept it as inevitable but look for ways to reduce our tax liability. Luckily for us, the IRS offers incentives in the form of tax deductions. Some common deductions include charitable contributions, interest on your home mortgage, and interest on your student loans. While you may have no control on when you pay your mortgage and interest, you do have control on when you make charitable contributions.
Basically we are talking about the time value of money. You get the same tax deduction for your charitable donations whether you make them all in January, throughout the year, or all on December 31. This allows you to use your money throughout the year instead of letting someone else use it.
Some people might want to make charitable deductions but are afraid that if they don’t make them in little contributions throughout the year, the money will be spent come December and they will lose out on the deductions. If you are really serious about making charitable contributions but also not wasting your money, put aside the money you want for charitable contributions each month in a savings account. This allows the money to collect interest, which you can use for yourself, or you can add it to your charitable contributions at the end of the year and get even more tax deductions. Either way, you have the money to make your charitable contributions, you got the value of having the money for the entire year, and you still get your tax deductions.
Special Tax Treatment for Family Employees
Wages of children under 18 years of age who are employed in the family business are not subject to social security or Medicare taxes. However, this holds true only if the family business is a sole proprietorship or a partnership in which both partners are parents of the children.
If the children are under 21 and perform only domestic services, they are not subject to social security taxes or Medicare taxes. These domestic services must be performed for the parents though and be provided in the parents home only.
In addition to not being responsible for social security and Medicare taxes, the income of children who fall under either of the categories above is not subject to federal unemployment tax. However, this income may still be subject to federal income tax withholding.
Starting your own business? Remember to pay your taxes!
Many small business owners start making a profit, take a salary, and then get a huge surprise when tax day rolls around. Most small business owners do not have a tax or accounting background, however, it is extremely important that you not neglect this side of your business. If as a self-employed person you are not taking employment taxes out of your paycheck each payperiod, you can be in for a shock when you complete your 1040 tax returns.
Employment taxes are actually two parts, the part that the employee sees taken out of his paycheck when he receives it and the part that the employer pays for each of his employees. If a person is considered self-employed, he mush pay both the employer and the employee portion of taxes. At the end of the year when he files his taxes, he will get a credit for a portion of the taxes he paid, however, if he hasn’t been making these payments throughout the year, he will have a huge bill to pay when he files his taxes.
Help! I can’t do my taxes!!
Many people today don’t know how to keep a checkbook or balance their bank statement let alone how to file an income tax return. If you are in this boat, don’t worry, there are plenty of ways to get your taxes filed without paying someone a hundred dollars to do the return for you.
The IRS websire has a list of programs designed to help tax illiterate people either file their own tax returns using easy to use software or find a program that will do simple tax returns for free. However, it doesn’t hurt to know a few key concepts just to make sure your preparer really is getting you the most money possible.
First, you need to know your filing status. The options here are single, married filing jointly (or qualified widow/widower with a dependent child), head of household, or married filing separately.
1. Single
This is for people who have never been married, are legally separated, or are widowed before January 1st of the tax year you are filing the return for (here it would be January 1, 2008) and did not remarry during the year and don’t have a legally dependent child. To claim this as a legally separated person, you need to do more than just have a fight and move out of the house, you need to take the steps required by your state of residence, ie the state that you live in, to legally separate. This can include a decree of divorce or a maintenance agreement.
2. Married filing jointly
Most married couples select this option. Couples can select this option is they married during 2008, even if they married on the last day of the year. You can also select this option if you were widowed in 2008 as long as you were married at least one day during the year.
When selecting your status, you should keep in mind that this status is determined under federal law. Same sex couples who were legally married in their state are not qualified as married for federal income tax purposes.
3. Married filing separately
Some couples elect this option because one spouse has higher itemized deductions and would get a larger return if using only that spouses income rather than both spouses. However, if you select this option you are not allowed to deduct education expenses such as tuition, fees, student loan interest or education credits, nor can you claim the earned income credit.
4. Head of Household
This status is for an unmarried person (single) who has a dependent. This dependent can be the individual’s child or close relation that the individual pays more than half the support for, including maintaining a home that the dependent lived in more than half the year.
Another great thing to know about when getting your taxes done is the earned income credit. The earned income credit is an additional tax credit for lower income people who work. Most people who qualify for this credit have at least one child.
Making Charity Work for You
Income taxes are just around the corner. You have been saving receipts all year in preparation for this moment. Once all your W-2s come in you are ready to hand the pile off to your tax manager to sort through the mess and make magic. However, there are probably some deductions that you haven’t thought about.
Charity is something that many of us do for a variety of different reasons but we don’t think about how it can affect our taxes. Did you pledge and pay money for someone to run for charity? Did you pay tithes to your local church? Did you donate a toy to your local toy drive? Each of these items is a charitable deduction that you can count on your taxes if you itemize.
Not only is the money donated to a charity deductible, so are goods. Those clothes that you dropped off at Goodwill are deductible just as much as the money you gave to the Red Cross. However, that isn’t everything. If you donate your time to a charitable organization you can track and deduct the mileage. In 2008 and 2009 the government is allowing a charitable deduction of 14 cents a mile for every mile driven to and from a charity where you donate your time. While you can’t donate the mileage of driving to Goodwill to drop of those clothes that no longer fit, if you donate your time once a month to help out at the local Salvation Army or Humane Society you can donate the miles for those trips.
Keep track of the miles you have when you leave the house to do your charitable work and the miles you have when you get back to document your deduction and make sure to let whoever does your taxes know about the mileage. For the mileage to qualify, the charity must be a 501(c)(3) tax-exempt organization.
The Tax Man Cometh
The commercials are starting to scare you early this year. Many are eagerly waiting to get their returns back so they can have the extra case to pay bills, perhaps even to pay off their Christmas. So, should I listen to all the commercials and hire someone else to figure out my taxes? It depends on how much money you make and how complicated your return is.
If you have a very simple return, one or two jobs and you are taking the standard deduction then it would be a waste of money to pay someone else to do your return. If the sight of those forms at the Post Office gives you a headache, check out the IRS website.
http://www.irs.gov/efile/article/0,,id=118986,00.html
This website lets you choose from a variety of online sights to complete your tax returns. The online versions are much easier than the paper forms. You just follow the steps and answer the questions asked. In addition, citizens with an adjusted gross income of less than $56,000 can use the software for free. Most websites charge a fee for state taxes and a fee if you want to file the return via e-file.
Personally, I prefer e-file. While it may cost a couple of dollars, it usually is not very much and may even be free and is much easier than mailing the paper return as you then need to send in all the additional schedules, copies of your W-2s, and make sure to make copies of everything.
If you are still concerned about filing your tax return, check out VITA at http://www.irs.gov/individuals/article/0,,id=107626,00.html. This website tells low to moderate income individuals, military personnel, and individuals 60 or older where they can get their taxes done by volunteers for free.