While there are a number of factors that could slow your payment down (the IRS was delayed in processing your return, there was an error on your return, or the IRS just doesn’t like you) there is a new one I found out about yesterday: TurboTax.

Apparently, if you used TurboTax to file your taxes, you may get a paper check in the mail - regardless of whether or not you chose to get your income tax refund by direct deposit.

From the TurboTax support site:

Under certain circumstances, however, the IRS has decided that taxpayers can only get their rebates by mail, even if they get their refunds by direct deposit. At TurboTax, this will happen if you use a “refund transfer” when filing your 2007 return. This service lets you pay for your tax preparation and/or e-filing from your refund proceeds, for an additional fee, under an agreement with Santa Barbara Bank & Trust .

What does this mean for you and me? Well, if you used TurboTax’s “refund transfer” option you’ve actually made two mistakes.

1. You actually paid money for a “refund processing fee” which for everyone else was absolutely free. Since the government did the “processing” of the economic stimulus payment based on your 2007 return (for free)… you just got scammed by TurboTax.

2. You also paid $30 to Santa Barbara Bank & Trust to “loan” you the money for your TurboTax preparation fees. When your refund comes, it goes to Santa Barbara Bank to satisfy your “debt” before you get what’s left over. This is where you got, um… screwed. Since your banking information was used only for the transaction between Santa Barbara Bank and you, it wasn’t passed on to the IRS.

As a result, the IRS can’t direct deposit your stimulus payment even if it wanted to… because it doesn’t have your banking information.

Some people end up omitting deductions they later found applied to them. But most realize they neglected to include some form of income - small business income, interest income, etc. For whatever reason, people fear that these types of mistakes will bring the IRS knocking at their door. However, there’s no evidence that amended returns are a “red flag” for IRS auditors. After all, it’s what’s on your return that counts.

The IRS even encourages individuals to file amended returns for deductions or credits they failed to take. For example, many people last year overlooked the one-time telephone-tax refund that was available on 2006 returns.

So, if you’ve made a mistake on this year’s return, what can you do? As mentioned above, simply file an amended return on Form 1040X (PDF Link). Don’t try and fix your mistakes on your current year return. The timing of your income and deductions can effect what you are able to do in future years.

Luckily, the statute of limitations states that you can amend your return within three years from the later of the filing deadline or the date you filed your return. But don’t file an amended return if you just correcting math errors. The IRS checks the math on your return and will send you a letter informing you of the changes they made to your return.

There is one downside to filing an amended return: you’ll have to do it on paper. You can’t file an amended return electronically yet.

The IRS has created an online tool appropriately called “Where’s My Refund?”

“Where’s My Refund?” is fast, easy, safe and convenient… why wouldn’t you use it? Nearly 9.7 million taxpayers have already checked the status of their 2007 federal income tax refunds online, up about 18 percent over the same time period last year.

To get to your refund status, be prepared to enter your:

• Social Security Number (or Taxpayer Identification Number)
• Filing status (Single, Married Filing Joint Return, etc.)
• Exact refund amount shown on their tax returns

You can check on the status of their refund seven days after e-filing a return. But if you filed a paper return (why would you torture yourself like that?), check four to six weeks after mailing your return.

“Where’s My Refund?” also includes links to customized information based on a your specific situation. For example if “Where’s My Refund?” shows that the IRS was unable to deliver a refund, you can change your address online. You can avoid undelivered refund checks by having your refund directly deposited into a personal checking or savings account. And you can even initiate a trace if the IRS says it mailed a refund check but you haven’t received it after 28 days.

So what are you waiting for? Where’s My Refund?

In fact, the IRS announced that e-filing is off to a fast start in 2008 with more than 38 million tax returns filed electronically so far. This figure is up 5 percent from the 36 million returns filed for the same period last year, with double digit growth coming from taxpayers filing from their home computers. More than 12.3 million returns were filed from home, an increase of almost 14 percent from the same time last year.

As for the total amount of all refunds, $106.7 billion has been issued so far in 2008 with the average refund amount of $2,708, up two percent from the same time last year. So far this year, the IRS has directly deposited 33 million refunds out of the total of 39 million refunds. The direct deposit refunds were valued at just over $96 billion with the average amount of a direct deposit refund of $2,900.

However, while many people are getting fat tax refunds, it just causes me to worry that too many people are giving the government an interest-free loan with their refunds instead of allowing that money to work for them! (see my post on how many W-4 deductions to take for more information).

The IRS is also reminding those who have not filed their 2007 returns yet that direct deposit is the fastest way to get both regular refunds and economic stimulus payments. These stimulus payments will be direct deposited for those eligible filers who select that option when filing their 2007 tax returns.

The press has been all over the recent economic stimulus package passed by congress. Personally, I don’t feel like the stimulus package is what will fix the sluggish economy, but it does look good in the news and for certain politicians. In any case, I’ve never been one to turn down free money!

In general, this late Christmas bonus is equal to the your net income tax liability, but no more than $600 for a single person or $1,200 for a married couple filing a joint return. The minimum payment is $300 for a single person or $600 for a married couple filing jointly. In additional, families with children under 17 will get an additional $300 per child.

However, many people have been confused as to how the checks will be cut. Do you have to apply somehow? Are there certain qualifications? How do they know that I want free money?

In an effort to help educate the public, the IRS has thrown up a website of frequently asked questions regarding the stimulus package.

Here’s what you need to know in a nutshell:

Under the Economic Stimulus Act of 2008, more than 130 million American households will receive economic stimulus payments beginning in May. The only way to get one this year is to file a federal tax return for 2007. This filing requirement also applies to some people who do not normally file, including many low-income people and recipients of Social Security, certain benefits received from the Department of Veterans Affairs and certain Railroad Retirement benefits.

Basically, the checks will be cut to those people who file taxes. So if you normally don’t file taxes, for whatever reason, you’re going to have to file this year in order to get your check in the mail.

Warning: when most people read a list like this they get excited and believe they are now able to deduct everything but the kitchen sink. Quoting IRS Publication 535:

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.

It is important to distinguish business expenses from:

• The expenses used to figure cost of goods sold,

• Capital expenses, and
• Personal expenses.

Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.

For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you generally can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and generally is not deductible.

I just wanted to warn business owners that you need to be very careful when deducting business expenses, especially when allocating expenses between personal and business use. These types of deductions are audit red flags for the IRS, so be sure to keep detailed records of your justifications for making business deductions.

“Am I running for president to shut down the federal government? Not exactly. But I am running to eliminate all federal income and payroll taxes. And I do mean all — personal federal, corporate federal, gift, estate, capital gains, alternative minimum, Social Security, Medicare, self-employment. Instead,we will have the FairTax, a simple tax based on wealth.”

That quote comes from the website of the former Republican governor Mike Huckabee. The plan is simple in theory, but isn’t new. A grassroots campaign has been gaining popularity after being proposed by a group called Americans for Fair Taxation, and it has already been written into a bill sponsored by Georgia congressman John Linder.

To answer a few frequently asked questions about the proposal… here are a few points you should be aware of.

So how does this change current tax laws?
In a nutshell, it throws out the tax code entirely. That’s right… no more Form 1040, no more dreaded April 15th. Under the plan, you would pay only one federal tax, which would be applied to just about everything you buy: not just the goods you buy at stores (on which most states assess a sales tax), but nearly all services, including health care and insurance, the purchase of a new home or rental of an apartment, even things like a teenager mowing a lawn or baby-sitting for a neighbor.

How much would this tax be?
Depending on how you look at it - 23 to 30% If you purchased a $100 pair of shoes, the price would increase to $130 or 30%. However, the plan’s supporters say that works out as a 23% rate because $30 is 23% of $130. Whichever way you look at it, it would mean about a 30% increase in prices.

How is this fair to those paying 100% of what they earn?
For those of us (including myself) who pay close to 100% of their earnings on living expenses (rent, food, medicine) paying 23% doesn’t seem very fair. However, the the sales tax plan would partly offset this effect by sending every household in America, from the family of a poor single mother to Warren Buffett, a check to cover the taxes on their spending up to the poverty level. If you factor in that cash from the government, each family’s net tax burden goes down, so that the Fair Tax looks more progressive. For example, a family of three earning $30,000 a year and spending all their income would give 7% of their pay to the government; one earning and spending $125,000 would pay a net rate of about 19%.

What about those who can afford to save?
Critics of the plan claim that those of us who have “extra income” that we can put away for a rainy day will be able to avoid paying taxes on that amount. For example, if Bill Gates earned a cool $1 Billion next year, but only spent about $100 Million on living expenses, he would have gotten away with paying only about 2% of his income for taxes. However, if you think about the Fair Tax on a lifetime or long-term basis it makes more sense. Bill Gates could save that $900 Million for 10 years, or 20, or even hold on to it until he dies - but at some point that money will be spent and taxed. Perhaps not by himself in his lifetime, but by someone.

Why haven’t we heard about this sooner? This sounds like a great plan!
Officially it’s because critics of the plan claim that the rate we would have to pay is more like 40%. Unofficially, the reason a plan like this hasn’t been widely publicized, and probably won’t happen for a VERY long time is politics. There are too many special tax breaks and loopholes backed by very well-paid lobbyists. The plan would also limit the ability of legislators to target tax breaks to help favored groups - including many in the middle class. And if the legislature began to create exceptions… the plan falls apart. If you carve out medicine of baby food, for example, the rate would need to be higher for everything else.

So is this plan going to work?
There’s two questions we should be asking ourselves, and our representatives. First, can it work and is it good for America? There are some people much smarter than myself who are working on figuring this one out - crunching numbers and looking at more tax tables that I want to ever see. The second question is can we implement it? This is where the feet need to hit the pavement and congress needs to figure out if it has the courage to implement something like this. If it can work, and it is good for America and the economy, then why is it not happening?

As you know, I am adamantly opposed to any Company who markets products (especially financial products) that harm or take advantage of consumers who don’t know any better. For example, Pay Day Loan brothels (yes, I said brothels) take advantage of people in need of short-term loans by charging interest rates as high as 1,600% (no, that’s not a typo).

Another product that has become increasingly popular is the Tax Refund Anticipation Loan. This loan, offered by companies such as H&R Block and Jackson Hewitt, allows you to walk out with cash in the amount of your anticipated tax return - for a fee. In fact, you don’t even have to complete your return! You can walk in, hand over your last pay stub, and walk out with a loan in the amount of your estimated tax return.

Well, the IRS has finally stepped in to put a stop to this ridiculous business practice. Citing tax fraud as its reason, the IRS has proposed restrictions on tax data used in refund anticipation loans. Basically, the IRS is stating that the tax information you hand over as part of your loan application is not allowed to be used for the purposes of getting a loan. And apparently from the reports coming out today, it seems that many people (and companies) didn’t exactly tell the whole truth on their applications, leaving banks with a huge difference between the amount loaned, and the amount of refund received from the IRS.

I for one am glad this revenue stream has dried up for tax preparers who have used this as a way to create more business. Your tax preparer should not be advertising loans using money you have not yet received. Your bank and tax preparer should be independent so that you can get fair and unbiased information from both. If the tax preparers are too focused on getting you a large refund only so that you can get a bigger loan - and they can get a bigger fee - then fraud is bound to occur.

Although the break is welcome, it is a little late - leaving taxpayers just a few days to adjust their finances. Congress also missed the IRS deadline for printing forms and instructions, and updating computer systems - meaning those who file early may be flagged incorrectly as owing the dreaded AMT. The IRS announced this week, however, that it will immediately begin the final reprogramming steps for its income-tax processing systems to prepare for the upcoming tax season. To help the tax professional and software communities prepare for the upcoming filing season, revised copies of the 12 tax forms impacted by the AMT legislation will be posted to IRS.gov within 72 hours after the AMT patch is signed into law.

I guess we have to be glad that Congress did something this year, even if it does end up costing taxpayers millions of dollars to implement. But I think Clint Stretch of Deloitte & Touche summed it up best when he said:

“This is the minimum amount of change you can make this year. They just keep passing the dead cat down to the next people who will have to deal with it. At some point the music will stop and somebody will be left holding it, but that’s probably not until 2009 or 2010.”

The AMT debate has been going on for years now. Everyone seems to think it’s a bad idea, especially the way it swallows up a larger and larger percentage of Americans, but nobody has the guts to make a change!

Let’s add “fixing the AMT” to the list of Congress’ New Year’s Resolutions.

For those of you that don’t know, a Flexible Spending Account allows an employee to set aside pre-tax dollars to pay for “qualified” expenses that usually include health care and/or dependent care. I know what you’re asking… Isn’t that why you sign up for health insurance?

A FSA goes above and beyond your typical health care plan by helping you pay for everything your insurance company doesn’t. All those $10 co-pays, deductibles, and prescription drugs can be paid for using pre-tax dollars. Many plans also allow you to pay for vision, dental, and even over-the-counter medication using your FSA!

The plan typically works by allowing you to elect a certain amount to be deducted from your paycheck, before taxes, each month (up to $5,000 per year). As you spend money on plan-covered items, you simply submit a claim for a refund which is paid from your pre-funded plan balance. In recent years, many plans have included a FSA debit card which allows you to directly pay for your medical expenses from your plan balance, without the hassle of submitting refund claims.

But a Flexible Spending Account is not without it’s dangers. One major drawback is that the money must be spent within the coverage period. This coverage period is usually defined as the period that you are covered under the cafeteria plan during the “plan year”. Any money that is left unspent at the end of the coverage period is forfeited back to the company; this is commonly known as the “use it or lose it” rule. However, most plans now allow you to spend any remaining money at the end of the year on non-prescription drugs or medical supplies. So just run to Costco and stock up on Tylenol and Band-Aids!

A second requirement is that all applications for refunds must be made by a date defined by the plan. If funds are forfeited, this does not eliminate the requirement to pay taxes on these funds if such taxes are required. For example, if a single person elects to withhold $5,000 for child care expenses and gets married to a non-working spouse, the $5,000 would become taxable. If this person did not submit claims by the required date, the $5,000 would be forfeited but taxes would still be owed on the amount. (Re-read that last sentence. $5,000 would be forfeited to “the company” and the person forfeiting it still pays taxes on it.)

But the main advantage of a FSA is the tax savings. An FSA allows money to be deducted from an employee’s paycheck pre-tax and then spent on qualified expenses.

For an example of potential tax savings associated with a flexible spending account, a person in the 28% Federal marginal tax bracket and an example 4% state tax (along with FICA taxes of typically 7.65%, for a total tax of almost 40%), could deduct $2,000 and put that money into an FSA for health care. This would result in almost $800 in tax savings. There’s a great little FSA benefits calculator at http://www.ebsbenefits.com/members/fsa_calc.htm#taxsav that will allow help you to estimate your yearly medical expenses, and calculate the potential tax savings from enrolling in an FSA.

So the moral of the story is… if your employer offers a FSA, I would highly recommend enrolling. If your employer doesn’t, then request that they do. Similar to my thoughts on enrolling in your employer’s 401(k) plan, there’s no reason you should be passing up this “free money.” You pay for medical expenses each year, so why not save money while doing it?