With tax season mostly behind us (hopefully you at least filed for an extension) this is the perfect time for me to remind everyone to spend some time and re-evaluate their tax strategy for 2010. Trust me, there’s a reason that wealthy individuals spend more money on tax planning rather than preparation. Filling out a 1040 is the easy part.

That being said, one of the easiest ways to control your bill from Uncle Sam is to re-visit the number of exemptions you’ve elected on your W-4. If you’ve been consistently employed for the past few years chances are you haven’t bothered to revisit your W-4 exemptions since being hired. But with many employers allowing you to update your W-4 online there’s no excuse NOT to.

First, the basics. Your employer is going to withhold something from your paycheck based on standardized graduated withholdings set by the IRS. The IRS calculates this withholding based on what it thinks you will owe at the end of the year so that you’re not hit with a huge tax bill in April. In a perfect world the amount withheld from your paycheck each pay period would equal the amount of taxes due. At the end of the year the IRS wouldn’t owe you a dime in refunds and you wouldn’t owe Uncle Sam anything either.

The problem is that our tax situations are all different. You may have 12 kids, or you may donate $50,000 to your favorite charity this year. The IRS can’t predict these tax events for you – so you have to give the IRS a bit of help by filling out your W-4 correctly. For every exemption you take on your W-4, you decrease the amount withheld from your paycheck. If done correctly, you could end up with more cash in your pocket throughout the year. If done incorrectly, you’ll end up writing a check to the government. In either case, Uncle Sam will demand his pound of flesh.

Hopefully you now see why now is the perfect time to re-visit your W-4 exemptions. Based on the check you just wrote or received, you can adjust your exemptions so that you can improve your monthly cash flow. As I mentioned in an earlier post (How Many Deductions to Take on Your W-4) there are a few online calculators to help you determine what the appropriate number of exemptions is. However, if you don’t want to worry about the number of exemptions you can always write in an additional amount you’d like withheld.

Now please be sure NOT to base your decision based solely on your 2009 tax bill. Consider any significant tax events that will take place during 2010 as well. This would be things such as, but not limited to:

• New child
• New job
• Raise or other increase in salary
• Child no longer a dependent (i.e. gets married)
• Buying or selling a home
• Getting married or divorced

Now that you’re a little more educated about your W-4 go out there and take charge of your tax planning!

Here’s a video from the Brookings Institution about the economic crisis.  I can’t say I agree with everything and I find the Cato videos to be more informative (call it bias).  I still thought it was worth watching.  Barry Bosworth is fiscal policy expert and worked in the Carter administration (his CV is available here).

 

Within Senator Christopher Dodd’s 630-page Senate housing legislation is a provision that nobody knows about, but affects the privacy and operation of nearly all of America’s small businesses. The provision, which was added by the bill’s managers without debate this week, would require the nation’s payment systems to track, aggregate, and report information on nearly every electronic transaction to the federal government.

Payment settlement entities, including merchant acquiring banks and third party settlement organizations, or third party payment facilitators acting on their behalf, will be required to report the annual gross amount of reportable transactions to the IRS and to the participating payee.

What does this mean for you and me?

If you’ve ever sold your old iPod on eBay, chances are you won’t be affected since you’ll be getting only a fraction of what you originally paid for it and the income isn’t taxable. However, if you’re one of thousand of eBay sellers and other small business owners who accept PayPal or any other electronic form of payment… that information could be now reported to the IRS.

Of course eBay sellers and small business owners should have been paying taxes on this income all along, but the fact is… they haven’t. For example, if you make money online using Google Adsense, Google isn’t required to report your income to the government until you’ve earned over $600. And since the income isn’t reported, most people don’t report it as income on their 1040. In fact, the government estimates that this bill will bring in an additional $9.802 billion over ten years.

Whether you report your small business income or not, this bill could be an invasion on everyone’s privacy. If you’re concerned, be sure to write your representative.

I’ve been getting a lot of angry comments on my earlier post (“Where’s My Refund“) regarding the payout of the economic stimulus package. Many people are upset they haven’t received their payment even though they filed on time and with direct deposit.

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.

Now that the tax season is officially over, a few of you have no doubt figured out that you’ve made a mistake on your tax return. In fact, with the constant addition of new tax laws and regulations, thousands of Americans are submitting their 1040s with errors. But have no fear – it’s not the end of the world. That is, of course, assuming it was an accident.

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.

If you’ve been anxiously checking the mailbox every afternoon for your tax refund, there’s a better way.

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 numbers that are in no way surprising, more Americans are realizing the many benefits of filing online.

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.

UPDATE:Thanks to one of our faithful readers, I was reminded of one crucial point I forgot to make earlier. The rebates represent a 2008 tax cut. But instead of getting the tax cut next year, when you file your 2008 return, you’ll get it this year. Although many people have been complaining about this fact, it’s actually a benefit for you. Normally, the taxes taken out of your paycheck are used by Uncle Sam interest free before you file a claim for a refund (your tax return). The government never pays you interest on the $600 that you are getting back as a refund. However, by getting that $600 now, you can actually put that money to work for you – either in an investment instrument or to pay down debt. You’ll get more out of that $600 now than you will next year.

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.

There’s a fairly comprehensive list I came across over at ProBlogger.net for deductions that bloggers might overlook; however, the 46 Tax Deductions That Bloggers Often Overlook can also apply to anyone running their own business from home.

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.

As I become more actively involved in watching the presidential debates and following various candidates, one of the topics that is at the top of my list of concerns is the economy. Specifically I worry about the rising cost of health care, the state of social security, and of course… taxes. Most candidates have touched on this subject in some way or another – proposing a tax cut here or a rate hike there. But there’s one candidate (who I myself do not personally endorse by the way of full disclosure) who has a more ambitious plan:

“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?