Tax Tips for Everyday People

Thinking of Retiring?

2011-06-11T10:08:00.000-07:00

Every year I prepare taxes for retirees as well as those recently retired. Some have properly completed their withholding paperwork while others have not and owe a tax balance. Seniors on a fixed income find it hard enough to live off their pension but when they owe taxes they can quickly spiral into what I call (using my ominous voice) “The IRS Payment Death Camp”.
Typically seniors will pull out money from their retirement account to payoff a tax balance. If not planned, this can mean higher taxes and another tax balance owed. This is how it works. Let’s say you are senior, we’ll call you Ms. Lucy. Ms. Lucy receives income from multiple sources: Two Pensions distributed by services such as Fidelity, Bankers Life, State Street, etc. and Social Security giving her a decent income of $29,000 - $34,000. This income range puts her in a 15% tax bracket (Unc Sam wants 15% of any taxable money she receives).
Well…Ms Lucy completed her paperwork as directed with 10% being withheld for taxes. At the end of the year she owes a balance because only 10% was being withheld instead of 15%. Ms Lucy promptly withdraws money from one of her pensions to pay the tax balance. The money withdrawn is added to her overall income for the year. So when she does her taxes her income is now $48,000. Now the fun starts. At $48,000 Ms Lucy has bumped herself up to a higher tax bracket of 25% but her pensions are still withholding 10%. Now she owes more taxes. Ms Lucy starts to cry in frustration but (hero music please) “Super Tax Problem Solver” comes to the rescue (try putting that on a spandex hero costume).
How did Ms Lucy get into this fix and what can she do? The folks that distribute your pensions are only looking at what they give you. They don’t know that you have multiple income sources. If the income they handle is within the 10% tax bracket threshold then they withhold for 10%. You must complete your W-4P (pension withholding form) to tell them how much to take out. Ms Lucy can change her W-4P forms to have more taxes taken out. She can have more taxes taken out of one or both pensions and/or her social security. Since the IRS allows you to change the W-4P form any time during the year she can change them to suite her financial needs; as long as she has enough withheld to pay the taxes owed.
For more information on retirement issues for this tax year go to the IRS website . For the largest possible refund next year start planning now.

Jamilah Riley-Humphrey, M.A. is the owner of Riley’s Tax Service and Speaker.

2010 TAX CHANGES

2010-12-19T06:41:00.000-08:00

The IRS has set stiff requirements and penalties for paid preparers this 2010 tax season. All preparers must register with the IRS which allows them to track any errors and fine preparers. Because of these changes many are getting out of the business. They enacted these rules to catch unscrupulous preparers using erroneous information to get illegal refunds. However, these person do not sign tax returns therefore have no registration record with the IRS. So who really gets hurt. What do you think?

We are all human and make mistakes from time-to-time. The IRS recognizes this by having preparers pay upwards of $2,000 – $10,000. It doesn’t matter if the customer gave the preparer bad information. This is going to make this tax season hard for small tax professionals as we turn away customers without certain documentation.

Some of the changes that may affect you and which you will need documentation for are below. For additional information see the IRS website:

In early October, the IRS sent a postcard to individuals who filed paper returns last year and did not use a tax preparer or tax software. The information explains how to get the tax forms and instructions they need for filing their tax year 2010 return. The forms and instructions will be available in early January 2011. These new clients must bring original documents for dependents or deductions claimed.

For calendar year 2010, the monthly exclusion for commuter highway vehicle transportation and transit passes is $230. The monthly exclusion for qualified parking is $230. You must have mileage and cost documentation.

For calendar year 2010, the exclusion for reasonable expenses of qualified bicycle commuting is $20 multiplied by the number of qualified bicycle commuting months during that year. Reasonable expenses include the purchase of a bicycle and bicycle improvements, repair, and storage. A qualified bicycle commuting month is any month you use the bicycle regularly for a substantial portion of the travel between your residence and place of employment and you do not receive any of the other qualified transportation fringe benefits. You are not entitled to this exclusion if the reimbursement for bicycle commuting is made under a compensation reduction agreement. You must have documentation.

The amount you can deduct for each exemption has not changed for 2010. It is still $3,650. But unlike 2009, when you would lose part of your deduction for personal exemptions if your adjusted gross income (AGI) was more than a certain amount, in 2010 you will not lose any part of your deduction for personal exemptions, regardless of the amount of your AGI.

The limit on itemized deductions expired in 2010. However, under current law, the limit on itemized deductions will resume in 2011 at pre-2006 levels. All deductions on this schedule must be accompanied by documents to verify the amounts to be deducted.

The definition of qualified higher education expenses for tax-free distributions from a qualified tuition program is expanded to include amounts paid in 2009 or 2010 for the purchase of computer software, any computer or related peripheral equipment, fiber optic cable related to computer use, and Internet access (including related services) that are to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is enrolled at an eligible educational institution. Proof is needed for all expenses as well as the tuition and fee statement sent to you by the institution. For more information, including restrictions on qualifying software, see chapter 9 of the 2009 revision of Publication 970, Tax Benefits for Education

For tax year 2010, the following changes have been made to the Hope and American opportunity credits.

The Hope credit is not available for 2010.
The American opportunity credit is available for 2010 and is unchanged from 2009.

For more information, see chapter 2 of Publication 970, Tax Benefits for Education.

EIC Amount of credit increased. The maximum amount of the credit has increased. The most you can get for 2010 is:

$3,050 if you have one qualifying child,
$5,036 if you have two qualifying children,
$5,666 if you have three or more qualifying children, or
$457 if you do not have a qualifying child.

Earned income amount increased. The maximum amount of income you can earn and still get the credit has increased for 2010. You may be able to take the credit if:

You have three or more qualifying children and you earn less than $43,352 ($48,362 if married filing jointly),
You have two qualifying children and you earn less than $40,363 ($45,373 is married filing jointly),
You have one qualifying child and you earn less than $35,535 ($40,545 if married filing jointly), or
You do not have a qualifying child and you earn less than $13,460 ($18,470 if married filing jointly).

Investment income amount. The maximum amount of investment income you can have and still get the credit is still $3,100 for 2010.

Advance payment of the credit. If you get the advance payments of the credit from your employer with your pay, the total advance payments you get during 2010 can be as much as $1,830.

The amount of taxable investment income a child can have without it being subject to tax at the parent's rate for 2010 remains the same ($1900) as 2009.

For 2010, the amount your earned income must exceed to claim the additional child tax credit is $3,000.

Beginning with 2009 tax returns, the noncustodial parent can no longer attach pages from the decree or agreement instead of Form 8332 if the decree or agreement went into effect after 2008. The noncustodial parent will have to attach Form 8332 or similar statement signed by the custodial parent and whose only purpose is to release a claim to exemption. The noncustodial parent must attach the required information even if it was filed with a return in an earlier year.

Source: Internal Revenue Service

Will Your Taxes be Audited?

2009-12-15T15:53:00.000-08:00

Chances are everyone will be audited once in their lifetime. It’s a numbers game and in some instances a red flag. The internal revenue service has hired additional revenue agents to audit specific files over the last four years. This year if you file: the Earned Income Credit, Schedule C, claim charitable contributions, Employee Business Expenses or claim mortgage interest you probably will be audited.
The best way to get though an audit is to be honest about the deductions you are claiming. Use a competent tax professional if you feel you cannot prepare your own taxes. Keep your original receipts. If you have computer access create a spreadsheet to categorize and total them for you. Most records should be kept for at least the three year look back period.
If you are representing yourself at the audit know your rights. The IRS has publications that will explain the process to you. While in the interview only answer the questions asked. The agent is trained to ask probing questions, make you feel comfortable, or intimidate to get you to talk. Remember, it’s their job to get money from you. During the audit whatever deductions you cannot prove are removed from you tax return and it is refigured.