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Tab Two

  • Maximizing Refunds and Speeding Refund Delivery
    This filing season, there are several steps taxpayers can take to maximize their refunds and speed the delivery of money from the IRS. Taxpayers should look into the numerous tax breaks available and take every credit, deduction and exclusion for which they qualify. More...
  • IRS Presents: Top Ten Tax Time Tips
    1. Gather your records…now! It’s never too early to start getting together any documents or forms you’ll need when filing your taxes: receipts, canceled checks, and other documents that support an item of income or a deduction you’re taking on your return. More...

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  • Keeping Good Records
    You can avoid headaches at tax time by keeping track of your receipts and other records throughout the year. Good recordkeeping will help you remember the various transactions you made during the year, which in turn may make filing your return a less taxing experience. More...

Personal Tax FAQs

Question: Why do I need a tax professional when I can buy tax preparation software?

Answer: Tax software producers claim their products can prepare complex returns, but you may want to think twice before relying on software for all your tax and financial guidance. Although software may help you make choices on your tax return that result in the lowest tax this year, you should consider the long-term effect of your choices in order to pay the lowest tax over a number of years.

With a professional tax preparer you get more than just a tax return. An established relationship with a tax professional who is familiar with your finances, your family, and your goals can prove to be invaluable.

If you prepare your own returns, it's a good idea to let a professional preparer review your returns at least every three years. That's because you only have three years to amend a return to change any items of income, deductions, or credits that were reported in error or omitted on your original return. Contact Us for further information.

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Question: Is there anything wrong with getting a big income tax refund every year?

Answer: Yes, it means you're giving the IRS an interest-free loan when you could have the use of that money during the year to invest for yourself. As early as possible each year, you should take the time to estimate your total tax bill for that year. Consider adjusting your withholding so that the amount your employer withholds comes closer to what you will actually owe on your tax return. You can change your withholding at any time during the year by giving a new Form W-4 to your employer

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Question: What if I can't file my return on time?

Answer: April 15* is the tax filing deadline for most individual income tax returns. If you can't complete your tax return by then, file Form 4868 with the IRS to give yourself up to six additional months to complete your return.

Caution: Form 4868 only extends your filing deadline; it does not extend your tax payment deadline. If your tax is not paid in full by April 15, you'll face interest and penalties on the balance owed. Contact Us if you feel you need more time and we can file your extension for you. * When April 15 falls on a Sunday or legal holiday, the deadline for filing is moved to the next business day.

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Question: What if I owe more money to the IRS than I can pay?

Answer: The IRS offers several options to taxpayers who cannot pay their taxes in full when they file their return.

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Question: Does my child have to file a tax return?

Answer: If you or someone else claims your child as a dependent, your child will need to file a 2007 return if he or she has:

If no one claims your child as a dependent, your child has the same filing requirements as any other taxpayer.

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Question: Are my social security benefits taxable?

Answer: Up to 85% of social security benefits can be taxed. Whether your benefits will be taxed depends upon your total income from both taxable and tax-exempt sources. Once your total income reaches $25,000 ($32,000 for married couples), a portion of your benefits will be subject to income tax.

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Question: Should I Itemize my Deductions?

Answer: If you have enough personal expenses, you may save income taxes if you itemize your deductions. Compare your itemized deductions with the standard deduction for your filing status, and use the larger of the two.

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Question: What is adjusted gross income?

Answer: Your adjusted gross income (AGI) is your gross income reduced by deductions other than itemized deductions, the standard deduction, and personal exemptions. Your AGI determines whether you are eligible for more than two dozen tax benefits, such as tax credits, itemized deductions, and exemptions. As your AGI increases, the maximum amount you can claim for certain deductions and credits decreases.

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Question: After I filed my tax return, I discovered an error. How do I fix it?

Answer: Oversights and errors are not uncommon, so the IRS provides a way for you to correct them. You can correct your return for up to three years after you file your original return by filing an "amended" return with the IRS.

You need to tell the IRS why you are correcting the return, and include the appropriate documentation with your amended return.

If you've discovered income or deductions that you should have reported on your income tax return, give us a call. We can help you set the record straight and pay only the tax actually due. Contact Us.

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Question: What is the alternative minimum tax or AMT?

Answer: The alternative minimum tax (or AMT) was created many years ago to insure that higher-income taxpayers with lots of deductions and credits pay at least a minimum amount of tax. But, because the AMT has never been indexed for inflation, a growing number of middle-income taxpayers now face this tax.

The AMT is a separate tax calculation that disallows many of the deductions and credits used to calculate regular income tax. It also adds back certain income that is not normally taxed. The most common AMT adjustments are for personal and dependent exemptions and for certain itemized deductions, such as state and local taxes. Also, if you exercise incentive stock options, sell investments with large long-term capital gains, or take depreciation on business property, you may be hit with the AMT.

You're required to calculate your tax under both the regular and AMT method. You then pay whichever tax is higher.

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Question: What determines whether my return will be audited?

Answer: The IRS uses various programs and techniques to determine which returns are audited, including:

Matching programs. Information returns (such as Forms W-2 and 1099) are matched to your tax returns, using your social security and other identifying numbers. Discrepancies usually generate an IRS notice requesting you to explain the differences. Unclear or evasive answers can generate a tax assessment, or you may be summoned to the local IRS office to explain the differences to an auditor.

Statistical analysis. The IRS uses computer software to analyze hundreds of variables to arrive at ratings (called DIF scores) for tax returns. The program compares actual returns filed to "typical" taxpayer profiles. Unusual features, such as higher than average deductions, result in higher DIF scores, which increase the likelihood of an audit.

Occupation. According to the IRS, returns filed by certain taxpayers, such as self-employed individuals and farmers, understate taxable income at a higher than average rate. Therefore, higher percentages of these returns are audited.

You can reduce your chances of being audited by filing an accurately prepared return.

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Question: How does the IRS conduct an audit?

Answer: The IRS conducts three types of audits:

Correspondence audits are handled entirely by mail. They consist of written questions about apparent errors, such as filing status discrepancies or wages reported on a Form W-2 that do not appear on the wage earner's tax return. Unclear or evasive answers can generate a tax assessment or escalate the case to an office audit.

Office audits begin when a taxpayer is summoned to the local IRS office to meet with an agent. The notification letter specifies the items to be examined and asks the taxpayer to bring certain records to the meeting. Although office audits are generally limited to specific items requested, the agent can expand the scope if the taxpayer's explanations raise additional questions.

Field audits may be conducted at the taxpayer's business or at an accountant's office. All pertinent taxpayer records must be available at the chosen site. The examination will cover all tax-related activities for the years under audit.

Contact Us when you receive a letter from the IRS. We will advise you, respond on your behalf, and represent you if you so desire.

RED FLAGS

The Internal Revenue Service is interested in auditing returns which are most likely to produce additional revenue. The Service has developed averages for certain returns which it feels have the best audit potential. Here is a list of some of the items which draw attention to your tax return:
  • Participation in tax shelters, including offshore trusts.
  • Use of offshore credit cards.
  • Your occupation if you are in a business which is often paid in cash, such as taxicab driver, hairdresser, or waitress.
  • Businesses run by a single family, especially those reporting on Schedule C, since they often make all the decisions and do their own record keeping.
  • Returns claiming a home office deduction.
  • Big deductions for business travel and entertainment expenses.
  • Sloppy tax return preparation.
  • Returns which are filed without the necessary supporting tax return schedules.
  • Business losses several years in a row.
  • Low S corporation shareholder salaries in relation to other distributions.
  • A major change in your income compared to your prior tax returns.
  • Deductions for automobile expenses.
  • Non-cash charitable contribution deductions.
  • High mortgage interest deduction and low income.
  • High damage or theft loss deductions.
  • Early withdrawal from an IRA account which is not rolled into a new account or reported on your tax return.
  • Deductions for "independent contractors" (versus employees) on business returns.
  • Conviction of a money crime where stolen property or stolen money is taxable.

This is only a partial list. There are different red flags for different industries, professions, and income levels. The IRS is constantly changing what it uses as audit indicators.

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Question: I made a loan to a relative that will never be repaid. Can I take a deduction for this bad debt on my tax return?

Answer: Your loss might qualify as a non-business (personal) bad debt deduction. In addition, you must be able to prove that a bona fide debt existed and that you've made efforts to collect the debt.

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Question: Who can I claim as my dependent?

Answer: You must pass five tests in order to claim someone as a dependent, including the member of household/relationship test, the support test, the gross income test, the joint return test, and the citizenship test. The rules are complicated. Also, just because you can claim someone as your dependent, you may not find it beneficial to do so. Give us a call for assistance.

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Question: What is the earned income credit?

Answer: The earned income tax credit (EITC) is a refundable tax credit available to working low-income individuals and families. Eligible taxpayers can get a refund check even it they owe no taxes. The amount of the credit depends on an individual’s income (both taxable and nontaxable) and the number of qualifying children. Taxpayers must have earned income (wages, salary, tips, self-employment income, etc.) to qualify for the credit, but if their total earned income is too great, they cannot claim the EITC.

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Question: Can I file as head of household?

Answer: Head of household status is available for unmarried taxpayers and certain separated taxpayers who provide a home for a qualifying person, such as a child or a parent. If you qualify, you'll generally pay less tax as a head of household filer than as married filing separately or a single taxpayer.

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Question: When is my hobby considered a business?

Answer: The IRS is suspicious of any business activity that looks like it provides personal enjoyment, such as antiques, photography, horse racing, etc. If you make a profit in any three out of five consecutive years (two out of seven years for horse activities), your activity is presumed to be a business, and any business losses are deductible.

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Question: Is the sale of my residence taxable?

Answer: That depends on the amount of profit from the sale. Single taxpayers can exclude from tax up to $250,000 of profit on a home sale and married couples can exclude up to $500,000. To take the full exclusion, you must generally have owned and used the home as your principal residence at least two of the five years prior to its sale. Also, you can't use the exclusion more than once every two years. A reduced exclusion may apply in some cases. Contact Us for details.

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