9 Easy Ways to Reduce Your Tax Bill

 

Looking for ways to reduce your tax bill? The IRS provides hundreds of deductions that taxpayers can claim but many taxpayers are not aware of them. No one has the time or wants to read all of the tax forms and instructions to find out what they are. A good resource to find hidden tax deductions is the book, Lower Your Taxes by Sandy Botkin.

There are tons of hidden tax deductions that can be claimed. One hidden tax deduction that taxpayers can claim is free services. Here are nine ways to deduct free services and other expenses on your taxes.

1. Pro Bono. Pro bono is when you donate your time and services for free or at cost. If you donate time and services for an event but ask for payment to cover traveling expenses - the time and services are considered donated and can be deducted. However, the services must benefit the general public.
2. Free Services. If you provide free services to a charity, you may have to claim the income for the value of the job as if you were paid even though you did not. For example if you are a speaker, provide a seminar to a charity, and would normally be paid $1,000, you may have to report $1,000 on your taxes. Talk to an accountant to or contact the IRS tax help line to get specific tax information about the services provided. The services must benefit the general public.
3. Volunteer Work. If you volunteer your time and services to help a charity you can deduct costs for hosting a party or fundraiser for an organization, supplies purchases that are required to perform volunteer work, cost of a uniform or clothing required to perform volunteer work, telephone expenses, and travel expenses such as parking, tools, gas, miles traveled, etc. Keep receipts of all expenses.
4. Food. You can deduct food and tips as long as you have the receipts as proof of payment.
5. Entertainment. You can deduct entertainment expenses except for alcoholic beverages.
6. Expenses. You can deduct “ordinary” and “necessary” expenses associated with or necessary for your job especially for a trade. Ordinary expenses are common expenses for your trade or profession. Necessary expenses are those that are helpful for you to perform your job and apply to full-time or self-employed employees.
7. Travel Expenses. Some travel expenses can be deducted if they were incurred to benefit a charity. Travel expenses that can be deducted include hotel costs, rental car and airline tickets.
8. Business Meetings. If you attend conferences or business meetings for your job, you can deduct travel expenses including the cost to drive to the event if you are not reimbursed by your job.
9. Car Mileage. If you use your car for your job or business and use it for that reason only, you can deduct the entire operation costs. If your car is used for your job and business, you can only deduct the cost for business use. You can deduct mileage usage using one of two methods: the standard mileage rate or the actual expense method.

The deductions are only allowed if you itemize your deductions. Visit the www.irs.gov website to get more information.

How to Pay Your Taxes If You Are Unemployed

                                                            

There are approximately 12.3 million Americans currently unemployed.  There are approximately 8 million Americans working part-time due to previous unemployment. Many unemployed Americans end up owing taxes because they are not aware that unemployment compensation or unemployment benefits are taxable.  

State unemployment insurance benefits up to 26 weeks and extended benefits, up to an additional 13 weeks are also taxable. Seven states fully exempt unemployment benefits: Montana, New Jersey, Alabama, Pennsylvania, Arkansas, California, and Virginia.  Wisconsin and Indiana offer partially exempt unemployment benefits. All other states that offer unemployment benefits tax them in full.

When you apply for unemployment you have the option to have income tax withheld. If you do not choose this option you will be required to pay taxes on the money received when you file taxes for the current year. You will receive a Form 1099-G of the following year which will show your total unemployment compensation and the amount of federal income tax that was withheld if applicable.

Even if you stopped receiving unemployment compensation it is to your advantage to file a return. You may be entitled to a tax refund if you income is lower for the year.

If you took early withdrawals from a pension plan or retirement account such as a 401k, the withdrawals are taxable unless they are rolled over into another qualified retirement plan or IRA within 60 days. If the withdrawal is used to pay for living expenses while you are unemployed the withdrawals are taxable. In addition, if you are under age 59 ½ you may also be subject to an additional 10% tax on early withdrawals unless your money is stored in a 457 plan. 

If you sold assets or property that you own, such as investments you may be subject to income tax if you had a gain on the sale. If you start a business or have other income on which federal income tax is not withheld, you may need to make estimated tax payments during the year. You should expect to owe taxes of $1,000 or more when you file your annual income return.

If you decide to start a business (self-employed) you will be required to pay income tax and self-employment taxes including Social Security and Medicare if you earned more than $400. 

The IRS has given taxpayers 6 extra months to pay taxes if you were unemployed for at least 30 continuous days in 2012. You will be charged interest on the amount due that is not paid but you will not owe a late payment penalty which is 5% per month up to 25% of what you owe. If you are past due 60 days or more, the minimum penalty is $100 or the balance of the tax due on your return, whichever is smaller. Filing bankruptcy does not discharge federal taxes owed.  Here are 16 options if you owe taxes and are unemployed.

1. Apply for a loan from a bank or credit union. The interest rate is much cheaper than setting up a payment plan with the IRS or a state taxing authority.

2.      Apply for a private loan from a friend or relative or from a peer-to-peer lending company such as Zopa or Prosper.

3.      Apply for a home equity loan or sell some assets.

4.      Apply for a hardship withdrawal from a retirement plan or pension plan to pay for expenses including medical insurance expenses, facing foreclosure or considering bankruptcy. 

5.      Apply for an installment plan and setup an IRS payment schedule by filing IRS Form 1127. If you can pay the amount owed in 3 years.  The IRS will charge a one-time fee of $105. The fee will be added to the total amount of back taxes, penalties, and interest that you owe. You may be eligible for reduced penalties.

6. Extend. Request an extension and request the maximum extension time of 6 months.
7. Pay by credit card.  Pay by credit card if you don’t have the money when the bill is due.
8. Use savings.  Use money in savings or checking accounts, savings bonds, stocks, mutual funds, etc. to pay the taxes.
9. Life Insurance. Take out a loan from your life insurance policy.
10. Borrow. Borrow money from family or friends.
11. Earn extra money. Consider getting a part-time job or work overtime at your existing job to earn money to pay back your taxes.
12. Pay.  Even if you can’t pay the required payment, pay something and pay what you can afford. Interest is charged on unpaid taxes from Tax Day until the day you make the final payment.
13. Short-Term.  If you can pay the taxes owed within 120 days contact the IRS to see if you can qualify for a short-term extension.
14. Streamline agreement. If you own less than $25,000 and can pay the amount within six years, ask the IRS for a streamlined payment agreement using IRS Form 9465 for an application fee of $102.
15. Ask the IRS. Go to an IRS office to get advice on the best option to handle your tax situation.
16. Offer in Compromise.  Request an Offer in Compromise if you cannot pay the total amount owed. This allows you to settle your tax debt for a smaller amount than you owe if you will be unable to pay back the amount owed within 10 years. The application fee is $150. 

Last Minute Tax Tips

Even though the deadline for filing taxes has passed, many taxpayers have not filed their taxes. If you are getting a refund you have to file within 3 years from the current tax year but you do not need to file an extension. After that, the penalty for not filing your taxes is forfeiture of your tax refund.

If you don’t file and you are getting a refund will receive a letter from the IRS reminding you to file your tax return, especially if W-2 or 1099 forms were reported to the IRS by your employer.  If you owe taxes and don’t file you will get a letter from the IRS reminding you to pay.

To determine if you have to file taxes 3 things are considered:  your filing status, your age and your income.  Once you reach a certain income level, the law requires you to file. Older individuals and blind individuals must determine if they need to file a Form 1040.

Children file when taxes when: they earned income as a salary, wages or tips or earned a taxable scholarship or fellowship grant; or earned income from investment interest or dividends, capital gains, unemployment benefits and some distribution of a trust fund.

For 2011, if you are under 65: single and earned $9,500, head of household and earned $12,200, married filing jointly and earned $19,000, widow/widower and earned $15,300 or married filing separately and earned $3,700, sold your home or are self-employed you have to file taxes. For more information review the 2011 IRS Publication 17.

Here are 3 tips if you can’t pay your taxes:

1. You can setup an installment agreement and pay the amount owed in 3 years. 
2. Request an extension and request the maximum extension time of 6 months.
3. Request an Offer in Compromise.  An offer in compromise allows you to settle your tax debt for less than the full amount if you meet certain requirements.

Here are 4 ways to file your taxes for free:

1. Free Software.  If your adjusted gross income is $57,000 or less you can use free tax software such as:  Turbo Tax, Free TaxAct, Tax Slayer or H&R Block’s Free File.
2. Use Free Forms.  Anyone can use free file fillable forms from freefilefillableforms.com.  The site provides online versions of paper federal tax forms.
3. File Electronically. Efile (electronically) your tax return for free by using direct deposit or pay your taxes online for free.
4. Paper forms.  Use paper tax forms to file your taxes and mail them to the IRS.  The only cost is postage.

 Legal action can be taken against you by the IRS if you owe taxes and don’t pay: it will be reported on your credit report, you can receive a tax lien, garnishment, judgment, lose your property at a tax auction or other means. Therefore, it is best file your taxes every year.

How Will I Pay My Taxes

It’s tax season again. Many people dread tax season. I dread having to gather all of my receipts and enter the information in the automated tax software I purchased. However, I must admit it is much easier than having to fill out paper forms. This year the deadline for filing your taxes is April 17, 2012. Tax season is even better if you don’t owe taxes. However, if you owe taxes there are several options available.

To make sure you are not violating any tax laws consult a tax lawyer, CPA or certified tax accountant to review your taxes and supporting documentation to make sure that the amount of taxes you owe is correct. Here are 10 ways to pay your taxes.

1. You can setup an installment agreement and pay the amount owed in 3 years.
2. Request an extension and request the maximum extension time of 6 months.
3. Pay by credit card. Pay by credit card if you don’t have the money when the bill is due.
4. Bank Loan. Apply for a bank loan to cover the entire amount of taxes owed. The interest rate is much cheaper than setting up a payment plan with the IRS or a state taxing authority.
5. Use savings. Using savings accounts, savings bonds, stocks, etc. to pay the taxes.
6. Life Insurance. Take out a loan from your life insurance policy to pay the taxes.
7. Borrow. Borrow money from family or friends.
8. Earn extra money. Consider getting a part-time job or work overtime at your existing job to earn money to pay back your taxes.
9. Request an Offer in Compromise. An offer in compromise allows you to settle your for less than the full amount in you meet certain requirements.
10. If you owe taxes from a previous year get caught up on all back taxes first then address any taxes owed for the current year.

The IRS has ten years to collect on back taxes so it is best to work with them to setup a payment plan to back the amount owed. For more information visit the IRS website at irs.gov.

Help for Delinquent Tax Payers

If you are delinquent on your IRS tax bill now there is help. The IRS is trying to help taxpayers who are delinquent on their tax bills. They are reducing the number of property tax liens and loosening the rules for small businesses to allow small businesses to setup installment agreements to pay back taxes. Tax liens are notices that are filed on land to ensure the government will collect back taxes when a property is sold, i.e. real estate, boat, etc.

The new IRS guidelines increases the amount of taxes owed before a lien is placed. Liens are automatically placed when the limit is reached. If you owe $10,000 or more a lien is placed on your property, previously the minimum amount was $5,000. If you meet certain income or debt requirements you can settle your debt for less than the original amount owed.

Small businesses that owe up to $25,000 will now be eligible to setup 24 month payment plans. This is great for small businesses that are not struggling financially but for small businesses that are still recovering from the recession, this will cause many to go out of business. This may cause another recession for small businesses which greatly contribute to the health of the economy and provide jobs for millions of Americans.

Once a tax lien is placed on your property it remains on your credit report for 7 years from the date the lien is paid. Unpaid tax liens can remain on your credit report for up to 15 years. Tax liens also lower your credit score and are considered public records which may affect your employment and the ability to get hired for a job.

Paying Taxes by Credit or Debit

The recession has caused many Americans to rely on credit cards to pay for basic necessities including debts owed such as taxes. The IRS allows taxpayers to pay taxes with a debit or credit card. If you owe taxes and will not be able to pay the debt via a payment plan or cannot borrow money to pay the taxes owed, your only other option may be to pay with a credit card.

Some taxpayers pay with their taxes with a debit or credit card just for the convenience – others because they neglected to take out enough money during the year to pay their taxes or did not have enough deductions to get a refund. Here are some pros and cons about paying your taxes with a credit card or debit card.

Paying With a Credit Card
Pros
1. Convenience. You can pay by phone, internet, efile through IRS or IRS approved service providers
2. The IRS website is safe and secure – you cannot ensure safety and security on other websites
3. You may be able to earn miles, points or rewards from your credit card company
4. You can pay using Visa, MasterCard, Discover or American Express
5. You can pay taxes for forms 1040/ES/X, 4868, 5329 for individuals and can pay taxes for forms 940, 941, 943, 944, 945, 1041, 1065 for businesses
6. You can make partial payments or setup an installment agreement
7. The filing fee is tax deductible
8. You can make a payment less than $100,000 via the IRS website, larger payments must be made through OPC or Link2Gov

Cons
1. You have to pay a fee when paying via a service provider (fees range from 1.95-2.35% of amount owed)
2. An immediate release of a federal tax lien is not provided
3. Payments made through service provider or credit card company may fail
4. Depending on the interest rate charged on your credit card, if you don’t pay the card balance off within a few months you will end up paying more money than the taxes owed to the IRS
5. Be aware of scam companies appearing as service providers

Paying With a Debit Card
Pros

1. Convenience. You can pay by phone, internet, efile through IRS or IRS approved service providers
2. The IRS website is safe and secure – you cannot ensure safety and security on other websites
3. The is a flat fee charged per transaction
4. You may earn rewards from your debit card company
5. You can make a payment less than $100,000 via the IRS website, larger payments must be made through OPC or Link2Gov
6. You can pay taxes for forms 1040/ES/X, 4868, 5329 for individuals and can pay taxes for forms 940, 941, 943, 944, 945, 1041, 1065 for businesses
7. You can make partial payments or setup an installment agreement
8. The filing fee is tax deductible
9. Don't have to worry about paying penalty charges, late fees or interest if paid in full
10. Can make a payment less than $100,000 via the IRS website, larger payments must be made through OPC or Link2Gov

Cons
1. Have to pay a flat fee when paying via a service provider (fees range from $3.89-$3.95)
2. Immediate release of a federal tax lien is not provided
3. Payments made through service provider or credit card company may fail
4. Be aware of scam companies appearing as service providers

I Can't Pay My Taxes - What Should I Do?

The deadline for filing your taxes has passed but there is still hope for those who didn't file their taxes on April 15, 2008. Here are some options:

1. Request an extension and request the maximum extension time of 6 months
2. Setup an installment agreement

If you owe taxes this year and don't have the money to pay the taxes owed to either federal or state here are some options:

1. Pay by credit card
2. Apply for a bank loan to cover the entire amount of taxes owed
3. Using savings accounts, savings bonds, stocks, etc.
4. Take out a loan from your life insurance policy
5. Take out a home equity loan
6. Borrow money from family or friends
7. Consider getting a part-time job or work overtime at your existing job to earn money to pay back your income taxes
8. Request an Offer in Compromise based on economic hardship