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1st
Flash
If you're filing a Form 1040EZ or 1040A, you can probably do it alone. Anything more complex requires some form of assistance to guide you through the maze of new rules, credits and forms you'll encounter while preparing your 2009 federal income tax return.
That assistance can come in several varieties. Choosing the right one for you depends on your individual situation. But you'll first need to understand a few basics before you can choose wisely. We'll start with a rundown of the most common forms.
W-2: You'll get this statement from your employer detailing what you earned during the year.
1098: Your mortgage holder will send this statement to verify how much interest you paid on your mortgage over the year.
1099: There are two common types. The 1099-MISC shows what a contractor or consultant was paid. Usually, no federal taxes were withheld but the payment was reported to the IRS. Taxes are the responsibility of the contractor. Many people will also get a 1099-INT that reports interest income on deposit accounts.
1040: This is the tax form most payers will use to file their return. If you plan to itemize your deductions or you earned over $100,000, this is the form for you. The standard deduction per exemption was raised to $3,650 for 2009. You'll want to itemize if your deductible expenses exceed that amount.
1040EZ: Those with a job and no investments can file the easy way. This one's for folks leading simple financial lives.
1040A: Now there's middle ground for taxpayers who are caught between the standard 1040 and the EZ. You might have investments or paid student loans, but not a high enough income or financial complexity to warrant the standard version.
Schedule C: Use this form to report income earned from self-employment, hobbies or activities that don't generate a W-2. Your offsetting expenses will be reported here as well.
Schedule E: Do you have rental property? This taxable income should be reported here.
Schedule M: This form qualifies you for the Making Work Pay or Government Retiree credit. Even if your federal income tax withholding was reduced during 2009 due to the credit, you must complete Schedule M to claim the credit on your return. If you (or your spouse if filing jointly) received a pension benefit for service performed for the U.S., your state or local government that wasn't covered by social security, file this form for a $250 credit. If you received a $250 economic recovery payment during the year, you don't qualify for this one.
Have I lost you yet? Even those who felt confident about preparing their own taxes in the past may want help this year. With so many resources available, why risk missing a credit you may be entitled to?
Electronic filing of your taxes is free to those whose adjusted gross income in 2009 was $57,000 or less. This includes about 70 percent of the taxpayers. You can find a list of participating companies on the IRS Web site. Those earning less than $50,000 qualify for help from a real person. Call the Volunteer Income Tax Assistance Program at 1-800-TAX-1040 to find a chapter in your community.
Tax software sales are up, customer traffic is down at tax preparation service offices. Cost and convenience are the two biggest factors. The software products take you through a line-by-line interview process that guides you through the proper forms for your situation. But it takes time and patience. If you lack either one, this option isn't for you. Those with a more complex financial life may need more personal help as well.
There are several good tax software programs available. You don't have to make an extra trip to the office supply store to buy a CD, their online versions allow you to login and out to start your return and come back later to finish it up. Some of the biggest names are TurboTax from Intuit, Tax Cut by H&R Block, TaxBrain and TaxActOnline.com. Prices range from $50 to $100, depending on the version you choose. There's usually an additional charge to file your state taxes.
Don't worry about mistakes related to filing electronically. The IRS says the error rate for an e-filed return is one percent compared to 20 percent for paper returns. When you file electronically, you'll get an acknowledgement that your return has been received and either accepted or rejected.
Those who would rather leave the details to someone else can visit a store-front firm like H&R Block or Jackson Hewitt. Charges vary from $100 to $500, depending on the complexity of your situation. These firms use tax software programs as well, and are basically just filling in the information for you. Bring your organized receipts with you.
Be aware of privacy issues. Read all forms carefully before signing or you may find your confidential information in the hands of marketers.
Professional tax preparers are a wise choice for those with complicated returns. These can include certified public accountants and enrolled tax agents. Check credentials before enlisting one. Are there complaints filed with your state's board of accountants or Better Business Bureau? Do they specialize in a particular area? How long have they been in business? Is their service guaranteed? Ask a trusted friend or family member for references. You're the one paying penalties and interest on any mistakes they make.
Stay away from refund anticipation loans, where you get your refund check immediately. You pay for this service. The National Consumer Law Center estimates that 8.4 million in refund loans were made in 2008. The moderate and low-income taxpayers who needed them the most lost $800 million of their refunds to these loans.
Tax time can be a taxing time for most folks. Thankfully, it only comes once a year.
Tax laws and preparation techniques change over the years. But two constants remain: The obligation for every citizen to pay income taxes and the fact that they will err in the process of doing so.
The Internal Revenue Service (IRS) knows this. If they judge your mistake to be pure human error, they'll be much more lenient with you than they would with a habitual offender. And they've been in this business long enough to tell the difference.
More often than not, common errors occur in favor of the taxpayer. It's easy to underestimate your deductions if you don't keep accurate records.
Did you hit the lottery or strike it big in Atlantic City? Gambling winnings are taxable income, as well as the value of any type of sweepstakes or drawing prize you won. Losses from these activities are deductible as well, but only to offset gains from the same type of transaction up to the amount of your winnings.
Unemployment benefits, tips, rental income and gains earned from a hobby are taxable income. Last year's federal stimulus bill eliminated taxes due on the first $2,400 of unemployment benefits received in 2009.
Also included in last year's stimulus bill was a COBRA subsidy where the government paid 65 percent of COBRA premiums for former employees to keep their health insurance coverage. You must repay part of the subsidy if your income is more than $125,000 or $250,000 for married taxpayers filing joint returns. Those earning more than $145,000 ($290,000 if married) must repay the entire subsidy.
You are required to pay FICA and withholding taxes for household workers you paid more than $1,700 in cash wages to during 2009. Report this on Schedule H (Household Employment Taxes). The tax amount you pay should be reported on the appropriate line on your Form 1040 or 1040A
A child's investment income of more than $1,900 must be reported on the parent's income tax return and taxed at the parent's income tax rate if the child was under age 18 at the end of 2009, was 18 years old at the end of 2009 and did not have earned income that was more than half the child's support, or the child was a full-time student, 19 to 23 years of age and did not have earned income that was more than half of his or her support. Use Form 8615 to figure out the tax for a child's investment income.
You'll need a receipt or acknowledgement for all cash donations to charity. Contributions of $250 or more require a letter from the organization stating the name of the donor, amount given and date received. Claim only the fair market value for items donated. If the value exceeds $500, you'll need a written description of the property as well.
Carefully check your entire return before submitting to the IRS. Make sure you've completed every line. Double check your math. Include any W-2 forms you received. And don't forget to sign your return.
Simple errors can delay the processing of your return. The extra time you spend confirming its accuracy is well worth the effort.
The unemployment rate fell unexpectedly this month from 10.1 percent to 9.7 percent. This drop below double digits occurred despite a drop of 20,000 in non-farm payroll jobs. This was after revisions in December downward of 150,000 jobs and in November upward of 64,000. The average workweek is edging up from 33.2 to 33.9 hours, leaning toward fuller employment. Finally, the average hourly earnings also edged up by .2 percent.
Manufacturing had a small loss of 11,000 jobs, while service employers hired 48,000 in January after dropping 69,000 in December. The biggest gain was in professional and business services with an increase in temporary help. Temp hiring has been a leading indicator for overall payroll, making this a positive sign in the report. Retail also had a large gain, despite the post-holiday period. Construction dropped in January, but the guess is that this may be weather-related and reverse in February. Overall, the labor sector is still struggling as employers are reluctant to hire.
The four-week average of initial jobless claims stayed relatively constant moving from 468.75 to 468.5k last week. The slow improvement seems to be following the predicted upward edge toward economic recovery.
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On The World Wide Web
Find forms, instructions, estimators and guides to get you through the tax season at irs.gov.
You're not alone if you think there are too many changes to tax law to stay updated. Find a concise explanation of what you need to know for this year's filing season here.
Links to tax topics, links to tax laws, IRS links, state links and links to tax information you didn't even know existed can be found on this site.
Tip of the Week
A provision within the Worker, Homeownership, Business Assistance Act (HR 3548), includes Net Operating Loss (NOL) tax relief for businesses of all sizes. This allows struggling companies to get quick cash refunds from the IRS by using either their 2008 or 2009 losses to offset taxes paid in the prior five years rather than the two years previously allowed. Certain restrictions apply. Contact your tax advisor to learn how this law affects your specific situation.
Quotable
"I am proud to be paying taxes in the United States. The only thing is – I could be just as proud for half the money." — Arthur Godfrey
Today in History
1878 - The silver dollar became U.S. legal tender.
Flash Fact
Struggling with which federal tax forms you need to complete? There may be a form for that! Congress creates a new tax form for every special interest credit designated. The number of tax forms jumped from 402 in 1990 to 526 by 2002. Click on the "Forms and Publications" heading on the IRS Web site and you'll get a listing of 1,124 separate items.
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