Just when you’re about to start gnashing your teeth and pulling your hair out in the national ritual leading up to the April 15 tax filing deadline, here comes the friendly IRS with some helpful tools/brochures.
And while we’re on the subject, let’s remember that the folks who work at the Internal Revenue Service don’t create the tax laws, they just enforce them.
A Little Help From Your Friends…at the IRS
First on the list is IRS Publication 17, a.k.a. “Your Federal Income Tax.” This is #5 on the “Top 5” list of most-requested items found on the IRS Web site, http://www.irs.gov . Inside is a wealth of information on the basic things you need to understand in order to prepare your individual tax return and much, much more. (Note: At 300 pages long, I don’t recommend printing this out. If you want a free hard copy to keep next to your bed at night, you can order one at 800-829-3676.)
The good news is that, in general, the explanations don’t require a CPA designation to understand and they’re quite thorough. For instance, there are eleven pages about IRAs covering everything from how much can you contribute (2005 and 2006) to what to do if you contribute too much. There is also a section on what to do if you inherited an IRA and step-by-step directions for calculating whether you’re eligible to have a Roth IRA.
If you partook of the real estate land rush last year you may want to check out “Rental Income and Expenses.” Other pertinent headings include “Sale of Property” and “Selling Your Home.”
No doubt about it, kids are expensive. So don’t miss a chance to cash in on a tax break or two such as the Child Tax Credit, the Education Credits, and/or the Child and Dependent Care Credit.
Although it feels a bit like having salt thrown into a wound, I’m sure this next IRS tool was genuinely designed to be helpful, otherwise they wouldn’t have called it the “AMT Assistant.”
This handy-dandy online tool can tell you if you are subject to the Alternative Minimum Tax. You can find it by typing “AMT Assistant” in the search box on the IRS website.
Note: to answer the questions the AMT Assistant asks, you’ve got to complete a regular Form 1040 tax return through line 44. You’ll need to enter information from this into the online calculator. It will instantly tell you if you owe any AMT. If that’s the case, you have to file Form 6251 in addition to your regular tax return.
According to the IRS, all entries are anonymous. The information you enter is “erased when you exit or start over.”
The AMT Assistant page will also allow you to link to other AMT-related topics. For instance, the home re-financing frenzy of the past few years caused the IRS to issue guidance in 2005 concerning the deductibility of home mortgage interest.
Under the AMT, “qualified housing interest” is one of the few deductions you’re allowed to take. A lot of folks wanted to know whether this was still the case if your mortgage had been refinanced. The answer: Yes, no matter how many refis you did, but only up to the extent of the original loan amount.
Must You File?
According to the Internal Revenue Service, more than 130 million individuals filed tax returns in 2003, the most recent year that’s been analyzed. The total amount of adjusted gross income was $6.2 trillion.
Not everyone who has income must file a return. In fact, according to the IRS, “every year millions of people file federal income tax returns even though they are not required to.”
It depends upon the type of income you receive, your filing status, and your age. For instance, if you are married and under age 65, you don’t have to file until your income hits $16,400. However, if you are self-employed, the threshold is $400.
To find out whether you are among the millions who don’t need to file, head to www.irs.gov and click on the “Individuals” tab. Then select “Do You Need to File a Federal Income Tax Return?” That will bring up a page that outlines the factors that determine whether or not you are obligated to file a return.
Should You File?
This is subtle, but important. Just because you’re not legally required to file, it might be in your best interest to do so anyway. Why? Because you can get money back.
For instance, if money was withheld from your paycheck or pension check and your income is under a certain amount, you will get some of that returned to you.
If you are a low-income taxpayer and qualify for one of several tax credits, you may qualify for a refund even if you don’t pay any tax! These include:
— Earned Income Tax Credit
— Additional Child Tax Credit
— Health Coverage Tax Credit
Don’t Be Stupid
I am constantly amazed at the number of people who think the federal income tax is unconstitutional. Every year there are multiple court cases involving individuals who refuse to pay their taxes on the grounds that the system is illegal. They always lose. I have only one piece of advice:
Get over it!
1) In case after case, the U.S. Supreme Court has upheld the constitutionality of the federal income tax.
2) If it were remotely possible to legally weazel out of paying taxes, don’t you think some smart, rich lawyers would have figured this out already? If lawyers are paying their income taxes, doesn’t that indicate the rest of us had better pony up as well?
As an individual, you’ve got three choices in terms of the form you can use to file your taxes. The one you should use is largely dependent on how complicated your return is.
Here are some guidelines from the IRS:
As the name implies, this is the simplest form. You may be able to use this if:
— Your taxable income is less than $100,000
— Your filing status is “single” or “married filing jointly”
— You are under age 65
— You are not claiming any dependents
— You have $1,500 or less in interest income to report
Likely candidates: college students; young, single workers in their 20s and early 30s; newlyweds.
This form allows you to claim certain tax credits and additional deductions. Consider this form if:
— Your taxable income is less than $100,000
— You are claiming dependents (children/elderly relatives)
— You have capital gains and/or dividends to report
— You are claiming your standard deduction
— You are claiming deductions for IRA contributions, student loan interest, educator expenses or higher education tuition and fees.
Likely candidates: Young couples with children, teachers, middle income parents with children in college, senior citizens.
This is the full monty of tax return forms. If you don’t qualify to use one of the first two choices, you’ve probably got to use this one, especially if:
— Your taxable income is $100,000 or more
— You are itemizing your deductions
— You have self-employment income
— You made money on property — including investments — that you sold
Likely candidates: individuals who have their own businesses, investors, people who incurred big medical bills last year, folks who live in states with high property taxes, anyone who sold a house.
Last year 68.5 million tax returns were filed electronically. Furthermore, if your adjusted gross income is $50,000 or less you may qualify to have this done for free thanks to a partnership between the IRS and private tax preparation companies.
Again, your starting point for information is the “Individuals” section of the IRS Web site. When you get there click on the “eFile” link. You can read the free filing conditions for each of the affiliated firms and choose one for which you qualify.
Note: This is America. Land of opportunity. The capitol of Capitalism. So each tax preparation firm will try to sell you something “extra.” You are under ZERO obligation to do so. They have to prepare and submit your return for free whether you buy additional services or not.
More ideas for reducing the stress and strain of tax season next week.
All the best,
If you have a question for Gail Buckner and the Your $ Matters column, send them to: firstname.lastname@example.org , along with your name and phone number.