One of the most introductory ways to plan for the effects of income taxes is to recognize how the various marginal rates are applied to the corresponding tax brackets. Because the United States does not yet currently engage in a flat tax system, our taxable incomes are broken down into different taxation ranges with specific taxation percentages assessed depending on where they fall along the tax bracket spectrum. Although our 2010 tax returns won’t be filed until April 15, 2011, for planning purposes, it’s always good to find out the new changes to the tax code as early as possible. Let’s examine some of the upcoming tax rate changes that are being projected for 2010 and compare them to the previous year’s 2009 tax brackets.

Projections Of New IRS Tax Rates Have Historically Been Extremely Accurate

Year after year, even before the official IRS income tax brackets are released, a select number of tax experts have gotten together and crunched a determinative number of officially released statistics by governmental agencies – to project and extrapolate the upcoming year’s tax brackets. Year after year, the tax rate predictions released by these groups have yielded results in advance with near 100% accuracy. Such an income tax bracket projection ahead of time is possible because many of the major tax code numbers are pegged to officially released inflation statistics – including the standard deduction, the personal exemption, the actual income ranges of the tax brackets, and contributions limits for the investment retirement accounts (both the Traditional and Roth IRA account).

One of these tax prognosticating groups is the Tax Foundation, a Washington D.C. think tank which collects data and publishes research studies on federal and state tax policies. The other notable group operates under the auspices of the Wall Street Journal and is comprised of a merry band of private tax professionals and economists – namely William E. Massey, a senior tax analyst from the Tax and Accounting arm of Thomson Reuters; George Jones, a senior federal tax analyst from CCH; and James C. Young, an accounting professor from Northern Illinois University. For numerous years now, both the Tax Foundation and the Wall Street Journal group have consistently released to the public very accurate, albeit unofficial, early bird peaks at the following year’s projected income tax brackets based on available financial data – well in advance of the official IRS releases. If you’re eager to get a head start on tax year 2010, read on.

IRS Tax Rate Schedule Updates For Tax Year 2010

This year, citing a very sluggish economy and extraordinarily low inflation rates for 2009 to which upcoming 2010 tax rates shall be pegged to, the Tax Foundation and associated experts are predicting very little year to year change for the 2010 federal tax brackets. If there’s anything good that came out of this global economic recession that has been plaguing us for the entirety of 2009 – it’s that the combination of low gas prices, depressed consumer spending, and high jobless numbers with so many people filing for unemployment – have enabled inflation rates to stay quite low during the span of 2009 – at a mere 0.19%. Just compare that to the incredibly high inflation rate of 4.26% during the previous year of 2008 when gas prices were skyrocketing, and it’s clear the recent sudden and precipitous drop in inflation has been extremely unprecedented.

As a result of low inflation, for the most part the 2010 tax bracket ranges will likely stay relatively unchanged. As noted by the tax pundits, for the very first time since the IRS started to index the official federal income tax rates to inflation during the mid 1980’s, taxpayers will get virtually no significant benefit from inflation in 2010. As such – year 2010 tax brackets, standard deductions, personal exemptions, and even retirement account contribution limits will see very little (if any) alterations from prior year numbers.

I will update the table below to reflect the official IRS tax rates for 2010 if decidedly different numbers are ultimately released by the IRS. However, with tax bracket projections by the experts having enjoyed a near perfect accuracy rate for quite a few years now, I don’t have any reason to doubt that the displayed figures below will ultimately wind up as official.

Federal Income Tax Brackets For 2010 – Based On Taxable Income Ranges

Beyond some slight numerical shuffling of the taxable income ranges, there will not be too many significant tax changes from 2009 into 2010. Here is a breakdown of the projected changes (if any) for 2010 as they compare to the prior year:

• Personal Exemption: No change. For the very first time, the standard exemption for 2010 will not be going up and will stay unchanged at $3,650, the same as it was in 2009.
• Standard Deduction: No change, except for Head Of Household filers. The standard deduction for married couples filing jointly will remain unchanged at $11,400. For those filing as single, the standard deduction will remain at $5,700 as well. However, Head of Household filers will see a slight increase by $50 – from $8,350 (year 2009) to $8,400 (year 2010).
• Overall Tax Bracket Thresholds: Will increase across the board for all tax filing statuses, albeit at a significantly lower amount compared to past tax year increases.
• Annual Gift Tax Exclusion Amount: No change. For tax year 2010, the current gift tax exclusion limit of $13,000 will stay the same. Often overlooked by most taxpayers, the gift tax stipulates that gift givers must pay a special tax on gift amounts that exceed a certain amount per year.
• Traditional and Roth IRA Contribution Limits: No change. Despite the fact that IRA and Roth IRA contribution limits did not rise in 2009 in response to strong inflationary pressures in 2009, there will still be no corresponding change in the maximum contribution limits to individual retirement accounts for 2010. The standard IRA contribution limit for 2010 will remain unchanged at $5,000. The catch up contribution limit for those 50 or older will remain at $6,000 as well.

Source URL: 2010 Federal Income Tax Brackets (IRS Tax Rates)

Copyright Protected © 2009 Money Blue Book: Personal Finance Blog. All Rights Reserved.

The following represents the Internal Revenue Service (IRS)’s officially released 2009 federal income tax brackets. Read ‘em and weep – or perhaps rejoice, depending on where you stand on the whole federal income tax bracket sliding scale. Regardless, you’re going to be getting close and personal with the marginal rates when you file your 2009 tax return in early 2010. Let’s have a look at some of the tax changes shall we?

Official IRS Tax Rate Schedule Updates For Tax Year 2009

Via the Wall Street Journal, the following graphical table below gives you the official marginal tax brackets for married couples filing jointly as well as the marginal rates for single filers for 2009. The previous year’s numbers are also provided to give you an idea of some of the more noticeable changes since 2008. The income numbers listed in the chart below are taxable incomes, and thus they have taken into consideration all available personal exemptions as well as any of either the standard or itemized deductions, including all pre-tax above the line 401k and deductible IRA contributions.

As key portions of the marginal tax tables are pegged to inflation, quite a few numbers must be annually revised. Thus you will note that there are quite a few key changes for the 2009 tax year compared to the year prior. However, while overall tax numbers appear to have nominally increased on the whole, taking into consideration the effects of inflation, effective tax rates may actually have remained level or even dipped a bit.

Despite the text below that says “projected”, the official IRS numbers have been released and they now represent official federal income tax rate brackets, locked in for 2009.

To summarize, here is a run through of some of the more notable tax rate changes for 2009 and even a quick blurb about some of the key tax benefits that did not change based on official IRS releases thus far:

• Personal Exemption and Exemption For Dependents – Increased to $3,650 from $3,500 (up $150) from 2008, but is phased out at higher income levels.
• Standard Deduction – The great majority of American taxpayers take the standard deduction rather than itemizing deductions for expenditures such as mortgage interest, charitable contributions, and state & local taxes. The standard deduction increased to $11,400 from $10,900 (up $500) for married couples filing a joint tax return, increased to $5,700 from $5,450 (up $250) for singles and married individuals filing separately, and increased to $8,350 from $8,000 (up $350) for heads of household.
• Overall Tax Bracket Thresholds – Increased across the board for all tax filing statuses. This means that if your annual income did not increase since last year or if you did not receive an inflation based pay raise, you may likely pay a little less in taxes in 2009 than in 2008. As the IRS notes as an example on one of its press releases, in regards to a married couple filing a joint return, the taxable income threshold separating the 15 percent bracket from the 25 percent bracket is $67,900, up from $65,100 compared to tax year 2008.
• Earned Income Tax Credit – Increased to $5,028 from $4,824 (up $204) for low and moderate income workers and working families with two or more children. The income qualification limit to take the earned income tax credit (EITC) for joint return filers with two or more children also increased to $43,415 from $41,646 (up $1,769).
• Annual Gift Tax Exclusion Amount – Increased to $13,000 from $12,000 in 2008 (up $1,000). Often overlooked by people, the gift tax requires the gift giver to pay a special tax on the gift amount if it exceeds a certain amount per year. For 2009, that threshold will be bumped to $13,000.
• Social Security Contribution and Wage Benefit Base – Increased to $106,800 from $102,000 (up $4,800). This means that 2009 income sources over $106,8000 will not be subject to Social Security taxation. With the Social Security tax rate at 6.20%, this also means that the maximum a person will shoulder in Social Security taxes for 2009 is $6,622.
• Traditional and Roth IRA Contribution Limits – No change from 2008. Despite inflationary pressures that increased tax bracket rates across the boards, sadly, IRA and Roth IRA contribution limits will be staying the same – stuck at a crappy and paltry $5,000 per year for those under age 50, and $6,000 per year for those 50 or above.
• Roth IRA Contribution Limits (Income Threshold) – Increased to $166,000 from $159,000 (up $7,000) for married filing jointly couples, and increased to $105,000 from $101,000 (up $4,000) for singles and others.

Watch Out For Possible Upcoming 2010 Tax Bracket and Tax Rate Changes

While official IRS federal income tax brackets are not usually released for the following tax year until the late fall, it’s frankly never too soon to get your hands on the earliest reliable marginal tax bracket predictions. Year after year, a group of private tax experts and economists associated with the Wall Street Journal get together and crunch officially released inflationary data to provide news readers an early bird peak at the following year’s projected income tax brackets. This group, comprised of members from the Tax and Accounting arm of Thomson Reuters, tax analysts from CCH, and an accounting professor from Northern Illinois University – usually releases their annual tax bracket projections and estimations on tax deduction numbers for the following year during early fall (around September), well before the official IRS numbers are issued.

As marginal tax brackets track changes in inflation and other economic data fairly closely, the annual tax rate estimations by the Wall Street tax team members have yielded pretty reliable and on par results over the years. If you’re antsy to get a head start on tax year 2010, stayed tuned in very early Fall 2009 for the newest updates on the 2010 projected federal income tax brackets.

Because of the election of Barack Obama as the new President of the United States and the handover of the country to a new political party, there are bound to be substantial changes in the tax code and income tax rates in the coming years. Working on an economic stimulus plan and advocating aggressive social agendas, President Obama has already proposed numerous changes to the ordinary income tax rates, such as raising the top rate from 35% to 39.6% – potentially boosting the tax burdens of higher income earners to new heights. He has also suggested the need to reduce tax deductions for American households earning more than $250,000 annually, and has also made proposals to increase taxes on capital gains and stock dividends. With a political and taxation platform that is decidedly against those those in the higher upper echelons of the U.S. tax code, those who have done well for themselves over the years seemingly have a lot to fear in Mr. Obama. Personally, while I feel Obama is doing a commendable job on the social and foreign policy front, I hope he doesn’t get too carried away with his taxation ambitions. His remarks on taxes always make me nervous.

In the mean time, many of us regular taxpayers can only just ride along and hope for the best. Regardless of what Obama ultimately decides to do and no matter how federal income tax brackets eventually look like in 2010 and 2011, we should try to wisely structure our actions today to reduce our future tax burdens as much as possible, regardless of what happens. Such smart tax moves would include taking advantage of employer sponsored pre-tax perks like flexible spending accounts (FSA), and investing  in tax deferred retirement vehicles like 401(k)’s and Roth IRA accounts.

Source URL: 2009 Federal Income Tax Brackets (Official IRS Tax Rates)

Copyright Protected © 2009 Money Blue Book: Personal Finance Blog. All Rights Reserved.

Tax day is a stressful and confusing time for many people as we scramble around with our W-2’s and 1040 forms, but it doesn’t have to be. Currently, there is a wealth of free tax filing resources available to help people like us with timely and accurate tax preparation, courtesy of organizations like the IRS and the U.S. government. Thus, even those those who do not have the extra financial means to afford premium tax software programs like TurboTax and Taxcut still have a wide selection of competent tax assistance programs at their disposal. Depending on their individual demographics such as age or income, and depending on the availability of other special status factors such as active duty in the armed services, certain taxpayers may even qualify for free federal government sponsored tax preparation assistance and free tax filing.

Free Tax Filing With IRS Free File Offers and Non Profit Volunteer Tax Preparation Services

The various free tax preparation and free tax filing services available can be broken down into two broad categories – offers that stem from the federal government’s partnership program to bring affordable partially subsidized tax filing services to lower income people, and offers that are provided by volunteer tax organizations funded by non-profit interest groups.

Taxpayers who wish to prepare and file their taxes electronically for free can take advantage of the “Free File” tax return preparation program provided by private tax vendors such as Turbo Tax, Tax Cut, and Tax Act, in partnership with the Internal Revenue Service (IRS). While the federally sponsored tax preparation and filing programs are indeed free for those qualified, the program costs are only waived for the federal income tax portion. Those who use the online tax services of an IRS “Free File” software provider must be mindful of the inevitable up-sell of the state income tax portion – in which the “Free File” tax software vendors offer the federal portion for free but try to sell you on paying for additional (and often necessary) state tax preparation. Marketing strategy has shone that loyal customers of a proven free software product have a tendency to return to the same familiar product again, even when they may not qualify for the original free trial version anymore. The hopes of these free tax software providers is to get you acquainted with their free federal tax filing programs today so that one day when your income finally exceeds the “Free File” qualification limits, you will be will more receptive to paying for the same service.

Be Mindful Of Inevitable Up-Selling For Paid State Income Tax Preparation and Filing

Oftentimes however, taxpayers using the services of the “Free File” software vendors are surprised by the last second add-ons, tax refund anticipation loan solicitations, and other marketing sales pitches. While there is no obligation for taxpayers to buy any of the products or services marketed by the “Free File” tax providers, because many times these convenient add-ons (for services like state tax form preparation) crop up so late in the free federal tax preparation process, they oftentimes leave the taxpayer with little choice but to pay the extra requested charges or face having to start the lengthy process all over again with another tax software vendor. However, despite the up-sell tactics used, there is nothing really outrageously deceptive or harmful with the practice of product up-selling in the case of “Free File” offers (especially for things like state tax return preparation) as they frequently do save the taxpayer time and hassle, particularly since the tax provider may be able to transfer all of the prepared tax data from the completed free federal tax forms to the paid state tax forms automatically for you. Furthermore, the state income tax form upsales usually only cost an additional $15-20 for electronic E-file. Of course, one probably ought to check his or her state’s taxation authorities to see if he or she can e-file or mail in state income tax return forms for free.

As always with utilizing online programs, particularly ones that will necessarily request confidential data and information from you such as your social security number, it’s important to be extra careful of the myriad of tax preparation scams floating around the Internet during tax season. Remember, when dealing with a tax preparation and tax filing firm, you are inevitably providing them all of the information they would need to fraudulently steal your identity. Always seek out a trusted and “Authorized IRS e-file Provider”, or stick to the popular “Free-File” tax vendors and verified free tax preparation services in the list I’ve provided below. Remember, it’s important to stay vigilant against tax scams and tax frauds to avoid succumbing to the dangers and headaches of identity theft.

Free Tax Filing Is Also Available to Qualified Low Income, Elderly, Or Active Military Personnel

Those  who are puzzled or confused by the “Free-File” online tax preparation options may consider seeking more personalized live tax help from free volunteer-based tax assistance programs. The most popular free in-person tax preparation programs for qualified taxpayers include the IRS’ Volunteer Income Tax Assistance Program and the Tax Counseling for the Elderly Program via the AARP organization. If you need guidance with your tax return or are not sure which tax credits or deductions to take, you may want to visit one of these volunteer tax assistance sites for some one-on-one tax prep help. Most of the walk-in tax centers provide full service tax preparation help for both federal and state returns with the help of fully trained community volunteers and sometimes professional tax preparers, however, they are best suited for straightforward and uncomplicated tax returns. Most of these community tax assistance organizations are also need-based and limited to certain types of people – such as lower income taxpayers, elderly folks, or active military personnel.

Below is a list of the verified and legitimate free 2009 tax preparation and tax filing resources I am aware of for tax year 2008. Please share your personal experiences with any of the the ones I’ve listed or have failed to mention:

1) TurboTax Free File Edition – Intuit’s TurboTax currently offers a free online edition of its popular tax preparation software to taxpayers who only need to file 1040EZ or simple straight forward 1040 tax return forms. The TurboTax free edition is designed for those who have simple tax returns and don’t need much tax guidance regardless of income level. If you have complicated child care expenses, mortgages, medical expenses, have made charitable donations, own stock investments, rental properties, or run your own business, you may need to upgrade to a paid premium edition of TurboTax. The TurboTax Free Edition doesn’t cover tax Schedules C, D, E, and F (required for taxpayers who own a business or have sold investments). Otherwise, those who have simple tax returns with just the standard deduction or a few basic itemized deductions, should take a test run of the TurboTax free version. At the very least you can try the program without cost and decide whether your needs are fulfilled by the free entry level version or whether you will require a more sophisticated software upgrade.

The TurboTax online free edition offers an intuitive, interview format tax preparation process featuring data compatibility with Quicken and various personal finance spreadsheet programs, along with integrated electronic state filing (at an additional cost). TurboTax provides a list of all the tax schedules and tax forms included in the federal Free File Edition, and as you will note, most of the major forms such as Schedule A (for basic itemized tax deductions) are included under the free filing program. While TurboTax is indeed free for federal return preparation and filing, those of you who need to file a state return as well will have to pay a little extra ($25.95).

• TurboTax Freedom Edition – As a special promotion, TurboTax also offers free federal and state tax return preparation and e-filing to qualified taxpayers who either have an adjusted gross income (AGI) of $30,000 or less, qualify for the Earned Income Tax Credit (EITC), or can qualify as active duty military members with an AGI of $56,000 or less. Qualified taxpayers can prepare and file their federal returns for free with the TurboTax Freedom Edition. Freedom Edition participants may also qualify for free state tax filing as well if filed in a state that sponsors its own “Free File” state program. Free File Program states include: AL, AR, AZ, GA, ID, IA, KY, MA, MI, MN, MO, MS, NY, ND, NC, OK, OR, RI, SC, VT, and WV. Otherwise, if your state’s not included, you can still prepare and file a state return with the Freedom Edition for just $9.95. Still not a bad deal at all for lower income taxpayers who qualify. Although the TurboTax Freedom Edition supports the Form 1040 long form with itemized deductions in addition to the basic Form 1040EZ, it does not support tax situations that are uncommon to lower income taxpayers, such as complex investments, rental property, and royalty income.
• TurboTax Business (Free Download) - Those who operate their own small business, run a corporation, a partnership, or a multi member limited liability company (LLC) may wish to try out the free TurboTax Business Edition with free federal E-filing. Intuit is hoping that once you try their promotional product download (which is the same as the paid TurboTax Business version), you’ll come back to TurboTax for your future paid tax preparation needs.

2) H&R Block TaxCut Free File – HR Block offers a basic free online tax preparation software and free federal E-filing package with its TaxCut Free Federal Edition for those with simple returns, such as those who are filing 1040EZ’s or have run of the mill 1040’s. The TaxCut Free Federal Edition offers a simple tax preparation process via an easy to use, step by step tax interview with automatic error and anti-audit double checking. However, if you’re looking to import your prior year’s tax data or if you’re looking to get extra tax preparation guidance for your Schedule C, home mortgage, rental property, home office, or business expenses, you will have to go with a more premium TaxCut version instead. While federal income tax preparation assistance is indeed free with the TaxCut Free File Edition, adding a state income tax return will cost extra – an upsell added price of $29.95.

3) TaxAct Free File – While not as popular as TurboTax or H&R Block’s TaxCut, TaxAct has quietly competed well against the two tax preparation giants. TaxAct offers its own free federal edition for those who would prefer to do away with paid complete tax support in favor of free tax preparation and free E-filing. As always with free tax preparation programs, TaxAct’s free filing edition is best suited for those with basic, non complex tax returns. Free TaxAct supports all of the major tax forms (view list) including 1040 and 1040EZ with itemized deductions. The only major TaxAct features not supported in the free version are data importation and complex deduction calculators for those who run their own small businesses. Otherwise, the TaxAct free version functions just like the paid version, allowing you to prepare your taxes at your own pace and return to your saved work as needed until you are finished.

Cost-wise, your free federal E-file is included, but tacking on an additional state income tax return will cost $13.95 (which is still a lot cheaper than both TurboTax and TaxCut’s state tax preparation prices). If you’re filing both the federal and state tax forms together, TaxAct’s Free File offer is one of the cheapest deals around.

4) TaxSlayer Free Tax Filing For Active Military – TaxSlayer online tax preparation and tax filing is free for active duty military personnel. While the online TaxSlayer classic edition offers free federal and state tax preparation services for non-military civilians with downloading, e-Filing, and printing at $9.95 each, active military personnel get to enjoy both the tax preparation and filing for free. Active military servicemen and women also get to add multiple state returns with no additional charge. If you are not sure whether you qualify, please visit the TaxSlayer website and submit your military EIN number from your W-2 Form into the query box to see if you are eligible for free TaxSlayer services.

5) IRS Free File Program – Through a partnership between the IRS and a group of private sector tax software companies called the Free File Alliance, those whose adjusted gross income in 2008 was less than $56,000 may be eligible for free tax services. If your income was less than $56,000 in 2008, you may be qualified to select a free tax preparation and free tax filing vendor from the the IRS Free File website to process your tax paperwork for you. To participate, you’ll need to visit the IRS’ website, fill out a short tax related questionnaire, and get matched up with an appropriate free tax preparation company. Those who wish to know more can obtain a list of all the Free File Alliance companies here. Those who can meet the program’s income restrictive terms should definitely take advantage of this government sponsored offer.

6) IRS Free File Fillable Forms – The IRS Free File Fillable Form option is not a free tax preparation software, but the most basic way of electronically filing your federal tax return without charge. Simply put – the site’s just a series of blank tax forms. You simply select the tax forms desired, fill in your appropriate tax return numbers, and E-file for free. There are no income restrictions and the service is available to everyone. For those of you who know exactly what you are doing and prefer to do your taxes manually by hand (not sure why anyone would want to, in this day and age of computer assisted tasks), this is a free tax filing option to consider, especially for those whose high income limits would otherwise disqualify them from other free electronic tax filing alternatives. Do keep in mind that the IRS Free File Fillable Forms service is not the same as the IRS Free File Program. The IRS Free File Program offers free tax preparation with free electronic filing, while this one only offers free basic filing without the extra preparation assistance.

7) Volunteer Income Tax Preparation Program (VITA) – The VITA program consists of a network of IRS sponsored tax volunteer sites that provide free tax preparation and free filing services to those people with low to moderate incomes, or those with limited English language abilities. Generally, the VITA sites assist taxpayers who have net incomes below $42,000 – individuals who are usually eligible for low income tax benefits such as the earned income tax credit. The certified tax preparation volunteers provided by the free program usually receive tax training to help prepare basic tax returns in places around the country. These free walk-in VITA centers are usually located in local community facilities such as libraries, elementary schools, shopping malls, and other neighborhood centers. While there is no comprehensive list of VITA locations available on the Internet, you can find your nearest VITA site by calling: 1-800-829-1040.

When I was in law school, I worked as a tax preparation volunteer through the VITA program and witnessed a great deal of care on the part of VITA volunteers. The VITA tax preparation volunteers may not always be the best trained to handle complex tax law issues, but they are generally fairly knowledgeable and very eager to help with basic tax cases.

8) AARP Tax-Aide Clinics (For Senior Citizens) - The VITA volunteer tax program’s sister companion is the Tax Counseling For the Elderly Program (TCE). Currently, the free tax assistance initiative for low income taxpayers with special attention to those 60 and over is being spearheaded by the AARP’s Tax-Aide program. Those who are age 60 or older with low to moderately low incomes may be able to call in and schedule an appointment for some free tax preparation and free tax counseling assistance. At any one of the AARP Tax-Aide locations, you’ll find trained tax preparation volunteers who can help you file your federal and state tax returns. Oftentimes, many of the volunteers who provide the tax filing assistance are themselves senior citizens affiliated with various IRS grant funded non profits. If you wish to find an AARP Tax-Aide center, please run a search with this online Tax-Aide finder tool, or locate your nearest AARP Tax-Aide site by calling 1-888-227-7669.

9) Low Income Tax Payer Clinics (LITC) - Low income tax preparation clinics are partially funded by the IRS and their goal is to provide affordable representation to low income taxpayers before the IRS in cases involving tax audits, tax appeals, tax collections, and federal tax litigation (usually for free or for a small nominal charge). The low income taxpayer clinics are usually operated and managed by non profit groups, law schools, or business schools with each independently evaluating prospective clients for program eligibility in terms of income limits and suitability.

When I was in law school, I participated in my school’s low income taxpayer clinic program as a law student where I assisted clients of limited financial means with their tax related problems. During my time in the clinic, I helped my clients resolve a variety of tax related issues including helping a few negotiate Offer In Compromise settlement negotiations with the IRS for lower fixed payments. For those who qualify, I highly recommend the low income tax clinics as a way to resolve more complex consumer tax issues affordably with the help of trained tax professionals. While tax clinics run by places like law schools are usually staffed by law students in training, such clinical programs are usually supervised by a fairly hands-on tax law veteran. In my case, while working at my school’s low income taxpayer clinic, I was supervised by a law school professor who was also a major partner at a prominent tax law firm nearby.

Source URL: Free Tax Preparation Software and Free Online Tax Filing Help

Copyright Protected © 2009 Money Blue Book: Personal Finance Blog. All Rights Reserved.

According to some news statistics, more than half of all Americans hire a professional tax preparer to file their taxes. In this day and age, those kinds of stats frankly surprise me. I would have thought by now that the vast majority of Americans would have finally embraced the benefits of online tax preparation and the added cost saving advantages of utilizing do-it-yourself tax software products. Chalk it up to the continuous complexity of our marginal tax bracket system with all of its intricate income tax deductions and tax credit varieties or blame it on the tendency of people in general to outsource their financial responsibilities – but many people still stubbornly prefer to depend on professional tax experts to take care of their annual income tax filing obligations instead of doing it themselves.

For many people, filing income taxes is a painful, expensive, and dreaded task – but it really doesn’t have to be. While I’m not suggesting the filing of one’s income taxes will ever become an enjoyable experience (that will never happen), there are mitigating ways to make the process much more bearable. In the past, when April 15 tax day drew near, the only way to avoid having to flip open the bulky U.S. tax code or pour over the volumes of tax regulations and detailed tax commentaries, was to go out and pay $200-300 for an overpaid accountant or professional tax preparer to fill out the appropriate tax forms for you. But now, with the availability of very affordable discount tax preparation packages from major tax software developers like Intuit and H&R Block, and the prevalence of user-friendly and comparatively lower cost online tax preparation solutions like TurboTax, TaxCut, and TaxAct – preparing and filing your own simple tax returns without the pricey services of an overrated accountant is a very realistic option. With the help of top of the line tax preparation websites and software, filing your own taxes can be an easy and affordable experience. For those that qualify, there are even ways to file taxes online for free.

File Your Own Taxes With The Help Of Online Tax Software and Save Money

The process of preparing one’s own taxes, even with the assistance of highly automated tax software and online tax preparation programs, is a highly educational and financially empowering experience. In this age of advanced computer software and electronic E-filing via the Internet, there is little need to fiddle with paper income tax forms anymore. Unless your tax return involves complex business tax issues that require a tax lawyer’s legal advice, most ordinary returns can be prepared by the taxpayer without professional supervision or assistance.

Those that insist on hiring a local third party tax preparation expert to do the brunt of their taxes for them may be surprised to learn that many of these so-called tax experts frequently rely on the same tax preparation software tools to do your taxes that are freely available to you as well. As someone who attended law school with subsequent experience working as a volunteer tax preparer for low income people, I’ve witnessed this first hand in many cases. Oftentimes, when you hire a tax professional to prepare your taxes for you, all you are doing is paying a lot of unnecessary money for some lowly entry level tax preparation agent to perform simple data entry into a completely automated tax software program.

So instead of shelling out $300-400 for what often amounts to nothing more than glorified data entry, why not strive to perform this simple task yourself? The reality is that the vast majority of income tax returns do not require the expensive services of an accountant or tax lawyer to prepare – most can be performed efficiently and accurately from the privacy of your own home.

Comparing The 2009 Online Tax Preparation Software Versions Of Intuit’s TurboTax and H&R Block’s TaxCut For Tax Year 2008

The tax preparation market is filled with hundreds of choices as competition for your business is very stiff. However, sitting at the very top are two of the most established and expertly developed online tax software products – online and desktop brands that have withstood the test of time and consumer review scrutiny – Intuit’s Turbo Tax and H&R Block’s TaxCut. Together, TurboTax and TaxCut enjoy the biggest market share among consumers looking for an affordable online and software driven tax preparation alternative to hiring an expensive tax professional. While TurboTax is the preferred choice for most people, with TaxCut being a close runner up second, they are very similar and both offer the same primary benefit – the ability to do your own taxes, conveniently, accurately, and affordably.

TurboTax and TaxCut are similar in so many ways that consumers frequently get the two confused and can’t decide which of the two popular tax preparation software packages offers the best tax preparation deal. Overall, you can’t go wrong with either one of the 2009 versions of Turbo Tax or TaxCut for tax year 2008 as both products have already gone through a tremendous amount of research and development, and subjected to numerous product testing upgrades. Both tax software products offer all of the tax filing features you’ll need to generate accurate returns and file your taxes electronically without hassle. Both TurboTax and TaxCut also feature top notch user-friendly designs that walk you through the income tax preparation process, without requiring you to deal with the the complexity of income tax law. With the ability to automatically save your carryover tax information for future year’s tax returns as needed, it’s important to pick a favorite online tax preparation brand and stick with it as you’ll likely end up going with the same online tax preparation company again year after year, due to brand familiarity.

While I highly advocate taking advantage of online TurboTax or online TaxCut for your tax preparation needs, there are still those who shun the Internet in favor of the less identity theft-prone traditional desktop software versions. The biggest difference between filing your taxes online vs. software used on your computer – is who holds your personal confidential data. Do you trust Intuit (the maker of TurboTax) and H&R Block (the maker of TaxCut) with all of the details of your life and personal finances? If you think their websites and databases are 100% safe from data theft, then stick with the more versatile and convenient online route – otherwise, buy the desktop software versions. Personally, I overwhelmingly prefer going with the online option as I have full confidence in the abilities of these reputable software makers to keep my online information safe and secure. Both products have been around for many years and both are run by legitimate companies with tremendous financial and professional backing. Besides, the ability to archive info online and import your prior year’s tax data automatically onto the following year’s tax forms as needed is an extremely convenient and invaluable bonus for me. Importing the previous year’s tax data automatically cuts down on data entry mistakes and gives a tax reference point during the interview questions for the current year’s tax return. Both TurboTax and TaxCut also offer support for importing data from other financial software packages such as Quicken 2009, QuickBooks, as well as Microsoft Money.

In terms of features, both TurboTax and TaxCut were designed with tax newbies in mind as both software tools provide a significant amount of hand holding and pre-chewing. For the benefit of tax beginners, both programs walk you through the various tax topics using a very easy to understand interview process, breaking complicated tax topics such as tax deductions, sole proprietor income, and capital gains income into more manageable bite-size steps. Having used both TurboTax and TaxCut before, the experience with filing your online taxes with either one can be likened to an actual question and answer interview with a live tax preparation expert. As the online program moves you along subject by subject, your various answers to its direct questions will cause relevant numbers to be automatically dropped into the correct fields on your tax form as required. Both Turbo Tax and Tax Cut also feature a handy federal and state income tax refund counter display that cycles up and down as you proceed along the tax interview process, updating you on where you stand refund-wise at all times. Stumped by a particular tax issue or want to get into the nitty gritty about a particular tax subject? Both TaxCut and TurboTax feature helpful tax explanation tabs throughout the entire tax preparation process for those that want to learn more about the relevant tax regulations behind the interview questions.

When you’ve completed the step by step consumer friendly tax interview, both Turbo Tax and Tax Cut offer a free error checking feature that scans your completed tax return for potential tax errors or possible accounting issues that may trigger a tax audit flag (such as clerical mistakes like indicating a stock purchase or sale on a government holiday when the stock markets were closed). Having an automated system effortlessly scan your tax return for mathematical and preparation errors beats having to double check your own tax numbers manually if you were doing things by hand. Both tax software programs also offer audit risk assessments and provide a comparison of your tax numbers to the U.S. averages, an interesting feature for those who like to know where they stand in relation to the population at large.

The bottom line is that both Tax Cut and Turbo Tax crunched out the same exact tax refunds when supplied with identical information, based on my own tests of both programs. Both tax preparation software algorithms proved to be highly accurate and very user friendly. Most of the slight differences between the two programs are primarily graphically based and center around how the respective websites lay out their tax interview content. TurboTax gets a slight edge in this department as it’s a bit easier to get started with and get going for the first time user of online tax preparation software, but the differences in comparison to TaxCut are rather minimal.

Both TaxCut and Turbo Tax come in separate online basic and premium business editions, with TurboTax differentiating its editions by taxpayer-type, and TaxCut differentiating its editions by the level of tax advisor support desired. Cost-wise, TurboTax is the more expensive tax application between the two top choices, but in my opinion, its online program is a bit more well put together and performs sleeker than its biggest competitor, TaxCut. If you are a new beginner to online tax preparation programs, I’d recommend trying out online TurboTax over HnR Block’s online TaxCut software due to TurboTax’s slightly more user friendly and more graphically intuitive website interface. However, both are equally capable of helping you prepare and file your taxes accurately without breaking the bank.

Review Of Intuit TurboTax Online 2008

Compared to H&R Block’s TaxCut, Intuit’s TurboTax program offers a slightly more graphically pleasing and informatively complete tax preparation experience. TurboTax also offers greater in depth tax explanations and extra hand-holding guidance as you work your way through its tax interview process. Where TurboTax really shines however is in the area of automated data importation. Unlike HR Block TaxCut, TurboTax allows you to import tax data and payroll information directly from employers who use ADP, PayChex, or ProBusiness, which according to software maker Intuit, covers more than half of all U.S. employers. This is not a feature that is currently supported by TaxCut. While not an absolute deal breaker for those who like TaxCut, it is a pretty significant bonus in favor of TurboTax, at least in my opinion. A search through web reviews will also review a nearly unanimous agreement that TurboTax is indeed an overall better online product than TaxCut, if only by the slimmest of margins. At least one reviewer, PC Magazine, has selected TurboTax 2008 as its editor’s choice as the number one online tax service provider for 2009.

TurboTax 2008 comes in a multitude of editions including the free edition, the deluxe edition, the premier edition, the home & business edition, and the feature-filled business edition for corporations, partnerships, and limited liability companies (LLC). I recommend taking a look at the provided TurboTax price comparison chart to find the right tax package for you.

• TurboTax 2008 Free Edition - Intuit’s free online tax preparation package is appropriate for those with simple 1040 EZ tax returns. While the federal edition is indeed free, the state portion will cost extra.
• TurboTax 2008 Deluxe - Most popular version – used by the vast majority of people. It’s targeted at those in the middle ground with some degree of tax complexity, such as those who own a home, have made donations, or have some medical expenses to deduct. Best of all for returning customers, this version permits data transfer from the prior year’s return.
• TurboTax 2008 Premier - This TurboTax version helps you with maximizing deductions and is specially suited for those who own stocks, bonds, mutual funds, and most notably, rental properties.
• Turbo Tax 2008 Home & Business – Specially geared towards the income tax and deduction complexities of sole proprietors, consultants, independent contractors, and single owner LLC businesses.
• TurboTax 2008 Business - This package is the most full service complete version, designed for those who run a corporation, a partnership, or a multi-member LLC business.

Price-wise, TurboTax is more expensive than TaxCut, but I think the higher quality cost is worth the higher comparative price – which is why I use TurboTax to handle the bulk of my online tax preparation needs. As a heavy user of Quicken 2009 and Quicken Online products, I prefer sticking by the same software maker who designed these products as I anticipate greater future cross compatibility some day.

Review Of H&R Block TaxCut Online 2008

Brought to us by the popular U.S. tax preparation chain, H&R Block’s TaxCut is a worthy online tax preparation alternative to TurboTax. TaxCut offers a highly similar user-friendly tax preparation experience as TurboTax with the same hand holding help and customer friendly explanations during the entire tax preparation process. However, TaxCut’s biggest selling point perhaps is its lower product cost and online editions geared towards providing extra live tax adviser support. Tax Cut product editions are generally a bit cheaper compared to their TurboTax edition counterparts but they offer nearly the same features, including data importation functions and the ability to automatically download data from prior tax returns into the current year’s tax forms. One of the only significant features offered by TurboTax that’s not provided in TaxCut is the ability to import 1099, 1098, or W-2 tax data automatically from a database of employers without resorting to manual data entry. This is certainly a very convenient feature offered by TurboTax not available in TaxCut, but one has to wonder if this online perk is worth TurboTax’s much higher comparative price.

While on the whole, TaxCut’s online interface, online tax descriptions, and help search features are not as aesthetically pretty or extensive as that offered by TurboTax, these rather mild and slight drawbacks do not detract from the fact that H&R Block’s TaxCut program is a very user-friendly and accurate online tax preparation tool. Those wanting more extensive live tax advisor support from a real person may want to consider H&R Block’s TaxCut program over TurboTax, as TaxCut is backed by a greater network of actual brick and mortar tax preparation branches.

TaxCut’s various editions are broken down based on the level of customer and live tax advisor support desired – ranging from 1 free included session of tax advice, to unlimited support from a live tax professional agent from one of H&R Block’s many tax preparation offices.

• TaxCut 2008 Free Edition – The Free edition is the most basic online TaxCut package – best suited for those with simple 1080EZ tax returns. While this product supports most income tax forms, you will get very little guidance or assistance in filling them out.
• TaxCut 2008 Basic – The Basic version supports the same tax forms as the Free edition but with this edition, you can transfer data from past TaxCut tax returns and even import data from rival TurboTax.
• TaxCut 2008 Premium – The Premium TaxCut version offers the same features as the Basic level edition, except it also throws in an “Ask a Tax Adviser” session with a live H&R Block tax preparation professional. This edition is recommended for most taxpayers as it offers the option to ask a live agent a more complex tax question for free should the need arise.
• TaxCut 2008 Signature – With the nearly full service TaxCut Signature edition, you will get all of the tax preparation assistance you’ll need in the form of unlimited tax advice from an actual H&R Block professional who will not only personally review and edit, but also sign and e-file your return for you.
• TaxCut 2008 Online Office – With this complete full-service tax preparation edition from H&R Block, the company will do all of the tax preparation work for you. If your income tax return or financial situation is pretty complex, this edition may be recommended.

Source URL: Best Online Tax Preparation Software For 2009: TurboTax vs. TaxCut

Copyright Protected © 2009 Money Blue Book: Personal Finance Blog. All Rights Reserved.

A second economic stimulus package for 2009 is on the way and from the looks of things in the news, it appears newly minted President Barack H. Obama and his Democrat controlled House of Representatives and U.S. Senate are determined to ram the lucrative spending proposals through the legislative meat grinder no matter what, much to the chagrin of skeptical and deficit-weary Congressional Republicans.

As Congress debates the wisdom and intricate details of the current version of the 2009 economic stimulus package, it’s clear that something needs to be done very soon to jumpstart and save our suffering economy before we spiral into a full blown economic depression. The unemployment rate is rising fast and everywhere you turn, there seems to be a never ending stream of unemployment and layoff news being announced everyday. The stock market has already shed more than half of its value since its peak in 2007, and billions to trillions of dollars worth of wealth have already been eliminated from the economy. Major banks and financial giants like Citibank, Bank of America, and JP Morgan Chase, once the financial pillars of our economy and the lifeblood of our credit industry, are now clinging onto U.S. government bailout money for dear life – hoping to still be in business at the end of every quarter.

With its almost limitless resources, it’s clear the federal government must intervene somehow and put this broken economy and financial system back on track to prosperity. But the question is – what should be the government’s role in all of this? More specially, what method should the government take to effectively jump start the economy to life again and ease the suffering on Main Street and Wall Street? Should the 2nd economic stimulus package continue to focus directly on sparking consumer spending by featuring a second round of free stimulus checks to consumers – perhaps for amounts much higher than the previous 2008 economic stimulus checks? Or should the plan this time around focus more on longer term indirect measures like job creation, infrastructure investment, and tax credits?

Current 2009 Economic Stimulus Package Focuses Less On Stimulus Checks – And More On Job Creation, Infrastructure Projects, and Tax Cuts

Before Barack Obama was elected president and during his 2008 Presidential election campaign, he supported implementing additional economic stimulus measures in 2009 – and even whispered at the rumored possibility of a second round of stimulus checks for taxpaying consumers in 2009 before tax day.

Whether a second stimulus check was a real possibility or not, the mere mention of a second round of stimulus payments and the prospect of getting more free government money certainly made my greedy ears perk up, but much of my optimism and enthusiasm were quickly dashed when Obama finally came into power. Almost immediately, he signaled a different stimulus proposal shift that favored a more multi-pronged approach of using tax cuts, tax credits, and pet projects, rather than relying on the 2008 economic stimulus check tactics of his predecessor, George W. Bush. Instead of just distributing free bailout money to the masses and hoping the funds will naturally trigger a huge surge in consumer spending activity to put the economy back on its feet again, Obama’s stimulus package focuses more on middle class tax cuts and massive increases in government spending to fund various infrastructure investments, green energy projects, financial aid to states, and social education initiatives – designed to create jobs and put people back to work.

The current 2nd economic stimulus plan laid down by President Obama for 2009 is a whopping, super-sized $825 billion economic rescue package containing staggering spending initiatives and ambitious tax cuts, and sprinkled with dozens of pork-based proposals and suspect social initiatives within hundreds of pages of legislation. The current package contains $300 billion worth of aggressive construction projects designed to improve the country’s  infrastructure and create millions of new artificially generated jobs in areas like health care, renewable green energy, school upgrades and repairs, and transportation related improvements. The package also contains about $200 billion worth of state social assistance provisions designed to help keep state sponsored health and unemployment programs well funded – to offer a measure of cushion for those people who have been recently laid off due to the economic down turn. Along with the state assistance portion are other safety net type provisions to help fund and keep afloat local food stamp programs, food banks, state sponsored health care, and governmental health insurance plans for those suddenly unemployed.

The other primary feature of the current Obama economic stimulus plan is the series of tax cuts and tax credits offered to qualifying individuals and small businesses. Under the tax cut portion of the stimulus deal, small businesses suffering losses because of the economic downturn and recession would receive more favorable tax loss write off terms.

For individuals, the current 2009 economic stimulus package offers pretty generous tax cutting proposals. The plan highly favors low and middle-income working families since the idea is that these income groups are more likely to spend and invest their tax savings rather than save the money. In terms of stimulating the economy, increased consumer spending is good, and consumer saving is bad. Nicknamed the “Make Work Pay Credit” by President Obama, the proposed tax credit is supposed to reach close to 95% of workers, and benefit even working tax filers without any tax liability – typically very low income workers. Here is a basic overview of the stimulus plan’s Make Work Pay Credit:

• Middle Class Tax Credit: Under the plan, there would be a tax cut amounting to $500 a year for individuals, and $1,000 for couples. The economic stimulus would be issued in the form of a tax credit, and would be limited to those making $75,000 or less ($150,000 or less for married workers filing joint tax returns).
• Low Income Tax Credit: For low income taxpayers, there would be an increase and expansion of the Earned Income Tax Credit to provide a refundable tax credit for low income assistance. The expansion would affect even working tax filers without any actual net tax liability – typically very low-income workers – and allow them to potentially qualify for free stimulus tax refund credits.
• Child Tax Credit: For those who have children, a temporary increase in the child tax credit would result in larger tax refunds.

Should The 2009 Economic Stimulus Plan Be Re-Written Or Re-Packaged To Contain Major Provisions For A Second Economic Stimulus Check?

It’s too bad the eventual 2009 stimulus plan probably won’t contain another round of hefty stimulus check payments to ordinary consumers like the ones that were dished out last year. While the 2008 stimulus tax rebate wasn’t much (only a few hundred dollars in my case), some additional government handouts in higher dollar denominations would still have been greatly appreciated by individuals like myself and put to good use. Plus, as an American consumer who embraces the virtues of capitalism, I feel I would have made a better decision for myself as to how best spend my portion of the stimulus money pursuant to what’s in my own best capitalist self interest.

Overall, I think President Obama’s administration is probably right in its revised efforts to focus more on job creation, offering greater tax cuts, and enhancing safety net protections to help suffering Americans survive the economic downturn for the long term. Offering greater financial assistance to struggling state unemployment programs (many on them on the verge of running out of funds), and stimulating growth with more job building projects is a proven way to stabilize the markets and improve consumer sentiment. However, I’m still a bit disappointed that the President and Congress have not explored the prospect of an enhanced second stimulus check further.

At least for now, President Obama’s administration seems to have given up on the idea of using government stimulus checks en masse again to jump start the economy. Instead, Obama’s advisers have indicated that they would prefer searching for viable ways to get government stimulus money into the hands of American taxpayers quickly that would not require or duplicate the tax rebate checks of last year. Apparently the $150 billion spent in 2008 in the form of stimulus payments to consumers proved to be quite an economic failure and pointless exercise of futility in terms of actually stimulating the economy to any extended degree. But perhaps the reason it didn’t work properly the first time around was because too little money was given out to substantially change consumer spending habits to forcibly inject money back into the economy again (simply compare the $150 billion spent last year to the $800 billion-plus worth of spending being proposed for 2009).

Perhaps The Problem With The First Stimulus Checks In 2008 Was That They Were Too Little To Make Much Of An Impact

I have mixed feelings about the prospect of yet another around of direct stimulus checks to consumers. On one hand, I understand that there are many struggling American families getting hammered by higher living  costs, and suffering from the ills of unemployment and layoffs. However, I’m not entirely convinced that the idea of handing out free money to families will really solve all of our economic woes and jump start the economy at its core. But yet I still wonder if perhaps we gave up on the idea of stimulus checks too early and that maybe, the concept is still workable. Maybe the amounts issued in 2008 were simply to small to change anyone’s spending habits as initially intended – after all, only about $150 billion was spent in 2008, when the current 2009 economic stimulus proposal’s already ballooned to a whopping $850 billion.

I know when I received my tax rebate stimulus check in early 2008, the check only amounted to a few hundred paltry dollars – not really enough for me to go on a greedy spending spree. So instead of spending it and doing my part to stimulate the economy, I ended up doing what most people probably ended up doing with their tax rebate check – putting the money in a bank and depositing it into a high yield savings account. Of course, my plans for the money would likely have been very different if the amount wasn’t something low like $300, $600, or $1,200, but rather something as high as $10,000. If the stimulus check issued to me was indeed worth upwards of $10,000, I would very likely have saved a small portion of it but ended up plowing a sizable portion back into the economy by spending it on major expenditures like a new wide screen plasma TV set, new home appliances, or even a new car.

What If The Entire Economic Stimulus Bailout Package Went Towards 2nd Stimulus Check Payments? Would This Actually Stimulate The Economy?

Almost all polls among ordinary American consumers show overwhelming support for a second stimulus rebate check. After all, who would really oppose it? Who would be opposed to receiving free stimulus check money. Think the prospect of getting a second stimulus check worth as high as $10,000 as a consumer bailout is impossible? Well it’s probably unlikely, but it’s not out of the realm of financial or budgetary possibility, at least based on the fiscal numbers alone.

On CNN Money, a very interesting question was proposed in regards to the bank bailout and economic stimulus packages. If instead of bailing out these credit crisis-stricken banks (who probably deserve their fates due to the risky mortgage bets they greedily placed into subprime loans), we just gave all of the bailout money to taxpayers in the form of a massive consumer cash stimulus. How much would we each get if the entire current economic stimulus proposals were issued out to consumers as a second round of stimulus check payments? The second important question to ask is – would this actually stimulate the economy for the necessary extended period of time to get it going again?

To arrive at the figure, CNN Money took the total amount of the bank bailout package of $700 billion and added that to the proposed 2009 economic stimulus spending estimation at the time of $819 billion – resulting in a total bailout package of $1.519 trillion (that is quite a staggering figure). Dividing that number by 156.3 million, the total number of U.S. workers who filed federal income tax returns in 2008, that number equaled $9,718.49 per U.S. taxpayer, or roughly the equivalent of a juicy $10,000 cash bailout payment for each qualified tax payer. Now that’s stimulus with oomph! With $10,000 in our pockets in the form of instant windfall economic stimulus checks, it’s very likely that the tremendously high amount would be sufficient to incite a major change in spending activity than a measly $600 check ever could.  People would probably go out and actually start stimulating the economy by buying cars, purchasing TV’s, paying for college studies, and going on vacations.

As a dose of devil’s advocate inspired reality though, while it’s very possible that $10,000 checks in every working taxpayer’s hands would probably send the economy skyrocketing, it’s also possible the growth could be short lived and not actually get to the true root of our current economic problems. The massive surge in consumer spending probably won’t do much to solve the lingering fundamental issues surrounding our current credit crisis, which centers around a failed banking system and a failed home mortgage lending market. But then if repairing the banks and injecting confidence back into our home mortgage and credit lending markets are our primary objectives – I’m not sure the current economic stimulus proposals by President Obama, which are focused more on tax cuts and job creation and most prominently, aggressive social spending programs – will actually accomplish those goals. At least for stimulus checks, they could be able to help alleviate some of the immediate economic suffering being felt by ordinary consumers – many of whom are fighting to stay alive, with a great deal currently resorting to desperate emergency fund measures like 0% credit card offers, balance transfers, and risky high interest payday loans.

I’m curious as to everyone’s opinion on the wisdom of a second stimulus check (if it ever happened). What’s your take? Would substantially higher stimulus checks of $1,000, or possibly even as high as $10,000, actually encourage you to spend the money (thereby stimulating the economy) instead of merely saving the amount or using it to pay down debt? How would your decision compare to how you actually spent your previous 2008 tax rebate stimulus check?

Source URL: Second Stimulus Check For Obama 2009 Economic Stimulus Package?

Copyright Protected © 2009 Money Blue Book: Personal Finance Blog. All Rights Reserved.

Actually, about a week ago I had already been given written notice that the check was on its way. I received one of those pointless waste of paper junk mail letters from the Internal Revenue Service (IRS) letting me know that I was entitled to an economic stimulus payment check as provided by the Economic Stimulus Act of 2008, and to expect its arrival in a week or so. The letter also provided a simple breakdown of how the federal government calculated my small time stimulus payment.

But what was the point of sending this predecessor letter out to let me know this? Why is the IRS and federal government so oblivious and wasteful when it comes to wasting millions of dollars on paper and delivery costs to send out these pointless letters? Why not just combine the calculation breakdown letter with the actual stimulus rebate check that I received yesterday rather than sending them separately on different weeks? The financial savings for the federal government could easily have been several million dollars. Especially since we are now in an economic recession and the government keeps griping and raising issues about needing to balance the budget, and even some of the presidential candidates like Barack Obama keeps talking about raising taxes against those with higher incomes to pay for more federal government programs, why not practice some fiscal sense now by adopting real cost cutting techniques? The government’s habitual wasteful spending activities truly baffles me sometimes.

How My Economic Stimulus Tax Rebate Was Calculated

While I had hoped to receive my economic stimulus rebate via direct deposit, because I filed my 2007 tax return through TurboTax and actually owed a sizable amount of taxes, I was not able to provide my bank account routing numbers on my tax return for direct deposit purposes. Thus I was one of many who had to wait for my economic stimulus check to be mailed via the postal service.

Taking a look at my rebate, here is how my actual stimulus payment was broken down, in case you’re wondering. Because my adjusted gross income on my reported 2007 federal income tax return was above $75,000, the IRS reduced my stimulus payment by 5% of the amount of my adjusted gross income exceeding $75,000. As such, with my single filing status starting qualification amount of $600 increased by $0 for my lack of qualifying children, but reduced by $230.25 for the adjusted gross income limitation, my final calculated stimulus payment turned out to be only $369.75. It’s not a whole lot, especially since the cost of living in my D.C./Maryland suburban neighborhood is pretty high, but I suppose every little bit helps me pay the bills in the grand scheme of things.

How I Plan To Spend My Economic Stimulus Check, and Its Impact On My Future 2008 Tax Return

I’m obviously elated to receive my tax rebate check finally after all these months, but after looking at the relatively small amount, it sort of leaves me wondering, how is this small amount of money really supposed to stimulate the economy to any significant degree? While the check is certainly free windfall money in the sense that I wasn’t really expecting it or planning for it until recently, the amount isn’t really large enough for it to be good for much.

I considered several financially smart as well as a few fun but reckless ways to spend my tax rebate, now that I have it in my hand. Here are the choices and possible options I came up with:

1. Use the economic stimulus payment to help pay my rent – The downside is that with a pricey monthly rental obligation of $1,425.00, this small economic stimulus payment isn’t likely to make much of a dent in my case.
2. Deposit the small stimulus rebate into my high APY savings account to earn interest and help build up my backup emergency fund – I usually try to keep at least enough liquid cash in my savings account to last 6 months. I advocate more emergency fund savings than most, but I think this offers greater peace of mind. In this recession, you never know what unfortunate events may strike when you least expect it – everything from out of the blue vehicle repair charges to sudden unemployment necessitating the need to file for unemployment insurance benefits.
3. Save the stimulus rebate for retirement and contribute the amount towards my Roth IRA retirement fund. This is a good way to plan for the future. Great for you, but not so good for the economy (at least for the present time).
4. Pay off debt – While this sounds like a logical choice, other than my usual monthly revolving credit cards bills that I always pay off in full, my 0% APR balance transfer credit card arbitrage funds, and my very low interest student loans, I don’t have significant debt that demands my immediate attention to speak of. I think I’ve done a pretty good job of managing debt.
5. Spend the money and actually help directly stimulate the economy by injecting it back into the stream of commerce – Possibilities include using it for discretionary entertainment reasons like spending it on expensive movie tickets or even just using the amount to pay for necessary driving expenses brought about by spiraling high gas prices.

After much thought, I decided to deposit the amount into my high yield savings account like a good grasshopper (or was it the ant) and save for a rainy day. Why change my frugal savings minded personality just because I came upon some windfall money? I’m the type of person who would probably still drive around in a rain storm for a free car wash to save some money as a force of habit even after winning a lottery for millions.

As for the taxation aspects of the economic stimulus payment, due to the terms and nature of the Economic Stimulus Package, recipients of the tax rebate such as myself will not have to report the amount of our stimulus payments as taxable income on our 2008 federal income tax returns. The amount is indeed free money and not something we will have to pay back or pay taxes on. Furthermore, if any recipient also received any other federal benefits or federally financed benefits, those benefits generally will not be affected by any stimulus payment received as well.

Where’s My Economic Stimulus Payment? Ask The Almighty IRS

For those of you who are still waiting for your stimulus tax rebates with bated breath, you should utilize this handy IRS stimulus rebate tool to locate the status of your economic stimulus payment. It should be able to answer your most pressing tax rebate question. To use the online tool and verify your identity, you’ll need to provide your social security number, your filing status, and the total number of your exemptions.

If you still are not able to obtain a satisfactory answer, you may want to visit your local Taxpayer Assistance Center for help or call the IRS via the Rebate Hotline at 1-866-234-2942 for updates.

Source URL: My Not-So-Stimulating Economic Stimulus Payment Has Finally Arrived

Copyright Protected © 2008 Money Blue Book: Personal Finance Blog. All Rights Reserved.

Sometimes You Make Mistakes in Life – And Taxes Are More Prone To Errors Than Anything Else

Despite knowing next to nothing about taxes, I still somehow managed to file my income tax by following the Internal Revenue Service (IRS) instructions, albeit in bumbling fashion. This was before I started using free tax preparation solutions or utilizing electronic do-it-yourself tax preparation programs like TurboTax or H&R Block’s Tax Cut (read my detailed TurboTax TaxCut review). Even though my income was low enough to file a simple 1040EZ with only one set of W-2’s, as a tax newbie, the first year’s filing experience still took hours and hours. The following year I had significant capital losses due to the dot-com stock market crash of 2001 so I had to file the regular Form 1040 return. The process took forever but somehow after many hours of filling in stock data, I successfully completed my tax filing (or so I thought at the time). Unbeknownst to me at the time, but I had forgotten to fill in my federal income tax withholding numbers for two straight years.

It wasn’t until I started law school during the third year that I decided to review my old tax forms. During that time I was enrolled in my school’s low income taxpayer clinic where I was assigned to help low income clients fill out their tax returns and represent their interests before the IRS. In the process I became more educated about taxes. One day on a hunch, I decided to take a look at my old tax returns and was stunned at what I discovered. Apparently I had been filing my taxes incorrectly for the past two out of three years. The reason none of my returns had triggered an IRS audit or unpaid tax liability investigation was because I never owed any taxes in each of those years due to my low $3,200 annual income. However, I had completely neglected to include any information about federal income tax withholding on my submissions. After crunching a few numbers, I realized I was entitled to tax refunds of approximately $340 for each of those two past years, for a total of almost $700. Almost three years had past at that point, but there was still time to correct the tax overpayment mistakes and claim my tax refund – I could file a Form 1040X Amended Federal Income Tax Return.

Tax Mistakes And Erroneous Filings Should Be Amended Upon Discovery

The IRS has a complex system of computers that will detect most simple mathematical calculation mistakes that result only in a few dollars here and there. However, more significant mistakes like the underreporting of certain Form 1099 income sources or failing to report self employment income may come back to bite you in the butt if you don’t report them eventually. The IRS will impose stiff penalties and interest on taxpayers for such tax shortfall violations. I don’t recommend trying to duck the obligation or hoping the danger will pass. If you catch the tax mistake before the IRS does, you may be able to avoid and avert a substantial amount of IRS tax penalties. Yes you may need to pay some interest for making the mistake in the first place and not paying on time, but the consequences for not catching it until much later can be disastrous. IRS unpaid tax penalties are ridiculously harsh.

Keep in mind that not all tax filing mistakes have negative consequences. Oftentimes they are detrimental only because they deprive the taxpayer of legitimate refunds due to overpayment of tax, like in the situation I described above. Sometimes for example, the taxpayer overlooked a more beneficial tax filing status such as head of household but did not realize that until later. Remember, so long as you are not engaging in illegal tax evasion, there is nothing wrong with finding legal methods of reducing your tax liability to boost your take home refund.

The Process Of Filing A 1040X Amended Return To Correct A Past Tax Return Mistake

The current time limit for filing an amendment to correct a past tax return is generally 3 years. So long as you are within 3 years of the filing date of the erroneous tax return, you may file a Form 1040X to fix it and reap whatever tax benefits offered. Of course, if that means you have to pay more in taxes, that’s part of the trade off for getting it right. You may draw some unwanted attention and scrutiny of your past tax returns, but keep in mind, the IRS is likely to catch the mistake eventually so it’s usually best to keep your returns currently and historically accurate. You never want to live your life in perpetual and continuous fear of a full blown IRS audit.

However, for those who failed to pay all of the taxes owed during the past original years filed, your time limit to amend the mistake is shortened to 2 years. From the date that you finally paid the tax, you will have only 2 years to correct the mistake, instead of the usual 3. But if your 2 year deadline arrives later than the standard 3 year deadline, you are permitted to file your 1040X at the later date.

The instructions for filing 1040X are fairly straight forward. Currently, taxpayers who want to file their 1040X Amended Returns online are out of luck since the IRS is not presently accepting 1040X Forms electronically. I’m sure they will bumble their way around to setting that option up eventually but for right now, amended 1040X filers must mail and submit them in paper form. The form itself is rather self explanatory. It does require that you locate archived copies of your past tax returns so you can transfer the original information onto the claim form. You have to list the information you originally reported, and include what your corrected numbers are. Finally you have to state brief reasons why you are now making the corrections. In my case, the reasons were simply that I made a few tax preparation errors by not including tax withholding information.

When filing your 1040X, remember to submit and file a separate 1040X Form for each year you are amending, and don’t forget to sign each one. Also, be sure to write down the year of the tax return that you wish to amend at the top of the 1040X Form. This is such a common mistake to make. After all, you don’t want to end up having to submit yet another 1040X to amend your incorrectly filed 1040X do you?

Source URL: File A Form 1040X To Correct A Past Federal Tax Return Mistake

Copyright Protected © 2008 Money Blue Book: Personal Finance Blog. All Rights Reserved.

The IRS has already stated that taxpayers who wish to receive their tax rebate payment in timely accordance with the official tax rebate payment schedule must file by April 15, 2008. Currently, the economic stimulus rebate will be issued according to the last two digits of the primary tax filer’s Social Security Number. People who chose to receive their tax refunds via direct deposit will enjoy speedy priority and will be among the first to receive the payments starting May 2 and lasting until May 16. For those of you who chose the slower paper check option, your stimulus payment check won’t get to you until the direct deposit crowd have gotten theirs. Paper checks won’t be sent out until May 16, and lasting all the way into July 11.

How Do I Request An Extension To File My Federal Income Tax Return?

If for whatever reason you cannot file your 2007 return by the due date, you may be able to get an automatic 6 month extension of time to file. The official directions to filing for a tax return extension and information about related late filing penalties are located on the IRS website. Essentially, you must file Form 4868 Application For Automatic Extension Of Time To File U.S. Income Tax Return by the tax filing due date, usually April 15. A granted extension will allow you to file your income tax return by the later date of October 15, 2008. Note that special rules may apply if you are living outside the United States, or out of the country when the filing extension expires, or if you are serving in a combat zone such as Iraq or Afghanistan. Be sure to file on time or request a proper time extension. If you don’t, the IRS will slap interest and penalties on your unpaid tax liability.

However, you must be aware that any grant of extension of time to file your return does not grant you any extension of time to pay your tax liability. This means even if you are permitted to file past April 15, 2008, you must still pay your estimated tax liability by that date. Those who owe taxes must make reasonable payment when they file the extension either by mailing a check or by making an electronic money transfer. If you don’t make payment by April 15, beware the mighty wrath of the IRS. If you do not submit payment for at least 90% of your total tax bill, factoring all prior tax withholdings, estimated payments, and additional payments, the IRS will hit you with an interest and penalty stick – and it’s a big one. You will be charged late payment interest and late payment penalties for each month the unpaid tax liability remains outstanding, up to a whopping 25% penalty of the total unpaid tax liability!

For those of you who reasonably anticipate a tax refund, you don’t have to worry about penalties, although by dragging it out you are essentially giving the IRS an interest free loan.

When Will Those Who Request An Income Tax Filing Extension Receive Their Tax Rebate Checks?

Unlike most of the usual governmental knuckle and foot dragging we usually see, the IRS is actually under substantial pressure and governmental poking to get these tax rebate direct deposits and payment checks out as soon as possible. The whole point of the rebate is to get them into the hands of Americans so we can start pumping some fast cash into our battered economy that’s already showing sickly signs of a recession (yes I think we are already in one). As such, even if you were to request a filing extension, I don’t anticipate the IRS waiting too long to send you your economic stimulus payment.

However, as tax rebate checks will only be sent beginning in May to taxpayers who timely filed their income tax returns, filing for an extension will inevitably delay your rebate payment as the IRS will not issue rebate checks for a taxpayer unless and until a 2007 federal income tax return has been filed. The IRS has indicated that people who file income tax returns after April 15 and receive a refund can expect to receive their economic stimulus payments in about two weeks after receiving their tax refunds, but not before the date they would have received their payment if the return had been processed by April 15, 2008. Despite the IRS’ somewhat ambiguity on the timetable of tax rebates for extension filers, I think taking into consideration the urgency of these rebates, those who file their tax returns as post-April 15 extensions should expect to receive their tax rebates within a month after their returns have been filed.

Remember, if you want to receive your economic stimulus rebate payment before the end of the year, you must file your tax return by the 6 month extension deadline of Oct. 15, 2008 at the very latest. If you delay and file your tax return after the extension deadline, you may need to rely on the tax rebate amendment option when you file your 2008 income tax form on April 15, 2009.

Source URL: Filing An Income Tax Return Extension Will Delay Your Tax Rebate Check

Copyright Protected © 2008 Money Blue Book: Personal Finance Blog. All Rights Reserved.

The term modified adjusted gross income is particularly important as well. It is used to determine qualification to take certain tax adjustments like the child tax credit and eligibility for certain education expense credits. Overwhelmingly though, the MAGI’s significance is most commonly associated with tax deferred investment retirement accounts (IRA’s). It is a key income factor in determining Roth IRA contribution limits and phaseouts, as well as qualification for IRA to Roth conversions. The higher the MAGI, the more the Roth IRA contribution limit is reduced and ultimately phased out. The MAGI term is often overlooked because the amount calculated in MAGI is often similar or even the same as the adjusted gross income for most ordinary tax situations.

For clarification, here are the income and deductions that comprise both the AGI and the MAGI:

1) Adjusted Gross Income (AGI) – is comprised of all gross income sources reduced by adjustment deductions. This total income amount represents the amount before you take your personal exemption, or choice of standard or itemized deductions into account. Thus standard and itemized deductions are not factored into the AGI. The adjusted gross income is also the delineating and final number on the first page of the 1040 federal tax form that separates above-the-line adjustments such as business deductions, from below-the-line itemizations such as the charitable deduction.

The following income sources added together comprise a taxpayer’s initial gross income figure:

• Salary and wage income,
• Interest income,
• Dividend income,
• Income from certain retirement accounts,
• Capital gains,
• Alimony received,
• Rental income,
• Royalty income,
• Farm income,
• Unemployment compensation.

To reach the adjusted gross income, the above total gross income amount must subtract the following deductions below:

• Deduction for contribution to an IRA,
• Health savings account deductions,
• Student loan interest deduction,
• Certain business expenses of reservists, performing artists, and fee basis government officials,
• Certain moving expenses,
• One half of self employment tax,
• Penalties on early withdrawal of savings,
• Alimony paid,
• Health insurance premiums due to self employment.

2) Modified Adjusted Gross Income (MAGI) – is basically the AGI figure, modified for various tax adjustments by excluding the items listed below. When the original AGI was calculated, certain deductions were subtracted from it. To arrive at the MAGI amount, take the AGI and add the following items back to it:

• Any deduction you claimed for a normal contribution to a Traditional IRA.
• Any deduction you claim for student loan interest or qualified tuition and related expenses.
• Any income you excluded because of the foreign earned income exclusion.
• Any exclusion or deduction you claimed for foreign housing.
• Any interest income from series EE bonds that you were able to exclude because you paid qualified higher education expenses.
• Any employer-paid adoption expense you excluded.
• Any amount claimed as domestic production activities deduction.

Tax Planning Tip For Lowering Your Modified Adjusted Gross Income (Useful for avoiding the Roth contribution limit and phaseout).

While many deductions are added back to the AGI to reach the MAGI amount, you should note that contributions made to an employer sponsored retirement plan such as a 401K is not one of them. If you anticipate reaching the annual income limit for Roth contribution phase out, you may want to seriously consider increasing your contributions to your employer’s sponsored plan. For example, in 2008 you may only make contributions to a Roth IRA if your MAGI is below $169,000 if you’re married filing jointly or below $116,000 if you’re a single filer. The amount you may contribute to a Roth starts to phase down once your MAGI reaches $159,000 as a joint filer or $101,000 as a single filer. If you anticipate reaching the phase out period and you’re on the fence, contributing some extra money into your job’s 401K plan will help reduce your overall AGI as well as your MAGI, since the contribution’s not one of the many items added back to calculate the MAGI.

Source URL: Adjusted Gross Income and Modified Adjusted Gross Income

Copyright Protected © 2008 Money Blue Book: Personal Finance Blog. All Rights Reserved.

Because of the power of compound interest, it is never too early to start saving for your future and planning your retirement nest egg. The earlier you start taking advantage of tax deferred investments, the more money you’ll have to live on when retirement rolls around. Don’t count on dying young to relieve you of the need to save either. Statistics show that improvements in medical technology and lifestyle changes, coupled with increased health awareness are extending our lives longer than before.

For the younger, single people out there, I know it can be strange discussing retirement so early on, but you must remember that your actions now have a huge impact on your future welfare. The cash you invest today in a tax deferred retirement account has a disproportionately more significant impact on your wealth level than money invested later. Don’t delay or keep putting it off – even catch up contributions won’t be much help if you wait too long to save for retirement.

When it comes to saving for retirement, there are a variety of tax deferred options such as the common employer sponsored 401K plan. But there is also the Traditional Investment Retirement Account (IRA) and the Roth IRA. Both are excellent ways to save for the future but you must be mindful of IRS rules when funding them – by being aware of the annual contribution limits, the contribution deadlines, and the applicable income phaseout ranges. I’ve created a list of helpful tables that cover the most important funding rules below. The income phaseouts listed on the charts are based on modified adjusted gross income (modified AGI or MAGI), which is derived by adding certain income factors back to the adjusted gross income. If you want further extra clarification, check out the official IRS explanation page for more information about AGI and MAGI calculation. For the majority of taxpayers, the modified adjusted gross income number will oftentimes be the same as their regular adjusted gross income.

1) Traditional IRA and Roth IRA Contribution Deadlines

With certain exceptions made for weekends, the April 15 deadline for filing your federal income tax is also the deadline for investors to make their final Traditional IRA and Roth IRA contributions for the closing tax year. For example, April 15, 2009 is the contribution deadline to make a IRA or Roth contribution towards the 2008 limit. After that date, all contribution money will go towards the 2009 tax year limit. This differs from a 401K, which has a contribution deadline that ends on December 31 of the tax year. Thus you should never miss the final deadline to contribute for the prior year. Contribution limits for the IRA and the Roth are considered by the IRS to be “used it or lose it” benefits. Those who fail to contribute the maximum allowed contribution to their IRA or Roth by the deadline, forfeit the limit for that year.

Note that even if you’ve already filed your tax return before April 15, you can still contribute to your IRA or Roth by the filing deadline, so long as you file an amended 1040X return thereafter to declare it.

2) Traditional IRA and Roth IRA Annual Contribution Limits

Qualification to contribute to an IRA or Roth account requires the contributing taxpayer to have earned income or taxable compensation, comprised of wages, salaries, fees, tips, commissions, bonuses, and taxable alimony. While the traditional IRA is available to all with no income restrictions or contribution phaseouts (not to be confused with IRA deduction limits), only the Roth reduces and limits your contribution if your income goes above certain levels. However for both the IRA and Roth, you are permitted to contribute the lesser of the normal contribution limit noted below or the entire amount of your total taxable income. You are not required to contribute the full amount but you cannot exceed the contribution limit. Those who are 50 years old or older are entitled to higher contribution limits called “catch ups” to help them expedite the pace of their investment.

Another thing to keep in mind is that for married couples, both the husband and wife may make separate contributions to their own individual retirement accounts, even if one of them is not working. This has the potential to effectively double the combined total they may contribute as a married couple.

3) Roth IRA Contribution Phase Out Due To Higher Income

Unlike the IRA which has no contribution phaseouts due to income, the amount of money that may be contributed to a Roth IRA per year is dependent on tax filing status, modified adjusted gross income, as well as age. Once the contributor reaches a certain modified AGI level, his or her maximum Roth contribution limit may be phased out or gradually eliminated in linear fashion. The phaseouts in the chart above show income ranges that span between a floor and a ceiling. Those with income below the lower floor amount may contribute the maximum amount. Those that exceed the higher ceiling are completely phased out and will not be permitted to contribute to a Roth IRA for that year. Of course, they can always still contribute to a traditional IRA.

Because the phaseout range is liner, if your income fell precisely in the middle of the income range, you would only be able to contribute 50% of the maximum Roth contribution limit shown above. Keep in mind that IRA and Roth’s share the same combined contribution limit. You may open multiple accounts, but the total contribution amount cannot exceed the limit.

4) Income Phase Out For The Traditional IRA Contribution Deduction

Traditional IRA’s, unlike the Roth, offer a unique tax benefit – contributors may be qualified to take a tax deduction on the amount they contribute. However, whether the entire amount can be deducted or only partially deducted from income depends on factors including tax filing status and income range.

An important factor that affects the phase out range is whether the contributor is already an active participant in an employer sponsored retirement plan, such as a 401K from work. For those who already participate in such a plan, their IRA contribution deductions are phased out quicker and at lower income levels than those who don’t participate in such a plan.

For married couples, if neither you nor your spouse participate in such a plan, the entire amount you are qualified to contribute towards your IRA may be deducted from income. If either of you participates in such a plan however, then deductibility depends on your tax filing status. There are two tables below – one for those covered under an employer plan, and the second one for those who are not. For those who are not personally covered by an employer plan, different rules apply if their spouses are covered (Spouse Covered) and for those whose spouses are not (Spouse Not).

For Those Who Are Covered By An Employer Sponsored Retirement Plan:

For Those Who Are NOT Covered by An Employer Sponsored Retirement Plan:

So what are you waiting for? Go open a Roth IRA right now! If you don’t qualify due to income phaseout, then at the very least you should go open a Traditional IRA.

Source URL: Traditional and Roth IRA Contribution Limits and Income Phase Outs

Copyright Protected © 2008 Money Blue Book: Personal Finance Blog. All Rights Reserved.

Individuals Can Apply For Business Credit Cards With Their Social Security Numbers

What many consumers seemingly overlook is that business credit card benefits can be available to them as well and are not reserved for complex business entities alone. Card applicants don’t have to be part of a corporation or a limited liability company (LLC) to qualify. Ordinary individuals can go into business for themselves and establish their business operation as a sole proprietorship. If you are self employed, a freelance worker, or an independent contractor like myself, you may very well be operating as a sole proprietor already. In the eyes of the Internal Revenue Service (IRS), the government, and credit card companies, the individual and his or her sole proprietorship business are one and the same for legal and income tax purposes. The only significant difference is when it comes to record keeping and business tax deductions. As sole proprietorships are entitled to write off their business expenses against their income, most are encouraged to apply for and utilize an Employer Identification Number (EIN). This federal tax ID allows the sole proprietor to more easily keep their personal and business expenses separate so that business transactions can be more properly distinguished and categorized for tax deduction purposes. Having a separate Employer Identification Number apart from the individual’s personal Social Security Number (SSN) also allows the individual to apply and obtain credit lines separate and distinct from his own personal credit history.

For ordinary consumers interested in taking advantage of the many benefits of business credit cards but aren’t interested in actually writing off any business deductions, so long as they properly pay off the balance each month, they won’t have to put up with any extraneous IRS tax filing obligations. Other than the introduction of a separate business credit line for the sole proprietorship or company applicant, the differences in usage between consumer and business credit cards are fairly minimal.

Business and Personal Credit History Scores Are Reported and Recorded Separately

While they may be taxed as income generated from the same source, the sole proprietor and his or her business entity are treated separately for credit recordation purposes. Their credit histories and credit scores are not intermingled or consolidated when it comes to reporting credit transactions to the credit reporting agencies. In fact, the way they are reported differ as well.

Business credit scores range from a scale of 0 to 100 with 75 generally regarded as an excellent credit rating (example of a business credit report). Some agencies even report their own metrics such as Dun & Bradstreet (DnB), which reports its own Paydex score regarding the likelihood of credit delinquency. There are different types of scoring methods used for personal credit scores as well, but the most popular one is the FICO score, which ranges from 300 to 850 with 700 regarded as excellent. Both business and personal scores along with their accompanying credit history attempt to reflect the individual or business entity’s credit worthiness based on past and current credit lines, credit inquiries, and history of paying back outstanding debt.

Even With An EIN, Business Credit Card Applications Usually Require SSN’s As Guarantees

A true business or corporate credit card is a line of credit that is offered solely under the name of the business entity with all activity reflecting only on its own business credit history through business credit reporting agencies like DnB, Equifax, and Experian. However, the vast majority of online business credit cards still require that the business card applicant provide a personal guarantee for business credit liability. That is why card issuers almost always still ask for both a business tax ID as well as the Social Security Number of the person applying for the card. There are ways to obtain a business credit card through local banks and major card issuers using only a EIN without the need of a SSN, but those types of cards are strictly limited to established businesses that have developed and extensive credit histories. Thus, unless your sole proprietorship has a long standing and proven credit rating with a major business credit reporting agency like DnB, you will be required to associate your SSN as a guarantee for unpaid debts.

How a business card application will impact the respective business and personal credit reports depends on the card issuer’s policy, but in the vast majority of cases, an initial and one time hard credit check is applied against the applicant’s personal credit history like any consumer credit card would for approval purposes. While the inquiry itself will show up on the personal credit report, the business credit card balance and credit line will not. This hard credit inquiry is only for the initial approval. Subsequent business credit activity will be recorded on the business’ separate credit history report solely, unless there is something like a missed payment. Because most online business credit cards are backed by the cardholder’s personal credit and linked by his or her personal SSN, in the event the business entity enters default such as by filing for bankruptcy, the default may be reported on the personal credit report. But in general, business credit activity is kept separate from the associated personal credit file. This is the case for all major business credit card issuers like Citibank, Chase, and American Express.

However, despite the association of the applicant’s SSN with the business card as a guarantor, so long as the card payments are made properly, there is no business credit balance or credit usage impact on the individual credit history report other than the initial application inquiry hit.

Applying For A Credit Card With Just A Business Tax ID, Without A Social Security Number

For various reasons, including wanting to keep a pristine personal credit history report, or fear and paranoia about identity theft, some card applicants may seek to apply for a consumer or business credit card with just a business tax ID, without having to provide a personal SSN as a liability guarantor. Unfortunately that is not possible with the majority of online credit card offers. With regular consumer credit cards, attempting to replace the SSN with an EIN on the card application will likely result in a rejection letter as well.

Source URL: Applying For A Business Credit Card With A SSN, And Without An EIN

Copyright Protected © 2008 Money Blue Book: Personal Finance Blog. All Rights Reserved.

Through his closely guarded network of online connections (he never disclosed them to me), he was able to secure excellent wholesale deals on hot electronics like laptops, desktop computers, and handheld PDA’s for sale on eBay. His racket continued for several years to my continued amazement as I wondered how he managed to stay so consistently profitable despite rising eBay fees and heavy online competition. One day I finally turned to him and asked him if he was reporting his eBay earnings as taxable income on his federal income tax. He simply smiled and changed the subject. Obviously, the answer was no, thus exposing the secret to his profitable eBay success – tax evasion!

Frankly I don’t really blame him for withholding his eBay profits from the Internal Revenue Service (IRS), although I wouldn’t have done that myself. The subject of eBay tax enforcement has been murky for years, mostly due to the lack of proper paper trails and the undeveloped legal area of online auction income. However, the IRS has been recently making moves to crack down on eBay powersellers and auction proprietors to compel the reporting of all business profits. The IRS has also set its taxation efforts on other popular online auction sites like Amazon and UBid, as well as other online hobby market networks like Etsy. I suppose it was about time the almighty IRS dealt with the issue of online auctions.

The IRS Struggles To Compel eBay Sellers To Divulge Their Taxable Earnings

When it comes to reporting their sales income to the IRS, eBay sellers currently operate on the honor system. However, this honor system has resulted in a significant shortfall of under-reported and untaxed auction earnings. Currently, eBay does not report seller stats or submit sales records to the IRS unless it is honoring a subpoena request for information. Many amateur and aspiring eBay entrepreneurs have been able to work the eBay tax loophole for some time and avoid having to pay tax on their profits. It’s a risky game of tax evasion roulette, but the lax enforcement has allowed it to persist for some time.

Recently, the federal government and the IRS has begun to put pressure on major online auction retailers like eBay to cough up user information and sales records, and has even introduced legislation to require market hubs to report personalized sales activity. Of particular taxation concern are the millions of auction sellers who consider eBay as their primary or secondary source of income but fail to accurately report their earnings. Obviously this effort is going to encounter much resistance from sellers and even the auction sites themselves since new tracking policies will undoubtedly result in higher tracking and record keeping costs. The prospect of requiring sites like eBay to track user information based on individual Social Security Number will obviously have the usual online privacy advocates up in arms.

While this taxation crackdown may bug a few eBay sellers, the requirement to report auction income and taxable business earnings is nothing new and has always been around. It’s just only until recently that the IRS finally decided to work harder at plugging up the tax gap to stem tax evasion activities. Mandating the implementation of tools to enforce tax compliance already exists in most employment sectors and the IRS believes the new frontier of online auctions should be no exception.

When Do Proceeds From An eBay Auction Sale Have To Be Reported As Taxable Income?

From the amateur seller who considers eBay to be nothing more than a hobby, to the heavy traffic Powerseller who runs his or her operation as a profit generating business, no one really wants to spent the time to report earnings as income if he or she can help it. However, the IRS instructions make it clear that all sources of income can be taxed, which includes everything from online auction profits, and income from gambling activity, to even illegal “business operations” such as drug dealing and prostitution.

Even if the eBay seller makes a few sales here and there as a hobby, the IRS requires all income to be reported – this includes wages, salaries, tips, gambling winnings, money found on the floor, sweepstakes earnings, business income, and yes, eBay earnings (both hobby and business). The hobby or business nature of your eBay income only becomes an important factor when determining whether your eBay losses and operation costs may be used to offset your eBay income as a business deduction.

The correct question to ask regarding taxability is not necessarily the frequency or dollar amount of the transactions – but rather – did the eBay auction activity result in a net profit? For those who use eBay or other internet auction sites to sell old stuff that’s been piling up in your garage, you probably don’t have to worry about paying income taxes on the proceeds since the cost (the basis) usually exceeds the selling price. Under current tax law, an individual who sells an item online and collects more money than its original purchased value is expected to report that money as income on his or her tax return. Items whose original purchase basis value cannot be determined is typically valued at $0 under current tax law. Thus, it’s advisable for all eBay sellers to get in the proper habit now of retaining their purchase and sales records. You never know when the IRS will flip the switch and go nuts with the eBay seller tax audits. It’s only a matter of time.

Why Does It Matter If Your eBay Selling Is A Hobby Or A Business?

All eBay online auction sellers have a duty to report their earnings and to comply with tax law obligations to avoid an IRS audit. For most casual eBay hobby sellers who occasionally run the online equivalent of the garage or yard sale, they usually are not obligated to report their sales. That’s because for most online garage or yard type sales, the items sold are usually personal household items purchased over the years and used. As such, the resulting selling prices are almost always lower than the original purchase basis price. The exception occurs when the item for sale has appreciated in value. Even if the transaction was intended to be a simple online yard sale, if the item being sold was something like a set of rare baseball cards that had appreciated in value in excess of the original purchase price, the resulting earnings must be reported as taxable income.

The hobby vs. business debate matters when it comes to self employment tax obligations and tax deduction benefits. If the eBay operation is properly regarded as a business, the taxpayer may be entitled to business deductions to write off operating costs. Whether the eBay seller will be treated as running a business will depend on his or her intent to generate profit. Activities such as visiting pawn shops for resale bargains like my friend used to do will likely be seen as demonstrating business intent. Furthermore, when the individual is running a business operation that results in regular profit sales, he or she may also be obligated to pay self assessed quarterly estimated tax payments through Form 1040-ES.

If you lose money pursuing a hobby, you cannot deduct your hobby loss from other income, but you can deduct your expenses up to the amount of your hobby income on your tax return. A hobby loss is a miscellaneous itemized tax deduction, and as such, only the total that exceeds 2% of the adjusted gross income may be deducted.

For more information regarding the differing IRS treatment of hobby and business related activity, check out the IRS explanation. The IRS also provides a good tax information resource for online auction sellers.

Source URL: Are eBay Sellers Required To Pay Income Tax On Sales?

Copyright Protected © 2008 Money Blue Book: Personal Finance Blog. All Rights Reserved.

I looked at the envelope more closely – the red lettering advertised the contents of the envelope as an important message from the IRS on the economics stimulus act of 2008 and implored me not to throw it away. Looks like I finally received one of those notorious notice letters that the IRS spent $42 million to issue. For $42 million you’d think the federal government would have been able to design a more conspicuously colored envelope rather than sticking with the traditional white junk mail design. If I hadn’t examined the lettering closer I may have chucked it into the trash can like I instinctively do with most spammy mail pieces I receive.

If you want to know what the letter said, I’ve transcribed the entire content message below. It was a typical boiler plate form message. They didn’t even bother to address the letter recipient by name. I’m simply referred to using the standard moniker – “Taxpayer”.

Why the federal government and the IRS chose to spend so much money to send us this information is beyond me. Is this part of the economic stimulus plan – injecting precious taxpayer money to jump start the U.S. postal service? Why else would they waste $42 million worth of stamps and envelopes to send every single taxpayer this pointless notice? None of the information provided was new and most of the facts could easily be gleaned from a simple Google search about the stimulus tax rebate or a visit to the official IRS tax rebate website.

What the federal government and the IRS needs to do is join the modern age and start issuing nation wide email and text messages rather than relying on ancient snail mail postal delivery means. The IRS already accepts free e-filing and most people already submit their tax returns electronically. It’s quick and easy. Official governmental notices being sent nationwide should accordingly adopt this electronic medium as well. Better yet, they should have used the money to help fund the Democratic Primary Re-elections in Michigan and Florida to stop the electorate disenfranchisement. That would have been a better use of governmental funds than to spend it on taxpayer junk mail.

If you didn’t receive your part of the $42 million colossal paper waste, here is what the message said. It’s applicable to everyone:

Economic Stimulus Payment Notice

Dear Taxpayer:

We are pleased to inform you that the Unites States Congress passed and President George W. Bush signed into law the Economic Stimulus Act of 2008, which provides for economic stimulus payments to be made to over 130 million American households. Under this new law, you may be entitled to a payment of up to $600 ($1,200 if filing a joint return), plus additional amounts for each qualifying child.

We are sending this notice to let you know that based on this new law the IRS will begin sending the one-time payments starting in May. To receive a payment in 2008, individuals who qualify will not have to do anything more than file a 2007 tax return. The IRS will determine eligibility, figure the amount, and send the payment. This payment should not be confused with any 2007 income tax refund that is owed to you by the federal government. Income tax refunds for 2007 will be made separately from this one-time payment.

For individuals who normally do not have to file a tax return, the new law provides for payments to individuals who have a total of $3,000 or more in earned income, Social Security benefits, and/or certain veterans’ payments. Those individuals should file a tax return for 2007 to receive a payment in 2008.

Individuals who qualify may receive as much as $600 ($1,200 if married filing jointly). Even if you pay no income tax but have a total of $3,000 or more in earned income, Social Security benefits, and/or certain veterans’ payments, you may receive a payment of $300 ($600 if married filing jointly).

In addition, individuals eligible for payments may also receive an additional amount of $300 for each child qualifying for the child tax credit.

For taxpayers with adjusted gross income (AGI) of more than $75,000 (or more than $150,000 if married filing jointly), the payment will be reduced or phased out completely.

To qualify for the payment, an individual, spouse, and any qualifying child must have a valid Social Security number. In addition, individuals cannot receive a payment if they can be claimed as a dependent of another taxpayer or they filed a 2007 Form 1040NR, 1040NR-EZ, 1040-PR, or 1040-SS.

All individuals receiving payments will receive a notice and additional information shortly before the payment is made. In the meantime, for additional information, please visit the IRS website at

www.irs.gov

Source URL: The IRS Economic Stimulus Notice Letter Is A Waste Of Taxpayer Money

Copyright Protected © 2008 Money Blue Book: Personal Finance Blog. All Rights Reserved.

- Honorable Learned Hand, U.S. Appeals Court Judge, Helvering v. Gregory, 69 F.2d 809 (1934).

The above quote is one of my favorite tax quotes from law school and one that I concur with wholeheartedly. It was a historical statement from a well known and respected former United States Appeals Court Judge regarding the minimalist extent of our obligation as citizens to pay taxes. The opinion reflects the view that we have no ethical or even patriotic duty to pay taxes beyond what has been legally assessed upon us. Thus, as the message advocates, it is within our compete given right to do everything within legal boundaries to minimize our personal tax liability exposure. If society deems the income and tax bracket disparity to be unfair or unjust, it is our duty as voters to ensure the government legislates fairly, rather than evade individual tax obligations out of protest.

Difference and Distinction Between Tax Avoidance and Tax Evasion

The practice of tax avoidance is essentially the credo of most tax attorneys and tax preparers. It is completely legal and there should be no moral or patriotic implications as it is in complete compliance with the law. Tax avoidance is simply the practice of working within the legal confines of tax law and regulations to maximize tax deductions while minimizing tax liability. In contrast, tax evasion works outside the rules by trying to duck legal obligations by hiding income through nondisclosure, or improperly taking deductions that one is not qualified for. There is a clear distinction between the two.

However, many people seem to inaccurately equate legal tax avoidance with the same type of immorality implications of those who practice tax evasion. For example, there are some who point out that wealthier people, through clever tax manipulation and deductions are able to drastically keep their tax liability very low. Even the Oracle of Omaha himself, Billionaire Warren Buffet noted that he only paid a 17.7% tax rate on his $46 million of taxable income in 2006, while his own employees paid an average 32.9% tax rate. His own receptionist reportedly paid a 30% tax rate.

This might not seem fair in my eyes or yours, but none of these moral questions obligate Warren Buffet or anyone else from having to pay more taxes than they are required to do so, as long as they fully comply with all existing tax regulations. If there was truly an injustice or immoral component or dichotomy to the current tax structure, it is the obligation of the federal government to implement a fair taxation policy, and ours as voters to ensure that the government do so.

We Should Not Confuse the Government’s Duty To Create A Fair Universal Tax System As Our Own

It’s been said that there are certain things in life that are simply inevitable, including death and taxes. Society needs taxes to function and requires an empowered government to execute the uniform exaction. Making the tax system voluntary would obviously never work because individuals would not be able to effectively enforce the collection without resorting to vigilante tactics. Thus it’s a necessity to have a strong government that can legislate and enforce tax codes, and mandate obligatory payments based on whatever sliding scale system it deems in the best interest of society. We have expressly given the government this power to legislate fair marginal tax brackets and to create an equitable system of tax deductions and tax credits to promote certain values and interests for the betterment of society.

It is not our own individual duty to draft our own federal tax returns to what we personally think will benefit the government. That duty has already been delegated away. Our responsibility as citizens is to operate in good faith within that tax framework to ensure we legally abide by the rules. If the day comes when we deem change is necessary, then our role is to change the individuals to whom we have delegated this legislative power to. However, our framed roles as taxpayers never expands beyond mere compliance.

So Long As We Abide By All Legal Tax Codes, We Are Free To Maximize Opportunities

Because our tax system is universally applied with every single income producing resident subject to it, we should not feel any moral, ethical, or patriotic duty to pay extra beyond what is demanded of us. So the next time you sit at your desk to prepare your tax return, you should not feel guilty about being able to cleverly duck certain tax obligations through legal manipulation. So long as you are fully abiding by the tax code, you are fully in the right. Our duty is to put the right people in power to make these difficult social and moral choices for the betterment of society. Once the universal tax codes have been laid in place, we are perfectly within our right to use every legal trick, tax loophole and strategy to minimize our own tax assessment to the betterment of ourselves.

As the taxpayer, we are under no obligation to provide any more to the government than we are required to. The tax code and our tax obligation is not in the nature of church tithing that we voluntarily offer out of altruistic feelings or charitable obligation. It’s a regulated and systematic way for the government to mandate fairness and to ensure equality of its citizenry. There is no tip that needs to be paid to the government. This is not a restaurant and the servers are not being paid minimum wage and dependent on our generosity. So long as we abide by legal regulations and aren’t resorting to the illegal practice of tax evasion, we are within our legal and moral right to try to reduce our own tax liability down to zero (if possible).

Thus the next time you feel guilty about being able to successfully and properly claim a whole slew of deductions, don’t be. There is nothing inherently wrong with the legal practice of tax avoidance. Thus, pay what you owe and nothing more. That’s the most responsible thing we can all do.

Source URL: The Difference Between Legal Tax Avoidance and Illegal Tax Evasion

Copyright Protected © 2008 Money Blue Book: Personal Finance Blog. All Rights Reserved.

The IRS has announced that it will begin sending more than 130 million economic stimulus tax rebate payments starting May 2, 2008. Those who chose to receive their 2007 tax refund payments via direct deposit will get priority in receiving their stimulus tax rebates. Those who chose to receive their tax refund payments via regular postal service will receive their tax rebate checks in mid May, after the initial wave of tax rebate payments have been sent to those who chose the quicker direct deposit option.

Tax Rebate Receiving Order Will be Based On Social Security Number

The order that the tax rebate checks will be sent out will be according to the last 2 digits of the Social Security Number (SSN) used when you filed your federal tax return. Please examine the stimulus payment chart below to determine when you will be receiving your tax rebate. As the IRS noted on its announcement, because the order will be based on the numerical order of Social Security Numbers rather than by name or household, there is a high possibility that neighbors, family members, and friends may not receive their tax rebate checks at the same time.

The Official Economic Stimulus Tax Rebate Payment Schedule - (for Federal Tax Returns Received and Processed by April 15, 2008):

How To Make Sure You Get Your Tax Rebate Check

If you want to get your tax rebate check sooner, you should make sure to elect the direct deposit option if you haven’t already done so. Secondly, you should make sure you file your 2007 federal tax return by the April 15, 2008 deadline. If for whatever reason your tax return is filed after April 15, you should receive your economic stimulus payment about two weeks after receiving your tax refund. For those requesting filing extensions, if you want to receive your tax rebate by the end of this year, you must file your tax return by October 15, 2008. To accommodate people whose tax returns are processed after April 15, the IRS has indicated that it will continue sending weekly payments even after the end of the above schedule.

As I indicated in my 2008 Tax Stimulus Rebate commentary article, if you are already in bankruptcy or have tax liens for delinquent or outstanding debts such as – unpaid student loans, child support, or tax obligations, all or part of your economic stimulus payment may be withheld or intercepted. The IRS has indicated that it will send a letter to the taxpayer explaining the tax rebate offset, if any.

How Much Will My Economic Stimulus Payment Check Be?

Explanations and detailed answers to your tax rebate questions can be obtained by viewing the official IRS publications and announcements on the matter. Here are some links to official IRS answers to tax rebate questions, where most of the commonly asked questions are addressed. The more complicated and issue-filled tax rebate questions relating to Chapter 7 and Chapter 13 bankruptcy filings have been winding up as comments on my tax rebate article. I will continue answering them to the best of my ability based on my legal experience and knowledge on the matter. However, while my comments may be construed as general background information, they should not be blindly followed as definitive legal advice. Remember to always perform your own due diligence and research.

Source URL: The Economic Stimulus Payment Schedule As Announced By The IRS

Copyright Protected © 2008 Money Blue Book: Personal Finance Blog. All Rights Reserved.