What Is Taxable Income

18 Jan

 

Today I will explain what is considered a taxable income. Many people are uncertain whether some types of income are taxable or not.

According to IRS:

Generally, an amount included in your income is taxable unless it is specifically exempted by law.

To put it simply: taxable income is every penny of income you have received in the past year. You can receive income in the form of money, property, or services.

Most people are aware that they must include wages, salaries, interest, dividends, tips and commissions as income on their tax returns.

However, many don’t know that they must also report other types of income.
Here are some examples:

  • Self-Employment Income – All income earned through the taxpayer’s business, as an independent contractor is self-employment income and is fully taxable. Some people are mistaken that if the income is under $600 per customer it is not taxable.
  • Childcare providers and babysitters – If you provide child care, either in the child’s home or in your home or other place of business, the pay you receive must be included in your income.  Additionally, fees received for jobs such as housecleaning and lawn cutting are taxable
  • Bartering – Bartering is an exchange of property or services. You must include in your income, at the time received, the fair market value of services you receive. For example if you are a hairdresser and provide your services in exchange for some accounting counseling done by a CPA, you must report the FMV of services received.
  • Prizes and awards -  the cash value of prizes or awards. Also, the fair market value of products won as a prize or award is also taxable.
  • Gambling winnings – are fully, and definitely taxable. It includes:  winnings from lotteries, casinos, horse races, etc. You may have to pay an estimated tax on the gambling winnings.

Image credits: 1,2,3,4,5

How To Choose A Tax Preparer

17 Jan

If you pay someone to prepare your tax return, you should choose wisely.
You as a taxpayer are legally responsible for what’s on your tax return even if it is prepared by someone else. So, it is important to choose carefully when hiring an individual or firm to prepare your return.

  • Check the preparer’s history. Check for any disciplinary actions and licensure status through the state boards of accountancy for certified public accountants; the state bar associations for attorneys; and the IRS Office of Professional Responsibility for enrolled agents.
  • Check their service fees. Avoid preparers who base their fee on a percentage of your refund or those who claim they can obtain larger refunds than other preparers.
  • Make sure the tax preparer is accessible. Make sure you will be able to contact the tax preparer after the return has been filed, even after the April due date, in case questions arise.
  • Watch for red flags. Some red flags include not asking to see your records and receipts, not asking multiple questions, a request to sign a blank tax form
  • Never sign a blank return. Avoid tax preparers that ask you to sign a blank tax form.
  • Review the entire return before signing it. Before you sign your tax return, review it and ask questions. Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.
  • Check the person’s qualifications. Ask if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics. All paid tax return preparers are required to have a Preparer Tax Identification Number
  • Make sure the preparer signs the form and includes their PTIN. Even though the preparer signs the return, you are responsible for the accuracy of every item on your return. The preparer must also give you a copy of the return.

Image credits: 1,2,3,4, 5, 6

E-file Your Tax Return

16 Jan

In my last video I talked about using VITA service to file your taxes for free. If you don’t qualify for Vita program and your income is $57,000 or less, you can take advantage of free tax preparation software and free e-filing.

It’s available only through IRS website. You can choose from 15 different companies offering free tax software including TurboTax or H&R Block. Most of these companies also prepare free state tax returns.

The free software is available starting this Tuesday so you can file your tax return as early as tomorrow.
If you made over $57,000 and are comfortable preparing your tax return you can use online forms and take advantage of secure and free e-filing.

Why should you e-file?

Here are some reasons:

  • Accuracy – using tax software can significantly reduce errors and the chance of getting a notice from the IRS. If there is a mistake on your return, the IRS can detect it and notify you in as few as 48 hours so that you can quickly fix the problem.
  • Security – e-file is the highly secure way to transmit your federal tax return to the IRS. It uses the latest encryption standards to safely and securely protect your personal data.
  •  Faster preparation – you can prepare your tax return much faster using a computer; also you don’t have to go to the post office to mail your return.
  • Fast Refunds – You get your refund in half the time, even faster with Direct Deposit. It can take as few as 8-15 days to have your refund deposited directly to your account.
  • Proof of Acceptance – You receive an electronic confirmation within 48 hours that the IRS has accepted your return for processing

Electronic filing is a fast, convenient, and accurate way to file your taxes so take advantage of this free service and enjoy your refund quicker.

For more information visit:  http://www.freefile.irs.gov

Image credits:1, 2, 3, 4,5,6

THE VOLUNTEER INCOME TAX ASSISTANCE PROGRAM

15 Jan

Tax season is just around the corner and many of you wonder where to file your taxes.

You may qualify for the IRS Volunteer Income Tax Assistance Program (VITA) or the Tax Counseling for the Elderly (TCE) Programs. Both programs offer free tax help. Trained volunteers will help you with your tax returns, in addition most sites offer free e-filing. If you take advantage of the e-file program you will receive your refunds in half the time compared to returns filed on paper – even faster when tax refunds are deposited directly into your bank account.

Who qualifies for the Volunteer Income Tax Assistance Program?

The VITA Program offers free tax help to people with low to moderate-income (generally, $50,000 and below).

The TCE Program provides free tax help to people aged 60 and older.

Items to bring to the VITA/TCE site to have your tax return prepared:
•    Proof of identification
•    Social Security Cards for you, your spouse and dependents
•    Birth dates for you, your spouse and dependents on the tax return
•    Wage and earning statement(s) Form W-2, W-2G, 1099-R, from all employers
•    Interest and dividend statements from banks (Forms 1099)
•    Proof of bank account routing numbers and account numbers for Direct Deposit, such as a blank check

If you file taxes electronically on a married-filing-joint tax return, both spouses must be present to sign the required form.

To locate the nearest VITA site, call 1-800-906-9887.

If you leave in Reno area you can visit Community Services Agency website http://www.csareno.org  where you can see their schedule.

Call 786-6023 to schedule an appointment for tax preparation.

Image credit

Standard vs. Itemized Deductions

13 Jan

Today I’d like to write about the difference between standard and itemized deductions since it seems to be a confusing subject for many people.

You can get a deduction from taxable income for certain personal expenses or you can claim a standard deduction.

For 2011, the standard deduction is $5,800 for single individuals, $11,600 for a married couple.

Itemized deductions are subtractions from your adjusted gross income (AGI) that reduce the amount of income that is taxed. Adjustments to your gross income (all income received in a given year) are made for alimony paid, contributions to many types of retirement or health savings plans, certain student loan interest, half of self employment tax, and a few other items.

If you choose to itemize your deductions, you can deduct the following expenses:

Medical and dental expenses – you can only deduct the amount that exceeds 7.5 percent of your AGI. Qualified medical and dental expenses are expenses that you paid for yourself, your spouse, and dependents.

State, local, and foreign taxes

Interest payments

Donations to charities – you are able to deduct all donations like: cash, clothes or furniture. Clothes and household goods must be in good condition to get the deduction. Make sure you keep the receipt!

Not all organizations qualify for deductible contributions. You cannot deduct donations given to:

  •     Chamber of Commerce
  •     Political organizations and candidates
  •     Social clubs
  •     Homeowners’ associations

Also, you can deduct 14 cents per each mile you drove your car for charity in 2011 .

Some miscellaneous expenses – include the payments you made to:

  •       Produce or collect income
  •       Manage, conserve, or maintain property held for producing income
  •       Determine, contest, pay, or claim a refund of any tax

For some miscellaneous deductions, only the portion that exceeds 2 percent of the taxpayer’s AGI can be deducted. Other miscellaneous deductions are deductible regardless of AGI.

You should itemize your deductions if itemizing results in a lower tax than taking the standard deduction.

 

Credit image

Estate Tax in the United States

11 Jan

According to IRS, the estate tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in. The estate tax is based on the fair market value of your assets on the date of death.

Since the 1990s, opponents of the tax have used the derogatory term “death tax”.

If the value of your estate didn’t exceed $3.5 million in 2009, or $5 million in 2010, 2011 and 2012 tax years, then all the inherited assets will pass to your heirs free from  federal estate taxes. The estate tax, have been indexed for inflation for the 2012 tax year such that it will be adjusted to $5.12 million beginning on January 1, 2012.

The $5 million estate tax exemption and 35% estate tax rate are only scheduled to be in effect until December 31, 2012.  On January 1, 2013 the federal tax exemption will be decreased to $1 million and the estate tax rate will increase up to 55%!

What can you do to reduce your potential estate tax?

You can give money away during your lifetime or leave certain amounts to your heirs that are exempt from taxation. In 2011 and 2012 you can give $13,000 to as many people as you want, or you can make the following unlimited donations without triggering the gift tax:

-    Gifts to charity
-    Gifts to a spouse
-    Gifts to a political organization
-    Gifts of educational expenses (must be made directly to the educational institution for tuition only).
-    Gifts of medical expenses (must be  paid directly to the medical facility)

In addition to the federal government, many states also impose an estate tax, called either an estate tax or an inheritance tax.

Image credit

Home Office Deduction

10 Jan

If you work out of your home you may be able to claim a deduction for “business use of your home“ expenses. If you meet the specific requirements, you can deduct a percentage of various costs such as utilities, rent, insurance, depreciation, mortgage interest, real estate taxes, and repairs. You can also deduct expenses for improvements of your home office.

You must meet the following requirements to qualify for the home office deduction:

  • Part of your house must be used as a principal place of business.

You must meet your clients at home, or use a separate structure on your property exclusively for business purposes. You cannot take a deduction if you use your home for a profit-seeking activity that is not a  business.

  • You must regularly use part of your home exclusively for business.

You must regularly use a room or other separately identifiable area of your home only for your business. You do not meet this requirement if you use the area for both business and personal purposes.

Even if you meet all the requirements, your deduction may be limited. You can deduct your income expenses only to the extent of gross business income, reduced by business expenses unrelated to the home. Any expenses that exceed that amount may be carried forward.

If you don’t meet the home office deduction requirements you can still deduct some business expenses that you incur at home such as a business telephone line, office supplies, equipment, etc.

 

Image credit

 

Follow

Get every new post delivered to your Inbox.

%d bloggers like this: