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You may be expecting a windfall back from the IRS. Or, most likely, you're one of the "lucky ones" and you OWE money.
Between the latest tax law changes AND the fact that the typical tax preparer often overlooks items that could be extremely beneficial to your return, it's a war out there!! We're here to help you win that war and avoid those costly mistakes!
Your "Professionally-Prepared" Tax Return May Be Costing You Money!
Here's some alarming news: In a recent study by the Government Accountability Office (GAO), there were errors in 100% of the tax returns they studied. 100%! Not only that, but only TWO of the completed returns actually tallied up the right amount (whether it was a refund or money owed).
In five cases, returns showed overblown refunds of nearly $2,000 each. THAT kind of mistake may mean penalties… for your tax preparer AND you.
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For more than 20 years, Ken and Daria Dolan have given the "Straight Talk" on how you and your loved ones can live money-smart, debt-free and cash-rich.
Here is a small sampling of where you may have seen them on TV:In two other cases, the taxpayers "owed" $1,500… when, in fact, they should have owed NOTHING! If that were you, that would be money out of YOUR pocket!
Keep in mind — these were returns prepared by outside commercial tax preparers and, granted, the study sample was small… BUT that's certainly enough to give us pause when it comes to the precautions we all need to take when filing our returns.
Bottom line: Be proactive. Don't count on the "professionals" to know and do it all. Know the latest tax laws. Also know your rights as a taxpayer and always, ALWAYS, be ready for an audit.
This report will help you do all that… to prepare you (and your returns) for this coming April 15th and beyond. Starting with…
9 New Tax Laws That Could Benefit
You and Yours
You know the folks in Washington — they can't leave well enough alone! Actually, by law, inflation dictates how much tax provisions need to be adjusted each year. The poor inflation numbers in recent months may mean good news for us taxpayers. Some of the latest tax changes could actually help alleviate our tax burden when all is said and done… that is, IF we make sure they're applied to our 2007 returns! Here, in a nutshell, is a quick breakdown of the tax changes you don't want to miss:
PMI deduction. This is an excellent one because for years, homeowners who bought a home with less than a 20% down payment had to not only purchase private mortgage insurance (PMI) to protect the lender against default — they also had zero tax benefits for those payments (which could
add up to hundreds, and even thousands, of dollars
over the course of just a few years)! Starting with
any new mortgages from January 1, 2007, you can
deduct this PMI expense along with your usual
mortgage interest from your income tax. Recently, legislation was passed so this will apply for any new mortgages through 2010. However, your family income needs to be less than $100,000 per year — if it's higher, your mortgage insurance won't be 100% tax deductible. For each $1,000 of annual household income earned in a year, the deduction is reduced by 10%. Once a family's income is over $109,000, the PMI deduction will not apply.
Higher personal exemptions. The value of each personal and dependency exemption is $3,400 for 2007 — up $100 from 2006.
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Tax bracket thresholds increase for each filing status in 2007? For example, for a married couple filing a joint return, the taxable-income threshold separating the 15% bracket from the 25% bracket is $63,700 — up from $61,300 in 2006. |  |
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Standard deduction increase. The standard deduction for married couples filing a joint return is up $400 to $10,700. For singles and married individuals filing separately, the deduction is now $5,350 — up $200. (For heads of household, it's $7,850, or up $300.)
Higher income limits for deductible IRAs and Roth IRAs. You can now take a full IRA deduction if you're covered by a retirement plan at work if your modified adjusted gross income is less than $83,000 (married, filing jointly) or $52,000 (single or head of household). You can also take a partial deduction up to $103,000 for married filing jointly or $72,000 for singles and heads of households.
To find out if you're eligible to contribute to a deductible IRA (and how much you may contribute), plug your income, work status and age into this speedy online tool here: IRA Calculator.
Tax relief due to foreclosures. There were certainly no shortages of foreclosures in 2007, and it looks like we'll be seeing the same kind of troubles this year and into 2009.
The positive news (if you can really call it that) applies to any foreclosures in 2007, 2008 and 2009. That is, any forgiven debt during those years in connection with a foreclosure, short sale or loan restructuring will not be treated as income, as it has in years past. There are a few restrictions, however:
This relief applies only to principal residences and not vacation home or investment property. (In most of those latter cases, the amount of debt canceled is considered taxable income.)
The tax basis of the home is reduced by the amount of canceled debt excluded from income.
Increased Section 179 expense deduction. If you own your own business that requires that you
to purchase heavy equipment, this deduction
allows you to elect to deduct all or part of the
cost of certain qualifying property in the year
you place it in service. And thanks to a new
law, the maximum amount of equipment that
businesses can expand increases to
$125,000 — a whopping $17,000 increase
from 2006.
The qualifying property must have been placed
in service in 2007 and includes only
depreciable and tangible personal property
such as trucks, machinery and computers. Real property, such as buildings and their structural components, does not qualify. Also excluded from the deduction are land and improvements made directly to the land.
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Tax-free parking for employees. If you're employed and your employer pays for your parking, you now have up to $215 a month in non-taxable employer-paid parking. That's up $10 per month from 2006 and can save you over $2,500 in taxable income. Also, the cap on tax-free transit passes that employers can give went up to $110 a month. That's another $1,200 per year savings.
Increased contribution limit for 401(k) plans. You can now contribute $15,500 to your 401(k) and other similar workplace retirement plans. This is up from $15,000 in 2006. By the way, if you're 50 or older, the limit rises to $20,500 — also a $500 increase.
Bigger health care deductions. If you have a health savings account (HSA), the maximum HSA deduction increases to $2,850 for singles or $5,650 for family coverage. That's up $185 and $200, respectively. And those ages 55 or older can add $800 on top of that.
Interested to see how you can apply some of these updated deductions and contributions to your 2007 return? Try our quick and easy-to-use Federal Income Tax Estimator and plug in your estimated total for itemized deductions and exemptions… and let the calculator do the rest. Check it out here.
And if you're not quite sure whether you should itemize or take the standard deduction, we also have a calculator to help you figure out which way is best depending on your own unique situation. Click here to try this calculator.
So that's the good news for this year. However, EVERY year millions of people still overpay their taxes. And that's mainly because they've missed at least ONE of the following…
Don't Overlook These 6 Important Deductions!
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The IRS TAXPAYER ADVOCATE SERVICE has won high marks from tax pros for its independence and willingness to help taxpayers? Try it if you have had no luck going through regular channels. Go to www.irs.gov/advocate/ to learn more about this service. |
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1. State taxes from last year. If you owed state tax in 2006 and paid it when you filed last April, then don't forget to include that amount with your state tax deduction on your 2007 return, along with state income taxes withheld from your paychecks.
2. Moving expenses for a new job. If you moved last year to take a new job, you may qualify to deduct some of your moving costs. But keep in mind the new job site must be at least 50 miles farther from your former home. Also, you must be employed full-time for at least 39 of the 52 weeks following the move OR you must be self-employed full-time for both 39 of the 52 weeks and 78 of the 104 weeks immediately following the move. If you meet these criteria, you can deduct the following:
- Travel costs for you and your family and
- Actual moving costs for your furniture and household goods
Parking fees and tolls are tax-deductible, as are actual car expenses such as gas and oil. (If you keep accurate records, you can itemize; if not, just take 19 cents a mile for your deduction instead.)
3. Reinvested dividends. Trust us, a LOT of people miss this one. If you choose to automatically reinvest mutual fund dividends into extra shares, don't forget that each reinvestment changes your tax basis in that fund. The good news here is that it reduces your taxable capital gain (or, to spin it another way, increases the loss) when you redeem shares. If you forget to include the reinvested dividends to your tax basis, you're overpaying your tax!4. Out-of-pocket charitable contributions. Yes, a lot of people miss some of the smaller contributions they make throughout the year. Remember you can, and should, write off the "little things" that do so much good. For example, if you send out a couple of fund-raising letters every now and then for your child's school, and the postage comes out of your pocket, that's a write-off! These types of contributions DO add up, so keep accurate records and don't miss any legitimate deductions.
5. Student loan interest for your child. That's right — it used to be that neither parents nor kids benefitted from the interest paid on a student loan. Now, however, if you pay back your child's student loan, the IRS sees that as though you gave the money to your child who then paid the debt. So your child can actually deduct up to $2,500 of student loan interest paid by you!
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6. Jury pay. If your employer pays your full salary while you're on jury duty, then they usually ask for you to turn your jury fees in to them. However, you are required to report those fees as income, but you do have the right to deduct that amount (but many don't). The IRS has just made it easier by including a line dedicated to this deduction.
Look at it this way — if you're missing any of the above listed deductions, you're losing money when you don't have to. BUT if, on the other hand, you make sure to account for EVERY single dollar and deduction you're qualified for, you've essentially beaten the IRS!
Want more? We've got 'em — check out our Frequently Overlooked Deductions article by clicking here.
OK, that should cover you for this year; but we're sure you must be asking…
"So, Ken and Daria, What's Up for Tax Year 2008?"
More changes, of course! (some surprisingly good ones.) While you won't realize the benefits from these changes until you file your returns early in 2009, it helps to know about them now so that you can keep proper records and make the smartest decisions for your money.
Here are 10 of the most important tax changes you should know about for 2008:
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1. The so-called "kiddie tax": This taxes the investment income of children at the tax rate of their parents. It now applies to both children younger than 19 (that's good; it was 18) and to full-time students under age 24 who do not provide more than 50% of their own support. Both age groups may receive up to $1,800 of investment income in 2008 and pay tax on that amount at their own lower tax rate.
2. Standard Deductions: These increase to: $8,000 for Head of Household; $10,900 for Married filing Joint/Qualified Widower; and $5,450 for Single/Married Filing Separate. The additional amount for blindness and age is $1,050 (married) and $1,350 (single). For dependents claimed on another's return, the standard deduction is the greater of $900 or $300 plus earned income, not to exceed the filing status standard deduction of the dependent.
3. The Earned Income Credit: Phase-out limits have increased for 2008 as well as the available tax credit amounts. The maximum investment income you can have and still receive this credit has increased to $2,950.
4. U.S. Savings Bonds: For taxpayers who receive income from qualified U.S. Savings Bonds used for qualified education expenses, the phase-out income limits have been increased: Married filing jointly or qualifying widow(er): $100,650–$130,650; married filing separately: deduction not allowed; all other filing statuses: $67,100–$82,100.
5. The Adoption Credit: The amount available for special needs adoptions and all other expenses increases to $11,650. The phase-out income limits for this credit are also increased. For 2008, the credit will be phased out for incomes between $174,730 and $214,730.
6. Keogh and SEPs: The maximum contribution to Keogh and SEPs (Simplified Employee Plan) increases to $46,000.
7. IRAs: The phase-out limits for contributions to Traditional and Roth IRAs have increased to $5,000 from $4,000, with an extra $1000 allowed for taxpayers 50 and older. Phase-out levels are married/filing jointly with AGI (adjusted gross income) of $159,000 and $101,000 for single filers.
8. 401(k) Plans: The maximum contribution to a 401(k) plan in 2008 is $15,500 if you are younger than 50; $20,500 if you are 50 or older.
9. Standard mileage rates have increased to 50.5 cents for business miles, decreased to 20 cents for medical and moving miles. Charitable mileage rate remains 14 cents/mile.
10. Earnings and Social Security: The amount of money you may earn before you Social Security benefits are affected has changed:
a. For people attaining NRA or normal retirement age (as defined by the folks at Social Security; click here to find your NRA) in 2008, the annual exempt amount is $36,120. This higher exempt amount applies only to earnings made in months prior to the month of NRA attainment.
b. For people attaining NRA after 2008, the annual exempt amount in 2008 is $13,560.
When earnings exceed exempt amounts, Social Security withholds $1 in benefits for every $2 of earnings in excess of the lower exempt amount. It withholds $1 in benefits for every $3 of earnings in excess of the higher exempt amount.
Here's another tip to keep in mind for 2008: Consider adjusting the number of allowances you claim on your W-4 form. If you typically OWE money every year, a painless adjustment here could make a world of difference. Get the details on how to do it (it's quick and easy) by clicking here.
Then find out what kind of surplus or shortfall you can expect if you DO make those adjustments — you can figure that out quickly with this handy calculator.
Every little bit helps, so be sure to take advantage of every tax break you're allowed. We recommend you discuss these and other upcoming changes, and how they affect YOU, with your tax advisor.
Speaking of tax advice, be sure to ask your tax advisor how you stay clear of audits. In the meantime, we offer up some guidance here…
Warning: Don't Over-Withhold!If you PURPOSELY withhold more allowances than you need to… JUST so you can get a big fat refund in April… here's a word for you: STOP! Nothing gets our goat more than over-withholding! The interest that you could have earned on that money — had it actually been in YOUR paycheck — goes into Uncle Sam's pocket! That's money you could have banked, invested or just had some fun with! Be smart… and claim everything to which you are entitled. In a perfect world, you want neither a refund NOR a tax bill at the end of the year! |
3 Ways to Audit-Proof Your Tax Return
You can "audit-proof" your tax return against red-flag tax deductions such as home-office expenses, medical expenses, charitable contributions, travel and entertainment expenses, business use of your car, and business losses. How? By using our three-step audit-proof plan:
STEP 1: Keep a log.
STEP 2: Create an affidavit.
STEP 3: File a disclosure statement.
Here's how you can use these three steps if, for example, you're claiming a deduction for home office expenses:
STEP 1: Keep a log. Use a spiral notebook as a log book. Keep the log book in your home office and log yourself in and out each time you work there. It shouldn't take you more than one minute each time. Merely write the date, the time you entered your office, briefly mention the work you did and the time you finished. Make your log as readable and consistent as possible.
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Not surprisingly, the IRS makes a lot of money every year nit-picking deductions. In fact, the average face-to-face audit nets the agency $9,000 over and above what you already paid in taxes. And when you add penalties and interest, that amount nearly doubles. So, we don't expect the IRS to give up on audits, especially since Washington is trying to increase revenue (and the Government Accounting Office has given the IRS a slap on the wrist for not performing enough audits). | |
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STEP 2: Turn your log into an affidavit. An affidavit is nothing more than a sworn statement that validates your activities and shows that you created your log contemporaneously (that is, at the
time of performing the actions). To turn your log into an affidavit, take your log once a month to a notary public (most banks have one) and have it stamped and signed. Keep the logs in your permanent tax records.
Now you've made it just about impossible for the IRS to come back and accuse you of having dashed off a defense of your deduction just prior to filing your taxes, or after receiving an audit notice.
Smart Money Move: To bring your log up-to-date for this year, have your appointment calendar notarized. The IRS considers an appointment calendar to be evidence of the work you've done at home. Having your appointment book notarized gives you an extra layer of protection.
STEP 3: Fill out Form 8275, the IRS Disclosure Statement. Call the IRS at 800/TAX-FORM and ask them to send you Form 8275 or go to IRS.gov. On this statement, you let the IRS know that you have supporting documents for any potentially controversial claim that appears on your tax form. You fully disclose the facts and present evidence showing you have a reasonable basis for making the claim. This way, even if your claim turns out to be erroneous, you don't get hit with penalties.
By filing Form 8275, you might outmaneuver the IRS. The IRS is more likely to pick a fight with the guy who doesn't tell them that he's got enough ammo to blow their claim out of the water!
That's our three-step plan for audit-proofing your tax return. No plan is 100% foolproof, but this one's darn close. Finally, remember to double-check your address, Social Security number, birth date and all of the numbers on your W-2 or 1099 before you mail out your tax returns. An innocent error on these items can also trigger an audit.
But If You DO Get Audited…
Remember your rights:
- Just say NO! You can say no to any decision the IRS makes. And when you do say no, you often get the IRS to offer you a better deal.
- You don't have to pay penalties if you simply made a mistake. Penalties are only due if you tried to beat the system. When you act in good faith and based upon a reasonable cause for your actions, penalties do not apply.
- The IRS can't force you to sit down face to face. You have the right to conduct your audit through the mail.
- You have the right to challenge any IRS notice without retribution.
- You have the right to pay your debt in installments. If you agree you owe more taxes and don't have the money to pay, the IRS must work out a payment schedule with you. You can use IRS Form 9465, Installment Agreement Request, to start the process.
For more details on your rights and how you can reclaim your upper hand, read Your Rights as a Taxpayer here.
We also recommend a book by our good friend, Dan Pilla, who helped us with this report. It's called "IRS, Taxes and the Beast," and is a terrific step-by-step audit defense guide.
What to Do at an Audit InterviewRule #1: When you go to an audit interview, bring only the specific supporting documents that were requested. Don't bring all your supporting tax documents or the IRS may find "other" areas they want to audit. Rule #2: At the audit interview, don't volunteer any information. Keep your answers to questions short and sweet. If the auditor asks for supporting documents, clarify what he or she wants by asking, "What specific items would you like to see?" Rule #3: Get it in writing. Once you finish your meeting with the auditor, ask him or her to specify exactly what adjustments will be made to your return. If you disagree, ask for more time to present additional supporting documents. |
Let's Save… and MAKE… More Money This Year!
We've certainly covered a lot of ground to help you tackle your tax return this year! We hope you now feel like you have the guidance you need to take control of your taxes — and beat the IRS at its own game.
It's still a good idea to seek the advice of a COMPETENT (we can't stress that word enough) tax advisor, especially if your tax situation is complicated. As we stated in the beginning, if you're planning on hiring an outside preparer, do your homework and make sure your return is airtight. When in doubt, don't forget to ask questions and demand explanations. It's your right!
If there's one thing we've learned in our decades of helping people with their money, it's that the best advice of all is to get involved and stay involved. Nobody looks out for your money the way you do.
And it's our mission to help you with all of your money matters…. so please, PLEASE do yourself a favor and visit our web site at Dolans.com. this Special Report is just one small sample of the advice you now have at your fingertips on www.Dolans.com.
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Discover Dolans.com…
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1. Just check out all the "centers" you can go:Here are a few articles you just can't miss:
Slice $300 Off Your Mortgage
Retirement Planning for Baby Boomers
Slash Your Health Care Costs
Vital Information You Must Have About Your Parents' Finances
Choosing an Executor
There's so much more there for you as well. Insurance… credit cards… saving money… getting out of debt… buying a car… paying for college… helping aging parents…. You'll find advice on virtually every money matter you can think of — do a quick search and see for yourself!
PLUS, you'll find hundreds of easy-to-use calculators, our video library, our very latest audio updates and much more. Just click here to check out Dolans.com for yourself.
Finally, we want to welcome you to the Dolans.com family! For more than 40 years, we've been helping people like you with real-life solutions to your most pressing money concerns — concerns that we've also experienced in our lives.
Anytime you have a question, just point and click, and we will be there to help! Not with just "information"…or stuff that's "nice to know." And not all the general — and frankly, not very helpful — "stuff" you'll find on many websites.
Just specific, relevant, timely and actionable information… to help you save more, make more, and live a richer, debt-free life!
We promise to bring you straight talk. No confusing mumbo-jumbo, no company propaganda, no sugar-coated fluff. We'll give you the timely advice, inside tips, techniques and more than a few "secrets" that will help you make smarter, more confident, successful money decisions every day.
We're thrilled you are part of the Dolans.com family! We look forward to getting to know you better, helping you however we can. And anyone who knows us will tell you we promise to have lots of fun doing it!
P.S. You have tons more tax information at your fingertips — don't miss one piece of valuable advice. (It could cost you a boatload of dough.) Visit the Tax Center at Dolans.com now.
