All About TAX

Are You Eligible For Any Of These Tax Credits?

Taxpayers should consider claiming tax credits for which they might be eligible when completing their federal income tax returns, advises the IRS. A tax credit is a dollar-for-dollar reduction of taxes owed. Some credits are refundable � taxes could be reduced to the point that a taxpayer would receive a refund rather than owing any taxes.

Earned Income Tax Credit
This is a refundable credit for low-income working individuals and families. Income and family size determine the amount of the EITC. When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit.

Child Tax Credit
This credit is for people who have a qualifying child. The maximum amount of the credit is $1,000 for each qualifying child. This credit can be claimed in addition to the credit for child and dependent care expenses.

Child and Dependent Care Credit
This is for expenses paid for the care of children under age 13, or for a disabled spouse or dependent, to enable the taxpayer to work. There is a limit to the amount of qualifying expenses. The credit is a percentage of those qualifying expenses.

Adoption Credit
Adoptive parents can take a tax credit of up to $10,390 for qualifying expenses paid to adopt an eligible child. A credit of up to $10,390 may be allowed for the adoption of a child with special needs even if you do not have any qualifying expenses.

Credit for the Elderly and Disabled
This credit is available to individuals who are either age 65 or older or are under age 65 and retired on permanent and total disability, and who are citizens or residents. There are income limitations.

Education Credits
There are two credits available, the Hope Credit and the Lifetime Learning Credit, for people who pay higher education costs. The Hope Credit is for the payment of the first two years of tuition and related expenses for an eligible student for whom the taxpayer claims an exemption on the tax return.

Retirement Savings Contribution Credit
Eligible individuals may be able to claim a credit for a percentage of their qualified retirement savings contributions, such as contributions to a traditional or Roth IRA or salary reduction contributions to a SEP or SIMPLE plan. To be eligible, you must be at least age 18 at the end of the year and not a student or an individual for whom someone else claims a personal exemption.

7 Ways to Avoid Problems at Tax Time

1. Don't Procrastinate. Resist the temptation to put off your taxes until the last minute. Your haste to meet the filing deadline may cause you to overlook potential sources of tax savings and will likely increase your risk of making an error.

2. Organize Your Tax Records. Tax preparation time can be significantly reduced if you develop a system for organizing your records and receipts. Start with the income, deduction or tax credit items that were on last year�s return.

3. File Your Return Electronically. About 61 million taxpayers filed their returns electronically in 2004. Aside from ease of filing, IRS e-file is the fastest and most accurate way to file a tax return. If you�re due a refund, the waiting time for e-filers is half that of paper filers.

4. Double-Check Your Math and Data Entries. Review your return for possible math errors and make sure you have provided the names and correct (and legibly written) Social Security or other identification numbers for yourself, your spouse and your dependents.

5. Have Your Refund Deposited Directly to Your Bank Account. Another way to speed up your refund and reduce the chance of theft is to have the amount deposited directly to your bank account. Check the tax instructions for details on entering the routing and account numbers on your tax return. Make sure the numbers you enter are correct. Wrong numbers can cause your refund to be misdirected or delayed.

6. Don't Panic if You Can't Pay. If you can�t immediately pay the taxes you owe, consider some stress-reducing alternatives. You can apply for an IRS installment agreement, suggesting your own monthly payment amount and due date, and getting a reduced late payment penalty rate. You also have various options for charging your balance on a credit card, either as part of an electronic return or directly through a processing agent, either by phone or online.

Note that if you file your tax return or a request for a filing extension on time, even if you can�t pay, you avoid potential late filing penalties.

7. Request an Extension of Time to File � But Pay on Time. If the clock runs out, you can get an automatic four-month extension of time to file, to Aug. 15.
Note that the extension itself does not give you more time to pay any taxes due. You will owe interest on any amount not paid by the April deadline, plus a late payment penalty if you have not paid at least 90 percent of your total tax by that date.

Tax Tips for Last-Minute Filers

1. Put all required Social Security numbers on the return (they're not on the label)

2.Double-check your tax

3. Sign your form tax

4. Attach all required schedules

5. Send your return or request a filing extension by April 15 The numbers to check most carefully on the tax return are the identification numbers � usually Social Security numbers � for each person listed. This includes the taxpayer, spouse, dependents and persons listed in relation to claims for the Child Care or Earned Income Tax Credits. Missing, incorrect or illegible SSNs can delay or reduce a tax refund.

Taxpayers should also check that they have correctly figured the refund or balance due and have used the right figure from the tax table.

Taxpayers must sign and date their returns. Both spouses must sign a joint return, even if only one had income. Anyone who is paid to prepare a return must also sign it.

The only attachments that should be at the front of the tax return are:

1. Form W-2, Wage and Tax Statement,
2. Form W-2G, Certain Gambling Winnings,
3. Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc.,
4. Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains, or
5. Form 9465, Installment Agreement Request.
All other required forms and schedules should be behind the Form 1040 or 1040A, in the attachment sequence order listed in the upper right of each page.

Individuals expecting a refund should consider direct deposit of the refund to their bank account. Choosing direct deposit is the best way to guard against a misplaced or stolen refund. A few words of caution � some financial institutions do not allow a joint refund to be deposited into an individual account. Check with your bank or other financial institution to make sure your direct deposit will be accepted. Also make sure you enter the correct nine-digit routing number for your financial institution and your correct account number when selecting direct deposit. Wrong numbers can cause your refund to be misdirected or delayed.

Persons sending a payment should make the check out to "United States Treasury� and enclose it with the tax return. The check should not be attached to the tax return or the Form 1040-V payment voucher, if used. The check should include the taxpayer�s Social Security number, daytime phone number, the tax year and the type of form filed.

Common Errors to Avoid

The IRS recommends reviewing your entire tax return to be sure it is accurate and complete. Even a simple mistake can cause problems which might lead to delays in processing your return and receiving your refund.

Want to avoid frequent trouble spots? Check these areas which can reduce problems:

1. Use the peel-off label. You may line through and make necessary corrections right on the label. Be sure to fill in your Social Security number in the box provided on the return. It is not on the label.

2. If you do not have a peel-off label, fill in all requested information clearly, including the Social Security numbers.

3. Check only one filing status on the tax return and check the appropriate exemption boxes. Make sure the writing is legible. Enter the correct Social Security number for each exemption. Incorrect or missing numbers will delay tax return processing.

4. Use the correct Tax Table column for your filing status.

5. Double check all figures on the return. Math errors are common mistakes.

6. Make sure that the financial institution routing and account numbers you have entered for a direct deposit of your refund are accurate. Incorrect numbers can cause a delayed or misdirected refund.

7. Sign and date the return. If filing a joint return, both spouses must sign and date the return.

8. Attach all Forms W-2, Wage and Tax Statement, and other forms that reflect tax withheld to the front of the return. If you are also filing a Form 9465, Installment Agreement Request, attach that to the front of the tax return. Attach all other necessary forms and schedules in the attachment sequence order listed in the upper right corner of each form or schedule.

Deductible Taxes

Did you know that you may be able to deduct certain taxes on your federal income tax return? Deductions decrease the amount of income subject to taxation. There are four types of deductible non-business taxes:

1. State, local and local income taxes
2. Real estate taxes
3. Personal property taxes
4. Foreign income taxes.
People will have a chance of claiming a state and local tax deduction for either income or sales taxes on their returns.

You can deduct any estimated taxes paid to state or local governments and any prior year's state or local income tax as long as they were paid during the tax year. If deducting sales taxes instead, you may deduct actual expenses or use optional tables provided by the IRS to determine your deduction amount, relieving you of the need to save receipts. Sales taxes paid on motor vehicles and boats may be added to the table amount, but only up to the mount paid to the general sales tax rate.

Taxpayers will check a box on Schedule A, Itemized Deductions, to indicate whether their deduction is for income or sales tax

Deductible real estate taxes are usually any state, local, or foreign taxes on real property. If a portion of your monthly mortgage payment goes into an escrow account and your lender periodically pays your real estate taxes to local governments out of this account, you can deduct only the amount actually paid during the year to the taxing authorities. Your lender will normally send you a Form 1098, Mortgage Interest Statement, at the end of the tax year with this information.

Personal property taxes are deductible when they are based on the value of personal property, such as a boat or car. To be deductible, the tax must be charged to you on a yearly basis, even if it is collected more than once a year or less than once a year.

Generally, you can take either a deduction or a tax credit for foreign income taxes but not for taxes paid on income that is excluded for U. S. tax.

10 Common Tax Return Problems

1. Social security number incorrect or missing or don�t match name.
2. Required documentation (W-2s, etc.) not attached.
3. Return not signed.
4. Filing status incorrect.
5. Math errors.
6. Incorrect or missing forms and schedules.
7. Standard deduction used when itemizing is more advantageous.
8. Social Security taxable benefits worksheet not completed.
9. Failing to claim credits (child tax credit, earned income credit, etc.) or figuring credits incorrectly.
10. Omitting income items.

Before you send your tax file, make sure to avoid the above mistakes!

Tips for working students

All employees have income tax withheld from their pay, right? Not necessarily. You may be exempt from withholding if:

You can be claimed as a dependent (usually on a parent's return),
Your total 2005 income will not be over $5,000,
Your unearned income (interest, dividends, etc.) will not exceed $250, and
You had no income tax liability for 2004.
You'll still have to pay Social Security and Medicare taxes, but skipping unnecessary income tax withholding will put more money in your pocket now. Read Form W-4 carefully before filling it out for your employer.

If customers tip you, those tips are taxable. You must keep track of the amounts, include them on your tax return, and � if they total $20 or more in a month � report them to your employer by the middle of the next month.

Tax Deduction Tips

For most Americans today, the amount of their tax refunds is much lower than what it could be. The United States government gives us a tax break on many situations and circumstances, but the majority of Americans fail to list these as deductions on their tax returns. With some important tax tips and basic knowledge, you can gain control of your tax situation and put more of your dollars back into your pocket.

Hybrid Cars: If you own a car that is run primarily on electric, it is well known that you can utilize a deduction known as the electric vehicle credit. Hybrid cars, do not qualify for the electric vehicle credit since they are not run primarily on electric motors. However, hybrid cars may qualify for the clean-fuel deduction. Generally, the clean-fuel deduction is limited to the cost of the electric components used in the vehicle. Also, to claim this deduction on your tax return, you must be the original owner of the vehicle and it must be used for your own business or personal use.

IRA Contributions: Making regular contributions to an IRA not only lowers your income and creates a tax advantage in that respect, you may also qualify for an IRA contribution credit. To be eligible, your adjusted gross income must be $50,000 or less if you are married and filing a joint return, $37,500 or less if you are head of household, or $25,000 or less for any other filing status. Also, you must be 18 years old or older, cannot be claimed as a dependent of any other taxpayer and cannot be a full-time student. The credit varies from 10 to 15 percent of your contributions, anywhere up to $2,000.

Volunteer Work: Make sure to keep track of your volunteer mileage. In participating in some volunteer activities, you can deduct 14 cents per mile as a charitable contribution on your tax return. Don't forget to include these deductions in addition to other contributions you've made throughout the year, such as monetary contributions to a church, charity, etc.

Medical Expenses: If you undertake a weight-loss program to control obesity, you can deduct the cost and expense of the program. The cost of any foods that are a substitute for the foods you normally eat are generally not deductible, however, you can deduct the cost of the foods if those foods help to treat or cure an illness, the foods do not satisfy your nutritional needs or if the need for those foods is verified by a physician or professional.


Employment Expenses: The United States government encourages people to find and keep employment. As such, you may deduct the cost and expense of job application, such as resume production, paper, supplies, printing, resume mailing, and even mileage expenses during travel for job interviews. Once you are employed, you may deduct the cost of any work uniforms, work shoes and union dues, since such costs are considered business expenses on your part.

Letting the IRS share your losses
Most taxpayers think they can deduct casualty losses only if they suffer catastrophic damages.

But you don't have to live through a fire, flood, hurricane, tornado or earthquake to file a casualty deduction. Losses from theft and vandalism are eligible losses, as are any damages from an automobile accident as long as it wasn't the result of driver negligence.

The IRS also has deemed costs for programs to help you kick the smoking habit are medically deductible, as are weight-loss programs undertaken at a physician's direction to treat an existing disease such as heart disease.
Special medical needs: The medical deductions section of your tax form is also where you account for the cost of a wheelchair, crutches and equipment that enables a deaf person to use the telephone or that provides television closed-captioning.

In general, make tax time a year-round concern, instead of a one-time worry. Proper planning throughout the year will result in a more efficient filing, a better knowledge of your available tax deductions and huge savings at tax time. Take note to watch out for and document all expenses that can be used as deductions and make plans for investments and donations with the ultimate goal of tax savings in mind.

TAX calendar - Year 2005

April 1 - Tax filing deadline in two weeks.

April 15 - Tax Returns Due
Get an automatic four-month extension to file your return. You can download Form 4868, Application for Automatic Extension of Time To File.

June 15
If you are a U.S. citizen or resident alien living and working outside the United States and Puerto Rico, file Form 1040 and pay any tax, interest, and penalties due.

August 15
If you filed for an extension, file your return by today and pay any tax, interest, and penalties due.

September 15
Make the third payment of your 2005 estimated tax if you are not paying your income tax for the year through withholding (or will not pay in enough tax that way).

October 1 - Deadline for establishing a SIMPLE IRA.

October 17
If your application for an additional two-month extension was approved, file your 2005 tax return by today and pay any tax, interest, and penalties due.

Source from www.finance-portal-online.com