You may be one of the many taxpayers who realize that they owe more in taxes than they have available right now.  If that’s the case, here are some tips that will help you keep your penalties and interest to a minimum.

1. Even if you can’t pay everything you owe right now, go ahead and file your return on time and pay as much as you can with the return. These steps will eliminate the late filing penalty, reduce the late payment penalty and cut down on interest charges. You may mail a check payable to the United States Treasury or check out the electronic and credit card options for paying. IRS.gov.

2. You may want to consider obtaining a loan or even paying by credit card. The interest and penalties that are imposed by the IRS may actually be lower than the interest rate and fees charged by a bank or credit card company.

3. Ask for an installment payment agreement. You do not need to wait for the IRS to send you a bill before requesting a payment agreement. Options for requesting an agreement include:
• Using the Online Payment Agreement application and
• Completing and submitting IRS Form 9465-FS, Installment Agreement Request, with your return. The IRS does charge a user fee to set up your payment agreement. See www.irs.gov or the installment agreement request form for fee amounts.

4. As part of the IRS Fresh Start Initiative for tax year 2011, qualifying individuals may request an extension of time to pay and have the late payment penalty waived. To see if you qualify visit www.irs.gov and get form 1127-A, Application for Extension of Time for Payment. But hurry, your application must be filed by April 17, 2012.

5. If you receive a bill from the IRS, please contact them right away to discuss payment options. The worst thing you can do is simply ignore the bill.

If you can’t pay in full and on time, the key to minimizing your penalty and interest charges is to pay as much as possible by the tax deadline and the balance as soon as you can.

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Are you stressed about tax time? Does the thought of doing your taxes give you a headache?  Tax preparation doesn’t have to be painful, if you follow some basic tips.

1. Don’t put off doing your taxes until the last minute. When you rush, you are more likely to make mistakes. You may even make mistakes that could cost you money.  So start them now if you haven’t already.

2. Use the IRS website. There were more than 300 million visits to www.irs.gov last year. Go to the “1040 Central” to check for the latest news and find answers to your questions about tax filing.

3. Use Free File. Free File is available exclusively at www.irs.gov. Everyone can find an option to prepare their tax return and e-file it for free. If you made $57,000 or less, you qualify for free tax software that is offered through a private-public partnership with manufacturers. If you made more than $57,000 and/or are comfortable preparing your own tax return, there’s Free File Fillable Forms, the electronic versions of IRS paper forms. Visit www.irs.gov/freefile for options.

4. Try IRS e-file. The majority of taxpayers now use IRS e-file, which is the safest, easiest and most common way to file a tax return. If you owe taxes, you can file immediately and pay later (by the April 17 tax deadline). Best of all, when you combine e-file with direct deposit  the IRS can generally issue your refund in as few as 10 days.

5. Don’t put off filing your taxes if you can’t pay. If you can’t pay the full amount of taxes you owe by the mid-April deadline, you should still file your return by the deadline and pay as much as you can to avoid penalties and interest. More than 75 percent of taxpayers eligible for an Installment Agreement can apply using the web-based Online Payment Agreement application available at www.irs.gov. To find out more about this simple and convenient process, type “Online Payment Agreement” in the search box at www.irs.gov.  You can also contact the IRS to discuss your payment options.

6. Request an extension of time to file – but pay on time. If the deadline clock is ticking, you can get an automatic six-month extension through Oct. 15. However, this extension of time to file, which must be filed or postmarked by the April 17 deadline, does not give you more time to pay any taxes due. If you have not paid at least 90 percent of the total tax due by the April deadline you may also be subject to an estimated tax penalty. You can obtain an extension through Free File at www.irs.gov/freefile. Or, file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, available for downloading at www.irs.gov or by calling 800-TAX-FORM (800-829-3676) to have a paper form mailed to you. Allow at least 10 days for mailed forms and publications.

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Did you or anyone in your family have significant medical or dental expenses last year?  If you did, you may be able to deduct those expenses when you file your tax return.

The following information will help you consider your medical or dental expenses when you file your tax return.

1. First of all, you must itemize your qualifying medical and dental expenses using Form 1040, Schedule A.

2. On Form 1040, Schedule A, you can deduct medical care expenses that exceed 7.5% of your adjusted gross income for the year.

3. You can include the medical and dental expenses you PAID during the year, regardless of when the services were provided. Make sure you have good receipts or records to prove your expenses.

4. You cannot count any expenses that have been reimbursed to you. Your total medical expenses for the year must be reduced by any reimbursement. Normally, it makes no difference if you receive the reimbursement or if it is paid directly to the doctor or hospital.

5. You may include qualified medical expenses you pay for yourself, your spouse and your dependents. However, check with the IRS or a tax professional if you are divorced or separated because some exceptions and special rules apply to divorced or separated parents, taxpayers with a multiple support agreement or those with a qualifying relative who is not your child.

6. You can deduct expenses primarily paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or treatment affecting any structure or function of the body. For drugs, you can only deduct prescription medication and insulin. You can also include premiums for medical, dental and some long-term care insurance in your expenses. Starting in 2011, you can also include lactation supplies.

7. You may deduct transportation costs that are essential to medical care that qualify as medical expenses. You can deduct the actual fare for a taxi, bus, train, plane or ambulance as well as tolls and parking fees. If you use your car for medical transportation, you can deduct actual out-of-pocket expenses such as gas and oil, or you can deduct the standard mileage rate for medical expenses, which is 19 cents per mile for 2011.

8. Distributions from Health Savings Accounts and withdrawals from Flexible Spending Arrangements may be tax free if used to pay qualified medical expenses including prescription medication and insulin.

For additional information about medical and dental expenses, see Publication 502, Medical and Dental Expenses or Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

Some Helpful Links:

• Publication 502, Medical and Dental Expenses (PDF)
• Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans (PDF)

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The IRS rules regarding exemptions and dependents affect many, if not most, taxpayers. Here are some facts about exemptions and dependents that should help you file your tax return this year.

Exemptions are fixed amounts that reduce the amount of your income that is subject to income tax, and they are on a per-person basis.  There are two types of exemptions- personal exemptions and exemptions for dependents. These two types of exemptions are for the same amount per person, but different rules apply in order to be able to claim the exemptions. On your 2011 tax return, you can deduct $3,700 for each exemption.

Your spouse can never be counted as your dependent. On a joint return, you may claim one exemption for yourself and one for your spouse. If you’re filing a separate return, you may claim the exemption for your spouse only if they had no gross income, are not filing a joint return, and were not the dependent of another taxpayer.

You generally can take an exemption for each of your dependents. A dependent is your qualifying child or qualifying relative. You must list the Social Security number of any dependent for whom you claim an exemption.

Even if someone else claims you as a dependent, you may still be required to file your own tax return. Whether you must file a return depends on several factors including the amount of your unearned, earned or gross income, your marital status and any special taxes you owe. Consult the IRS website or a tax professional to see if you must file.

If you are being claimed as a dependent, you cannot claim an exemption. If someone such as your parent is claiming you as a dependent, you may not claim your personal exemption on your own tax return.

Some people cannot be claimed as your dependent. Generally, you may not claim a married person as a dependent if they file a joint return with their spouse. Also, in order to claim someone as a dependent, he or she must be a U.S. citizen, U.S. resident alien, U.S. national or resident of Canada or Mexico for some part of the year. There is an exception to this rule for certain adopted children. See IRS Publication 501, Exemptions, Standard Deduction, and Filing Information for additional tests to determine who can be claimed as a dependent.

For more information on exemptions, dependents and whether you or your dependent needs to file a tax return, see IRS Publication 501 on the IRS website.

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Many people give to charities toward the end of the calendar year because they are in the giving spirit AND because they realize that they don’t have much more time to take advantage of tax deductions.

The following are some reminders about year-end giving.

• Make sure that the organization is qualified. Only donations to qualified organizations are tax-deductible. IRS Publication 78, available online and at many public libraries, lists most organizations that are qualified to receive deductible contributions. The searchable online version can be found at IRS.gov under Search for Charities. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in Publication 78.
• If at all possible, get a receipt from the charity when you are donating property such as clothing and household items. Ideally, the receipt should include the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
• Charitable contributions are deductible in the year they are made. If you charge a donation to a credit card before the end of the year, but the credit card bill isn’t paid until the following year, you still get to claim the deduction for the year is which the charge was made. Also, checks count for the year they were written as long as they are mailed during that year and clear shortly thereafter.
• Only individual taxpayers who itemize their deductions on Form 1040 Schedule A may claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. Use the 2009 Form 1040 Schedule A to determine whether itemizing is better than claiming the standard deduction.
• The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
• If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.

If you have any questions about charitable donations and your taxes, contact a tax professional.

Daniel Stoica Accounting Professional

You have probably heard people argue about the need to comply with federal tax laws.  You, or someone you know, may even believe that filing taxes is voluntary or that the federal tax laws are unconstitutional.  Of course, people can hold any belief that they want, and they can choose to file or not file according to those beliefs.  The truth is, however, that the IRS does not listen to any of these arguments.  They have even published a document called “The Truth About Frivolous Tax Arguments”.  If you have questions about whether or not we are required to file, this document will address all of them.

Some of the arguments that the document addresses are:

• The filing of a tax return is voluntary
• Payment of taxes is voluntary
• Only foreign income is taxable
• Taxpayers can refuse to pay taxes due to religious or moral grounds
• The IRS is not an agency of the United States
• Federal Reserve Notes are not income

“The Truth About Frivolous Tax Arguments” can be found here.

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Taxes are generally held by employers and sent to the IRS as payroll taxes. For the self-employed, you have to make installment payments every quarter based on your estimated taxes. All taxpayers have to file a tax return by April 15^th, unless they file an extension. If they paid too little in taxes throughout the year, they will owe the IRS the balance at tax time and will have to pay those taxes when they file their taxes. If your payment is late, you will have to pay penalties and interest on what you owe. If you can’t afford to pay what you owe, you need to contact the IRS before they are due and make arrangements to make payments.

There are several ways you can arrange payment options with the IRS. Here are four options to pay your tax bill:

1. Mail a Check

Many taxpayers still send their tax payments by this method. You check must be sent before April 15^th. In reality, it must be postmarked by April 15^th. Your tax booklet will tell you where to send your check, or you can check the IRS website for the address in your region. The IRS recommends priority mail via U.S.P.S.

2. Use Your Credit Card/Debit Card

You can use your credit card to pay your taxes, however, it may end up costing you more in the long run with the interest rates your credit card company may charge. If you decide to go this route, you should know that the IRS has partnered with three companies that provide credit card services to help taxpayers make payments. The IRS website provides information about these companies.

3. Direct Deposit

You also have the option of agreeing to a direct deposit. This allows the IRS to take the taxes you owe from your bank account. This service is easy and free. If you are expecting a refund, choosing direct deposit could also get your refund to you much more quickly than if your refund check is mailed to you.

4. Electronic Federal Tax Payment System (EFTPS)

You may also use the EFTPS service when paying the taxes you owe. The IRS offers this service by allowing taxpayers to make regularly scheduled payments. It’s a free service and all individual taxpayers may use it. You can enroll for this service at www.irs.gov.

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The IRS has started a program that allows employers to fix past worker classification issues, and, for very little money, lets them reclassify their workers.

The program lets employers be compliant in making the minimum payments on past payroll taxes instead of waiting to be audited by the IRS.

This program is part of the IRS’s “Fresh Start” program, which helps taxpayers and businesses take care of their taxes.
IRS Commissioner, Doug Shulman said, “This program gives assurance and relief to employers in an important area. This is part of a bigger effort to help taxpayers and businesses to help give them a fresh start with their tax obligations.”

The Voluntary Classification Settlement Program, or VCSP, has been implemented to get employers to be in compliance with their tax obligations and reduce tax burdens for employers, employees and the government. Eligible employers can get help with their payroll taxes that they owe if they treat workers as employees. The VCSP is accessible for many businesses, tax-exempt companies and government agencies that treat their employees as non-employees or independent contractors. It has been implemented so employers can address and correct this issue.

To be eligible, an applicant must:
-Have regularly treated their workers as non-employees,
-Have filed all required 1099 Forms for their workers for the last three years
-Not be in the process of an audit by the IRS, the Department of Labor or a state agency concerning the classification of these workers

Employers may apply for this program by filing an 8952 Form, Application for Voluntary Classification Settlement Program, for 60 days before they begin treating their workers as employees.

Employers who are accepted will pay a fee that equals a little over 1% of the wages that are paid to their reclassified employees for the last year. There will be no interest or penalties, nor will the employer be audited on their payroll taxes for these employees. For the first three years, employers will be subject to a six year statute of limitations instead of the normal three years on payroll taxes.

For full details and answers to any questions can be found on the Employment Tax Pages and Announcement 2011-64 at www.irs.gov.

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If you are one of the many taxpayers who filed an extension and still haven’t filed your taxes, now is the time to get them done and out of the way.  The following are some tips to help. 

Commonly Missed Deductions:

-State-tax refunds for AMT taxpayers

If your refund is less than your disallowed Alternative Minimum Tax (AMT), your state refund won’t be taxed.

-Environment Friendly Home Credit

Did you install energy efficient windows, a solar powered water heater, geothermal heat pumps, or low-energy roofing? If so, you might qualify for a 30% credit on your 2011 taxes, or a maximum of $500. Being environmentally conscious will help you save money.

-Car Insurance

Did you know you can deduct your car insurance on your federal taxes? You can deduct the cost of oil, tires, your license, and your insurance premiums if you use your vehicle for business. If you decide to only deduct your mileage, you cannot deduct the other expenses. You may choose one or the other, but not both.

-Health Insurance

You can also deduct your health insurance premiums on your federal taxes. You can even deduct 100% of your premiums if you’re self-employed, which includes premiums for your spouse and dependents. Your health insurance itself, however, is not deductible.

-The American Opportunity Credit

If you pay college tuition, you can take the American Opportunity Credit. You can take a credit of up to $2500. This credit has been extended through 2012 and is there for taxpayers whose adjusted gross income is less than $80,000.

Common Audit Triggers:

-Large Mortgage Interest Deductions

If your deductions are over $50,000, it generally sends a red flag to the IRS. You are allowed to deduct interest on you mortgage for a loan less than $1 million, which makes the interest around $50,000 or 5% of your mortgage. But by doing so, you may send a red flag for an audit.

-Rental Real Estate Losses

Taxpayers who claim to be real estate professionals due to rental income losses and attempt to deduct the losses on their income will trigger an IRS audit. You can only claim yourself as a real estate professional if you have at least 750 work hours, so if you are claiming this profession, the IRS will turn their heads to look. With the housing market in the situation it’s in, most taxpayers are losing a lot of money on their rental properties, however, they can’t qualify as real estate professionals, so they can’t take the tax deduction that comes with it.

-Home-buyer tax credit

Congress passed three stimulus bills in 2008. Initially, the stimulus bill caused some fraudulent activity. Today, Congress requires more intensive documents in order to qualify for the tax credit.

Common Human Errors:

-Overstating Charitable Work

If you went to a charity dinner where the cost was $500 per plate, you can’t deduct the entire $500. This is also true of charitable activity. The charity must tell you about this rule, so it’s a good idea to read through the correspondence you receive from them.

-Omitting Payments On Interest

Most taxpayers forget about the interest they pay during the year. Banks and other financial institutions aren’t required to give you a 1099 for for anything under $10. Even small amounts of interest are considered taxable income and you must report them on your taxes. If you don’t, the IRS will notice.

-Mortgage Deductions

Many taxpayers calculate their mortgage “points” incorrectly for their deductions. On first mortgages, the fees are deductible. Refinance points have to be amortized, and can then be deducted throughout the loan.

It’s recommended that you hire a tax professional when you are filing your taxes, especially if you have many deductions and credits. Be organized and keep all of your receipts and other financial documents safe and close.

Daniel Stoica Accounting Professional