Telephone Tax Rebate

When it comes time to prepare and file your 2006 tax return, make sure
you do not overlook the “federal excise tax refund credit.”  You claim
the credit on line 71 of your form 1040.  A similar line will be
available if you file the short form 1040A.  If you have family or
friends who no longer file a tax return AND they have their own
landline phone, not a cell phone, in their home and have been paying a phone bill for years,
make sure they know about this form 1040EZ-T.  What is this all about?
Well the federal excise tax has been charged to you on your phone bill
for years.  It is an old tax that was assessed on your toll calls based
on how far the call was being made and how much time you talked on the phone.  When phone companies began to offer flat fee phone service,
challenges to the excise tax ended up in federal courts in several
districts of the country.  The challenges pointed out that flat
fee/rate phone service had nothing to do with the distance and the
length of the phone call.  Therefore, the excise tax should/could not be
assessed.
The IRS has now conceded this argument.  Phone companies have been
given notice to stop assessing the federal excise tax as of Aug 30,
2006.  You will most likely see the tax on your September cutoff
statement, but it should NOT be on your October bill.  However, the
challengers of the old law also demanded restitution.  Therefore, the IRS has
announced that a one-time credit will be available when you and I file
our 2006 tax return as I explained above.  However, the IRS also
established limits on how BIG a credit you can get.

Here is how it works.

If you file your return as a single person with just you as a
dependent, you get to claim a $30 credit on line 71 of your 1040.  If
you file with a child or a parent as your dependent, you claim $40.
If you file your return as a married couple with no children, you
claim $40.
If you file as married with children, you claim $50 if one child, $60
if two children.

In all cases, the most you get to claim is $60 - UNLESS you have all
your phone bills starting AFTER Feb 28, 2003 through July 31, 2006 (do
not use any bills starting Aug 1, 2006.), then you can add up the
ACTUAL TAX AS IT APPEARS ON YOUR BILLS AND CLAIM THAT FOR A CREDIT.
Now if you have your actual phone bills and come up with an ACTUAL TAX
AMOUNT, you cannot use line 71 on your tax return.  You have to
complete a special form number
8913 and attach it to your tax return Individuals using the special
from 1040EZ-T will have to attach this form 8913 also.

One final point- this credit is a refundable credit.  That means you
get this money, no matter how your tax return works out.  If you would
end up owing the IRS a balance, the refund will reduce that balance
you owe.  If you end up getting a refund, the credit will be added and
you get a bigger refund by that $30 to $60, depending on how many
dependents are on your return.
Feel free to pass this on or make copies for family and friends who
do not have computers.

Tax schemes to watch out for!

The Internal Revenue Service divulged this last year a list of notorious tax scams, the “Dirty Dozen,” reminding taxpayers to be wary of schemes that promise to eliminate taxes or otherwise sound too good to be true. Theses 2005 tax schemes include several new scams that either abuse credit counseling services, rely on refuted arguments to claim tax exemptions or manipulate laws governing charitable groups. There is also a continuing rise of identity theft schemes that deceive people through the Internet, e-mail, the phone, or by mail. If caught or found to be involved with tax schemes, imprisonment and fines could follow. The Internal Revenue Service routinely pursues and shuts down promoters of these scams.


The Internal Revenue Service urges people to avoid these common schemes:

  1. Trust Misuse. Some trusts do not deliver the promised tax benefits, and the Internal Revenue Service is actively examining these arrangements. More than two dozen injunctions have been obtained against promoters since 2001, and numerous promoters and their clients have been prosecuted. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust.
  2. Frivolous Arguments. People have made the following outrageous claims: that wages are not income; that filing a return and paying taxes are merely voluntary; that the Sixteenth Amendment concerning congressional power to lay and collect income taxes was never ratified; and that being required to file Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy. These and similar claims are false. Such arguments have been thrown out of court. The fact remains true that taxpayers have the right to contest their tax liabilities in court. However, disobeying the law is not a right that has been given.
  3. Return Preparer Fraud. Dishonest preparers of returns cause headaches for taxpayers who become victims to their deceitfulness. Preparers make their profits by skimming a portion of their clients’ refunds and charging inflated fees for their services. They attract new clients by promising large refunds. Taxpayers should choose carefully when hiring a tax preparer. As the saying goes, if it sounds too good to be true, it probably is. No matter who prepares the return, the taxpayer is ultimately responsible for its accuracy. Since 2002, the courts have issued injunctions ordering dozens of individuals to cease preparing returns, and the Department of Justice has filed complaints against dozens of others, which are pending in court.
  4. Credit Counseling Agencies. Taxpayers should be careful with credit counseling organizations that claim they can fix credit ratings, push debt payment agreements or charge high fees, monthly service charges or mandatory “contributions” that may add to debt. The Internal Revenue Service Tax Exempt and Government Entities Division has made auditing credit counseling organizations a priority because some of these tax-exempt organizations, which are intended to provide education to low-income customers with debt problems, are charging debtors large fees, while providing little or no counseling.
  5. “Claim of Right” Doctrine. In this scheme, a taxpayer files a return and attempts to take a deduction equal to the entire amount of his or her wages. The promoter advises the taxpayer to label the deduction as “a necessary expense for the production of income” or “compensation for personal services actually rendered.” This so-called deduction is based on a misinterpretation of the Internal Revenue Code and has no basis in law.
  6. “No Gain” Deduction. Similar to “Claim of Right,” filers attempt to eliminate their entire adjusted gross income (AGI) by deducting it on Schedule A. The filer lists his or her AGI under the Schedule A section labeled “Other Miscellaneous Deductions” and attaches a statement to the return, referring to court documents and including the words “No Gain Realized.”
  7. Corporation Sole. Since September 2004, the Department of Justice has obtained six injunctions against promoters of this scheme and filed complaints against 11 others. Participants apply for incorporation under the pretext of being a “bishop” or “overseer” of a one-person, phony religious organization or society with the idea that this entitles the individual to exemption from federal income taxes as a nonprofit, religious organization. When used as intended, Corporation Sole statutes enable religious leaders to separate themselves legally from the control and ownership of church assets. But the rules have been twisted at seminars where taxpayers are charged fees of $1,000 or more and incorrectly told that Corporation Sole laws provide a “legal” way to escape paying federal income taxes, child support and other personal debts.
  8. Identity Theft. It pays to be choosy when it comes to disclosing personal information. Identity thieves have used stolen personal data to access financial accounts, run up charges on credit cards and apply for new loans. The Internal Revenue Service is aware of several identity theft scams involving taxes. In one case, fraudsters sent bank customers fictitious correspondence and Internal Revenue Service forms in an attempt to trick them into disclosing their personal financial data. In another, abusive tax preparers used clients’ Social Security numbers and other information to file false tax returns without the clients’ knowledge. Sometimes scammers pose as the Internal Revenue Service itself. Last year the Internal Revenue Service shut down a scheme in which perpetrators used e-mail to announce to unsuspecting taxpayers that they were “under audit” and could set matters right by divulging sensitive financial information on an official-looking Web site.
  9. Abuse of Charitable Organizations and Deductions. The Internal Revenue Service has observed an increase in the use of tax-exempt organizations to improperly shield income or assets from taxation. This can occur, for example, when a taxpayer moves assets or income to a tax-exempt supporting organization or donor-advised fund but maintains control over the assets or income, thereby obtaining a tax deduction without transferring a commensurate benefit to charity. A “contribution” of a historic facade easement to a tax-exempt conservation organization is another example. In many cases, local historic preservation laws already prohibit alteration of the home’s facade, making the contributed easement superfluous. Even if the facade could be altered, the deduction claimed for the easement contribution may far exceed the easement’s impact on the value of the property.
  10. Offshore Transactions. Despite a crackdown on the practice by the Internal Revenue Service and state tax agencies, individuals continue to try to avoid U.S. taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore credit cards, wire transfers, foreign trusts, and employee leasing schemes, private annuities or life insurance to do so. The Internal Revenue Service, along with the tax agencies of U.S. states and possessions, continues to aggressively pursue taxpayers and promoters involved in such abusive transactions.
  11. Zero Return. Promoters instruct taxpayers to enter all zeros on their federal income tax filings. In a twist on this scheme, filers enter zero income, report their withholding and then write “nunc pro tunc”–– Latin for “now for then”––on the return.
  12. Employment Tax Evasion. The Internal Revenue Service has seen a number of illegal schemes that instruct employers not to withhold federal income tax or other employment taxes from wages paid to their employees. Such advice is based on an incorrect interpretation of Section 861 and other parts of the tax law and has been refuted in court. Recent cases have resulted in criminal convictions, and the courts have issued injunctions against more than a dozen persons ordering them to stop promoting the scheme. Employer participants can also be held responsible for back payments of employment taxes, plus penalties and interest. It is worth noting that employees who have nothing withheld from their wages are still responsible for payment of their personal taxes.

Tax “Stress Relievers”

With the tax deadline past, here’s a list of some important lessons learned.

  • Check your dependents. Sometimes your child no longer qualifies as a dependent, and the time to find out is before you file, not after your tax return has been rejected by the IRS.
  • Keep your receipts and other tax documents organized. If there’s one thing your tax preparer does not want to do it dig through all your receipts.
  • Check up on your previous tax returns. You have only three years to claim a refund of overpaid taxes. So it makes sense to review your older tax returns every so often just to make sure you didn’t overlook an important tax deduction.
  • Adjust your withholdings. Some people have far too little taxes withheld from their paycheck, and then they end up owing the IRS. Other people have too much withholding. By filing out a new W-4, you can have just the right about of tax withheld from your paycheck.
  • Pay off the IRS. There’s really only five ways to get out of tax debt. Very often, you can get back on track with the IRS by filing missing tax returns and setting up a payment plan.

Important Tax Dates and Deadlines for 2006

April 17, 2006

Tax returns are due today!

Your 2005 income tax return is due, unless you file for an extension until August 15, 2006. Note: The April 15 statutory deadline for income tax filing falls on a Saturday. When that happens, the IRS pushes the deadline to the next business day.

File for extension. If you want an automatic extension of time to file your 2005 tax return, file Form 4868. To avoid a penalty, pay any tax that you owe.

Both IRAs and Roth IRAs contributions. This is the deadline for making contributions to IRAs or Roth IRAs for 2005. This is also the deadline to open these accounts for 2006.

Your estimated tax payment. Your first-quarter estimated tax payment for 2006 is due.

State tax returns due. If you are required to file a state tax return, it is probably due — but check with your state to be certain. Many states automatically extend the filing time to those who have filed for a federal extension.

Household employers report due. If you paid cash wages of $1,300 or more in 2005 to a household employee, file Schedule H (Form 1040) with your income tax return and report any employment taxes by April 17, 2006.

June 15, 2006

Tax filing deadline. If you’re a United States citizen or resident alien living and working (or on military duty) outside the U.S. and Puerto Rico, file Form 1040 and pay any tax, interest, and penalties due. You can file for an extension until Aug. 15, 2006.

Estimation on your taxes is due. Your second-quarter estimated tax payment (using form 1040-ES) for 2006 is due.

August 15, 2006

Income tax return due. Your 2005 income tax return is due if you filed for an automatic extension with Form 4868.

File for a second extension. File Form 2688 if you need an additional 2-month extension to file your 2005 income tax return.

September 15, 2006

Estimated tax due. Your third-quarter estimated tax payment (using form 1040-ES) for 2006 is due.

October 16, 2006

Income tax return due. Your 2006 income tax return is due if you filed an extension request using Form 2688 and if the IRS approved the request.

December 31, 2006

Deduction deadline. This is the last date on which you can make payments that can be deducted from your 2005 return.

Also keep in mind that if you didn’t have a chance to get to your taxes because you are busy, you can always file for an extension. In cases penalties will have to be paid. However, if you are due for a refund, you will not be penalized. (Why should you for lending them your money “interest free” for until you get a return in?).

6 Days Left Until Tax Filing Deadline!

With such little time before the deadline, people are trying to figure out what they can still do, what resources are available, and how to go about the process of filing for an extension. Hopefully, the following will be able to help you out.

How do I know if I should I file for an extension?

What an extension does is provide adequate time to file a return. Extensions do not allow for an extension for payment on taxes due. Typically with an extension, you are required to pay tax estimation in advance.

How do I get an extension to file my tax return?

You should file a Form 4868, and this will give you an extension. The extension is good for 6 months. Keep in mind that this is only an extension for time. It’s not going to eliminate any late-filing fines and any taxes you’re indebted will still need to be included.

What if there was something wrong on a W-2 and you are still awaiting a correct one?

There are a couple of choices for you. You can pay the amount that is due and send an amended return, or file for an extension, and explain that the extension was due to the incorrect W-2 form you had received.

The 401 k…a retirement plan.

The 401 (k) is a retirement plan implemented and provided to employees by their employer as a means to save for their retirement.  Not only do many employers contribute to the employees 401 (k) along with employee contributions (this is known as matching), but the contributions are pre-tax contributions; in other words the deduction is taken prior to calculating the state and federal taxes due on the wages.  This helps not only the employee, but also the employer.

There are many variations of the 401 (k) and depending upon your employer’s status as a small business, and their ability to fund a 401 (k), you may operate under a Simple 401 (k), a traditional 401 (k), or The Safe Harbor 401 (k).  All the plans vary as to their contribution limits, the employers required matching contributions, and the level of administration and IRS reporting that must be factored into the plan upkeep.  Let’s take a look at each of the plans, and discuss some of the advantages and disadvantages of each.

The Simple 401 (k) is best suited for small businesses that have a reliable earnings stream.  In other words, their cash flow and earnings level are fairly steady and reliable, and they want to establish an easily controlled method for providing for retirement funding.  Quite often, many of the family members will participate in the 401 (k) as a way to fund their own retirement, and offset some of the taxable income from the family business.  The disadvantage in operating this type of retirement account lies in the fact that contributions made on behalf of the employee by the employer are not optional, and some form of contribution must be made each year.

The traditional 401 (k) is the most often avoided plan by small to medium sized businesses, simply because of the massive reporting requirements, and the compliance testing that must be done each year.  It can be costly for the traditional 401 (k) for a company of about 10 employees. Costs can be around $2000 per year to administer. That doesn’t include the setup costs or the costs of loan features.  In addition to the optional features costs, there is the cost of offering many investment choices.  Most of the 401 (k) plans for small businesses that were surveyed had a much better rate of participation as well as lowered plan costs when only a few options were offered, instead of 10 or more.

The compliance testing that must be done with the traditional 401 (k) are quite complex, and require much involvement by the accounting or payroll department of the business.  Today, many small businesses outsource their payroll function, and include the 401 (k) plan administration as one of the outsourced functions also.   The greatest advantage to the small business is that the business is not required to contribute to the plan, unless there is a significant imbalance in the contributions of the highly compensated employees versus the lesser paid employees.

The Safe Harbor 401 (k) is a spin-off of the traditional plan, except for the fact that there aren’t all the compliance requirements and testing that must be completed each year.  The Safe Harbor plan is best suited for the small business that has a steady revenue stream, and that is able to make a required contribution each year to the employee fund.  The employer must make a 3% contribution to all employees who qualify for retirement funding, regardless of whether the employee makes a contribution; also, the employer contribution level for non-highly compensated employees must not differ more than 2% from the highly compensated employee contribution rate.  In this manner, the employer is required to provide the same benefits for all employees, without all the compliance testing of the traditional plan.   The Safe Harbor 401 (k) is simple to set up, and can be accomplished within 30 days of the New Year, and is quite easy to administer.  The disadvantage to this plan is the required contribution rates, and if the business does not have a steady cash or revenue flow, it is not a recommended plan.

After examining the different plan options available for small to medium companies, there should be at least one that fits within any small businesses scope of operations.  Providing retirement funding for small business family members, as well as all other employees is one of the greatest benefits a company can offer current and prospective employees.

IRA tax deductions

Individual Retirement Arrangement (IRA) is a savings plan that lets you save for retirement and gives your savings tax benefits in the form of tax deductions. Every contribution made to this plan is entitled to the IRA tax deduction. This does include earnings from these IRA contributions. That is unless they are distributed to you.

There are two types of IRA and therefore two set of rules where deductions are concerned.

First there is simple IRA. Traditional IRAs are a personal savings plan that encourages a person to save for retirement and gives this person tax advantages for doing so. All contributions that are made to a normal IRA may be a deduction in part or whole. Earnings from IRAs are also exempt from taxes, unless they are distributed to you.

When setting up an IRA the person must be younger than seventy and a half years at the end of the tax year in which you have applied. Also, the person must have a taxable compensation when they set up this plan. Taxable compensation includes: salaries, commissions, alimony, maintenance or any other means of income generated by self. Rental or any other income from property, annuity or deferred compensation does not qualify as taxable compensation.

Maximum dollar amounts contributable to the IRA are either $ 3,000 or the taxable compensation for the year, whichever is less. Contribution limits are $ 3,500 if you are 50 years or older. If you are not covered by any other retirement plan at the time of contribution then the whole amount that you contribute is deductible. If currently the person is covered by a valid retirement plan, the IRA deduction can either be reduced or eliminated, depending on the amount of the Modified Adjusted Gross Income and the filing status.

In the case of withdrawals, anything that you withdraw from IRA is up for taxation, either wholly or in part. If full deduction for contribution made is being claimed, the taxation on the amount withdrawn will be cent for cent.

Traditional IRAs can be established at many financial institutions, including credit unions, banks, insurance companies and brokerage firms.

Roth IRAs are the other type of IRA. The Roth IRA is the reverse of the traditional IRA. All contributions that are made to Roth IRAs will get no tax deductions. However, there are no taxes on the withdrawals or earnings either. Everything else about Roth IRA is like the simple IRA. Just like a simple IRA it can be either an annuity or an account. Roth IRAs must be designated as a Roth IRA when it is set up.

What is a 1099 and who gets one?

What is a 1099 and who gets one? We hear this term used more and more frequently as many employers are opting to use contract labor versus hiring employees, who can turn out to be quite expensive when you factor in the insurance, payroll taxes, and other possible liability. Hopefully this will be able to explain, who can receive one, its purpose, and why.

The 1099 forms, if you are the recipient, should be furnished to you on an annual basis, by a set deadline (January, 31st), and must be furnished and filed by the company no later than February 28, 2006.

If you are an independent contractor, or you receive income that is classified as non-employee income, or miscellaneous income you will receive what is known as a 1099-Misc. These are the information returns most often received for contract for-hire work, leased workers, or general contractor payments which are not direct sales as a merchant to a consumer.

The other most often used 1099 form would come as a 1099-Int; this is a 1099 received for interest income purposes; whether the income be from a lending institution, or from the sale of a seller financed mortgage, the recipient of any income from interest will receive a 1099-Int. A close relative of the 1009-Int is the 1099 OID. This is an information return provided when you receive an original issue discount, usually from transactions related to mortgages served by the Federal Housing Authority.

Another 1099 can come as a 1099 B for barter exchange transactions. What does this mean? It means that instead of monetary payment, you received a bartered form of payment, an exchange of something other than money, with value attached in order to pay for a service.

1099 C is received if there is a cancellation of debt, as from a bankruptcy proceeding, credit card default, or other failure of a maker to make good on a debt that the lender or seller can use as a tax deduction. The 1099 CAP is a 1099 used to report significant changes in corporate control and capital structure. What does this mean in laymen’s terms? If you and several other individuals are in business together, as an incorporated entity, and 3 of you buyout another individual, you will be required to furnish that individual with a 1099 CAP so that the individual reports any income or gain from the capital sale of stock.

A 1099 that we’ve not seen very much until recently, but one that I’m sure we’ll see much more of in the not too distant future is the 1099 LTC. Long-term care and accelerated death benefits are filed on this 1099; with a larger segment of our population aging, this will make more use of long-term care insurance and payouts, and many of them will receive types of 1099s.

Although these are most often forms of taxable income to the recipient, this is not always a steadfast rule. For many older citizens, and for individuals receiving the returns as part of a discounted program through the government, and for certain other situations, these are only information returns that do not result in added tax liability. For the rest of us a 1099 usually means we have increased tax liability.

The Security Behind Filing Your Taxes Online

Due to hectic schedules many individuals rely on the internet to file their taxes. Since the e-filing program was first developed, millions of Americans have changed the way that they file their tax returns. At one time the majority of Americans relied on paper tax forms or the IRS’s telephone filing system. Now the popularity has shifted to online tax filing; however, the majority of Americans still do not file their own taxes online. Although filing taxes via the internet is easy and convenient many individuals are concerned about the safety and security of their personal information.

Filing taxes online is not only convenient, easy, and doable by just about any individual it is also extremely secure and safe. Although the process is safe and secure there are a number of precautions that every online tax filer should take just to insure the safety of their personal information and documents.

The majority of individuals who plan to file their taxes online will use the e-file program that is offered by TaxEngine.com. The e-file program and information pertaining to it can be found by visiting www.taxengine.com. TaxEngine’s website is most likely one of the most secure websites around. Due to their possession of many important documents their computer systems are often equipped with extra protection that is used to safeguard their valuable information.

It is possible for an individual interested in using the internet to file their taxes to use a tax software program. Some of the tax software programs have an option to submit tax forms either directly to the IRS or some claim that they will handle the return themselves. It is possible to find a legitimate company who will offer this service; however, it is not always guaranteed that their company website is safe and secure. When working with an unfamiliar company or website there are ways to verify that the company website is secure.

Each and every website that obtains personal information should have a privacy policy displayed somewhere on the website. This privacy policy will familiarize users with what is done with personal information, how it is handled, who may see it, and if the information will ever be sold for commercial use. When submitting important personal information it is important to examine the website. Towards the lower bottom right hand corner of the web page should be a small lock icon. That lock icon is used to symbolize privacy. If a website has that symbol when you are entering in personal information that means that the website is secure.

The majority of websites that request personal tax information are secure; however, it is a still a good idea to make sure that the computer being used is also secure. Hijacking of computers, worms, and virus are now all too common; therefore, it is important to make sure that a computer being used to submit an online tax filing is free of them. Thanks to libraries and internet cafes it is possible for an individual without internet access inside their own home to file their taxes online. When using a public computer it is important that each program has been fully shut down and logged off. Be sure none of your personal account information is stored in the cache or memory of the computer after you log off.

Filing a tax return online is an easy and convenient way to file your taxes. Although this process is extremely safe and secure, is it still important to take precautions to safeguard your personal identity and tax-related information.

How Tax Software Programs and Online Tax Filing Work Together

With the popularity of online tax filing on the rise a large number of individuals or families are starting to prepare and file their own taxes over the internet. Unfortunately many individuals make a number of mistakes when they are inexperienced in tax preparation and try to file their taxes online. One of the most common mistakes that an individual makes happens because the person does not fully understand the process of preparing his or her tax return and then filing it online because in reality, they are two different things.

The development of tax software is what has made the online filing of taxes easier to use. Tax software programs are developed to help guide an individual through a particular tax form. The tax software will offer instructions like a traditional tax form and may even have a customer service department that can be contacted by phone or over the internet. Undoubtedly, you will find the best customer service at TaxEngine.com. A tax software program can often be purchased and download from the internet or a number of retail stores. Since each year there are tax laws that have been updated or changed it is important to make sure that the latest software version is being purchased.

When purchasing a tax software program it is important to determine if the software will allow the completed tax forms to be filed electronically. The majority of tax software programs will offer a choice between paper print-outs or electronic filing. It is possible for just about any software program to have tax forms uploaded to the e-file program. It may be a good idea to purchase a software program from an authorized provider. On the website of the company or the box of the software program there should be a logo or a label that marks the product as being an authorized IRS e-file provider.

A tax software program will help to prepare the files and then submit them via the e-file program which can be found by visiting www.irs.gov. There are other ways to obtain free online tax forms that can be used to file taxes online; however, many individuals feel that a tax software program is a great investment. As previously mentioned there are many helpful tips and resources that are provided with a software program. The majority of the tax software programs on the market will check and make sure that the forms are filled out correctly and that all mathematical equations equal out. Making sure that all of the information is correct will help a return be processed quicker.

There is a difference between tax software and online filing; however, many tax software programs will file the taxes online. Quality tax software programs can be obtained by downloading them from a reputable tax software company or by purchasing them from a book, media, or department store.

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