Unofficial Tax Guide

Tax season is a period of time that is filled with many mixed emotions. Many individuals are anticipating their tax return while others are concerned or stressed about preparing and filing their tax return on time. Due to the cost of having tax forms prepared and filed by a professional there are many individuals or families who must prepare their own taxes. One of the most common problems faced by individuals who prepare their own taxes concerns which tax forms are to be used.

There are a number of ways to determine which tax form an individual should be using. One way to learn is by researching the forms at irs.gov. Also, the website of the IRS has a list of all of the available tax forms which can be downloaded and printed off for use. As with the tax forms that are often available at post offices, libraries, or other financial instructions online tax forms will often come with an instruction booklet. This instruction booklet will provide information pertaining to the tax form that it goes along with. If the information or instructions provided in the book are something that does not apply or is not need then another tax form should be examined.

Perhaps the best way to learn about the correct forms for filing taxes is by going to TaxEngine.com. You will be asked a series of questions that will be used to determine which forms need to be used for your particular tax situation. If you have any questions about a specific tax form, you can find additional information about all the various tax forms at http://www.taxengine.com/1040-forms.asp.

There are additional resources available including pamphlets, brochures, and tax books. Many printed books can be obtained by purchasing them through a local or online book store. Since tax laws and guidelines change each year it is important to make sure that the most recent resources or publications are being purchased. Many tax resources are also aimed at specific individuals. For example, if a small business owner is interested in finding the appropriate tax forms for them to fill out they may be able to pick up a pamphlet from their county or state offices or they can purchase a book offering tax information for business owners.

In addition to the correct tax forms many individuals may need to find a particular form or schedule attachment. Although it is cheaper for an individual to prepare their own taxes it may be easier to have them prepared and filed by a tax professional. When in doubt about which form is the correct one a professional should be contacted. Do not prolong a refund any longer than it needs to be. Ensuring that proper tax forms are obtained and filled out correctly will help to speed up the process.

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There are two kinds of tax deductions for automobiles available under the federal law in the US. The first is for those automobiles that qualify as clean fuel automobiles and gasoline-electric hybrids. The second is donating to charitable organizations.

Owners of clean fuel burning vehicles are entitled to a one-time tax deduction up to $2,000. Similarly owners of electric automobiles can get a one-time tax credit of $4,000. The IRS describes the clean fuel automobiles as those that are run on Natural gas, Liquefied natural gas, Liquefied petroleum gas, Hydrogen, Electricity (like hybrid vehicles) and any other fuel that is at least 85% alcohol or ether.

The tax deduction covers the cost of the vehicle’s engine, the equipment used to store and deliver the fuel and the equipment used to exhaust combusted gases. Provided the expense on this head is not more than $2,000.

This deduction applies for automobiles bought in the year 2005. Those who have purchased an automobile in 2004 or any other taxable year can still apply for this deduction. They just have to fill an amended tax 1040X Form return for that year.

Further Requisites:
• The vehicle must be new and purchased for personal usage.
• The vehicle cannot be bought for resale.
• The vehicle must be used primarily in the US.
• The vehicle’s pollution/emission capacity must meet all federal and state requirements
• The vehicle must have four or more wheels, and should be driven on road.
(Does not include automobiles operating by rail)

If any of the above requirements are altered within 3 years of purchase, the taxpayer may have to pay back some of the amount that was claimed as tax deduction.

This deduction is valid up to December 31, 2005. Automobiles bought in 2006 and later, may be entitled to a federal income tax credit. However, this is dependent on the fuel economy, fuel savings and other factors.

The second head under which tax deduction is available is vehicle donation. The rules for this are slightly more complicated. The amount of taxable deduction depends on the donor’s claimed value of the gift and how the charity uses the vehicle. Thus you might not know the amount your deduction will be when you make the donation. In addition, there is a $500 limit on the donated vehicle’s value. Beyond this the rules get even more complex. A donor can receive a fair market value deduction if the charitable organization conducts major repairs that significantly increase the value of the donated vehicle.

For the majority it is therefore better to sell the vehicle and get cash in hand than get a relatively small tax deduction. An automobile should be donated when you don’t wish to spend money on fixing it up, and, of course, if you’re in a charitable mood.

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Child care tax deduction is a policy that gives you yet another reason to keep your family tree growing. There are many tax savings that you may be entitled to because of the children that are part of your family. Some of the benefits are:

• Dependency Exemption
• Child Tax Credit
• Child and Dependent Care Credit
• Tax deduction, by transferring revenue to the child.

Dependency Exemption: This is a form of personal exemption that reduces your tax bill by subtracting the necessary amount from your gross income directly proportional to the annual inflation. This exemption should meet the following criteria:
• The child or dependent must be living at your residence during the year or they must be a relative.
• The dependent’s gross income must not exceed the annual exemption amount. This does not apply to children who are less than 19 years or are full-time students and are less than 24 years.
• The taxpayer must support at least half the dependent’s total cost of living.
• Other

If the dependent meets all these rules, then all you need to do is furnish the dependent’s social security number, and you are qualified for another exemption.

Tax Credits: Additionally, with the personal dependency exemption, there are certain tax credits that may be applicable to you after your child is born. For instance, you are entitled to Child Tax Credit and Child and Dependent Care Credit. Tax credits are a real very beneficial because they dramatically lower the amount of tax you pay on a dollar-for-dollar basis. In cases where the child is adopted, it is even possible for the foster parents to assert tax credits on their income tax for legal adoption expenditure.

Income shifting: Since children fall in a lower tax bracket, you can save on taxes by shifting funds from a parent to the children. However, you need to be careful when doing this. Obviously putting a grown-up’s investment in a child’s name is not permissible.

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It is extremely important to follow the rules when claiming a business expense tax deduction. Due to the slight complexity it is often recommended to use a professional tax service.

If you are an employee you can claim business expenses tax deduction on expenses that you may have incurred while conducting the company’s business. These deductions should be claimed as itemized deduction on Schedule A, Form 1040.

The IRS recognizes the following as business expenses on which tax deductions can be claimed: transportation charges, lodging and food expenses on business trips away from home, local transportation other than commuting to work place, entertainment and gifts.

Even thought local commuting costs aren’t considered for deduction, there are exceptions. If you are going from one workplace to another then you may deduct the expense. If you travel from a headquarters office to branch offices this can qualify for a deduction. If you work from your home then trips from your home office to office of the organization also qualify. You can also deduct the cost of traveling between home and a temporary work location outside the area where you live and work. A place where you expect to work for less than a year is called a temporary location. Business travel expense has a long list of items that are deductible; you can refer to IRS Topic 511 for details.

You can claim any type of fare or money spent on travel when you commute to another city to conduct business. If you have used your own vehicle then you can claim the money you may have spent on making the trip. IRS Topic 510 gives you full details about expenses related to using your car for a business trip.

Business expenses and gifts are also deductible subject to limits. These are covered in full under IRS Topic 512 and 463. It is mandatory that you keep a record of all the expenses you incur and put them up for deductions. IRS Topic 305 gives you information on how to keep records.

It is also important to account for all expenses that you have made through an advance from the employer to meet the business requirements. Otherwise this income may become taxable income. To avoid this from happening, you must account for these expenses within an agreed time period and return any excess in an acceptable time frame.

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If you have some form of day care business in your home, you are eligible for the daycare tax deduction. This deduction is valid even if you do not use the premises exclusively for business. What could be a daycare center by day, can also be home by night; and you will still be eligible.

It is necessary to understand what qualifies as a daycare business. When you provide care for persons or children incapable of watching after themselves due to physical or mental impairments you are in the daycare business. Usually to run one you need to have valid licenses or certifications. If you have had your license revoked or certifications rejected, or for any other reason you are not eligible to run a daycare center you will not be allowed this deduction.

When running a daycare facility there are a few important things you must keep in mind when figuring your allowable deductions. First off you are entitled to deductions related to the location in which you conduct your business, in this case your home.

It is necessary to find out exactly what portions of your home you occupy for business use and how frequent that is. If you use certain portions exclusively for daycare then you are, abiding by the stated limits, eligible to deduct all expenses. If the usage is partly business and a portion personal use then you will need to state what percentage of the premises total use is for business.

This does not mean that you have to log hours physically and maintain records of the same. Let’s say you run a day nursery for children in your basement, for a certain amount of hours a day Monday through Friday. You may use the basement for personal use for the rest of the time, it does not matter; you are eligible to show the time used and claim deductions. However, if you were to use the basement occasionally for babysitting, you would not be allowed to claim it as a deduction.

Along with the basement you might be using an additional room or rooms in your house where children could take a nap, eat, or do activities. Though the room is unlikely to be used all the time, you need to keep it available through the business day. These rooms also qualify as an expense and are eligible to figure in your tax deductions. Also expenses related to the maintenance and repair of these rooms can be figured in your expense list.

If you qualify as a family daycare provider then you can claim deduction on expenses made on providing meals and snacks. If you have employees, you can deduct 100% of their food cost as expense, provided that their salary does not include a food component. If you provide snacks and meals to your wards then to claim deductions you need to maintain records of consumption and show them to be exclusively for the daycare centre. Since your own household is fed from the same kitchen it may be a difficult process to follow. It is advisable therefore to show the standard rate for meals and snacks as an expense and claim them as a deduction.

Standard rates are applicable per person for breakfast, lunch dinner and three snacks per day. This typically includes beverages but not non-food material that may be needed to prepare or serve the food. Such utilities, however, can be shown as a separate expense.

So while daycare can be a taxing business, a little care could make sure that the taxes don’t make you feel so. Plan ahead and you could take care of it all!

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The policy regarding charitable car donations is not as straightforward as other charitable donation policies. The tax relief depends on the donor’s claimed value of the donation and the way the charity intends to use the vehicle. Thus you may not know the size of your deduction when you make your donation. In addition, the statutes for tax deduction for cars donated to charitable trusts have been altered from that of 2005. Now if the stated worth of the donated vehicle is more than $500, and if such vehicle is put up for sale by the charitable trust, then the taxpayer is limited to the gross profits from the transaction.

Taxpayers whom are interested in using the car tax deduction donation need to keep the following points in mind:

1. Verify the eligibility of the organization: The charitable trust must be a qualified one for the contribution to get the tax benefit. You can do this by viewing Publication 78, which is available online and in public libraries.

2. Itemize the deductions for your advantage: In order to avoid deductions for your car donation, you need to itemize your deductions. Those who claim standard education can’t benefit from this clause.

3. Estimate the fair market value: There are various factors that must be considered in order to determine the value of your car. Many used-car buying guides will give you precise instructions so that you can make adjustments to the value of a car for accessories, mileage and other indicators of its general condition.

4. Deduct the fair market value of the car: You are only allowed to deduct the fair market value of your car, which accurately takes into consideration the condition of the donated vehicle. You are not allowed to claim the full value of the car, as some people mistakenly believe.

5. File the Charitable Contribution Deduction: When donating your vehicle and claiming tax deduction, record keeping is essential. You must document all the receipts and forms related to the car donation and its fair market value.

Taxpayers who have any doubts about whether a contribution is deductible should call the IRS at 1-800-829-1040, or for TTY/TDD help, call 1-800-829-4059. If you are concerned that contributions are being sought for deceitful purposes, you should immediately contact the appropriate state charity official, who is often located in the state attorney general’s office.

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The federal income tax deduction is a statutory requirement under the American laws. It has to be paid by all American citizens who fall under the tax bracket as decided by the American government. Taxable income is calculated by removing excluded income, exemptions, and permissible deductions from the individual’s gross income.

The following are the heads under which you can avail the tad deduction:

1. Exemptions: Some of the common exclusions from gross incomes are:
• Earnings made from life insurance contracts
• Earnings made from gifts and inheritances
• Proceeds granted for personal injuries
• Interest received from state and municipal bonds

It must however be noted that all of the above exemptions are subject to certain conditions, and thus a tax adviser’s help must be taken while availing these exemptions.

2. Deductions: In addition to the standard deduction, some common “above-the-line” deductions include:
• Trade/ Business expenses
• Alimony
• IRA contributions
• Net capital losses
• Expenses incurred due to property used for income generation

Income tax laws are not easy to understand. It is therefore always possible that individuals choosing the standard deduction may or may not be able to take advantage of other deductions.

3. The Standard Deduction: When individuals have minimal “below-the-line” deductions, they are directly granted a standard deduction. The standard deduction under different heads in 2004 was as follows:
• Single $4,850
• Head of household $7,150
• Married filing a joint return $9,700
• Qualifying widow/widower w/ dependent child $9,500
• Married filing a separate return $4,850

4. Miscellaneous Itemized Deductions: These usually include:
• Interest paid
• Taxes paid
• Losses incurred
• Charitable contributions
• Medical costs borne

Such miscellaneous deductions are permissible if and only if they surpass 2% of adjusted gross income.

5. Alternative Minimum Tax: Alternative minimum tax is applicable if an individual’s taxable revenue is more than a predefined amount. In that case, the individual would otherwise pay negligible tax now has to shell out a certain amount, which lowers the advantages of certain deductions and credits.

6. Itemized Deductions: The alternative to the standard deduction is itemized deductions. For the year 2004, the major items included in itemized deductions were:

• State and local income and property taxes
• Donations made to charitable organizations
• Employee transference expenses
• Medical expenses incurred
• Casualty losses
• Interest paid on mortgage

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People who have a business from their home or are self-employed should take full use of the provisions made under the different home business tax deduction laws. These deductions include:

1. Home Office: A home office is defined as the part of the home, which you use solely for your business’s needs. You are allowed this deduction if you use this office on a regular basis and only for business. Indirect business expenses and depreciation can also be deducted.

2. Car: If you use a vehicle to conduct your business then you are allowed the deduction of the business cost of the car. Also you are allowed to deduct any operating and maintenance expenses for car. The deduction can be based on actual costs or off of the IRS standard business mileage rate.

3. Personal assets: Tax deductions can be claimed on a deduction for personal assets that you use in running your business. These can be things like computers, scanners, copiers, fax machines, etc. However you have to qualify the percentage of use.

4. Business Travels: Expenses incurred on airline travel, hotel rooms, internal transportation, shipping and even tipping are tax deductible. Meals are only deductible for half the total amount. The travel costs of an employee, client or partner are also deductible.

5. Gifts and Entertainment: Being in a business with clients almost guarantees having to entertain your clients and customers. Up to 50% of your business-entertainment expense, inclusive of meals and tickets, are tax deductible. In cases there may be lavish gifts given to important clientele, and in this case the entire cost of the gift is deductible.

6. Retirement: The payments you make when saving for your retirement are deductible from your personal income tax. Thus it follows that the dollars you spend for your retirement plan grow tax free in your business until time comes for you to retire.

7. Family Connections: Hiring your children as legal employees in your business can allow you to transfer funds in their name. And since children fall in a lower tax bracket they may not have any tax liability. However, only 8 year olds and above can be hired. Also, the work allocated to them should be such that they can perform it without physical or mental strain. Similarly you can hire your parents as employees thus saving the dollars you spend on taking care of them.

8. Social Security: As a self-employed worker, you have to pay double the social security contribution. Fortunately, half of this contribution is tax deductible in the 1040 form.

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When it comes to home improvement tax deduction there has to be some distinction between the home improvement and home repair. The reason is that home improvement is allowable for tax deductions as home repair is not.

While you are deciding whether or not to spend on home improvement, you need to know what kinds of things constitute a home improvement. Home improvements are constituted as any addition or upgrade that adding to the quality and value of your home. This would include installing a fence, driveway, new room, swimming pool, garage, deck, insulation, new heating/cooling systems, a new roof or landscaping.

What falls under home repair? Home repairs are quite different from home improvements. Home repairs are something you are doing to stop the wear and deterioration of your property. Repairs are different for the reason that they fix something breaking or broken. They are generally keeping the value of the home equal with what it should be, not adding.

What constitutes home repair? Repainting, any sort of fixing, repairing leaks, and replacing broken fixtures constitute home repairs. There is a clause here that states if while you were improving or remodeling your house, and if you were to simultaneously carry out some repair alongside, then it is possible to show the whole thing as home improvement. Although, some repairs, like a new roof, can be claimed as improvements. So the next time you want to build an addition to the house, remember to make those needed repairs too.

The best times you should do home improvement are when interest rates have dropped. During this time you can get refinancing to get the benefits of the lower rates. This usually can free up some cash to help with the improvements as well. If you do use the proceeds of your new mortgage to finance a home improvement spree then, you can deduct the loan points in the year you refinance. It is still alright if you do not use the proceeds of a refinance to improve your house. The points will then be deducted over the life of the loan. If you use a portion of the loan then the deduction is proportional. The remainder is deducted over the life of the mortgage.

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Home office tax deduction makes it possible for you to decrease your taxes by managing your home as your workplace. By the using of your house for a business, it makes possible to help cover part of household costs such as utility bills, rent, insurance, depreciation, interest, real estate tax, home repairs, and improvements.

You need to fulfill some basic requirements to make the grade for such a deduction. The biggest thing is use a specific area of your house exclusively for conducting the business. There are two parts to this condition. First, you use the house regularly for business on an ongoing basis. Secondly, that it be for some hours every day or for some days every week.

Next you make sure the business part of your house separated from the personal part, and use it for only business. It should not happen that you convert it into a guest room at night and office space in the morning. An exception to this rule is that part of your house where you store business samples. This can be considered personal space.

Also, the home office deduction holds good only for a bona fide business that shows clear profits and clear losses. A business activity that is more of a hobby than a commercial enterprise does not qualify for tax deduction.

In addition to using your home on a regular and exclusive basis for business, it is also essential that your home be your primary place of business. This implies that if you are working from two or more locations, your home is the main office. This can be ensured by using your home work space for most of your managerial and administrative activities.

Thus it is not compulsory that all activities taking place at home should be your chief source of revenue. What is essential is that your home is used for all business events book keeping, ordering goods, planning meetings and for consultations with clients, patients and customers.

At times it may be necessary to prove that you are using a part of your home as an office. For this you should have the following evidence ready:

1. Make a diagram to show which part of your home is being used as your office. (If possible, take photographs to give a clear idea.)
2. Ensure that all business mail comes to your home.
3. Business cards and stationery must list your home address as your business address.
4. You must get a separate phone line installed in the business part of your house.
5. Keep a record of the visits to show that you have actually conducted business at home.

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