What Happens When You’re a Super Saver

Saving is a good thing- sadly, as Americans we don’t do enough of it.  The law provides for many options when it comes to tax-favored accounts…whose contributions are tax-free.  The more you put into a tax-favored account, the less federal income tax you will pay.

One popular example of a tax-favored account is the Individual Retirement Account (IRA).  Contribute a few thousand each year and by the time you retire you should have a nice amount for your golden years.  For the super-savers among us, there is temptation to stock away as much as humanly possible into these types of accounts.  Too bad there are contribution limits.

Limits on IRA Contributions

For both major types of IRAs, the contribution limit for 2013 was $5,500.  It goes up a bit each year, around $500 or so, although not every year.  If you are over age 50, you can contribute an extra $1000 to your IRA.  If you go over the limit, you must file IRS Form 8606 and pay a fine.  The excess contribution fine is 6%.

You would think that staying under the IRA contribution limit would be easy- but there are circumstances when you need to change what you’ve already put into your account.  For example, if you contribute the maximum amount to your traditional IRA during the year then find out at the end of the year when doing taxes that your Modified Adjusted Gross Income puts you over the limit for contributing the maximum amount to your Traditional IRA, you have contributed excess amounts without meaning to.

Form 8606 is for Recharacterizations and Excess Contributions

What would you do in this situation?  Use IRS Form 8606 to recharacterize that IRA contribution into a Roth IRA contribution, which has a higher limit for higher MAGIs.  The other option is to just leave it there and pay the 6% fine.  Then it would be said you make a nondeductible contribution to your IRA (the title of Form 8606).  In either case, you must fill out and submit IRS Form 8606.

Once you’ve made a nondeductible contribution to your IRA, any distribution you take from here on out will mean you have to fill out Form 8606 that year.  For this reason alone it’s good not to make any nondeductible contributions!

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5 Things You Should Know About Taxes & Retirement

When you retire, hopefully you have some sort of plan set up to provide a steady stream of income in your golden years.  You can get Social Security if you worked enough quarters, and maybe your old jobs had a pension, and may you had the foresight to set up an Individual Retirement Account at some point.  All of these savings vehicles offer income which is taxed, unless you arranged special tax-favored IRAs called Roth IRAs.  The way to report and figure tax on retirement income is explained in IRS Publication 575.

 1.  There’s Federal Withholding on Your Retirement Plan

All those years of having withholding on paycheck after paycheck for payment into the Social Security Program.  Now that you’re retired and drawing Social Security, you’re still paying in!

2.  If you retire from your job and choose a lump sum payoff, you’ll see heavy taxes that year

Lump sum payouts from your retirement plan- a choice that’s more and more common these days as employers look to save on retirement expenses.  The lump sum is counted as income.  More detail on this in Pub 575.

3.  If You Use Your Pension Early, You’ll Pay Additional Taxes

The law likes to encourage saving for retirement, so when you use your retirement money before you retire, the IRS will slap you with not only the income tax but also some additional taxes.  Use IRS Form 5329 for this.

4.  You Must Start Taking Distributions from your Retirement Plan at Some Point

If you reach your mandatory retirement age of something like 70 1/2 and you don’t take distributions from your retirement plans, you are entering the state of excess accumulation.  That means you’re accumulating too much…you’re supposed to use it before you die, not give it all to your heirs, according to the law.

5.  Survivors or Benificiaries Will Pay Income Tax on their Inherited Pension or Annuity

This works just as if the heir were the actual person who used to own the account.  Check up on the estate tax rules, since you may be able to exclude some from being taxed.


5 Types of NonCash Charitable Contributions

When it comes to giving, there are more ways than one to contribute to charity and get a tax write-off.  Probably the most common type of giving is cash the cash donation.  But did you know you can get a tax deduction for other donations as well?  IRS Form 8283 outlines the details of Noncash Charitable Contributions.  Let’s look at the 5 most surprising types of noncash charitable contributions.

1. Donate your old textbooks to a College

If you went to college, you know the pain your wallet felt at the start of each semester.  Textbooks are very expensive, often costing around $100 each…one of the biggest captured- market purchasing markets ever.  And after the course is done, you rarely have use for them.  Why not donate them to your college before they become obsolete?  If the total of the donated books is more than $5000 to one college, you would use Section B of IRS Form 8283.

2.  Donate Your Furniture to Charity

If your furniture is gently used there are a lot of tax-exempt organizations that will take your noncash donation.  Some you will probably have heard of are:

  1. The Salvation Army
  2. Goodwill
  3. St. Vincent de Paul
  4. Vietnam Veterans of America

Don’t even try and insult these organizations or the people who ultimately receive or purchase your used furniture by trying to donate dirty or broken items.

3.  Vintage Clothing

Donating old clothing is hardly worth the hassle of the record-keeping for a tax deduction because it’s worth very little.  On the other hand, if you have some nice vintage designer pieces you might be able to get a receipt for something that’s worth your time.  Make sure the place is IRS-approved tax-exempt and make sure to get a receipt.

4.  Your Old Electronics

Your old TVs, computers, stereos, phones and other electronics are probably doing you absolutely no good lying around your house.  You can donate them to several tax-exempt places to get a tax deduction.  Donate as soon as possible because the longer you wait the more outdated they become.

  1. Goodwill takes old electronics.
  2. The Wireless Foundation accepts used cell phones.
  3. StRUT takes old electronics for student to practice their IT skills.
  4. eBay Giving…auction your used goods for a tax deduction.

5.  Donate Land to Charity

Yes, even real estate has a cause sometimes.  You can donate your land to charity and get a nice tax deduction.  It’s even better when you donate your land to something like Acres Land Trust, which accepts the land in order to preserve it.  You can even donate cash or stocks to them, which will also go to preserving natural areas.

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Tax Credits for Going Green: Do You Know Them All?

If you went green in 2013, your timing couldn’t be better.  The US government’s focus on helping the environment through tax credits and deductions was still in force for 2013, and IRS form 5695 is the form to use to claim those tax breaks.  How does it work?  Good question, since there are a lot of rules involved here.  Here’s the basic idea:

First, Find Out if Your Home Qualifies

If the home you greened was your primary residence in which you live all year round, then no problem, it qualifies.  It can take any shape: condo, farmhouse, trailer and even a houseboat.  As long as you lived there most of the time you’re good so far.

Your home under construction counts for some of the energy credits claimed on IRS form 5695.  Likewise, only some of the energy credits are available for homes that are under construction.  There are different types of credits for different types of home improvements.  That takes us to the next step:

Find Out if Your Home Improvements Qualify

For things like a solar energy system, it’s called the Residential Energy Efficient Property Credit Part 1).  For things like a energy-efficient water heater or energy efficient windows, it’s called Nonbusiness Energy Property Credit (Part 2).  

Main homes and homes under construction qualify for the improvements made under Part 1.  Part 2 is just for existing homes.

The government runs the Energy Star Program.  This tells consumers all about the energy efficiency of home items from irons to energy efficient roofing materials to your washing machine.  If your purchase had an energy star ticket on it when you bought it, then you can look it up on their website and find out about it’s qualifications on IRS form 5695.   They have a page that’s just for the 2012 and 2013 Federal tax credit for energy efficient home improvements.

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8 Useful Business Travel Deductions

You shouldn’t have to put wear and tear on you vehicle when you use it for your job.  That goes for sole proprietors, too: if you use your vehicle for your business then you can deduct expenses on your federal income tax return.  For employees of companies who reimburse them for travel-related expenses, deducting business travel, gift, entertainment and car expenses is not an issue.  But for those who put in for these expenses because they are not reimburse at work or because they run their own business and it’s a sole proprietorship, IRS Publication 463 is the ultimate guide.  Here are the 8 most common business travel deductions described in Pub 463.

1.  Airfare

The cost of your ticket to fly from your home to the business destination is fully deductible.  If you use your miles to get a free ticket, however, there is nothing to deduct.

2.  Hotel

The cost of your hotel, as long as it involves business the next day or a night after a full day of business, is also deducible.   There are US government lodging rates associated with just about every city in the world, used as guidelines in case you want to use the standard lodging allowance.  It’s easier than deducting what you actually paid, since using the actual method means you must keep all your receipts.  That’s hard to do while traveling.

3.  Dry Cleaning

If you have to have your suit dry cleaned on the business trip, this is deductible.  Same goes for laundry.

4.  Meals

Your meals are deductible, too.  If your business trip is far away enough or long enough that you must eat on the road, keep your receipts because it’s deductible.  However, if you want to use the standard meal allowance, no need for receipts.

5.  The Tips You Give

Yup, that’s part of traveling: tips on cab fare, bellboys, baggage handlers, you name it.

6.  Entertaining a Client

Careful, though:  you must either be conducting business in a definite space that’s for conducting business or if not, you must be engaging in business even though you are at a non-business location.

7.  Business Gifts

You can give up to $25 per person per year.  IRS Publication 463 describes in detail what kind of gift is a business gift.

8.  Traveling Locally Around Town

If you need to drive to a meeting across town that’s not at your regular workplace then it’s deductible.  Visiting clients also counts as deductible.



Here is a Method That’s Turning Tax Debt into Manageable Payments

If you owe the IRS less than $50,000 and you’re not capable of paying the debt off in less than 120 days, get a copy of IRS Form 9465 and set up an Installment Agreement with the IRS.  The form can be submitted when you file your 1040 or it can be filed any time you wish to set up an IRS payment plan.  The cost of setting up an IRS Installment Agreement is $120- the price went up starting in 2014.

How to Set up an IRS Installment Agreement with the IRS

You can get a copy of IRS Form 9465 right here on the IRS website.  Print it out, fill it out and mail it to the address included in the IRS Form 9465 Instructions.  Boy it’s easy: just fill out your name and other identifying information, how much you owe, and how much you can pay each month.

They let you decide how much to pay each month!  Incredible!

If you wish, you may set up direct debit from your bank account on IRS Form 9465.  Now, if you default on a prior installment agreement, you will have to fill out Part II on page 2 of IRS Form 9465.  They ask you about your income, your spouse’s income, your dependents, the vehicles you own, whether you have health insurance, and much your spouse makes, too.  The IRS wants to know what it’s getting into this time.

Instead of Using Paper Form 9465, Apply Online for an IRS Installment Agreement

Again, this is only if you owe less than $50,000 to the IRS.  You can apply for an Online Payment Agreement Application here on the IRS website.  You must have first filed all your tax returns.  You’ll need some personal data and tax info to apply, so gather your information first.  You get an immediate answer when the online application is up. Hours are posted on the page, too.  Good Luck!

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4 Sure-Fire Ways to Save on Your Tax Bill by Paying for Education

If you are saving for education or currently paying for it, then you should become aware of what’s in IRS Publication 970.  This IRS guide lists all the ways you can save on your federal taxes by investing in higher education.  There are several ways the feds encourage education through tax breaks, from education tax credits and tax deductions to tax-favored savings accounts to help you save for future higher education costs.  There is even a deduction for miles you drove to work-related higher education.

The education costs can be for your or your children (dependents).  Here are the major types of Education tax savings available from the Federal government.

  1. The Lifetime Learning Credit.  This will knock off up to $2000 from your tax bill with the IRS every year you pay for higher education for yourself, your spouse or a dependent.  That’s like a $2000 tax coupon every year!  It’s for tuition and some qualified expenses and it must be an accredited institution of higher education (which means post-high school).  You don’t have to be in a degree-seeking program either.  This is a great benefit for taxpayers.
  2. The American Opportunity Credit.  This is worth up to $2500 per student!  But it’s not good every year, only four years per student.  There is a limit because this is supposed to be for  getting your undergraduate degree, which traditionally takes four years.  Must be in a degree program.
  3. Student Loan Interest Deduction.  The interest you pay during the tax year can be deduction from your taxable income.
  4. Tuition & Fees Deduction.  The money you pay in tuition and fees for higher education can be deducted from your taxable income.  There are rules, however, so check out Chapter 6 of Pub 970.

See How Easily You Can Save Money On Taxes With Form 8889

If you started a Health Savings Account (HSA) and made contributions, then you already know there are some nice tax benefits involved.  The contributions you make to this account are not taxed so you can not only save for future medical bills but also get a nice tax advantage.  The way to let the IRS know you are claiming some tax-exempt income is to use IRS Form 8889, Health Savings Accounts.  Fill it  out and make note of your contributions for the tax year using the tax document you got from the administrator of your HSA, and attach IRS Form 8889 to your 1040 when filing your federal tax return.

You Must File IRS Form 8889 If…

When you make contributions during the tax year, as mentioned above, you must file IRS Form 8889.  Also, you must file if you received distributions during the tax year.  What does receiving distributions mean?  It means when you use your HSA money to pay a medical bill…that’s a distribution.  Most financial institutions that offer Health Savings Accounts will issue you a debit card for your account.  Use it like a credit cad for paying medical expenses.  For example, if you have a dentist appointment pay with your HSA debit card.  That’s a distribution from your HSA.  Use IRS Form 8889 to report this distribution.

If you forget at the dentist’s office and use a credit card instead of your HSA debit card, don’t worry you can reimburse yourself from your HSA.  That will then count as a distribution which you would report on IRS Form 8889.

The distributions must be used to pay qualified medical expenses.  If not, then you will pay a penalty for using the health savings account for something other than medical expenses.   For that, use IRS form 5329 to report rule-breaking behavior with tax-favored accounts like a Health Savings Account.

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Do You Make These Tax Mistakes?

When you have just a little bit of financial savvy and a bit of extra cash, you can start to take advantage of what the IRS calls tax-favored accounts.  These are special savings accounts you can set up with almost any financial institution which have very nice tax savings built into them.  It’s the government’s way of encouraging good financial behavior through offering tax savings when you save money for the future.  You only have to agree to a few simple rules.  With the retirement savings accounts, called IRAs (Individual Retirement Account), you must agree not to touch that money until you are at least 50 1/2 years old.  Likewise, you must start drawing on that account when you reach age 70.

Types of Tax-Favored Accounts

There are tax-favored accounts for medical savings accounts, education savings accounts and other types of retirement accounts.  For any of these, all of which come with rules, the penalty for breaking the rules is extra tax and sometimes actual penalties.  To report your wrongdoings with the tax-favored accounts use IRS Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.  

When to Use IRS Form 5329

Here are some examples of “rules” you can break with tax-favored accounts, causing you to have to file IRS Form 5329…

  • you receive an early distribution from your Roth IRA
  • you receive an early distribution form a Coverdell Educational Savings Account
  • you receive an early distribution from a Qualified Tuition Plan (QTP)
  • you contribute too much to your Traditional IRA or your Roth IRA
  • you contribute too much to your Coverdell ESA
  • you contribute too much to a Health Savings Account or an Archer Medical Savings Account
  • you didn’t receive the minimum amount you are required to take out of your retirement plan after hitting a certain age

If any of these describe you, then get a copy of IRS Form 5329 and submit it along with your IRS Form 1040.  If you aren’t required to file the 1040, that does not exempt you from having to file IRS Form 5329.  For more details, see the IRS Form 5329 Instructions here.

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Ultimate Guide to IRS Form 1099

IRS Form 1099 is used to report any payments made to a person for whom no withholding has been taken out.  For example, IRS Form 1099-DIV is used to report Dividend payments made to a person…this is income and no tax has been made on this payment.  It will been to be included on the Individual Income Tax Return Form 1040, counted as income.  Another example, IRS Form 1099-INT is used to report interest income.  Again, no withholding, social security or medicare taxes have been taken out.  But probably the biggest concern and most often-abused or misunderstood IRS Form 1099 is the MISC.  Let’s see why…

The IRS Form 1099-MISC

IRS Form 1099-MISC is used to report payments over $600 to anyone you hired.  You hire a painter to paint your kitchen for $700 so you must issue an IRS Form 1099-MISC at the end of the tax year so he or she pays income tax on this payment.  You issue a copy to the person you paid and to the IRS.

The receiver of the IRS Form 1099-MISC can be a person, an estate or a partnership.  IRS Form 1099-MISC are not usually issued to corporations.  If you don’t issue IRS Form 1099-MISC then you are participating in tax evasion because that person who got paid can get away with not paying any taxes on that income if the IRS never hears about the payment via the IRS Form 1099-MISC.

Are You a Freelancer?  You Should Know About IRS form 1099

You’ll probably get to know the 1099-MISC pretty fast if you are a freelancer or any type of independent contractor.  If you got one, then the IRS got the same copy so don’t even consider not reporting this income on your Federal Income Tax return.  The IRS knows about it and will match up any 1099s they get for you with the 1099s you report on your 1040 when you file your tax return.  They’d better match up or you’ll get a letter from the IRS and you’ll owe the income tax plus possible penalties and interest.

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