Making Work Pay Tax Credit
Once again this year, most taxpayers will need to file a Schedule M in order to claim the Making Work Pay Tax Credit. Its worth up to $400 for single taxpayers and up to $800 for married filing jointly couples. It’s the same schedule M form that you had to file last year to receive the credit; it just hasn’t gotten very much publicity lately so some people might forget about it.
Most tax software will automatically calculate it for you, but if you’re preparing a return by hand, you need to remember to include the form. Here’s a link: http://www.irs.gov/pub/irs-pdf/f1040sm.pdf
Most people who earned wages or were self employed qualify for the Making Work Pay tax credit, although if your parents claim you as a dependent then you won’t qualify. Also, persons filing a non-resident return or persons filing a return without a work-valid social security number won’t be able to claim one either. There are also restrictions for high-income wage earners as well.
If you need more information, here’s a link to the instructions for the form. http://www.irs.gov/pub/irs-pdf/i1040sm.pdf
How to Stick it to My Ex with the IRS – divorce issues
Photo by Dr. John Bullas
You wouldn’t believe how often I am asked, “How can I stick it to my ex?” People going through a divorce or breakup are so angry and hurting that it’s natural to want to strike back. While I feel deeply for peoples’ pain and suffering, the best advice I can give to that question is don’t. Here’s why.
The easiest way to mess up someone else’s tax return is to claim their children on your tax return before they can file theirs. It’s that simple. Once the children’s social security numbers have been claimed on a tax return, they can’t be used on another return. That means your ex can’t e-file a return and can’t get the refund she’d get with the kids. It sounds pretty nasty, but there’s a very important downside.
First, if don’t have custody of the children and they haven’t lived with you for at least six months, well then you’d be committing tax fraud. Depending upon the severity of the fraud (especially if you received an Earned Income Credit) it’s even possible that you could see some jail time. How badly do you want to mess with your ex?
But let’s forget the possible jail time. Let’s examine what would happen in a regular dependency dispute. Your ex, if she were smart (or had at least hired someone like me), would still submit her tax return claiming the children. She’d have to mail the return in, because e-file would no longer be available to her. Then because there would be two returns claiming the same children the IRS would issue dependency audits to both of you. That audit letter is around eleven pages long listing several items that you’re going to have to come up with to prove that you are really the custodial parent. The information is fairly easy for a custodial parent to access, downright impossible if you’re not.
So, although you’ve dealt your blow and messed up her refund temporarily, in the end she’ll get the money and you’ll lose the audit. Not only will you have to pay back the tax money you received from the IRS, there will be fines, penalties, and you’ll probably be forbidden from claiming and Earned Income credit in the future (even if you would really be entitled to it.)
So, back to the original question, “Is there a way to stick it to my ex?” The answer is yes, but it will hurt you worse.
When Can I File My Tax Return?
If you’re expecting a refund, you want to know just how soon you can file. For most people, the earliest day that the IRS will begin accepting e-filed returns is January 14th, that’s this coming Friday. It’s important to remember that you’re not allowed to file until you have all of your W2s and other income documents. Your employer isn’t required to send them out until January 31st, but if you receive them early then it’s okay to file.
Some people though, will not be able to file their tax returns until mid to late February because the IRS still has to change some forms due to the new tax legislation that was recently passed.
The more common troublesome forms are:
Schedule A: yep, if you itemize your deductions, then you’ll have to wait to file. The big hold up here is that Congress reinstated the state and local sales tax deduction which had previously been eliminated. Because that goes on the Schedule A, everyone who files a Schedule A will have to wait.
Higher Education tuition and fees deduction (Form 8917): This was a tax deduction that was also phased out but reinstated in the tax deal. This does not affect filing your return if you qualify for the American Opportunity Tax Credit (that’s what used to be called the Hope Credit but was changed last year) or the Lifetime Learning Credit.
Educator Expense deduction: That’s not even a whole form, that just line 23 of your 1040. What I find most amusing about this is that I get to see draft copies of IRS forms before they’re published. In November, the 1040 form still had a space for the educator expense deduction because the folks at the IRS kept thinking that Congress would reinstate that one. Well, nothing happened on that and there wasn’t any discussion about extending it so they finally pulled it in preparation for filing season. It was the right thing to do at the time. Now it’s back and the form has to be changed. (If you meet an IRS IT technician in a bar, buy him or her a drink. You’ll recognize them by the chunks of hair missing from their heads because they’ve been pulling it out from all the stress of crazy tax law changes.)
Just because you can’t actually file your return yet doesn’t mean you can’t have it prepared and ready to go once the IRS gives the okay. Although it’s normally illegal for a tax preparer to “stockpile” income tax returns, the IRS is allowing preparers to hold client returns until the IRS is ready to receive them. And of course, if you’re preparing your own return, you can finish it and hold it until the release is given. I’ll be posting that date as soon as I know it.
Get Your Refund Faster
You may have noticed that it’s harder to get a Refund Anticipation Loan (RAL) these days. Between actions by the IRS and some bank regulations, the RAL money is pretty hard to come by. You will still get your income tax refund, it just won’t be as fast without the RAL. On the bright side, RAL charges are really expensive and the money you save could be worth the wait.
You’ve probably heard advertisements on TV that say you can get your refund in as little as 8 days. It’s true, but you need to know the whole truth, it could be 8 to 14 days. Also, if you do one of those Refund Anticipation Checks (RACs), that’s where the fees you pay to a preparer are taken out of your refund, then that could add another 1 to 3 days onto the timeline. I believe in “truth in advertising.” I’m hearing a whole lot of “Get your money in as little as 8 days” and “without even paying anything up front” but I’m not hearing about the extra time added for doing that, or the extra cost. You need to know the whole story.
One thing you should know about is timing. Thursday is the important day. The IRS issues checks on Thursdays. The cutoff for determining what checks get written is the Thursday before check writing day. That means, if you have your taxes prepared and submitted on Wednesday, and you’re doing a DIRECT DEPOSIT into your personal bank account, then you’ll receive your IRS refund in 8 days; one week from the Thursday cut-off. If you have your taxes prepared on a Friday, then you’ll get your refund almost two weeks later instead.
Remember, the cycle runs on Thursdays; your refund will be computed on the first Thursday and the check will be cut on the second Thursday.
So, the best day of the week — in order to get the fastest refund – is Wednesday. Now, if you file your taxes on Thursday morning, you might be okay. If the filing is received by the IRS by noon, you’ve made the cut-off and you’ll receive your refund the next week. The catch here is you might go into an office, file your return and have it sent before noon, but there are things called “batch systems” that may prevent your return from actually being received before noon by the IRS. If you file on Wednesday, all those batches will be processed before noon on Thursday and you’ll receive your refund the Thursday after that.
I always recommend filing on Wednesday over Thursday morning just to avoid the risk of being held up in the batching. (Most preparers have no control over that.) Of course, the important thing is to just file when you’re ready. Don’t file before you have all of your documents. Remember, your employer isn’t required to have the W2’s completed until January 31st. If you happen to get your paperwork early, consider yourself lucky.
Just because the IRS issues checks and does its DIRECT DEPOSITs on Thursday doesn’t mean you will receive your money on Thursday. If you are doing a RAC, where you had your fees withheld from your refund, then your IRS refund is going to go to a bank that works with your tax preparer and then the bank will direct deposit the money into your account. There’s a time lag there that can be for as long as three days. You need to keep those things in mind when you’re looking for your money.
Keep your money in mind also as you listen to those TV commercials. “You can have your refund with no money due from you when you file.” That’s all fine and dandy, but how much money are they keeping? There will be a fee for the tax preparation, plus a fee to the bank for bank processing, plus a fee for completing the paperwork required by the bank. Make sure you know how much you’re spending for that convenience. Depending upon your situation, it may be well worth it to pay the charges, it may not be. Ask questions, know what you’re buying so that you make an informed decision.
The fastest way to get your income tax refund, without using a loan program, is to e-file your taxes on a Wednesday and have your refund DIRECT DEPOSITED by the IRS into your personal bank account.
Tax Tips for Single Moms
Welcome to the world of parenthood. Raising kids is hard enough with help but it’s even harder when you’re alone. Here are some tips to help you navigate the changes that will happen to your tax return, because you deserve a little help once in awhile.
Claiming your baby as a dependent: If you are earning income (over $3650), then you’re going to want to file a tax return and claim your baby as a dependent. I sometimes hear women say they didn’t claim their children because the child was born in December and they read the child is supposed to live with you for 7 months. In the year of birth, you claim the child even if he was born on December 31st. Let’s be honest, if you’ve just gone through a pregnancy, that child has been living with you for more than 7 months anyway. Claim your baby! We’ll talk a little more about possibly letting someone else claim the baby, but unless there are special circumstances, plan on it being you.
Changing your filing status: If you’re on your own and supporting yourself, then once your baby is born you will change your filing status from Single to Head of household. It gets a little more complicated if you are living with your parents, the baby’s father, or someone else. The issue becomes, who is providing most of the support for the child? If you’re using computer software, there are all sorts of questions you can ask to determine how much support is provided to the baby and by whom, but here’s a quick and easy technique that’s pretty helpful. If you prepare the tax return with Head of Household status, and then switch it to Single status and the refund amount is exactly the same, then claim Single as your filing status. If your income is so low that your refund won’t change, then you really don’t need Head of Household status. The IRS will audit returns claiming HH status when the income is too low, they never audit Single for the income being low. Why not just avoid a headache that you don’t need. The Earned Income Credit amount is the same for single as Head of Household filers.
What about letting someone else claim the baby? If you are living with the baby’s father and it would benefit you to have the child on his tax return instead of yours, then that’s fine. If you are living with your parents and they are supporting you and the baby, you can let your parents claim the child. Your parents would have to make more money than you do to be able to do this.
Letting anyone outside of you, the father, or a grandparent claim your child on a tax return has the potential to get you into trouble and even land you in jail for tax fraud. There are a few situations where it can be done, but for that you should go see a professional. The rules regarding dependents change often. Things that were allowed a few years ago aren’t allowed now. Sometimes well meaning friends and relatives can give you bad advice which could get you into big trouble. Protect yourself.
The Earned Income Credit: Many single moms, especially when they’re just starting out, qualify for the Earned Income Credit. It’s a refundable credit, that means you get the money even if you didn’t pay any tax into the system. EIC is a big deal and can make a huge difference on your refund. That’s why people may want to try and claim your baby for you. There’s between $13 to $14 billion dollars a year of EIC fraud. It’s also why you need to be careful, the IRS is very aggressive about pursuing EIC fraud—that’s why you don’t let anyone else claim your child.
Also, you need to protect your child’s social security card like it was gold—it’s that valuable. Infant identity theft happens all the time. You won’t know it’s happened until you file your tax return and it get’s rejected because someone else has claimed your child. Do not carry the card around in your purse. If you have a safe deposit box, put it there. Store it someplace safe.
File Your Taxes for Free Online
There’ve been lots of ads about filing your taxes for free online. That’s all fine and dandy, but if you’re not careful, it’s not really free. For example, if you go to the IRS website, you can probably file a free federal tax return, but there will be a charge for filing the state return. What tends to happen; is people go to the IRS site, file their federal return and then don’t file their state return because they have to pay for the state program. They decide that they’ll get the forms from the library or someplace later and then they “forget” and then get a nasty little note from the state saying they owe money. That’s when they wind up calling someone like me (or worse one of those “pennies on the dollar TV ad places”) and they pay much more for fixing their tax problem than they would have had to pay in the first place.
So, is there really such a thing a totally free e-file? Yes, but there are restrictions. For example: here in Missouri, you can go to the Missouri Department of Revenue site and get a free state and federal tax return program. Generally, you’ll have to qualify for the Earned Income Credit, or be under age 20, or be in the Military. You must access one of the tax providers from the Missouri website to get the free tax return. Here’s the link: http://dor.mo.gov/personal/individual/vendors.php#freeonline
The most important thing to remember is that you have to access the tax programs from the Missouri website in order to get the free filing! The same holds true for other free file programs. You must access the program through the government link in order to qualify for the free file, otherwise you will be expected to pay for the service.
Some states, like Illinois, will let you file your tax directly through their state website. You’ll have to prepare your federal tax return first, but then you can file your state. To find out if you qualify to the Illinois web-file, click on this link: http://tax.illinois.gov/Individuals/StudentQualifications.htm
In a case like that, you’ll want to do the IRS free file first. That link is:
http://www.irs.gov/efile/article/0,,id=118986,00.html?portlet=8
The IRS won’t have that site open until January 14th. But once it comes open, there will be a list of free file providers and the requirements for using the service. Generally, if your income is below $57,000 you should be able to find at least one service that will free file your return through the IRS website.
Do not forget to file a state return! I cannot stress that enough. After the federal filings are all in, the IRS shares the information on your federal tax return with the state listed as your home address. If you deserve a refund, the state will not notify you, and you’ll just miss out on receiving your refund. If you owe, you will receive a notice showing your balance due, plus penalties for not filing and penalties for late payment, plus interest due on the amounts owed. These notices will not take into account and deductions that you might be entitled to. It’s definitely in your best interests to file your own return and not take the state’s bill at face value.
What do you do if your income or other circumstances prevent you from using the free e-file programs? This is of course making the assumption that your tax situation is easy enough for you to file your own taxes. (You are reading this Blog on a professional tax preparer web-site, if you can’t prepare your own return really you should be calling me, right?)
My recommended for pay “prepare your own taxes” website is here:
Although much less expensive than having a professional prepare your return, this site is not free. It’s actually through Drake software. I use their professional version when I prepare income taxes for my clients. I like the online software because as new issues pop up, the software is updated constantly. You’re less likely to have tax return mistakes due to software issues when you use an online program. Also, the online programs will determine which forms you need, 1040EZ, 1040A, or 1040. The program will pick the easiest form you qualify for. You also don’t need a credit card, you have the option of having your fees withheld from your refund if you’d like. You can try it out for free, then if you choose to file with this program you can pay, otherwise just walk away.
What about the tax filing products that you buy at Sam’s Club and Office Depot? The tax return products in a box are generally good products IF you remember to download and install the latest updates before you actually file your return. If you fail to download and install your updates, those programs are close to worthless, especially this year with all the last minute changes made by Congress. Be sure to buy the program that’s best for you. Don’t buy the “basic” when you need the “premium.” Read the boxes carefully to determine what type of filer you are. If after looking at the examples on the box you honestly don’t know which program to buy, you should have a professional prepare your return.
One more tip for filing your own return: Many tax companies will, for a fee, review a return you’ve prepared yourself. I do it all the time. This is especially helpful for people who don’t feel 100% comfortable with filing for themselves or just if you have questions. It’s a low cost alternative to hiring a full professional service versus going it completely alone. Be careful though, some companies use that as a ploy to get you to purchase their professional filing services. They offer a cheap “review” rate then tell you you’ve missed something but won’t tell you how to fix it. Reputable companies will tell you what’s wrong, why it’s wrong, and how to fix the problem.
When to Hire a Professional Preparer
Friendly, neighborhood, professional tax preparer
Okay, you’re reading this on a professional tax preparation website and I’m an enrolled agent. Are you really expecting to see any answer other than, “Always?” So you’ve been warned. But seriously, many people are perfectly capable of preparing their own income taxes and they do it quite well. For those people, the question is, when do you get a second opinion? Here’s my list:
Whenever you have a major lifestyle change, like getting married, having a baby, buying a house, starting a new career, retiring. You get the picture. Many of the big life style changes have tax implications that go with them, it’s a good time for a professional.
Whenever you start a new business—many of the biggest tax problems occur during the first year of business. Even if you’ve started a new business before, the rules are constantly changing. You would be amazed at how many people prepare the wrong tax form for their business.
Whenever you’re dealing with two or more states on your tax return—most home software programs don’t handle multiple states well. Some of them can handle two states. Even with my professional tax software, if there are three or more returns, I’m often re-computing the figures by hand. If you hire a company that sells an accuracy guarantee, always purchase that agreement for a multistate return. Most tax preparation firms focus on the federal return and the state information automatically flows through from the federal. There isn’t a lot of training for state returns, the assumption is that the software will handle it. The problem is, the software is only as good as the person using it. Multistates require someone with experience. (Ah, like me, just saying.)
If you’ve had stock options-I put this in because one year I represented several people who all worked for the same company. They received stock options and didn’t report them correctly on their tax return. They all received scary IRS letters saying they owed thousands of dollars in taxes. Once I was done with their amendments, they all received refunds, but they shouldn’t have even had to have gotten letters in the first place.
Finally, I recommend having your taxes reviewed every three years, even if you don’t experience any of the above. Let’s say you’ve been doing your taxes on your own and a law changed and you missed a big tax deduction. You only have three years to file an amendment to get your money back or you’ve forfeited the refund.
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