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Home Business And Taxes: Doubling Up On Tax Day

When Tax Day rolls around, those who owe taxes are often a little disgruntled. But, if you have a home business, you need to be extra careful if you owe. Don't forget that you actually have two tax payments to make: What you owe from underpaying the year before, and your first quarterly estimated tax payment for the current year.

Quarterly Estimated Taxes

When you have side income, you might need to pay estimated quarterly taxes. If you are making regular income throughout the year, and not having it withheld by an employer, the IRS expects you to pay quarterly. A traditional employer pays taxes quarterly — including the amount of money withheld from your paycheck for the purpose. And if you are making income on the side, you are expected to pay quarterly as well.

Over the course of the year, this can be a helpful state of affairs. You make your quarterly payments, and you don't have to worry about coming up with the money to pay a huge bill on Tax Day. At least that's the theory. You still need to plan carefully, though, or else when Tax Day rolls around you could find yourself in trouble.

Two Tax Bills Due on Tax Day

When I first started with my home business, I got on track with quarterly tax payments, and began making them faithfully. However, as my income grew, it was plain that the quarterly tax payments weren't enough to cover my total tax bill. I usually owed a couple thousand more at the end of the year. That didn't seem too bad — provided I was prepared for it.

However, one thing I didn't prepare for was the fact that the quarterly estimated payment for the first quarter of the current year is due on Tax Day. So, instead of making one tax payment, I actually needed to make two tax payments. And that didn't even count the bill owed for my state taxes.

One year, I discovered that, with what I owed the IRS from the previous year, plus the quarterly tax payment, plus state taxes, I had almost $8,000 due on Tax Day! While I was prepared to pay some of it, I had been so focused on paying what I owed at the end of the year that I forgot about my new quarterly estimated tax payment. The result, unfortunately, was raiding the emergency fund as a way to help pay what was owed.

It's true that many of us would rather owe the government, rather than get our own money back, without earning interest, through a tax rebate. However, there does need to be a level of preparation. And, if you are making quarterly estimated tax payments, it's important to consider that they may not be enough to cover what you owe throughout the year — especially if your income is growing. On top of that, remember that your first quarterly payment will be due the same day as your previous year's tax bill. Plan ahead for that reality, or you could find yourself stuck.

Should You Itemize Your Tax Deductions?

By Miranda Marquit 2 Comments

For years, my husband and I just took the standard tax deduction, and were happy with it. After all, that deduction is fairly hefty. Then, my home business started making money (and our contributions to our church rose correspondingly), and we bought a home.

Now, suddenly, we had a higher amount that we could deduct — and it was more than the standard deduction. We started itemizing our tax deductions.

should you Itemize deductions

Do Your Deductions Amount to More than the Standard Deduction?

It may seem like a pain to add up all of your deductions, but it can pay off in the end. If your itemized deductions add up to more than the standard deduction, your taxable income will be lowered by that much more. Some of deductions that you can itemize to help you reduce your income by a little bit more include:

Uninsured medical and dental expenses: If you paid out of pocket for medical and dental expenses, these can be deducted. Your expenses must exceed 7.5% of your Adjusted Gross Income, though, if you want to deduct them. For some, though, who have high deductibles, and for those who don't have dental insurance and had major work done, this can be a real help in offsetting some of the costs.
Interest and taxes on your home: The mortgage interest that you pay is tax deductible. Additionally, your property taxes are deductible. Unfortunately, as 2011 expires, so, too, does the tax deduction for PMI premiums paid. But, you can still get a fairly hefty deduction for interest and taxes on your home.
Unreimbursed employee business expenses: If you spent a great deal out of pocket on behalf of your employer, for business-related items, and you were not reimbursed, you can receive a tax deduction for that. Make sure that you keep good records of the expenses incurred, including receipts.
Miscellaneous deductions: In some cases, you might have large, unreimbursed expenses that don't readily fall into any category. With proper documentation, you can deduct these as well, but you might want to consult a tax professional before you do.
Uninsured losses due to theft or casualty: If your home was hit by a disaster, or if you have had a theft, you might be able to itemize those deductions. First of all, any theft or casualty tax deduction has to be on expenses that were not covered by your insurance company. If you insurance company paid for repairs, you can't deduct that amount. You can only deduct the amount using a formula provided by the IRS on losses not taken care of by insurance.
Charity donations: Large charity donations to qualified non-profits can be deducted as well. If you make large enough donations, it can overwhelm your standard deduction.

There are other eligible tax deductions as well. You don't need only one of the above to exceed your standard deduction in order to benefit from itemizing. You can add up as many items as necessary to get your total. It's this total that matters when determining whether or not you have more than the standard deduction. And, if it looks like you will have a larger number than the standard, it's a good idea to itemize in order to increase your tax efficiency.

Tax Preparation Checklist: All The Things You’ll Need At Tax Time

By Mr. Money 1 Comment

Tax time is quickly coming upon us as we move into the new year. A lot of people actually look forward to tax time because they plan on getting a big refund around this time -and it's often used as a time to splurge on vacations, big screen TVs and more! While I personally try to work out my withholding so that it comes out about even with no refund and no taxes owed, the fact is most people don't do that. In fact, the average tax refund for 2010 was around $2,892, so a lot of people will be ready to file as soon as they can. They want their money!

So today I thought I'd get everyone ready for the day that they finally plan to file by giving a tax checklist you can use – so you have everything you need in one place on tax day.

tax preparation checklist

Tax Preparation Checklist

When you're filing your taxes there is a ton of information that you'll need to have at the tip of your fingers when filing. There are a lot of blank spaces on that tax form! In fact, there are 165 blanks on tax form 1040, 127 on Form 1040A, 94 on Schedule C, 77 on 1040EZ, 55 on Schedule A, and 44 on Schedule B! Do you have all of that information ready to go – ready to fill in all those blanks? Here are some of the pieces of information you'll need.

Tax Information To Have Handy

Tax returns for the last two years
Birth dates and occupation(s)
Change of address (if you moved)
Bank name, routing and account numbers (for refunds or payments)
Spouse name and social security number
Dependents names and social security numbers
W2s and 1099s for all income and compensation
1099 Interest, 1099 dividends, 1099 Misc, 1099C cancellation of debt, 1099G unemployment compensation, 1099R distribution from IRA, 401k, etc.
Last year’s state tax refund
Health care costs if they were greater than 7.5% of AGI
State and local income tax, car sales tax
Charitable contributions
Theft and casualty losses
Home office deductions
IRA contributions or retirement plan contributions
Student loan interest
Moving expenses
Student tuition fees
Estimated federal and state tax payments
Energy efficient home improvement tax credit info
Credit for child and dependent care info
Education credit info
Child tax credit/adoption credit info

So there’s a good start on the information that you should have handy when filing your taxes this year.

What Does It Cost To Prepare And File Your Taxes?

How much it costs to do your taxes will vary pretty widely depending on how you file. You can hire someone to file for you, file a paper form yourself (does anyone do this anymore?), or use a software like TurboTax like I do. 32% of people did in 2010 used a software to file, so you'd be in good company if you did that. Your amount of income made can also have an impact as there is free-file available for some lower income folks.

Hiring a CPA or company: On average around $230.
Tax preparation software: About $18-60 on average, depending on which software or site you use.
Doing it yourself with paper forms, or using low income free file: Free. Click here read up more on free tax filing options.

Why Would You Ever Pay Someone To Do Your Taxes?

There are quite a few situations where it would make sense to hire a professional tax preparer to help you with your taxes. Here are a few:

You’re self employed, have your own business and a complicated tax situation.
You got married or divorced in the past year, and your situation is changing.
You’ve bought or sold investments during the year, or received a large windfall.
You just don’t do well with complicated topics like taxes.
You think you could save a lot of money using tax strategies you don’t understand.

These reasons are only the beginning of why you might want to hire someone to do your taxes. What other reasons can you come up with?

Do you think we missed anything on our tax preparation checklist? Did we leave anything off the list – what would you add? Any other tax time tips for the rest of us?

What’s Next For Employer-Sponsored, Tax-Advantaged Retirement Accounts?

By Miranda Marquit 3 Comments

Everyone seems rather focused on the deficit right now. This isn't surprising, considering the fact that we have a serious budget crisis brewing in the U.S. However, a lot of the plans to “fix” the problem involve getting rid of tax incentives for the people who need them most.

One of the issues on the table is getting rid of some of the tax advantages associated with employer-sponsored retirement accounts.

Your Tax Deduction Could Disappear

One of the ways that some lawmakers hope to improve revenue is to stop providing the ability to contribute to employer-sponsored retirement accounts with pre-tax dollars. Another plan is a cap on the combined employer/employee contribution limit, reducing it to the lesser amount of $20,000 a year, or 20% of income. (Currently, the corresponding amounts are $49,000 a year and 100% income.) There are different suggestions as to how to change the tax advantages associated with retirement contributions, but all them have the possible effect of reducing the amount workers set aside for retirement.

Additionally, there are concerns that reducing the tax benefits that employers get for setting up these retirement plans would have the effect of reducing the number of plans even available. Employers are already feeling the pinch from the rising costs of health care benefits. They might not be so willing to continue offering retirement plans if the tax incentives to do so began disappearing.

Would You Still Contribute To A Retirement Account Without The Tax Benefit?

Already, there are concerns that Americans aren't saving enough for retirement — and that's with fairly decent tax benefits to do so. What happens when that incentive goes away? If you thought the retirement savings rate in America was bad already, just wait until there's no reason to sock money away in a tax-advantaged retirement account.

The flip side, of course, is that there are some people who would contribute to a retirement account no matter. If you are preparing for your future, you know that you will need to set money aside — whether or not the government gives you a tax break. While it certainly is nice to receive the tax benefits associated with retirement plan contributions, if they disappeared tomorrow, I'd still make retirement account contributions. (Of course, I contribute to a Roth IRA, so I don't get a tax deduction anyway. But we will soon be contributing to a 403b through my husband's job, so a deduction could be a very real possibility soon.)

Bottom Line

Any number of suggestions are being floated as ways to reduce spending and boost tax revenue. This means that there are a number of tax deductions and credits on the table, many of them affecting individuals and businesses. From retirement account contributions, to the mortgage interest deduction, you could soon see some of your tax breaks disappearing. This means that you will need to plan for the possibility. Decide what's important to you, and what you can handle without the tax break. Hopefully, you will decide that it's still important to make contributions to your retirement account, even if there is no tax break associated with it.

2012 Federal Income Tax Brackets: Official IRS Marginal Tax Rates

By Mr. Money Leave a Comment

Last year around this time we were in the middle of tax bracket drama as our elected officials in Washington D.C. were fighting over whether they would be extending the Bush tax cuts of the early 2000s (making them the Obama tax cuts?), or whether they would allow them to expire and rates to go up for everyone who pays taxes.

In the end Obama and the Democrats agreed to extend the tax cuts and in exchange were able to get the following concessions from Republicans:

Extend Bush tax cuts for everyone, for 2 years.
Reduce Social Security tax levied on a worker’s wages from 6.2% to 4.2% for one year.
Reinstatement of the estate tax at 35%
Extension of jobless benefits for another 13 months, beyond current 99 weeks.
Extend current tax rates on capital gains and dividends for two years, including for higher earners.
Extend a raft of business tax breaks, including credit for spending on research

2012 federal income tax rates The parts that affect most people include the extension of the rates for everyone (ensuring that taxes don't go up), and the reduction of the social security tax levied on worker's wages.

After this year, for the tax year 2012, social security tax levied on worker's income will be going back up to 6.2%. Get ready for the outcry!

2012 Tax Rate Projections

For the 2012 tax year, the tax rates have not been released as of yet, but several groups have projected what the rates will be. The rates are calculated by the IRS with a complicated formulate based on inflation rates among other things. Thankfully we don't have to figure it out on our own.

As you can see, the rates haven't changed much from previous years, just some slight upticks in the lower and upper ends of each bracket.

2012 Tax Brackets	Single	Married Filing Jointly
10% Bracket	$0 – $8,700	$0 – $17,400
15% Bracket	$8,700 – $35,350	$17,400 – $70,700
25% Bracket	$35,350 – $85,650	$70,700 – $142,700
28% Bracket	$85,650 – $178,650	$142,700 – $217,450
33% Bracket	$178,650 – $388,350	$217,450 – $388,350
35% Bracket	$388,350+	$388,350+

For comparison's sake, here is a look at the tax rates for 2011.

2011 Tax Brackets	Single	Married Filing Jointly
10% Bracket	$0 – $8,500	$0 – $17,000
15% Bracket	$8,500 – $34,500	$17,000 – $69,000
25% Bracket	$34,500 – $83,600	$69,000 – $139,500
28% Bracket	$83,600 – $174,400	$139,500 – $212,300
33% Bracket	$174,400 – $379,150	$212,300 – $379,150
35% Bracket	$379,150+	$379,150+

Standard Deductions Rise

The standard deductions for married and single filers are projected to go up slightly as well.

The standard deduction for married filing jointly is projected to rise to $11,900 in 2012 from $11,600 in 2011.
The standard deduction for singles will rise to $5,950 in 2012 from $5,800 in 2011.
Personal exemption rises to $3,800 in 2012 from $3,700 in 2011.

No Drama This Year, But Wait Until Next Year

So while the rates are seeing only slight changes this year due to inflation, next year could be shaping up for another battle. Not only will it be an election year, but the extension of the Bush tax rates will be up for debate again as they expire at the end of 2012. Buckle your safety belts, it's gonna be a bumpy ride!

What are your thoughts on what we could see next year when it comes to the tax rates? Will there be another battle about extending the rates?

Lower Your 2011 Tax Bill by Going Green With Home Energy Tax Credits

By Contributor 2 Comments

Although the U.S. government's ability to function is heavily dependent upon tax revenue, taxpayers are not completely forgotten about. In fact, the government offers taxpayers breaks for taking certain actions or making certain purchases that are good for themselves, the economy or the environment. One such break is a tax credit available to homeowners who make energy-saving home improvements and upgrades.

Last December, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which extended numerous tax credits to both taxpaying individuals and businesses, including those making home energy improvements. Some of these home energy tax credits will continue to be allowed for the 2011 tax year and beyond, although most are lower than the last two years. Nevertheless, it is well worth the small effort needed to maintain any records so that you can claim these tax credits at the end of the year if you qualify.

Last December, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which extended numerous tax credits to both taxpaying individuals and businesses, including those making green energy improvements. These credits will continue to be allowed for the 2011 tax year, although they are lower than the last two years at just $500 for the lifetime of the taxpayer. Despite this, however, it is well worth the small effort needed to maintain any records so that you can claim these tax credits at the end of the year if you qualify.

The Benefit of Claiming Tax Credits

Unlike a tax deduction, which only lowers your taxable income by the amount of the deduction, a tax credit – as its name suggests – is a credit toward the taxes that you owe. In other words, it is a dollar-for-dollar reduction in tax liabilities. For example, if you owe $1,200 and receive a $500 tax credit, you will only owe $700 on your tax bill. In some cases, tax credits may result in your receiving a refund under circumstances in which you may otherwise have owed money.

Changes to Some Home Energy Tax Credits in 2011

While the good news is that some residential energy tax credits that were set to expire at the end of 2010 are being extended through 2011, the bad news is that there is now a total lifetime cap of $500 for the following energy-efficient improvements:

Heating, Ventilating & Air Conditioning (HVAC) Equipment – Includes furnaces, boilers, air source heat pumps, advanced main air circulating fans and central AC. (Central AC capped at a $300 credit, electric heat pumps capped at a $300 credit, furnaces and boilers capped at a $150 credit, main air circulating fans capped at a $50 credit)
Insulation – Typical bulk insulation products, such as batts, rolls, blow-in fibers, rigid boards, expanding spray and pour-in-place, as well as many products designed to air seal, such as weather stripping, caulk, house wrap and spray foam in a can, are included.
Metal & Asphalt Roofing – Metal roofs are required to have appropriate pigmented coatings, asphalt roofs are required to have appropriate cooling granules, and installation costs are NOT included.
Non-Solar Water Heaters – Includes qualified natural gas, propane or oil furnaces and hot water boilers. (Furnaces are capped at a $200 credit and must be 95% efficient.)
Energy-Efficient Windows, Doors & Skylights – Also includes storm windows and doors. (Credits for windows are capped at $200).
Biomass Stoves – Must have a thermal efficiency rating of at least 75%. Biomass stoves can burn agricultural crops, wood, plants, grasses, residues, and fibers. (Credits for biomass stoves are capped at $300.)

The $500 lifetime cap is a rather significant reduction from the $1,500 cap that existed previously. This means that if you have already received at least $500 total in energy tax credits through 2009 and 2010, you are no longer eligible to claim these tax credits. On the other hand, if you have only claimed a portion of the $500 threshold so far, you are still eligible to claim the remainder of it as long as you make qualified improvements before the end of this year. For example, if you have only used $300 in credits, you still have $200 left for 2011.

Another major change to these energy tax credits this year is that it only extends to 10% of the cost – down from 2009 and 2010, when it was 30% of the cost – so you will need to spend $5,000 in order to receive the full $500 tax credit. However, if you are already planning to make some of these qualifying energy-efficient home improvements discussed above, it is in your best interest to make these changes before the end of 2011. If you are not already planning to upgrade at this time, you may want to consider how much money you will save long-term by upgrading to an energy-efficient appliance sooner rather than later.

If you are eligible for the aforementioned energy tax credits, you must complete any qualifying home improvements before the end of this year in order to receive these tax credits as they will expire on December 31, 2011.

Eligibility Guidelines for the Home Energy Tax Credits Discussed Above

It is important to be aware of the many rules and restrictions limiting what is eligible for the energy tax credit and how much you can claim. You will certainly not want to get to the end of the year thinking that you have tax credits, only to discover that you have purchased and installed ineligible systems.

The residential energy tax credits are a bit complicated in that:

Improvements must be made to an existing home
Improvements must be made to your principal residence
Only certain home improvements are eligible
Only certain appliances and systems are eligible
There are individual caps on many items.

Home Energy Tax Credits Through 2016

Fortunately, many residential energy tax credits will not expire till December 31st, 2016. These include geothermal heat pumps, small wind turbines and solar energy systems, as well as residential fuel cell and microturbine system installations. The first three aforementioned home improvement energy tax credits have no upper limit or cap and can get you a tax credit of up to 30% of the total cost (including installation costs). For residential fuel cell and microturbine system installations, you can obtain a tax credit for 30% of the total cost (including the installation) up to $500 per .5kW of power capacity.

Eligibility Guidelines for Home Energy Tax Credits Through 2016

Just like the other home energy tax credits expiring this year, there are some limitations on the energy tax credit. However, these limitations are much less restricting. Here are the major differences in the limitations:

Improvements may be made to an existing and new construction homes
Improvements may be made to your primary residence and your second home (except for fuel cells which only qualify for your primary residence)
There are no individual caps.

Claiming Energy Tax Credits on Your 2011 Tax Return

In order to claim energy tax credits on your 2011 tax return, you must take the following steps:

Plan your home improvements wisely and consult the ENERGY STAR website to see which improvements are eligible to claim, and whether you can claim installation costs for certain systems and improvements
Keep your receipts and Manufacturer's Certification Statements in a special folder so that you can add them up at the end of the year. You must be very clear about which items you purchased during the year.
Record your spending on IRS Form 5695 and submit it with your 2011 tax return. On IRS Form 1040, the residential energy tax credit is claimed on line 52.

Learn More

You can obtain more information, eligibility requirements and other details on qualifying products at both Alliance to Save Energy and ENERGY STAR. Or consult a tax professional to see how you may be able to benefit from the residential energy tax credit, as well as the many other tax breaks available.

For you, as the taxpayer, making home improvements that save energy creates a win-win situation, where not only will you reap a short-term benefit by receiving the tax credit, but you will also enjoy the long-term advantage of saving a great deal of money on your energy bills.

This guest post was provided by Manny Davis. His website contains a frequently updated tax blog with tax news, tax changes and tax saving tips, as well as detailed guides to help people through various tax related problems.

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