CNN Tax Tips 2005

TAX TIP #1

Accountants agree! The first thing you need to do to tackle your taxes is to get organized. Barbara Kruger, head of In A Pinch, is an organizing consultant who is telling her clients
"As the papers come in, those itty bitty pieces of paper, file them according to a category such as travel expenses and put those in one folder, charitable donations in another, so when it comes time for you to turn it all over to your accountant or to put it into your computer program you will have everything organized in the categories that are asked for on your tax filing forms."
Color code those files says Barbara - green for investments, red for banking for example - and get it done early. Barbara says that way you can get to your accountant early in the tax filing season.
"Get it in there early so that your accountant will be spending more time looking at your account and finding the best ways to save money on your taxes.
For more information, check out Barbara's web site www.bkinapinch.com

How aggressive should you be when it comes to your tax forms? Tax expert Eva Rosenberg of the web site www.taxmama.com says it’s one thing to be aggressive, but don’t ask your tax preparer to push the envelope.
“Too many people are coming to us and saying ‘I want to pay a thousand dollars in taxes and do whatever you have to to get there. You are asking your tax professional to do illegal things and make up numbers for you. This will not only put you in jail at some point but it might help them lose their license and put them in jail. That is not a good place to be, even though they do give you free room and board!"
Rosenberg also warns if you run a small business, 2005 is the year when the IRS is looking especially hard at your numbers.
"When they are looking at your tax return which has a Schedule C, if you also have income coming in from your S Corporation our partnership or other things, that same little auditor in their office is going to be empowered to examine the tax returns of the other entities relating to your whole business picture. "

There are two major software programs for tax returns - Turbo Tax and Tax Cut. Are these programs reliable? If so, which is best? Consumer expert Clark Howard tells us "There are people who love Turbo Tax and there are people who love Tax Cut. I don't care which one you enjoy using - enjoy is a funny word when you are doing taxes - but compared to doing taxes by hand I would say it is enjoyable. I think they are a great idea to buy one of these programs."
Clark says a review by the Wall Street Journal found Tax Cut was excellent for people doing a simple return. But if you have a home office or rental properties, the Journal says get a specialty software package from Turbo Tax. Clark says whatever; don't be too eager to get your return done early, because software packages usually have a few bugs in the early releases. "You want someone else to be the guinea pig and find whatever problems there are with those software packages first, so that they are then fixed before you do your own return with them." For more information go to Clark's site www.clarkhoward.com

Your mortgage company sends you what looks like another advertisement in the mail, but wait - don't throw it out. Open all your envelopes this month. Inside might be vital tax documents such as form 1098, the one that details your mortgage interest and property taxes paid in 2004. Atlanta CPA Kathie Gottlieb says look for another pesky form if you moved an IRA this past year from one place to another - form 1099-R.
"A 1099-R is used to report distributions not only from retirement accounts but also trustee to trustee transfers. If you receive a form 1099-R, you should report the gross distribution on line 15a or 16 a of your form 1040 and then on line 15b or 16 b you would report zero if in fact it was a trustee to trustee transfer."
Annoying perhaps says Kathie, but if you ignore the form you will get an audit notice from the IRS and that you do not want to have happen!

It's always a good idea to start your tax planning each year by looking at last year's tax forms. Tax attorney Donna LaValley, contributing editor of JK Lasser's Your Income Tax 2005 has a warning though! Some tax laws have changed. For example, a small business owner who bought a heavy vehicle late in the year may not be able to write the whole thing off.
"How much you can write off on the purchase of a SUV has dropped dramatically. It used to be up to the first year expense limit, which was $102,000 in 2004. It is now going to be capped at $25,000."
The law changed in a set of tax reforms signed by President Bush on October 22nd, 2004. Donna says if you bought a heavy duty vehicle like a SUV after that day, the newer lower writeoff rules will apply. On a good note though, you can take a deduction on the 2004 Schedule A for charitable contributions you made in the month of January to groups working to aid victims of the South Asia Tsunami. Congress passed the special tax break early in January and it was immediately signed by President Bush.

If you worked this past year for a company that went out of business, you may never see a W-2 form for your taxes. So, what do you do? CPA Sheldon Donner, tax advisor to the web site www.moneybulletin.com says if you don't get a W-2, "You would include a form 4852 and explain on that form what you have done to obtain your W-2 and the reasons why you have not obtained it. Then what you should include with your tax return is your best estimate if the salary and wages that you've earned and the witholding. Remember, if the employer has filed payroll tax returns with the IRS, the IRS already has that information. But, if the company went out of business, it's not unlikely that they have failed to file their payroll tax returns and you've not received any credit for the income you have earned or more importantly the amount of taxes withheld."
To deal with that, Sheldon says attach a copy of your last pay stub from the now defunct company to form 4852.

Teachers are famous for spending their own money for class supplies and there is good news this year for those teachers. A tax break has been extended to include money spent in 2004. Tax expert Eva Rosenberg runs the web site www.taxmama.com and she says teachers should gather up receipts for money spent in the past year.
"If they keep all of their receipts, they can use the $250 deduction that IRS provides on the front page of the return. If they spend a lot of money, go ahead and use form 2106, the employee business expense deduction form, and include everything else that you spend for class support, supplies, for things that you do for research."
Keep in mind that form 2106 expenses are not a 100% writeoff. These and other miscellaneous expenses have to go above 2% of your adjusted gross income to count on Schedule A. Still, if you have a lot of expenses, give it a try. You'll find a lot of good advice on this subject at taxmama.com.

In years past, critics blasted the help line of the IRS noting in many cases those answering the phones gave out the wrong information to bewildered taxpayers. Have things gotten better since then? Noted consumer advice expert Clark Howard says the answer in a word - NO!
”The IRS has no clue how to answer questions from taxpayers who call but it's not the IRS's fault. Congress has made the tax code so impossible to understand, that even things that might seem like routine questions, you can so easily be sent on the wrong path. Even accountants disagree about what the right answer is to a question even after they research it. So there is no chance that you can ask the IRS a question that might be complicated about taxes and have any assurance you're going to get the right answer."
Clark warns by the way, even if the IRS gives you the wrong information - you are still at fault if you make a mistake on your return!

We all want to get the messy work of our tax forms done and out of the way as soon as possible. However, tax attorney Donna LaValley, contributing editor for J.K. Lasser's Your Income Tax 2005, says in your rush you could easily mess up.
"There are a number of things that I would check over not once, not twice but three times. One is having your name signed at the bottom of the return. Having your social security numbers match the recipient and the recipient's name. So, if you married and you have not changed your name with the Social Security Administration, use your maiden name and your social security number. Also, I suggest if you've added up your tax return, you have your taxable income, put it down, go back to it in a few hours, or a few days. If you are filing a joint return, have the person who didn't prepare it look it up. Also, remember to sign your check!”
Sending a check by the way is a good thing, says LaValley, because it means you owe a little bit more on April 15th, but getting a big refund means you have let your money sit in Washington earning no interest for over a year and that she says, makes no sense.

Baby boomers who are raising children and who also have aging relatives can find themselves caring for both. It's a common situation that has led to the term "Sandwich Generation." Tax expert Eva Rosenberg runs the web site www.taxmama.com. She says if you find yourself caring for aging parents, don't overlook some tax breaks.
"If you're supplying support for your parents, they don't have to be in your household for you to get them as your dependents or for you to become head of household or anything else. Your parents can live in their own home or in a home for this to apply."
Also to apply, you have to supply over half of your parents support for the past year. Eva says though there is an exception to that rule. If all the kids are pitching in and collectively all of you are paying more than half for the support of the parents, "IRS has a form 2120 and anyone who provides more than ten percent of the support can be granted the entire dependency by having everybody else who is supporting them sign off giving it up for that year. You can change that every year."