Our tax system would have a pretty hard time being more complex. If you are like most Americans, you hear terms like tax deductions, tax credit, adjusted gross income and you want to know more, but you never really do any research. It is not until you really need to know what a tax term means that you finally pay attention and figure it out. What if you found out that you may be paying more taxes because these terms? Would you want to know more? I thought so.

Let’s start with the basics. A tax deduction is something that lowers your tax liability. In other words, a deduction allows you to take some amount of your income for the year and not have to pay taxes on it. If you paid taxes on 30% of your income, a deduction of $1000 saves you that 30% you would have paid or $300. Tax deductions are often confused with tax credits. A credit comes straight off of the taxes you pay. So rather than saving 30% of your money, you save 100% of that money.

A tax deduction helps you lower your adjusted gross income. To define adjusted gross income, it is simply the amount of income you have after you have subtracted all of your deductions. Why does this matter? Your tax bracket is determined by your adjusted gross income and not your total income. The more deductions you have, the lower your adjusted gross income will be, and the lower tax bracket in which you will be. Tax brackets are important because the higher bracket you are in, the higher percentage of taxes you will pay.

Let’s work through an example. The 2008 federal tax brackets say that taxpayers filing with a status of single will pay 10% on all income between $0 and $8,025. They will pay 15% on all income between $8,025 and $32,550. If they fall into the 15% tax bracket, they will also pay the 10% on the $8,025. For our example, we will say that Mike makes $20,025. Taking no deductions into account, Mike would pay his 10% for the first bracket or $802.50. Mike would also pay 15% on the rest (20,025 - 8,025) * 15% = $1800. Add those together and Mike pays $2602.50 in taxes. Ouch! Deductions would have helped Mike. Here is how.

Mike owns his house. He pays a mortgage. One tax deduction available to homeowners is that all interest paid on the mortgage is tax deductible. You can see that in order for Mike to get into the lower tax bracket completely, he would need $12,000 in deductions. However, every dollar of tax deduction he does have is less he pays at the higher 15%. If Mike paid $6,000 in mortgage interest last year, he can deduct that and bring his adjusted gross income down to $14,025. Now the amount he pays at 15% is (14,025 - 8,025) or $6,000 instead of $12,000. He pays $900 instead of $1800. He saved $900 in taxes! If Mike would have paid that $6,000 in rent instead of to a mortgage, he would have paid Uncle Sam $900 extra dollars.

Some common places to watch out for tax deductions or other items that lower your adjusted gross income are 401K plans at work, charitable contributions, child-care costs, vehicle license tax, interest on first and second mortgages, losses on investments, interest paid on student loans, property taxes and contributions to IRAs.

Using tools such as TurboTax and TaxAct will help you make sure you don’t miss out on any tax deduction to which you are entitled. Click here to file your federal return for FREE.

Don’t forget April 15th is the deadline!

As you prepare your taxes, you may discover several new tax law changes that may help maximize your refund. Jackson Hewitt Tax Service reports that more than 100 new tax law changes have been passed this year to help individual consumers. Here are some Tax changes that can help you save toward your debt settlement. For further details about your specific situation, contact a tax professional.
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Recovery Rebate Credit
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Taxpayers that did not qualify for the entire Economic Stimulus Payment in 2008 may be able to receive the remainder of the funds through this tax credit. Individuals that had a child in 2008 after filing a tax return may also be eligible. Taxpayers that do qualify for the Recovery Rebate Credit will not receive separate checks, but the amount will be included in their refunds.
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Mortgage Debt Relief Act
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According to the IRS, homeowners that foreclosed on their primary home can exclude the cancelled debt amount from their taxable income. The mortgage had to be the taxpayer’s primary residence and not exceed $2,000,000. The home loan also had to be used to buy, build, or improve the home.
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First-Time Homebuyers Credit
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Taxpayers who purchased a new home for the first time after April 8, 2008, may qualify for a refundable credit up to $7,500. This credit is part of the American Housing Rescue and Foreclosure Prevention Act. It acts like a refundable tax credit and works like an interest-free loan. The credit must be paid back in equal parts over a period of 15 years beginning in 2010. In addition to first-time home buyers, the IRS web site indicates that individuals who have not owned a main home in the past three years may also qualify for this credit.
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Unemployment Deductions
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If you lost your job in 2008, ask your tax professional about itemized tax deductions for job search expenses. According to Jackson Hewitt Tax Service, you may be eligible to deduct costs associated with travel, printing resumes, or job placement fees. If you were required to relocate for a new job, you may be able to deduct moving expenses.
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Assistance Available For Those Unable To Pay Taxes
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If you discover that you will not be able to pay your 2008 taxes, you may have options available. The IRS has compiled a list of questions and answers on their web site that deal with certain scenarios and financial situations. Due to the present state of the economy, some taxpayers may qualify for leniency if they owe back taxes. According to the IRS web site, financially distressed taxpayers may be eligible for suspended collection activity if they have a hardship case. For those unable to make a scheduled payment in an existing installment plan, the IRS may allow the individual to skip a payment.
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Disclaimer
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This article is intended to give a basic overview of tax changes that may be available to you. It is not intended to replace the advice of a qualified tax professional. We recommend that you consult an experienced tax expert that may be able to help you with your individual situation.
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Tax Resources
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Free File: Free File Alliance companies will participate in the program run by the IRS and the Free File Alliance, a consortium of tax preparation software companies. This program is available to taxpayers that have an adjusted gross income of $56,000 or less. Each company sets its own criteria for who can use the service. Visit www.irs.gov and click on the “Free File” link on the left hand side. You can then read the requirements and search for participating companies.
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VITA: The Volunteer Income Tax Assistance Program (VITA) offers free tax help to individuals with low and moderate incomes (usually $42,000 and below). VITA sites are usually located at libraries, schools, and shopping malls. Call the IRS at 1-800-TAX-1040, press option #1 followed by option #5. Ask the customer service representative for a VITA site located within your zip code.
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TCE: The Tax Counseling for the Elderly (TCE) Program provides free tax help to people age 60 or older. For more information, you may also call the IRS at 1-800-TAX-1040, press #1 followed by option #5. AARP also offers the Tax-Aide counseling program for elderly individuals with low incomes. To locate the nearest AARP Tax-Aide site, call 1-888-227-7669 or visit the AARP-TaxAide site at www.aarp.org.

When used correctly, C Corporations are a great way to supercharge a tax strategy. I find that when my clients make the most of their C Corporations, they reduce their taxes by a minimum of $10,000 every year.

How do you find a tax preparer that is right for you?

First, not all tax preparers are the same. I wrote an article about this last year titled: Tax Returns: Are They All Created Equal?

HOW DO YOU FIND A TAX PREPARER THAT IS RIGHT FOR YOU?

First, not all tax preparers are the same. I previously wrote an article about this last year titled: “Tax Returns - Are they really all created equal”, and you may be as surprised as other readers about just how much tax return preparation can vary.

In fact, I calculated the average savings I typically find from annual tax savings, reducing professional fees and audit assessments. In total, the average savings are:

- $23,750 Annual tax savings

- $5,000 Audit defense savings

- $10,000 Reduced audit assessment savings

- $50,000 Reduced legal fees

- $3,000 Reduced tax return preparation fees

This is a total average potential savings of $91,750! Your tax preparer does make a difference! How much more could you do with these savings?

Second, the right tax preparer for you depends on what is important to you. Take a minute to answer this question:

WHAT MAKES YOUR TAX RETURN SUCCESSFUL?

How you answer this question will impact what type of tax preparer you need on your team. I’ve asked this questions to clients, prospects and colleagues. I have compiled the most popular answers and what it means to you as you find the tax preparer for your team.

ANSWER #1: Paying the least amount of tax legally

Your tax preparer needs to:

- Know the tax law very well and know how to be creative legally.

- Ask you a lot of questions about your situation in order to understand your situation and goals.

- Have a review process where at least one other person reviews your return solely for the purpose of how to reduce your taxes legally.

HERE ARE SEVEN (7) QUESTIONS YOU SHOULD ASK YOUR TAX PREPARER TO DETERMINE IF IT’S A GOOD FIT:

Q1: Can you tell me about the other ___________ (your industry) you service?

A: Your tax preparer needs to know how the tax law applies to your situation. Having other clients in your industry or with similar investments indicates that the tax preparer is likely to be familiar with the tax laws that impact you.

Q2: Who will be working on my tax return?

A: It’s very common (and a good business practice) for tax preparers to have staff prepare your tax return. You want to make sure the other people working on your return have the same level of expertise.

Q3: What is your tax return review process?

A: Tax preparers who are focused on reducing your taxes will have this built into their review process. Usually it involves having another experienced tax preparer review the return solely for the purpose of finding ways to reduce your taxes.

Q4: What would you have done differently on my past tax return?

A: Show the tax preparer you are interviewing your prior year tax return. Creative tax preparers will be able to give you at least one idea of what you can do to reduce your taxes by looking at your tax return for just a few minutes. If it’s creativity you are after, this is a great question to ask! But don’t expect the tax preparer to give you all the details right then and there - that’s why you pay them!

Q5: How much can you save me in taxes?

A: While it’s difficult for any tax preparer to answer this in just a few minutes of looking at your past tax return, it is possible for them to know if they can save you taxes after spending 30 minutes with you.

Q6: What deadlines do you impose on clients?

A: This may seem like an odd question for minimizing your taxes but it has a direct impact. If your tax preparer allows you to provide your information a week before the tax return is due, it’s very unlikely that the tax preparer will have the time to focus on your return to truly minimize your taxes. Tax preparers that want to reduce your taxes want your tax return information early and will communicate that to you.

Q7: What recent tax law changes should I be aware of? A: To minimize your taxes, your tax preparer needs to know the tax law inside and out, which includes the latest changes. Your tax preparer needs to be able to answer this question without hesitation.

ANSWER #2: Minimizing tax return preparation fees Your tax preparer needs to:

- Focus on the tax work and recommend someone else for the non-tax work (such as bookkeeping).

- Request tax information in a certain format.

- Require you to input your information online.

HERE ARE TWO (2) QUESTIONS YOU SHOULD ASK YOUR TAX PREPARER REGARDING MINIMIZING RETURN PREPARATION FEES TO DETERMINE IF IT’S A GOOD FIT:

Q1: What can I do to reduce my tax return preparation fees?

A: To minimize your tax return preparation fees, your tax preparer always needs to have your fees in mind. Ask your tax preparer what you can do to reduce your fees. If you don’t get at least 2 suggestions, your tax preparer probably isn’t thinking about how to keep your fees low.

Common suggestions include:

- Have someone other than the tax preparer do your bookkeeping. I am always skeptical when a tax preparer does the bookkeeping. First, they either charge an arm and leg or if they reduce their rates to accommodate you, it means they don’t spend their time entirely on tax issues, which could indicate their tax skills aren’t up to par.

- Organize your information. Don’t bring your tax preparer a shoebox! A tax preparer that is really focused on keeping your fees down will have forms, spreadsheets and other tools available for you to use to organize your tax return information.

- Enter your information online. Many tax preparers now require clients to input their information online. Accurately entered information can help reduce fees. Caution: Information that is entered inaccurately can increase your fees!

Q2: What is your fee structure?

A: Your tax preparer needs to be able to answer this question with confidence. Any wavering could indicate that the tax preparer knows the fees are too high for you but just doesn’t want to tell you. Unfortunately in these situations, you find out too late!

ANSWER #3: Reducing audit risk Your tax preparer needs to:

- Know the tax law very well and how to properly report your activity.

- Understand the IRS’s current “hot buttons” or “red flags.”

- Offer an audit defense plan.

HERE ARE FOUR (4) QUESTIONS YOU SHOULD ASK YOUR TAX PREPARER IN REGARDS TO REDUCING AUDIT RISK TO DETERMINE IF IT’S A GOOD FIT:

Q1: How many audits have you been through and what triggered the audit?

A: The most important part of this question is what triggered the audit. If it was triggered by how something was reported, then that may be something the tax preparer had control over (and may be a bad sign for you).

Q2: What was the outcome of the audits you have been through?

A: A return can be randomly selected for audit or selected because of a certain activity (even though it was reported correctly). So it’s important to understand the outcome of the audits. Was additional tax assessed or were there no changes? Additional tax may indicate that something was not reported properly.

Q3: Do you offer an audit defense plan?

A: Tax preparers that are confident in their work will offer an “insurance” program that covers their professional fees to handle your audit if your return is selected for audit.

Q4: What is your tax return review process?

A: Although tax returns can be selected randomly for audit, many are selected due to how items are reported on the tax return. Tax preparers who are focused on reducing audit risk will have a review process that includes another tax preparer reviewing your return solely for accuracy of reporting.

Be selective with the tax preparer you put on your team. The average savings I find for my clients is over $90,000! Your tax preparer makes a difference!

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1. Be Careful and Thorough. Avoid common problems like illegible hand writing, mathematical errors, transposition of numbers, and missing signature. These little oversights can end up costing you time and money if you are slapped with penalties.

2. Get Organized. Allow enough time to get your “stuff” in order. For example, properly categorizing your expenditures now will save you a lot of time later. Come tax time, you will be glad you grouped your expenditures by category (match it with verbiage on Schedule C if self-employed) and not by month or name of vendor payee.

3. ?Be Flexible. Timing your cash flow can save you money. ?In other words, always accelerate deductions in the year you are doing taxes for and always defer income, if you can, into the next year, thereby lowering your current year’s tax bite. ?If you fall into the Alternative Minimum Tax, you may want a professional to advise you.

4. ?Know When To Ask for Help. Tax preparation tools like TurboTax and TaxCut are great, but people with anything more than a straight W-2 (including anyone with even the smallest business ?Schedule C”) should be aware of the limitations of these software programs.

5. Don’t be Penny Wise and Pound Foolish. Hiring an expert CPA or EA to prepare your return is a small annual investment that can pay off big! Don’t do your taxes yourself unless you are a straight W-2 wage earner that takes the Standard Deductions (in other words, someone who doesn’t itemize or have any unreimbursed employee business expenses).

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The recently enacted “American Recovery and Reinvestment Act of 2009″ (2009 Economic Stimulus Act) includes a wide-range of tax incentives, many of which are retroactive to the beginning of the year. This week I’ll share the changes impacting individuals. Then, be sure to look for email next week when I share the changes impacting businesses. Here’s What Individual Taxpayers Need to Know about the New Tax Law: Expanded First-Time Credit for First-Time Home Buyers Last year, Congress provided taxpayers with a refundable tax credit that was equivalent to an interest-free loan equal to 10% of the purchase of a home (up to $75,000) by first-time home buyers. It applied to homes purchased on or after April 9, 2008 and before July 1, 2009. Taxpayers receiving this tax credit were required to repay any amount received under this law back to the government over 15 years in equal installments or earlier if the home was sold. The credit phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return). The new tax law enhances the credit by eliminating the repayment obligation for taxpayers that purchase homes on or after January 1, 2009. It also extends the credit through the end of November 2009, and bumps up the maximum value of the credit from $7,500 to $8,000. Expanded and Revised Higher Education Tax Credit The new law creates a $2,500 higher education tax credit that is available for the first four years of college. The credit is based on 100% of the first $2,000 of tuition and related expenses, including books, paid during the tax year and 25% of the next $2,000 of tuition and related expenses paid during the tax year. The credit is subject to a phase-out for AGI in excess of $80,000 ($160,000 for married couples filing jointly). Forty percent of the credit is refundable. This new credit temporarily replaces the Hope credit. Computers as an Education Expense The new law permits computers and computer technology, including internet access, to qualify as qualified education expenses in 529 education plans for tax years beginning in 2009 and 2010. Tax Break for New Car Purchasers The new law allows taxpayers to deduct state and local sales taxes paid on the purchase of a new automobile, including light trucks, SUVs, motorcycles, and motor homes. The tax break phases out starting with taxpayers earning $125,000 per year ($250,000 for joint returns). The deduction is allowed to both those who itemize their deductions as well as to those who do not. The deduction cannot be taken by a taxpayer who elects to deduct state and local sales taxes in lieu of state and local income taxes. Alternative Minimum Tax(AMT)Patch To hold the number of taxpayers subject to the AMT at bay, the new law increases the AMT exemption amounts for 2009 to $46,700 for individuals and $70,950 for joint returns, and allows the personal credits against the AMT. Making Work Pay Credit The new law provides an individual tax credit in the amount of 6.2 percent of earned income not to exceed $400 for single returns and $800 for joint returns in 2009 and 2010. The credit is phased out at adjusted gross income (AGI) in excess of $75,000 ($150,000 for married couples filing jointly). The credit can be claimed as a reduction in the amount of income tax that is withheld from a paycheck, or through a credit on a tax return. Under the credit, workers can expect to see perhaps $13 a week less withheld from their paychecks starting around June. Next year, the extra take-home pay will go down to around $9 per week Economic Recovery Payment The new law provides for a one-time payment of $250 to retirees, disabled individuals and Social Security beneficiaries and SSI recipients receiving benefits from the Social Security Administration and Railroad Retirement beneficiaries, and to veterans receiving disability compensation and pension benefits from the U.S. Department of Veterans’ Affairs. The one-time payment is a reduction to any allowable Making Work Pay credit. Refundable Credit for Certain Federal and State Pensioners The new law provides a one-time refundable tax credit of $250 in 2009 to certain government retirees who are not eligible for Social Security benefits. This one-time credit is a reduction to any allowable Making Work Pay credit. Unemployment Compensation Exclusion The new tax law temporarily suspends federal income tax on the first $2,400 of unemployment benefits received by a recipient in 2009. Expanded Earned Income Tax Credit The new law provides tax relief to families with three or more children and increases marriage penalty relief. The changes apply for 2009 and 2010. Expanded Child Tax Credit The new tax law increases the refundable portion of the child tax credit for 2009 and 2010 by lowering the income threshold to $3,000 (from $8,500 in 2008). Qualified Transportation Fringe Benefits Qualified transportation fringe benefits, such as transit passes, qualified parking and van pooling are not included in an employee’s income up to a specified dollar amount. The new tax law increases the monthly amount to $230 per month from $120 per month starting in March 2009 and continuing through 2010. Energy Incentives The new tax law enhances several energy tax incentives that reward taxpayers for installing energy-efficient property and alternative sources of energy in their homes.

As we come to the conclusion of 2008, many businesses have lost money in this year. The economy for 2009 looks very volatile and some industries may start to recover in 2009, while others may take a little longer. One positive area to bring to the table is that the price of oil has decreased significantly and regular gas prices have come down?below $2.00 or so per gallon depending upon your location.

The question through this difficult year where losses have mounted up, why do you have to tax plan? If you were profitable in year 2006 and/or 2007 and paid business taxes in those years, you may be entitled due a tax refund in 2008 to recover part or all of these monies paid in previous years. This tax recovery is called a net operating loss carryback claim…This situation applies to proprietorships, corporations, limited liability corporations, and so forth.

The first part of this discovery phase is to identify whether you are a qualified individual and/or company to recapture monies paid in from prior years…It would be a good idea to obtain from your accountant, bookkeeper, CPA, or your own in house books an updated balance sheet and profit and loss statement for 2008. Additionally, you may want to locate your 2006 and 2007 either personal and or corporate tax returns and review the past years information. If you have paid business taxes in those past years and are in loss situation for 2008, there is a good chance you will be able to recover either partial or all monies paid to the
government for 2006 and/or 2007.

.If you are a farmer and have losses in 2008, you should locate your 2003, 2004, 2005, 2006, and 2007 prior years tax returns because your eligible carryback years extend back for five years. Everybody else, for the most part, can carry back their business losses two years…

Once you have located your prior years tax returns and reviewed the business taxes paid into those years, compare this to the 2008 Profit and Loss Statement. It is good idea that your 2008 information should be current and accurate because it could have a major effect on your decision making. Assuming you are in a loss situation for 2008, you may want to plan you year end cash flow accordingly. For

this illustration, we will assume everyone is on a cash not accrual basis accounting system. Because of your tax situation and the possibility of recovering a tax refund back in early 2009, you may, if cash flow permits, pay more bills in December 2008 than the normal January 2009 payment cycle. The bottom line here is that a qualified professional should be assisting you at this stage because of the cash flow and tax effect though the period ending December 31, 2008. The professional cost vs tax recovery benefit could be a big plus to you.

This carryback claim process is important because it can generate needed working capital if the economy hasn’t recovered in your niche for 2009. Additionally, with all the available acquisition and financing deals available for commercial vehicles, construction trucks, office equipment, computer systems etc, these monies could be used as a down payment or a combination of working capital and acquisition funds.

These carryback claims can be carried back two years, except for farmers, five for them, and if needed carry forward for twenty years. It doesn’t matter what your business structure is…There are exemptions to these rules and you should consult your tax professional for advise on these carry back and carry forward rules.

For illustration the types of industries that would qualify for these carryback losses include construction, trucking, farming, restaurants, all retail shops, mail centers, franchise operations, consulting firms, manufacturers, wholesalers, service providers, This is obvious a partial list of qualified businesses. In addition, the type of entity doesn’t play a role in these carryback claims. There are a few exceptions to the rules, therefore consult a good tax adviser.

In addition to the carry back rules, there are numerous business and individual tax changes for 2008. It would be a good idea to get a head start at the end of this year to understand them and see if there are any you want to take advantage of before December 31, 2008.

In conclusion, 2008 was a trying year for many, but this recapture of tax monies shouldn’t be ignored. If done properly, you can get a head start on 2009 and have a profitable and less stressful year… … Who says Tax Planning is boring