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Tis the Season - Things to Know Before
Filing Your Taxes
Everyone loves a good tax tip. And now that tax season is in
full swing, the IRS and other experts have started to issue tip
after tip after tip. Here's a recap:
Getting a jump on your
taxes long before the April deadline is the best tip of all. To
do so, the IRS recommends gathering your records in advance,
including W-2s and 1099s. In addition, the IRS recommends
getting the right forms, all of which are available 24 hours a
day, seven days a week at the IRS' web
site, www.IRS.gov.
That site also has some helpful calculators to get you started.
That being said, tax payers should avoid getting too early a
jump on their taxes. With the preferential qualified stock
dividend rate, complicated foreign tax credits, lower capital
gains rates and other changes over the last few years, many
investors are finding that they receive Revised 1099s, or other
tax reporting documents, well into March. If you've already
filed your return, this can lead to costs of re-filing an
amended return that you may wish to avoid. The best bet may be
to get your tax return all completed, and then hold off filing
it until the end of March, to see if any amended 1099s arrive.
Of course, keeping organized, thorough records is the key to
filing on time. The IRS suggests that you can avoid headaches at
tax time by keeping track of your receipts and other records
throughout the year. Good record-keeping will help you remember
the various transactions you made during the year and help you
document the deductions you've claimed on your return. You'll
need this documentation should the IRS select your return for
examination. Normally, tax records should be kept for three
years, but some documents - such as records relating to a home
purchase or sale, stock transactions, IRA and business or rental
property - should be kept longer.
To be sure, some citizens
wonder whether they need to file a tax return. According to the
IRS, you must file a tax return if your income is above a
certain level and that amount varies depending on filing status,
age and the type of income you receive. For example a married
couple, under age 65, generally is not required to file for the
2006 tax year until their joint income exceeds $16,900. Even if
you do not have to file, the IRS notes that you should file to
get money back if Federal Income Tax was withheld from your pay,
or you qualify for certain credits.
It's also important to
choose your correct filing status, of which there are five
options. According to the IRS, your federal tax filing status is
based on your marital and family situation. It is an important
factor in determining whether you must file a return, your
standard deduction and your correct amount of tax.
Besides
choosing the correct filing status, it's important to calculate
whether you should itemize deductions or not. And that will
depend on how much you spent on certain expenses last year.
According to the IRS, money paid for medical care in excess of
7.5 percent of adjusted gross income (AGI), mortgage interest,
taxes, charitable contributions, casualty losses and
miscellaneous deductions in excess of 2 percent of AGI can
reduce your taxes. If the total amount spent on those categories
is more than the standard deduction, you can usually benefit by
itemizing. The standard deduction amounts are based on your
filing status and are subject to inflation adjustments each
year.
Also of note, if you gave any one person gifts in 2006
that were valued at more than $12,000, you must report the total
gifts to the IRS and may have to pay tax on the gifts (if,
including prior taxable gifts, in excess of your $1 million
lifetime exclusion). The person who receives your gift does not
have to report the gift to the IRS or pay gift or income tax on
its value. Gifts include money and property, including the use
of property without expecting to receive something of equal
value in return. There are some exceptions to the tax rules on
gifts.
In some cases, a taxpayer may want to consider using a
paid tax preparer. If so, the IRS has tips on its web site to
follow. Of note, only attorneys, CPAs and enrolled agents can
represent taxpayers before the IRS in all matters including
audits, collection actions and appeals. Although you might not
find that you need the services of a paid CPA or accountant
every year, having a relationship established when unexpected
opportunities or events occur will make getting timely
professional input that much easier. Someone who knows your
income and deduction patterns, and can quickly answer routine
questions or research the more complicated issues, may well be
worth the price - even in the years when things seem
straightforward.
When completing your tax return, make sure that
you take your time, double-check your math and verify all Social
Security numbers. Math errors and incorrect Social Security
numbers are among the most common mistakes found on tax returns.
And remember, if you are getting a tax refund, consider making
an automatic contribution to your IRA; this is the first year
that this can be done.
February 2007 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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