This is a relatively long review of TurboTax 2012 Online, software for completing tax forms and submitting them to both the federal and state authorities. I’ve updated the review to reflect the changes to the software in 2012 (for filing 2011 tax returns).

Recently, the IRS began accepting federal tax returned filed electronically. Even before the IRS began accepting returns, you could still have completed your tax forms online through software. Programs like TurboTax, H&R Block, and Jackson Hewitt have been accepting customers and holding off on filing until now. This delay affected those who had itemized deductions, claimed the tuition and fees deduction, or claimed the sales tax deduction.

Many taxpayers are just getting started with their 2011 federal returns now. I’ve been using the services of an accountant for the past few years, and he was able to cut through the more confusing tax consequences of owning a business, saving me $15,000. Before my tax situation was complicated, however, I completed my taxes online using various software. Following a series of questions, completing and filing my 1040 form was easy.

Every year, the companies that provide tax e-filing services like TurboTax and H&R Block tweak their products, not only for the latest tax laws, but to improve features, making the process of tax filing easier. I took a look at TurboTax to see what changes the newest edition has to offer.

The first thing I noticed with TurboTax is the wide variety of products they have available. There is an option that is completely free for filing federal returns, but it is limited. This free version is for taxpayers whose returns can be completed using the 1040-EZ form, a simplified version of the 1040 form. If you have deductions, investments, a mortgage, or self-employment income, or if you want a step-by-step hand-holding guide to completing the forms, you will not be able to take advantage of the TurboTax Free Edition.

TurboTax offers several flavors in addition to the Free Edition, including Deluxe, Premier, Home & Business, and Business, each to handling more complicated tax situations above and beyond the lighter editions. The Deluxe Edition focuses on capturing all of your deductions. The Premier Edition does deductions, as well, but also includes the forms you need for investments like stocks, mutual funds, and rental properties. Home & Business covers all of the above as well as self-employment income, and the Business Edition is for anyone who is a partner in or owner of a corporation.

The editions are flexible; start with the Deluxe Edition, and as you come across features you need, TurboTax will ask if you’d like to upgrade — without charging you yet — to the edition that takes all of your needs into account. I started the Deluxe Edition to see how far I could go. I saw that for the most part none of the upgrades are needed if you are confident about your tax accounting abilities and are willing to enter your information directly into forms rather than have the software hold your hand through every decision.

Get your refund in as little as 8 days. E-file with TurboTax today. It’s Easy

Here is an overview of my entire process of completing my federal and state tax returns with TurboTax.

I am a returning customer, and although I didn’t file my taxes using TurboTax last year, I did begin entering my information to test the software. TurboTax recalled last year’s information, although I didn’t enter accurate information at that time, and used it to get me started.

As you can see, some of the found information looks a little odd. If you click on the image here, you’ll see that TurboTax thinks my adjusted gross income for 2010 is a negative $106,905. This may be a result of last year’s incomplete information. Nevertheless, I continued. This year, TurboTax is no longer emphasizing the GPS device metaphor that helped guide filers through the process last year, but still retains the idea that filing your taxes is like traveling down a road.

Free tax advice from TurboTax experts

This year, TurboTax has added a new, useful feature: free on-demand tax advice from a tax expert.

While TurboTax seems to encourage users to exhaust all other options, like searching frequently asked questions and participating in the community, before contacting a live representative, this feature could prove useful for tax filers who are used to interacting with a human being to solve tax-related issues. The experts can answer questions related to filing Forms 1040, 1065, 1120, and 1120S, so even business owners can take advantage of the free advice. Be aware that by using the free advice service, you’d free TurboTax and Intuit from any liability, and are agreeing to binding arbitration if any legal issues arise from your use of the service. That’s not a customer-friendly policy, but it has come to be standard among many types of financial services.

The experts are typically seasoned tax preparers, with CPA certification and experience. When I began to initiate a chat on a Tuesday morning, there was a delay of about ten minutes before someone was available. If I were to chat over the phone rather than online, the delay would have been longer.

Income

The first step in the tax filing process covers personal information. TurboTax asks the taxpayer to check any life changes that occurred during the year from among a list to begin the section covering income.

Alongside the checklist is a link to TurboTax’s Live Community. This is a place where taxpayers can look for help from other users, the most experienced and helpful being SuperUsers, and from TurboTax employees. These guides are very helpful and thorough, but I warn anyone against making significant decisions based on answers that are not tailored to your specific situation and not backed up by a tax accountant who is familiar with you. The Live Community is great for the most typical and basic tax questions, such as, “If I became married in December, can I still file as a single taxpayer?”

If you need answers to questions specifically related to your situation, you can use the new feature mentioned above to speak to a tax expert.

After submitting my choices on the form above, TurboTax recommended I upgrade to Home & Business for an upgrade price of $45, but noted I still have the option of staying with the Deluxe Edition. Home & Business offers more guidance, but at this point, not more tax features, I opted to stay with the Deluxe Edition. I continued to enter my personal income information.

My employer — now former employer — does not seem to offer the ability to load my W2 data directly into TurboTax, so I located my form online and pulled the numbers myself, just like in the old days.

After completing my W2, TurboTax guided me through more income possibilities. For interest income, TurboTax has the ability of downloading your tax information from your bank or broker. The list of institutions offering this ability isn’t large, and many of my banks were not listed. I did give this a try with Vanguard. TurboTax asked for my Vanguard user name and password, and within seconds determined that I had dividend income of about $315 from this source. In the interest of time, I didn’t bother with any other dividend or interest income now, the software is flexible so you can return to any section at any time.

TurboTax remembered that I purchased employee stock in the past, and asked if I sold any shares, which would have resulted in income. This is a great benefit to filing your taxes with the same software each year; the software “gets to know you,” and asks the right questions based on how you’ve filed in the past. As you go through the income sections, if you state that you don’t have a certain type of income but TurboTax thinks you should, it will flag the category to let you know that you’ll need to review the section.

For my business income, TurboTax prompted me to enter the income I received on 1099 forms, stating that these forms are required for anyone who has paid the business more than $600 for services. With a corporation, I’ve found this to be incorrect, and some businesses will not send my business a 1099, and according to my tax accountant, I’m not required to send 1099s to other businesses that I pay more than $600. This rule would have changed, however, and 1099 forms would have been required, if Congress didn’t quickly repeal a much-hated provision of the health care reform law. TurboTax required 1099s in this section because this section is for “Schedule C” businesses, like sole proprietors or LLCs treated as sole proprietors. My business is an S Corporation — or, more accurately, an LLC treated as an S Corporation — so while most self-employed individuals will follow TurboTax’s guidelines for self-employment income, I would need to wait and include income from Schedule K-1, filed by my business, possibly in addition to a W-2 for the business.

As of today, the IRS has not yet finalized this year’s K-1 form, so I would not be able to submit my federal tax return yet.

After completing the income and answering questions about foreign bank accounts (I have none), TurboTax provided a snapshot of my money, and suggested I try out Mint.com to determine how I spend my money and find options for investing in an IRA. I skipped these suggestions, though I do recommend Mint.com, and proceeded to the section covering deductions and credits.

Deductions and credits

Once again, I followed the “EasyGuide” to make the most out of the suggestions provided by the software. In this section, I reviewed whether I could claim deductions and credits for mortgage interest, the homebuyer credit, the Making Word Pay credit, and more. For charitable contributions, I was easily able to enter the recurring monthly payments I made to non-profit organizations as well as the lump sum payments I sent to charities.

After completing the questionnaire, TurboTax performed an integrity check to ensure I captured all the deductions and credits I could be entitled to. When the analysis was complete, TurboTax offered some suggestions for possible missed credits. TurboTax was under the impression that I may qualify for credits I didn’t take, like the Earned Income Credit for children.

After I reviewed my final federal tax numbers, TurboTax transferred the relevant information to my state return. After a few state-specific questions, I was able to claim a property tax credit — homeowners and renters both qualify for a credit of some sort. When the process was complete, TurboTax reviewed my information and determined my risk for an audit was low, but noted two warning flags:

• I included Schedule C income.
• I had more than $100,000 in business income.

Both of these might increase the chance of being audited. In the final return that I file with my accountant, I won’t have Schedule C income. I won’t be filing my finalized return through TurboTax this year, as I prefer to work with an accountant. The Schedule C income above was is included here just as a test. The entire process was not without some confusion.

Error checking and support

Last year, after TurboTax reviewed my federal return and suggested child-related deductions and credits, I tried to determine why. It looked as if TurboTax was assigning me a credit for adopting a child — a credit I didn’t enter. I reached out as many customers do in the Age of Information: on Twitter. The customer service account is @TeamTurboTax, so you can mention that account in a message on Twitter to get their attention.

It wasn’t long before I received responses, most from people recognizing that I did not, in fact, adopt a child:

The official response from Customer Support came only a few minutes later. We discussed the issue through private messages on Twitter before I realized that I was looking at the wrong column. I expected the final page listing income, deductions, and credits, would compare the previous tax year with the current tax year, as I believe they software had done in the past, but the first column represented the current tax year and the second column listed the difference between what I was claiming and the maximum I’d be allowed to claim for each credit and deduction. TurboTax properly listed $0 for the adoption credit. That’s a big relief in many ways.

I appreciate the quick response from Intuit’s Customer Support via Twitter, and this is a feature that helps TurboTax rise above some of their competitors.

Printing and filing the returns

You have the option of filing electronically or by mail, but electronically is almost always the better option. If the government owes you a refund, you will receive it much faster, particularly if you have a bank account for direct deposit. You must pay before printing your return for filing by mail or filing electronically. I completed by entire return using the Deluxe Edition, for $29.95. The New Jersey state edition added an extra $36.95 to that total, the most I’ve ever paid to file a state return without an accountant.

On the payment screen, I noted that TurboTax guarantees their calculations; if the IRS or your state charges you a penalty due to TurboTax’s error, they will pay the penalty and interest. It’s not hard to calculate numbers correctly; the danger is in entering them correctly in the first place — and human error is not covered under this guarantee.

Once you submit your return for electronic filing, TurboTax will send you updates to let you know when they are accepted by the IRS and your state’s tax authority. After that point, you can check the status of your federal and state refunds.

Conclusion

I was surprised how easily TurboTax, even the version just one step up from the Free Edition, handled my complicated tax situation. If I had finished my corporate tax returns first, I would have had everything I needed to finish my personal federal and state returns in under a few hours. It’s important to have all your forms together before you sit down to get started. Even though TurboTax lets you stop and return to the place you left off at a later time, it’s generally to focus and get everything done as soon as you have everything available. These days, you’ll probably receive some tax forms online and some in the mail, so it’s getting more difficult to keep track of everything. The more organized you are, the smoother the tax filing process.

Consumerism Commentary is an authorized affiliate of Intuit. Intuit did not compensate Consumerism Commentary for this review.

The original version of this article, TurboTax 2012 Online Review, is copyrighted by Consumerism Commentary.

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An elegant answer to the over-complicated tax system is to shift the basis of the system from income to spending. There have been a variety of proposals to make this happen. It’s the core of the so-called Fair Tax and Herman Cain incorporated its concept into his 9-9-9 tax plan. Other proposals have called for a value-added tax similar to the system in the United Kingdom.

Working to earn a living contributes to society, as does investing in businesses. Taxes on income, whether wages or dividends, could discourage this type of economically-beneficial activity. Consumer spending also benefits the economy, though, and if this tax system discourages spending, it might have a negative effect on the economy initially.

Also, lower-income households and those who live paycheck-to-paycheck would bear a higher burden. When almost all of a family’s income is spent, this family would be taxed on a high percentage of their income. On the other hand, a corporate executive earning more than a million dollars does not need to spend all of his money. His tax burden is more affordable. Under today’s tax environment, someone with the means might put money into real estate, invest in businesses, and shelter assets in offshore accounts. Under the new system, a wealthy individual might stay away from buying houses if those transactions are taxed, while bringing more offshore assets back to the United States.

Rather than adding a national sales tax to determine consumption, one solution is to report all income, as is currently done, as well as all contributions to savings, just like what is done for IRA and 401(k) accounts. The difference between income and savings would be the basis on which the government levies the consumption tax. There could be a high standard deduction applied to the difference, so that lower-income families who are struggling to save do not need to pay an unaffordable tax bill, and so that the system remains progressive.

Reforming the tax system away from income tax is a tall order. Thanks to deductions for tax-advantaged savings, the income tax system has already begun to shift towards a focus on spending, but if you believe that the system could be vastly improved by focusing solely on consumption, the system has a long way to go before workers and savers aren’t punished by a tax collection system.

Would you prefer a tax system based solely on consumption?

Photo: exfordy
New York Times, Slate

The original version of this article, Fix the Tax System By Taxing Consumption, is copyrighted by Consumerism Commentary.

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It’s no surprise that politicians have difficulty relating to their constituents. When Mitt Romney was asked about his finances, he admitted two facts that would sound strange to most listeners.

• Romney considers what he earned from speaking fees in one year, $362,000, as “not that much.”
• Like most individuals who earn most of their income from investments, Romney’s effective tax rate is closer to 15 percent.

For Romney $362,000 may not be that much. His net worth is estimated to be between $85 million and $265 million. The most that income from speaking can increase his net worth each year is by 0.4%. That is a drop in a very large bucket. I can understand why Romney would say that this amount is not that much. For him, it’s practically nothing.

For most people, though, $362,000 is a significant amount of money. This small portion of Romney’s annual income could support ten families or more of four members for one year. “Not that much” is relative.

When President Obama proposed the Buffett Rule, a tax on millionaires to pay a representative share of the tax burden, he had people like Romney in mind. Buffett has pointed out that his effective tax rate is lower than his secretary’s, and this happens when most of an individual’s income comes from investments. Investment income, like dividends, as well as carried interest, is taxed at a 15 percent rate rather than the sliding scale used in the tax brackets for ordinary income. People who earn high enough salaries and wages pay higher tax rates than individuals who make a living off investments.

To compare Romney with his political peers and competitors, Governor Rick Perry has indicated his effective tax rate in 2010 was 23.4 percent, and that rate is closer to what most middle-class Americans might pay in any one year. Rick Perry is the least wealthy of all the presidential hopefuls, with a net worth between $1 million and $2.5 million. President Obama and his family paid an effective tax rate of 25 percent in 2010.

How does your effective tax rate compare to Mitt Romney’s?

Update: ABC News just broke the story that Mitt Romney has made judicious use of an offshore tax haven in the Cayman Islands to shelter his assets from the U.S. Treasury.

Tax experts agree that Romney remains subject to American taxes. But they say the offshore accounts have provided him — and Bain — with other potential financial benefits, such as higher management fees and greater foreign interest, all at the expense of the U.S. Treasury. Rebecca J. Wilkins, a tax policy expert with Citizens for Tax Justice, said the federal government loses an estimated $100 billion a year because of tax havens.

Christian Science Monitor, ABC News

The original version of this article, $362,000 in Income: Not That Much for Mitt Romney, is copyrighted by Consumerism Commentary.

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Although the home mortgage interest deduction is one of the most oft-cited benefits of owning a home, most taxpayers don’t take advantage of it because it requires itemizing taxes. If itemized deductions including mortgage interest paid throughout the year exceed the standard deduction, a taxpayer can take advantage of the benefit.

The benefit isn’t as great as it sounds. If you pay interest, it certainly does help to get a tax benefit, but it rarely tips the balance of the long-term financial effects of renting vs. buying a house. Don’t let the real estate industry sway your opinion about owning a house through this faulty rationale. And certainly don’t decide to take out a mortgage if you were intending to buy with cash. Since this is a deduction, your taxes are reduced by only a percentage of the interest you pay, related to your tax bracket.

The home mortgage interest deduction is currently endangered. The Obama administration and Congress are looking for ways to cut spending, and this tax deduction is on the table for consideration. Some estimated put the cost of this deduction at $100 billion each year.

Despite the cost and its overstated effects, the tax deduction has helped convince renters to become homeowners — at least among people I have spoken with. In other words, for the cost of $100 billion, the economy has seen the benefit of a growing real estate market for many years. This law has made the National Association of Realtors, a lobbying group for the real estate industry, very happy, and they are working hard to prevent the government from eliminating the tax deduction.

There are many rules that determine whether you can claim the interest you pay on your mortgage for a tax deduction. The rules help ensure that the benefit goes to home owners rather than “investors” who earn a living from flipping houses, though due to market conditions the past few years, that activity has been less of an issue.

The interest you pay for construction, purchasing or improving your primary or secondary home, whether through a mortgage, home equity loan, or home equity line of credit, qualifies. There are limitations, though. You can deduct interest paid on up to only $1,000,000 of home acquisition debt. For home equity debt, which is any loan that was taken not to construct, purchase, or improve a house, you can deduct interest paid on up to only $500,000 of this debt or the fair market value of the home, whichever is less. For taxpayers who are married, filing separately, each of these limits is reduced by half.

Normally, the total of all of your itemized deductions are limited by income, but that income limitation was lifted in 2010. It could be lifted again if the benefit is not eliminated.

Question for homeowners: Do you take the home mortgage interest deduction? Question for everyone: Should this deduction be eliminated for the sake of reducing the national budget deficit?

Photo: Wonderlane

The original version of this article, Home Mortgage Interest Deduction, is copyrighted by Consumerism Commentary.

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It’s with a tinge of schadenfreude that people are fascinated with the failures and foibles of famous celebrities. Every year, the IRS chases people who evade or underpay federal income tax, and actors and popular figures in the media, who often don’t manage their own finances, make the news.

The latest is Lindsay Lohan. You may remember her from such films as Mean Girls, Freaky Friday, and Herbie Fully Loaded. TMZ has discovered that the IRS has obtained against Lindsay for almost $100,000, representing tax she didn’t pay for her income in 2009. Like many busy people, Lindsay employs an accountant to handle her finances, and she says the oversight will be handled immediately.

The sum Lindsay owes is small compared to the problems other celebrities have had with the IRS.

Wesley Snipes failed to pay up to $17 million to the IRS for his income taxes, not including penalties and interest. After his trial and a failed appeal, he was sentenced to prison for three years.

Nicolas Cage also blamed his accountant for his failure to pay a $14 million tax bill in 2010; even more recently, Nic failed to pay over $600,000 for a gift tax.

Pamela Anderson owed $2 million to the IRS and to the state of California.

Annie Leibovitz isn’t a movie star, but she is at the top of the list of famous modern photographers. She owed $2.1 million in back taxes, and pledged to sell her ownership of her photography to pay the bills.

Martha Stewart owed $220,000 to New York for taxes, but she believed she didn’t need to pay this tax because she didn’t spend time in that state.

Celebrities often have tax situations that differ from people who aren’t performers or professional athletes. They need to handle state tax returns for every state in which they’ve earned income each year, just like all taxpayers, but in any given year, performers may have earned income in a large number of states. Celebrities will almost always be too busy to handle their own tax returns, so they trust accountants to handle the paperwork and the payments.

On the other hand, it’s safe to say that some famous individual who owe the government money for failure to pay their tax bills are aware of the situation and are trying to skirt the law as much as possible, until they are forced to pay.

Photo: Rafael Amado Deras
TMZ via Don’t Mess With Taxes, New York Times, UPI, Back Taxes Help

The original version of this article, The Worst Celebrity Tax Problems, is copyrighted by Consumerism Commentary.

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After political bickering, the House of Representatives agreed to make a deal with the Senate to extend the payroll tax holiday. This tax cut reduced the payroll tax — a tax separate from but often associated with federal income tax — from 6.2% to 4.2% of the first $110,100 of wages. The tax benefits Social Security, a program politicians often claim is in danger of being underfunded. The payroll tax rate was scheduled to return to the normal amount of 6.2% at the beginning of 2012, but once a bill is signed into law, this rate will continue until the end of February 2012.

The Senate was only able to pass a bill that extended the tax cut for two additional months. In general, policy makers believe the lower tax rate will help stimulate the economy, but there are concerns about the effect of the long-term reduction into Social Security. After the Senate passed the bill, the House eventually relented. Part of the deal between the House and the Senate requires representatives to start working immediately on a new plan to find a way to extend the lower tax rate until the end of 2012.

Expanded federal unemployment benefits were also scheduled to end at the beginning of the year, but this bill would extend these benefits for two months as well.

The extension of the payroll tax cut and the expanded unemployment benefits will be paid for by an increase in the amount mortgage lenders must be Fannie Mae and Freddie Mac to insure loans.

An average project manager saved $1,300 last year due to this tax cut of two percentage points, and if politicians agree on extending the cut for all of 2012, that amount could double by the end of next year. When the tax cut was announced initially last year, I offered 20 suggestions for using the money you save through the payroll tax cut. With doubled savings, the opportunities for using the cash benefit are even greater.

The original version of this article, Payroll Tax Cut Extended for Two Months, is copyrighted by Consumerism Commentary.

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The year is quickly coming to a close, and the first priority for many people right now is getting through the holidays with as little stress as possible. Focusing solely on the holidays at the expense of your household’s financial needs can only add to stress later, so it might help to get a few items in order now rather than attempting to manage your year-end tasks in the one week between Christmas and the new year. A few days ago, I suggested changing your 401(k) contribution level now because of the time it takes for changes to take effect, and today, I’m looking at charity.

A tax benefit shouldn’t be the sole reason you contribute to charitable organizations, but there is a federal tax deduction for charitable contributions, and it’s better for a family’s own financial situation to take advantage of this benefit if plans call for charity regardless. Unlike other benefits that allow qualification extensions into the new year, to receive a deduction on this year’s tax return, the organization to which you donate must receive the contribution this calendar year.

Unfortunately, the time you spend volunteering for a non-profit organization is not tax-deductible. While volunteering could benefit an organization more than a moderate financial contribution, the tax code favors gifts of value, not time.

Choose your recipient

Charity isn’t an end-of-year activity. If you value a certain cause, doing what you can throughout the year can be a more effective way of maximizing the benefit you can provide to a non-profit or religious organization. Nevertheless, in busy lives, people often don’t think about finalizing their charitable gifts until the spirit of the holiday giving season is in full-force. If you think about giving throughout the year, you may already have one or more intended benefactors.

If you have a charity in mind or if you need to find one, take the time to ensure the organization is not only legitimate but each dollar you provide will do the most good.

Charity Navigator is an indispensable tool. Using Charity Navigator, you can research any non-profit organization. You can see an evaluation of how efficiently the organization uses donors’ contributions and read the latest financial reports to determine how highly the executives are compensated. Charity Navigator will also help you ensure the organization you choose is a qualified 401(c)3, a non-profit organization recognized by the government.

I like to evaluate what percentage of contributed money is used for marketing, particularly. Marketing is of course very important to an organization, and effective marketing can pay for itself in increased donations, but if too much money is spent on marketing and not projects that directly apply to the organization’s mission, you have to consider that your donation may be more effective elsewhere.

In choosing an organization, consider your own values. You may be aware of an organization whose goals you admire and respect, and can start there. But if not, consider what issues are central to your core beliefs. Would you like to see poverty eradicated around the world? Do you believe people can improve their lives by living in a new home? Are you concerned that budget cuts in education are affecting children’s ability to receive a well-rounded education? Should more resources be committed to helping military veterans? You should be able to find an organization catering to the same issue that you consider most important.

When you complete the donation, be sure to keep a copy of the receipt for tax purposes. The receipt should show how much of your contribution is tax-deductible. If you receive a thank-you gift in return for your contribution, the amount you provide will most likely not be 100% deductible.

Open a donor-advised charitable fund

If you can’t or won’t decide which organization is most relevant to your values and charitable desires, open a donor-advised charitable gift fund. I opened this type of account a few years ago at Fidelity. The charitable gift fund allows an individual to contribute today and receive the tax benefit, while granting donations from the fund to worthy organizations over time. By using the gift fund, I could contribute funds throughout the year, invest in index funds, and assuming the funds appreciate in value, donate even more to the non-profit organization.

Even if the value goes down, most organizations can receive gifts in stocks or funds, so they can choose to sell and use the cash when it’s best for the organization.

You cannot withdraw the money you’ve contributed to your charitable gift fund, however. You can’t use a charitable gift fund as a saving or investment vehicle for yourself. Once you transfer money to your charitable gift fund, it becomes the property of the fund itself or its parent company. That’s the reason you can take the tax deduction immediately rather than waiting until you grant your donation to a non-profit organization.

Each year, I donate to DonorsChoose, an organization that helps teachers receive the resources they need for effective classroom instruction, an organization within my undergraduate university, and a few other organizations that match my values or are in response to important issues.

If you donate to charity, do you do so during the year or only at the end of the year? How important is the tax deduction?

The original version of this article, Year End Reminder: Donate to Charity, is copyrighted by Consumerism Commentary.

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I recently received reader feedback from a conscious saver who is planning to move his money from Wells Fargo to a credit union. She won’t make the Bank Transfer Day November 5 goal, because the credit union’s branch is planned to open November 7. This reader plans to be one of the new branch’s first customers.

This reader wrote into Consumerism Commentary not to write about the effort to move away from big banks. She volunteers for charitable organizations and is wondering why there is no tax benefit available for volunteer time. Charitable financial contributions, such as cash, stocks, or property, are often tax-deductible if the organization receiving the donation is a registered non-profit. I’ve taken advantage of these tax deductions for several years, but for me, the purpose of contributing to non-profit organizations is not the tax deduction. The purpose is to legitimately help an organization whose mission is meaningful to me and my worldview.

I’ve been lucky to be in a financial situation where contributing to organizations would not endanger my own bank account. Another method of donation that can have a great effect on an organization is spending time as a volunteer. In my experience, most non-profit organizations do not generate enough revenue from operations or fundraising to maintain a healthy payroll. They often rely on passionate volunteers to handle a large amount of work. If you don’t have a large amount of money to provide an organization, you could be more beneficial to the group by offering your services as an unpaid volunteer.

If the more financially-comfortable money donors receive a benefit from the government for their assistance in the form of a tax deduction, shouldn’t volunteers receive a benefit related to the financial value of their time and work? Furthermore, the requirement that taxpayers need to itemize deductions in order to receive the charitable contribution deduction results in lower-income taxpayers, who are less likely to itemize, don’t take a deduction they might deserve. This tax deduction favors upper middle class and above because they are more likely to have money to share and are more likely to itemize deductions.

The Congressional Budget Office agrees with me: “Such tax incentives are limited, however, to the subset of taxpayers who itemize, and they favor high-income people, who face relatively higher marginal tax rates.”

While the feeling of being a positive force in the world should be a good enough motivator for working with organizations whose missions you’re passionate about, why should one form of contribution be encouraged through tax policy while another is not?

The War Revenue Act of 1917 established the charitable contributions deduction, only four years after the federal income tax as we know it was established. It’s long been a part of the U.S. tax code and isn’t likely to go away, particularly because it’s not only individuals who take advantage of the benefit. Some corporations can deduct up to 10% of their taxable income, and you can be sure that regardless of corporate goals, shareholders want their companies to reduce expenses for taxes as much as possible. Major contributions also constitute great public relations, helping prospective customers associate good deeds with the company.

Understanding that the tax deduction for charitable contributions would never go away without a major overhaul of the U.S. tax code, is there a place for additional deductions for time and effort spent volunteering?

There would be a few challenges.

• Fraud. With a financial transaction, the bank has a record that can be submitted to the IRS for proof if called upon to do so. Without an independent verification of the time spent volunteering, it would be too easy to submit false documentation and take advantage of the system.
• Valuation. How do you put a value on one hour spent as a volunteer? The value of time has always generated good discussion. Is an hour from a CEO who sacrifices the time he could be spending building a company, creating jobs, to be a volunteer more valuable than an hour from a high school student who is looking for opportunities to enhance his college applications? If the CEO spends his time stuffing envelopes with fundraising postcards and the student takes an hour to organize an event having a direct impact on an elderly community, is each hour rated the same?

These issues are not insurmountable, but it would take some planning to develop a method of making the tax deduction verifiable and fair. With tax policy set by lobbyists, we may never see an arrangement like this within the tax code. Unless corporations were to find value in spending time rather than money for charitable causes, there would not be enough pressure on politicians to change the rule.

The reader who brought this idea to my attention also asked the following: “How do we make suggestions to the tax laws? Is there a process for raising such an issue?”

The first stop is your local Representative and Senators. Send letters, call their offices, and get more people to do the same. Laws can be changed by citizens, but it would take a significant effort. If you feel strongly about the issue, convince others to take up the cause with you.

It’s almost Thanksgiving, so take a page from Arlo Guthrie’s Alice’s Restaurant. For people to change even a small aspect of the tax code, it’s going to take a movement. If you’re passionate about this idea, start websites, inspire people to follow, and change the world.

Photo: Fort Meade
Congressional Budget Office

The original version of this article, Tax Deduction for Time Spent Volunteering, is copyrighted by Consumerism Commentary.

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In the latest CNN poll, Republican Party hopeful Herman Cain is statistically tied with Mitt Romney with support of 25% to 26% of Republicans asked, but two thirds of the respondents haven’t made up their minds. Likely a big contributor to Cain’s surge from from 9% to 25% is his 9-9-9 tax reform plan.

This plan is a significant simplification of how the federal government levies taxes on the public. The three nines refer to a starting point that includes a 9 percent federal income tax, a 9 percent corporate transaction tax, and a 9 percent federal sales tax. Despite the appearance of a tax cut due to the fact that many people pay more that an effective 9% on federal income taxes, this would likely result in a significantly higher tax bill for most people. The 9 percent national sales tax would be in addition to any state sales taxes. For the middle class and families lower than middle class on the socioeconomic scale, who need to devote a larger percentage of their income on buying the necessities of living like food, an increased sales tax makes it much more difficult to make ends meet.

Even if the new national sales tax is added only to items that are purchased new, there are some significant necessities that cannot be purchased used, such as food.

Those who support a value-added tax or a flat income tax have often recognized that “equal” doesn’t always mean “fair,” and have adjusted blanket proposals with credits that benefit those who would be harmed by a tax like this.

Defense of Cain’s 9-9-9 tax plan also relies on the idea that the costs of consumer goods will go down when embedded taxes disappear. For example, if corporations can better control their tax expenses, they won’t need to increase a product’s price to cover a potentially higher tax bill. The underlying assumption is that businesses will lower prices (or not raise prices) to compensate for lower expenses, but that doesn’t happen. When a product is sold at a certain price point, a reduction of expenses for the product just result in higher profit for the company. Companies with shareholders won’t turn away the “easy” profits earned by reducing expenses and keeping revenues the same.

We’ve seen that as recently as the airline tax fiasco. During a short period of time earlier this year, airlines had the opportunity to pay less tax. During this period of time, several airlines raised fares so customers did not see any difference in the total expense.

The 9-9-9 tax plan is not an immediate change. The plan calls for first phase that includes a reduction of the top tax brackets to 25%. The second step would be the plan that includes a 9% rate on each of the three categories. The final phase would be a flat national sales tax, eliminating income tax entirely.

This is from the Washington Post’s fact-checking analysis of the plan:

Right now, nearly half of taxpayers don’t pay income taxes, but they do pay their share of payroll taxes, which amounts to 7.65 percent of wage income (though much of it is capped at $107,000). Cain would also eliminate the earned-income tax credit, which is intended to lift working Americans out of poverty. Many of these workers currently receive tax refunds.

On top of that, Cain would introduce the new sales tax, which would affect lower and moderate-income people who spend most of their income on purchases, not savings and investments. Depending on how you do the math, people now paying zero or negative taxes might be faced with a 27 percent tax on income.

In other words, while on paper Cain is promising a tax cut, in reality tens of millions of lower-income Americans would face tax increases. People in high tax brackets — 28 percent and higher — would likely see big tax cuts.

Do you support the 9-9-9 tax plan?

Photo: johntrainor
CNN, Washington POst

The original version of this article, Herman Cain’s 9-9-9 Tax Plan, is copyrighted by Consumerism Commentary.

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New Jersey has been gaining a worldwide reputation thanks to the plethora of newer television programs featuring the state. It may have started with The Sopranos, but Jersey Shore, Jerseylicious, The Real Housewives of New Jersey, and Jersey Couture have continued. The state government has been providing a tax credit encouraging filmmakers to bring their production to the Garden State. The incentive hasn’t resulted in New Jersey becoming “Hollywood East” as was either hoped or feared, depending on your point of view, when the state created the tax credit.

New Jersey is not alone in this approach. New York City has offered a similar tax credit to bring film production to the east, benefiting many films and television series, and along with film production comes many jobs.

The tax credit in this state doesn’t just apply to entertainment about New Jersey. Parts of the film Transformers 2 was filmed here, as well. I haven’t seen the movie, but as far as I know about the film, there’s nothing included that could tarnish the reputation of the state’s citizens, unlike some of the other projects filmed here. Most notably, Governor Chris Christie singled out Jersey Shore. In his role as governor, Christie has revoked the $420,000 tax credit for production of the series filmed for MTV. As a New Jersey resident, I’m acutely aware that the personalities of the characters on Jersey Shore don’t reflect the reality of the greater community within the state.

I don’t necessarily think the tax credit should be repealed based on a show’s content, however. The goal of the tax credit is not to encourage marketing in favor of the state’s reputation (propaganda) or tourism, but to bring an industry and that industry’s jobs to the state, many of which might not have been here otherwise.

It’s valid to argue that the tax credit shouldn’t exist in the first place. Producers would naturally gravitate towards locations where it is more economical to produce. A tax credit gets in the way of market forces. I’m fine with tax credits for certain industries if it benefits the state economically, and it’s easy to see that the tax credit program for filmmakers does that. As a New Jersey citizen, I’d prefer hat the tax credit be used to produce quality entertainment, but that’s a judgment call. It’s an opinion, and one that the government shouldn’t be using for policy decisions.

The governor most likely wants to kill the tax credit altogether, and is just using Jersey Shore as an example of entertainment that “uses” the credit to enhance the negative reputation of its citizens. He understands that appealing to the state’s reputation could be an easier fight than killing a job-producing tax credit on its merits as government intrusion on a free market. I’m no fan of Jersey Shore, but either kill the tax credit entirely or don’t arbitrarily decide who should receive the benefit. Move the funds to the marketing and tourism budget if the government decides funds should be dedicated only to entertainment that sheds a positive light on the state.

Photo: wfyurasko
Yahoo News, New Jersey Motion Picture & Television Commission

The original version of this article, The Jersey Shore Film and Television Tax Credit, is copyrighted by Consumerism Commentary.

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The IRS has finalized the 2012 federal income tax brackets, but most people aren’t concerned with these numbers until next year. In April 2012, you’ll need to be concerned with the 2011 tax brackets to file your 2011 income tax returns. Most taxpayers won’t need to deal with the 2012 rates until early 2013.

While tax laws are always in flux, and things could change before 2012 tax returns are due in April 2012, the new tax brackets are official. They increase each year due to inflation. I’ll update these tax tables if the IRS announces any changes. For those who like to get a head start on their tax planning, these tables will at least provide a starting point.

Here are the tax tables for 2012, applicable for taxpayers filing by April 2013, still in the distant future. Keep in mind that the “taxable income” used in these tables is not your gross income. Taxable income already has certain deductions removed, like 401(k) contributions.

To lower your tax burden this year by up to $5,000, consider opening an IRA (Individual Retirement Account). Mint.com has an IRA wizard that can show you what kind of IRA to open and where to open it.

Married individuals filing joint returns and surviving spouses

Heads of households

Get your refund in as little as 8 days. E-file with TurboTax today. It’s Easy

Unmarried individuals (other than surviving spouses and heads of households)

Married individuals filing separate returns

The original version of this article, 2012 Federal Income Tax Brackets and Marginal Rates, is copyrighted by Consumerism Commentary.

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Warren Buffett has frequently claimed that he pays less tax as a percentage of his income that his secretary. President Obama has jumped on this as a basis for the Buffett Rule, a new proposed tax code that ensures that millionaires pay their fair share of income tax.

According to Buffett, his effective tax rate is 17.7 percent while the effective tax rate for his secretary, who earns $60,000, is 30 percent. There are two primary reasons that Buffett’s tax rate is so low. First, only the first $100,000 or so is subject to the payroll tax. For the secretary’s income, all is subject to this tax, while only a small portion of Buffett’s income is subject. Also, most of Buffett’s income is taxed at the lower long-term capital gains rate of 15 percent rather than the tiered ordinary income rates that are in effect for his secretary’s income.

It is also fair to consider why the secretary’s tax rate is so high. I may have to run some calculations again to check, but before I owned my own business, my effective tax rate tended to be 15 to 18 percent considering federal and state income taxes as well as payroll taxes.

Someone with a $60,000 income will also spend a larger percentage of this income on expenses subject to sales tax, increasing their total tax burden more dramatically than someone whose income is high enough so that it can mainly remain in investments or savings.

The Tax Policy Center has offered data that show that while Buffett may pay a smaller tax rate than his secretary, this is not the case on average. The research group estimates that this year, millionaires, or households earning $1 million in income or more, will pay an average of 29.1 percent of their income in federal taxes while households earning between $50,000 and $75,000 will pay an average of 15 percent. Buffett and his team do not seem to follow the norm; in fact, their tax roles are reversed.

Historically, tax situations that favor the wealthy are friendlier than they have ever been. In 1986, the top marginal federal income tax rate was 50 percent. Throughout the 1970s it was 70 percent.
In 1964, it was 77 percent. Throughout the 1950s, it was 91 or 92 percent. In the mid-1940s, the highest bracket was 93 percent. The income required to fall into the top box varied each year, but not by so much that someone earning $1 million per year in today’s dollars would have found him or herself anywhere other than in the top bracket. These highest tax brackets applies to households earning over at least $1 million in today’s dollars. Individuals today need to earn only $380,000 to be placed into today’s highest tax bracket.

Beyond the rates, the poorest and the wealthiest all have ways to reduce their tax bill, though depending on your point of view, the other group seems to have more opportunities to do so. Over the long term, tax policy in the United States has shifted greatly in favor of wealthy households and corporations, while assistance plans for the poor have been facing more scrutiny.

“People who are doing quite well and worry about low-income people not paying any taxes bemoan the fact that they get so many tax breaks that they are zeroed out,” said Roberton Williams, a senior fellow at the Tax Policy Center. “People at the bottom of the distribution say, ‘But all of those rich guys are getting bigger tax breaks than we’re getting,’ which is also the case.”

The Buffett Rule, intended to ensure that wealthiest households pay their “fair share” to avoid situations like the one between Buffett and his secretary, could be designed to have no effect on the “average” household earning more than $1 million, those households that conform to the averages predicted by the Tax Policy Center.

Associated Press

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As a continuation of President Obama’s jobs proposal (economic stimulus) for curbing spending and increasing federal government revenue, the administration is taking a cue from famous investor, Warren Buffett. On many occasions, Buffett has claimed that wealthy Americans do not pay a fair share of the tax burden relative to their means to do so. In his famous example, Buffett describes his effective tax rate as being lower than his secretary’s.

Many wealthy people earn income through investing returns, not ordinary income, which are taxed at a rate of 15 percent rather than a marginal rate schedule with a maximum of 35 percent in 2011.

Critics of Buffett’s outspoken desire to reform the tax code say that Buffett can help reduce the deficit by donating a portion of his net worth to the U.S. Treasury, as the government allows for such donations. Those who feel that Buffett’s comments, if they influence policy, could hurt them today or in the future say that Buffett could voluntarily not take deductions that lower his tax liability, but like a good capitalist, Buffett will continue to take advantage of every avenue the tax code provides his for saving money.

Economists have crunched the numbers to show that tax law changes fashioned after Buffett’s statements would not raise enough revenue to cover the gap between government spending and revenue, but there doesn’t seem to be any implication by the plan’s supporters that this would be the case; cutting back cable television service won’t allow a poor family to afford a house, but it’s still a beneficial change.

People who once respected Buffett’s investing prowess now call him a socialist, despite the fact he’s one of the most successful capitalists the modern world has seen. I have no interest in defending Buffett’s philosophies, but he is a literal capitalist, as through his company Berkshire Hathaway he provides the means in the form of capital for other companies to thrive. Like a good capitalist, Buffett invested $5 billion in a struggling bank, with conditions only he could negotiate, such as a significant discount on the investment and influence among management for operational decisions.

To take advantage of Warren Buffett’s name, the president is informally calling his tax-related measures the “Buffett Rule.” If I were Warren Buffett, I wouldn’t my name attached to a politically-charged discussion even if I believe in the core aspects of the proposal. Buffett doesn’t mind that his name is being used in such a manner and is publicly supporting the measure.

What’s included in the Buffett Rule

Simply put, the Buffett Rule is a minimum tax on taxpayers with an income over $1 million. This would replace the misdirected Alternative Minimum Tax (AMT). The original purpose of the AMT was similar: wealthy households should pay a fair share of taxes. Over time, though, as the income range for middle class grew, the AMT was not automatically adjusted. The AMT began to hit an increasing number of families who would not consider themselves wealthy.

In addition, the Buffett Rule would limit the tax deductions available to families in this income range and end subsidies to major corporations such as oil companies.

Another key to the revenue portion of Obama’s proposal is to let the tax cuts enacted under President Bush expire for couples with incomes over $250,000. That’s not necessarily part of the Buffett Rule, and the proposal has been making the rounds since at least the beginning of Obama’s presidency.

A Congress unfriendly to tax increases will make passage of the Buffett Rule difficult. Wealthy families believe they are already paying their fair share of the tax burden and want to see low-income families pay more. According to the U.S. Census, the gap between the top and the bottom of the income scale has expanded to its widest point in history, and a situation in which both the rich and the poor feel the government unfairly discriminates against them will not lead to a solution.

The desired outcome in this case would be enough revenue to cover the government’s obligations plus the feeling among the systemically lower class that they have a fair opportunity to succeed and a feeling among the wealthy that they have an obligation to pay for a representative bulk of the country’s expenses.

Photo: Aaron Friedman

The original version of this article, The Buffett Rule: Tax for Millionaires, is copyrighted by Consumerism Commentary.

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The comparison of owning a home in New Jersey or Long Island with owning a home in New York City shows that the city has one financial advantage: property taxes. In New Jersey, it’s hard to discuss the cost of owning a home without talking about property taxes. With high property tax rates, it’s worthwhile to take as many actions as possible to reduce those rates. When filing personal income tax returns, taxpayers look for every deduction and credit, saving hundreds or thousands of dollars, but most homeowners accept what they owe for property taxes, even though that could easily be a bigger bill than income taxes.

With home prices on average having dropped in the past few years, now is a perfect time to take a look at these taxes. The amount of property tax you owe is based on an assessed value of your house, and depending on where you live, that assessment could have occurred when the market was at its peak. On average, assessments lag behind current values by three years.

Homeowners could save thousands of dollars with a successful appeal. We’d like to think our home values continue to increase because we want to feel that the decision to buy a home will result in a good investment over time. When it comes to assessments for tax purposes, it’s better to have the lowest value possible. Review your recent assessment, and consider these factors for appeal:

• Comparable home prices. Look at actual sales of houses in your area. Knowing the current market is a key to determining a fair assessment for your house.
• Age of the assessment. If the assessment is from over a year ago, comparable homes in your area might have sold for less money more recently.
• Room count and layout. Most assessments are accomplished without definite knowledge of your house’s layout. There could be mistakes in your assessment that result in a higher value on paper, like too many bedrooms. If your basement is unfinished, you could argue for a lower assessment.
• Amenities. When assessments are based on comparable home prices, if your home does not have the same amenities as your neighbors’ houses, you could be unfairly assessed. If you don’t have a pool like the houses surrounding yours, you shouldn’t have the same property tax bill.

After you receive notice of your newest assessment, review it quickly and repeal right away. Review the property record card and look for inaccurate details. Take photographs of relevant features of your house. Look at documentation for comparable home sales in your neighborhood. When you have your hearing, bring all the documentation to support your case. Authorities are aware that most assessments are inaccurate, but they won’t do anything unless owners speak up, and some who are unsuccessful with the first appeal give up. The savings from a successful appeal could be substantial, so don’t give up until your home’s value is accurately assessed.

Wall Street Journal

The original version of this article, Appeal Your House’s Assessment to Lower Your Property Tax Bill, is copyrighted by Consumerism Commentary.

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Update: The concepts implied by Warren Buffett have formed the basis of President Obama’s Buffett Rule proposal.

Warren Buffett is staying in the news. I wrote recently about his desire to continue investing in stocks during market volatility, and today he published an opinion piece in the New York Times. He laid out the facts about how income is generally taxed. Income generated by working most jobs is taxed (overall, not marginally) about 33 to 41 percent, while income generated by money (investing, selling companies, etc.) is taxed much less thanks to the 15% rate for carried interest.

The theory making the rounds around Washington is that if investors are taxed higher, they will let their cash sit on the sidelines and not invest in businesses thanks to the fear of paying a higher tax rate on their earnings. Buffett points out that this is not how investors reacted the last time rates were high.

I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.

Buffett may be a brilliant investor, but he doesn’t speak for all millionaires. Most who earn money classified as this favored type of income, millionaires or not, want to keep the 15% tax rate. The low tax rate exists, in Buffett’s mind, to coddle to the rich so politicians gain their favor (and their money, presumably).

He also criticizes the concept of “shared sacrifice,” code words designed to elicit a feeling among the middle-class and lower-class general public that it is a civic duty to bear the burden of the economic recovery, while billionaires are avoiding responsibility in this “shared sacrifice.”

Is eliminating the favorable tax treatment of the 15% carried interest rate part of a solution for improving economy in the United States?

I tend to think that quibbling over tax rates clouds the view of the bigger picture. Looking at the economy over the past few centuries, it seems like the country was until recently in its “start-up” phase, like a burgeoning company. Through innovation, venture capital, and military conquest (hostile acquisitions?), the United States grew into a major world power.

Innovation is cheaper elsewhere, venture capital (investments from overseas) might eventually become unavailable, and military conquest beyond our shores is too expensive both in financial terms and foreign relations. Looking at the United States as if it were a company, the country has settled into a phase where the domestic growth we’ve come to expect over the past few centuries is not likely. I don’t think whether the tax rate on carried interest is 15% or 28% will change this.

New York Times

The original version of this article, Warren Buffett Doesn’t Want to Be Coddled, is copyrighted by Consumerism Commentary.

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The Alternative Minimum Tax (AMT) is one section of the tax code everyone, regardless of political party affiliation, seems to hate. Originally designed to ensure the wealthiest Americans wouldn’t be able to avoid paying a fair share of tax, the AMT isn’t adjusted for inflation, so an increasing number of not-as-wealthy Americans are subject to higher tax bills.

Right now, politicians are concerned with the debt ceiling. Congress limits the amount of debt the federal government can owe, and this maximum must be raised every so often because essentially the economy runs on debt and relies on debt to operate. A special bipartisan team in Congress, the “Gang of Six,” now leads the charge in determining how to prevent disaster while keeping as many politicians in Washington as satisfied as possible.

If nothing is done about the debt ceiling, politicians and economists do claim there could be a financial disaster. While this has never happened in the past, and every time the subject has come up it has been resolved, experts speculate about the outcomes.

• The government won’t be able to send out checks to federal workers and military personnel.
• Federal benefit recipients, like those on Social Security, Medicare, or unemployment, will not receive checks.
• The United States debt would be downgraded by rating agencies, making it less likely investors will buy federal bonds.

Any faith that people, particularly investors, around the world have in the (financial) stability of the U.S. government will be in jeopardy. This is a situation for which neither Democrats or Republicans want to accept the blame. The Gang of Six allows a few motivated members of Congress to work out a deal while the remainder bicker, posture, and try to work their public relations to help sure their outlook is favorable for the next election.

Part of the Gang of Six’s recommendations is the elimination of the Alternative Minimum Tax. This, along with $4 trillion in spending cuts, the Gang believes will allow Congress to agree on raising the debt ceiling. There have been many attempts to eliminate the AMT throughout the past few years, but Congress has never been motivated to follow through with the proposals. This time could be different.

Fortune

The original version of this article, The End of the Alternative Minimum Tax (AMT), is copyrighted by Consumerism Commentary.

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The other day, Derek Jeter achieved his 3,000th hit, a major baseball milestone. The hit happened to be a home run, and the fan who recovered the ball, Christian Lopez, has been in the news — well, the sports news, anyway. Players like to be able to claim milestone baseballs for their own collection, so that some day, they hope, they will have the chance to donate the item to the Baseball Hall of Fame. Christian Lopez is such a fan of the Yankees that after being ushered away by security, and after being asked what he wanted in exchange for the baseball, settled for a few signed pieces of memorabilia and season tickets at Yankee Stadium for the rest of the year.

Christian could have asked for tens or hundreds of thousands of dollars from the team in exchange for the baseball. Some sports memorabilia aficionados have claimed the baseball could have fetched $300,000 to $500,000 on the open market. Who knows what the Yankees, Major League Baseball’s richest team, was prepared to offer if Christian had asked? He has now been criticized for his decision.

The criticism is coming from opposite points of view, as well, but both seem to think the Yankees need no generosity.

• If Christian wanted to be generous, why not sell the baseball for its fair market value and give the proceeds to charity?
• While Christian is clearly a Yankees fan, the team’s finances are not exactly in need of generosity. Derek Jeter’s salary this year is almost $15 million. If he wanted to personally pay Christian for the fair market value of the baseball, it most likely would not have hurt his finances.

There is perhaps good news for Christian. If he were to have kept the baseball, he might have owed tax on its value, even if he didn’t sell it. A few years ago, Barry Bonds surpassed Hank Aaron’s home run record, and lawyers speculated that the lucky fan who walked away with the ball could owe tax just by taking the souvenir home. By trading the baseball in for souvenirs and tickets worth about $50,000, he lowered his potential tax bill. But with student loans and other expenses, that’s a tax bill Christian — or any unsuspecting fan — might not be able to pay. Smelling publicity opportunities, a number of companies have offered to pay the tax bill for Christian.

To a true fan, loyalty to the team means more than just money. Despite the tax bill, Christian could have done himself and his future family a big favor by keeping the ball and selling it. The proceeds could have helped purchase a house without the need to take out a thirty-year mortgage. He could have invested and retired a few years earlier than he would have needed to otherwise. He could have been able to put a few kids through college. Christian seemed to feel so loyal to his team, that despite the fact the $300,000 to $500,000 he could earn for the ball would mean the world to him and his family but its value would be only negligible compared to the wealth of the Yankees or Derek Jeter, he forfeited a good slice of future financial security to be seen as the good guy.

This is about loyalty to a sports team, but it’s very much like dedication to an employer. Working for a company, it’s easy to ignore or even be unaware of the negative aspects of the employer. That’s why employees (like me) tend to hold onto company stock. Their experiences are often clouded by upper management who, through the filter of an internal communications team that works closely with public relations, broadcast mostly the good news. Fear of losing a job can breed loyalty, as well. When you have management who are trained in the art of motivation and manipulation, employees can be taught to believe anything, like twenty-four hour, seven-day dedication to the cause is the only path to success.

Loyalty can cause you to make strange choices — choices that may harm you financially. While it’s a virtue to consistently put others’ needs before your own, when an organization who is in a much stronger position has convinced you to put the organization’s needs before your own, it’s manipulation. The convincing isn’t always explicit, like a supervisor rallying troops to “take one for the team” in the form of pay cuts or a politician declaring a nationwide shopping spree to spur the economy. By engendering fans, sports teams have managed to create the same relationship. Fans will do anything for their teams, for practically nothing. (Read the fine print on a baseball ticket to discover all the rights Major League Baseball has and your team has, and all the rights you don’t have, once you enter that stadium, park, or field.)

I enjoy going to baseball games — but I don’t enjoy it often because I am a fan of the Mets and the team has lost almost every game I’ve seen this year.

What would you have done if you were in this fan’s position?

Photo: _FXR

The original version of this article, Man Gives Derek Jeter’s Baseball to Team, Criticized for Everything, is copyrighted by Consumerism Commentary.

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The first-time homebuyer tax credit was a major incentive that the government, in collaboration with the real estate industry, initiated to stimulate the economy. It’s understood that the tax incentive worked in the short-term, encouraging more home purchases for a period of time that continued to be expanded by Congress. Nevertheless, the housing market continues to be in a slump. The index of home prices was down again in the most recent reports.

What happened to taxpayers who applied to receive the tax credit? For the most part, filers who included all the required forms received the credit in about six weeks. Anyone who didn’t file the paperwork properly found their applications under review, and the IRS quickly became overwhelmed with the requests. As a result, even taxpayers who filed the proper paperwork and are rightfully owed the credit were faced with delays and problems.

There are still taxpayers to whom the government legitimately owes the credit who haven’t received a check. The government changed the homebuyer credit several times. The benefit morphed from a maximum $7,500 credit in the form of a loan that must be paid back to the government over time, to a maximum $8,000 credit available to first-time homebuyers only that would not need to be paid back, to a credit available also to long-time homeowners rather than just first-time buyers. In addition to the changing form of the credit, the qualifying home purchasing and closing dates changed frequently, as well. Tax preparation experts struggled to keep up with the changing laws.

Making the situation worse, along the way but towards the beginning of the $8,000 credit qualification period, the government changed the set of paperwork required to qualify for the credit. This was likely done to stem a flood of fraudulent applications. The IRS simply could not keep up with the research necessary to validate all the applications, so after weeks passing, some taxpayers received requests for more paperwork. After sending the paperwork in, there were instances where the IRS could not keep the information organized, and taxpayers who were counting on the credit were stuck in limbo.

It was surely a mistake for taxpayers to count on the government to distribute the credit in a timely manner. Many assumed the credit would arrive soon and planned their finances around a potential increase of up to $8,000 from the government. When the $8,000 didn’t come as expected, homebuyers were thrust into an uncomfortable financial position. Looking back, it’s easy now to say one should plan their finances only by what they have in the bank, not by what they expect to receive in the future.

Are you still waiting for the homebuyer credit? Do you think that the IRS could have implemented a better plan if the government wanted to try to stimulate the housing sector of the economy? Was all this credit mess worthwhile now that we see the real estate market is still a mess?

Photo: Images_of_Money

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The Department of Justice filed an anti-trust lawsuit against H&R Block. This second-largest income tax preparation service intended to acquire the company that owns third-largest income tax preparation service, TaxACT. Based on the number of customers who used these companies’ services to self-file 2010 tax returns, the combined company would still be a distant second to Intuit’s TurboTax. The new combined tax-filing service would be run by TaxACT’s management team, which is surprising considering H&R Block’s At Home product has more customers and is a more recognized brand.

According to the government agency, the proposed merger would result in too much consolidation in the marketplace, decreasing choices for consumers and increasing prices. Consumers’ interests are better served in a competitive marketplace, and the Department of Justice has the job of stepping in when a merger or acquisition would result in unfair competition. For a while, the DOJ has been quiet, allowing companies to consolidate, deferring to market forces. The DOJ didn’t act when AT&T planned to acquire T-Mobile, a deal that would create a duopoly among mobile phone service providers. The government also didn’t have a problem with Comcast’s purchase of NBC Universal, which put the full stream of television, from production to broadcast to delivery, in the hands of one company.

H&R Block responded to the government’s suit with claims that the merger would increase options for tax-filing customers.

CNN, H&R Block

The original version of this article, Government Blocks Merger of H&R Block and TaxACT, is copyrighted by Consumerism Commentary.

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The federal government can only operate with the help of the millions of individuals who earn income in this country and dutifully pay taxes. You would think that, in order to ensure a smooth revenue stream of considerable size, the IRS would make filing taxes as easy and painless as possible. That’s obviously not the case, considering the tax code is one of the most confusing human inventions on the planet today. The IRS does ensure that filing federal tax returns is completely free for millions of Americans with the help of a select number of software companies, provided the taxpayer meets a few eligibility requirements. If you can file your federal taxes for free, do so. There’s no point in spending unnecessary money.

If your taxes are complicated, and you require a professional to review or complete your forms, or you require some features not available in the free editions, then go ahead and pay for software or pay a professional. For the cast majority of Americans, free e-filing is a great option.

Starting with the most popular software companies, here are the best options for filing your taxes for free.

TurboTax Online. TurboTax tops the list because they are fast to adjust to tax law changes, it’s part of a large company that has a strong reputation for personal finance, and there is a large user community for peer-to-peer support. The TurboTax Freedom edition is free for e-filing if any of these criteria apply to you:

• Your adjusted gross income (AGI) is $38,000 or less, or
• You are active military with an AGI of $58,000 or less, or
• You qualify for the Earned Income Tax Credit (EITC)

I’ve used TurboTax in the past, and here is a TurboTax Online review as of the latest version of the software. If you live north of the border, you’ll need to access TurboTax Canada.

H&R Block At Home. H&R Block’s primary business is in seasonal storefronts where taxpayers can bring their financial documentation into a specialist to work through the forms in person. The company also offers the “At Home” filing service for those who like the do-it-yourself approach. While the company normally charges for federal tax filing, if you use the At Home service and meet the following condition, you can e-file your federal taxes for free.

• Your adjusted gross income (AGI) is $58,000 or less, and
• You are age 51 or younger

Here is my review of H&R Block’s At Home software, updated recently to reflect the changes since last year.

Free TaxAct. When TurboTax was no longer free for me, and before moving to an accountant to handle my business, I was still able to e-file for free using TaxAct. TaxAct doesn’t have the brand strength or the large community of the two above software services, but the calculations are correct and the system that guides you through your calculations is just as complete. You can e-file your federal taxes for free using Free TaxAct if the following conditions apply.

• Your adjusted gross income (AGI) is $58,000 or less, and
• You are between the ages of 19 and 55 inclusive

eSmart Tax powered by CompleteTax. To e-file for free, your AGI must be less than $58,000 and you must be age 51 or younger.

TaxSlayer. TaxSlayer offers free e-filing for taxpayers with an AGI of $58,000. You must be age 25 or younger or 65 or older, which limits the qualification to a smaller population.

Other free e-filing options are limited by the state in which you live in addition to other limitations similar to those above.

The deadline is approaching fast, and maybe taxpayers wait until the last possible minute to file. I suggest starting as early as possible, once you have all the information you need, to ensure you don’t encounter any delays or glitches. I have never heard of there being any software problems at the last minute, but it’s better to be safe than owe penalties to the government.

The original version of this article, How to File Your Taxes for Free, is copyrighted by Consumerism Commentary.

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With one week before the deadline, many people are just starting to think about filing their tax return. The problem I’ve often encountered with waiting to the last minute is it’s easy to miss important items. Many years ago, I filed in the manual style: my only tools were a calculator and pencil. Although my tax situation was much simpler back then, with no real investments and only a W2 to report, with the most confusing item a tax credit for student loan interest, I still managed to make a mistake.

A miscalculation came back to haunt me when the IRS found my error and politely informed me I owed an additional three hundred dollars. This was at a time I didn’t really have much money. Life has moved on since then, and I progressed to online tax filing, first with TurboTax, then with TaxACT. Even more recently, I’ve begun working with an accountant. He does the dirty work now.

If you’re just starting to prepare your taxes now, don’t panic. Here are some suggestions for making sure you get it right.

File for an extension

I’m filing for an extension this year. Here’s how to file a tax extension for free — the method I used. If you haven’t organized your documentation throughout the year, taking more time to get it right doesn’t hurt. The IRS will automatically extend your deadline for filing to October 15 if you ask.

If you file an extension and end up owing after you calculate your tax return, if you didn’t pay by the original due date of April 15 (or April 18 this year), you’ll owe additional penalties as well as interest. So if you expect to owe, send in a check for the estimated amount when you file your extension.

Most software will allow you to file your extension request online, including an electronic payment of your estimated bill. If you do a poor job estimating your final bill, you could still owe penalties and interest, but any guess is better than none.

Contribute to your IRA

You can fund last year’s traditional or Roth IRA up to the maximum until the tax due date of April 15 (or April 18 this year). Even if you file for an extension, you won’t receive extra time to make this type of retirement investment.

Don’t wait until the eleventh hour

If you are filing your taxes online, don’t wait until the last second. While most major software companies have strong enough hardware to withstand millions of people filing at the same time, you don’t want to take any chances in filing late due to glitches beyond your control. With my luck, the hour I need to be online to file my taxes before midnight would be the hour my internet service provider decides to do “routine maintenance.”

Carefully consider all of your credits and deductions

The tax code seems to grow more complicated each year, and many people who file by hand will miss certain new deductions. It’s overwhelming for someone with a life consumed by other responsibilities to remain current with the latest tax law changes. I’ve found it helpful to use online software that walks you through every deduction. It’s less likely you’ll miss something, as long as you pay attention to the software’s questions and answer accurately.

Make sure you look at these credits and claim them on your return if you qualify:

• The American Opportunity Credit. This $2,500 credit is a beefed-up version of the Hope credit for college expenses.
• The Fuel-Efficient Car Credit. If you purchased a vehicle on or before December 31 that fits certain specifications, you could qualify for this credit. This is geared towards hybrid, alternative-fuel, and electric cars.
• The Home Energy Credit. Some energy-efficient improvements you make on your home will qualify for this tax credit.
• The Home Buyer Tax Credit. This credit, now available to long-time homeowners rather than just first-time home buyers, has been extended for military personnel. This can still be claimed on the latest tax forms. Here is how to claim the new home buyer tax credit; you will need special documentation. Keep in mind that if you purchased a house under the original tax credit in 2008, you will need to begin repaying the credit this year.

Pay attention to the details

If you’re filing online, you won’t be able to proceed without providing your Social Security Number. Taxpayers who complete their return by hand are more likely to make this mistake. Software won’t tell you if this number is wrong, however. Also, check to ensure your name and address is spelled correctly. If you entered banking information for direct deposit of a refund, verify the routing and account numbers are correct.

Triple-check your numbers

Once again, filing using software like TurboTax is ideal. Built-in algorithms check your work, but they won’t catch all errors. Match the numbers you typed or wrote with the numbers on the forms you receive such as W2s and 1099s. Check to make sure you’ve included all your income. Count your receipts if you’re deducting business expenses.

Don’t forget to sign your form. Once again, if you file fully online, your electronic signature will be required. If you file by mail, nothing will prevent you from dropping off the forms at the post office without your signature. Make sure it’s there.

Keep this in mind

The tax system isn’t perfect, but it’s still a good idea to understand the basics.

Getting a large refund after you file your taxes is not necessarily a good thing; this is your money that you could have had use of throughout last year. Some people like the idea of the “forced savings” a refund provides, but it’s not hard to force yourself to save without giving the government an interest-free loan of your money. Then again, you might not have earned much interest on that money if it was just sitting in the bank.

Don’t be scared of earning more money because you feel you’ll move to a higher tax bracket. A higher tax bracket only affects the amount of income you earn above the limit of the previous tax bracket. In other words, you won’t owe 28% of all your income if you earn $1 above the limit of the 25% tax bracket, you’ll only earn 28% on that $1.

Likewise, for most people, as most of us are not fund managers whose income is for some reason classified differently, income called a “bonus” is not taxed differently than income called a “salary.” You have have more taxes withheld at the time you receive the bonus, but it all evens out in the end, after you file your tax return.

The marriage penalty is a myth. In fact, the financial benefits to marriage (and filing as married-filing-jointly) often outweigh any negative effects. For more explanation, take a look at this great article by Liz Weston.

Good luck with your tax filing this year. Whether you owe or are due a refund, I hope the result matches with your expectations.

The original version of this article, Last Minute Tax Filing Tips, is copyrighted by Consumerism Commentary.

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Earlier this week, I finally got around to filing my taxes. In years past, when I filed for myself and my taxes were simpler, I usually waited until the last day. My procrastination has been helped by the availability of online filing. I’m thrilled to no longer need to run to the post office late at night on April 15. (This year, the deadline is April 18 due to a holiday in D.C.) In recent years, I could just as easily fill out the paperwork and file in my pajamas without leaving the house, even from the comfort of my own bed with a laptop computer.

The last few years, my taxes have grown more complicated, and my accountant now has me in the habit of filing an extension every year. This gives me six extra months to file my paperwork, a task getting increasingly complicated, having moved from an employee with only W-2 income, to a “part-time” self-employed individual with some income recorded on W-2 forms, some on 1099 forms, and some on no forms, to the sole owner of a business filing with an S-Corp status, with K-1 forms in addition to 1099s and W-2s.

Filing a federal extension for your personal taxes is free and simple. Before you get started, find your previous year’s final tax return (or just your adjusted gross income amount) to verify your identity with the IRS. Make sure you know your other personal information, like Social Security number, and have the information from your W-2 ready.

Note: The potential shut-down of the federal government does not affect the due date. You will still need to file your taxes, file for an extension, and more importantly, pay any amount you owe the government, by the regular deadline regardless of the operational state of the government.

Step 1. Visit the IRS-sanctioned website, Free File Fillable Forms. Popular tax filing software programs also offer customers the ability to file for an extension. With the IRS-sanctioned website, you can be sure that the service will always be free and you won’t be distracted by advertisements for paid products. As of today, it’s free to file an extension using TurboTax, but there is no guarantee that this method will be free on the day you want to file your extension.

Step 2. Create your account. Whether you use the Free File Fillable Forms website (hereafter called “FFFF” for brevity) or commercial software, you’ll be required to create an account or login to an existing account. If you’re creating a new account, select a user name that will be easy to remember. With FFFF, you’ll have the opportunity to print your account username and password for reference.

Step 3. Select the appropriate form. With FFFF, you have the choice between forms 1040, 1040A, and 1040EZ. You’ll need to select the form that’s right for you. Form 1040 is the most comprehensive choice, so it is always safe. Depending on your situation, you may not be able to file your taxes using forms 1040A or 1040EZ. Keep in mind that you can still use TurboTax, H&R Block, or any other software to file your taxes before the extended deadline. Even if you file your extension using FFFF, you do not need to return to the IRS-sanctioned website to finalize your tax return. For example, I filed my extension via FFFF myself, but my accountant will be filing my tax return later this year using the method of his choosing. If you plan on finishing your return using some other method, just choose Form 1040 here by clicking the “Start 1040″ button.

Step 4. Complete your personal information. Begin by entering your information at the top of form 1040. Include just your name, address, and Social Security number. At the top right of the screen, there is a button labeled “EXT” that looks like the image included here. Click that button (on FFFF, not here).

Step 5. Estimate your tax liability. Here’s the problem with filing for an extension: the IRS won’t extend the deadline for paying any tax that you owe. Only the paperwork receives the extension. If you haven’t paid your full tax bill, you may owe money. You need to estimate how much total tax you owe for last year’s income. On the form, you will then subtract your total payments, including withholding from your job. To avoid having to pay any penalties, your total payments must be 100% of what you owe. I added up all the payments I made, included withholding from my former day job, the amount of last year’s overpayment that I applied to this year’s taxes, and the estimated payments. Since I paid more than my estimated total liability, I did not need to make a payment when filing for the extension.

Step 6. Complete the form. You’ll need to select a PIN, enter your birthday, and consent to the disclosure statement.

Step 7. Pay your tax liability. If you’ve determined in Step 7 that you need to pay when filing for an extension to avoid a penalty, you have a few options. You can print form 1040V and send a check to the IRS, or you can provide your tax filing service, whether FFFF or a private software company, with your banking information. The IRS will pull the amount you specify from your account electronically using direct debit.

Step 8. Submit your extension. Once all the information is complete, the “E-File Extension Now” button will be available at the top of the page if you’re using FFFF. With other software, you will be prompted to file your extension paperwork at the end of the process, though in some cases, you might need to pay a fee. You’ll receive responses through email twice. The first will come as soon as you submit your form to notify you that the extension has been submitted to the IRS. Within hours, if there is no problem with the information you entered, you should receive a second response to notify you that the IRS has accepted your extension paperwork and you will now have an extra six months to file your taxes.

Don’t forget to look into filing an extension for your state taxes as well. In New Jersey, where I live, this is easy. I do not need to file any paperwork in New Jersey for my personal extension. When the IRS grants an extension for federal tax returns, New Jersey will automatically allow the later deadline. If I didn’t pay enough state taxes throughout the year, I would need to pay the state when filing for the extension, just like I would need to with the federal tax extension. When I file my paperwork later this year, I can include a copy of my federal extension form and the state will not penalize me for filling late. Different states may operate differently, so always verify what you need to do before the initial tax filing deadline.

The original version of this article, How to File a Free Income Tax Extension, is copyrighted by Consumerism Commentary.

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For the first time ever, the adoption tax credit is refundable. This is a great change for parents who have adopted children in the past few years, because it means they could file their 2010 taxes and receive a bigger-than-expected refund. Keep in mind that refundable is a good thing when it comes to taxes; it means that even if you don’t owe any additional money to the government otherwise, the credit can make your liability less than zero. The government will owe you money, and you’ll receive a refund check. Here’s a deeper explanation of refundable tax credits.

If you’ve had adoption-related expenses, you can receive a tax credit, which reduces the amount you owe the government dollar for dollar. For the 2010 tax year, parents can receive as much as $13,170 per adopted child. The adoption credit lets you carry forward unclaimed expenses from the five previous years, as well. If you’ve paid more than the maximum in 2009 and claimed the maximum that year, you could claim the excess 2009 expenses for the same child on your 2010 tax return as long as the total claimed for each child does not exceed the maximum.

With the capability of receiving a larger refund due to the refundability of the adoption tax credit, the IRS has increased its requirements for documentation of the adoption. To qualify, taxpayers must complete Form 8839 and include additional paperwork.

While the U.S. tax system is designed for wealth distribution as well as raising money for governmental operations, the existence of refundable credits puts a spotlight on the more controversial aspect of the IRS. Additionally, the adoption tax credit is phased out at an adjusted gross income of $182,520 for 2010. This is a high maximum and will not disqualify most families who adopt children, but it means that the credit exists to help middle and low income families meet the needs of their children.

When it comes to the children’s needs, adopted children classified as “special needs” enable the parents to qualify for the entire credit, even if the family did not pay expenses that reach the total of $13,170 per child. In practice, adoption expenses tend to exceed tens of thousands of dollars, so even the maximum refund does not fully reimburse a family for an adoption.

As a result of the changes this year, a family earning a gross income of $39,000 in 2010 determined that the IRS will be paying them a $54,000 tax refund this year. This family has adopted five children over the course of three years. I could certainly argue that supporting the needs of five children on a $39,000 salary is going to be a challenge, but families manage to make it work.

I’m surprised that this family, as interviewed in CNN Money, did not recognize that their $54,000 windfall would be a perfect candidate for starting a college fund or replenishing savings accounts. The family is free to do whatever they like with a tax refund, but considering the needs of their adopted children might have been a good choice for a priority rather than a vacation. To be fair, I’m not in their shoes, so I don’t know what their needs are. The mother of the family indicates she does want to spend the money wisely, but anyone else receiving this credit should probably consider saving as well as spending.

If you file your taxes online using TurboTax or H&R Block, both of which offer free federal tax filing, the software will guide you through claiming the adoption credit. Meeting with a tax professional in person will be helpful, as well, to ensure you’ve claimed all that you can qualify for.

This credit will be refundable on 2011 tax returns as well, so any family adopting a child will benefit from the more generous tax law as well. Regardless, adopting children for the sole purpose of receiving a tax credit isn’t something I’d recommend.

CNN Money

The original version of this article, The Adoption Tax Credit, is copyrighted by Consumerism Commentary.

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If you have an adventurous, thrill-seeking personality, your life may never be complete until you’ve solicited an income tax audit from the Internal Revenue Service. There is good news and bad news for you. The good news is that audits have been more frequent in past years, so the chance of being audited has increased. The bad news is that budget cutbacks might force the IRS to reduce audits for the 2010 tax year and beyond, so you might not have the opportunity to provoke an audit unless you try hard. You may not want to leave this up to chance, so here are a few concepts that when applied will tip the scales in your favor.

I would prefer to avoid an audit, but I realize that different taxpayers have different priorities. My strategy is to take the opposite approach of what is recommended throughout this article. Thrill seekers are free to take this article at face value, however.

Even if you follow these ten suggestions, you may still not be audited. The exact formula used by the IRS for picking victims is unclear. But those wishing to invite additional stress are welcome to give these a try and report back with their results.

1. Earn more than $200,000. Taxpayers who report income above this level are 50% more likely to be audited.

2. File a loss on Schedule C. Self-employed individuals are already targets for audits, but if you want to increase your chances, report a net loss year after year. Either your business is losing money or you are finding deductions that bring your taxable income below zero; in both situations, you might invite more scrutiny by the IRS.

3. Be selflessly charitable. The government wants you to give your money to worthy causes, but only to a certain extent. If you claim charitable expense deductions that approach your level of income, the IRS will view your return suspiciously. Donating 10% of your income rarely causes a problem, but donating 90% might raise the red flag you’re looking for.

4. Hire your family members. For taxpayers operating a small business, payments to employees are considered deductions. The IRS pays attention when you hire your family members and write off their salaries as deductions. You may have to prove that your relatives are actually working if you want to survive an audit.

5. File your taxes by hand. Using tax preparation software helps to eliminate some of the basic mathematical and transcription errors that are common in hand-written returns. You may not want to intentionally include miscalculations or the wrong Social Security number, but the chances of doing so are increased when you use paper and a pencil.

6. Open overseas bank accounts. Wealthy individuals often use overseas bank accounts to hide assets and investment income from the United States government. Hiding is more difficult now that the government has successfully pressured certain foreign governments and banks to cooperate. If the IRS finds out about your foreign bank account, you could be audited and required to pay penalties.

7. Receive your income in cash. Consider becoming a professional gambler, waiter, or eBay store proprietor. Working in a job where you receive most of your income in cash is a signal that you have the opportunity to hide income from the government.

8. Round your numbers. If the IRS notices that your income and deductions fall neatly on round numbers like $50,000 or $2,000, you are inviting additional scrutiny. Even if you round in an unfavorable direction from your perspective, the government will be interested.

9. Transfer large amounts from your business savings to your personal savings. Banks must report all deposits over $10,000 to the federal government. They will also report deposits of $5,000 or more if the bank teller or manager has a reason to believe the money is coming from a less than reputable source.

10. Refuse to write off common deductions. If you operate a business, the IRS expects your deductions to look like most business that operate in a similar capacity. For example, certain business owners who do not claim deductions for travel may leave the IRS wondering what else has been left out of the tax return.

I am not condoning lying on your tax return, whether to avoid or to welcome an audit. As I mentioned above, I would prefer to avoid being audited by the IRS, so I will work with my accountant to make sure I have no red flags without detailed substantiation. These suggestions above are only for those who wish to bring difficulty into their lives by inviting the IRS into their homes.

Photo credit: Robert S. Donovan

The original version of this article, How to Get Audited By the IRS, is copyrighted by Consumerism Commentary.

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This is a relatively long review of H&R Block’s online tax preparation and filing service. H&R Block has provided Consumerism Commentary with six coupon codes for H&R Block Premium Edition, the most complete service offered by the company.

If you haven’t filed your household’s tax return yet, chances are taxes are on your mind. If you believe you’ll owe money to the government, it makes sense to put off filing as long as possible, up to this year’s filing deadline. If you expect to receive a refund, however, file your taxes early to receive your money faster.

Previously, H&R Block offered a product that allowed customers to get their refund even faster than the few weeks the IRS takes to process, but this year, they are not offering refund anticipation loans. The least expensive and quickest way to receive a refund is to allow the IRS to deposit your refund directly into your bank account, but H&R Block does offer a refund anticipation check, which for a small fee, will provide you with your refund sooner than the IRS will.

Regardless of how you receive your refund, if you don’t visit an H&R Block location, you can file online using their software. Here is what you need to know.

Save 25% on H&R Block At Home Online Premium

Different editions of the software

H&R Block offers four editions of their online software.

The Free Edition should be sufficient for most taxpayers, but keep in mind that H&R Block will charge to file your taxes with your state, even with the Free Edition. For my review, I started with the Free Edition to see how far I could proceed before being required to upgrade to a more advanced and expensive version of the software.

I chose to begin entering my tax information without creating an account to be stored on H&R Block’s servers, even though I know that if I want to save my tax return either to complete at a different time or to finish filing, I’ll need to create one.

H&R Block clearly outlines the tax preparation process into three steps.

Income

For the first step, H&R Block suggests importing a W-2 or 1099 for your income, a feature that requires an upgrade to H&R Block Basic for $19.95. I know that my former employer does not offer W-2, so I skipped this step, opting to input my income manually. The software asks me about any life-changing events during the past year. I selected “lost a job” because I left my corporate employment at the end of the year. I expected some immediate feedback about my life-changing event, but H&R Block proceeded to ask about my filing status (single) and required me to enter my personal information including Social Security number and dependents.

After verifying my personal information, I began the section pertaining to income. This section begins by reviewing a list of my needed documentation for completing this information including a variety of 1099 forms (1099-G, 1099-INT, 1099-MISC, 1099-B, etc.) and any W-2 forms. I pulled up my W-2 online to verify the numbers my former employer reported to the government.

Even before entering any income information, by virtue of the fact I have self-employment and business income, H&R Block informed me an upgrade would be required. For a better look, click on this image to zoom in. Including gains through the sale of investments in your income would require an upgrade, as well. There is no need to get fancy; if you don’t need hand-holding walkthroughs, the H&R Block Basic Edition, the least expensive flavor of the software, is all that’s necessary, although H&R Block recommends the other options, as well.

In fact, they will keep suggesting further upgrades, but if the Free Edition doesn’t contain all the features you need, the Basic Edition will be sufficient.

Adjustments, deductions and credits

I continued through the income section, entering information from my business, and proceeded to the section for adjustments and deductions. After entering the appropriate deductions, H&R provided the opportunity to choose to file using my itemized deductions or the standard deduction, with the total effect on my tax return for each.

Following the deductions, I was prompted to select credits I might qualify for. The Making Work Pay credit was already selected for me, most likely because I had entered W-2 income. The credit section moved quickly for me, and I proceeded to the taxes section, where H&R Block checks for additional taxes or penalties I would be required to pay, such as excess contributions to or early withdrawals from retirement accounts.

Printing and filing the returns

After finishing all sections and reviewing my federal tax return, H&R Block transferred my information to the state return. I entered the information that applies to New Jersey, such as the renter/homeowner rebate. After finishing the forms, I noticed that I did not enter the estimated tax payments I made throughout the year, so I went back to the pages to enter that information for both my federal return and state return.

At this point, H&R Block suggested upgrading to “H&R Block Basic + Best of Both Worlds,” which is an option where the tax returns are reviewed by a local H&R Block office. H&R Block would be the tax preparer of record, so they would responsible to pay any fees due to mistakes on the returns. This service costs $79.95 plus $34.95 for the state return.

In the final stages of filing, H&R Bock allows me to review the charges. I was required to upgrade from the Free Edition to the Basic Edition, so my federal return cost $19.95. The state return cost $34.95. Once filing and providing my banking information for direct deposit, I should receive my refund within ten days.

The first option for paying this fee is H&R Block’s Simple Pay, in which the filing fees are deducted from your refund (if the government owes one to you), for an additional fee. Other options are credit and debit cards, electronic transfer from a bank account, and coupon code. Six lucky Consumerism Commentary will receive a coupon code that will cover the federal and state filing fees, so keep reading to find out how you can enter to win.

Only after paying for the return does H&R Block offer some of its own options for receiving a refund, such as a Refund Anticipation Check. This service, for an additional fee, will provide me with my refund amount quicker than the IRS would produce a check. This might be beneficial to taxpayers who do not have bank accounts for direct deposit and, for whatever reason, need the cash fast. I don’t recommend this for most taxpayers. Open a free bank account and get direct deposit.

Consumerism Commentary is an authorized affiliate of H&R Block. Six giveaway products were provided to Consumerism Commentary free for the benefit of our readers. H&R Block did not compensate Consumerism Commentary for this review.

Photo: socialwoodlands

The original version of this article, H&R Block Online Tax Filing Review, is copyrighted by Consumerism Commentary.

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With the holidays approaching, many companies are preparing their bonus checks, and employees who are looking forward to their bonuses are concerned about tax consequences.

I gave up this “extra” part of my corporate pay for the benefit of working for myself when I left my day job last year. If this year were anything like what I’ve experienced in the past, people I know would complain that they’d rather not receive a bonus. There is a widely-held belief that the extra income from a bonus, which is not really extra, just a variable aspect of compensation, supposedly bumps them into a higher tax bracket. This, they believe, is bad, because it would mean that they owe the government a higher tax rate on all of their income. This is incorrect and represents confusion about marginal tax rates.

These misconceptions and the resulting complaints are intensified when the bonus check arrives with a net payment amount representing only a fraction of the gross income listed on the pay stub.

For most taxpayers, the IRS treats bonus income the same as regular income. All taxable W-2 income gets added together in one box when you file your federal tax return forms, and the same tax rates apply. There is a catch, and this is why confusion is rampant: While the IRS doesn’t discriminate between regular pay and bonus pay, employers often do.

Employers can choose between two methods of withholding federal taxes from bonus or supplemental income when it is given to the employee in a check or direct deposit separate from regular income.

Option 1. The employer may withhold a flat 25% for federal income taxes from the bonus payment. If the employee receives over $1 million in bonus payments in one year, the employer can withhold 35% from the amount over $1 million in addition to 25% of the first $1 million.

Option 2. The employer may add the bonus payment to the most recent regular income payment, determine the standard withholding based on tax tables and the sum of the two payments, subtract the amount already withheld from the most recent regular income payment, and withhold the rest from the bonus.

The third option is for employers who choose to combine bonus compensation with regular compensation in one payment, check or direct deposit, without any differentiation between the two types of income.

Option 3. The employer may base withholding on the sum of the bonus and regular pay using the standard withholding tables.

Regardless of the method the employer chooses, bonus income and regular income are grouped together when you file your taxes. The IRS will refund any overpayment and will collect any underpayment.

One interesting exception to the idea that bonuses are taxed the same as all other income applies to hedge fund and other investment managers. This type of income is known as carried interest. Investment managers often take their bonuses from investment gains, and these can be taxed at the long-term capital gains rate of 15%, a rate usually significantly lower than their marginal tax rates.

Don’t be afraid of earning that bonus or more money in general. Your employer might withhold more of the check for taxes than you’re used to, but it will even out when you file your taxes.

The original version of this article, Federal Taxes on Bonus Pay, is copyrighted by Consumerism Commentary.

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About the author: This is a guest article written by Leigh Mutert, CPA. Leigh is the manager of the H&R Block Get it Right Community, a blog that focuses on breaking down complex topics for taxpayers, and the manager of social media, corporate relations for H&R Block. Leigh was a recent guest on the Consumerism Commentary Podcast.

Searching for and starting a new job can cause workers to spend money when they may be short on funds. A bright spot is that some of those expenses may be tax-deductible.

Unemployed and searching for a new job

Taxpayers — particularly the unemployed and underemployed — should file tax returns to claim all tax credits and deductions they are entitled on their tax returns, to ensure they get the largest tax refund they are due.

Remember, all income must be reported to the IRS, regardless of the source. It does not matter if it is from unemployment compensation (all of which is subject to federal income tax this year), tips, a lawn mowing business or working as a nanny.

While looking for a new job, keep good financial records because items used exclusively for the job search are tax-deductible as long as the job is in the same field. Among these expenses are résumé development, professional placement services, and unreimbursed mileage, airfare and hotel expenses for interview travel.

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Moving for a new job

If relocating for a new job, unreimbursed moving expenses may be eligible deductions that do not have to be itemized. These are the eligibility requirements:

• Any moving expenses incurred within one year from the first day of work
• The new job would have increased the taxpayer’s commute by more than 50 miles, and if the taxpayer was previously unemployed, the new job must be at least 50 miles from the taxpayer’s old home
• Taxpayers must be employed at least 39 weeks during the first 12 months after the move.

Starting a new job

Expenses for unreimbursed items necessary for working, such as computers, mobile phones, training that allows workers to keep their current positions, union dues and required uniforms may be eligible tax deductions. To be eligible, these items must be required by your employer and used exclusively for work purposes. This job deduction calculator on H&R Block’s Tax Calculators page can help you quickly see what expenses are typically claimed based on your occupation.

Eligible job expenses must be claimed as itemized tax deductions and they must total more than 2% of adjusted gross income; only the portion of job deductions and other miscellaneous itemized deductions that exceed 2% of adjusted gross income may be claimed.

Getting help filing taxes correctly

H&R Block has online tax preparation software for filing your taxes yourself that can help you accurately claim your job-hunting expenses automatically. If you have questions about what qualified as a job-hunting expense, or any other tax question, you can always get a free 30-minute consultation with an H&R Block tax pro at an office near you.

The original version of this article, Tax Tips When Looking for Work is Your Job, is copyrighted by Consumerism Commentary.

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Although the tax code is mired with decades-old rules, fixed up with temporary bandages every year, and convoluted, the IRS is still able to produce something fresh, modern, and simple. Today, the government agency released its free application for iPhone and Android phones, IRS2Go. The app simplifies the process of checking the status of your tax refund.

The app accesses a mobile version of the IRS website. By entering your Social Security number, filing status, and your refund amount in exact, whole dollars, the IRS will find your information in its database and let you know, if possible, when to expect your refund. The information is transmitted over a secure, encrypted connection, just like the “Where’s My Refund” website.

In addition to checking your refund status, the mobile app provides options for enrolling in the IRS tax updates email newsletter, which contains tips and the latest news daily during the tax-filing season and periodically during the rest of the year. The app includes a link to the @IRSnews Twitter account, which you can follow for factoids and tips about tax. For those who wish to speak to an IRS customer service representative, the app includes functions that allow you to call the correct IRS number by touching just one button on the screen.

The IRS2Go app is free in the Apple App Store and in the Android Market.

The original version of this article, Check Your Federal Tax Refund With Your Phone, is copyrighted by Consumerism Commentary.

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Thanks to the bevy of new changes to the tax code for 2010, the IRS is still unprepared to handle tax returns filed early. If you itemize your deductions, you must wait until Valentine’s Day to submit your returns to the IRS.

That doesn’t stop taxpayers from starting early. If you use software to file your taxes, like TurboTax or H&R Block At Home, you can start the process at any time. When you finish and are ready to file, the software provider will hold onto your results and won’t file on your behalf until February 14.

If you do not itemize your deductions, opting for the standard deduction, you can file your taxes through an e-file provider or by paper now. The benefit of filing earlier is receiving your refund in advance; if the government owes you money, it’s beneficial to file as early as possible. Even those who take certain tax credits that do not fall within the “itemized deduction” list can file now, so if you receive the earned income tax credit, education credits, and the child tax credits, there is no need to wait.

The original version of this article, Itemizers Must Wait Until February 14 to Submit Tax Returns, is copyrighted by Consumerism Commentary.

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If you purchased a house in 2008, beware of this new change on the 2010 income tax returns. Some taxpayers who claimed the first-time home buyer tax credit will be required to pay the credit back to the government this April.

The initial $7,500 tax credit was available to homeowners who purchased their first house in 2008, but it was designed as a loan rather than a gift like the later home buyer tax credits. These taxpayers, from the start, should have been aware that the benefit received from the initial credit would need to be paid back, though I am sure most taxpayers do not know this. The credit requires that taxpayers begin repaying the benefit in two years — and that starts with 2010 tax returns. Those who claimed the credit on 2008 income tax returns need to begin repaying the credit now. Use form 5405 to calculate how much should be repaid, and this amount will be included on line 59 of form 1040.

The good news is that the IRS allows the tax credit to be paid back over a 15 year period, so there is no rush to come up with the full amount right away.

The bad news is the IRS doesn’t have complete records. For many who claimed the initial $7,500 first-time home buyer tax credit, the IRS doesn’t know whether the house was purchased in 2008 or later. I expect that many taxpayers who don’t need to repay their credit will receive a notification of the IRS falsely warning of the repayment requirement, and many who do need to repay the government will not receive a notification.

Those who qualified for the later credit with a maximum of $8,000 or the long-time homeowner credit with a maximum of $6,500 do not have to repay the government. This would require having purchased a house in 2009 or 2010. In those later years, the tax credit was not a loan, it was a gift. The IRS is identifying discrepancies in their records before sending out notices, but perfection will always be a fantasy.

If you receive a notice to repay your homebuyer tax credit but you believe your credit was one of the later credits, give the IRS a call and have your HUD-1 settlement statement ready.

The original version of this article, Do You Have to Repay the Homebuyer Tax Credit?, is copyrighted by Consumerism Commentary.

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The global financial industry is more powerful than any government entity. Governments continually create regulations and laws to keep the industry in check, but the financial industry manages to find ways to skirt rules and convince the public that any regulation is bad for the world.

Even though Americans holding bank accounts in Switzerland in order to evade taxes is illegal, and even though some banks have eventually cooperated with the IRS by providing the names of some customers taking advantage of this type of tax haven, the practice continues. The more money you have, the more opportunities exist for you to operate outside the rules that bind most other citizens.

When WikiLeaks released information to reporters and news outlets that pertained to the U.S. State department, Visa and MasterCard, companies with no relation to the documents but with economic power, began refusing to process donations to the organization.

Following the recent speculation that WikiLeaks has private information about Bank of America to release, a former executive of the Swiss bank Julius Baer has provided 2,000 names of prominent individuals and companies that engaged in tax evasion through offshore, unreported accounts. The bank claims the documents are falsified, and the former executive is facing trial.

Is it wrong to evade taxes? What would you do if you had the opportunity and means to keep a big portion of your wealth and income outside of the eyes of the government?

New York Times
Photo: Oyvind Solstad

The original version of this article, Swiss Bank Account Owners Handed Over to WikiLeaks, is copyrighted by Consumerism Commentary.

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First enacted in 2006, the charitable IRA rollover is a way to let certain taxpayers reduce their tax liability. Individuals who own an IRA must begin taking minimum distributions at age 70½, and those distributions could increase the tax bill at a time when there may not be much income. While the tax bill will always be less than the distribution, the fact that it is required to take these distributions puts any individual in less control of their financial situation than they might want to be.

The charitable IRA rollover is a way to donate a portion of your distribution to a charity and avoid the tax liability. The amount the account holders wishes to provide to a charitable organization and transfered directly from the IRA, with no stop in a personal investment or bank account. There are some limitations, however. The maximum value of the rollover cannot exceed $100,000 each year. Donor-advised charitable funds like the Fidelity Charitable Gift Fund and most private foundations do not qualify. The transfer qualified as part of the required minimum distribution.

This benefit was scheduled to end in 2009, but last-minute tax law changes extended the charitable IRA rollover into 2010 and 2011. Since this change was late, IRA holders have until an extended deadline, January 31, 2011, to establish a tax-free transfer to a charity to have their contribution be tax-free for 2010.

I am not a certified tax professional. Always check with your tax accountant before making any changes.

The original version of this article, Tax-Free Distributions From Your IRA: Charitable Rollover, is copyrighted by Consumerism Commentary.

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It’s a good thing I’ve been saving a good portion of my income for the past year. Even with making estimated tax payments — the last of which is due on January 18 — I’ll have a significant tax bill this year thanks to increased income. Many taxpayers may not look forward to filing their taxes, even though they receive a refund from the IRS. Some, like me, have a stronger reason for the lack of anticipation: we will end up owing money. For those who haven’t saved money throughout the year for whatever reason, this is a dreaded situation.

What you can do if you can’t afford your tax bill

First of all, you don’t want to owe the IRS money. This type of debt is one of the hardest types to erase. There is no statute of limitations on IRS debt — so it won’t just go away on its own if ignored long enough. Even if you declare bankruptcy, it’s very difficult to get rid of IRS debt.

Sometimes taxpayers receive a notification that they owe money that might not be accurate. The IRS is a system subject to human error, just like any other agency. You can dispute the amount you owe if it doesn’t match your records and you have a reason to believe your calculation is correct.

The government is sensitive to the issue of whether you can afford to pay, so they’re willing to work with you a little bit. The best option avoids using your credit card to pay your debt, which would ordinarily be most consumers’ automatic choice. When you file your taxes, don’t pay online at that time if you can’t afford it. After you submit your form and it’s accepted by the IRS, visit the IRS website to file an Online Payment Agreement here.

If you wait, the IRS will send you a tax due notification, but there’s no need to wait. If you have your adjusted gross income from your tax return, the amount you owe, and of course your Social Security number, you can get started. The form will ask you how much you can pay and when you can pay it, and will come up with a payment plan that will work for you.

The payment plan will allow you to spread your tax bill out over a longer period of time, improving the chances that paying your bill won’t cause you a financial hardship and the IRS still manages to collect the bill. There is a fee for creating a payment plan, ranging from $43 to to $105.

If your financial hardship is only temporary, the IRS may delay collection, though interest and late fees will still be added to your bill. The IRS could, even if they delay collection, file a federal tax lien, which means your property could become property of the government to satisfy your debt.

The last line of negotiation with the IRS is an Offer in Compromise. There are only a few situations in which the IRS will accept a lower tax payment than what they believe is due. If the IRS believes you’ll never be able to satisfy your tax liability, but you agree to the amount you owe, an Offer in Compromise might satisfy the IRS. If there is legitimate doubt about the tax bill — and this will usually happen only in complicated situations — the IRS might consider an Offer in Compromise.

If you could afford your tax bill, but paying it would create a significant economic hardship, the IRS might also consider an Offer in Compromise. This is only in exceptional circumstances.

Because the IRS does charge you interest and penalties when you don’t pay in full or on time, even if you agree to payment plans, the best solution is to pay the bill in full as soon as possible to reduce these extra costs. I prefer the above options over other payment types when cash isn’t available at the time the bill is due, but the IRS offers these additional suggestions:

• Cash advances from credit cards
• Bank loans
• Taking cash out of your bank accounts and investments
• Borrowing from your 401(k)
• Cashing in your equity in an asset like your house

I’m not a big fan of any of these, but it is important to take care of your IRS debt above many other financial priorities.

Photo: sushi♥ina

The original version of this article, How to Pay a Tax Bill You Can’t Afford, is copyrighted by Consumerism Commentary.

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When Congress and the President extended the Bush-era tax cuts, taxpayers subject to the Alternative Minimum Tax (AMT) received a break. As Leigh Mutert, CPA discussed in our recent podcast interview, this is something middle class taxpayers need to know about now, because it effects the 2010 income returns that are being filed from now through the regular federal tax deadline on April 18, 2011.

In short, the income levels that are subject to the Alternative Minimum Tax increased for 2010 income.

The Alternative Minimum Tax

The Alternative Minimum Tax is a different method for calculating the federal taxes a taxpayer owes to the government. In some cases before the AMT, rich taxpayers were able to use deductions to reduce their income tax liability to zero, even if they earned millions of dollars. This IRS rule requires that those households above a certain income level will be subject to a different calculation, ignoring personal exemptions and the standard deduction. Some itemized deductions are still allowed.

In 1970, 19,000 taxpayers owed the Alternative Minimum Tax, which held a significantly different form at the time. The AMT as reformed in 1982 to be what we know it as today. One of the issues with the Alternative Minimum Tax is that the income levels are not indexed to inflation. In real dollars, the threshold at which point the AMT is applied shrinks every year inflation is greater than zero. Congress, however, usually intervenes and raises the floor periodically.

I am glad that these calculations are handled automatically by software like TurboTax and H&R Block At Home. Failing an automated calculation, the IRS will be sure to let you know if you were supposed to pay additional tax under the AMT rules.

Here are the basics of the AMT. For each filing status, a certain level of income is exempt from the calculation, but this phase-out decreases and eventually becomes zero — or in one case, less than zero — above another income level. There are two tax rates for all filers other than corporations. The numbers you need to know are in the following table.

The exemptions exist so taxpayers don’t result in paying 26% (or 28%) of their entire income, only on the income minus their exemption. The income calculation used for the Alternative Minimum Tax is not the same as Adjusted Gross Income (AGI) or Modified Adjusted Gross Income (MAGI). It is a specific calculation that uses tax form 6251.

The original version of this article, The Alternative Minimum Tax (AMT), is copyrighted by Consumerism Commentary.

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Most taxpayers can choose between itemizing tax deductions to reduce taxable income, which requires accurate record-keeping and support, and taking the standard deduction. The standard tax deduction is a fixed amount that reduces the amount of money on which taxpayers owe the federal government. Generally, if you can show that you’ve had more deductible expenses than the amount of the default standard deduction, it’s better to itemize.

IRS publication 501 outlines each year’s deduction amounts. There are some cases where adjustments should be made to the standard deduction. For example, if you are 65 or older, or if you are blind, the standard deduction increases.

To lower your tax burden this year by up to $5,000, consider opening up an IRA (Individual Retirement Account). Mint.com has an IRA wizard that can show you what kind of IRA to open and where to open it.

The personal exemption is another deduction to your income that you can take for yourself and for any dependents.

Note: When you file taxes in April 2012, you’re filing for 2011 income, so review the numbers in the 2011 column and understand the federal tax brackets. The numbers for 2012 are predicted and are not yet official.

A dependent child can increase the standard deduction by $950 or the amount of earned income plus $300, whichever is greater. That increase has a maximum of $5,700.

Do you itemize your tax deductions or take the standard deduction?

The original version of this article, Standard Deductions and Exemptions for Federal Income Tax, is copyrighted by Consumerism Commentary.

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The extended deadline is here for filing your 2010 income tax return. Since the Bush era tax cuts were extended, the income you’ve earned in the United States this year is subject to the same low rates as last year, but the margins have been slightly adjusted for inflation.

In a few short months, 2012 will have begun. As of now, the rates will remain the same but again, the margins will be adjusted for inflation. Click here for the 2012 income tax brackets and marginal rates. In the article below, I outline the 2011 tax brackets. This is the information you can refer to when you file your 2011 income tax return, due April 16, 2012. If you’re filing your taxes in early 2012, you are reading the correct article.

Marginal tax rates are often misunderstood. If you are in the 33% tax bracket, you don’t owe 33% on all of your income. I’ve spoken to many people throughout the years who seem to be concerned about getting a bonus that is too high because it would knock them into a higher tax bracket. Being in a higher tax bracket is a good thing. You’ll only owe “more” tax on the portion of your income that falls within that bracket.

To lower your tax burden this year by up to $5,000, consider opening up an IRA (Individual Retirement Account). Mint.com has an IRA wizard that can show you what kind of IRA to open and where to open it.

Here are the tax tables for 2011. Most people will file their income taxes for 2011 at the beginning of 2012.

Married individuals filing joint returns and surviving spouses

Heads of households

Get your refund in as little as 8 days. E-file with TurboTax today. It’s Easy

Unmarried individuals (other than surviving spouses and heads of households)

Married individuals filing separate returns

The original version of this article, 2011 Federal Income Tax Brackets and Marginal Rates, is copyrighted by Consumerism Commentary.

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One of the most popular services available surrounding tax season is also one of the most expensive. Refund anticipation loans (RALs) are great products from a lender’s point of view; they are low risk and they are expensive. From a customer’s point of view, they provide a means to get cash when a household files its tax return rather than waiting for a check from the IRS. Tax preparation services like those offered by H&R Block sell these expensive loans in partnership with banks and other lending institutions. Since most customers who use these products need cash right away, they seem to be more willing to pay the high fees associated with these loans.

With the IRS sending direct deposits faster than ever, one might wonder why these products, and their cousins, the refund anticipation checks, are so popular. Millions of Americans simply don’t have bank accounts. Living paycheck-to-paycheck, these families see little need to store their money somewhere safe because they have nowhere to store it. I am amazed that 40% of H&R Block’s clients used these products last year considering the high fees. I consider refund anticipation loans one of the worst forms of debt, second only to pay day loans.

While I understand the function of thees products in the marketplace, I don’t like the concept of charging someone in a difficult financial situation to borrow his or her own money — and charging the borrower a high fee from an annual interest rate perspective. In a perfect world, no one would be living paycheck-to-paycheck, unable to make the rent or mortgage payment, and one step away from homelessness, but the reality is that many households are facing these troubles.

In 2011, H&R Block will not be offering refund anticipation loans. A federal regulatory agency, the Office of the Comptroller of the Currency (OCC) has barred HSBC from offering these products. HSBC was H&R Block’s exclusive partner for refund anticipation loans. The customers who would be interested in these products will be directed to refund anticipation checks as a similar alternative, although it doesn’t provide the cash as quickly as a loan.

HSBC is not the only bank offering refund anticipation loans, and I am unsure why the OCC has singled out this one bank. If the bank was handling the sales of these loans in a reputable manner, the regulation should be applied consistently across all institutions. For H&R Block, these loans provided a significant portion of revenue, $130 million in 2010. Earlier this year, when HSBC was considering on its own not offering the refund anticipation loans to H&R Block, the tax return agency sued the bank.

Unless the situation changes, competitors like Jackson Hewitt will still be able to offer this product to their customers. TurboTax does not offer refund anticipation loans.

H&R Block, Wall Street Journal, Fox Business

The original version of this article, No More H&R Block Tax Refund Anticipation Loans, is copyrighted by Consumerism Commentary.

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When Congress passed the Tax Hike Prevention Act earlier this year, it included an economic stimulus in the form of a payroll tax holiday. As Leigh Mutert, CPA explained in our podcast interview, the payroll tax will be reduced in 2011 from 6.2% to 4.2%. As a result, paychecks will be a little more than 2% higher than they would have been without the payroll tax holiday. That could result in an extra $1,300 for an average project manager or $2,000 for a senior level programmer.

Unlike the stimulus checks sent out from the government earlier in this century, taxpayers won’t receive a lump sum. The payroll tax holiday is a benefit that employees will see in a small amount each pay period. The best bet, if you want to use this money to spend on one particular purchase, is to create an automated transfer of 2% of your paycheck from the bank account that receives your paycheck to another account to hold the savings. Otherwise, this benefit will most likely be absorbed into your everyday spending. The latter situation is generally the goal of an economic stimulus plan, but everyone is free to do what he or she wishes with the savings.

What are your suggestions for using this extra money? Here are some of mine.

Indulge in your hobbies and interests

1. Take a class offered at a local college.
2. Find a private tutor who can help you excel with your hobby.
3. Travel and attend a seminar to learn more and meet interesting people.
4. Advertise your hobby as a business and attract clients.
5. Support a charity or non-profit organization focusing on your interests.

Improve your personal finances

6. Establish your emergency fund.
7. Pay off your credit card debt.
8. Make an extra mortgage payment.
9. Open a high-yield savings account.
10. Invest in an index mutual fund.

Around the house

11. Upgrade to energy-efficient appliances.
12. Upgrade your entertainment system.
13. Upgrade your wardrobe.
14. Upgrade your electrical system from fuses to a circuit breaker.
15. Redecorate the room in which you spend most of your time.

Have some fun

16. Explore a local city in depth.
17. Travel to a location you’ve never visited.
18. Take your family to a major amusement park or resort.
19. Buy a new computer or gaming system.
20. Train for and earn your pilot’s license.

Add your own suggestions below.

The original version of this article, 20 Ways to Use the Payroll Tax Holiday, is copyrighted by Consumerism Commentary.

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There seems to be more than enough in the new tax cut bill, which will soon become a law, to keep every income level happy. The Tax Hike Prevention Act of 2010 extends the tax cuts first implemented during President Bush’s tenure and adds more benefits for everyone.

For another two years, the marginal income tax rates (10%, 15%, 25%, 28%, 33%, and 35%) will stay the same. These are the income tax rates for 2010, and this tax rate comparison shows what the rates would be if the cuts were to expire. The lower capital gains tax rates will also be extended for two years, including a rate of 0% for those in the 10% or 15% tax brackets.

The bill changes the income level affected by the Alternative Minimum Tax (AMT). The AMT hasn’t been indexed to inflation, so over time, more and more households that consider themselves “middle class” have been falling into the sweet spot. The bill changes the amount of income exempt from the AMT in 2010 as well as 2011 so fewer taxpayers will be affected by the AMT.

For another two years, students and former students will benefit from the American Opportunity Tax Credit. This tax credit was a significant benefit increase from the previous educational tax credits, and it affects more taxpayers.

The estate tax was scheduled to be reinstated in 2011. Prior to 2010, only 0.3% of taxpayers who left anything of value to their heirs upon death also left a tax bill. The estate tax affects a tiny percentage of the population, but it is a hotly contested issue. When the estate tax returns in 2011, the first $5 million of wealth will be exempt (or $10 million for couples), so this tax will affect even fewer than the 0.3% previously. The top tax rate will be reduced from 55% to 35%.

Also, when an investment in an estate is later sold by an heir, they’ll only owe tax on the stepped-up basis. In other words, the gain will be calculated based on the value of the investment when it was inherited, not when it was originally purchased.

The payroll tax will be reduced by 32% for everyone who pays into Social Security. The rate will drop from 6.2% to 4.2% for one year, effectively replacing the Making Work Pay credit, but affecting more taxpayers.

The child tax credit will remain $1,000 rather than revert back to the $500 it was before the Bush era tax cuts.

Unemployment benefits will be extended by thirteen months.

Photo: Ryan Wick

The original version of this article, Congress Passes Tax Hike Prevention Act, is copyrighted by Consumerism Commentary.

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President Obama offered a framework for the tax-related aspects of spurring the economy moving forward. The foundation of the proposal, which conflicts with a bill that has already passed the Democrat-controlled House of Representatives, is the full extension of the Bush-era tax cuts, even for the wealthiest taxpayers.

The proposal also calls for an extension to unemployment benefits for another thirteen months and a consolation to Republicans who wanted more favorable tax treatment for estates.

None of this proposal is automatic. Congress must still form bills based on this proposal, pass the bills through a vote, and send a compromise bill to the president to sign. All along the way, there will be more compromises. The new laws affect taxes for 2011 income, so there is enough time for more partisan debate to shape a bipartisan law before taxpayers will owe their final tax bill for the year in April 2012 (or October with an extension).

For those who need to plan for 2011 taxes ahead of time, particularly small business owners, it would be better to know the results as soon as possible.

Is Obama conceding to Republican pressure too early or is this plan the right move to boost the economy?

The original version of this article, President Obama’s 2011 Tax Plan, is copyrighted by Consumerism Commentary.

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The 2009 economic stimulus came to the middle class in the form of the Making Work Pay credit, which provided a $400 credit for single taxpayers or a $800 credit for married taxpayers filing jointly across two years. The credit was embedded in W-2 paychecks, hardly noticeable to many.

The credit was also designed to last throughout 2009 and 2010, automatically expiring in 2011, when the economy was expected to be in better shape. Without a congressional action to renew the credit, taxpayers will notice a lower net income on each paycheck when the year beginnings — lower than it would be anyway with the other taxes that start at the beginning of the year but are fully paid in the middle of each year.

Most of the recent talk about taxes is on the possible repeal of lower tax rates for those with adjusted gross incomes over $250,000, a move that would result in a 3 percentage point increase in just the highest marginal rate. This change would effect a tiny portion of American taxpayers, but if the Making Work Pay credit isn’t renewed, all single taxpayers earning $75,000 or less or married-filing-jointly taxpayers earning $150,000 or less will pay more. In terms of numbers, this credit benefits 90% of all taxpayers or 110 million households.

The credit costs $60 billion. That’s certainly a lot of money, but it’s small when compared to the cost of extending the tax cuts for individuals earning over $200,000 or couples earning over $250,000. That move would cost $700 billion, but pales in comparison with the $3 trillion cost extending the tax cuts for everyone else, an expense that can most likely not be avoided.

The Making Work Pay tax credit, as it allowed most taxpayers to spend a little more, may have helped support the economy’s feeble recovery over the past year. With the economy not yet fully recovered even though we are no longer in a technical recession, should the tax credit be extended?

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A group of millionaires — the definition of which is any individual with an annual income of over $1,000,000, not a net worth of $1,000,000 — has assembled to let the government know that they’d like the tax cuts for that income level expire, in patriotic duty to the fiscal solvency of the United States.

Less than 1% of all American taxpayers earn over $1,000,000. While a reversion structured like this wouldn’t affect many Americans, relatively speaking, it could go far to reduce the deficit. Use of the term “millionaire” is worrisome; many more people consider themselves millionaires than are reflected by this proposal. A small business owner, with an income of $300,000 a year, may have used that income to amass a nest egg and an expensive house or two, and may value their wealth at a value well over $1,000,000, but this is not who would be affected by this campaign.

Here is the organization‘s call to action:

We are writing to urge you to stand firm against those who would put politics ahead of their country.

For the fiscal health of our nation and the well-being of our fellow citizens, we ask that you allow tax cuts on incomes over $1,000,000 to expire at the end of this year as scheduled.

We make this request as loyal citizens who now or in the past earned an income of $1,000,000 per year or more.

We have done very well over the last several years. Now, during our nation’s moment of need, we are eager to do our fair share. We don’t need more tax cuts, and we understand that cutting our taxes will increase the deficit and the debt burden carried by other taxpayers. The country needs to meet its financial obligations in a just and responsible way.

Letting tax cuts for incomes over $1,000,000 expire, is an important step in that direction.

The often-cited argument for keeping lower tax rates for the rich is trickle-down economic theory, which has never worked as promised in American society. The theory says that if the rich can keep more of their money, they will stimulate the economy by hiring workers for their own companies and investing in other businesses.

That’s not what happens, though, as we’ve seen over the past few years. Companies build up their cash reserves. Again, in theory, this would be a good thing as it allows banks to increase the money supply by lending out more than they’ve accepted in deposits. If the banks aren’t lending to businesses and the middle class, with risk aversion swinging too far to the conservative side, all those tax cuts don’t trickle down anywhere.

It looks like Democrats and Republicans are ready to compromise and extend at least part of the Bush era tax cuts. What do you think of the proposal to allow tax cuts to expire for those earning over $1,000,000 a year?

The original version of this article, Patriotic Millionaires for Fiscal Strength, is copyrighted by Consumerism Commentary.

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Last year, I mentioned my accountant saved me $15,000 by re-classifying my self-employment income from a limited liability corporation (LLC) to an S-corporation. I glossed over the process; in fact, getting to the $15,000 in tax savings was a bit more complicated than simply filing as an S-corporation. I could likely have saved even more if it hadn’t been too late to re-classify prior years, as well, or if I had worked with an accountant from the beginning.

I’ll share some details now so that readers — those with self-employment income, whether from a blog or otherwise — can determine whether this is the right choice for them. Keep in mind I am not an accountant or tax professional. Always discuss your particular situation with a tax accountant who will help you come to the right decisions.

An S-corporation is a type of legal business entity that, like LLCs or partnerships, allow all income or losses from a business to be passed along to shareholders and included in personal income tax returns. The biggest benefit, unlike LLCs or partnerships, is that not all business income needs to be passed to the owners as salary or wages.

For example, if you are the only shareholder, you could assign yourself a reasonable salary. You would owe self-employment tax on only this salary, not on your full business income. The remainder of your business profit will still be added to your personal income. You will owe income taxes on the full profit of the business, but only owe additional self-employment tax on the amount you designate as salary.

There are a few disadvantages for filing your business taxes as an S-corporation. The amount of necessary paperwork increases. If you’re busy running your business, you may not have time to deal with this. I’m glad I have a tax accountant to advise me and handle the paperwork. Considering the amount of money I saved, he has been worth his fee.

Filing as an S-corporation may make you more vulnerable to IRS audits, so ensure you’ve fully documented your income and deductions.

To create an S-corporation, complete your state’s process for incorporation and acquire a federal tax identification number. If you’ve already incorporated, or if you’ve formed an LLC, you do not need to re-incorporate, but ensure your state’s rules for your entity type meet your needs. File IRS form 2553 to elect S-corporation status.

When you file your taxes each year, rather than completing the form 1040 Schedule C, use form 1120S and Schedule K-1. Form 1120S is due before personal income taxes, so ensure your documentation has been sent in, or your extension request has been filed, by March 15 every year. Don’t forget to check your state filing requirements, too.

The original version of this article, S-Corporation Designation, is copyrighted by Consumerism Commentary.

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Thanks to an organization called Third Way, American taxpayers can get a good, detailed look at how much of a typical tax bill is destined for any particular government program. Third Way is a progressive think-tank, and they studied the federal budget to provide an itemized tax receipt for the typical taxpayer.

Here is their methodology:

The total amount of federal spending is the denominator and the amount of money spent on a particular program is the numerator. The resulting quotient is the percentage of all federal spending that goes to that program. For example, the amount of money spent on Pell Grants in fiscal year 2009 was $19.38 billion, which is divided by total federal spending of $3.518 trillion. This means that 0.55% of all federal spending went to Pell Grants. Multiply this number by the amount a taxpayer paid in taxes (in this case $5,400) and that means this person contributed $29.75 to Pell Grants.

Based on their research, here is a calculator that will help you determine how much you are contributing to these programs. The calculator defaults to a total tax payment of $5,400, which was used by the study. You can enter your own total tax payment from line 60 on the 2009 version of the federal income tax return (1040) IRS tax form.

Enter your total tax bill (no dollar signs or commas):

Expense Category	Amount
Social Security	$1,040.70
Medicare	$625.51
Medicaid	$385.28
Interest on the National Debt	$287.03
Combat Operations in Iraq and Afghanistan	$229.17
Military Personnel	$192.79
Veteran’s Benefits	$74.65
Federal Highways	$63.89
Health care research (NIH)	$46.54
Foreign Aid	$46.08
Education Funding for Low Income K-12 Students	$38.17
Military Retirement Benefits	$32.60
Pell Grants for Low Income College Students	$29.75
NASA Space Program	$28.09
Internal Revenue Service	$17.69
Environmental Clean Up (EPA)	$11.67
The FBI	$11.21
Head Start	$10.91
Public Housing	$10.50
National Parks	$4.27
Drug Enforcement Agency	$3.14
Amtrak	$2.23
Smithsonian Museum	$1.12
Funding for the Arts	$0.24
Salaries and benefits for members of Congress	$0.19

Note that the amounts above do not add up to 100%. This is only a selection of some of the more interesting categories. The report from Third Way explains more.

The original version of this article, Where Your Federal Tax Money Goes, is copyrighted by Consumerism Commentary.

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The government is currently tackling the question of whether to extend or end the Bush era tax cuts, and to what extent to do so. President Obama would like to end the tax cuts for the wealthiest Americans. Many Republicans want to make Bush’s tax cuts “permanent.” (Let’s all agree that there is no such thing as “permanent” when it comes to tax laws.) Economic experts like Alan Greenspan suggest ending the tax cuts for all Americans to help ensure the country’s fiscal health in the long term.

Here is an overview of what the tax rates might be under these scenarios, as well as a historical comparison, including 1987, the first year the brackets were simplified, and 1980, before the tax changes that occurred under President Reagan.

Remember that this is a system of marginal tax rates; the rate on each level of income is paid only on the excess income earned over the threshold of the previous level. You don’t pay the highest rate on your full income. That’s explained here.

* Capital gains and dividends taxed as ordinary income.

Should the current tax cuts be made permanent, extended for all with a sunset provision or extended for some such as the middle class? Share your thoughts in the comments below, but register for a Consumerism Commentary account to earn points for your comments.

Sources: 1, 2

The original version of this article, Tax Rate Comparison: Extend the Tax Cuts?, is copyrighted by Consumerism Commentary.

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Now that I’ve finally gotten my credit card balances down to zero, I’ve been trying to figure out the best use of the extra money I’ll have in my checking account. Options include: make extra car payments, put it in a savings account, put it in a mutual fund, make extra house payments, make impulse purchases, etc. In looking over the spreadsheets for our household finances, I saw one monthly bill that nags at me the most: $167 a month to the IRS.

Throughout 2007, I made a big mistake with my employer’s W-4 form, by answering it without reading the small print about having a working spouse. We were hit with a ~$6,000 tax bill the next year, and we didn’t have the cash to pay it. Our best option was to set up an installment plan with the IRS, to whom we’ve been paying $167 a month between then and now.

My wife and I have a perfectly logical, though surprisingly unusual, bill payment system which relies primarily on the difference between our salaries. We supply funds to our joint checking account according to what each of us can afford, instead of, for example, making 50/50 contributions, or assigning different utilities to each person. We’ve both been contributing to this annoying monthly IRS bill just like all the other monthly bills, but I feel more than 50% responsible for the fact that it got so messed up in the first place.

So I’ve decided to apply the leftover money in my account each month to the IRS bill from many years ago. Coincidentally, we just got a statement ending July 2010, and we still owe about $2,700. Depending on the month, I should be able to pay between $500 and $900 a month, so it should be taken care of quickly. Knowing what I do about how difficult it was to start paying them in the first place, I only hope they make it easy to pay them more than $167 a month.

The original version of this article, I’m Tired of This IRS Installment Agreement, is copyrighted by Consumerism Commentary.

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The 2009 economic stimulus, usually called the Making Work Pay tax credit, provided slightly bigger paychecks for the middle class throughout part of 2009 and all of 2010. This benefit is in danger of expiring if Congress does not act to extend or renew the credit. This stimulus took a different form than those previous. In the recent past, the government sent checks to Americans for a lump sum, encouraging consumers to put that money directly to use.

Most people used the free money to increase savings or pay off debt, which may have had indirect stimulating effects, but the country remained in a recession. By spreading the credit out by including a small bump in each pay check, economists believed that consumers would grow accustomed to having extra money and the stimulus would be incorporated into everyday finances.

If the credit disappears, pay checks would decrease by about $15 every two weeks in 2011. This could be seen as a tax hike on the middle (working) class. Extending the credit for one year would cost the government, and therefore the taxpayers, $60 billion. Whether Congress could pass such a bill now is anyone’s guess.

The original version of this article, Making Work Pay Tax Credit Extension, is copyrighted by Consumerism Commentary.

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Whether or not you believe the New York Yankees have seen successful years because of or in spite of the team’s fabled owner, George Steinbrenner, you have to admit he has good, though of course unfortunate, timing. If the tax laws don’t change, or if they do change but are not deemed retroactive, through his recent passing he saved his heirs and perhaps the Yankees organization as much as $500 million. This year, estate taxes are temporarily suspended.

Steinbrenner falls among the 0.3 percent of those who have wealth to pass onto their heirs that would normally be, in other years, subject to the estate tax. Those whose heirs owe this tax reflect a much lower percentage of all Americans, as most of us do not pass on wealth either due to the lack of an estate or the desire to leave the estate as charitable contributions.

Steinbrenner is likely the richest American to pass away so far in this freakish — from a tax perspective — year of 2010. How much his heirs will save depends on the details of his will. Any assets he has left to his wife or to charity would be tax-free, anyway.

I don’t recommend trying to time your demise based on tax laws, particularly when there is a chance those laws might change retroactively.

Did ‘The Boss’ Trump The Ben?, Kevin McCormally, Kiplinger.com, July 14, 2010

The original version of this article, George Steinbrenner’s Heirs Inherit $1 Billion Tax Free, is copyrighted by Consumerism Commentary.

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Good news, everyone. The home buyer tax credit extension, after failing in the Senate last week, was finally passed by the House of Representatives earlier this week and the Senate late last night. The bill that includes the extension has been signed into law by President Obama on Friday, July 2.

Originally, before the extension, in order to qualify for the credit of a maximum $8,000 for first-time home buyers or $7,500 for long-time home owners, the house had to have been purchased (contracts signed) by April 30 and the sales had to have been closed by June 30.

This extension applies only to home buyers who met that first April 30 deadline. As the closing process can easily take more than 60 days, Congress approved an extension of the closing deadline to September 30. These two additional months will be helpful for those buyers whose closing has been delayed for any reason.

Unfortunately, this extension does not allow for new home purchases to qualify for the tax credit. The bill that was passed also doesn’t include the extension of unemployment benefits that was being considered in the bill that ended up failing in the Senate last week.

Photo: Cuba Gallery

The original version of this article, Home Buyer Tax Credit Extension, is copyrighted by Consumerism Commentary.

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The problem with widely publicized tax credits like the home buyer tax credit is that people who don’t qualify — and know they don’t qualify — will apply for the credit. Many of these taxpayers, perhaps assisted by their tax preparers with or without their knowledge, will successfully convince the IRS to provide the tax credit, usually with fraudulent documentation.

An audit of the U.S. Treasury Department discovered that 1,300 state and federal inmates received an undeserved home buyer tax credit. It is true that you can buy houses from prison; in fact, many prisoners claimed and received the home buyer tax credit legitimately.

In total, The Treasury Department estimates that they are investigating 400,000 questionable claims. As you can imagine, this is making it difficult for legitimate home purchasers to claim the tax credit. When it was first offered the process of receiving the credit took about six weeks, but while the IRS was backlogged, it took up to six months judging from readers’ comments.

The Treasury Department, as a result of the 1,300 cases out of 400,000, wants federal, state, and local prisons to supply taxpayer information for all prisoners. Should tax returns filed by prisoners receive more scrutiny than the typical non-incarcerated taxpayer?

Prisoners, scammers profit on home-buyer tax credit, Andrea Coombes, Marketwatch, June 23, 2010

The original version of this article, Home Buyer Tax Credit Fraud, is copyrighted by Consumerism Commentary.

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