Personal Dividends - Money+Lifestyle » income tax

IRS Notice – What to do if You Receive One

Manny — Wed, 09 Jun 2010 18:02:20 +0000

Every year, the Internal Revenue Service sends millions of notices and letters to taxpayers. The IRS sends notices for various reasons, typically for problems with a prior tax return. The IRS takes several months to process returns and they normally start sending a strong push of IRS notices to taxpayers beginning mid June each year.

Here are a few things to keep in mind if you receive an IRS notice:

Do not panic and make things worse on yourself. Just because you receive an IRS notice does not mean that you owe thousands of dollars or are heading directly to prison. Many of these notices can be dealt with quickly and easily.
An IRS notice will more than likely cover one very specific issue. Some of the most common include: notify you of a change to your account, request payment of back taxes, or ask for additional information. Make sure you read your IRS notice carefully so you know what is being asked of you.
If you receive an IRS notice asking for a correction, compare this information to your return to see if it is accurate.
Is the correction accurate? If so, you probably do not need to do anything else. Of course, if you owe money or the notice tells you that further action is needed you should comply.
What about a correction that you do not agree with? In this case, you need to take additional steps to fix the problem. It is your responsibility to respond in writing telling the IRS why you do not agree. Along with this explanation, you should include documents that back up your claim. After doing so, you should give the IRS up to 30 days to respond.
You are not left out in the dark when you receive a notice. Instead, the IRS includes specific instructions that you are asked to follow.
Most IRS notices are self explanatory. The majority of people who receive a notice do not need to call the IRS or visit a local office. But if you do have a question or concern, you can contact the IRS at the number listed on your notice.
Keep copies of all notices and letters that you receive. Along with this, make copies of any correspondence that you send back.

Are you interested in learning more about IRS notices? If so, you should review Publication 594, The IRS Collection Process. Also, details concerning penalties and interest are available in Publication 17, Your Federal Income Tax for Individuals.

If you receive one of these, there is no reason to panic. The IRS sends notices to millions of taxpayers, and as long as you comply with their request you do not have anything to worry about. Typical IRS notices are part of an automated procedure used by the IRS and if there is a serious problem, you will have time fix. Be sure to keep in mind that the IRS is willing to work with taxpayers on any tax problem and the sooner it is resolved, the less the consequences will be.

Post from: Personal Dividends. Subscribe to the original site Feed

IRS Notice – What to do if You Receive One

Dividend Income Investing – Constructing a Dividend Income Stock Portfolio

Arohan — Mon, 07 Jun 2010 20:11:12 +0000

Source: sxc.hu Photo: penywise

Investing for dividend income is a smart way to invest in the market and participate in the profits of successful businesses. Sure, the income from dividends might not be as tax efficient as long term capital gains, but there are many other benefits. Depending on your goals and your situation in life, a well constructed dividend income portfolio maybe something to consider.

Is Dividend Investing the Same as Income Investing?

Great question. Sure, dividends are income so all dividend investing is income investing. But income investing can be done in a variety of ways, stock dividends are only one of them. The interest or coupon payments on bonds is also one way of income investing, and so is private loans to individuals or businesses, either negotiated as a commercial note or done through online debt exchanges such as Prosper or Lending Club. Income from rental property also classifies as income investing. When you compare interest income vs. dividend income or even rental property income, keep in mind that their tax treatments can be quite different. Interest income typically earns the regular income tax rates, while dividend income may be taxed at a lower rate. The income tax laws regarding dividend income keep changing, but the tax rates are generally the same or lower than regular interest income.

You Should Consider a Dividend Portfolio if any of the Following is True

You are retired or are close to retirement and need a regular, fairly dependable income stream to live on without having to sell your investments
You have a full time job or a business and want to invest in unrelated businesses (diversify your income) and generate additional passive income through dividends
You are investing for the long term and are looking for an easy way to find profitable companies to invest in. Dividend paying companies are typically better managed, and the cash flow is less likely to be misrepresented as real cash needs to be paid out to the shareholders as dividends
You are looking to invest in DRIPs (Dividend Reinvestment Plans) either for yourself or may be to teach a child about investing using DRIPs. DRIPs allow you to bypass a traditional stock broker and their fees for the most part and invest directly with the company, and you get a real stock certificate in your name.
You want the peace of mind that can only come when the stock you invest in shows you the real cash.

Frankly, I like dividend stocks just because they throw up cash that I can than use to make new investments. This allows me to stay fully invested in my stocks so I do not miss those precious few days of stock appreciation in any year that make all the difference between a great performance and a dismal one. Whatever your reasons may be, there are many choices available to you as you select stocks that you want to include in your dividend income portfolio.

Your Investing Choices

Depending on your income requirements, the amount of risk you want to take, as well as the level of complexity you want to handle in your taxes, you may want to integrate one or more of the following types of investments in your portfolio.

Stable no or little growth dividend payers: Most utility companies fall in this category. While these companies do not expect to grow much or grow their dividends much in the future, these companies have a stable customer base, predictable revenue streams and typically some sort of regulatory protection that keeps competition away. You will be rewarded with a predictable quarterly dividend stream and you can sleep better at night knowing it is unlikely that these companies will disappear overnight (Enron and Calpine were exceptions, they went way beyond what a typical staid utility companies do). They also generally pay higher dividends. 4%-6% dividend yield is not uncommon. Two examples are DTE Energy and Southern Company. Beats putting money in a CD any day.
Dividend growth companies: These companies have a long history of not only paying uninterrupted dividends, but they also grow their dividends every year as their business grows. Johnson and Johnson is my favorite, but of course there are many others. It is not uncommon with these companies to find after decades of ownership that the dividends you are getting now every quarter per share are actually more than the original investment in each share of these companies. In other words, you get paid back and more. If you reinvest these dividends in more shares, you actually compound your dividend income even faster. Pretty powerful!
REITs: Real Estate Investment Trusts, or REITs, technically do not pay dividends. The trust payments are classified more as a traditional income. Still these are structured and more liquid way of enjoying real estate/rental income without the hassle of property management, mortgage negotiations, etc. REIT income yield can be high, but depending on what the REIT invests in, you may be on a riskier territory. If you want to go this route, make sure you understand what the REIT is investing in. For example, a REIT that invests in hospitals and medical offices maybe safer than a REIT that invests in developing Florida marshlands for baby boomer retirees.
Royalty Trusts and Master Limited Partnerships: These are less understood but can be highly lucrative. Royalty trusts and MLPs also in the strict sense of the word do not pay dividends. Due to their corporate structure, they pay out a distribution to their unit holders. This distribution is directly linked to the profits in the business they are involved in, as profits technically flow through to the unit holder. As a unit holder, you are considered as a partner in the business, which means that you will receive a partnership K1 form for completing your taxes, which might get quite involved. You will definitely want to get a competent CPA for your taxes. Understand that many CPAs are also not properly educated on how these entities work. The yields can be very high and as a flow through entity, accounting expenses such as depreciation or resource depletion can be used to offset your income tax liability. The risk with US based Royalty trusts are that they will eventually dissolve. They are not allowed to raise new capital or fund growth so as the wells or mines are depleted, so is the income. An alternative is to invest in Canadian trusts (also called CanRoys) that have no such restrictions.

Most of the companies pay dividends on a quarterly basis. There are a few companies that pay annual or semi-annual dividends. REITs, MLPs and Royalty Trusts are your best bets if you are looking for monthly dividend income. Alternatively, you can structure a portfolio of quarterly dividend paying stocks whose dividend schedule fall on successive months. This way you are sure that you will be earning predictable income every month.

Post from: Personal Dividends. Subscribe to the original site Feed

Dividend Income Investing – Constructing a Dividend Income Stock Portfolio

How and When you Should File an Amended Tax Return

Manny — Thu, 06 May 2010 13:58:36 +0000

Source: sxc.hu Photo: dishaw

Imagine this: you file your tax return just to learn soon enough that you made an error or omitted important information. While this may feel like a kick in the gut, it is not nearly as bad as it sounds. Rather than worry about whether or not the IRS will audit and catch you, file an amended tax return.

Common Reasons to File an Amended Tax Return

Here are several reasons why you may need to file an amended return:

To claim or remove dependents
Report additional income
To correct a mathematical error
Make changes to your deductions or credits
Change your personal exemptions
Report additional withholding

How to File an Amended Return

Now that you know some of the most common reasons for filing an amended tax return, you should consider how this is done.

It takes two steps to amend a return. Part one consists of filling out a new Form 1040. Once you are done with this, you need to complete Form 1040X which shows the differences between your original and new return.

Why do I need to fill out a new 1040? The main reason for this is that you will be asked to match items from this form against 1040X. Along with this, it is a good idea to have an accurate return for your records.

Before you start to fill out Form 1040X, you should gather the following documentation: your new 1040, as well as your original information. Part 2 of Form 1040X is where you get down to business. It is this area where you will note what changes you made and why this was necessary. Make sure you are as clear and complete as possible.

Need more information? Here are several things the IRS wants you to know about amending your return:

You must use Form 1040X, Amended U.S. Individual Income Tax Return.
You are only allowed to paper file an amended return – you cannot electronically file even if this is how you did so originally.
At the top of Form 1040X there is an area where you can enter the year of the return that you are amending. It is important that you include this information so the IRS can properly update their records. You have three years from the date you originally filed or two years from the date you paid, whichever is later, to file Form 1040X.
Need to prepare more than one amended return? Make sure you use a separate 1040X for each, and mail them in individual envelopes.
If you find that you owe additional tax, you should file an amended return as quickly as possible and then pay your liability right away. This will help to limit the amount that you pay in penalties and interest.

The process for filing an amended tax return is simple. Hopefully you never have to do this, but if the time comes make sure you follow the above advice.

Post from: Personal Dividends. Subscribe to the original site Feed

How and When you Should File an Amended Tax Return

7 Income Tax Breaks – Thanks to Your Children

Miranda — Fri, 12 Mar 2010 16:43:22 +0000

Source: sxc.hu Photo: dishaw

As April 15 inches closer for U.S. tax filers, it’s time to get serious about looking for income tax breaks. This includes tax credits and tax deductions related to your children. Indeed, the fact that you have a family plays heavily in your favor at tax time, with existence of a number of tax breaks. Look through your expenses for last year (2009), and consider what is coming up for 2010. Get together your documentation, and find out if you are eligible for some of the tax breaks that come with children. If you don’t think you’ll have time to do a thorough job, you can consider a tax return filing extension so that you have the time you need to make sure you turn in an accurate tax return that includes all of the breaks you are entitled to, including these 7 tax breaks that you can enjoy, thanks to your children:

$1,000 Child Tax Credit: It you have a child under the age of 17 for the full year, you can get a $1,000 tax credit. A tax credit acts sort of like a gift card. You apply it after you have figured how much tax you owe, reducing the amount you have to pay. There is a phase out, though. For single parents, that phase out starts when adjusted gross income reaches $75,000 and for couples it starts at $110,000. You lose $50 of credit for every $1,000 you are over the cut off.
$3,650 Dependent Exemption: If your child is 18 and under, or a full-time student 23 and under (and not claimed as a dependent elsewhere) for part of the tax year, you can claim a dependent exemption. There is no age limit for disabled children. Phase out begins at $250,200 for married filing jointly in 2009. But watch out! That pesky AMT can phase you out at lower incomes.
Adoption Credit: You are eligible for a credit of up to $12,150 (dollar for dollar) in the year that you adopt a child. If you paid the expenses in the prior year, those are still eligible. You can actually carry forward some of your expenses as well. For special needs adoptions, you are eligible for the entire credit, even if your expenses did not reach $12,150. Phase out begins for couples who make $222,180.
Dependent Care Credit: If you pay for child care, you can get a credit to offset some of the costs — 20% of what you pay, up to $3,000 for one child and up to $6,000 for more than one. Except in the case of disability, the child must be 13 and under when you pay the expenses. Eligible expenses include daycare, paid preschool, nanny services and after-school care. Private, paid day school isn’t eligible.
Dependent Care Account: This works if you’ve got an awesome employer that offers the option of diverting some of your money to pay for eligible child care costs. You can put up to $5,000 per couple into the account pre-tax, lowering your taxable income. However, it is important to note that you have to coordinate this effort with dependent care credit. Using this option means that you won’t get the dependent care credit in full.
Kids’ Accounts: You can use investment accounts in your children’s names for sheltering purposes. You open custodial accounts in your kids’ names, and the first $950 of income isn’t taxed. The next $950 is taxed at 10% — which is the child tax rate. Everything after is taxed at whatever rate you pay. Good uses for money in these kinds of accounts are for non-essential expenses, like summer camp, music lessons and other costs.
529 Contributions (State): No, you can’t get a federal tax deduction from 529 contributions. But in 34 states and the District of Columbia, you can get get a deduction for contributing to the plans offered by those states. In some states, you can even get a tax break for contributing to a plan out of state. Double check the state income tax break possibilities for 529s in your location.

Before you take any of these tax breaks, double check your eligibility. You want to be sure that you really are allowed to enjoy these breaks. You can consult with a tax professional to get a better idea of what you are eligible for.

Post from: Personal Dividends. Subscribe to the original site Feed

7 Income Tax Breaks – Thanks to Your Children

Selecting an IRS Payment Plan If You Owe Tax And Cannot Pay in Full

Manny — Thu, 25 Feb 2010 15:18:44 +0000

Source: sxc.hu Photo: gossamerLL

With April 15th approaching, you may find you owe tax but can’t pay in full. Just because you cannot pay your tax liability does not mean that you should not file on time. In fact, failing to file on time can be the worst thing to do as the “Failure to File Penalty” is excessive at 5% per month on the unpaid balance (up to 5 months). If filing by April 15th is problematic, you can request an extension by using form 4868 which will give you until October 15th to file (not pay).

When selecting the most appropriate IRS payment plan, it is important to understand where you stand. Do you think you will have with the money in a few months (<120 days), or do you think you will need more time? Another important factor is estimating or finding out your total tax liability.

If You Can Make a Payment in 120 Days or Less

If you can make a payment in less than 120 days or less, you can request a short-term payment extension with the IRS using the Online Payment Agreement Application (OPA). Requesting a longer term than what is needed will cost you more as a short-term extension carries no application/user fee unlike an Installment Agreement (explained below). If the IRS gives you an online approval for this payment extension, you typically will get a hard-copy confirmation in the mail within 10 days. Realize that the IRS will usually add on a “Failure to Pay Penalty” so, therefore, if you can pay the IRS in full on April 15th, you can avoid this penalty.

If You Cannot Make A Payment in 120 Days or Less

If you cannot make a payment in 120 days or less, you may want to consider an IRS Installment Agreement which will allow you to pay your taxes over a series of monthly payments. It does carry interest (currently 4% compounded daily), and, unfortunately you will incur the Failure to Pay Penalty. However, the latter penalty will be reduced by 50% with an IRS acceptance. Now there are a few different types of IRS Installment Agreements (IAs), each dependent upon your total tax liability, but these have a user fee ($105 or $52 if directly debited from your bank account).

Guaranteed Installment Agreement – If you owe the Internal Revenue Service over $10,000 this IA will be the most appropriate for you. To request this agreement, either use the IRS Online Payment Agreement Application or file form 9465. Remember, with all types of payment plans you need to make sure you filed all tax returns due. This payment plan is unique because under the tax code you are “guaranteed” an acceptance by the IRS. When requesting this IA you will need to state a monthly payment amount that is equal to or greater than the minimum monthly payment. To calculate this, take the total amount you owe (including penalties and interest) and divide that number by 30. Your minimum payment should pay off your total debt amount in 36 months taking into account penalties and interest.
Streamlined Installment Agreement – If you owe the IRS more than $10,000 but less than $25,000 (taking into account penalties and interest) you can apply for a “Streamlined” Installment Agreement by utilizing the Online Payment Agreement Application or by completing form 9465. The reason this is typically coined “Streamlined,” is due to the fact that the IRS will not require financial disclosure or verification of your income, expenses, and assets. To figure out your monthly minimum payment take the total amount you owe (again plus interest and penalties) and divide this number by 50.
Financially Verified Installment Agreement – If you owe tax for over $25,000 or more, or you cannot make the minimum monthly payment on a Streamlined Installment Agreement, it is suggested that you request this type of payment plan. This type of Installment Agreement is more complicated because you need to provide a financial statement to the IRS (Form 433-A) which is called a Collection Information Statement. You need to disclose again your assets, income, and liabilities; your monthly payment will determined by what you have the ability to pay each month determined by Form 433-A. With this IA it is best to work with a tax professional simply because Form 433-A can be complex.
Partial Payment Installment Agreement – This Installment Agreement is best if you cannot qualify for any of the other IAs, and you owe more than $10,000 (including penalties and interest) in tax. It allows you to pay a monthly payment amount up until the Statute of Collection (SOC) expires on each period of your debt; this time frame is generally 10 years minus the period from the assessment date. As the SOC expires on each period, that debt will fall off, and you will continue to make monthly payments on the remaining balance. This is a great alternative to an Offer In Compromise (OIC), especially if you had an OIC rejected or you are on the cusp of qualifying. It will also allow you to pay what you can afford or what you have the ability to pay, which is determined by Form 433. Ultimately, you will end up paying less than the total amount you owed but expect to pay what equity is left in your assets and your disposable income (over the remaining statutory collection period). Sometimes, though, the IRS will require you to sell or liquidate assets before you can qualify for this payment plan. It is highly recommended that you work with a tax professional as negotiations will occur and you need to understand complex terminology and calculations.

Overall, these are a few different payment options that lead to compliance if you owe the IRS money and you cannot pay in full. Realize, that there is always a cost to paying the IRS over time rather than when your taxes are due. Therefore, in deciding whether to even agree to a payment plan with the IRS, you must consider other alternatives and their respective interest rates (e.g. credit card, bank loan, personal loan, etc). From a nominal perspective, the IRS charges 4% (compounded daily) and (.25% compounded monthly) on the unpaid balance.

Post from: Personal Dividends. Subscribe to the original site Feed

Selecting an IRS Payment Plan If You Owe Tax And Cannot Pay in Full

5 Income Tax Filing Assumptions that Could Cost You Big

Miranda — Thu, 21 Jan 2010 21:02:30 +0000

Source: sxc.hu Photo: gossamerLL

We have a complex tax code that can be quite confusing. Trying to tote up credits and deductions, and working on getting an advantage, can be time consuming work. It is not surprising, therefore, that a number of assumptions about tax filing turn out to be incorrect. And, while some filing assumptions (such as the myth that using the provided address label will mark you out for an audit) are relatively harmless, there are some false assumptions that could end up costing you. Before you give in to assumptions about tax filing, do a little research — and consult with a trusted tax professional. Here are 5 tax filing assumptions that could result in large costs:

1. Tax Filing is Voluntary

This is a nice thought. The idea that paying income taxes is voluntary floats around out there, and comes from IRS statements and a Supreme Court case from 1960 that state that our tax system is based upon “voluntary assessment and payment…” Unfortunately for would-be tax avoiders, the courts and the IRS have been at pains to explain that it’s the assessment that is voluntary, not the payment. The reason that the assessment is voluntary is because tax payers are responsible for figuring out the amount of their obligations and then offering (volunteering) that information to the government. Of course, this is why there are audits — they are meant to double check that your voluntary assessment is accurate.

If you don’t pay your taxes, you are subject to penalties. There is a penalty for failure to file (and it’s heftier than the failure to pay penalty), and there are interest charges on the amount that you owe. If you aren’t careful, the fees and penalties can add up, costing you quite a bit.

2. No 1099? No Need to Report

Many of those who earn income from a side business, home business or contract work believe that if there is no 1099-MISC submitted for their income, there is no need to report it. There are a couple considerations here. Sometimes, someone who hires you will send a 1099 to the government, but forget to send you a copy. That makes catching your perfidy fairly simple. Others think that since your employer doesn’t have to send in a 1099 when s/he pays you less than $600 in a year, you don’t have to report that income. Not true. All income is taxable. No matter how little you make, and whether or not someone sends in the 1099. If you are audited and the discrepancy is discovered, it could mean back taxes and penalties.

3. A Canceled Check Works as Documentation for Donations

When you give to charity, whether it’s cash or goods, you need to have some sort of documentation, whether it’s a receipt or a canceled check if you want to itemize for the deduction. For donations of under $250, this works just fine. However, once you reach that $250 mark, you need a donor acknowledgment letter specifying how much you gave, and/or describing the property you donated. If you received goods or services from the charity in exchange, that has to be in the letter as well. And this includes donations and tithes given to your church. My congregation issues a yearly letter that itemizes donations, and clearly states that the only benefits I receive are intangible, and associated with my faith. You can see Publication 526 from the IRS for more information. Claim something you shouldn’t, and you could owe that amount — plus interest.

4. Unless My Parents Live with Me, I Can’t Claim Them as Dependents

Many people provide support for their parents, even though they don’t live with them. If you aren’t claiming the dependent-care exemption for parents you support, you could be missing out on tax savings, paying more than you should. There are some caveats, though. You and your siblings must pay at least 50% of their living expenses, and only one of you can claim the exemption each year. Some families rotate who gets the exemption, while others just provide it to the sibling that offers the most day to day support (even if it isn’t the most financial support). You do have to provide at least 10% of total support if you want to take the exemption, though. Check IRS Publication 501, or consult a tax professional for more information.

5. If You’re Married, It’s Best to File Jointly

Most people just assume that if they are married they should file jointly. However, there are some situations that may warrant filing separately. When the kids leave home, and the dependent exemption is no longer available, or if there has been a big change in income, couples may actually do better with separate filings. Sometimes, these savings are more apparent with state taxes. See if your tax professional will run a comparison between the two options, including state and federal taxes. You could save money, using it for you, rather than handing it over to the government.

Bottom Line: It’s best to rethink your assumptions about filing your taxes, and see if you could save a little more — or at least avoid common pitfalls that could cost you a great deal.

Post from: Personal Dividends. Subscribe to the original site Feed

5 Income Tax Filing Assumptions that Could Cost You Big

Do You Really Need to Itemize Your Income Taxes this Time?

Miranda — Thu, 17 Dec 2009 19:07:17 +0000

Source: sxc.hu Photo: dishaw

I’m an itemizer. By the time everything is added up on Schedule A of my Form 1040, my items usually exceed the standard deduction. So I itemize. But the decision to itemize your 2009 taxes may be a little more difficult this tax time, due to the fact that there have been some interesting changes to tax law for 2010.

Higher standard deduction

The standard deduction has been increased to $11,400 for married couples filing jointly. The number for head of household is $8,350, and $5,700 for those who are single or married filing singly. This relatively high standard deduction means that when you add everything up, you still might be short of the standard. If that is the case, then the decision is fairly easy: Take the standard deduction.

But the decision to itemize becomes a little muddled when you start to think of the extras that are being provided for those who take the standard deduction. Here are some of the extras that those taking the standard deduction can tack on:

Over 65: If you at least 65, you can tack on an extra amount to that standard deduction. For singles, the amount is $1,400. For those married filing jointly, the number is $1,100. And if your spouse is over the age of 65 as well, that’s another $1,100. So, two married people filing jointly over the age of 65 actually get a standard deduction of $13,600.
Blind: Those who are legally blind also get to add to their standard deduction. For singles, it’s $1,400, and for those who are married, it’s $1,100. If you are blind and over 65, you can add both those deductions to your already increased standard deduction. You can see how, for some people who normally itemize, this is not the year to do so.
Property tax: Normally, in order to deduct the property tax you pay, you have to itemize. This year, though, those who are single can add a deduction of up to $500 to the standard, while those who are married filing jointly can add up to $1,000. This means that you will have to do a little math. If you itemize, you can usually deduct the entire amount of the property taxes you pay. So you need to decide whether it is more advantageous to take the higher standard deduction and add some of your property taxes to it. For example, if you add up your items on Schedule A (including full property tax), and you get $12,000, if you are married filing jointly, you are probably better off taking the standard deduction of $11,400 and then adding the $1,000 to it for $12,400, even though you might not be deducting the entire amount of your property taxes.

As you can see, it is a bit more of a numbers game this year, with the standard deduction providing a bit of an advantage for some taxpayers. It is also worth noting that other considerations might come into play as you look at whether this is a good tax year to itemize. The vehicle sales tax deduction on new cars and light trucks bought after February 17 and before December 31 of this year also provides a consideration. And, don’t forget that you can itemize state and local income taxes, as well as charitable donations.

It might be a good idea to look at Schedule A and see what’s on there, and perhaps consult with a tax professional who can help you determine the best course of action for this tax year. If you normally itemize, take a hard look at the 2010 rules for the standard deduction, and consider your tax strategies, to see whether it is in your best interest to continue doing so.

You can also visit the IRS web site for more information.

Post from: Personal Dividends. Subscribe to the original site Feed

Do You Really Need to Itemize Your Income Taxes this Time?

Tax-Friendly States for Retirement

Miranda — Thu, 01 Oct 2009 17:56:34 +0000

Source: sxc.hu Photo: ctoocheck

One of the things that can eat into your retirement funds is taxes. No matter where you live in the U.S., you will have to pay federal taxes. However, state income and sales taxes are a completely different matter. These taxes vary according to where you live, and can make a big difference how much money you have to use at your disposal during retirement. Kiplinger offers a really great interactive map that offers insight into states where the tax situation can make retirement more desirable. Here are some of the results:

No income taxes

If you want to avoid income taxes altogether, you can try moving to Oregon, Nevada, Alaska, Texas, South Dakota, Wyoming or Florida. It is also worth noting that New Hampshire and Tennessee only tax interest and dividends, so other income is safe. These states can provide you with a way to avoid paying state taxes on your hard-earned income. Watch out, though: Only Oregon, New Hampshire and Alaska have no sales tax to go with their lack of income tax. Tennessee has one of the highest sales tax rates in the country, and that could offset — to a small extent — the fact that only interest and dividends are taxed.

Real estate taxes

In addition to paying income and sales taxes, if you buy a home to live in during retirement, you will have to pay real estate taxes. According to Kiplinger, none of the states with low income taxes and sales taxes have the lowest property taxes. Probably because they make up for their lack of income tax with charging higher real estate taxes. New Hampshire, in spite of having low income taxes, actually has some of the highest median property taxes. The states with the lowest property taxes are Arkansas, Louisiana, West Virginia, Alabama and Mississippi.

Other tax considerations for retirement

Part of arranging for a prosperous retirement is understanding what sort of tax situation you want to be in. If you are planning to move somewhere for your retirement years, then it is a good idea to understand the tax implications. Looking at a combination of income, sales and property taxes is a good start. But you should also consider your pension and your Social Security benefits. Several states treat public and private pensions differently, and some will even tax public pensions. A number of states tax Social Security benefits, meaning that each time you receive Social Security income, you are taxed on it. Interestingly, Pennsylvania and Mississippi won’t tax any of your retirement distributions — even if they come from your 401k or IRA.

It can be a bit of a headache, but figuring out the best situation for you should include taxes. Living in a state with low property taxes does you no good if you don’t want to buy a home. For those who like to travel, setting up a residence in a state with low income taxes and relative low sales tax, but renting and not worrying about property taxes, might be a wise decision. For those who want to stay at home, and buy a cozy house, living in a state with high property taxes might be disastrous, even if low income taxes were part of the equation.

In the end, you need to decide what you want, and what sort of tax situation might be best for you. A financial planner or tax professional could help you determine where you would best flourish, as well as provide you with guidance related to retirement tax planning. Just because you’re retired from work, it doesn’t mean that you are retired from paying taxes.

Post from: Personal Dividends. Subscribe to the original site Feed

Tax-Friendly States for Retirement

Tax Preparation Checklist

Miranda — Thu, 19 Mar 2009 16:48:49 +0000

Source: stck.xchng Photo: gossamerLL

It’s that time of year again: Spring is approaching — and so is April 15. It’s tax time, and if you haven’t got your information together, now is a good time to start collecting the documentation you need to complete and file your tax return. Even if you use a professional tax preparation service or an accountant, you are still responsible for getting everything together and taking it in. For the simplest tax returns, your checklist is fairly short: All you need are your Social Security Number, and the Social Security Numbers of your spouse and/or children and other dependents. You will need your address, and any W-2 forms. If you have a child care provider, you should get the name, address and tax identification number so that you can deduct a portion of those expenses.The only other things you might need are your charitable donations and the mortgage interest and property taxes you have paid if you itemize your deductions. Receive your refund faster by providing your bank account number and the routing number for your bank for direct deposit purposes.

But what happens when you have a more complicated tax return? With investment gains and losses, interest income, self employment income and taxes and education expenses, the forms and schedules start to add up. Here is a checklist that should help you get what you need for a more complex tax return. Your accountant (especially if it’s you) will thank you.

Self employment taxes

If you are self-employed, you know that there are any number of extra items to worry about. One of the important things you will need, especially if you bring your taxes to an accountant for professional tax preparation, is a profit and loss statement. Prepare this ahead of time, with your income listed, as well as your expenses. Understand that foreign income should be broken out and listed separately, as well as foreign income tax paid. Categorize your expenses so that they are easy to identify. Expenses include 50% of meals and entertainment for business purposes, mileage, supplies, trade subscriptions, cell phone use, Internet use and other items that are used strictly for business. Personal finance or business finance software can help you keep track of business expenses to make this process easier. If you offer insurance and retirement plans, these expenses can also be deducted.

You will need any 1099s that have been sent to you, recording work you have done for others. For those with S-corps and LLCs, check the 1099s that have been sent to you. You want your business tax ID on the form. If your personal Social Security Number is on the 1099 instead, you will have to fill out Schedule C for that income. If you pay for health insurance, make sure you have your total premiums paid over the year. You can also hire your children under the age of 18 to work for you, receiving a deduction. For most LLCs and for sole proprietorship, no FICA is required. Depreciation deductions and new equipment deductions are also available. Balance sheets and payroll information is also required in some cases; make sure you keep good records. If you pay estimated taxes quarterly, make sure you have what you have already paid for the year.

Interest income and capital gains

If you have investments, you will need to report your earnings. Even interest earned on a savings account needs to be reported as income. Capital gains (and losses) need to be reported. Make sure you understand the rules for government municipal bonds. You may not have to pay taxes on interest earned, but you may be subject to capital gains tax. Retirement accounts are tax-deferred, and the earnings on these investments work differently. Also, be aware of what taking different distributions, qualified or unqualified, might do to your taxes. Don’t forget about 529 plans, Coverdells and health savings accounts. All of these have certain tax benefits and information on these accounts should be part of your tax preparation.

Other items you may need

In addition to the tax-related documentation above, you might fall into one or more of the following categories. Here are some of the other items to remember when it comes to preparing your taxes:

Jury duty pay.
Alimony.
Unemployment benefits.
Prizes and/or gambling winnings.
State and local taxes paid during the year.
Student loan interest.
Qualified education expenses (also: Lifetime Learning or Hope credit information).
Moving expenses.
Work-related expenses you were not reimbursed for.
Losses due to theft.
Casualty losses.
Medical expenses.
Gains from real estate sale (consider a 1031 exchange).

Keep it organized

Keep what you need in mind throughout the year. I have a file folder set aside for documents I need for my taxes. I also keep track of my income, deductible expenses and charitable contributions in personal finance software so that it is easier to retrieve at the end of the year. If you have a complex tax return, with a number of forms and schedules, you might consider having it professionally prepared. Finally, if you have questions about what you need, it is possible to find most answers on the IRS Web site or by talking to a knowledgeable tax professional.

Post from: Personal Dividends. Subscribe to the original site Feed

Tax Preparation Checklist