With the AMT, it's not easy being green

Looking for something to get steamed about? Read the blog by my colleage Gordon Hard on the alternative-fuels tax credit for the purchase of a hybrid or alternative-fuel automobile. It turns out lots of car-buyers who thought they were eligible for the credit probably won't get a dime in tax savings from their purchase. Why? Because their Alternative Minimum Tax liability makes them ineligible for the credit. That's a double whammy, if ever there was one. 

The irony is that middle class folks who might be willing to spend a little more for an energy-saving hybrid over a non-hybrid model are the very folks most likely to be snagged by the AMT. They paid more to do the right thing, and now they won't get the promised reward.

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The IRS recently announced enhancements to its web site to make it easier for individuals and tax practitioners to set up an automatic payment schedule for an installment agreement. That's useful if you know you won't have the money by April 17 to pay what you owe. The agency says that more than 75 percent of those who need to set up an installment agreement can do so through the enhanced web page. For other options to help you avoid paying penalties and interest on taxes due, read  our article, "What if you can't pay your income taxes?"                                                   
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If you've ever wondered what all the little boxes on your W-2 form mean, check out The Anatomy of a W-2 Statement on the Quickbooks Payroll site.

The two subjects the page doesn't detail are Box 12 and Box 14. Box 12 covers all manner of items, some taxable and some untaxed, including elective deferrals to retirement plans, travel allowance and moving-expense reimbursements, group term-life insurance coverage over $50,000, and nonstatutory stock options exercised; they're mainly posted for informational purposes. In Box 14, you'll find taxable fringe benefits and miscellaneous payments. On my W-2, that box included state disability insurance premiums, life and health insurance premiums, and union dues.

 

Waiting for the CPA

In a past blog I explained why I'm using a tax preparer this year instead of doing it myself. I did it for all the right reasons. I wanted accuracy. I wanted experience and expertise. I wanted someone else to do the financial heavy lifting. The main negative, I thought, was the extra money I might spend by not doing it myself.

But I discovered another negative: I have to wait.

I gave my stuff to Mr. S., my accountant, nine days ago, and I have to restrain myself from calling him every day to get the results. I know I owe, so I'm in no hurry to pay. But I still want to know the damages. I want to compare his calculations with my own. I want to wrap up this tedious annual chore.

Some clever marketers have figured out that the desire for instant gratification extends to tax preparation. That's undoubtedly why both TurboTax and TaxCut, the two leading do-it-yourself tax-software packages, have refund counters on every screen. This year TurboTax added a counter that adds up your deductions, too. Within a few keystrokes of starting your tax return, those suckers start reporting what you'll get back from the IRS, or what you'll owe. Watching that refund number mount is quite satisfying. It's entertainment, tax-prep-style.

If you're reading this, Mr. S., please call me. Of course I'm paying you to do a thorough job, but hurry it up already, will you?

Tax law: Comprehensive and creepy

Tax Topic 357 has to be among the saddest and creepiest documents the IRS produces. Its title: "Tax Information for Parents of Kidnapped Children."

According to the law, you can claim your kidnapped child as a dependent if law enforcement officers presume that a non-family member did the kidnapping, and if your child lived with you prior to the kidnapping for at least six months of the tax year. If your child meets those criteria, you can use his or her dependent status to claim an exemption, apply for the child tax credit, and file as a head of household with a child.

If my child had been kidnapped, I doubt I'd be spending my time looking for tax breaks.

But let's look at this more carefully. If I'm reading this correctly, you can only claim your kidnapped child as a dependent if he or she was abducted after June 30th. Too bad if your child disappeared before that. Gone a year or more? Fuggedaboudit.

That seems a bit harsh. And it begs the question: Why wouldn't the government just give parents of kidnapped kids a break? Could it be that policymakers are concerned that the child could be claimed as a dependent twice--by the parents and the kidnapper?

There is one break for those parents. In IRS Publication 547, Casualties, Disasters and Thefts, it says that ransom is considered a tax-deductible loss. But on page 370 of my favorite bedtime reading, J.K. Lasser's Your Income Tax 2007, it says that the costs of trying to find the child are not tax-deductible. Again, that seems like a weird inconsistency.

Some will say I'm cruel to even discuss such a gruesome topic. But hey, I wasn't the first one. Someone proposed the provision, others approved it, others interpreted it and, regrettably, some parents have had to use it. May you never be one of them.

And perhaps we should be thankful to our government for its thoughtfulness. For every life event you can think of, there's probably a tax law to cover it.

Why I use a tax preparer

What's a leading occupational hazard of tax preparers?

Paper cuts.

At least, that's what my accountant told me the other day as he leafed through my papers, his thumb swathed in his daughter's Sesame Street Band Aids. All that paper shuffling takes its toll.

Well, compiling all my family's tax materials had taken its toll on me. After organizing the W-2s, the info from my husband's home business, the deductions, the interest and dividend forms and all the other miscellany, I was ready to have someone else take over. Hence, the visit to Mr. S., my trusted CPA.

Why wouldn't I bother just doing my taxes myself? In fact, using TurboTax, I'd already done a quick calculation of what we owed. I found the software's free companion product, Its Deductible, useful in valuing our deductions. But, as we discovered when we tested TurboTax and its leading competitor, TaxCut, these programs have their limitations, particularly if your financial life is a bit complicated.

Last year, I filed for an extension after getting confused by the different results provided by several tax software products. I paid what I thought we owed, and made an appointment to see Mr. S. Turns out we missed reporting some information from the interest and dividend statement on our daughter's custodial account, and owed tax and a late-payment penalty. The tax software didn't mention that. But Mr. S. did.

This year, Mr. S. says we may be able to save overall by filing separately. He says that while the IRS penalizes married couples filing separately, New York State does not. This year, the savings in New York State tax in our particular situation may outweigh the additional tax that the Feds impose.

Now that I know that, I could go back and spend three or more hours creating four separate tax returns--two federal, two state--on TurboTax or TaxCut. But my time is worth something. (Of course, now I have to wait a few days to get Mr. S's results.)

If you have a simple return--say, one using the standard deduction--by all means try tax software. But as the tax code and your life get more complex, you may find it worth your while to invest in a good professional, paper cuts and all.

Why pay your tax online?

I'm in no hurry to pay the taxes I owe. Last night, I did a preliminary calculation and found my husband and I more than $1,600 short, due to the abominable Alternative Minimum Tax. So I'll file electronically but wait 'til the very last day to send that check by mail.

Some folks put off the pain of paying even longer. They use services that let you charge your tax payment on your credit card. For a 2.49-percent "convenience" fee, Pay1040.com and Official Payments Corp. say they'll help. I'm sorry, but if I'm already paying $1,600, why would I want to shell out another $39.84 for the privilege of paying my taxes online? And if I've already got a balance on my credit card or can't pay the amount all in one billing period, finance charges on $1,600 could quickly balloon like the federal budget.

Ed Braswell, president of the company that runs Pay1040.com, insists people aren't using his service just to forestall the agony of paying. A majority of those polled say they use it for convenience or because they just run out of time. He doesn't mention extras like frequent-flier miles, points or other rewards, but I'd bet those figure in the equation, too.

Having more than once done the 11:50 P.M. Tax Day Mad Dash, I can relate to the desire for convenience. I also understand that for folks who don't owe nearly so much, a 2.49-percent fee doesn't seem so high. But to save $40, I'd brave the post office crush again. My advice:

•If you want to pay your taxes with a credit card because you don't have the money now, check out options that don't involve average credit-card interest rates of 13 percent. And don't fall for the rewards-points come-on from credit-card companies; the value of those points gets dwarfed quickly by finance charges.

•If you have the money on hand but like the convenience of paying online, arrange to have the funds transferred electronically from your bank account. The IRS offers a free electronic funds transfer payment system (EFTPS). It's good for periodic or once-a-year payments, but isn't for last-minute filers. Enrollment is required, and can take more than 2 weeks.

•If you're really up against the wall on the evening of April 17th, find an inexpensive tax-payment service online. This year, for the first time, Braswell's company is offering incometaxpayment.com, which lets you use popular ATM, check cards and debit cards to pay taxes electronically. It doesn't require advance registration and costs a flat $2.95 per federal form.

We've not tested the $2.95 service, but the price seems right. Given the cost of gas in my neighborhood, that sum might well equal a trip to the post office plus a 39-cent stamp.

Is a Roth IRA better for young savers?

In my last post, I discussed how parents and grandparents could assist their working kids by helping them fund a 2006 IRA by the April 17 deadline. Silly me. I should have mentioned there are two flavors of IRAs to choose from: traditional and Roth. And for working young people, there are benefits to both.

With a traditional IRA, your current contribution reduces your taxable income now, but you pay later. You defer taxes on gains and withdrawals until you're ready to retire--or at least until age 59 1/2, the earliest age for penalty-free withdrawals.  Check the 2006 version of the IRS's Publication 590, "Individual Retirement Arrangements (IRAs)" for details.

The Roth IRA offers delayed gratification. You get no tax deduction with a Roth contribution, though if you meet the income and other qualifications, you'll still get the saver's credit for 2006. As with a traditional IRA, Roth investments grow tax-free. Most important, you pay no federal tax when you take the money out of a Roth IRA, presumably after it's grown substantially.

In the example I gave in my last post, a young person making $17,000 could save $909 in federal taxes by socking away $2,000 into a traditional IRA for 2006. The savings would come from reducing taxable income from the IRA, a saver's credit, and a drop in taxable income to the 10-percent bracket. That same person would owe $359 in tax by contributing to a Roth. That's because that taxable income of $17,000 wouldn't drop to $15,000, as it would with the deduction of traditional IRA investment. In addition, the taxpayer would only be eligible for a $400 saver's credit, versus $1,000 when investing in a traditional IRA.

Still, the Roth might very well be a better choice for young savers, and any parents and grandparents who want to help them out. That's because by the time those savers are ready to withdraw that money, they'll probably be in a higher tax bracket. Tax rates in general may be higher. And, if you play your cards right, the money will have grown to a big, fat sum that's free of tax. So losing a small tax benefit now may translate to much bigger savings later. See our story,  Your best retirement choices, for more details.

Help your working kids with the saver's credit

Most tax breaks seem to benefit high earners, but the Government throws a few crumbs to the little guy. The Retirement Savings Contribution Credit, aka the saver's credit, is one crumb worth digesting.

The saver's credit helps you save on your taxes if you're a low-wage earner and contribute to a retirement account. For young workers in particular, it's a good enticement to save. Funding an IRA and triggering the saver's credit also can be a way for parents and grandparents to give their working kids a leg up on the future without a direct handout.

Here's how it works: If you contribute to an IRA, 401(k), 403(b) or other qualified retirement plan, you're entitled to a saver's credit that reduces your federal taxes. Depending on your income, you'll get a credit of between 10 and 50 percent of what you contributed. The maximum saver's credit is $1,000 per person per year. It's too late to contribute to an employer's retirement plan to get a tax benefit for 2006, but you can still contribute to an IRA by April 17.

You're eligible for the 2006 saver's credit if your adjusted gross income is $25,000 or less as a single filer, $37,500 as a single head of household, or $50,000 as joint filers. There are other requirements: You can't be full-time student, you can't be used for an exemption on someone else's return, and your birth date has to be before Jan. 2, 1989. (For more, download the 2006 version of IRS Publication 590, "Invidividual Retirement Arrangements (IRAs)."

The saver's credit, together with an IRA or retirement-plan contribution, can deal a triple blow to your tax bill. The IRA deduction reduces your taxable income. It may also drop you to the 10-percent bracket from the 15-percent bracket, cutting your tax bill further. The saver's credit, subtracted from your tax, reduces what you owe even more--perhaps to zero.

Mark Luscombe, principal analyst of the tax and accounting group at CCH, a provider of tax information and software, helped me work the numbers for a single person making $17,000. Let's say you contribute $2,000 to an IRA, reducing taxable income to $15,000. Subtracting the standard deduction of $5,150 and exemption of $3,300 drops that figure to $6,550--and into the 10-percent bracket. The tax on that $6,550 is $658. Subtracting a $1,000 saver's credit from that reduces taxable income to zero. In contrast, you'd have paid $909 by doing nothing.

Of course, most folks earning $17,000 a year would find it impossible to put away $2,000. That's where a parent or grandparent can step in. They can help fund the young person's IRA, which triggers the saver's credit and the tax savings. The gift remains relatively out of reach in a retirement account, growing for the long term.

If you're funding your own IRA, take advantage of timing to reduce your outlay. File your 2006 tax return now, wait for the refund, and then use the refund to establish your 2006 IRA by the April 17 deadline. You'll have a better chance of getting that refund before April 17 if you file electronically and arrange to have your refund direct-deposited; the IRS says electronically-filed returns are generating refunds in about two weeks' time. So: 

•Decide how much you want to contribute to a 2006 IRA

•Include that figure and the saver's credit in your return

•Prepare your return electronically and file through the IRS's online Free File program

•Arrange for your refund to be direct deposited into your bank account

•Use that refund to partially or entirely fund your IRA by the April 17 deadline

•Give yourself a pat on the back, saver!

Hey folks, get your $2.2 billion here!

The IRS said today that there's an estimated $2.2 billion dollars just sitting around waiting to be claimed. And as Ed McMahon might say, it could be yours!

Are you eligible? If you didn't file your 2003 tax return yet, you could be. The IRS says lots of folks are due refunds for that year and haven't yet filed. All you have to do is file those errant forms by the last-chance deadline, April 17.

For half of those filers claiming refunds, the amount they're due is more than $611. That would buy a real nice HDTV that's well-rated by Consumer Reports. Or, for the more financially virtuous, it could pay down credit card debt or fund an IRA. Yet the IRS says some 1.8 million people have yet to file.

I'm trying to get a handle on what might keep folks from filing if they were eligible for a refund. Maybe they don't realize what they're owed. Or they don't want to spend the money or time to find out. I understand the urge. Getting all the stuff ready to do your taxes--and then doing them--has all the appeal of an afternoon at the podiatrist's.

For  a potential $611, though, I'd  turn off Rachael Ray this Saturday and spend a few hours filling out those forms, or paying someone else to do it.

And besides, if you don't get that money, it'll go right back to the Government's coffers. Just think about your money funding (fill in this blank with your version of the Government's most wasteful expenditures). Motivated now?

Clip coupons, save on tax preparation

Penny-pinchers, add this to your coupon file: A $25 coupon off tax-prep fees.

I found the coupon on the back of my Stop and Shop supermarket register tape the other day, next to an ad for a local Greek restaurant. A franchise office of Jackson Hewitt, the storefront competitor to H&R Block, is making the offer until October 15 of this year. That means it's even good for folks who need to file an extension.

When I called the local Jackson Hewitt, the manager confirmed the offer. "Say your bill from us was $150," he said. "We'd take $25 off the top." He added that at his franchise, a typical 1040 with a Schedule A for itemized deductions cost $150 to $160 to prepare.

The offer wasn't being made nationally, he said. Rather, it's up to local franchise owners to decide how to promote their businesses.

What this means for you: If you plan to use a storefront operation, ask what the office would likely charge for a return like yours. Then ask about any current promotions. You may be surprised what you find--and where you find it!