Simple Tips to Reduce Taxable Income

Just about everyone would really like to reduce his or her taxable income. Well, believe it or not, it’s actually not hard to do so, especially if you’re someone who has investments.   

The first step for reducing taxable income is to make sure that your investment accounts are varied. Ideally, you should have both tax-free and tax-deferred accounts for maximum tax benefits

This simple strategy, known as asset location, works for a variety of reasons, including the facts that:

l  You’ll enjoy lower taxes on both long-term capital gains and qualified dividend income if you have varied accounts

l  Outside of those related to your retirement account, you won’t have to report interest income or short-term capital gains as taxable unless you make an account withdrawal

l  Outside of retirement accounts, you can sell losing investments for capital losses

As you can see, having a wide variety of different types of investment/retirement accounts can really work in your favor. Of course, just going out and open a bunch of varied accounts isn’t the way to go about it if you want to receive maximum benefits.You have to be strategic and know what you’re doing!

If you need a little help with that “knowing what you’re doing part,” and, let’s face it, most of us do, don’t worry! There are skilled tax professionals/financial advisers out there who will gladly help you to make the smartest choices for your situation- choices that will help you to diversify your investment portfolio and to receive maximum rewards as a result.

How to Pay Lower Taxes in Retirement

When you think of yourself in the future, at the retirement age, how do you imagine yourself? If you’re like most people, then you probably see yourself sitting on a beach somewhere sipping a cool drink or maybe traveling the world. In any case, you probably do not like to imagine yourself paying through the nose for taxes.    

Sadly, though, paying a lot of taxes in retirement is a reality for many people. Fortunately, however,, if you plan properly and adequately for retirement, you can avoid having this become your reality.

Some tips for not getting drowned by taxes in retirement include:

l  Have diversity in your retirement accounts. Aim to have both tax-deferred accounts (think 401(k)s and IRAs), as well as after-tax savings accounts in order to receive maximum tax breaks where applicable and benefits in general.

l  Vary your itemized deductions each year or even every other year.

l  Vary your income regularly

Plan Ahead

In addition to following the useful tips listed above, be sure to do some ahead-of-time tax planning where you can. Ideally, this should include both long range tax planning and annual tax planning.

With long range tax planning, you can easily come up with a plan as to how much you can withdraw from various accounts over the years, as well as what you can expect from benefits.

Annual tax planning should be focused on just the upcoming year but will give you a chance to factor ever-changing tax rates, deductions, and other variable information into your long range planning for improved accuracy.

Get Help from a Pro

In addition to following the tips presented here, bear in mind that absolutely nothing compares to getting expert professional help from a financial adviser, planner, or other finance professional. These pros will know all the ins and outs of the industry and will be able to use their knowledge, coupled with your own and your own efforts, to help you pay as few taxes as possible in the “golden years” of your life.

Pre-tax Accounts vs. After Tax Accounts

When it comes to financial accounts, such as retirement plans, for example, there are a lot of details and a lot of jargon used to discuss these accounts. Unfortunately, if you are not familiar with these terms and phrases, it can all get to be a bit confusing and overwhelming. That’s where it really helps to have a financial professional on your side assisting you and walking you through the process.   

Even if you don’t have such help, though, one of the most important things you can learn is the difference between “pre-tax” and“after-tax” accounts. Knowing this information alone can really help you to make smart and informed choices about the accounts that you open.

Pre-Tax Accounts

To start off with, pre-tax accounts are accounts into which you can put in pre-tax funds.These include accounts like:

l  IRAs

l  Pensions

l  401(k)s

l  457 plans

l  Profit sharing accounts

l  403(b) plans

Using these types of accounts, the IRS allows you to put some untaxed money into them. There, these funds can grow undeferred, which means you won’t have to pay taxes on interest income, capital gains, or dividend income associated with the account  until you take a withdrawal.

Basically, with these types of accounts, you are “home free” until you make a withdrawal; once you have done that, you are subject to being taxed.

After-Tax Accounts

After-tax accounts are, as the name implies, accounts that are comprised of funds from which you have already paid taxes. These accounts might include:

l  Savings accounts

l  Mutual fund accounts

l  Brokerage accounts

The good news about these types of accounts is that when you “cash in” on an investment from them, you only have to pay taxes on the gain that is above the investment amount. This can actually lead to paying less in taxes, believe it or not, than having only pre-tax accounts!

While you may be leaning toward one type of account or the other, the truth is that both have their own benefits as well as their drawbacks, which is why many people actually find it smart to have a mix of both types of accounts. The best way to determine what would be the best account choices for your particular financial situation and future financial goals is to talk with a qualified tax professional.

Investments and Taxes

Investing is very important if you want to put your money to work for you. With that said, though, if you’re not careful about how you invest, you could end up paying a lot of money in taxes that are related to your investments. The good news, though, is that you don’t have to. Believe it or not, there are many ways to lower your investment-related taxes, or, in some cases, even to get rid of them altogether!    

Non-Retirement Tax-Efficient Funds

One of the smartest and simplest ways to get taxed less is by choosing your mutual funds responsibly and carefully.

To avoid paying hefty capital gains taxes and dividend distribution taxes, look into index funds or tax-managed funds.

If you’re not sure which type of fund will be the most beneficial for you and your situation, remember that you don’t have to go it alone! You can always hire a financial adviser to help you choose the best possible option.

Take Advantage of Your Tax Bracket

If you are someone who falls into a lower tax bracket, classified by the IRS as 15% or lower, you may be able to benefit from your bracket status.

People in this category often fall into the zero percent capital gains tax bracket, which means that they do not have to pay taxes on any realized capital gains.

If this applies to you- and, again, a financial adviser can help you to determine if it does or not- you basically have a “get out of jail free card” when it comes to taxes.

Delay Social Security

Finally, you may want to think about “holding out” a bit longer to start receiving social security because it’s very likely that your benefits will be taxed.

Again, situations do vary from person to person, but, in many cases, IRA withdrawals are a smarter early-retirement choice than social security.

As you can see, you do have some options for lowering your investment-related taxes or perhaps even eliminating them. These are really just a few ways in which you can do so. To discover more, speak with a financial professional.

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Can You Escape the Early Withdrawal Penalty

Having a traditional IRA is a great way to plan for your future. Unfortunately, however, if you don’t plan fully and appropriately, you may end up needing to take money out of your IRA sooner than you thought. When this happens, you may find yourself being forced to pay what is aptly known as an early withdrawal penalty tax. The good news, however, is that there are some exceptions to the rules…at least sometimes. Believe it or not, in certain situations, you may be able to get out of paying a penalty tax.          

Situation #1: You Used Your Withdrawal for Medical Expenses

To start off with, one situation in which you may qualify for a tax exemption on withdrawn IRA funds is if you used your IRA withdrawal funds to pay for medical expenses. Of course, as is always the case with the IRS, there are some stipulations involved.

In order to qualify for a tax exemption on withdrawals used for medical expenses, they must total 10% of your adjusted gross income. As long as your expenses meet this qualifier, you are in the clear!

Situation #2: You’re Disabled

Being disabled is not easy, but it may end up qualifying you for an exemption on early IRA withdrawals.

The “catch”- and isn’t there always one with the IRS?- is that you need to be able to prove that you are disabled and that, as a result of your disability, you cannot engage in any gainful activity.

Getting proof of your disability may require an additional trip to the doctor,but it’s worth it if it saves you money in the long run!

Situation #3: You’re Buying Your First Home

Guess what? If you’re trying to buy your very first home, your IRA deduction may be tax exempt. You can withdraw up to $10,000 to buy, rebuild, or build your very first home for yourself or certain qualified family members…all without paying a penalty.

As you can see, there are definitely some circumstances in which you can avoid an IRS penalty; these are just a few of those situations. The best way to determine if you could possibly qualify for a tax exemption on early IRA withdrawals is to speak with a financial professional.

Will Your Social Security Benefits Be Taxed

Modern Social Security card. (Photo credit: Wikipedia)

Receiving social security benefits is great, but be aware that, sometimes, you may have to pay taxes on as much as 85% of your social security benefits! You can find your total social security benefits on box 20a of the 1040 form, and, in the less popular box 20b, you’ll see the taxable amount of those benefits.     

The Role of Combined Income

Your combined income and its amount will play a role in determining whether or not your social security benefits will be taxable.

Just in case you are not familiar with this term, “combined income” refers to your adjusted gross income plus nontaxable interest plus half of your social security benefits. If you need help determining what things go in which category- which can get pretty tricky- remember that you can always ask a professional accountant for help!

Basically, though, if you’re a single filer with less than $25,000 in combined income or a married filer with less than $34,000 in combined income, then your social security benefits won’t be taxed (lucky you!).

If, however, you earn more than these so-called “threshold amounts,” it’s simply a matter of determining how much of your Social Security benefits will be taxed.

Typically, what you will be forced to pay will be the lowest of any of the following amounts that are applicable to you:

·         85% of your social security benefits

·         50% of your combined income over the first threshold amount, in addition to 35% of your combined income over the second threshold amount

·         50% of your social security benefits plus 85% of the combined income over the second threshold amount.

As you can probably already tell, figuring out how much you have to pay can be quite confusing! So, if you determine that you are going to be taxed, it’s a very good idea to have an accountant help you to navigate through the process and make the right choices.

Hearing from the IRS?

When it comes to hearing from the IRS, most people assume that “no news is good news.” However, just because you receive some kind of notice from the IRS does not mean that you have to panic, nor does it necessarily mean that you have been selected for an audit. So, if you happen to receive a notice from the IRS, take a deep breath and tackle the situation with a level head.   

First things first, carefully read through the letter and make sure you understand what it is telling you. There are actually many reasons that the IRS might send you a notice. Possible reasons include:

l  To inform you that you owe more taxes

l  To inform you of a larger refund coming your way

l  To request missing or extra information related to your tax return

If you are having trouble understanding your notice, you can refer to the notice number printed on it. Using this number on the IRS website, you can get more information about the type of notice that you have received. You can also show the notice to a qualified tax professional for clarification and explanation.

In most cases, you will have 30 days to respond to your IRS notice. Make sure that you do provide some kind of response within the given time frame and that you follow any instructions on the notice carefully. Again, if you’re feeling unsure about what to do, turning to a tax professional is your best bet.

Typically, as long as you feel certain that the information on the notice is accurate and correct, all you have to do is follow the instructions given. If, however, you believe the information is incorrect, you will need to get in touch with the IRS and explain your concerns, which is also something that a tax professional can help you with.

No matter what, however, make sure that you do not ignore the notice, no matter what it says. Ignoring an IRS notice will lead to more trouble and problems in the future, so, whatever you do, take action right away.

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Don't Miss Out on Deductions

Logo of the Internal Revenue Service (Photo credit: Wikipedia)

Tax deductions are one of the best ways to lower the amount of taxes you owe and to increase the amount of money that you get back. In fact, the more deductions you can legally report, the lower your taxable income will be. Unfortunately, though, many people miss out on deductions that could be saving them big…all because they simply didn’t know these deductions were available to them.

 If you don’t want to miss out on great deductions, your best bet is to hire a tax professional to assist you with preparing your returns. Of course, it also doesn’t hurt to educate yourself on deductions as well.   

Get and Examine a 1040 Form

First things first, one of the easiest ways to learn about the various deductions that you may qualify for is to get a copy of the IRS 1040 form.

On the very first page, this form will list all possible deductions that can be used to calculate adjusted gross income. Carefully read through any given information about how to determine eligibility for the deduction, and, if you are sure that you’re eligible for that particular deduction, go for it!

Deciding whether or not you are eligible for a deduction can sometimes be challenging, as can determining whether or not itemizing your deductions is a wise choice for you. It is for these reasons that many people prefer to let a tax professional help them make the big decisions.

These professionals will know for sure which deductions you qualify for and can also determine the very best way for you to file for them. Their main goal is to get maximum rewards for you, and they’re a lot more knowledgeable about how to go about this than the average person. So, while you can try to figure it all out on your own, professional financial advice is the smartest, surest way to go.

Figuring Out Your AGI

When it comes to filling out tax forms, you are typically asked a lot of questions that require a numerical answer. One of the most difficult of these questions to figure out is your “adjusted gross income,” and this is a figure that is asked for on just about every tax return you will fill out. However, this number can vary depending on the form that you are using since some forms allow for more income adjustments than others.   

Total Income

One good rule of thumb to keep in mind is that your adjusted gross income will never be higher than the total income that you report.

This is because your total income is made up of all of your annual earnings that are taxable.

Deductions

As you fill out your tax form, you will find that there are some areas in which you can qualify for deductions, and some of these deductions will actually lower your total income, which will, in turn, affected your adjusted gross income.

The deductions that are factored into your adjusted gross income are “adjustments to income” or “above the line” deductions.

You can learn about qualifying deductions by talking with a tax professional. These professionals can also help to ensure that you don’t miss a single deduction that you could possibly take.

The Impact of Your Adjusted Gross Income

Your adjusted gross income will have an impact on other deductions and credits that you can claim. For this reason, you want to take steps to legally reduce your adjusted gross income as much as possible because the lower it tends to be, the better that is for you, tax-wise.

Of course, you still have to report your adjusted gross income correctly and honestly, but, with the help of the right tax professionals, you can lower this amount to receive significant benefits.

Tracking Your Income Tax Refund

One of the hardest things about filing your taxes is waiting on your income tax refund! Fortunately, though, you don’t just have to idly wait with no clue when you’re going to get that nice little (or, if you’re really lucky, not so little) refund in the mail or in your bank account. There are things that you can do to track your refund and determine when it is going to arrive.   

Tracking your refund, like most things tax-related, is a whole lot easier if you filed your taxes electronically. However, even if you filed the old-fashioned way, by mail, there are still simple ways to determine when your refund should arrive.

Try the “Where’s My Refund?” Feature

To start off with, if you visit the official IRS website, you will find that the site offers a “Where’s my Refund?” tool that allows you to track your refund.

All that you will need in order to use this feature is your social security number, filing status, and refund amount. Using the feature, you can find out when your refund will be mailed or direct deposited and if there have been any problems or errors with processing your refund.

If you do find that there is some kind of problem with your refund, be sure to contact a tax professional to try and figure out what might have gone wrong and to rectify the problem as quickly as possible so that you can get your refund.

Give the IRS a Call

If you are having trouble using the online tool, have other questions, or just prefer to speak to a real person, be aware that you can always call the IRS directly to determine what’s going on with your refund.

With your return in hand, you can get information about your refund by calling 800-829-1954.

As you can see, you do have options for checking up on your refund and its status. By making use of these options, you can stay in the know about your refund and when it should arrive.

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IRS Penalties to Stay Clear Of

No one likes to think about being penalized by the IRS, but, unfortunately, if you’re not careful, this can happen to you very easily. All it takes is a simple mistake on your part, and you can end up paying more money to the IRS than you would have had to otherwise.  

Fortunately, though, there is a way to avoid all types of penalties, and that way is to be careful to follow all rules and guidelines set forth by the IRS, to adhere to any and all deadlines the IRS gives, and, above all else, if you know that you are unlikely to be able to meet all of the IRS’ strict requirements, making the smart choice to hire a tax professional to assist you.

If you don’t hire a professional and you aren’t capable of doing all of your taxes on your own, then you could find yourself facing one of these serious penalties.

Late Filing Penalties

One of the most common penalties that people have to pay, come tax time, is the late filing penalty, which applies if you do not file your taxes on or by April 18^th.

If, for some reason, you know that you are not going to be able to have everything filed by that date, then you need to at least file for a tax extension by that date. Not filing your taxes or filing for an extension by the appropriate date can lead to a sizable late filing penalty that can add as much as 25% to your tax bill.

Avoid this hefty penalty by knowing and remembering the filing date mentioned above and getting your return done on time.

Penalties for Math Mistakes

Obviously, not everyone is a “math whiz” or good with numbers.  Unfortunately, though, if you’re not someone who’s a math expert, then you could easily find yourself making errors on your tax returns, especially if you fill them out the old-fashioned way, i.e. by hand.

You’re much better off filing your taxes online or via an automated program that will do the math for you, or, better yet, relying on a professional. But, in any case, you need to, plain and simple, find a way to avoid mathematical errors.

If you don’t, you could find yourself paying interest on taxes that, thanks to your faulty math, you didn’t initially pay.

As you can see, it’s very easy to make a tax mistake that could lead to a penalty- these are just two of many examples. Avoid these problems and penalties by relying on a professional for help; that’s really your best bet!

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How Your Vehicle Can Earn You a Tax Credit

When you think of buying a car, you probably think about how much money it’s going to cost you. If you’re smart, though, your car purchase could actually end up saving you money in the long-run.  

When you choose to buy a vehicle that runs on electricity via a plug-in rechargeable battery, you are more than likely eligible for what is known as the qualified plug-in electric drive motor vehicle tax credit. If you do qualify for this credit, you can take advantage of it by filing form 8936.

Make Sure You Qualify

Qualifying for this great tax credit is exciting, but be aware that the requirements that must be met in order to qualify are pretty stringent. For this reason, most people find it helpful to have a tax professional assist them with determining their eligibility status, which isn’t a bad idea.

A few of the requirements that must be met include:

·         The vehicle must have been purchased after December 31, 2009

·         The purchased vehicle must be new, not used

·         The purchased vehicle must be made by a manufacturer that followed the guidelines of the Clean Air Act

·         The vehicle must have at least four wheels

·         The vehicle must have a weight rating under 14,000 pounds

·         The vehicle must be eligible to be driven on public streets/highways

·         The vehicle must have an electric motor that uses a rechargeable battery for at least four hours of capacity. 

        Once you have selected a qualifying vehicle, you can get a certificate showing the vehicle meets all requirements from the vehicle manufacturer, and, from there, it’s just a matter of filing the right paperwork and claiming your credit!

As you can see, those requirements are pretty strict so if you want to ensure that you meet them all or that a vehicle you are thinking of buying does, don’t hesitate to turn to a tax professional for help with the process.

Proving Head of Household Status

Being able to declare yourself as “head of household’ comes with many benefits as far as the IRS is concerned. However, not everyone who thinks that they qualify for this title actually does. In order to be considered as “head of household” for IRS purposes, you need to be unmarried and living with a qualified person or dependent for over half a year.   

While various types of people can be qualified as dependents by the IRS, in head of household situations, this person is usually a child, an elderly parent, or someone unable, for various reasons, to care for and support himself or herself. If you are unsure of whether or not someone qualifies as a dependent, remember that it’s always best to check with a tax adviser first before you file.

If you do qualify as head of household, you can end up enjoying many great benefits, such as a higher standard tax deduction, more eligibility for some deductions and credits, and reduced tax rates. All of the benefits involved are why the IRS often asks filers to prove their head of household status, which you can do by:

·         Proving you provide over half of the financial support for your dependent. You can prove this through bills, property tax records, and receipts for various living expenses.

·         Proving the dependent lives with you through school, medical, or other records.

If you are having trouble providing this proof, are unsure whether or not you qualify for head of household status, or have other questions or concerns, remember that you don’t have to handle all of this on your own or figure everything out yourself. After all, that is why tax professionals exist, so don’t hesitate to seek help where needed from a tax professional. In fact, doing so can make the whole process of filing and filing correctly simpler and easier!

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Let Your Tax Refund Help with Holiday Debt

No matter what holidays you celebrate, there is a very good chance that, from about November to January, you spent a little more than you should have. The good news, though, is that, if you play your cards right, there could be a nice tax refund coming for you soon- a refund that you can use to pay down some of your debts and get yourself into a better place post-holidays.   

One of the first steps toward successfully using your refund to pay down holiday-related debts is to ensure that you file your taxes as soon as you possibly can. Work with a tax professional to determine the earliest date that you can file, and then get it done! The sooner you file, the sooner you can use your refund wisely.

Consider E-Filing

In addition to filing your taxes as early as possible, you will also find it helpful to electronically file or to “e-file” your tax returns.

When you do electronic filing, all it takes is a few clicks and a little data input on your part or on the part of your accountant or other financial professional, and you can be well on your way to getting your refund!

Do Use Direct Deposit

Another simple way to ensure the speediest return possible is to choose the direct deposit method when you select how you will receive your return funds.

When you choose this option, you don’t have to wait for the IRS to get around to cutting a check and sending it to you. Instead, as soon as your return is processed and ready, it can immediately be put into your bank account, allowing you to get and (responsibly!) use your money much faster.

As you can see, there are definitely ways to get your return as soon as you possibly can, and doing so, especially with the help of a qualified financial professional, will ensure that you can use that money to pay off any overspending you may have done over the holiday.

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Using Form 1099R

Sometimes, keeping track of all of the various tax forms that exist and of which ones apply to you can be tough. However, the fact remains that there are some important forms you will likely need to know about in your lifetime, and Form 1099-R is one of them.  

This is the form that is used to report distributions of any retirement benefits, such as pensions or benefits from retirement plans. While there are some variations on this form, depending on the specifics of your situation, more often than not, the standard 1099-R form is what is used.

You will typically be given a copy of this form or one similar to it to fill out if you receive a distribution of at least $10 from a retirement plant.

Pension and Annuity Distributions

One of the most common types of retirement benefits that people receive come in the form of pension and annuity distributions. These are mostly given to retired and/or disabled employees or to the beneficiary of a deceased employee.

In most cases, the benefit amount is included in your taxable income unless after-tax contributions were made to the annuity or pension before distribution. When this happens, only some of the distribution is generally taxable.

Loans

Many people think that, when they take out a loan against their pension plan, these count as distributions. It is important to understand, however, that, in most cases, these loans have to later be repaid with interest and are not considered distributions.

You would usually only have to use Form 1099-R if, for some reason, you did not make your loan payment when you were supposed to. When this happens, the amount that you owe is then considered a distribution and may even be penalized.

As you can see, Form 1099-R and when to use it can be tricky, and there are always special circumstances and situations as well.  For that reason, if you think you have to use this form but are unsure or if you have questions about using it properly, remember that it is always best to talk these matters over with a tax professional for best results.

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Positive Life Changes Can Equal a Tax Break

It’s a brand new year, and, if you’re like most people, then you have probably committed yourself to making some big and positive changes in the year to come. Whether your resolution is to lose weight, volunteer more, to get out of debt, or anything in between, you might be surprised to learn that many of these positive changes you plan on making actually come with tax deductions attached, which is even more reason to stick to your guns and actually follow through on your resolution.  

Want to Lose Weight?

One prime example of a common new year’s resolution with benefits attached is losing weight.

If you’re determined to shed the extra flab this year, you can rest assured that,in the future, you will be likely to save on health care costs by avoiding many of the ailments, such as high blood pressure and heart disease, that affect the chronically overweight.

Furthermore, you can often deduct the costs related to approved weight loss programs, gym memberships, and other health and wellness related measures if your doctor can verify, in writing, that you need to do these types of things to benefit your health.

Finish that Degree

If your new year’s resolution is more about improving your mind than your body, don’t worry- you can still benefit!

If you are planning to attend a trade school or college in the new year, you can, in many cases, benefit from the American Opportunity Tax Credit, which can lead to some pretty awesome opportunities and savings.

Spread the Love

Maybe your new year’s resolution is to be more mindful of others. That’s a great goal and one that, ultimately, you can still benefit from yourself!

If you choose to give allowable goods or cash donations to a reputable charity, these things are fully deductible, which can lead to savings and benefits.

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Tips on Managing Self Employment Taxes

Being self-employed is a wonderful thing, mainly because it allows you to do things on your own terms and in your own time. One thing that you cannot do on your own time, however and unfortunately, is your taxes. Taxes are one of those things that, like it or not, have definite deadlines, and, since tax time is upon us, it’s important to make sure that you are properly managing and making the most of your self-employment taxes. Fortunately, there are several simple tips that, if followed, can help you to do just that.    

Know What Deductions You Can Take

Obviously, the first step in understanding and managing your deductions is knowing what they are! You should take extra care to find any and all deductions that your particular business is eligible for. And, since these do vary greatly from one type of business to the next, it’s a good idea to either do some serious research and reading and/or to speak with a tax professional who can analyze and categorize your business and let you know of all potential tax deductions that are available to you, including those that you might have overlooked in the past.

Keep Detailed Records

Once you are fully aware of all of the deductions that you can take and, even more importantly, are taking full advantage of them, then your next step is to ensure that you are properly recording and keeping detailed information on each deduction that you take advantage of.

You may want to have a card/account for business related expenses and deductions and/or a software program to help you record them (or both).

If you are not up to all of that work, then you may want to hire a professional financier to keep track of all of that information for you.

No matter how you go about it, it is crucial to record all deductions you utilize, as well as general self-employment related monetary transactions so that you will have both an easy record and easy proof of any and all information you may need for tax purposes and, if the instance arises, audit purposes.

As you can see, properly managing self-employment deductions and, for that matter, self-employment itself, is not that difficult, especially not with the right professional help, so follow these useful tips to ensure success.

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No Health Insurance, No Money

Recent legislative changes have made it so that Americans are required to have some kind of health insurance. If they do not have adequate health insurance, however, they are forced to pay sizable penalties in many cases. What do you do, however, if you don’t have health insurance and can’t afford to pay the penalty for not having it? Well, fortunately for you, there are some things you can do to make things a bit easier on yourself.     

Exemptions

One of the first things that you should be aware of is that, under the new laws, there are many exemptions (more than 30 actually!) that will keep you from having to pay the aforementioned health insurance penalty, and almost half of non-insured Americans will ultimately qualify for such an exemption. This means that, oddswise, your chances of being exempted from paying the penalty are pretty good!

Your best bet, if you want to learn about exemptions thoroughly and/or think that you may qualify for one, is to speak with a professional tax adviser to learn more about these exemptions and how they may potentially apply to you and your situation.

In fact, in some cases, such as when your income is below the IRS income filing threshold, you may not even have to apply for these exemptions in order to receive them.

The Tax Credit Option

If you ultimately find that you do not qualify for an exemption, then rest assured that this does not necessarily mean that all hope is lost. You may, instead, be able to qualify for a tax credit that can take care of or at least offset the penalty you have to pay. Examples of such credits include:

l  The Child Tax Credit

l  The American Opportunity Tax Credit

l  The Earned Income Tax Credit

The bottom line is that, no matter where you currently are in the process, a qualified tax professional can either help you to find qualifying health insurance or to potentially find a way around paying the penalty, which is why you should get in touch with a pro as soon as possible.

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What to do if your Identity is Stolen

Identity theft is a very real and very serious problem in the United States. And, sadly, one of the most common identity-theft crimes is when a scammer manages to steal and pocket another person’s income tax refund. Typically, the person who has been “had” does not find out until he or she goes to file a real return.   

While, sadly, there is not really anything you can do to 100% guarantee that this won’t happen to you or that you won’t become the victim of another type of identity theft, there are, at the very least, things you can do to prevent this kind of thing from happening, and, worst case scenario, to lessen the damage if it does.

Know the Signs of Income Tax Fraud

First and foremost, one of the best things that you can do for yourself is to educate yourself on the warning signs of income tax fraud. That way, if these warning signs do happen to crop up in your life, you will take notice, contact the IRS, and, hopefully, stop what is happening in its tracks.

Some warning signs of identity theft typically include:

l  Getting a notification/alert that more than one income tax return has been filed in your name

l  Cancellation of state and/or federal benefits for reasons you do not understand

l  You show a balance due but were not required to file a return

l  Your earned income is higher than you actually earned

l  Refund offset occurs when you were not required to file a return

l  The IRS has inaccurate information about your employer

l  You have a collections action in a year in which you were not required to file a return

If you notice any of these signs, and/or if something just seems “amiss”with your taxes, be sure to contact the IRS, as well as, ideally, a tax professional, to help you sort things out before the situation gets even messier.

If You Notice These Signs…

As mentioned, if you notice any signs of trouble, then you should act immediately.

As soon as you have verified the fact that identity theft did occur, you will want to fill out and send in form 14039, the identity theft affidavit, preferably with the help and guidance of a seasoned professional.

This will let the IRS know that you have been victimized and will start you down the right path to undoing any damage that has been done.

Remember, this process can be complex to go through, especially alone, so you are highly advised, whenever possible, to seek help from a financial professional.

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Differences in Taxable and Non-Taxable Income

When it comes to income, there are basically two different types that you should be aware of: taxable income and non-taxable income. It is important for you to understand which type of income you should declare as taxable and which type you should declare as non-taxable. Making smart decisions in this regard can help you to reduce your tax liability.    

A good general rule of thumb to follow is that any income that increases your wealth is considered to be taxable income. Also, understand that most income does not fall under the non-taxable category. That doesn’t necessarily mean, however, that you have no non-taxable income, and assuming that and just declaring everything as taxable can end up hurting you in the long run.

What is Non-Taxable Income?

As mentioned, there honestly isn’t a ton that is non-taxable. However, some things that are typically going to be non-taxable include:

l  Inheritances

l  Healthcare benefits (in most cases)

l  Gifts

l  Cash rebates

l  Bequests

l  Welfare payments

l  Adoption reimbursements

l  Money from a life insurance policy in the case of a death (in some cases)

l  Money from a qualified scholarship that is not used for room and board

What is Taxable Income?

As mentioned, anything that increases your wealth or overall “value,” monetarily speaking, is considered to be taxable income.

This can include things such as:

l  Salaries

l  Childcare fees

l  Commissions

l  Stock options, as well as their interests and dividends

l  Unemployment compensation

l  Royalty payments

l  Strike pay

l  Income from rental properties

l  Alimony

l  Income from fringe benefits

Of course, as with all things, there are some “gray areas” when it come to what is taxable and what is not.

For this reason, it is wise to have a tax/financial professional who can assist you with fully understanding the difference between the two types of income and helping you to make the best possible financial decisions for yourself. While you can figure all of this out on your own, why not make it easier and get professional assistance?

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