Questions for the Tax Lady: April 18th, 2011

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: I had $20,000 worth of credit card debt forgiven last year, and now the IRS is claiming I owe back taxes on that money. Was I supposed to include the forgiven debt on my tax return?

Answer: I hate to be the bearer of bad news, but canceled debt is considered taxable income by the IRS. Your creditor may have sent you a 1099-C, showing the forgiven debt. The IRS also receives a copy of this, and will slap you with a tax bill that can make your jaw hit the floor.

Canceled debts should be listed as income on line 21 of Form 1040.

While canceled debt that resulted from a foreclosure is exempted from your income (thanks to the Mortgage Debt Forgiveness Act), credit card debt that is forgiven is absolutely taxable.

I’m so sorry you are in this position. Your best bet at this point is to resolve your back tax debt as quickly as possible, either through an installment agreement, or if your financial situation is dire, you may be able to be placed on Not Currently Collectible status. While your debt does not go away, you will at least be protected from forced collections until your money outlook improves.

Question: Roni, I wasn't able to finish calculating my estimated tax payment. Is there any way I can get an extension? If not, is there a penalty if I don't get the payment sent to the IRS for a couple more days?

Answer: The IRS does not offer extensions for estimated tax payments. If you are late, for whatever reason, you should pay them as quickly as possible, and you should expect a penalty for underpaying your taxes. I know, it seems strange, but according to the IRS, those payments ensure you are paying enough taxes. Failure to pay by the due date means you have underpaid your tax obligation. That penalty is imposed on each underpayment for the number of days it remains unpaid.

Generally, the penalty will be imposed when you file your tax returns. Last year’s penalty for underpayment was 4% for the number of days the payment remained unpaid. So, a few days will probably not hurt too badly, but it can add up quickly. So make every effort to file on time, and start your calculations a little earlier for your June payment.

Questions for the Tax Lady: April 11th, 2011

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: Roni, is there any way to get an extension of time to file my state return? I live in California.

Answer: Oh, are you ever in luck! The California Franchise Tax Board, who is in charge of state income tax filing, automatically grants you an extension until October 17, 2011. No forms to fill out, nothing to mail in.

That said, if you owe more state income taxes than you paid, you still have to pay that by April 18^th. You can pay by online here, and you can pay by credit card, but additional fees will apply. Not sure if you owe? Check out this site to get a tax estimate. Remember, this is only for California income taxes.

Check with your own state’s taxing authority to find out whether you can get an extension of filing time as well.

Question: Is it better to use my refund to pay off credit card debt or save it for retirement?

Answer: Well, that all depends upon your financial situation. If your debt issues are causing problems, but your retirement savings are doing well, by all means, pay down debt (remember, highest interest rate debt first). On the other hand, if your debts are minimal and of the “responsible debt” variety (like student loans, or your mortgage) but your retirement savings are laughable, go ahead and use your tax refund to start investing in your future.

If you are like many people and your situation falls between these two extremes, I recommend using the rule of thirds: devote 1/3 of your refund to paying off debt, another 1/3 to saving for your future, and 1/3 to buy something you need now.

At the end of the day, there are no hard and fast rules for how you use your tax refund. It all depends upon your personal financial situation.

Questions for the Tax Lady: April 4th, 2011

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

1. I filed for bankruptcy and my debts were discharged, but I am still getting collection letters from the IRS? What should I do?

Answer: The first thing you should do is read the letters. Make sure they are referring to debts that were in fact discharged by the bankruptcy filing. Not all tax debts are dischargeable and not every chapter filing allows you to discharge tax debt. So, reread your court documents and official discharge order.

Next, make sure the letters you are receiving are actually collection letters from the IRS. The IRS sends a variety of notices, and even a bankruptcy discharge will not remove some liens. If the letter is a demand for payment, or notice of collection activity, then you need to call the IRS to figure out why you are getting these notices.

It could be that the IRS is slow to update their systems. Or, you might need to send them a copy of the discharge order. If you call the IRS and still don’t get anywhere, call your bankruptcy attorney and see if they can get to the bottom of it.

2. Roni, I owe the IRS over $22,000 this year because I withdrew from my retirement account early to prevent foreclosing on my home. Is there any way to lessen this penalty?

Answer: The IRS has some funky rules to help those in financial hardship. If you house is foreclosed, you can exclude the canceled debt income, up to $2 million. But there is no relief for people who had to cash out their investments and retirement savings to avoid foreclosure.

That being said, you do have some options for resolving your tax debt. If you have the ability to make monthly payments, you should be able to get a Streamlined Installment Agreement. If you do not have any ability to make payments, you might try to get placed on the Currently Not Collectible status. This does not remove your debt, but does give you a “tax timeout” where you will be safe from enforced collections while you are experiencing financial hardship.

Questions for the Tax Lady: March 28th, 2011

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: My ex wife let a friend of hers claim our son as a dependent on their taxes, is this legal?

YIKES! Short answer: no this is not legal. Taxpayers are only allowed to claim dependents on their taxes in very specific circumstances. According to the IRS, to claim someone as a dependent they must meet IRS tests for Qualifying Child (including their age, your relationship, where the child lives, who supports the child financially and more) or a Qualifying Relative. From the sound of it, your ex wife’s friend is not able to claim your son as a dependent.

Kids are not commodities you can lend to someone for tax purposes. To avoid the consequences of an audit and a disallowed dependent exemption, your ex wife’s friend should immediately file an amended tax return and pay the difference in tax bills.

Question: If I owe the IRS do I need to pay by check? Can I use a credit card instead?

You can absolutely pay the IRS by credit card. There are a variety of services you can use to do so (See here). Paying with a credit card can be more convenient and payments are securely completed using trusted online services. Paying with your card lets you avoid costly IRS penalties and interest (of course, on the other hand, if your credit card has a high interest rate, you might end up paying more than you would on an IRS installment agreement).

Remember, there are convenience fees for paying with plastic. Those fees can tack on a pretty penny, up to 2.35% of the total. So, be sure you understand that before you enter your information.

For more information on paying the IRS with a credit card, click here.

Questions for the Tax Lady: March 14th, 2011

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: I am a self employed architect and have not received 1099s from several clients. How should I report this income?

Answer: Great question! Too many people think that just because they didn’t receive a 1099, they don’t have to report the income. WRONG. You still have to report all income, the 1099 is simply an informational form provided by the payer. So, this is where keeping good records will save you from a world of hassle. Use your own bank records and deposited checks to determine the amount of income, and report it on your 1040 Schedule C.

Now, what happens if you receive a 1099 and you’ve already filed? First, pull out a copy of your return; see if the amounts are different from what you claimed. If the amounts are different, you should file an amended return (Form 1040X) as soon as possible. If the amounts are not different from what is shown on your tax return, then file that 1099 away, and relax.

Question: Roni, what are some of the biggest IRS audit red flags?

Answer: The IRS uses a lot of different criteria to determine who will be audited. Honestly, I think too much emphasis is placed on the concept of red flags. If you are entitled to a deduction or credit, you should claim it. If you keep proper documentation, you really should have nothing to fear, even in the face of an audit.

Now, that being said, you should be aware of items that are under close IRS scrutiny. Here are just a few things that the IRS keeps a close eye on:

• First Time Home Buyers credit – If you claimed this tax credit, you can be sure the IRS will be going through your return with a fine-toothed comb.
• Earned Income Tax Credit – This credit is one of the most under claimed and abused at the same time. That abuse means that anyone claiming the EITC should be ready to verify their tax information, should the IRS ask.
• Self Employment income – yes, the IRS loves to audit entrepreneurs and small business owners. This group has historically had trouble properly reporting income and over claiming expenses. Now, we all bear the burden of intense IRS scrutiny.
• Claiming higher than the norm in tax breaks – the IRS has a lot of information about how much most people claim in deductions and credits based on income levels. So, if your amounts are higher than the norm, they will likely be asking to see your receipts.
• Big incomes – people earning more than six figures have an increased likelihood of audits. Big incomes allow people more resources to hide assets. (not that all rich people are tax evaders. Far from it. But, remember the UBS scandal?) So the IRS takes a special interest in wealthy folks’ taxes.

Remember, you should never let fear of an audit keep you from claiming your rightful tax breaks. There is nothing you can do to prevent an audit, and even avoiding heavily scrutinized tax items will not inoculate you. Just be honest in your IRS dealings, keep immaculate records, and when in doubt, ask for a second opinion on your taxes.

Questions for the Tax Lady: March 9th, 2011

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: Roni, I saw your press release last week on advice for celebrities on how to avoid tax debt problems. Do you have any simple tips for those of us not living in Hollywood?

Answer: Of course! While my tips for celebs certainly apply to everyone, there are so many tax tips for John Q Public. Here are my favorite tips to avoid trouble with the IRS:

1. Pay your taxes. Whether you are a W-2 employee, an independent contractor, or a business owner, you have to pay taxes. If you are an employee, make sure you are withholding enough from your paycheck to pay Uncle Sam. If you are an independent contractor or business owner, make sure you are making your quarterly estimated tax payments. This simple tip would save thousands of people a year from tax trouble.
2. If you aren’t sure about something on your taxes, ask for help! Too many people claim tax breaks that they aren’t entirely sure about, and you know what? The IRS figures it out. It might take a while, but they will eventually notice and when they do, it’s going to be unpleasant.
3. Double check your tax return. I cannot tell you how many people wind up with tax troubles because of careless errors on their tax returns. A math error, transposing digits, sloppy documentation… any of these things can cause your tax return to be incorrect, and can leave you with a nasty tax debt.

2. If I file an automatic extension with the IRS today will it give me six more months to file my return from today or six months from April?

Answer: Every taxpayer is entitled to a six month extension. You must file the extension before April 18 (remember, because of a Washington DC holiday, you get three more days to file this year!), but regardless of when you filed the extension, your new tax filing deadline will be October 18.

Quick reminder, a filing extension is not an extension of time to PAY. If you know you will owe when you file, you are still required to make that payment by April 18.

Questions for the Tax Lady: February 21st, 2011

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: The IRS is taking $50 per month out of my pay check. They've been doing it for over a year, how can I get them to stop?

Answer: What you are experiencing is an IRS wage garnishment. Just one of the collection methods the IRS uses to collect on unpaid tax debts. There are a couple of ways to get the garnishment removed:

1. Pay the entire balance of your tax debts in full.
2. Negotiate an installment agreement with the IRS. This allows you to pay your debt in manageable monthly payments, instead of forced collections.
3. Show the IRS you have a hardship and cannot afford to repay your debts at all, right now. This involves divulging your finances and bills to the IRS so they can see - in black and white - that you simply cannot afford to pay your debt right now.

If you don’t take some action, the IRS will keep garnishing your wages until your debt, with penalty and interest, is completely paid off. My recommendation: talk to a tax professional and get this handled ASAP!

Question: If I refinance a mortgage on a building and then pay it off, does the depreciation on the building continue?

Answer: The short answer is: YES. I have to assume this is a business-related building, not a personal use, or you wouldn’t be depreciating it, right? The depreciation should continue until you sell the property or take it out of use.

Additionally, the refinance costs may actually add to the amount you can depreciate. If your refinance included non-deductible fees and expenses, talk to your tax professional about how they can be depreciated.

Questions for the Tax Lady: February 14th, 2011

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: I'm thinking about moving to Pakistan for a new job opportunity, and I've been told that my wages will not be subject to federal taxes. Is that true?

Answer: This is a really common misperception. According to the IRS, “United States citizens and resident aliens are taxed on their worldwide income, whether the person lives inside or outside the United States.”

Now, that being said, some people may qualify for a Foreign Earned Income Exclusion. There are very specific rules to qualify, with all the normal IRS confusion. In order to avoid paying federal income taxes on your foreign earned income, you must:

• Have a foreign earned income (meaning your money must actually be earned and received for working in a foreign country);
• Have a tax home in a foreign country (meaning, the general area of your main place of business, employment or post of duty, regardless of where your family home is); and
• Meet the bona fide residence test or the physical presence test

As you can see, it is not as simple as just moving to a different country. There are a lot of rules and regulations, and you will likely still have to pay taxes in the country you move to. If you are seriously considering moving to a new country, speak with a qualified tax and finance professional, who is well versed in international tax laws. Relocating to a new country can be an exciting and rewarding experience, just don’t do it only for the hope of a tax break.

Question: Roni, I got divorced in October, will we still need to file a joint return since we were married for most of the year?

Answer: The way the IRS sees it, whatever your marital status as on December 31, that’s your marital status for the entire year. Since it sounds like your divorce was finalized in October, you would file single, or head of household if you qualify.

I’d like to add a word of caution: since you may have had some joint expenses and combined finances during 2010, I would highly recommend you work with a qualified tax professional to file your 2010 tax return. Splitting finances equitably after a divorce is difficult, so the guidance of a professional can be incredibly helpful.

Best of luck to you in your new life, and here’s wishing you a stress-free tax season!

Questions for the Tax Lady: February 7th, 2011

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: Roni, I had a local CPA prepare my tax return a few years ago, and I just got a notice from the IRS that I owe more money from that year. What should I do?

Answer: Isn’t that one of the most heart stopping letters you’ll ever receive? Upon receiving an IRS notice, the first thing you should do is read the entire thing. Double check Social Security numbers, verify that the issues the IRS is reviewing are accurate; mistakes do happen so your first order of business is to make sure the IRS has the right person, and the right information. Take special care to notice due dates, write them on your calendar, circle them in red; do whatever you need to do to commit these deadlines to memory.

Second, call the CPA who helped you prepare your return that year. Ask them to review the letter, and the tax return for the year in question. Remember, tax laws are subjective, so even if the CPA did everything correctly, the IRS can still see things differently. Many tax professionals will stand by their work and help you put together an answer for the IRS. Whenever the IRS sends a letter adjusting a tax return, you have two options, agree to their adjustment and pay the difference via check or a resolution method, or you can disagree with the adjustment and write a letter showing why the adjustment is incorrect. Which option you take is up to you and your tax professional.

Third, call the IRS. You do not have to agree to the amounts owed, or settle on a debt resolution method at this point. You simply want to get on the same page, let the IRS know that you received the notice, and that you are being proactive in dealing with it. Use this time to verify the amounts shown on the notice, let them know that you are working with your tax professional and will be working toward a solution promptly.

Fourth, you must follow through. Whatever you choose to do, dispute the adjustment, set up an alternate resolution method like an installment agreement, or just write a check, do so within the IRS deadlines. If you fail to respond, the IRS will simply begin enforced collections; unpleasant, to say the least.

Question: What is the difference between an IRS Installment Agreement, and a Streamlined Installment Agreement?

Answer: A Streamlined Installment Agreement is actually a type of IRS Installment Agreement. Both involve paying off your tax debt in monthly chunks, including penalties and interest. There are some differences, however.

If a person owes less than $25,000 and the debt was assessed within the last five years, he or she may be eligible for a Streamlined Installment Agreement. Why is this a good thing? This method of tax debt resolution does not require you to disclose all your personal financial information to the IRS. The monthly payment amounts are based on how much you owe, and the process is generally much faster. You will pay the entire tax liability, including interest and penalties within 5 years. So, on the plus side, you get your debt paid entirely off within five years, and you don’t have to spend months arguing with the IRS about your income and expenses. However, this might mean some large monthly payments to the IRS.

On the other hand, general Installment Agreements do not have a cap for how much you owe, but you will have to disclose your income and expenses to the IRS. The reason: your payments will be based on how much you can pay each month. The IRS will review your monthly income, and your allowable expenses (including housing, groceries, and medical costs but not credit card payments) and whatever is left over from those IRS recognized expenses will be how much you must pay each month. Yes, those payments can be very high. However, since tax debts have an expiration date – generally 10 years after they are first assessed – you may not have to pay off the entire balance; just keep making those monthly payments until the debts expire.

Questions for the Tax Lady: January 31st, 2011

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: Roni, is it worth it to hire someone to prepare my return? I usually file on my own, but I bought a house in 2010 and since I'm probably going to itemize I was thinking about getting professional help. Do you have any advice on finding a good tax person?

Answer: The tax system was designed so that everyone can prepare and file their tax returns, all by themselves. The reality is our tax system has grown so complex that the vast majority of taxpayers either hire a tax professional, or use guided tax software to prepare their tax returns. The IRS estimates that fewer than 20% of taxpayers actually do their taxes by themselves. In fact, the commissioner of the IRS, Doug Shulman, uses a tax professional to prepare his taxes.

I would absolutely recommend you use a tax professional to ensure you prepare your taxes properly, and to make sure you claim every single deduction and credit you have coming. This is especially important when something in your life changes, like buying a new home.

The best advice I have for finding a good tax professional:

• Get recommendations! Don’t just blindly pick someone out of the phone book. Ask your friends, coworkers, business associates who they use, and whether they would recommend them.
• Cheapest/Most Expensive are not always the best. Bargain hunting can be a bad idea when it comes to taxes. On the other hand, just because someone charges you a lot, does not mean they are the best. Focus less on how much they charge, and more on their expertise and experience.
• Find someone who is available year round. Remember, tax issues spring up all year long, not just during tax season. This is why having a tax professional who is available in July is absolutely crucial.
• Your tax professional should have a lot of questions for you. They need to know about every aspect of your life: how many kids you have, how old they are, are they in daycare, are they in college, where you keep your money, if you’ve done any home repairs this year…. The list goes on and on. If your preparer does not have dozens of questions for you, they might not be getting the right information to help get you the maximum tax savings.
• Don’t Rush! Interview a few tax professionals before you hire one. Give yourself plenty of time to find the right tax professional, one who will take the time to answer your questions, and who you feel comfortable with. This person will know a lot about you, at the end of the day, so it’s absolutely necessary that you feel good about the person who holds the keys to your tax return.

Question: My husband and I just had a baby, and are already thinking about his education. What are the tax benefits of starting a college saving account for my new son?

Answer: First of all, Congratulations! Is there anything more incredible than holding a brand new baby? I can’t think of one. Second of all, good for you! With tuitions rising sky high, now is absolutely the time to start saving for Junior’s college. The good news is, if you put your money in a tax-friendly college savings account, you’ll be more than prepared by the time the tuition bills roll in.

There are a handful of different kinds of college savings vehicles (e.g., 529b plans, Coverdell Savings, etc), each one has slightly different rules, but for the most part, they function similarly. You contribute your after-tax dollars to the account. Any earnings from the account are tax-free, so long as the funds are spent on qualified school expenses, such as tuition, housing, school fees, etc.

This is a better deal than just socking the money into a standard savings account. In a savings account, or a mutual fund, you would be on the hook for taxes on the gains. Over 18 years, and potentially thousands in gains, this can add up to a hefty tax bill.

Your best bet is to speak with your financial advisor to see which college savings vehicle is the best option for you, your family and your kid.

Questions for the Tax Lady: January 24th, 2011

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: Roni, do I need to have my W-2 to file my tax return? I still have not yet received mine, what should I do if it never comes?

Answer: Employers generally have until January 31 to give you the W-2. If your W-2 is mailed to you, you might be waiting a week or two longer. If mid-February rolls around and you still don’t have your W-2, call your employer, see if there’s been a delay, or if they have a bad address for you.

If February 16 arrives and you still don’t have your W-2, call the IRS at 800-829-1040. They will ask you for:

• your employer’s name and complete address,
• employer ID number,
• employer’s phone number,
• your contact and taxpayer ID info, and finally
• estimated wage amounts and federal income taxes withheld during the year.

All this information can be found on your paystubs, your best bet is to use the last paystub from 2010.

The IRS will use this information to prepare a Form 4852 Substitute for Missing Form W-2. You can use this form to complete your tax returns. This may delay the processing of your return for a bit, but will save you from the horrors of not having the proper documentation should the IRS request it. Remember, you have until April 18 to file your tax return this year.

Question: If I owe the IRS, do I have to mail them a check? Can I pay electronically using a credit card?

Answer: When you make tax payments, you can absolutely pay by credit card. The IRS uses a number of services to process credit and debit card payments. You can find all the options here. Fair warning: paying by credit or debit card involves fees. Debit card fees go up to $3.95 per transaction, and credit card convenience fees go up to 2.35% of the total amount being paid. Yes, that can be expensive, so consider whether the convenience of paying online is worth the extra expense.

If those fees have you running scared, consider this: those fees are still much less than late payment penalties. So, for those occasions when your options are: pay late, or pay online, take the hit and pay those convenience fees.

Questions for the Tax Lady: January 5th, 2011

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: When is the earliest that I can file my tax return with the IRS?

I love that you want to get a jump on filing your taxes. In theory, you can file your taxes as soon as you receive all your W-2s, 1099s, or other tax-related documents. However, this filing season you might have to wait until mid-February to file. Congress waited until the very last minute to pass the “tax compromise” which means the IRS is still scrambling to update the tax forms and processing systems. So, who will have to wait?

1. Taxpayers who itemize deductions on Schedule A.
2. Taxpayers who claim the Higher Education Tuition and Fees Deduction.
3. Taxpayers claiming the Educator Expenses Deduction.

In addition to the delays, the IRS is urging anyone who falls into any of the three categories above to file electronically. With all the changes to the forms, filing electronically will ensure you file the updated versions of the forms and help you detect any mistakes before you file. No specific date has been given yet, but the IRS should announce it shortly.

So, if you claim the standard deduction and do not plan to claim the tuition and fees deduction, or the educator expenses deduction, you are free to file as soon as you receive all your tax information. Otherwise, you can spend the next month and a half getting organized so filing will be a snap!

Question: I am currently on a payment plan with the IRS, but my income has been reduced significantly over the past few months. Is it possible for me to renegotiate with the IRS to lower my monthly payment?

I commend you for getting out ahead of your financial issues, instead of waiting until you default on your installment agreement with the IRS.

Most IRS tax debt programs are based on your financial situation right now. So, when you income declines or you lose a job, you may be able to negotiate a lower payment. Your first step is to call the IRS (800-829-1040) as soon as you think you have a problem.

You will probably have to provide documentation for your decreased income, such as your W-2s or an updated profit and loss statement for your business. So, gather your documents and call the IRS. And good luck on getting a little relief in this still-shaky economy.

Questions for the Tax Lady: December 20th, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: I bought a home in 2008 and took advantage of a $7,500 incentive. I recently got a letter saying the money was a 0% interest loan from the government and that I must pay back $500 per year. I can barely pay my bills and have to get food from the good bank. Is there any way to get this lowered or removed?

Answer: You are in good company. Many people who received the First-time Homebuyer Credit in 2008 did not realize they were going to have to pay back the credit. Unfortunately, there really isn’t a work around. Since the IRS considered this an interest-free loan, they will come collecting.

Your best bet is to increase your income tax withholding by $42 a month. I know times are tough, but trust me, $42 a month is a lot less than the interest and penalties that would result from failure to pay back the credit.


Question: Since Obama signed the tax cut deal, does that mean my tax rate is going down next year?

Answer: Isn’t that the question of the week? Everyone is desperately trying to figure out what the tax deal means for them. Here’s the basic breakdown:

The short answer is no, your tax rate will not change. This means your official marginal tax rate will be the same that it was last year. That being said, there are other changes to the tax laws that might affect your overall tax liabilities. The most obvious example is the payroll tax deduction.

The Making Work Pay Tax Credit is gone, however, the tax deal reduced Social Security tax withholding by about 2%, so you might get a better tax break in the long run. If you earn $40,000, you’ll end up saving $800 in payroll taxes.

Questions for the Tax Lady: December 13th, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: I have a tax debt stemming from 1997, and a failed Offer in Compromise attempt from 2005. Will attempting to resolve my tax problems extend the IRS' 10 year statute of limitations on the original tax debt?

Answer: Good question. The first thing you should do is check when the statute of limitation or CSED deadline is. Most tax debts will expire 10 years from the date of assessment, so you might be entirely off the hook. However, it is very important for you to find out how much time was tacked on to the liability during the Offer in Compromise process.

When your previous attempt at getting an Offer in Compromise was pending, the statute of limitations clock stopped running. So, if the IRS was reviewing your offer for 6 months, your statute of limitations would be extended by 6 months.

If your debt still hasn’t expired, then you should look at how to resolve your debts. Installment agreements and being placed on Currently Not Collectible status generally will have no affect on the statute of limitations.

Question: I got a letter from the IRS notifying me that I was selected for an examination. If I ignore the notification will the IRS keep trying to contact me? Is it possible they might forget about my account?

Answer: The worst thing you can do with any notice from the IRS is ignore it. Once you get notice that you are being examined (that means you’re being audited, by the way) the IRS will NOT forget about you. They will send a few more letters, then they will start calling and it only gets worse from there. Ignoring the notice could lead to some pretty nasty consequences, like the auditor hunting you down at your job when you fail to respond.

Your best bet is to read the notice, call your tax professional and follow the directions in the notice. Be especially mindful of any due dates; if the notice states they need to see your documentation by December 22, they are not kidding. Many examinations are pretty simple. If you get proactive and tackle the issue head on, you have a better chance of nipping this problem in the bud.

Questions for the Tax Lady: December 6th, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: Question: If I owe the IRS, can they place a levy on my husbands wages?

Answer: Good question. If you file jointly, it is possible that the IRS would come after your husband’s wages to cover your debt. When you file a joint tax return with your husband the IRS goes by the concept of “joint and severable liability”. Which means you can both be subject to collections for unpaid debts.

Now, there are things you can do to avoid this situation. First, if you have an existing tax debt, tell your spouse. Second, don’t file a joint tax return. This should go a long way toward keeping your debt from affecting your husband’s taxes.

Another issue you might discover, if you file jointly, is that the IRS may keep your husbands tax refund to pay your tax debt.

Question: Is it true that making an extra mortgage payment before the end of this month can help lower my tax liability?

Answer: Absolutely! Prepaying deductible expenses, like mortgage interest, is a great way to reduce your tax burden. Just a few things to remember: All payments must be made by December 31, 2010. You should also be aware that the Form 1098 your mortgage lender sends you may not show the early payment. You can still deduct it, you’ll just have to make sure you hang on to receipts and canceled checks as backup documentation. And finally, no double dipping! That early payment cannot be deducted on the following year’s tax return if you use it on this year’s, so plan accordingly.

Questions for the Tax Lady: December 1st, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: If Congress fails to pass any legislation, what will happen to the estate tax next year?

Answer: This question is haunting people all over the country. When the Bush Tax Cuts were enacted, the plan was to phase them out over a number of years, and then have a one-year repeal. The way the law is written, the estate tax will return to pre-2001 levels. Meaning estates valued over $1 million dollars are subject to a top rate of 55%. This is only if Congress does not take any action at all.

How likely is this? At this point, who can say? Several different plans are circulating through the halls of Congress right now, but it’s anyone’s guess what actually sticks.

Question: I saw in the news that the IRS announced they have a lot of money in undeliverable refunds? How do I find out if the IRS owes me a check?

Answer: Good question! Every year, millions of dollars in refund checks are returned to the IRS, usually due to a bad address. The good news is that, so long as you figure out that your refund is missing within 3 years of its issue, the IRS will issue you a new check. Visit www.IRS.gov and look at the “Where’s My Refund” page (http://www.irs.gov/individuals/article/0,,id=96596,00.html). You’ll need to enter in your Social Security or Individual Taxpayer Identification Number, your filing status, and the exact whole dollar amount of your refund (which should be displayed on line 72 of your Form 1040). It’s free, it’s quick and the best part, it could put hundreds more dollars in your pocket!

Questions for the Tax Lady: November 23rd, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: Roni, can I deduct all of my gambling losses on my tax return?

Answer: Unfortunately, the answer is no. You are allowed to deduct gambling losses on your tax return, but only to offset the amount of gambling winnings you report.

For example, if you report $2,000 in gambling winnings (as miscellaneous income on your tax return), you could only deduct up to $2,000 in gambling losses.

Question: I keep hearing about the expiring Bush tax cuts in the news, and how Congress still hasn't voted on them. How late into the year will we have to wait before we find out if the tax rates are going to change next year or not?

Answer: Get ready to wait some more! Congress has now said they will not vote until “after Thanksgiving.” How long after that, no one is sure. It could be their first order of business, or their last before the Winter break. I do think that no matter when they start discussing, they’re going to be arguing for quite a while.

The worst part is that no matter what is decided, you will likely see more taxes being withheld from your paychecks for the first part of 2011. The reason is the IRS has to print and distribute the tax charts to employers. Printing and distributing take time. So, the tax withholding charts had to be made as the laws are written right now: all cuts expire. Oh, you’ll get the money back, but in the meantime it will be confusing quagmire.