The Internal Revenue Service is warning taxpayers that 2015 could be a tough year to get the tax help you need. IRS Commissioner John Koskinen recently pointed to budget cuts for the federal tax agency that could result in operational shutdowns and furloughs, poor telephone customer service, and delays in return processing and refund payments. National Taxpayer Advocate Nina Olson characterized the cutbacks as telling “millions of taxpayers who seek help each year, in essence, ‘We’re sorry. You’re on your own.'”
Yet just because the IRS won’t necessarily be the perfect resource to get the tax help you need doesn’t mean that you have to go without assistance entirely. For many taxpayers, other sources of help in tax preparation can give you a much better experience.
Let’s take a look at three ways to bypass the IRS to get high-quality help.
1. Get Free Help from Volunteer Income Tax Assistance
T he Volunteer Income Tax Assistance program offers help in preparing and electronically filing tax returns. If you have a disability, are elderly, have limited understanding of the English language or make $53,000 or less in income, then you can typically qualify to participate in VITA. Volunteers are IRS-certified to be able to provide basic help and tax-return preparation, and at many locations, you can get help with more difficult issues. Find a local location via this IRS website: http://irs.treasury.gov/freetaxprep/ or by calling 800-906-9887.
To participate, bring photo ID along with your Social Security number, date of birth, copies of your previous year’s tax returns,and any W-2s showing your work income and 1099s or other forms showing interest and dividends or other types of income. To take advantage of direct deposit options, you’ll also want to have your bank account and routing numbers handy.
2. 60 or Older? Get Free Help Tailored to Your Needs
The Tax Counseling for the Elderly program is designed to provide free tax help with an emphasis toward serving people who are 60 or older. TCE volunteers tend to be retired themselves and are IRS-certified to offer help on questions about pensions, retirement-account distributions and other retirement-related issues that those over 60 most commonly face.
The majority of TCE sites are administered by the AARP Foundation’s Tax-Aide program, which has operated for more than 45 years and helped nearly 50 million taxpayers nationwide. To find an AARP-administered site, go to this AARP website: http://www.aarp.org/applications/VMISLocator/searchTaxAideLocations.action or call 888-227-7669. You can also use the same IRS links and phone number listed above for the VITA program to find a list of TCE sites as well.
3. Use IRS Free File
The Free File program is a partnership between the IRS and various private companies that make software for tax preparation. Free File offers two different services depending on your income. If you made $60,000 or less in adjusted gross income in 2014, then you qualify for complete tax-preparation services for free. With your choice of several preparation programs, you’ll get guidance throughout the preparation and filing process, with electronic filing at no extra charge. For those who make more than $60,000, tax preparation software isn’t free, but you can still use the program’s fillable forms, which will help you by automatically doing the math for the figures you enter.
The documents you’ll need for Free File are similar to those for VITA and TCE, but the benefit is that you can use your own computer without leaving your home. For more information, check out the IRS Free File website: http://freefile.irs.gov/
Just less than one in three taxpayers claim itemized deductions on their tax returns, with the vast majority choosing instead simply to take the standard deduction, according to the latest available IRS figures, from the 2012 tax year. Yet that still means that more than 46 million returns include itemized-deduction statements, and the figures reveal the several key deductions that more Americans rely on than any other tax breaks available. Let’s take a look at the five most popular tax deductions and whether you can qualify for them.
5. Tax Preparation Fees
More than 21.7 million taxpayers claimed itemized deductions for tax preparation fees. The total deductions claimed totaled up to $7.2 billion, or an average of about $330 per taxpayer.
That number might seem low, especially given how many people need to get tax help. Yet the thing to remember is that your ability to deduct tax preparation fees and other miscellaneous deductions is limited. Unless those deductions add up to more than 2 percent of your adjusted gross income, you can’t deduct a penny — and even if the amount is greater, you can only deduct whatever the excess is over that 2 percent figure. As a result, despite its popularity, many people who pay for tax preparation find themselves unable to take advantage of this deduction.
4. Home Mortgage Interest
One of the most important deductions available to homeowners is the mortgage interest deduction, which allows you to write off the interest portion of your mortgage payments on your tax return. More than 34.3 million taxpayers reported mortgage interest on which their lenders had provided information, and another 1.2 million deducted interest despite having no documentation from their lenders. The total amount claimed was the highest of any deduction, with taxpayers writing off more than $326 billion.
Interestingly, that figure comes even as mortgage rates remain near record lows. In past years, when mortgage rates were higher, the mortgage interest deduction was an even more important part of reducing your tax liability. Some have called for a limit to the mortgage interest deduction, but given the policy interest in encouraging homeownership, it would take draconian measures to get rid of this highly popular deduction.
3. Gifts to Charity
Americans are well known for their charitable giving, and more than 37.3 million taxpayers deducted a total of nearly $200 billion. More than 90 percent of the taxpayers who claimed charitable deductions listed cash gifts, while 60 percent made gifts other than by cash or check, which includes donations of things like clothes or vehicles. Gifts of cash and checks made up about three-quarters of the total value of the charitable donations, but that still leaves a substantial amount for non-cash gifts. Many nonprofit organizations rely on the tax breaks from charitable giving to spur donations, and that makes it a popular tax break not just for taxpayers but also for charities as well.
2. Property Taxes on Real Estate
Moving back to homeowners, not every property has a mortgage, but just about every piece of real estate carries taxes. That led 39.2 million taxpayers to deduct their real-estate taxes, with total deductions amounting to $173.3 billion.
Taxpayers are allowed to deduct real estate taxes on any property owned, including not only your primary residence but also vacation homes and even open land in your possession. Note that your deduction is based on the amount you actually pay in any given year, so in some cases, paying taxes earlier than they’re due can actually boost your deductions in one year at the expense of reducing them in other years. That strategy can help you take advantage of the standard deduction and boost your overall write-offs half the time.
1. State and Local Income and Sales Taxes
The most-often-taken deduction is for state and local income and sales taxes. About 43.9 million taxpayers, or 95 percent of all those who file for itemized deductions, took this deduction, amounting to a total of nearly $300 billion.
Historically, taxpayers used to be able to deduct only state and local income taxes. But in part due to the efforts of lawmakers in states that impose no income tax, the rules changed to allow taxpayers to choose to deduct sales taxes instead of income tax. Still, even though a quarter of all returns claim sales tax deductions, the amounts involved heavily favor the income-tax side, with total deducted amounts of $283 billion for state and local income taxes versus just $16.5 billion for sales taxes.
“The IRS recognizes the first return submitted under a Social Security number, and usually the identity theft is identified when the second return is filed” under that same number, said Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting, US.
Another clue might be an IRS notice saying you have unreported income. That could happen if someone steals your Social Security number and gives it to an employer to avoid being taxed on earned wages. You get the tax bill instead.
Identity theft could lead to long delays in getting your refund or bigger tax bills for unreported income. “Tax refund fraud associated with identity theft continues to be an evolving threat, one that imposes a serious financial and emotional toll on honest taxpayers and threatens the integrity of the tax administration system,” the Government Accountability Office said in a report in August.
236,000 Returns Linked to Identity Theft in 2014
More than 236,000 tax returns processed last year were deemed fraudulent because of identity theft, and nearly $1.2 billion in refunds from those fraudulent returns were blocked, according to the Treasury Inspector General for Tax Administration. The number of identity-theft returns is down significantly from 2012, and the IG said in a report last fall that new filters the IRS put in place to identify the crime may be responsible.
“The IRS is investing in that area,” said Bob Meighan, vice president of consumer advocacy for TurboTax (INTU). “People have to have confidence that the returns that they file are protected and secure,” he said.
The IRS is providing identity-theft victims with a personal identification number to prove who they are when filing tax returns. In 2014, more than 1.2 million of these identity-protection PINs were issued, up from 770,000 the previous year. The agency also has more than doubled the number of workers assigned to identity theft cases since 2011, to about 3,000 in 2014, according to the GAO.
Beginning this year, the number of refunds direct-deposited to a single account is limited to three, another attempt to reduce identity theft. “The fourth and subsequent refunds automatically will convert to a paper refund check and be mailed to the taxpayer,” the IRS said.
National Taxpayer Advocate Nina Olson wants the agency to do more. She has called identity theft “an invasive crime that can have a traumatic emotional impact.” She said early last year that she has called on the IRS to designate a single point of contact, someone who can provide “sensitive, holistic assistance” to an identity-theft victim.
What You Should Do
Kathy Pickering, executive director of the Tax Institute at H&R Block, says prevention is the best defense. Don’t give out your Social Security number or your date of birth, she says.
The IRS also advises people to protect their personal computers and Internet accounts, check their credit reports and avoid giving out personal information over the phone, especially if you didn’t initiate the call.
And beware of phishing attempts — online or over the phone — that seek access to your personal information. “The IRS does not initiate contact with taxpayers by email to request personal or financial information,” the agency said. “This includes any type of electronic communication, such as text messages and social media channels.”
If you get a notice from the IRS that leads you to believe you are an identity-theft victim, the IRS says you should respond immediately. The first step, the agency says, is to complete and submit an Identity Theft Affadavit, Form 14039 at http://www.irs.gov. If the issue remains unresolved, taxpayers should contact the Identity Protection Specialized Unit at 800-908-4490.
WASHINGTON — Many taxpayers can rest easier knowing that Congress extended a series of tax breaks for individuals and businesses before adjourning in December.
But the effects will be short-lived. The extension only lasted until the end of 2014. The new Congress that took office Jan. 6 will have to decide once again whether to renew them. Going forward, the tax breaks may not be around. “Don’t rely on them,” said Mark Luscombe, principal tax analyst for Wolters Kluwer Tax & Accounting US.
Credits and Deductions
For the 2014 tax year, Kathy Pickering, executive director of the Tax Institute at H&R Block (HRB), estimates that one in six taxpayers will be affected by the extenders. They include college students and their parents; homeowners; residents of states without income tax, and more. Those who qualify could see larger refunds, or a smaller tax bill. Credits directly reduce the amount of taxes owed. Deductions reduce the income on which taxes are computed.
For individuals, the tax extenders are linked to expenses you’re likely to have, tax break or not, said Bob Meighan, vice president for consumer advocacy at TurboTax (INTU).
Live in a state that doesn’t have an income tax? If you itemize, the congressional extension means you can take a deduction for sales tax.
Are you and your child struggling with the high cost of college? The tax extenders bill passed by Congress includes the $4,000 above-the line deduction for tuition and fees. Above-the-line deductions reduce adjusted gross income, which is used to calculate eligibility for many tax breaks, including the tuition and fees deduction. This is only one of many tax breaks for higher education. Among the others: the lifetime learning credit or the American Opportunity Credit.
“Though income levels differ for each of these three benefits and people should see which one works best, the trend in recent years has heavily been toward the credits,” said Internal Revenue Service spokesman Eric Smith. The extenders also include an above-the-line deduction for schoolteachers in kindergarten through high school who spend their own money on books and supplies for the classroom. They can deduct up to $250 for this expense.
Help for Homeowners
There’s help, too, for homeowners — and those who fell behind on mortgages. Was your house underwater and some of your mortgage debt was forgiven? As a result of the congressional action, that forgiven debt will often not be counted as taxable income. Were you required by your lender to purchase mortgage insurance? One extender will allow you to deduct the cost of those premiums. The credit of up to $500 for making environmentally friendly improvements to your home also was renewed for 2014. Among the things covered: energy-efficient heating or air conditioning, new windows and insulation.
If you’re 70½ or older and required to take a minimum distribution from your retirement accounts, the extenders allowed you to do this tax-free, by rolling it over directly to a charity. But you would have had to do that before Dec. 31 to avoid having the distribution counted as income and taxed as such.
In some previous years, when the tax breaks were extended late in the year, Congress included a special provision that allowed distributions made in January to qualify, the IRS said. There was no such rule this year.
Increasingly, these extenders have only been enacted for a single year. Luscombe says that’s because some in Congress believe they should be discussed as part of “fundamental tax reform.” And that could mean a push for lower individual rates in exchange for giving up some credits and deductions. Politically, that might be difficult for people who are fond of their tax breaks,” he said.
Tax Hacks 2015 : Avoid These 10 Common Filing Mistakes
It’s time. Your W-2s and 1099s are likely making their way to your mailbox or inbox right now, assuming they haven’t already arrived.
As you start filling in your tax forms, be aware that a mistake can cost you valuable time or money. Money Talks News finance expert Stacy Johnson spoke with Tom Sawyer, a CPA with Sawyer & Latimer in Fort Lauderdale, Florida, to uncover some of the most common tax-time mistakes.
Mistake No. 1: Paying for tax preparation when you could get it for free –
The first mistake some people make is paying someone else to do their taxes. Depending on your income level, you may have more than one option when it comes to getting free tax prep services.
Volunteer Income Tax Assistance: Sponsored by the IRS, VITA offers free tax preparation by trained volunteers. You may be eligible for the VITA program if your income is $53,000 or less, you have a disability, are elderly or have limited English-speaking ability.
Tax Counseling for the Elderly: Also sponsored by the IRS, the TCE program is intended for people age 60 and older.
Free File: If your income is less than $60,000, you can use an online software program to prepare and file your federal income tax return for free.
Mistake No. 2: Getting your Social Security numbers wrong –
On its list of common tax mistakes, the IRS puts wrong and missing Social Security numbers at the top.
Long gone are the days in which you could claim dependents without a Social Security number. Today, every member of your household listed on your return needs to have one. Make sure to double check all the numbers before submitting your return to ensure there aren’t any transposed or missing digits.
Mistake No. 3: Spelling your name wrong –
Sure, you know what your name is, but maybe you’re typing too quickly and hit a wrong key. Or you could be interrupted while filling out the form and pick back up at the wrong spot. There are plenty of scenarios in which people can, and do, misspell their names on their income tax forms. Those simple errors can lead to rejected returns and delayed refunds.
In addition, if you recently married or divorced and haven’t registered a name change with the Social Security Administration, be sure to use your old name. You need the name on your forms to match the name listed in Social Security records.
Mistake No. 4: Making math errors –
Fortunately, this becomes less of a problem if you use software to prepare and file your taxes. The computer program will do all the calculations on your behalf, which virtually guarantees you’ll get it right.
However, the computer program can’t know whether the numbers you’ve entered are correct. Double check everything to be sure your return is completely accurate. It should also go without saying that if you’re doing a paper return, use a calculator and do the math twice to confirm the results.
Mistake No. 5: Forgetting your John Hancock –
There are two places this mistake can trip you up:
This first is by failing to sign a paper return before mailing it. The second is failing to sign your check if you’re sending in a payment. Either one can result in lengthy delays in processing your return.
You can avoid this mistake by filing and signing your return electronically and having tax payments directly withdrawn from your bank account. Saves on postage, too.
Mistake No. 6: Using the wrong tax form –
Most of the mistakes above have the potential to affect how quickly the IRS processes your return and issues your refund. However, they don’t necessarily affect your bottom line. But using the wrong tax form could mean lost dollars.
If you use the 1040EZ form, you get the standard deduction. For most people, in 2014, that amount is $6,200 for singles and $12,400 for couples filing jointly. These deductions are subtracted from your income so you don’t have to pay taxes on those amounts.
However, if you have a mortgage, home office, significant health care expenses or charitable contributions, you may be better off using a regular 1040 form so you can itemize and get a bigger deduction.
Mistake No. 7: Selecting the wrong filing status –
Another costly mistake can be selecting the wrong filing status. This mistake may be most common for single parents.
For example, unmarried parents who have a qualifying dependent and pay more than half the cost of keeping a home may be able to file as a head of household, a status that boosts their standard deduction by $2,900. In addition, you can be considered “unmarried” so long as your spouse did not live with you for the last six months of the year.
Meanwhile, widows and widowers can still use the “married filing jointly” status for the year in which their spouse died. Then, if they have dependent children, they may be able to file as a “qualifying widower with dependent child” for two more years, a status that allows the same standard deduction as those who are married and filing jointly.
Mistake No. 8: Missing deductions or credits –
It’s not enough to simply use the right form and the right filing status. If you want to maximize your refund, you also need to take advantage of every tax deduction and credit available to you. Fortunately, there are plenty of credits and deductions that have the potential to reduce your taxable liability by thousands.
Here are a few of the bigger credits and deductions you don’t want to miss. You may want to consult with a tax professional to learn more about whether you qualify.
American Opportunity Credit: Available to college students of all ages, this credit is based upon college expenses and can provide up to a $2,500 tax reduction per year for four years.
Earned Income Tax Credit: Offered to low-income families, this credit is refundable, and that means the government will send you cash even if you don’t owe any taxes. Sometimes this is overlooked when eligible families have incomes so low they aren’t required to file returns, so they miss out on claiming the credit. That can be a costly mistake because the credit can be up to $6,044 for some families.
Child Care Credit: If you pay someone else to watch your children while you work, you may be able to claim a credit on up to $1,000 of your expenses. Most eligible taxpayers will get a credit worth 20 percent of that amount, for a total credit of $200.
State Income or Sales Tax: You can deduct any state income tax you pay from your federal return. If your state doesn’t charge an income tax, you can use the amount you paid in state sales tax instead.
IRA Contributions: While contributions to Roth IRAs aren’t deductible, you can deduct up to $5,500 if you put that money in a traditional IRA. If you’re age 50 or older, the limit is increased to $6,500.
Mistake No. 9: Failing to claim all your income –
You might also make the mistake of thinking you don’t need to claim income unless you receive a W-2 or 1099 form for your work. In reality, you need to claim all income for the year regardless of whether someone paid you $20 or $2,000 for a side job.
While most people are aware they must include wages, salaries, interest, dividends, tips and commissions as income on their tax returns, many don’t realize that they must also report most other income, such as:
Cash earned from side jobs
Barter exchanges of goods or services
Awards, prizes, contest winnings
Cheating the IRS may seem like a victimless crime, but you could be hurting yourself if you ever are audited.
Mistake No. 10: Sending your return through the mail –
If you insist on being old school and send your return through the mail, you’re making the last mistake on our list.
Filing through the mail is a mistake for oh, so many reasons. First up, you greatly increase your chances of making one of the other mistakes listed above. There is less chance of missing Social Security numbers, forgetting to sign and making math errors. In addition, a good software program will help you root out all of those deductions and credits you may otherwise miss. It should also guide you to the right filing status.
But more importantly, filing electronically means you could have your refund cash in hand in only a few weeks. In 2014, the IRS processed returns from 27 million taxpayers and deposited $146.3 billion in refunds through direct deposit. If you’re not already e-filing, it’s time to get on this bandwagon. Trust us, it will make tax time a relative breeze.