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Daily Tax Tips January 2012

Tax_tip_icon_pencil_pointWelcome to Tax Season 2012.

With the arrival of the annual march to the tax filing deadline, Don't Mess With Taxes resumes the popular Daily Tax Tip feature.

Just like last year, you'll find a tip a day -- Saturdays,  Sundays and federal holidays, too; that that you slackers at the IRS! -- to help you finish up your 2011 tax return or implement some tax planning strategies to reduce your 2012 tax bill.

The tips will run through year's filing deadline of April 17.

Many of the tips will be courtesy of Bankrate's annual tax guide, of which I'm a contributing editor. Others will be new posts from me as I don my DMWT hat.

Watch for the day's new tip in the upper right corner of the ol' blog. I'll try to get it up as early in the day as my other duties and life's constant happenings allow.

Since there ultimately will be 100 tips -- thank you Leap Year for getting us to a nice round number -- the tips will be broken up into separate pages for each month. At the end of this January list, you'll find links to tips for February, March and April (through, as I mentioned, the April 17 tax-filing deadline) as those months arrive.

So if you miss a tax tip or simply want a refresher, bookmark this January tax tip page and come back at your leisure to check out the running list of Daily Tax Tips for 2012.

OK, enough administrative lead-in. Tax time is ticking. Let's get started!

  1. 7 ways to get organized for the tax year -- You'll be getting a tax refund so you're more than ready to file your tax return. Or are you? To make sure you get the correct amount back from the IRS -- or don't have to pay more tax than you should -- take some time for a bit of tax filing preparation. There are Social Security numbers to double check, tax statements (W-2s and 1099s, to name a few) to have on hand and documentation (especially important for small business Schedule C filers) to ensure that the IRS doesn't have any problems with the tax deductions or tax credits you claim. Getting this data together before you sit down to fill out your 1040 (or 1040A or 1040EZ) will make sure this tax season gets off to a good start. (Jan. 9, 2012)
  2. Your tax preparer choices -- You're tired of going it alone when it comes to your taxes, so this year you've decided to get some tax pro help. You're not alone. More people each year turn to a tax pro for filing help. And you have lots of options. There are tax preparation chains, Enrolled Agents, accountants and CPAs and tax attorneys. You'll also want to make sure whichever tax pro you pick is complying with new IRS oversight rules. And start your tax pro search now. The good ones fill up their tax season schedules quickly. (Jan. 10, 2012)
  3. Do you have to file a tax return? -- Probably. Almost 1.5 million of us do each year. But double check just to be sure. There are three things to consider when determining whether you have to file a return: your age, your filing status and your income. Generally, once you reach a certain income level, the law requires you to file. The amounts are adjusted annually for inflation. And the earnings thresholds that trigger the filing requirement also are larger for older individuals. The IRS also has different rules for dependents who earn money, breaking down the filing requirements based on a child's earned income, such as wages, and unearned income, like investment earnings. Self-employment income also demands that the earner file a tax return, complete with Schedule C or C-EZ. And remember that sometimes it pays to file even if you don't have to do so. That's the case where a taxpayer might be able to get a tax refund. The only way to get that money is to file a tax return. (Jan. 11, 2012)
  4. Filing status could make a difference in your tax bill -- Picking the proper filing status isn't that difficult. Most taxpayers can check the same box on their tax return as this did the previous filing season. But if you've had a change in your personal life, it's worth it to double check that you've chosen the appropriate tax filing status. It could make a big difference in what you owe the IRS. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, Surviving Spouse (also known as Qualifying Widow or Widower with Dependent Child). You must meet certain criteria to claim each. And each status allows -- or prevents -- you from claiming certain tax credits or tax deductions. A quick and easy example is the newly divorced mom with custody of her two young kids. Sure she's now single, but for tax filing purposes, she gets a better deal by claiming head of household since she then can claim several child-related tax breaks. So review your personal and tax situations and make sure that you pick the proper tax filing status. (Jan. 12, 2012)
  5. Your Form 1040 could affect your tax bill -- The IRS offers you a choice of three individual tax return forms: the long 1040, the 1040A and the simplest 1040EZ. Each version has certain requirements. More importantly, each 1040 iteration determines what tax credits or tax deductions you can -- or can't -- claim. You should pick the easiest form that fits your filing situation. But choose carefully. You could end up trading some tax savings simply for ease of form completion. That's usually not wise, especially since most of us nowadays use tax software and those programs do the heavy lifting of filling out our tax forms. (Jan. 13, 2012)
  6. Business tax tips, tax calendars -- In addition to running a business, owners of their own enterprises also have to make sure they comply with tax laws. The IRS tries to make that a bit easier by offering small businesses and Schedule C filing self-employed taxpayers an annual tax calendar. (It comes in Spanish, too.) In addition to the calendar grids noting key business tax filing deadlines, the document elaborates on business tax issues each month. If you prefer a smaller version, the IRS has a desktop calendar connector you can install on your PC or laptop. Or you can subscribe to updates that will show up in your Outlook 2003 or 2007 calendars. (We're waiting on word about Outlook 2010.) The bottom line is that with all these options, a small business owner shouldn't miss any of the important tax deadlines. Check out the business calendar format that works best for you and your company. (Jan. 14, 2012)
  7. Don't overlook the tax advantages of volunteering -- If you're one of the many people who spends your free time working for a charitable organization, thank you. Your efforts are appreciated. Unfortunately, they're not appreciated as much by the Internal Revenue Service. Tax law doesn't allow you to write off the value of your personal time or the product you created, such as a public relations campaign, for your favorite charity. But you might be able to deduct some other costs associated with your volunteer efforts. The materials you bought to create a poster for the charity, for example, might be deductible as long as the expense meets some IRS guidelines. You also can deduct mileage driven in connection with a charitable project, such as delivering meals to the homebound. As with the more standard charitable gifts, be sure to keep good records of your purchases, miles and the like. If the IRS does question your tax deduction for your good works, you want to be able to prove how nice a person, tax-wise, you are. (Jan. 15, 2012)
  8. Getting the most from tax software -- The Internal Revenue Service starts accepting electronically filed returns on Jan. 17. Most taxpayers now use tax software to complete their 1040s and then e-file them. But if you're just now joining the computerized tax parade, here are a few tips to make sure you pick the tax software that fits your tax needs as well as your budget. Are your taxes relatively simple or do you have a lot of tax issues to take into account, such as a freelance job on the side, investments or dependents with their tax-related considerations? If you're not exactly sure how these could add to or help cut your tax bill, then look for a program with plenty of explanations that walk you through the process step by step. If, however, you're an old hand at tax filing but want the software calculators that double-check your math, look for a package that lets you easily skip over sections. You might be able to get the program you want and need online, without buying and installing the software on your own computer. Or, even better, you might be eligible for the IRS' Free File program, which also kicks off the 2012 filing season on Jan. 17. The bottom line for both your taxes and your bank account is to comparison shop when it comes to picking tax software. (Jan. 16, 2012)
  9. Your tax e-filing options -- Electronic tax filing gets more popular every year. Part of it is technology, both our growing comfort levels using it and the added ways to take care of all our tasks, including taxes, online. You know it's mainstream when the IRS has a smartphone app! E-filing also is popular because it is fast and it means we can get our tax refunds sooner. And there are lots of ways to e-file. An IRS approved electronic tax preparer (or ERO, electronic return originator, in IRS-speak) can prepare and e-file your taxes. You can do it yourself via tax software that you download onto your home computer or use online via the manufacturer's website. Or if you qualify, you can use Free File. Both the no-cost tax prep and e-filing option and the general open to anyone e-filing became available Jan. 17. So pick your electronic filing method and join the ever growing e-filing parade. (Jan. 17, 2012)
  10. Dependents can help reduce your tax bill -- Parents know how expensive kids can be. So does their Uncle Sam. So your favorite federal relative offers some ways that your dependents can pay off at tax time. Each child that a taxpayer can claim as a dependent immediately provides that filer an added tax exemption. This is a dollar amount, adjusted annually for inflation, that you get to subtract from your adjusted gross income. Then there are the associated tax breaks, such as the child tax credit and child and dependent care credit. And don't forget about adult family members who rely on you for support, such as a parent who can't quite make it on Social Security alone. If those kin meet IRS rules, you can claim them as dependents, too, and get the tax benefits for being a good relative. (Jan. 18, 2012)
  11. Make sure your kids are a tax credit to you -- Remember yesterday's tip on claiming dependents and how they can pay off? (Just glance up a few lines if you missed it.) Today we look at some specifics. The child and additional child tax credits are a couple of the best tax returns parents can get on their kids. The basic child tax credit is worth $1,000 per qualifying kid. If you have more, you might be able to claim the additional child tax credit which could get you a tax refund. There are, of course, requirements to meet. The key one is that the youngster is, as noted earlier, your dependent. Then the kid must be 16 or younger during the tax year for which you're making the claim. Check out the rest of the rules in today's tip and get more details in IRS Publication 970. Then sit back at tax filing time and enjoy the payback your family gets from Uncle Sam. (Jan. 19, 2012)
  12. Standard vs. itemized deduction -- Every taxpayer depends on deductions to cut his or her income down to a lower taxable income amount. The less taxable income you have, generally the lower your tax bill. Most filers have two choices when it comes to deductions: standard or itemized. Once upon a tax time, the itemizing on Schedule A all your allowable tax deductions seemed the way to go. And it still is for some filers, particularly those who pay property taxes on their home(s), big state income tax bills or lots of interest on their mortgage. But over the years, the standard deduction amounts have increased and lots of folks are finding that's the way to go. Although it's referred to as "the" standard deduction, it's actually a different amount depending on your filing status. The various deduction dollar details are listed on page 2 of Form 1040 and Form 1040A (Form 1040EZ filers don't get a choice between standard or itemizing). If you find that your standard deduction amount is greater than your total itemized deductions, then claim the standard deduction. If next year you have more expenses you can deduct via itemizing, then file Schedule A that year. You get a choice every filing season. Be sure you pick the one that gives you the bigger tax deduction. (Jan. 20, 2012)
  13. 2011 and 2012 tax rates, tax brackets -- The key tax-filing question is how much tax do I owe the IRS? A good place to start finding that answer is in the annual income tax brackets that show which tax rates apply to how much income for each filing status. Sound complicated? Not really. The tables offer a good snapshot of the six tax rates – starting out at 10 percent and topping at 35 percent – and the income levels. Keep in mind, though, that the tax bracket that your annual income falls into doesn't necessarily mean that's how much tax you'll pay. As the tables show, the various segments of income are taxed at the varying rates leading up to that last tax bracket. So if your last dollar is in the 28th income tax bracket, some of it also is taxed at 25 percent, 15 percent and 10 percent. That combination of progressive rates means that your actual, effective tax rate is probably going to be less than your marginal, or last dollar's, income tax rate. (Jan. 21, 2012)
  14. Tax preparation checklist -- You're getting a refund, the IRS is now accepting e-filed returns, so you're ready to get that Form 1040 into Uncle Sam. Wait just a minute. You need to do a little tax filing preparation to that you can easily, and accurately, fill out your tax forms. Start with your tax statements, such as W-2s and 1099s. You might not even have them all yet since issuers have until Jan. 31 to send them out. You'll also need other tax supporting documents, such as your annual mortgage interest tax statement, or 1098. And don't forget to gather the Social Security numbers of everyone who'll be listed on your return -- you, your spouse and any dependents. Then there are the deduction docs to make sure, if you itemize, you fill out Schedule A properly. In addition, there's a long list of questions you need to ask yourself, or if you hire a tax pro to help you file that he or she will ask. Yes, it is a lot to think about. And sorry that it's not for many filers as simple as plugging a few numbers into your Form 1040. But if you go into filing prepared, it will make the process easier and in many cases more profitable since you won't overlook tax breaks. (Jan. 22, 2012)
  15. Tax benefits of caring for your parent -- Those of us of a certain age are getting a very personal lesson in aging. Not surprisingly, it comes from our parents, but this time we are learning how to provide them with a little help, financial as well as emotional, during their retirement years. The good thing, in addition to being there for the people who were always there for us, is that we might be able to claim some tax benefits because we're caring for our folks. Of course, there are requirements before you can claim a parent as a dependent. You need to consider your mom's or dad's income, including Social Security as well as how much support you provide for living expenses, contribute to their housing costs and/or medical bills you pay. If you have brothers and sisters, you also need to factor in the how much financial help all siblings contribute and decide who gets to claim mom or dad on their taxes. It's a sometimes difficult situation, but some open discussions before the time arrives will help you help your parents as they age. And it should help get you some tax breaks, too. (Jan. 23, 2012)
  16. Don't let your beneficial stock tax loss be washed away -- If you were a savvy enough investor to harvest some tax losses, the last thing you want to do is negate that benefit. But you could if you don't pay attention to the timing of your sales and purchases. If you repurchase a stock you sold or one that's substantially similar to it, you'll violate the wash sale rule. This regulation prevents a shareholder from selling an asset at a loss, using that loss for as a tax break and then buying the same or similar stock. Essentially, the tax code doesn't want investors to make moves simply to get a tax break. And be aware that the wash sale rule doesn't just apply when you repurchase too soon a stock you sold. It works the other way, too. You aren't allowed to take a tax loss on a security sale if you obtained the same or a substantially identical security 30 days before or 30 days after a sale. The one piece of good news is that you don't technically lose the tax loss benefit. You'll just have to postpone it until you sell the repurchased asset. But you might not need the stock tax loss as much then as you do now, so don't take any chances. Wait a bit longer to buy back that stock you sold. (Jan. 24, 2012)
  17.  Be on the lookout for your tax documents -- If you're getting impatient for the tax statements you need to file your return, hang in there. Employers, banks, stockbrokers and other institutions and agencies that were involved in your financial life last year have until Jan. 31 (or the next business day when that date falls on a holiday or a weekend) to get these annual tax statements on their way to you. Employees will get a W-2 from each job. But there are lots of other forms en route, too. There are many 1099 iterations detailing money from independent contractor jobs to unemployment benefits to investment earnings to retirement payouts to state income tax refunds. When they do arrive, double check them to make sure the information is correct. Definitely don't overlook any of them. The IRS also gets copies of each form so it knows if the amounts are missing from your Form 1040. And be sure to check your email box. You might have signed up for all electronic communications a while back and that probably means that's how you'll get your tax statements, too. (Jan. 25, 2012)
  18. 4 ways to receive your tax refund -- If you end up spending your tax refund as soon as it arrives, the IRS might be able to help you save. It offers four ways for you to get your tax refund, including a couple that will put your tax cash directly into a financial vehicle so you won't be tempted to spend it. Of course there's the direct deposit of your refund into a checking account. That's been around for a while, but it means you will have immediate access to your refund money. If you don't have much willpower when it comes to spending your tax refund, consider having it sent directly to a savings account. You still can get to this second refund option, but not as easily. A third choice is to have your refund money directly deposited into your IRA. Finally, you can use your refund to buy U.S. savings bonds. You can choose one or all four of these refund receipt options. If you opt for two or more, just check the box on your Form 1040 that indicates you are splitting up your refund. Then fill out Form 8888 with your refund deposit directions. (Jan. 26, 2012)
  19. Nanny tax filing time -- If you employed a nanny or any other household help last year, the deadline is almost here for some tax reporting duties. There are two things to keep in mind. First, determine whether, under Internal Revenue Service guidelines, the worker was an employee or a contractor. If the worker is properly an employee, then note how much you paid the worker. If in 2011 you paid the employee $1,700 or more then, then just like any other employer you must pay your portion of the Social Security payroll tax, as well as the Medicare portion and unemployment taxes for your help-around-the-home worker. You also must give that worker a Form W-2 by Jan. 31 or the next business day if that date falls on a weekend or federal holiday. Then you must follow up by filing a copy of the W-2 you issued by submitting Form W-3, Transmittal of Wage and Tax Statements, to the Social Security Administration. This form's filing deadline generally is Feb. 28 (or 29th in Leap Years), unless that day falls on a weekend or holiday. Yes, it is extra work to meet the tax duties associated with your household help. But isn't it worth it when you consider how much easier they made your life the rest of the year? (Jan. 27, 2012)
  20. Getting old tax return records -- Do you need a copy (or copies) of old tax returns in order to get a loan? If you didn't hang on to your old filing paperwork or lost it in a move or disaster, the Internal Revenue Service might be able to help. You can get a complete photocopy of your old return (as long as it filed within the last seven years) by submitting Form 4506. This option, however, will cost you: $57 per each tax return. They also could take up to two months to arrive. If a bit less tax info will do, you have a couple of transcript choices: a tax return transcript or a tax account transcript. A return transcript shows most line items contained on the return as it was originally filed. An account transcript show any post-filing changes made to that return by you or the IRS. Transcripts can be ordered by sending in Form 4506-T or 4506T-EZ, by calling the automated order line at 1-800-908-9946 or by ordering your transcripts online. The good thing about transcripts is that they are free. And transcripts usually are sent out within 10 days of your request. (Jan. 28, 2012)
  21. Report all your income -- You earned some extra money from a side job. Or you have your own business and a few of your jobs were small. This money is tax-free, right? Wrong. You must report all your income, even when the amounts are small and you don't get official tax statements listing that income. You'll get a 1099-MISC when you are paid $600 or more. But that amount applies only to the payer's reporting responsibility. Any amount you are paid is, in most cases, reportable income on your Form 1040. Another number often mentioned is self-employment income of $400. But that's just the amount that triggers filing self-employment taxes, the independent worker's equivalent to payroll withholding that is reported on Schedule SE. Again, all self-employment earnings are reportable, taxable income. True, the IRS might not be able to easily discover you didn't report all your income and pay all the income tax you should have. But do you really want to take that chance? (Jan. 29, 2012)
  22. Working around a missing W-2 -- You're ready to file your 1040 but you're still waiting for your annual earnings statement. Yes, you need the money, but give it a few more days. Employers have until Jan. 31 (or the next business day if that falls on a weekend or federal holiday) to send out your W-2. But if mid-February arrives and you're still waiting on this tax document, there are some steps you can take. First, bug your payroll office. If that doesn't work, dig out your tax year's final pay stub and download Form 4852. This is a substitute form in which you plug in, using your pay stub info, as much as you can to recreate your missing W-2. The attached instructions will walk you through the process. You also can ask Uncle Sam for help. Call the IRS (toll-free 1-800-829-1040) and the agency will contact the employer or payer for you and request the missing tax statement. If, however, you don't get your W-2, you can use the Form 4852 to file. Note, though, that using the substitute W-2 will probably slow down processing of your return. (Jan. 30, 2012)
  23. Working around missing 1099s -- Investors and independent contractors are eagerly awaiting their Form 1099 tax statements so they can file their tax returns. But as with W-2s, issuers don't have to get these tax documents on the way to you until Jan. 31 or the next business day if that date falls on a weekend or federal holiday. But if you simply don't get a necessary 1099, there are some steps you can take to file your 1040 anyway. Unlike a W-2, you generally don't have to include 1099s with your filing. The documents are issued for information only, yours and the IRS', so you just need the correct amounts. The best way to get the missing data is to call the employer, bank or investment company and ask for your income information over the phone. In some cases, the amounts that would be on a 1099 are readily available from documents you already have, such as year-end statements. And don't forget to check online. Even if you're still getting these statements via the U.S. mail, if the 1099 is from an investment company it likely has a website where you can download the form. (Jan. 31, 2012)

January's gone, but the 2012 tax filing season continues:

February 2012 Daily Tax Tips

March 2012 Daily Tax Tips

April 2012 Daily Tax Tips

Still can't get enough tax tips? Check out more tax news and advice at Bankrate's Tax Channel, as well as Don't Mess With Taxes' ever-growing collection of tax tips.