This year, the Tax Foundation is first out the gate with their prediction that everything will essentially remain the same as inflation was a mere 0.19%. When they performed this exercise in predicting the 2009 federal income tax brackets, they were 100% correct. I’m fairly confident that these numbers will be accurate when the IRS officially announces the tax brackets for 2010.

2010 IRS Tax Brackets

Here are the projected federal income tax brackets for 2010:

Here are some other important non-tax bracket-related updates (until these are made official by the IRS, these are merely predictions by the experts). As expected, no (or very small) changes:

• Standard deduction remains the same: The standard deduction for singles will remain at $5,700. For married filing jointly, the number will also remain at $11,400. If you are a Head of Household, it’s expected to increase by $50 to $8,400.
• Personal exemption remains the same: The personal exemption will remain at $3,650.
• Annual gift tax exclusion unchanged: For 2010, the current 2009 gift tax exclusion of $13,000 is expected to remain the same. The gift tax is how much you can give to someone else without any tax considerations.

For comparison, here are the 2009 Federal Income Tax Brackets and the 2008 Federal Income Tax Brackets.

2010 Federal Income Tax Brackets (Estimated) from personal finance blog Bargaineering.com.

If you filed your taxes on April 15th, you can ignore this post. If you requested a tax filing extension, let this be a reminder that your tax return will be due in exactly one month. October 15th is the tax return filing deadline for people who requested and were approved for a tax filing extension.

Since I can see the future, I know that in some point in the future someone will read this article and be wondering when all the various tax return related deadlines are. Being the nice guy that I am, I’ll list them for your reference. Your tax return filing deadline will depend entirely on your tax situation because the extension gives you extra time to file, not extra time to pay your bill!

Here are my suggestions on when you should file:

• If you owe federal taxes, file or mail your tax return by April 15th. If April 15th falls on a holiday or a Sunday, file or mail your return by the following day.
• If you are due a refund, file or mail your tax return as soon as possible so you get your refund as soon as possible. The deadline for employers and other institutions to mail you W-2s and 1099s is January 31st, unless it falls on a weekend, in which case it is the next business day.

2009 Tax Return Filing Deadline Dates

Here are all the deadline dates for 2009 (to be updated each year):

• W-2/1099 Mailing Dates – February 2
• 1040 Tax Return Filing Deadline – April 15
• 1040 Tax Return Extended Filing Deadline – October 15
• Estimated Tax Due Dates – April 15, June 15, Sept 15, Jan 15

Tax Return Filing Deadline from personal finance blog Bargaineering.com.

Federal Taxes

You might be surprised to learn that there are no federal tax consequences. The IRS does not consider the voucher as income so you won’t need to pay any taxes on it. You can also take advantage of any State and Federal tax incentives for buying hybrid vehicles, the Cash for Clunkers voucher doesn’t cancel that out (something the dealer probably told you if you purchased a qualifying hybrid vehicle). For a full list of those vehicles, as well as how much of a credit you receive, visit Fueleconomy.gov’s Energy Tax Credits for Hybrids page.

State & Local Taxes

You may have to pay taxes to the state or local government on the tax voucher though. For example, in Maryland, you pay a 6% sales/excise tax on the price of a car when you register it. If you purchased a car with a voucher, you have to pay the 6% tax on the full purchase price of the vehicle including the voucher. So on a $3,500 voucher, Maryland residents pay $210. On the $4,500 voucher, Maryland residents pay $270. The voucher is not recognized as income in the state of Maryland, but you still pay taxes through sales tax.

I hope that clears up any tax questions you may have had associated the Cash for Clunkers program!

Other bloggers tackling this issue:

• Cash for Clunkers – Tax Rules
• Is there a Cash for Clunkers tax?
• Cash for Clunkers taxable income?
• Cash for Clunkers taxable?
• Cash for Clunkers Tax Rules
• Who benefited from the Cash for Clunkers program
• Does Cash for Clunkers Affect Your Taxes?
• Cash For Clunkers – Tax Rules

Cash for Clunkers Tax Rules from personal finance blog Bargaineering.com.

However, my annual travel itinerary would also include two totally tax-deductible domestic vacations. I would attend the National Conference of the National Association of Tax Professionals (NATP) and the Annual Convention of the National Society of Tax Professionals (NSTP), held each year in a different US city. I have visited Anaheim, Atlanta, Arlington, Alexandria, Boston, Corpus Christi, Minneapolis, Orlando, Sans Antonio, Diego and Francisco, Washington DC, and other locations as a registrant of these two annual events, and deducted every penny of my hotel, meal and travel expenses.

What You Can Deduct

You can deduct expenses that are “ordinary” and “necessary” for your trade, business or profession. An “ordinary” expense is one that is common and accepted in your specific trade or profession and a “necessary” expense is one that is helpful and appropriate. This is true whether you are a W-2 employee working for someone else or are self-employed, either as a sole proprietor reporting income and expenses on Schedule C of Form 1040, a partner in a partnership which files Form 1065, or an employee of your own “one-man” corporation filing either Form 1120 or Form 1120S.

An employee would deduct such expenses as a “miscellaneous deduction” on Schedule A, subject to the 2% of AGI exclusion. So the deduction is only available if you itemize and could be limited. However if you have a one-man corporation and pay yourself a salary the corporation can pay directly, or reimburse you under an accountable plan, for such expenses and deduct them on the corporate return.

Conferences Are Educational

One “ordinary and necessary” business expense for which you can claim a tax deduction is the cost of education that is (1) expressly required by an employer, by law, or by government regulation, or (2) maintains or improves skills required in your current trade or business. If a conference falls under this category, then the associated registration and travel expenses are deductible as well!

To be deductible, you must show that your attendance benefits your trade or business. Unfortunately, if the convention is for investment, political, social, or other purposes unrelated to your trade or business, you cannot deduct the expenses:

The convention agenda or program generally shows the purpose of the convention. You can show your attendance at the convention benefits your trade or business by comparing the agenda with the official duties and responsibilities of your position. The agenda does not have to deal specifically with your official duties and responsibilities; it will be enough if the agenda is so related to your position that it shows your attendance was for business purposes.

Example Deductible Expenses

• The registration fee for the conference or convention and any related books or materials.
• Round-trip airfare, trainfare, or busfare at cost, or the Standard Mileage Allowance for business travel if you drive (or, as an alternative, a percentage of the total actual costs of operating your car) and related red cap tips.
• Taxi fares to and from the airport, train or bus station, to and from your hotel, and to and from other business locations while away.
• Hotel or motel lodging expenses, including tips to bellman and maids and the cost of laundry services.
• All meals (although as with any business meal only 50% is actually deductible).

After I deduct all my travel expenses, I often save enough in taxes to cover the registration fee and some of the travel expenses! I get a free quality education, which benefits my practice, and I save on the actual cost of the trip.

What You Can’t Deduct

If you are travelling with your family, only your expenses are deductible. However airlines often offer discounts for accompanying family members, and a hotel room is generally the same price whether regardless of the number of people in the room. You can deduct what it would cost if you were travelling alone. There are special rules if your spouse also works for your business.

You cannot deduct auxiliary sightseeing expenses while at the conference or convention, such as guided tours or travel to and from attractions, museums, sporting events, theatres, etc (unless you were attending with a client or colleague and the activity qualified as deductible business entertaining).

Record Keeping Rules

As with any other business expense you must keep detailed records and receipts. Use a credit card for all meals, get receipts from taxi drivers, and keep a copy of the detailed hotel bill in addition to the charge card receipt. And be sure to save the conference or convention agenda/schedule to prove its relevance to your trade, business or job.

Just as with business use of your automobile and the Standard Mileage Allowance, the IRS allows you to deduct either the actual out of pocket expenses for meals and “incidental” expenses and lodging or claim a federal “per diem allowance” that is determined by the location of the trip. There is a per diem rate for lodging and a separate one for meals and “incidental” expenses. If you claim the per diem allowance you do not have to save receipts for actual expenses, here are the GSA per diem rates.

The per diem rate for meals and incidental expenses includes tips given to porters, baggage carriers, bellhops, hotel maids (the “incidental” expenses) – so the actual out of pocket for these incidentals are not deductible if you claim the per diem. On the first and last day of a business trip you claim 75% of the per diem amount, unless you can show you leave before breakfast on the first day and return after dinner on the last.

You can decide whether to deduct the GSA meals and incidental per diem rate or actual expenses on a trip by trip basis, but you must use the same method for all days within any single business trip. You can use the actual expenses when attending a conference in New York City in May and the per diem rate for an August convention in Las Vegas.

Remember, 100% Business

Make sure to schedule your trip so that it remains 100% business. Let’s look at this year’s NATP National Conference (in Reno) as an example. Registration begins on Sunday, with activities running Monday through Thursday. You would want to arrive on Sunday and leave on Friday. This way you have no “personal days”. However, all you need to do on Sunday is register, leaving the rest of the day to do whatever you want.

FYI, travel extended to get a reduced airfare (such as a Saturday or Sunday night stay-over for domestic travel) is allowed, even though there is no business activity on the extra day, if the extra cost of the stay-over is less than or equal to your airfare savings (IRS Private Letter Ruling 9237014).

So you have always wanted to visit San Francisco. Find a conference or convention related to your business that is being held there and take a tax-deductible vacation!

If you have questions about anything discussed above I suggest you consult your tax professional. You can find a tax professional in your area at www.taxprofessionals.com. Or you can leave a comment and I will try to answer if appropriate.

Robert D Flach is a Jersey City, New Jersey based tax professional who has been preparing 1040s for individuals in all walks of life since 1972, and writing the popular tax blog THE WANDERING TAX PRO since 2001. He also writes the NJ TAX PRACTICE BLOG. You can follow rdftaxpro on Twitter.

(Photo: yourdon)

How to Enjoy a Tax Free Vacation from personal finance blog Bargaineering.com.

Fortunately, it was “just” a CP2000 letter.

A CP2000 is the letter than the IRS sends out when they want more information from you. The scary part about the letter is that sometimes is says that you may owe more taxes (never a good thing). Fortunately, owing more taxes is generally the worst case scenario. In many instances, they just need to ask you some questions because there were some discrepancies.

Why did you get this? When you file your tax return each year, the information on your return is compared with the information received from other sources. The W-2 that your employer sent you is also sent to the IRS. When there is a discrepancy, the IRS wants to know why. When you consider how complicated the tax return is, with all of your sources of income, various credits and deductions, and the several thousand page rulebook behind it, it’s not surprising that something could slip through the cracks. How many bank accounts do you have? Did each one send a 1099-INT to report interest? Those sorts of situations trigger these CP 2000 clarification letters.

How to properly response: How you respond will depend on how complicated your answer to the questions are. If it’s a simple clarification (”I included the income in this line”) then do it by phone. Call 800-829-8310 if the letter was from Brookhaven, Ogden, or Philadelphia; call 800-829-3009 if the letter was from Atlanta, Austin, or Fresno.

If it’s more complicated and you need to attach documentation like a 1099 you missed or corrected W-2’s, then you’ll have to include a written statement and send it in by mail. If you need time, they will grant you a 30 day extension if you request one and even longer for special cases. You must respond in some way before the due date of the notice.

You can read more about CP 2000 at the IRS.gov website as well as this SMart Money article on the ten things the IRS will not tell you and Bankrate’s mailbag answer on clarification letters.

Remember, there’s no need to panic because this isn’t a bill and you haven’t necessarily done anything wrong.

(Photo: rosengrant)

What is an IRS CP2000 Clarification Letter? from personal finance blog Bargaineering.com.

Update: Chuck makes an excellent point in the comments, the best place to open a Roth IRA at the last minute is at a broker you already have accounts at. Since they’ve verified your identity, opening the account should be a cinch and you can probably transfer funds the same day. Call your broker to be sure but this is definitely better than trying to open an account and hoping they approve you.

I talked to a TradeKing rep and an E*Trade Brokerage rep and both said that online applications are often instantly approved thought some can take as many as one business day. My recommendation is that you try TradeKing (only $4.95 a trade) and then E*Trade ($12.99 a trade) if you don’t have a Roth IRA anywhere yet. From what I can gather, neither have account minimums or account fees but they do charge IRA termination and transfer out fees (if you move brokers, but that’s standard for all brokers).

BVC #9 – Last Minute Tax Tip (Roth IRA) from personal finance blog Bargaineering.com.

If you procrastinated this year, vow not to procrastinate next year because you’re letting the government hold onto your money for absolutely no reason!

All stats provided by the PR folks (MSL Worldwide) for TurboTax. They claim that it takes an average of two hours to complete a tax return, which is another reason you should file in February after you get all your forms!

(Photo: blmurch )

Tax Filing Procrastination is Expensive! from personal finance blog Bargaineering.com.

The only gotcha is that you are still required to pay taxes owed. The extension is only for filing your return, not for payment. If you owe taxes and can’t pay, start the process of setting up an IRS payment plan today because the extension won’t help you.

If you’re supposed to get a refund, I recommend that you file ASAP so you can get your money back!

How to Request an IRS Filing Extension from personal finance blog Bargaineering.com.

Common underpayment scenarios: If you don’t think you will ever underpay, think again, there are plenty of common underpayment scenarios. If you sold your house this year, you may have walked away with a large profit that you didn’t pay quarterly estimated income taxes on; should you be penalized? You may have sold a stock you held and managed to squeak out a decent profit; should you be penalized? In both cases, no, and as long as you satisfied the Safe Harbor rules for income tax payment, then you’ll be safe.

A “safe harbor,” in legal terms, is a provision of a regulation that eliminates a party’s liability as long as the party acted in good faith. In the case of income taxes, it’s an amount that protects you from IRS penalties for income tax underpayment.

Income Tax Safe Harbor Rules

The IRS has many Safe Harbor rules but in the case of income tax payments, you will not pay an underpayment penalty for 2008 if:

• You did not have a tax liability in 2007: If you didn’t owe taxes a year ago, then you won’t be penalized for underpayment this year. If you owe this year, this opens you up to potential underpayment penalties when you file next year if you underpay two years in a row.
• Your underpayment is less than $1,000: If you owe $5,000 and you paid $4,001 throughout the year through withholding and estimated payments, then you’re safe.
• You paid within 90% of your actual liability: If you owed $100,000 for 2008 and you made payments throughout the year that amounted to more than $90,001, then you’re safe.
• Through withholding and estimated payments, you paid more than 100% of your 2007 tax liability ($110% if your AGI is greater than $150,000): If you owed $5,000 in income taxes in 2007 and you owe $50,000 for 2008, as long as you paid more than $5,000 in 2008 (and made all your required estimated tax payments) then you will be safe from penalties.

Hopefully that clears up IRS underpayment penalties and the Safe Harbor rules for avoiding the penalty. You can read more about tax withholding and estimated tax in IRS Publication 505. Tax preparation packages are great, I used TurboTax all the time when I was doing my taxes, but they can only help you if they know all the information.

(Photo: mlee)

IRS Safe Harbor Income Tax Underpayment Rule from personal finance blog Bargaineering.com.

It’s only March 18th, if you act quickly you can prepare your taxes before they raise the prices. TurboTax will officially increase their prices on March 28th (with the others probably doing the same) so you’ll want to file before then. Of course, if you qualify for free tax filing, you can wait until the 15th if you want.

(Photo: techne)

File Your Taxes Now or Pay More Later from personal finance blog Bargaineering.com.

Qualified Retirement Accounts

These are the retirement accounts that qualify for the Saver’s Credit:

• A qualified IRA (Traditional or Roth IRA), or,
• 401(k), or,
• Governmental 457, or,
• SEP, or,
• SIMPLE plan, or,
• qualified retirement plan as defined in section 4974(c) (including the federal Thrift Savings Plan), or,
• a 501(c)(18)(D) plan

Tax Credit Phase-Out Schedule

The credit is 50%, 20%, 10%, or 0% of your contribution, less any distributions, based on your income. You only qualify if you have income of less than $26,500, or are a head of household under $39,750, or are married filing jointly incomes of under $53,000. For those that qualify, your tax credit is adjusted based on your income, according to this schedule:

Single Filers: (This also applies to Married filing separately and qualified widow(er)) Tax credit of 50% of your contribution, up to $1000, if you earn less than $16,000. If you earn between $16,000 and $17250, you are eligible to claim a credit of 20% of your contribution, up to $1000. If you earn between $17,250 and $26,500, you are eligible to claim a credit of 10% of your contribution, up to $1000. If your income is above $26,500, you cannot claim this credit.

Head of Household: Tax credit of 50% of your contribution, up to $1000, if you earn less than $24,000. If you earn between $24,000 and $25,875, you are eligible to claim a credit of 20% of your contribution, up to $1000. If you earn between $25,875 and $39,750, you are eligible to claim a credit of 10% of your contribution, up to $1000. If your income is above $39,750, you cannot claim this credit.

Married Filing Jointly: Tax credit of 50% of your contribution, up to $2000, if you earn less than $32,000. If you earn between $32,000 and $34,500, you are eligible to claim a credit of 20% of your contribution, up to $2000. If you earn between $34,500 and $39,750, you are eligible to claim a credit of 10% of your contribution, up to $2000. If your income is above $53,000, you cannot claim this credit.

Double Dipping

This credit is in addition to any other tax benefits you may receive for contributing to your retirement. For example, 401(k) contributions is tax deductible. If you contribute to your 401(k), you would deduct the contributions from your income taxes and still be eligible for this tax credit! Take advantage of this if you’re able to!

(Photo: jbhill)

Saver’s Credit: Retirement Savings Contribution Tax Credit from personal finance blog Bargaineering.com.

Make Work Pay Tax Credit

The Make Work Pay Tax Credit was a law included in the new stimulus package called the American Recovery & Reinvestment Plan and called for a refundable tax credit to workers in 2009 and 2010.

Details:

• Workers get a tax credit of 6.2% of their earned income, up to $400 for individuals and $800 for couples.
• Nonresident aliens and individuals claimed as dependents are not eligible.
• The credit phases out at 2% of income over $150,000 for couples and $75,000 for single filers, with the credit completely eliminated for couples earning more than $190,000 and singles earning more than $95,000.
• The credit is reduced by any other payments associated with the stimulus package, such as the Social Security benefit of $250.

The credit will come by way of a reduction of paycheck withholdings, meaning your paycheck will be slightly larger than before. It won’t seem like a lot but it’ll be $400 or $800 (or less, based on your income) you didn’t have before! The Tax Policy Center has a little writeup about it, giving it a B+.

One thing to watch out for is how employers implement this. For single filers, you don’t have to worry because your employer knows your complete tax picture. For couples, you may want to work with your HR to determine the proper amounts. If you believe your combined income is in the phaseout region, or above it, be sure to tell your HR representative. If they give you the credit and you aren’t supposed to get it, you will owe taxes, and perhaps penalties, next year, warns MarketWatch.

That’s it! That’s the Make Work Pay Credit and what some people call the new stimulus check!

(Photo: oyf)

Make Work Pay Stimulus Tax Credit from personal finance blog Bargaineering.com.

You are legally required to pay income tax. To argue otherwise is at best a political statement (which I think is fine, it’s our First Amendment right) and at worst a one way trip to the slammer.

Want to know which law requires it? Read on.

Internal Revenue Code

Tax law itself is codified in the Internal Revenue Code, which is known as Title 26 in the United States Code. The United States Code, as defined by the Government Printing Office, is the codification of general and permanent laws of the United States. It’s divided into fifty “titles” (or volumes) and published by the Office of the Law Revision Counsel of the U.S. House of Representatives every six years, with supplements being made available between editions. In layman’s terms, the United States Code is the collection of laws passed by the legislature and signed by the executive – the Code is law.

Title 26 covers the Internal Revenue Code. The Code itself is a collection of laws that were passed by Congress and bits and amendments were passed through the years. When people talk about AMT reform, they’re talking about passing amendments to adjust who gets affected by the Alternative Minimum Tax.

Which part of the Internal Revenue Code requires us the pay taxes? Section 1 (26 U.S.C. § 1), it states:

There is hereby imposed on the taxable income of every individual … who is not a married individual a tax determined in accordance with the following table ….

There you have it, right in the first section of the Code. When taxes are due is set in Section 6076: “[R]eturns made on the basis of the calendar year shall be filed on or before the 15th day of April following the close of the calendar year.” If you are unconvinced, I think I’ve discovered the single most valuable resource on the Internet with regards to the mandatory nature of income tax at Jon Siegel’s Income Tax Page. If you’re really interested, you could spend a good hour poking around at everything in there. Professor Siegel is a Professor of Law at The George Washington University Law School, he knows his stuff.

Finally, if you have any other frivolous tax arguments, the IRS has refuted practically all of them by now, including the one about how payment of tax is voluntary. Maybe you can find a new one and get yours added to the list!

(Photo: blmurch )

What Law Requires Us To Pay Taxes? from personal finance blog Bargaineering.com.

1. You must itemize: Charitable contributions of any kind are only tax deductible if you file itemized deductions. If you take the standard deduction then you can save yourself some time and stop here because you won’t be able to deduct mileage or contributions.
2. Determine whether the charity is an eligible charity: The IRS goes through a bunch of rules and lists five “qualified organization” types. In general, if they’re a recognized charitable organization then, as the Howard County Meals on Wheels is, you’re safe.
3. Decide if you want to deduct actual expenses or mileage: You have two choices with car related expenses, you can either claim the out of pocket expenses related to the direct use of your car (includes gas and oil, but not repair, registration, tires, insurance, etc) or you can claim the standard mileage of $0.14 a mile. If you pick the standard mileage rate, you can still deduct parking fees and tolls.
4. Keep adequate and accurate records: If you deduct mileage, you will want to keep a record of the mileage as it is being driven. FOr my business mileage, I keep an excel spreadsheet that documents my mileage. Some people keep a notebook in their car. The IRS says: “Whether your records are considered reliable depends on all the facts and circumstances. Generally, they may be considered reliable if you made them regularly and at or near the time you had the expenses.” For expenses, simply record the costs. Lastly, you may want to get acknowledgment from the organization you’re supporting but that shouldn’t be an issue after the fact.
5. Claim the deduction on Schedule A: If you use tax preparation software, it can enter it in for you.

I had hoped the value of a mile driven for charity would be equal to that of one driven for business (over fifty cents!), but it’s not. It does make some sense though, money isn’t the motivation for volunteering, unlike business, so we should be happy we can deduct anything at all!

(Photo: jacobwlester)

Deducting Miles for Charitable Volunteering from personal finance blog Bargaineering.com.

• Service fees: Most of the companies that accept credit or debit card payments charge a percentage convenience fee that ranges from 2.49% to 3.93%. The ones that offer a flat fee often have restrictions – for example Link2Gov’s $3.95 flat fee is only for debit card payments less than $1,200 (in which case you might as well use a electronic debit for free or a personal check!). Paying 2.49% on top of the taxes you have due is too high and unnecessary. Even if you have it offset by credit card rewards, you’re still paying a premium on what probably is a fairly large amount.
• Interest payments: Credit card interest has a funny way of turning a molehill into a mountain.

What should you do? You should try to reach an agreement with the IRS on some sort of payment plan. You will still have to pay interest but you avoid double digit credit card usury rates and you can avoid the “convenience fees” charged by the third party providers.

Two IRS Payment Plan Options

You have two options, the first is an installment agreement and the second is a partial payment installment agreement. With the installment agreement, you are requesting that you be given essentially a loan from the IRS to pay back the taxes owed over a period of three years or less. Fill out IRS Form 9465 and the IRS will respond in about 30 days. Read the instructions carefully because there’s a lot of information in there that may pertain to you. For example, there you may be qualify for guaranteed acceptance if you meet certain criteria; also, if you can pay within 120 days, you can avoid the agreement fee ($105, $52 if you would’ve paid via electronic debits). The interest rate the IRS charges is typically the Federal short-term rate plus 3% and is updated quarterly. If you want the partial payment option, fill out Form 9465 as normal and then fill out Form 433-A, Collection Information Statement. It’s a little more complicated by this About.com page covers it pretty comprehensively.

You’ll have to decide which option is best for you but I’m pretty sure the credit card route is a risky one. Even if you were to open a 0% APR credit card and get your purchases at 0% for 12 months, it’s a risky game to play unless your amount is small and you’re certain you can pay it back given a few more months.

(Photo: mlee)

IRS Tax Payment Plan: Don’t Pay Taxes With A Credit Card from personal finance blog Bargaineering.com.