Who enjoys doing taxes? For the one guy out there who raised your hand, put it down… no one believes you anyway. The rest of us hate doing taxes and more importantly, we hate paying The Man. One thing we hate more than paying The Man, is overpaying The Man. So, the annual searching and researching for deductions begins right around now and goes on until April 15th. Let me make a quick suggestion, skip the caveman tax return by-hand thing and enter the 21st century. Let software do the heavy lifting.

By using tax software, you essentially guarantee that you’ll get as accurate a return as you can possibly get as long as you answer all the questions accurately (as they say, “garbage in, garbage out”). If you miss a potential deduction, tax preparation software will likely ask the right questions and get the deduction if you qualify. The software updates itself so you’re sure to get any changes to tax law that are passed after the IRS printed out the paper forms (such as the AMT patch). While software isn’t infallible, it’s certainly better at it than you are.

One additional thing to consider is that many Americans qualify for free tax preparation (and even filing!) through special programs. If it’s free, it makes no sense to do it yourself.

Lastly, here are some common income tax deduction and some often overlooked income tax deductions if you still want to do the caveman by-hand thing.

With the recent passage of the 2008 tax stimulus package, many people have been asking what their adjusted gross income is and how that differs from their take home pay, their salary, and the other similarly named modified adjusted gross income. The differences are pretty simple once you understand the motivations behind it but it’s easy to confuse many of them together.

First off, you salary is the pre-tax amount your employer pays you to work for them. Next, your take home pay is your salary minus any deductions you may have for health insurance, retirement plan contributions such as a 401(k), taxes, and any other adjustments. Your take home pay is the dollar amount that gets written on the check (or is deposited into your bank account). Your salary is what you tell your parents when you get a job (it’s bigger).

Why is this important? The AGI and MAGI are often used to determine if you are eligible for certain benefits, deductions, etc. For example, the MAGI is used to determine contribution eligibility for IRAs such as the Roth IRA.

Adjusted Gross Income

According to the IRS, your AGI is all taxable income you earn including the following categories:

• wages,
• salaries,
• tips,
• taxable interest,
• ordinary dividends,
• taxable refunds, credits, or offsets of state and local income taxes,
• alimony received,
• business income or loss,
• capital gains or losses,
• other gains or losses,
• taxable IRA distributions,
• taxable pensions and annuities,
• rental real estate,
• royalties,
• farm income or losses,
• unemployment compensation,
• taxable social security benefits,
• and other income

minus

• specific deductions including educator expenses,
• the IRA deduction,
• student loan interest deduction,
• tuition and fees deduction,
• Archer MSA deduction,
• moving expenses,
• one-half of self-employment tax,
• self-employed health insurance deduction,
• self-employed SEP, SIMPLE, and qualified plans,
• penalty on early withdrawal of savings, and
• alimony paid by you.

Some argue that this is what appears on your 1099 or your W-2’s, but that’s not entirely accurate (self-employment tax isn’t even within scope for a 1099). The full list above is comprehensive and provided by the IRS so that’s the official story (source). Note one important item(s) missing from the “minus” list, the standard deduction or any other itemized deductions (like mortgage interest).

Modified AGI

How does the MAGI differ? You simply take your AGI and exclude the following (source):

• Any passive loss or passive income, or
• Any rental losses (whether or not allowed by IRC § 469(c)(7)), or
• IRA,
• taxable social security or
• One-half of self-employment tax (IRC § 469(i)(3)(E)) or
• Exclusion under 137 for adoption expenses or
• Student loan interest.
• Exclusion for income from US savings bonds (to pay higher education tuition and fees)
• Qualified tuition expenses (tax years 2002 and later)
• Tuition and fees deduction
• Any overall loss from a PTP (publicly traded partnership)

Relationships

So your MAGI will be higher than your AGI but smaller than your gross income. Your gross income will be your salary plus any other income, passive or active, and thus larger than MAGI or AGI (since they include subtractions for certain items).

Why is this important?

Knowing what makes up these numbers is important because those values will dictate what you are permitted to do, tax-wise. The best example is with a Roth IRA. If you file as a single and your MAGI is under $99,000 for 2007, you can contribute the maximum $5,000. If your MAGI is between $99,000 and $114,000 then your contribution is phased out (Roth IRA contribution phase outs). If your MAGI is over $114,000, then you can’t contribute to a Roth IRA.

So, if you know you’re within those phaseout ranges, you might want to contribute a little bit more into the 401(k) so you can take advantage of the Roth IRA. Since you know what makes up the MAGI calculation, you would be well informed and smart to do that (if you wanted to contribute to a Roth IRA).

There you have it, AGI and MAGI, all wrapped up in a pretty little (and somewhat complex) bow.

The deadline for a company to send you a W-2 or 1099 was January 31st. Since that date is more than a week behind us, you should have all of your forms and you should be able to prepare you taxes this very moment. If you are expecting a rebate, I’d finish up your taxes this weekend, e-file, request direct deposit, and you could have the funds back to you in less than two weeks. If you’re expecting to pay taxes, maybe you can wait a little bit!

What if you haven’t received them all or don’t know which ones to expect? Below I’ll list all of the major 1099 forms out there, who will be sending what, and what you should do if you haven’t received it yet.

First, you don’t actually need any of your 1099 forms at the time you fill out your taxes. It’s important to have a copy of them in case you are audited but you won’t send any of them with your return. If you e-file, you don’t send anything at all. The IRS will already have their copy of the 1099 anyway so they don’t really need yours. You will, however, need the information on the 1099 since you will need to enter that as income on your return.

So, what 1099s should you expect? Six 1099 forms cover what the majority of taxpayers will be receiving and they are:

• 1099-INT - This 1099 form primarily covers interest income from banks. A lot of banks have stopped mailing the form and make them available online (such as ING Direct). This is better for the environment and cheaper for them! If you haven’t gotten one you should just check your online account. If you don’t have online account access, you should sign up for it! If its not available online, which is extremely unlikely, call your bank and request your 1099. They should be able to tell you how much interest you’ve earned last year so you can fill out the return without waiting for the form.
• 1099-B - Typically sent to you from a brokerage, these indicate the proceeds earned or lost from the sale of securities. Again, many brokerages will provide this on the brokerage site itself and not mail out a paper form. You’ll use this information on Schedule D (Capital Gains and Losses).
• 1099-DIV - This one covers “Qualified and non-qualified dividends” and those values will typically be used on your 1040 form. This will usually come from a brokerage so turn to them for the form if you haven’t received one yet.
• 1099-SSA - This form will detail your Social Security earnings for the year. If you’ve lost it, you’ll have to request a new one from the Social Security Administration and that will take 10 days.
• 1099-R - This form details any distributions you’ve received from your IRAs, pensions, and annuities. Since each IRA, pension, and annuity account will send you one, you should request this form from the place you are actually missing it. So if you have a Vanguard account and you received a distribution from a Traditional IRA with them, request a 1099-R from Vanguard. The values on this form will go onto your 1040 as well.
• 1099-MISC - This is for… everything else. If you performed work as an independent contractor, your “employer” will send you a 1099. Usually they will only send one if you earned more than $600 that year but they will report the income regardless of the amount (it’s an expense on their books, they’re going to take the deduction!). The income from this usually goes on a Schedule C: Profit and Loss from Business. If you need a new one, request it from your “employer.”

Earlier this week I shared a list of free tax preparation services, so why not end the week with a tax-related giveaway? I was contacted by a PR representative of H&R Block and offered two online codes that would allow two hardworking Americans the ability to take advantage of H&R Block’s TaxCut online service absolutely free.



I ask two things of you:

• Please read this list of free tax preparation services. Don’t enter if you can get it for free!
• Please share with me either the craziest tax related story you heard, the more ridiculous tax deduction you’ve ever heard, or your favorite tax related joke in the comments. (no story/deduction/joke, no entry!)

How will I pick the winner? One winner will be selected at random, one winner will be selected by me.

When does it end? I will select two winners on February 15th, email them, and the PR company will send out the codes as soon as they can. If I email you on the 15th and you don’t respond by the end of the business day on the 19th (Tuesday), I’m picking someone else (sorry!). Tax day is coming up soon so I don’t want to dilly dally, whatever the heck that means.

Good luck!

(Photo by nicksteever)

I bet the first thing you thought after you screamed “Happy New Year!” was how it was now time to do your taxes. (no? me neither) Unfortunately, it’s now February and it’s time to start thinking about doing taxes! Wheee! To help you along, I wanted to outline all the free resources you have for tax preparation. By this I mean I’m listing every single way I think you can get absolutely free tax preparation based on your financial situation. Some tax prep companies offer free tax filing if your situation is simple (1040EZ, or plain 1040), the IRS offers free tax filing if your adjusted gross income was under $54,000 in 2007 (it’s through third party companies), and some other companies offer free tax preparation for their customers as a fringe benefit. I’ll try to list them all. If I miss one that you know of (one that expands on the group of eligible taxpayers, we don’t need another company that offers free tax prep for the same groups already covered below), please leave a comment or email me and I’ll add to this list.

Why do companies offer free tax filing?

Companies don’t do things out of the goodness of their hearts, so where’s the catch? It appears that many of these companies offer free federal tax filing in the hopes that you’ll sign up for their state tax filing services too. With many of the programs it’s easy for them (and thus easier for you) to transfer the data over and recalculate for your state taxes. They also hope to capture you as a recurring customer since your tax information will be stored in their databases and thus you’ll have a history with them. Finally, some will try to make money off services such as “refund anticipation loans” or “money back loans.” Those “loans” are horrible deals for the consumer, which means they make tax prep companies lots of money. (If you e-file, the IRS estimates that it takes around 8-15 days with direct deposit to get your tax rebate!)

How good could these freebies be?

I haven’t tried them all, but William Perez of About.com has tried a few and wrote about their advantages and disadvantages. I don’t know how accurate that article is because it’s not dated, but it’s a start. I think that most of the major companies are going to give you great free service. The field is simply too competitive for them to risk standing up a sub-par “free” version. Today’s free customer is tomorrow’s paying customer. If my free experience is bad, there will never be a paid experience!

Now, onto the offers!

IRS freefile

The IRS freefile program is designed for those with an AGI under $54,000 in 2007 and some of the companies that offer these services also put age restrictions as well. For example, Free1040TaxReturn.com states: “Free Federal online tax preparation and e-File if your adjusted gross income is $54,000 or less and you are age 49 or under.” (emphasis mine) I suspect that has to deal more with handling the added complexities of Social Security and Medicare and isn’t age discrimination. With any of those companies listed, you’ll definitely get free federal tax filing and e-filing; you may have to pay extra for state. The IRS also offers a wizard to help determine which company is best for you.

One caveat is that not every company listed follows the $54,000 AGI rule the same way. As you’ll see in the description below of TurboTax’s offering, the $54,000 AGI rule only applies to active duty military.

TurboTax

TurboTax offers free tax filing if you:

• earned $30,000 in adjusted gross income, or,
• qualify for earned income credit with an AGI up to $39,783, or,
• served as active duty military with an AGI of $54,000 or less.

As an added bonus, you get free state filing if you live in Alabama, Arkansas, Arizona, Georgia, Idaho, Iowa, Kentucky, Massachusetts, Michigan, Minnesota, Missouri, New York, North Dakota, North Carolina, Oklahoma, Oregon, Rhode Islane, South Carolina, Vermont, or West Virginia.

What does TurboTax cover in their free version? Your standard 1040, 1040A, and 1040EZ forms along with a bunch of schedules. They provide a list of what’s covered in the free version. The first part of that list shows the included forms, the second part shows the forms not included. One notable form excluded from the free filing is Schedule D: Capital Gains and Losses.

TaxAct

TaxAct offers free federal tax filing of 1040, 1040A, and 1040EZ along with free e-filing, with no income restrictions (state filing is, as expected, extra). I was wondering if they had any catches (I realize they say “no catches! no gimmicks!” but c’mon… who takes marketing at face value!?) and discovered this list of “Included IRS Forms.” From what I can tell, it contains everything I could possibly need including Schedule C: Profit/Loss from Business. In fact, I wrote up this review of TaxAct and give it a B+ back in March of 2005. It’s nearly three years later, I might have to try them again and update that review.

State Farm Customers

State Farm is offering free tax filing through TurboTax for its customers.

Just Need Some Assistance?

If you’re just looking for a little extra help but not full blown preparation (or you don’t qualify for any of the above programs), you can turn to the IRS Volunteer Income Tax Assistance (VITA) Program or the Tax Counseling for the Elderly (TCE) Program if you qualify. To learn more about either program and their criteria, please visit this IRS page.

(Photo by gratiot)

Every year millions of hard working Americans will walk into a tax preparers office to get their taxes done. A small subset of those hard working Americans will agree to a tax rebate loan, sometimes called a refund anticipation loan, without fully understanding how ridiculously expensive they are. Sometimes they aren’t well informed, sometimes they are simply strapped for cash, sometimes they just don’t do the math and don’t realize they’re getting the short end of the stick. Ultimately I believe the responsibility falls on the consumer to understand it because the tax preparation companies disclose everything. They tell you exactly what you’re paying, they don’t make the information difficult to find (I found H&R Block’s RAL information within two minutes), and it’s always on the consumer to be aware of what he or she is signing.

That being said, I feel that it’s my responsibility to at least write a little about how absolutely ridiculous these types of loans are. According to the IRS, if you e-file and select direct deposit as one of your options, you should get your refund in an estimated 8 to 15 days. Eight to fifteen days. That’s it! You could file right this second and get your refund in time to make rent at the end of the month. That’s how quick it is.

So, in order to get your own money back a little quicker, people are turning to loans? I had no idea how expensive they were until I looked at actual pricing information. Check out this H&R Block Refund Anticipation Loan pricing sheet (I found this in two minutes, no joke). Let’s say you are going to get a $2,000 check directly from H&R Block, rather than waiting the 8 to 15 estimated days it’ll take for the IRS to direct deposit the funds to your account. How much will you pay?

• Activation Fee: $29.95 right off the bat to even play the RAL game.
• 36% APR: That’s the interest rate of the loan you’re getting! Thirty-six percent APR! People scream about how credit card companies are predatory and the highest rate they charge, when you start defaulting on payments, is 29.99%! (That’s Citi’s default rate)
• Check Processing Fee: Another $20 fee to “process” your check.

So, on a $2,000 check they estimate that it’ll have fees of about $71.41, or about 3.5%. $71.41 is the price of a nice dinner for two. $71.41 towards your credit card debt will find you closer to freedom. Paying $71.41 to borrow money from your future self (in 8-15 days too)… that’s an outstanding ripoff. The lower the amount you get back, the more exorbitant the fees look. If your RAL is only for $200, then you’re paying $52.09 in fees which makes it an unfathomable 26%. That’s like me reaching into your pocket and swapping out all your twenty dollar bills with fifteen dollars bills. You think that sounds ludicrous? Think of how many people accept those fifteen dollars bills!

Are you really that strapped for cash? If so, that’s totally understandable. The solution isn’t a refund anticipation loan, the solution is to file your taxes right this very second. You can find an IRS sanctioned tax preparer that will help you prepare and e-file you taxes for free (if you qualify). Then, the next step is to adjust your withholdings so you aren’t over-prepaying your taxes next year. The last resort is a refund anticipation loan.

(Photo by hullbody)

This week’s hodgepodge of links range from a primer on how to read financial statements to discussion of severance and overtime to U-Haul getting the smackdown in California. Should make for some entertaining weekend reading!

Looking for a good primer on how to read financial statements? Why not check out the folks who analyze the stuff everyday, the SEC? The Security and Exchange Committee has a really easy to read beginners guide to financial statements that will more than adequately acclimate you to how to analyze a financial statement of a company. (Courtesy of Jeremy!)

All this talk of recession has probably gotten a lot of people spooked and I was doubly surprised to discover that there is no federal law requiring severance pay! It is more a custom than it is a requirement, which makes sense if your company has let you go because it’s facing a tight financial situation. I suppose I always assumed a severance package was standard. (Oh, and it’s legal for your company to require overtime from you, but they have to pay)

One of the most commented posts I have is my horror story about U-Haul and how I hate U-Haul; so, I was delightfully surprised to hear that U-Haul has settled a class action lawsuit in California that would result in them paying $50 every time they didn’t honor a reservation. Despite this new agreement, I still wouldn’t rent from U-Haul since that $50 doesn’t guarantee that you won’t be driving a death trap capable of breaking down going 60 mph on the highway.

An issue that has come up a bunch of times, especially now with tax season looming, is whether or not credit card rebates are taxable. I’ve always thought that they aren’t so this is good confirmation from a third party.

I just got this great email from a publicist that sent me a copy of J.K.Lasser’s Your Income Tax 2008 and it involves what casinos report to the IRS (I’m a fan of the casino, in moderation, so this was entertaining to read):

• Slot machines and bingo: Payouts of $1,200 or more are reported to the IRS, but there is no withholding taken out.
• Keno: Similar to slot machines, but the amount won must be at least $1,500.
• State lotteries and sweepstakes: Withholding is taken out of all winnings of more than $5,000.
• Parimutuel pools, including horse and dog races: Subject to withholding, but only if the winnings are both more than $5,000 and at least 300 times as large as the amount bet.
• Big winners are reported to the IRS on a special Form W-2G.
• If winnings are to be split, as with a lottery pool, winners are reported on a Form 5754.

Finally, I leave you with this great little exchange between Mrs. Raising4Boys and their three year old tyke. (I don’t want to ruin it, so click through and read it; I guarantee at least half of you won’t be disappointed)