Taxes Column


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 Taxes 
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Spectacular Celebrity Tax Problems

Nicolas CageIt’s hard for us to conceive of the idea that celebrities have tax trouble. After all, they have plenty of money. Shouldn’t they be able to pay their taxes? Shouldn’t they be able to hire people who make sure they can pay their taxes? The tax brackets shouldn’t trip them up… they’re usually in the highest one!

Celebrities are people, too, and they have some of the same problems and troubles we have. Maybe you forgot to deposit that million dollar check for appearing in that straight to DVD movie? Maybe you forgot the $50,000 royalty check for your show’s syndication last year… eh, we all have those problems. Right? Of course, these troubles tend to happen on a larger scale — just as celebrity wealth is on a scale beyond what most of us will see in our lifetimes.

Here are some of the most surprising celebrities with tax issues:
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 Career, Taxes 
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Your Teen’s Summer Job and Taxes

summer jobIt’s a good idea for kids to learn how to work. A summer job might be just the thing. Indeed, a summer job is probably one of the best things a teenager can do to learn about hard work, and to learn about money management. Even if you feel that a high school job isn’t necessary during the school year, once summer rolls around, there are few things as rewarding as a summer job for a teenager.

Not only can a summer job help your child earn money, but it can also reduce the number of times you hear “I’m bored” echoing throughout your home. However, even as your teen learns valuable life skills and makes more money, it’s important that your remember that Uncle Sam is likely to want his cut. There’s a chance that your teenager will also end up paying taxes on his or her summer job. (And, if your child has investment income, don’t forget about the kiddie tax.)

Generally, if your teen is your dependent, he or she doesn’t even have to file a tax return unless he or she makes more than the standard deduction. For 2012, the standard deduction for singles is $5,950. As long as your teenager doesn’t make more than that, you don’t have to worry about his or her taxes. When filling out the W-4 for an employer, your teen might be able to claim an exemption on Line 7 is he or she is pretty certain that wages for the year won’t exceed the standard deduction.

While that is pretty straightforward, things get a little stickier if the employer uses different employee designations.

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 Taxes 
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What is the Fiscal Cliff?

Oceanside CliffYou have may heard a lot of talk lately about this “fiscal cliff.” It refers to yet another battle over the debt ceiling, a lot of automatic cuts and tax law expirations, and generally a “perfect storm” of fiscal policy that paints a bad economic picture. Coupled with all the political fighting, a Presidential election, and you have yourself a bad scenario with a potentially bad outcome.

They call it a fiscal cliff because fiscal policy refers to using taxation and spending to influence the economy (as opposed to monetary policy, which uses the monetary supply to influence the economy) and all of these problems are fiscal problems. They’re the result of politicians kicking the proverbial can down the road, implementing extensions rather than making a decision for the future. I don’t blame them, it’s hard to make these decisions and get them passed in such a partisan environment.

But that doesn’t help us understand what it is. Here’s the fiscal cliff, as I understand it:

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 Taxes 
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How to Fill Out a 2012 Form W-4

Form W-4When go to work for “the man,” you will be expected to fill out a Form W-4. This is a form provided by the IRS that helps employers figure out how much money should be taken out of each paycheck and sent on to Uncle Sam. The way you fill out your W-4 determines how much of your paycheck is withheld. And how much of your paycheck is withheld determines how much money you owe in April, or how big of a refund you get back.

For many, the sweet spot is figuring out the withholding so that you don’t owe a lot of money come tax time, but also so that you don’t have a huge refund, which is tantamount to giving the government an interest-free loan. The idea is to get yourself as close to 0 as possible. If you want to adjust your withholding to better reflect your tax liability, all you have to do is fill out and turn in a new W-4.

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 Taxes 
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Maryland State Income Tax Increase

I don’t usually write about specific state by state tax issues but since I live in Maryland, I hope you’ll indulge me a little as I chew through the recent news that the Maryland Assembly approved a budget bill that would raise $260+ million in income taxes. This isn’t a soak the rich type of proposal, which the millionaire’s tax seemed to be, but one borne out of a need to raise more funds for education and other “positive” things.

We’ll take a look at the income tax situation as it stands now and what will be changing once the bill is signed. Please let me know if I get anything wrong and I’ll fix it as soon as possible. If you just want to know the difference, basically if you make more than $100,000 (or are married filing jointly and make more than $150,000), your tax liability will go up.

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 Taxes 
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How Capital Gains Taxes Work

Wall StreetWhen you hear about billionaire Warren Buffett paying a lower effective tax rate than his secretary, you’re hearing long term capital gains at work. The tax code smiles favorably on investment and the tax rate on capital gains of assets held for more than one year is much lower than ordinary income tax rates. If you own an asset for less than one year, you pay short term capital gains which mirror the rate of ordinary income tax.

Qualified dividends also enjoy favorable tax rates, with the income taxed at long term capital gains, which make them especially appealing to those on fixed income, such as retirees. As long as the dividend is considered a qualified dividend, you can enjoy the lower rates.

So what are the capital gains tax rates for 2012?

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 Taxes 
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When Should You File an Amended Return?

TaxesTax Day is past. You’ve filed your tax return with the IRS. You are either awaiting a refund, or you have dutifully mailed off the check for what you owe in taxes. However, you realize that you are missing something. You forgot to add some paperwork, and you are entitled to a bigger refund, or you don’t owe as much money. Maybe you forgot to report some income, or you made a mistake. Do you have recourse now that your 1040 is already wending its way through the IRS system?

Actually, yes. You can file an amended tax return.

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 Taxes 
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How Long Should You Keep Your Tax Records?

I don’t have any evidence of this but I would guess that the one of biggest mistakes made by most of us during the year is not keeping important receipts and paperwork. I don’t know many people who claim that they have a talent for keeping their important documents organized. In fact, most of the people I know are the type that can’t keep track of things at all and that can be detrimental during tax season.

Since its tax time, how long is long enough to keep your tax or financial documents? When can you throw them away or should you ever?

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