Which Tax Software Should You Use?

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It’s January, and that means that employers have begun to give employees their W2 forms. When it comes to filing your taxes, you should consider your options. Do you want to meet with a professional, or would you rather use a tax software? This article focuses on tax software. Below is a breakdown of three of the most popular tax software options.

TurboTax

TurboTax is one of the most popular names when it comes to online tax software. The software is easy to navigate, and the instructions are straightforward which makes it a great choice for taxpayers who are using tax software for the first time. Furthermore, the software allows you to import documents from over a million employers and financial institutions. The bottom line is that TurboTax is one of the most user-friendly tax software options that are available. With TurboTax it’s never an issue to go back and update your entries, so you don’t have to worry if you forget to add something. One of the only cons with TurboTax is its price. There’s a fee for using the online version and a fee for getting a state tax return. Plus if you have certain investments you might have to use TurboTax Premier which is more expensive than their basic version.

H&R Block

H&R Block’s tax software is just as easy to use as the TurboTax software. One of the best features of Block’s software is the checklists it provides. For example, one checklist makes sure you don’t forget to provide all of the required tax forms before you submit your filing. Block also provides “Learn More” links that answer most of the questions you will have when completing your taxes. The cost of using Block is similar to TurboTax; however, unlike TurboTax, you don’t have to pay more if you have investment income. One of the only downsides of Block is its search feature. It doesn’t always provide the best resources to help you get the answer you’re looking for.

TaxAct

TaxAct is one of the most inexpensive software on the market. However, if you decide to itemize you may have to pay more than you would otherwise. Still, the software offers a great deal when compared to competitors. Compared to competitors’ software, it’s not as easy to update your filing if you realize you forgot to add information. TaxAct probably isn’t the best choice for taxpayers who have never used tax software before. Other programs do a better job of hand-holding. The software has some reassuring security features, though. If you leave the program open but aren’t active, it will automatically log you out after a couple of minutes. Ultimately, TaxAct is the best software to use if your biggest concern is affordability. The software’s “Price Lock Guarantee” means that once you pay for the program you won’t have to pay more—even if you purchase it in January and wait until April to submit your filing.

Tax Refund Boosting Hacks

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Tax season will be here before you know it. It’s time to start thinking about the ways you can get the most out of your return. Taxes can be tricky to navigate. There are a lot of factors that go into your return, some of which automated tax software won’t be able to pick up on. Before you file your taxes, take a look at the following items to see if you can take advantage of the unique benefits they offer.

Use Tax Deductions!

Many people shy away from tax deductions. Most of the time it’s only because they don’t understand them or didn’t know they qualified. You can deduct charitable donations and unreimbursed work expenses. There is even a deduction available if you’ve moved over 50 miles for a new job. You can claim all the moving, storage, and travel expenses associated with your move. Save all work expense and charitable donation receipts throughout the year so you can receive the right deduction and have the proof to back it up.

File Early

Filing early does not have a direct effect on the amount of money you get back. It does, however, expedite the refund process. You may even save yourself some money if you use part of your refund to pay off debt from the holidays. The sooner you pay down the debt, the less interest you have to pay.

Retirement Contribution Benefits

If you contribute to an IRA account, try your best to max out your contribution before the end of the year. You can receive a tax deduction for as much as your maximum contribution allotment. You may even be lucky enough to reap the benefits of a rare “double dip.” If you qualify for a saver’s credit, you’ll receive an additional deduction on top of retirement contribution deduction.

Dependents

Did you know that family members are not the only ones you can claim as dependents? If you have taken in and supported a friend for the entire year, you could receive a dependent exemption. There are some caveats to this rule. In order to qualify, non-relatives must reside within your home, but relatives do not. In either situation, you must provide for over half of their support. Finally, the dependent must also not make more than $4,000 in taxable income. If you think you may be able to claim dependents, it will not hurt to look into!

Raising Money-Savvy Kids

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Unfortunately, money management does not fall under the curriculum taught in school. Parents are responsible for leading by example and teaching the basics of money management. It may seem like a daunting task, because most people do not remember how they were taught about money, they just know it now. That’s why I put together this list in order to give you ideas on how to start raising money-savvy kids.

Talk About Money

The first step in teaching your children about money is constructing an ongoing, open discussion about money. Talking about money is something we don’t normally deem acceptable. We do not disclose salaries, we try not to lead onto how much we have, and we certainly do not ask other people about their money. These social norms have their place within our society and it’s important to stress that to your children as well. There’s a time and a place for everything. When it comes to money, let your children know they can talk to you about it, ask questions, and not fear making you uncomfortable.

Budget Together

Budgeting is a huge part of money management. Keeping track of spending and setting restrictions on yourself is a great habit to establish early. Budgets are hard to implement after bad habits are formed, so to avoid forming them, budget together. You can be as open about this as you’d like. If you want to be completely transparent and work on the household budget, go for it! If that seems too daunting, work on a personal budget with your child. Have them outline goals and also learn how to work with the income (allowance) they receive.

Utilize Teachable Moments

There will be many teachable moments throughout your money management lessons. Identifying them and knowing how to come out the other side with a lesson is a great way to further instill all you both have been working towards. There are opportunities for real world application everywhere. Include your children in on the family grocery shop. Explain how much you plan on spending and how you came up with that number. Then work together to stick to it!

Use Tough Love (even when it’s hard)

Tough love is a necessary evil when it comes to learning about money. You more than likely ran into some financial trouble at one point or another. After you recovered and stabilized your finances, you learned a valuable lesson about what not to do. Providing children with these realizations early on can firmly cement your teachings into their minds. They may have to find out the hard way that it wasn’t a good idea to blow all their money on a toy the day they receive their allowance. Your child won’t even learn that lesson until a few weeks later when they do not have enough money for something else they desperately want. By not giving in and buying it for them, you’re practicing tough love so they can learn a valuable lesson.

Cash vs Accrual: Which is King?

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There are two methods by which most accounting is done and by which income is reported to the IRS. There is the Cash method and the Accrual method.

These two things are basically the methods of business keeps track of its income and expenses. They have to do with the timeframe in which debits and credits are made. Which method a business uses is entirely up to them. However, it is important to understand how each one works.

Cash

The cash method is the common way in which small business tracks their debits and credits. With this method, income is not counted until cash is actually received, and expenses are not counted until they are actually paid.

Accrual

The accrual method is income that is counted when the sale occurs. It is also the method by which expenses are counted when the goods or services are obtained. In this method, you don’t have to have money in hand or actually pay money out, to record a transaction.

Choosing a method

As stated, you are free to choose whichever method you want for your business, with some exceptions. NOLO.com states that the exceptions are as follows:

Most small businesses (with sales of less than $5 million per year) are free to adopt either accounting method. You must use the accrual method if:

 

  • your business has sales of more than $5 million per year, or
  • your business stocks an inventory of items that you will sell to the public and your gross receipts are over $1 million per year. Inventory includes any merchandise you sell, as well as supplies that will physically become part of an item intended for sale.

Cash: Pros and Cons

Pro: provides a more accurate picture of how much actual cash your business has and you can deduct expenses in the year they are paid instead of having to wait until the related revenue is earned and reportable.

Con: may offer a misleading picture of longer-term profitability. You also need to report revenue as soon as payment is received, which means you may end up paying tax on the gross amount if your deductible expenses aren’t reported until a future tax year.

Accrual: Pros & Cons

Pro: shows the fluctuation of business income and debts more accurately.ou can deduct expenses in the year you receive the underlying service or property and become liable for payment, even if you don’t actually make payment until a future tax year.

Con: Does not show accuracy in which cash reserves are available. In addition, you will have to report income in the year your customers have a legal obligation to make payment, not at the time of actual payment. Because of this, you may end up paying tax on money you didn’t receive during the tax year.

Again, most small businesses function well on the cash method. This is the easiest to track and manage. However, there was a recent article written by Forbes in the Entrepreneur section of its website that might interest those considering the accrual method. It discusses some little known tax advantages of this method. You can find that article here.

No matter what method chosen, it is important to be knowledgeable about the choices available. Both cash and accrual have their advantages and should be considered with care.

The Documents You Need To Provide Your Tax Accountant

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When you meet with a tax accountant it is important to bring all the necessary documents in order to get the most out of this meeting. There is a long list of important documents necessary to prepare your tax return. I recently found this article, which I thought would be important to share. Whether you have been to an accountant before or you just need a refresher, here is a comprehensive list of documents that you need to bring to make the most of your visit.

Documents that show all your income for the year. These documents may include:

  • W-2s from your employers
  • 1099-MISC forms (self-employment income)
  • 1099-INT (interest) and 1099-DIV (dividends) forms
  • 1099-B forms (shows brokerage trades in stocks and bonds)
  • K-1 forms (income from a partnership, small business, or trust)
  • 1099-SSA (Social Security received)

Expense Documentation

It is important to bring written documents, such as a spreadsheet or bank statement, for any income not reported on a W-2 or 1099 form. This income could include other self-employment income, rental income or alimony.

You will also want to bring the necessary documentation for any contributions to your traditional or SEP-IRA, moving expenses, college expenses, medical and dental expenses, real estate taxes, gifts to charities and churches, and daycare or childcare costs.

Note: Some expenses are reported to you. For example, mortgage interest is reported on form 1098 and student loan interest is reported on form 1098-E.

Lastly, if you paid estimated taxes, bring a summary of your estimated federal and state tax payments as well as any canceled checks.

What to do if you are missing documents:

  • If you are missing your Form W-2, you can ask your employer to send you a new copy. Some employers may charge a small fee for this service but all employers are required by law to keep copies of your W-2 forms for at least four years.
  • If you are miss your Form 1099, your bank may have tax documents available on their website or you could get a copy mailed to you by contacting customer service.
  • To report stock trading and dividend activity, investment brokers can mail you copies of Form 1099-B and 1099-DIV. You can also try to download a copy from the brokerage website.
  • For consultants or independent contractors, if you earned more than $600 then you will need a 1099-MISC to report this income. Your client is required to send you this document, but even if they did not send it, you are still required to report this income.
  • For other types of 1099 forms, you should contact the organization responsible for issuing the tax form.

How to obtain copies of your tax documents from the IRS

  • Online: You can request a copy of your Wage and Income transcript for this link.
  • Mail: You can mail or fax Form 4506-T to the IRS. This form will allow you to your income documents, including: Form W-2, Form 1099 series, Form 1098 series and Form 5498 series transcript.

Note: Your tax accountant will be able to request copies from the IRS as well. You will likely want to contact the institutions shown on the IRS transcripts to obtain a copy of the original documents as well.

Frequently Overlooked Tax Deductions & Credits

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Every year, millions of dollar in unclaimed and undelivered tax refunds stack up in the IRS bank account. The rightful owners of this money, often times, do not even know the money is waiting for them or how to claim it. In an effort to help you get all the money you deserve back into your pocket, I offer 9 frequently overlooked tax deductions and credits that you should familiarize yourself with going into the next tax season.

1) Job-Hunting Costs

If you spend time looking for a job during the year (as long as it is not your first job) then most of the expenses incurred while job-hunting can be deducted from your taxes. These expenses include: transportation costs (56 cents a mile for driving), parking, tolls, cab fares, food and lodging, employment agency fees, and cost of printing resumes, business cards, postage, and advertising.

2) Moving Expenses For New Job

If you moved over 50 miles away from your old home than you can qualify for moving expensed deductions. You can deduct the cost of moving yourself and your household goods to the new location. A few of the larger eligible deductions include: 23.5 center per mile while driving your car, parking and tolls, and lodging. This deduction is available even if you do not itemize.

3) Sales Tax

You have the option to deduct sales taxes or state taxes off your federal income tax. The sales tax deduction is especially important if you live in a state that does not impose a state income tax. However, even if you have to pay state taxes, the sales tax break may be the better deal if you made larger purchases (such as a car or engagement ring).

4) Child-Care

You are eligible for a tax credit worth between 20% and 35% of what you pay for child care while you work. A tax credit is even better than a deduction! It is also legal to list the cost of a babysitter as a charitable contribution on your tax return if you can document that you were volunteering while the babysitter was performing their duties.

5) Energy-saving Home Improvements

If you install qualified residential alternative energy equipment then you can be eligible for a credit of up to 30% of the total cost of such systems installed through 2016. This can include things such as a solar hot water heater, geothermal heat pump, or wind turbines.

6) Lifetime Learning Credit

The Lifetime Learning credit can provide students up to an additional $2,000 a year. You are eligible to take 20% off of the first $10,000 you spend on education after high school in an effort to give yourself a new or improved skill. While this deduction phases out at higher income levels, it does not discriminate based on ones age.

7) Health Insurance Premiums

In some cases, insurance premiums can be deducted from your taxes. Medical expenses usually need to exceed 7.5% of your adjusted gross income in order to be deducted. However, if you are self-employed and responsible for your own health insurance cover then you can actually deduct 100% of your premium cost. This will be taken off your adjusted gross income as opposed to an itemized deduction.

8) Self-employed Social Security

If you are self-employed and forced to pay the full 15.4% Social Security tax on your own, then you can write off half of what you pay. This deduction can be found on the face of the 1040 form, therefore, you do not need to itemize to take advantage of this deduction.

9) Out-of-pocket Charitable Deductions

You can write off out-of-pocket expenses incurred while doing charity work. For instance, if you make food for a soup kitchen or fundraiser, you can deduct the cost of ingredients used to make the food. It is important to save the receipts or itemize the cost inc case you are audited.

 

 

Online Streaming Services Usher In New Form Of Taxes

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The city of Chicago has recently announced that they will begin targeting online databases and streaming entertainment services with a new “cloud tax.” This new tax will affect users of online streaming service such as Netflix and Spotify.

The new tax is composed of two recent ruling made by the city of Chicago’s Department of Finance. The first, covers “electronically delivered amusements” and the second covers “nonpossessory computer leases.” These rulings are essentially extensions on existing laws to include an extra 9 percent tax on certain types of online services. It is assumed that first of these ruling will affect services such as Netflix and Spotify and the second will affect services such as Amazon Web Services or Lexis Nexis.

Consumers of such services should not worry just yet about increased payments, as Netflix has already begun making arrangements to add the tax to the cost charged to its Chicago customers. This means that while the tax is technically levied upon customers of these services, the companies are likely to actually carry the burden of the tax.

This new “cloud tax” is likely to be just the beginning and online streaming services recognize that they need to prepare for this to be a trend utilized by more areas across the country in the future. As these massive online streaming services have taken vast entertainment resources and moved them online, it has made it a challenge for cities that have previously relied on tax from the sale of these entertainment services at local businesses. The “cloud tax” is a move to fight back against the loss in tax revenue due to the online streaming services.

Many have already voiced their displeasure with this new tax. After the announcement was made, Michael Wynne argued that the tax violates the Federal Telecommunications Act and the Internet Tax Freedom Act, intended to prevent discrimination against services delivered over the internet. In his response, Wynne stated “I could do that same activity of research using books or periodicals without being tax, so it seems like I’m being picked on because I chose to do it online.”

This “cloud tax” is clearly a response by cash-strapped cities to the continuing loss of tax revenue from sales previously made in brick and mortar stores. Online services are swallowing up business that use to be conducted within the city but is now happening online. Before the rise of these services, people would consume entertainment at video rental outlets and music stores – which paid local property taxes along with municipal sales taxes – and now these entertainment outlets have become irrelevant with the birth of online services. The cities clearly are looking for a way to make up the difference in lost tax revenue, and the new “cloud tax” seems to be the prevailing option.

 

15 Facts About U.S. Taxes

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Americans pay taxes to the government basically everyday. Whether it is at the store or the income tax withheld from their paycheck throughout the year. No one enjoys paying taxes and when tax season rolls around it can become an extremely stressful time. However, at the end of the day, taxes are a vital part of how our country functions. Despite taxes having such a large influence on our lives, many people do not know much about them.

Check out some of these interesting facts about the American tax system and learn how you fit into the tax system as a whole:

  1. The IRS is the U.S. government agency that is responsible for collecting taxes and enforcing revenue laws. This agency is part of the U.S. Department of the Treasury.
  2. Every year the IRS receives over 140 million individual tax returns. In total, they collect over $950 billion in taxes.
  3. Over $325 billion in tax refunds are paid out each year. The average tax refund is $2,953. Keep in mind that a large tax refund suggest that you had to much money withheld from your pay or you made estimated tax payments that were too large. In a sense, it is money that you loaned to the government interest free.
  4. More than 40,000 Californian residents reported over $1 million in income, the most of any state. Vermont, on the other hand, has less than 300 millionaires.
  5. Electronic filing is now nearly a universal practice. Almost 90% of individual tax returns are e-filed.
  6. The tax code is extremely wordy, with about 4 million words in all.
  7. The tax code is continually changing. There has been more than 4,500 changes since 2001.
  8. The biggest tax deductions are those for taxes paid to the state and local governments. After that, taxes paid for interest is the next highest, especially on home mortgages.
  9. The word ‘tax’ derives from the Latin word taxo, which means “I estimate.”
  10. Around 90% of Americans who employ a housekeeper and babysitter cheat on their taxes.
  11. The United States has a progressive tax system. This means that the more money a person makes, the more he or she pays in income taxes.
  12. As a whole, Americans spend over $27.7 billion each year doing their taxes.
  13. Americans spend over 7.6 billion hours complying with federal tax requirements.
  14. The top 20% of all income earners in the United States pay about 86% of all federal income taxes.
  15. The United States is the only nation in the world that tries to tax citizens on money they earned in foreign countries.

Crazy Taxes: 4 Crazy Tax Laws from Around the World

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Tax is complicated business, but at its heart it is a way for the government to generate more revenue. So, when a nation is strapped for cash (or just trying to get that extra bit of cash), some lawmakers have turned to some pretty wacky ideas. In no particular order here are four of the strangest tax laws known to man.

 

Bagel Tax

You read that right. In New York, the state taxes bagels that have been altered in anyway. The grounds from this comes from the fact that an extra tax is placed on food prepared on premises. So, you get that bagel cut, toasted, and filled with a nice spread? That’s about as prepared as you can get, and will cost you an extra .08¢.

Card Tax

No, not greeting cards. Alabama has been charging an extra dime on playing cards since 1935. Make no mistakes, Alabama legislators are serious about this tax, and require an official state revenue stamp on all playing card decks. It’s only limited to decks of up to 54 cards, though.

Window Tax

For this one, we need to take a trip across the pond– and back in time. In 1696, England introduced a tax on windows that lasted for over 150 years. While it seems odd on the surface, it was essentially a wealth tax. This was based on the idea that bigger houses had more windows, and that extra wealth could be a marginal source of revenue for the Crown. It was repealed after enough subjects complained it was a tax on light and air.

Beard Tax

Another gem from history. Back at the turn of the 17th century, Russian Emperor Peter the Great struggled to get his vast empire to conform to the beauty and fashion standards of western Europe. However, he noticed many mean were still attached to their beards. Not to be outdone, he cooked up a way to incentive Russian men to part with their whiskers. Excepting priests, all bearded Russians had to pay a then-hefty tax of 100 Rubles per year!