Tax return : the basics

Your business activity must be included on a federal tax return. Which return and when it’s due will depend on your choice of entity selection. If you are a sole proprietor or a single member LLC, put it on schedule C of your individual tax return (form 1040). Otherwise, it goes on a separate tax return. If you had expenses only but no revenue, you should still complete a return to utilize the loss either this year or to create a net operating loss carry forward or carry back.

Revenue Tax: Washington State imposes a tax on total revenue. Some cities impose a similar tax. These returns are due either monthly, quarterly or annually. The state (and perhaps your city) will assign a frequency based on information you put on your business license application. Getting help from a professional can save you the trouble of completing returns more frequent than needed. The tax rate depends on the type of business. Many service businesses pay a state revenue tax of 1.5% of gross sales.

Sales Tax: Washington State imposes a sales tax on the retail sale of tangible goods and many services. This tax is reported on the same revenue return discussed above. Thus, it can be due monthly, quarterly or annually. The rate varies depending on your location.

Other State Taxes: The State imposes other taxes on specific industries. For example, hotel/motel tax, public utilities, tobacco products, refuse collection. Consult a tax professional regarding taxes for your industry.

Employment Taxes: When you hire your first employee, the government gives you a few more rolls of red tape. Both the State and the federal government impose a variety of taxes on businesses that have employees.

Federal Employment Taxes: The federal government requires all employers to complete quarterly employment tax returns (form 941). These returns are usually due the last day of the month following the quarter. Form 941 tells the IRS how much income tax you withheld from employees, how much social security and medicare you withheld and the employer’s contribution to social security and medicare.

Tax accountant John Huddleston has a law degree and masters in tax law from the University of Washington School of Law. He has been a guest tax expert on the radio. He advises small businesses in the Seattle Bellevue Kent Everett area on various tax issues. His firm, Huddleston tax accountants, also provides tax preparation service, quickbooks consulting and general accounting and bookkeeping service. Seattle Bellevue tax accountant John Huddleston is a frequent publisher of tax saving ideas.

Here are seven reasons for not being late filing your
income tax returns.

1. Avoid Late Filing Penalties

Late filing can result in substantial and continuing
penalties. This is in addition to any interest that is
due.

2. Receive Better Service from Your Accountant

The earlier you get your paperwork to your accountant,
the sooner he can start preparing your tax returns. More
importantly, there will be more opportunities to explore
and implement tax saving strategies. On the other hand, if
you file late, you tie your accountant’s hands. For example,
he may hesitate to retain profit in your corporation if
such profit will be subject to substantial penalties.

3. Avoid Criminal Charges

Of course, if you don’t file tax returns at all for a few
years, you may also face charges of tax evasion.

4. Prevent Bankruptcy

Generally speaking, persons who don’t file tax returns on
a timely basis also lack adequate records for managing
their business. Since they don’t keep their bookkeeping
and accounting up-to-date, they only think they know how
they’re doing and how they stand financially. This, of
course, is a recipe for financial disaster.

5. Enjoy Better Relations with Tax Authorities

Late filers also receive the unwanted attention of the
taxation departments. Non-compliance can result in audits,
aggressive collection action and legal proceedings. In
addition, if you ever do have extenuating circumstances
that might call for some leniency or extraordinary
consideration on the part of the tax department, you are
more likely to receive it if you have a flawless history
of co-operation and compliance.

6. Obtain Financing

You’ll have difficulty obtaining financing if you can’t
provide your financial institution with current income
information. Assessment Notices from taxation authorities
give banks more assurance that the income claims you make
are true. As well, if you haven’t filed your current income
tax returns, what hidden tax liabilities exist? What is the
state of your record-keeping? How do you run your business
without adequate financial information? Your bank may
hesitate to loan you money or refinance under these
circumstances.

7. Reduce Stress and Worry

Many people who are late filing their tax returns feel
guilty about it. At the back of their minds, they worry
about taxation authorities contacting them, audits, asset
seizures, criminal prosecution, penalties and interest, and
so on. Some of these worries can become magnified beyond
what the actual situation warrants. Save yourself
unnecessary stress by filing your income tax returns
on time.

RESOURCE BOX

J. Stephen Pope, President of Pope Consulting Inc.,
has been helping clients to earn maximum business profits
for over twenty-five years.

For profitable Work at Home Small Business Ideas,
visit http://www.yenommarketinginc.com/

To learn how to reduce your income taxes, visit
http://www.yenommarketinginc.com/income-taxes.html

Each year there are millions of Americans who prepare their own federal and state tax returns and even more individuals have their taxes professionally prepared. Whatever choice a taxpayer makes there are a number of important tax tips that everyone should know.

A W-2 or 1099MISC is needed to accurately prepare a federal or state income tax return. There is always a chance that a taxpayer may misplace these forms or for one reason or another the forms may not have reached them. For federal tax returns and most state tax returns a W-2 or a 1099MISC is required. Individuals who do not attach these items are likely to prevent their tax returns from being processed or cause a refund delay. The Internal Revenue Service (IRS) states that all taxpayer should receive their W-2 or 1099MISC forms before February 15th. Individuals who did not receive these items are encourage to contact their employer to determine why the forms have not arrived. Taxpayers who misplaced their W-2 or 1099MISC forms are encouraged to contact their employer right away to receive a copy. Taxpayers must do so because even if a wage or income form is missing a tax return is due on the traditional April 15th deadline or else late fees and penalties may be assessed.

Another one of the popular tax tips that taxpayers should know about is tax deductions. It is estimated that each year the American public loses millions of dollars from tax deductions that they were entitled to, but failed to claim. A professional tax preparer and a tax software program may prompt an individual to claim tax deductions that they qualify for. Individuals preparing their own paper taxes are more likely to miss tax deductions that they may claim. To prevent this from happening taxpayers are encouraged to research the most frequently overlooked tax deductions to determine which deductions they may qualify for.

Another one of the most common tax tips that taxpayers need to be aware of is what to do if they can’t pay the amount of taxes owed on federal or state tax returns. The biggest mistake that taxpayers make when realizing that they cannot pay the amount due on their taxes is to not file a tax return. Some people think that not filing a return will prevent a refund from being owed on time when in reality it can make the situation a lot worse. Taxpayers can file an extension deadline; however, the estimated amount of taxes owed is still due on the traditional tax deadline. The Internal Revenue Service (IRS) will impose a number of late fees and penalties on tax payments that were not received in time. Just ignoring the Internal Revenue Service (IRS) may increase the number of or the amount of penalties.

One of the most important tax tips that a taxpayer needs to keep in mind is that the Internal Revenue Service (IRS) and many state governments change or update their tax laws each year. For this is reason taxpayers are encouraged to check out the website of the Internal Revenue Service (IRS) or the website of their state tax department to determine if any of the tax law changes need to be applied to their federal or state tax returns.

These helpful tax tips are just a few of the many tax tips that can help tax preparation flow more smoothly. The above mentioned tax tips will also help to reduce the amount of money that an individual owes on federal or state taxes or even potentially increase the amount of their refund. Why pay late fees or lose money on tax deductions that you deserve? Let these and other helpful tax tips assist you this tax season.

http://www.taxhelpdirectory.com/irs/irstaxlaw/

About The Author
Gray Rollins is a featured writer for the Tax Help Directory. To learn more tax tips, visit http://www.taxhelpdirectory.com/taxtip/ and for more tax information, visit http://www.taxhelpdirectory.com/taxinformation/.

Most taxpayers concentrate on ways to reduce their “taxable income”. However, beginning with the Tax Reform Act of 1986, your “Adjusted Gross Income”, or AGI, has become the most important number on your tax return.

Many tax credits and deductions are phased-out, or altogether eliminated, based on your AGI, or in some cases a “Modified” AGI (no gift from this MAGI), and several items of income are increased and some deductible losses are reduced as this number grows.

The Tax Reform Act of 1986 started the ball rolling by limiting the allowable rental loss deduction for taxpayers with an AGI in excess of $100,000 and phasing-out the amount of IRA contributions that could be deducted based on an AGI threshold. The Budget Reconciliation Act of 1990, the Taxpayer Relief Act of 1997 and the many tax Acts passed under George W all continued the trend of limiting credits and deductions based on AGI.

Items that are affected by your AGI (or MAGI) include:

* the taxable portion of interest on US Savings Bonds used to pay for education,

* losses from rental real estate activities with active participation,

* the taxable portion of Social Security and Railroad Retirement benefits,

* deductible traditional and spousal IRA contributions,

* the ability to contribute to a ROTH IRA, and to convert a traditional IRA to a ROTH,

* student loan interest,

* the deduction for tuition and fees,

* medical and dental expenses,

* charitable contributions,

* casualty and theft losses,

* job expenses and most other “miscellaneous” deductions,

* total Itemized Deductions,

* the deduction for personal exemptions,

* the dreaded Alternative Minimum Tax (AMT),

* the Credit for Child and Dependent Care Expenses,

* the Credit for the Elderly or Disabled,

* the HOPE and Lifetime Learning education credits,

* the Retirement Savings Contributions Credit,

* the Child Tax Credit,

* the Adoption Credit,

* the Earned Income Credit,

* Coverdell Education Savings Account contributions, and

* the safe harbor amount for quarterly estimated tax payments.

Each of the items listed above has a separate set of AGI thresholds. For some items, such as the education credits and the deductions for student loan interest and tuition and fees, the amount for joint filers is twice that for unmarried taxpayers; for some it is not. For the reduction of Itemized Deductions the threshold is the same whether you file as Single, Head of Household, Married Filing Joint or Qualifying Widow(er). In some cases married taxpayers filing separately are not allowed the deduction or credit at all; in others the threshold for separate filers is half that for joint filers.

While qualifying dividends, capital gain distributions and long-term capital gains are taxed separately at a lower rate, both for the regular tax and the AMT, these items of income are included in your AGI, as well as your Alternative Minimum Taxable Income (AMTI), and can reduce or eliminate the various deductions and credits affected by AGI, and cause you to become a victim of, or increase, the AMT.

Because of the way the taxable portion of Social Security and Railroad Retirement benefits is calculated, for every additional $1.00 of AGI you could be taxed on as much as $1.85. For a taxpayer in the 15% federal tax bracket who finds himself in this situation a $1,000 increase in AGI could increase the tax liability by $278.00 - almost 28%.

There are several moves you can make to reduce your AGI:

* Maximize “pre-tax” contributions to your 401(k), 403(b) or other pension or deferred compensation plans, including any “catch-up” contributions for participants age 50 or older.

* Maximize the amount of wages set aside in an employer-sponsored “pre-tax” medical expense or dependent care flexible spending account.

* Postpone the receipt of a year-end bonus until next year.

* Postpone billing clients until January, accelerate or prepay business expenses at year-end, and maximize contributions to a SEP, SIMPLE or Keogh plan if you are self-employed.

* Accelerate or prepay expenses at year-end if you own rental property.

* Sell investments at a loss to take advantage of the maximum $3,000 net capital loss deduction.

* Maximize deductible contributions to a traditional IRA, including catch-up contributions.

* Instead of deducting the total fee for tax preparation as a “miscellaneous” deduction on Schedule A, allocate a portion of the fee, if applicable, to Schedule C and/or Schedule E.

* Invest in tax-free municipal bonds or tax-deferred US Savings Bonds instead of bank CDs (remember that tax-exempt interest is included in the calculation of taxable Social Security and Railroad Retirement benefits).

Let us look at an example where reducing AGI by $1,000 could result in $913 less federal tax - a 91.3% tax savings!

John and Jane Q. Taxpayer anticipate an AGI of $130,450 for 2005. They will be in the 25% tax bracket. John and Jane have three dependent children, two under age 17 and one who is a college freshman. They paid $5,000 in college tuition and their miscellaneous deductions are more than 2% of their AGI.

If J and J gave an additional $1,000 to charity before year-end they will save $250 in federal income tax. If, instead, they can reduce their AGI by $1,000 they will put an additional $913 in their pocket.

By reducing their AGI from $130,450 to $129,450 they will be able to deduct an additional $2,000 in tuition and fees as an “adjustment to income”, which will further reduce their AGI. This brings their total AGI reduction to $3,000. As a result they will be able to deduct an additional $60 in miscellaneous deductions on Schedule A. The taxable income on their 2005 Form 1040 is reduced by a total of $3,060, which will translate to $763 less income tax.

The Child Tax Credit is phased-out by $50 for each $1,000, or part thereof, that a married couple’s AGI exceeds $110,000. By reducing their AGI by $3,000 John and Jane will increase their Child Tax Credit by $150. The total tax savings is $913 - $763 in reduced tax liability and $150 in increased Child Tax Credit.

Robert Flach is a tax professional with 34 tax seasons of experience preparing 1040s for people in all walks of life. He writes THE WANDERING TAX PRO weblog (rdftaxpro.tripod.com/weblog), the NJ TAX PRACTICE BLOG (rdftaxpro.tripod.com/newjerseytaxpractitionernetwork) and the tax planning and preparation website http://www.robertdflach.net, which provides a wealth of tax advice and information. He also writes and publishes THE FLACH REPORT, a quarterly tax newsletter. This article is expanded from a 2004 posting to THE WANDERING TAX PRO.