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Money Management (03/26/2008)
Top ten tax tips to know before filing taxes

Your sanity is a terrible thing to waste, which is why the Minnesota Society of Certified Public Accountants (MNCPA) offers a list of ten tax time tips to help you keep your wits this tax season.

Things to know before you file:

1. Check for deductions. Even if you don't itemize, their still may be deductions that are available to you. These can include traditional IRA, SEP and other qualified retirement plan contributions, student loan interest, alimony, job-related moving expenses and self-employed health insurance premiums. There are a handful of additional deductions, so take your time and be thorough.

2. Going green pays. If you made energy-efficient improvements to your home in 2007 you may garner a tax credit of up to $500. Improvements include exterior windows and doors, insulation to walls, ceilings, high efficiency water heaters, furnaces and boilers, and central air conditioning units. Additionally, a tax credit may be available for the purchase of a hybrid or alternative fuel vehicle. Check with the IRS at www.irs.gov for a list of qualifying vehicles.

3. New rules for charitable contributions. Starting this year, a donor must be able to show proof of a donation to take a deduction for any monetary charitable gift, including clothing. So make sure you have a cancelled check, credit card statement or receipt from the charity to verify your donation.

4. Count your kids - The Child Tax Credit allows you to reduce your federal income tax by $1,000 for each qualifying child under the age of 17. This credit begins to phase out if your modified Adjusted Gross Income is above $110,000 for joint filers, or $75,000 for single or head of household filers.

5. 529 is here to stay - The tax benefits of 529 college savings plans, which were to expire in 2010, are now a permanent part of the tax code. These plans give parents and other relatives a tax-advantaged way to save money for higher education expenses. Funds in the account grow tax-free and withdrawals also are tax-free if they are used to pay for qualified educational expenses. To decide on the plan thatís right for you, consult with a CPA. He or she can help you determine the best strategy for saving for your childís education.

6. Don't rush. Take a deep breath and relax. Rushing through your paperwork won't make tax-time any less painful. In fact, speeding through tax prep can lead to mistakes, which can spell much bigger headaches and unnecessary correspondence with the IRS later on. Double-check everything. Is your name spelled correctly? Did you include your social security number? Go slow.

7. File on time but if you can't pay, donít panic. Unfortunately, the IRS isn't as forgiving as we'd like to think. Especially when it comes to missing important deadlines. Even if you don't have all your materials together, file an extension (usually 6 months). Then work to finish your taxes as soon as possible to avoid additional charges.

The IRS offers several payment options. Todd Koch, a CPA with John A. Knutson & Co., PLLP, in St. Paul says, ìIf you cannot pay the full balance due, file your return anyway. The penalties for late payments are substantially higher for late filed returns. If you have no other resources, you can start by filing a Form 9465 with the IRS, in which you request a monthly installment arrangement.

8. Donít forget about the State. ñ When you have completed your Federal income taxes, you are not done. Now you have to look at differences between the State and Federal taxes. This can lead to additional deductions such as those for K-12 school expenses and U.S. Government interest. It can also lead to disallowed deductions such as post secondary education expenses and state income taxes paid.

9. Never fear, help is here. Don't be afraid to ask for help. There are options that can assist you if youíre struggling with your tax preparation. The free CPA referral service at www.mytaxtime.com is a convenient, confidential and proven way to find an accounting professional for you and your business. Deployed military personnel and their spouses can also receive free tax preparation by CPAs. This service is offered in cooperation with the MNCPA and the Minnesota National Guard Family Programs. Call 888-234-1274 to be connected with a volunteer.

10. Plan for the future. Tax-season doesn't always have to consist of hair pulling, crumpled papers and broken pencils. Think of it as a time when you can get a perspective on your financial situation and plan for 2008. Koch says, ìTax planning is not an event, it is a process. Itís never to early to start.î Also, consider letting a professional handle it. A CPA can assist with all of your near- and long-term financial planning questions. They know the code, they're smart with your money and they can save your sanity. Find articles and tips for year-round tax planning at www.mytaxtime.com.

Tax tips for members of the military

At this time of year, people are organizing their records in preparation for filing their tax returns. This is often a challenging task, and that may be particularly true for those who are serving in the armed forces. Thatís why the Minnesota Society of CPAs (MNCPA)advises that anyone who is in the military or has family members that serve our country be aware of some of the special tax breaks and programs available to them.

Breaks for those in combat zones

If you or a family member are on active duty in the military, there are important tax breaks available to you. For example, all qualifying military pay earned by enlisted personnel and warrant officers and by commissioned officers up to specific limits serving in combat zones-óor hospitalized as a result of a wound or injury while serving in a combat zone-óare excluded from gross income. The exclusion for hospitalization does not apply to any month that begins more than two years after the termination of combat activities in the zone.

In addition, military personnel serving in designated combat zones and civilians who are serving in support of these military members in designate combat zones, or those who are hospitalized outside the United States as a result of an injury received in a combat zone, can receive extensions on filing and paying their taxes. That means that they do not have to file or pay taxes until 180 days after their last day in the combat zone or hospitalization. The extension also generally applies to the spouses of military personnel who are serving in combat zones who wish to file a joint return.

Tax credit for Minnesota soldiers The Credit for Military Service in a Combat Zone enacted by the 2006 Legislature and signed by Governor Tim Pawlenty is available to any member of the military who served in a designated combat zone or hazardous duty area since Sept. 11, 2001. The credit is a refund equal to $59 for each month (or partial month) of service in one of the designated areas.

To claim the credit for months served between Sept. 11, 2001 and Dec. 31, 2006, use the 2006 Form M99, Credit for Military Service in a Combat Zone. The 2006 form may be filed any time between now and Oct. 15, 2010. To claim the credit based on service in 2007, file the 2007 Form M99, which will be accepted beginning Jan. 1, 2008. (This form is filed separately from Form M1, Minnesota Individual Income Tax Form.)

File electronically for free

If you are in the armed forces, or a federal reservist or National Guard member, and your adjusted gross income is $54,000 or less, you are eligible for an Internal Revenue Service program called Free File. To take advantage of this program, you W2 from one of the military services. Free File makes it possible for you to gain free access to commercial online tax preparation and electronic filing services. If you qualify, you can use these services to compile and file your tax returns online at no charge using software provided by participating tax software companies. To learn more, go to the IRS Web site at www.irs.gov and click on the Free File icon on the home page.

Access to IRAs

Thanks to the Heroes Earned Retirement Opportunities (HERO) Act, members of the military serving in combat zones are allowed to make contributions to a traditional individual retirement account or Roth IRA based on their tax-free combat pay. Before this law took effect in 2006, soldiers who received tax-free combat pay generally did not qualify to set aside any of their earnings in tax-advantaged IRAs.

How to find help

To find out more information about how the tax laws apply to those in the armed forces, turn to IRS Publication 3, ìArmed Forcesí Tax Guide,î which is available online. You can access it by going to www.irs.gov, then clicking on ìIndividualsî and finding the section entitled ìTax Information for Members of the U.S. Armed Forces.î You can also call the IRS toll free at 1-800-829-1040.

MNCPA volunteer CPAs prepare returns for military

Deployed military personnel and their spouses can receive free tax preparation by CPAs. The service is being offered in cooperation with the MNCPA and the Minnesota National Guard Family Programs.

Deployed military personnel (all branches) who are residents of Minnesota qualify for free tax preparation of their 2007 state and federal individual income tax returns. Service members or their spouse should call Minnesota National Guard Family Programs at 651-268-8200 or 888-234-1274 to be connected with a volunteer.

Information and resources are available to the public on the MNCPA Web site (www.mncpa.org/information) including state and federal tax forms and information and financial planning information for individuals and small businesses. A free CPA referral service is also available on the Web site or by calling 800-331-4288. The MNCPA is part of the national 360 Degrees of Financial Literacy campaign to help Americansí improve financial literacy; information and resources are available at www.mncpa.org/360.

 

 

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