Many Americans overpay the government each and every year and in essence, these overpayments are interest free loans to the government. Now granted, if you file your taxes properly, you should get all of the overpayed taxes back but if you hadn’t overpayed that money to begin with, it could have been sitting in an interest bearing savings account earning you money instead.

There are a few ways by which you can avoid overpaying on your taxes. One of the best and most effective ways to avoid overpaying is to adjust your withholdings on your IRS Form W-4. The W-4 is used by employers to determine the correct amount of tax withholding to deduct from an employee’s wages. Each employee must fill out a W-4 when beginning work for a new employer. Your employer is required by law to allow you to make changes to your W-4 when you request to do so. In most circumstances, you won’t make changes to your W-4 unless you have life changing experiences such as a marriage or the birth of a child. If either of these occur, you can adjust your W-4 to reflect that you have more dependents by claiming an allowance for each new dependent. Each allowance is worth $3,650 in tax free income for the year 2009. You want to be careful not to claim more allowances than you are allowed as the IRS can and will penalize you for underpayment of taxes.

Another effective way to reduce overpayment of taxes is to itemize your deductions versus using the standard deduction, which is the fixed amount the IRS allows as a deduction. Itemization generally requires extremely meticulous record keeping as you need to keep receipts for every expense that could be considered for use as an itemized deduction. Most people find this rather tedious which is why most people elect to use the standard deduction instead. You could in fact be saving yourself a lot of money by taking the time to record and keep receipts of relevant purchases and expenses. Thinking of it that way should make it that much easier, keep a few records and pay Uncle Sam less.

Perhaps the most effective way you can choose to try and reduce your overpayments to the government, is to opt to have the help of a professional tax preparation specialist. These professionals can and will help you find the most suitable ways to reduce your income tax owed and to help you receive the biggest refund you are entitled to. You can find one of these tax preparation gurus at anytime of the year, so there is no need to wait until the last minute. The majority of these individuals are well versed in the current tax codes and are knowledgeable on how to reduce the amount of taxes you owe to the government while maximizing the amount of the refund you should get. Stop paying the government too much money and start getting the money you’ve worked hard for and earned.

Each year as the time comes again to prepare and file an income tax return, many people look and look to find the most deductions to reduce the amount of taxes they owe or to increase the amount of their refund. Here is a compilation of some useful but oftentimes overlooked, tax deduction tips that many people can qualify for.

For the younger taxpayers out there who may have just gotten their first job this year and had to move more than fifty miles to get that job, you can write off the expense of traveling and moving to that new place. That’s right, you can write off the costs of driving your own car and moving your own belongings, to include a set amount per mile driven plus any tolls and parking fees paid on the trip.

Also, for the parents of students going off to college this year, there is the Hope Credit which applies to students in their freshman and sophomore years in college. It provides up to $1800 in tax credits. There is also the newer American Opportunity Credit which provides up to $2500 in tax credits for parents of students who are in years one through four. Basically the same as the Hope Credit, only it is applicable to the first four years of a student’s college education. If student loans are involved and the student’s parents pay back the loan, the IRS sees it as the money being given to the child, who in turn paid back the loan. Any child not claimed as a dependent is eligible to deduct up to $2500 of the interest on student loans that their parents paid.

If you made any energy saving home improvements last year, be sure to list them. You can get up to 30% of the total spent on those home improvements back. These credits apply to many qualifying, energy saving home improvements such as windows and doors, solar lighting panels, heat pumps and many, many other such home improvements. Beautify your home and make it more environmentally friendly and the government will give you back up to 30% of what you spent, not a bad deal.

Child care credits are sometimes overlooked if they are paid through an account at your work known as a reimbursement account. Up to $5000 worth of child care expenses can be paid through the reimbursement account but if you spend more, then you may be eligible to claim credit for up to $1000 more in the form of a credit.

Another often overlooked tax deduction is for any charitable expenses you paid out of pocket. Mostly, you won’t forget to deduct those large, payroll deducted, annual contributions but what about the little contributions? Have you ever given any food like baked goods to the local nonprofit soup kitchen? Or helped out with a local school’s fundraising efforts by buying school supplies? All of those things can be deducted as charitable contributions, no matter how small the amount. It’s good to know that you can make a difference when helping others and be rewarded yourself in the process.

The Internal Revenue Service (IRS) form W-2 is an individual’s wage and tax statement for a given tax year. It contains information used by the Internal Revenue Service to determine an individual’s total wages earned and total taxes paid in. State governments use the IRS form W-2 as well, in the calculation and preparation of state taxes, for those states in which an individual is responsible for paying taxes. We’ll break each box of the W-2 down and explain it’s purpose.

Boxes A through F represent the tax payer’s employer and the tax payer themselves. Box A is the employee’s social security number followed by Box B which is the EIN or Employer Identification Number. Box C gives the employer’s name and address while Box D is the employer’s assigned control number. Boxes E and F represent the employee’s full legal name followed by their full legal address. This address is the address where the employer will mail the W-2 to the employee so it is crucial that this address is current and correct.

On to the numbered boxes, starting with Box 1. Box 1 is your total wages, tips, and any other compensation. Simply put, this is the total money you made at this job for the whole year. Box 2 is the amount of Federal income tax withheld. Box 3 is called Social Security Wages and is generally the same as Box 1. Box 4 is the amount of Social Security tax withheld from your earnings. Box 5 is Medicare Wages and Tips and, again, is usually the same as Box 1. Box 6 contains the amount of Medicare tax withheld. Boxes 7 & 8 are for Social Security tips and Allocated tips, respectively. Box 9 is for any advance Earned Income Credit(EIC) payments made. Box 10 is for any dependent care benefits that your employer paid to you or incurred on your behalf. Box 11 contains any amount from a non qualified deferred compensation plan that you received a distribution from during the year. Box 12 will contain any elected deferrals such as contributions to a Roth IRA or other retirement accounts. There can be various codes and rules related to these kinds of deferrals so it is best to consult with your tax preparation specialist to ensure proper documentation.

Boxes 15 through 20 are related to an individual’s home state or where they legally reside. Box 15 is the Employer’s state Identification Number, assigned by the state where the employee is a resident. Line 16 contains the state wages, tip, etc which is the total amount of money earned by the employee at that job for the year. Box 17 is the amount of state taxes pain in on the wages earned. Boxes 18, 19 and 20 are relevant to the local area where the employee lives and any taxes paid to that locality.

W-2 forms come with six copies. Each copy has a specific purpose and great care should be taken to ensure that the proper copy goes to the proper place to avoid any delay in the filing of your income tax return. Also, any mistakes that you find on your W-2 form should be reported immediately to your employer. You should also request that your employer file form W-2c with the Social Security Administration to correct any discrepancies you find on your W-2 form

Dreading that April 15th tax deadline? Well then, why not file your taxes early and put all that dread to rest! There are a number of benefits to filing your taxes early and we’ll discuss them here so that you can be informed and prepared before the deadline rolls around.

Probably the most likely benefit that most people see in filing their tax returns early is the fact that you’ll get your refund faster. The sooner you file your taxes, the quicker the government will send your overpaid taxes back to you in the form of that glorious refund check (or direct deposit, if you’re so inclined). Most people will get a refund within two weeks of filing when filing before the April 15 deadline. On the flip side of that, if you owe taxes this year, paying them as early as possible can relieve the stress of knowing you owe the government money. Nobody likes to owe the government money, so file as early as possible to avoid that dreadful feeling.

Another good reason to file early is to avoid the mad rush of last minute, beat down the door, got to be first in line at the tax preparer’s office to get the biggest refund, madness. We’ve all been there, done that and it’s not a pretty sight. Filing your taxes isn’t supposed to be (very) painful, so filing at the earliest opportunity makes for a less stressful preparation experience and will still get you the same refund you’re entitled to. Avoid crowd thinking and file your taxes as early as possible. Your tax preparer will thank you!

If you choose to file your taxes online using any of the available softwares or companies, it’s still a good idea to file as early as possible in the event that there are unknown software glitches or system crashes or the like. Filing early and experiencing something like that will still give you time to complete a paper return instead and thereby avoid any late fees or penalty fees that may be accrued in association with a late return. Also, if you make a mistake when filing an online tax return and you filed early, chances are you’ll be able to correct that mistake and avoid any long term hassles. That rule applies to paper returns as well, so file early just in case.

Filing your taxes doesn’t have to be hard. If you know that your return is going to be a difficult one, do your tax preparer a favor and go in as early as possible to file your return. You’ll be avoiding the crowds and long lines as well as saving yourself and your tax preparer a lot of time and you, probably, a lot of money.

In general, filing early is just good practice. The earlier you meet your tax debt or get your refund, the better the system runs. The better the system runs, the better the country runs which is good for all of us!

As the April 15th deadline approaches, many people are looking for ways to reduce the income tax they may owe while increasing the amount of the refund they are eligible for. In general, there are a few ways an individual can reduce their income taxes. They can reduce their income, take advantage of all available tax credits they are qualified for, and increase their deductions.

*Reduce Your Income

We’ll start with reducing one’s income. An individual’s Adjusted Gross Income (AGI) is the basis for determining the amount of taxes owed to the government and in turn, determining the amount of money to be refunded. The best and most practical way of reducing one’s income is to make contributions to a retirement plan such as a Roth IRA or a 401(k)plan. Another good benefit of a 401(k) plan, besides the immediate reduction of a person’s AGI, is that alot of employers will match contributions to 401(k) plans thus making it a good investment in the future. Another way of lowering one’s AGI includes making allowable adjustments such as education related expenses, including interest paid on student loans and any associated classroom costs. Alimony paid is also an allowable adjustment. Tax form 1040 has a full list of allowable adjustments to make certain an individual is able to make any adjustments they are qualified for.

*Take Advantage Of Tax Credits

Taking advantage of any and all tax credits available to an individual is another smart way to reduce one’s AGI, thereby reducing the amount of taxes owed. There are many available tax credits. A few that just about anyone can qualify for are education related. The Lifetime Learning Credit can be claimed by anyone, regardless of age, who is enrolled in a qualified collegiate institution, regardless if the classes taken are related to the person’s career or not. This credit can also be claimed by an individual paying a family member’s tuition (spouse or child). The Hope Credit if for students in their first or second year of college. Also like the Hope Credit is the American Opportunity Tax Credit which is a modification of the Hope Credit making it available to students in their first four years of college rather than being limited to the first two years. The Earned Income Credit (EIC) is the most widely used tax credit. The EIC acts like a tax payment to your account and oftentimes, even if the amount of taxes owed has been reduced to zero, individuals will receive a refund. Individuals earning less than a certain amount may be eligible for the EIC.

*Increase Your Deductions

Increasing one’s deductions is a sure way to reduce taxes owed. Taking itemized deductions such as healthcare expenses, property taxes and state and local taxes and comparing them to your standard deduction, then taking whichever is higher will decrease an individual’s AGI and decrease the amount of taxes owed.

Finally, the very easiest way to decrease the amount of taxes owed is to simply increase your withholding. By increasing your withholding, you will see less money in your paycheck each week but come tax time you are very likely to see a sizable refund. Talk it over with your tax preparation specialist to find out the best course of action to reduce the amount of taxes you owe and increase the amount of money you get back in the form of a refund.

One of the defining characteristics of the American tax code is that it is specifically designed to encourage behavior that the government believes are productive and desirable. Not surprisingly, this includes higher education which leads to a better educated and more productive society and workplace. Therefore there are a host of different tax credits and deductions that relate to expenses associated with higher education. However, like all programs administrated by the Internal Revenue Service (IRS), it can be challenging to determine what expenses are covered by each credit or deduction and what can – or can not – be claimed. The basic rules are presented in IRS Publication 970, which runs to ninety-nine pages in PDF format for 2009. In 2009, the most education expenses can be claimed against your tax liability by using the three primary tax credits: the American Opportunity Credit, the Hope Credit, and the Lifetime Learning Credit.

The American Opportunity Credit (AOC) requires you to meet two primary conditions before you can claim it. First, you have to pay the qualified education expenses yourself, for either yourself or an eligible student (which includes yourself, your spouse, or a dependent that you claim on your annual tax return). Second, you cannot be claiming the Hope Credit (see below) for any student for the same year. You cannot claim the AOC if you: (a) file as married, filing separately; (b) you are listed as an dependent; (c) your modified adjusted gross income (MAGI) is $90,000 or higher (or $180,000 or higher if married and filing jointly); (d) if you or your spouse were a nonresident alien during any part of the year; (e) if you claim the Lifetime Learning Credit or the tuition and fees deduction for the same student in the same year; or (f) if you claim the Hope credit for any student during the year. The maximum limit of the tax credit is $2,500 and all the relevant information is provided in IRS Publication 970.

The Hope Credit (HC) is an older tax credit that has been replaced by the AOC (see above) for most students, though the Hope Credit is still applicable to students attending schools in the federally-declared Midwestern disaster areas. The basic requirements to still qualify for the Hope Credit are that the student has to be attending a qualifying institution of higher learning in the Midwestern disaster area and you cannot be claiming the AOC. The Midwestern disaster areas include a defined list of counties in several states: Arkansas, Illinois, Indiana, Iowa, Missouri, Nebraska and Wisconsin. The complete list is provided in IRS Publication 970. This tax credit has a higher limit that the AOC, covering up to $3,600 in qualifying expenses. Like all tax credits, the terms and conditions are complicated and so a comprehensive review of Chapter 3 of IRS Publication 970 is a good idea.

The third primary tax credit is the Lifetime Learning Credit (LLC). This credit has much the same qualifying conditions as the AOC, except that it can be claimed against expenses beyond the first four years of college and there are no set limits on how many years the credit can be claimed. This is somewhat offset by the fact that the credit is smaller, reaching a maximum of $2,000; although this is doubled for students in the Midwestern disaster areas described above. The overall terms and conditions for the LLC are easier, so this is probably the best tax credit for many people to explore. Chapter 4 of IRS Publication 970 provides all the essential information.

Generally speaking, the Internal Revenue Service (IRS) actively encourages people to pay their full tax bill by the date it is due. This is the primary reason the IRS actively encourages people to withhold taxes and routinely send in their withholding amounts to the IRS. For the record, getting an extension for your filing date does not extend your due date if you owe money, so additional penalties and interest will be assessed to your liability whether or not you file for, and receive, an extension for filing your annual return. Despite this, the IRS does offer two options for taxpayers to establish payment plans or installment agreements to pay their tax liability over a period of time. These options still involve additional penalties and interest, but offer a viable option to people simply unable to pay their tax bill by the due date.

For taxpayers that owe $25,000 or less (a total combining all taxes, penalties, and interest into one number), the IRS offers the Online Payment Agreement (OPA) program. In order to qualify for an OPA, the applicant has to apply online via the IRS website – www.irs.gov – or can call the IRS toll-free telephone line or mail in a Form 9465 to their tax processing center (as listed on the bill). All that is needed to file for an OPA is a valid Social Security Number (SSN) and an IRS issued Personal Identification Number (PIN); though the IRS may request additional documentation regarding the your income or general financial situation.

Taxpayers owing more than $25,000 in combined taxes, penalties and interest can not apply for an OPA, but may still qualify for an installment plan. In order to apply, you will be required to fill out both Form 9465 (applying for an installment plan) and Form 433F (which is a collection information statement). Once these forms are filled out, they have to be mailed to the tax processing center where your taxes should be mailed. Supplementary documentation may also be requested by the IRS prior to approval.

As mentioned before, the IRS does not encourage people to set up a payment plan, so they charge a number of fees and assess interest. There is a direct initial fee of $105.00, though this can be reduced to $52.00 if you opt to set up a direct debit payment option from your bank account. Further, interest is charged on all unpaid tax amounts until the bill is paid in full. If you can show reasonable cause for not paying your tax bill in full by its due date (for 2009 taxes, April 15, 2010) you can avoid a late payment penalty, but if not this penalty will be regularly assessed until it equals twenty-five percent of the amount originally owed. Further, the late penalty applied to the interest owed will continue to accrue until the entire tax bill is paid. Due to all of these penalties, it is often more cost efficient to take out a personal loan in order to pay off the tax liability altogether, as the interest on such a loan will almost inevitably be less than the amounts charged by the IRS. In fact, the IRS specifically recommends this option before setting up a payment plan.

With very few exceptions, all income earned by American taxpayers – both individuals and entities – is taxable in one way or another. This, not surprisingly, includes income earned by renting property. Whether this income is payable by the individual or an entity depends on who the legal owner of the property is, but the income remains taxable. In fact, people failing to report, or under-reporting rental income is a major source of the “tax gap”, the difference between the amount owed each year and the amount collected each year by the Internal Revenue Service (IRS). This means that owners of rental property face additional scrutiny in the audit process, so the owners or beneficiaries of rental property should be sure to keep proper records.

Generally speaking, rental income includes any and all monies received in exchange for the use or occupation of property, and though this most commonly refers to real estate, it may also apply to other rental properties like storage units or household items (like renting household appliances). Most landlords operate their rental properties on a cash basis, which means that both the amounts received and the relevant deductions are claimed for the specific period of time in which these amounts were received or spent. This makes the reporting of rental income much easier than the alternative models, however it also leads many people to under-report since they do not consider all income received as rental income, though the IRS does.

The basic rent amount is self-evidently something that has to be reported as rental income, but there are also a myriad of other amounts on money received that also count as rental income and must be reported as such. These include, but are not limited to: (a) rent payments made in advance; (b) fees charged for the early termination of a lease; (c) some expenses paid by the tenant for the landlord; (d) property or services received in place of money; and others. Further, there are special provisions for rent-to-own payments and other arrangements related to rental agreements.

Security deposits are not usually considered income and should not be reported as such upon initial receipt. However, if the land lord opts to retain all or part of the security deposit once the initial agreement is concluded because the tenant did not live up to his obligations; this retained portion of the security deposit becomes income and has to be reported as such. This is one of the most common mistakes made by landlords and one that RS auditors are careful to look for when examining a landlord’s records.  

Offsetting this reportable income is also a wide range of deductions that can be claimed as expenses by the landlord. These can range from major devaluations through depreciation to minor deductions such as the purchasing of materials for maintenance of the rental property. The overall tax ramifications of owning and renting property can be complicated, so it is frequently in the landlord’s best interest to hire a tax professional to help them determine what has to be reported and what deductions can be claimed.

Anyone that regular follows the news and arguments in Washington about taxes knows that capital gains are taxable to one extent or another because the capital gains tax has been the subject of a great deal of vigorous debate in Congress and between the political parties. As such a contentious tax, it is frequently changed or modifies by Congress. For example, for 2008 through 2010, at least some net capital gains will not be taxed if they would otherwise be taxed at lower rates than the standard 15 percent that is the usual for capital gains taxation. The rules change a lot, so people with significant capital gains (or capital losses) should consult with a tax professional.

Generally speaking, almost everything that is purchased for personal or investment purposes is considered a capital asset by the Internal Revenue Service (IRS). When these assets are sold, the difference between the base value or price of the asset and the actual amount realized in the sale is either a capital gain or a capital loss. If the amount realized was above the basis value, then it was a gain; if it was below the basis price, it was a capital loss. Capital gains are generally taxed at around 15 percent, but as noted previously, this changes a lot each year depending on the political wrangling in Washington. Capital losses are also at least partially deductible, again depending on a myriad of factors related to the asset and the sale.

The extremely simplified definition provided above notwithstanding, capital gains and losses are an extremely complex tax matter, explained in detail in IRS Publication 550, which for 2009 runs to more than eighty pages. There is an endless array of exceptions and exemptions based on the nature of the asset, the nature or timing of the buying or selling of the asset, how long the asset was held, where the asset was sold and the amounts realized from the sale. Even fairly simple capital gains or losses – like those related to a personal home – can become extremely convoluted since there are all kinds of incentives and disincentives related to home ownership as well.

Capital gains or losses are reported on Schedule D of the 1040 form used for filing a individual tax return. Discarding IRS Publication 550, just the line-by-line instructions for Schedule D run to ten pages and include four different worksheets which are used to calculate amounts to be reported. Bear in mind that all of the amounts used to do this also have to be documented so that the numbers claimed can be substantiated if requested by the IRS. Further, this document is full of sentences that are barely comprehensible to most people, like: “Figure the amount of gain treated as unrecaptured section 1250 gain for installment payments received in 2009 as the smaller of (a) the amount from line 26 or line 37 of your 2009 Form 6252, whichever applies, or (b) the amount of unrecaptured section 1250 gain remaining to be reported.” [Instructions for Schedule D 2009, PDF Page 9]

Needless to say, non-experts may find it well worth the extra expense to hire a tax professional to help with detailed capital gains/losses filing. Not only is it complicated and time consuming, but mistakes can be very costly.

The American tax code is an extremely complex body of laws and regulations that really requires a degree of expertise to get the most out of the opportunities contained within it. Of course people with very simple tax situations do not necessarily need professional assistance, but then again their ability to maximize their refunds or minimize their liabilities is also very limited. For people with more complicated tax situations, there are a lot of options available to get the most from their annual tax filing.

After the adjustments – or amounts deducted from the gross income in order to give an adjusted gross income (AGI) – the next step is to determine which deductions to claim. Deductions are amounts that are subtracted from the amount due on each person’s tax return. Like everything else related to the American tax system, deductions can be complicated and tricky and claiming deductions that you are not entitled to can be costly if the problem is caught by the Internal Revenue Service (IRS). Therefore it really pays to understand the deductions, how they work, and if the qualifying conditions are met.

The first choice the taxpayer is confronted with is whether to claim the Standard Deduction or if it is more beneficial to itemize deductions. The Standard deduction is much simpler to file for and requires only basic documentation to substantiate if audited by the IRS. Itemized deductions offer a lot more opportunities to save money, but are also more time consuming and demand copious documentation in order to substantiate the claim. The proper way to determine the right option is to work out the total deduction amount available using both the Standard Deduction and itemized and then choosing the appropriate one. However, this is twice as time consuming, so many individuals just opt to take the Standard Deduction and be done with it.

People that have extremely complicated tax situations – high income, multiple financial investments, real estate, and so on – can frequently benefit by itemizing, but few choose to do the work themselves, instead hiring an expert to do it. Similarly, self-employed people, businesses, and other entities usually opt to itemize since there are many deductions that are only available through itemization. One of the consequences of the American tax system being progressive is that it is specifically designed to encourage specific behaviors and investments, and especially things related to small business and entrepreneurship. Therefore, people engaged in such activity should probably itemize, though they should also use the services of a professional to do so.

The real danger of maximizing deductions is that it is very easy to misunderstand or misread how the deduction works, resulting in an erroneous claim. Further, the IRS generally begins with the assumption that all errors are deliberate and thus subject to penalties and interest. The IRS uses a lot of terminology that can be tricky because the strict IRS definition of these common terms is not the same as the popular understanding. For example, the idea of a “business expense” appears fairly straight forward and most people believe they can determine what is – or is not – a ‘business expense.” However, the IRS has a very strict and well documented definition of what constitutes a “business expense” that may not be the same as the common sense definition of the term. Further, not all “business expenses” – as defined by the IRS – are treated the same and can be claimed the same way, so there is a lot of room for error.