Like most bureaucratic organizations in the world today whose function involves a large amount of paperwork, the Internal Revenue Service (IRS) is now actively encouraging people to file their annual income tax returns electronically. This makes the annual filing faster and easier, ensures that the return is received on time and means it can be processed sooner, resulting in faster refunds or settled bill amounts for taxpayers. The IRS now offers three main ways to file electronically, though each has its own terms and conditions. Further, there are some types of filing – like claiming the making Home Affordable Tax Credit – that have to be done on paper.

The Free File program offered by the IRS offers two distinct services: Traditional Free File and Free File Fillable Forms. Traditional Free File is a partnership between the IRS and the Free File Alliance LLC that provides free tax preparation and filing for people with an adjusted gross income (AGI) under a specific amount. The qualifying amount for Traditional Free File differs each year, but in 2009 is for people with an AGI under $57,000. Free File Fillable Forms offers a range of the most popular tax forms online that can be filled out and filed electronically. Unlike Traditional Free File, there is no tax preparation assistance provided, but there are also no limits on who can use this feature to file their taxes as long as the relevant forms are available.

The IRS e-File program is actually carried out by tax preparers, non-profit tax assistance organizations, and included in many tax preparation software packages available on the retail market. Almost all the major filing types can be e-filed: personal returns, small business returns, large corporate returns as well as returns for charities, non-profits and people paying excise taxes. The e-file option has been the most successful electronic filing option and is now widespread. Most tax preparers will charge a small fee for e-filing a return, but there are usually free options available such as the Free File program described above, people e-filing with the assistance of non-profits, and those who own their own tax filing software like TurboTax.

The third option is the Electronic Federal Tax Payment System (EFTPS), which is commonly used by companies that choose to make regular payments to the IRS throughout the year. Though it is more popular for companies and entities, individuals are also welcome to use the system and some do. The EFTPS system allows business owners to make regular payments to the IRS weekly, monthly or quarterly and today almost ten million taxpayers are enrolled in the system.  The EFTPS system also allows people to make their regular payments – usually based on the estimated amount owed as determined by Form 1040ES – over the telephone as opposed to online. There are additional features included in the program as well, such as automatic bulk payments for employers sending in payroll taxes regularly.

Filing electronically is much better than manual filing in almost every respect and the IRS is actively encouraging taxpayers to use this option. It is faster and easier for both the IRS processors as well as for the taxpayer and is usually available for free or at a small nominal cost (which can, incidentally, be deducted as a Miscellaneous Expense).

As most small business owners already know, tax planning plays a big role in maximizing profit and minimizing expenses, and tax deductions are a big part of this. The American tax system is designed for more than merely collecting revenue, but is specifically designed to encourage behavior that the government feels is beneficial to society and the state. Among the behaviors that are encouraged is small business, which means the tax code provides a myriad of tax benefits that are part of the larger goal of using the tax code to actively encourage small business activity. A wide range of business expenses are deductible from the amount owed in taxes each year if the business owner chooses to go to the trouble of itemizing them all.

Most small business expenses that are deductible fall within one of two categories: regular business expenses and capital expenses. Business expenses are those that are paid on a regular basis and are necessary for the successful operation of the business. These may include rent and utilities payments for a store front, travel expenses, and the cost of managing a payroll. Capital expenses are those related to buying specific assets meant to improve your business or enhance your service, like new equipment or vehicles. Generally speaking, capital expenses are not deductible as business expenses, but there may be other methods by which these amounts can be recovered in the tax code through amortization, depreciation or depletion. Knowing the difference between these two classifications of business expense can help small business owners avoid trouble with the Internal Revenue Service (IRS) due to claiming expenses as deductions incorrectly.

With most business structures – corporations, companies, partnerships – a separate tax return has to be filed and most of your business deductions are deducted from the business, not the owner’s personal taxes. There are some exceptions to this, such as pay outs from partnerships or limited Liability companies (LLCs) that have “flow through” taxation or for sole proprietorships. However, as a general rule business deductions are claimed against the business’s tax liability, not that of the individual running the business. There are also many times when personal and business expenses become confused, but the IRS has very strict guidelines regard what can – and can not – be deducted as a business expense.

Confusing personal and business expenses is a major problem and the IRS is now actively going after people that claim many of their personal expenses as business deductions. This has been a real problem due to the advertising efforts of online “tax planners” that make the factually incorrect claim that if a small business is based at home, the small business owner can claim most of their household expenses as business deductions. Although there are some home office expenses that can be claimed as deductions, the guidelines are very strict and spelled out in detail in IRS Publication 587. Further, people claiming home office deductions come under closer scrutiny and have to file a special form – Form 8829 – in order to ensure that the claims receive special attention from IRS processors and enforcement agents.

Although many people consider the April 15 deadline for filing their personal tax return as non-negotiable, in reality getting an extension is an easy and painless process that is available to all American taxpayers. Almost anyone is allowed to file a Form 4868, which will grant them a four to six month extension of their tax filing deadline. However, it is important to note that an extension to file does not amount to an extension to pay any taxes due, so if you suspect that you will owe taxes you will be charged interest on any amounts due for the duration of your extension time.

One popular myth surrounding filing for an extension is that in order to do so you have to have a good reason. In reality this is not the case at all. The Form 4868 is a very simple form that asks for nine pieces of information. The only effect that your reason for filing for an extension has is if you tick the box for Line 8. Line 8 asks if you are a U.S. citizen or resident that is currently outside of the United States. If you tick this box, the length of your extension goes down from six months to four months. Otherwise the form does not ask for any further information regarding your reason for filing an extension and the instructions do not place any other reason based restrictions on extensions.

Generally speaking all you have to do is fill out Form 4868 and file it. Although you can file a paper version through the mail, it is usually a better idea to file your 4868 electronically, because then you will get a confirmation that the Internal Revenue Service (IRS) received your filing and, in some cases, a specific confirmation number to verify this. There have been some instances when a Form 4868 has been properly filed and is then misplaced by the IRS, putting the burden of proof on the taxpayer. Therefore it is always a good idea to receive and save acknowledgement of receipt or your confirmation number.

If you suspect that you will owe money and want to avoid having to pay most (or all) of the interest that will accrue during your extension, the Form 4868 also allows you to send in a check for any amount you think is appropriate. The amount sent in will be credited to your tax liability, so interest will only accrue on any amount owed in excess of that covered by your check. Again, you should be careful to document everything and record precisely how much you sent to the IRS just in case there is a processing error. You can also pay forward money that you think you owe via electronic funds transfer, credit card or debit card. The exact instructions in this respect are provided in the instructions for Form 4868.

Filing an extension is a quick and easy process and is available to virtually all filers, even those that have to file paper returns for whatever reason. As a consequence, there really is no justifiable reason for anyone to be late fling their annual tax return. In fact, this may well be why the IRS has a zero tolerance for late filers and automatically charges them with penalties.

Generally speaking, the Internal Revenue Service (IRS) does allow tax payers to deduct the costs associated with their tax preparation as a miscellaneous deduction on Schedule A (Itemized Deductions) of the form 1040. However, as is the case with most things related to tax deductions, this deduction does have specific limitations and restrictions. Further, there are new changes that have been introduced for the 2009 tax year that may deny you this deduction.

Deductions related to your tax preparation may include any money paid for reasonable and ordinary expenses related to preparing your taxes. These may include, but are not limited to: the cost of tax preparation software; fees paid to a professional tax preparer, planner, or attorney; electronic filing of your return; publications and reports purchased to aid in calculating your taxes; and expenses related to traveling to your tax professional’s office. Basically, any expense paid for the “determination, collection or refund” of federal, state, or local taxes can be deducted as a miscellaneous expense.

As is the case with all itemized deductions, in order to claim your tax preparation expenses you have to file the standard Form 1040 along with Schedule A. Further, you have to be able to substantiate your deductions; which means keeping your receipts and other evidence of the expenses you are claiming a deduction for. Further, in 2009 there is a new change which restricts the number of miscellaneous deductions that can be claimed by people that have an adjusted gross income (AGI) of $166,800 or more (or $83,400 if married filing separately). To see if your miscellaneous deductions are restricted under this new policy, the IRS provides a worksheet in the Schedule A instructions – related to Line 29 – which can be filled out to see if you can claim miscellaneous deductions in 2009.

Further complicating the picture is the fact that most miscellaneous deductions – including tax preparation expenses – are subject to an exclusion that is equal to two percent of the taxpayer’s AGI. That is, if the deduction does not equal or exceed two percent of the taxpayers AGI, it cannot be claimed and only the amount that does exceed two percent can be deducted. For example, if you have an AGI of $50,000, you could only claim tax preparation expenses that exceed two percent of the AGI, or those that exceed $1,000. Although this two percent exclusion does not apply to all miscellaneous expenses, it does apply to tax preparation expenses. One final complication is that only the expenses related to your personal tax preparation can be claimed on Schedule A; tax preparation fees related to other entities (businesses, rental properties, or farms for example) have to be reported on their appropriate schedules with the 1040.

Therefore, while it is true that expenses related to tax preparation can be deducted from your annual tax return, this does not mean that all such expenses can be deducted and it does not mean that all people can claim these deductions. Due to the two percent AGI exclusion, this deduction is frequently limited to wealthy people with complex tax situations.

Prior to 2008, the real estate market was essentially the prime driver of the United States economy after consumer spending. The housing bubble began to burst in 2008 and the subsequent collapse of the housing market continues to be a major problem into 2010 and is project to remain so through 2011 at the earliest. As a consequence, the United States government has passed several different measures extending tax credits to both first time home buyers and long time home owners in an effort to boost the housing market.

The first measure was the Housing and Economic Recovery Act of 2008, which created a tax credit for first time homebuyers of up to $7,500. Contrary to some of the information being circulated online, this tax credit was not a traditional tax credit which is paid out without an obligation to pay it back; instead it operated much like an interest free loan from the federal government and has to be paid back gradually over the next fifteen years. This initial measure only related to homes purchased between April 8, 2008, and before Jan. 1, 2009 and only first time homebuyers could qualify, specifically defined as people that had not owned a primary residence for the previous three years. This measure only met with limited success because at the time most residential property values were actively declining, meaning that very few people were willing to buy new homes until the market bottomed out.

Due to the limited success of the first law, the terms were significantly changed through the American Recovery and Reinvestment Act of 2009 (and supplemented by the Worker, Homeownership and Business Assistance Act of 2009). These increased the potential tax credit to $8,000, and extended the time period from January 1, 2009 through May 1, 2010. Further, these additional measures dropped the first time home buyer requirement, extending the credit to long time homeowners, defined as people who have owned a primary residence consistently for five years prior to buying their new home. The fact that most American real estate markets have already bottomed out and that long time home owners – those most likely to qualify for a new mortgage loan in the current climate of tight credit – means that most analysts believe these new measures will be much more successful.

People wishing to claim this credit have to file a paper return and include the special Form 5405 and the required supplementary documentation required by the 5405. The precise guidelines governing who can, and can not, claim the tax credit are provided both on the Internal Revenue Service (IRS) website (www.irs.gov) as well as with the instructions accompanying Form 5405. There are details conditions relating to when you bought your home, your personal filing status, the value of the home in question, the amount of your annual income, who you purchased the home from, your age at the time of the purchase and many others. Therefore anyone considering claiming the credit should take the time to carefully read over all the requirements first.

The tax credit can been very advantageous, and since it is credited back immediately, can serve as a down payment for some home purchases.

When most people think of likely errors on their tax returns, the first thing that comes to mind is mathematical errors; incorrectly calculating or reporting the various amounts asked for on the return. Although it is true that mathematical errors are common, they have been declining as more and more people use some form of tax software to fill out their annual returns. Most modern tax preparation software comes with built in calculators that highlight any errors before the person using it finishes filling out the return, much less prints it off or electronically files it.

Instead, many of the more common errors today relate to incorrect personal information as this is something that no tax preparation software can detect or correct. Essentially, whenever the personal information on a tax return does not match the information on record with the Internal Revenue Service (IRS), the return is immediately rejected and the taxpayer is notified of the problem. When a tax return is rejected, it is not considered filed – even if the erroneous return was filed on time – which means it is a good idea to not wait until the last minute to file, even if the filing is done electronically. One simple typo on the Social Security Number (SSN) is enough to have the entire return rejected and can result in penalties for late filing and other problems.

The IRS has eight specific error codes that relate to incorrect personal information, each of which can result in the return being rejected. The most common problems are: (a) an incorrect SSN for either the filer or any other person claimed on the return (spouse, dependents); (b) the SSN does not match the surname on record with the Social Security Administration (a fairly common problem for women that have recently married and changed their names); (c) the date of birth reported for either the primary filer or any other person listed on the return does not match the date of birth in the IRS records; or (d) one or more people listed in the return – as identified by the SSN – have been reported on another return by another person. Basically any error related to the name, date of birth, and SSN of anyone mentioned on the tax return can result in it being rejected. A common example is people that report their children as dependents and use an informal name for the child that does not match the name recorded with the Social Security Administration. Though perfectly innocent, this mistake will likely result in the return being rejected.

Another common error made by people that file paper returns is simply forgetting to sign and date the paper return. This is not a problem for people filing electronically, but there are a large number of circumstances when the IRS will not accept electronically filed returns and other people just prefer to file on paper. Related to this, if the filer is sending in a check, they sometime forget to sign and/or date the check, which will also result in the return being rejected.

Although filers should obviously ensure that the math is correct, errors related to personal information – names, dates of birth, and SSNs – are more common today and easier to overlook.

Most American tax payers know that their annual income tax return is due on April 15 each year. Every year this date is marked by traffic disruptions and lengthy lines at the post office as people filing at the very last minute try to get their tax returns postmarked by the deadline. These disruptions have decreased some in recent years due to the rise of online filing, yet every year there are always many thousands of people that mail in physical returns and wait to the very last day to get them in the mail. In fact, for many people it seems almost like a game; waiting until the last possible minute to do their taxes and get them in the mail before the deadline hits.

One of the odd facts about this trend is that many of the last minute filers are precisely the people that would stand to benefit the most by filing much earlier. It seems that a majority of the people that wait until the very last minute to file their taxes have extremely simple tax situations, use the 1040EZ form to file and can safely expect a tax refund as opposed to having to pay additional taxes. For these people, waiting until the very last minute increases the processing time and delays the arrival of their expected tax refunds considerably longer than would be the case if they had filed earlier.

People with more complex tax situations tend, on average, to file much earlier. This is primarily because it is important for them to work out the amount owed – either the additional amounts owed to the Internal Revenue Service (IRS) or the amount owed back to them as a refund – long in advance of the deadline. The more complicated someone’s tax situation is, the higher the likelihood that there will be some little problem or omission that drastically effect the end result, therefore it only makes sense to work everything out with plenty of time to spare for revisions or changes. Suddenly discovering something that was unexpected at the last minute tend to mean that the person filing the return will be forced to make time consuming amendments to their return after they have been filed, following the basic process connected to filing form 1040X which only increases the chances of more problems.

Therefore, for most people – whether they have a simple or complex tax situation – it generally makes much more sense to file in advance. The IRS will accept tax returns as early as January, but more often than not it is better to wait until the middle of February at the earliest to file. This is because Congress has a habit of adding new options or possibilities that can affect the previous year’s tax return at the beginning of the year. A recent example of this was the decision to allow people to claim charitable contributions made to help with earthquake relief in Haiti as a 2009 deduction instead of claiming it on the 2010 return. People that qualified for this additional option – people who had made deductible contributions to help in Haiti – and waited until February or March would be able to take advantage of this, while people that had filed in January would not be able to without filing an amendment.

It should come as no surprise to anyone familiar with the American tax system that it can be a rather complicated matter to determine whether or not your child in college can be claimed as a dependent for purposes of your annual tax return. There are a series of factors that have to be taken into account to make this determination, so while one parent may be able to claim their child in college as a dependent, another parent may not be able to. It all depends on the individual circumstances of the child and the parent as well as their filing status and other related matters.

The first determination that has to be made is whether or not the child qualifies as a student according to the definition set by the Internal Revenue Service (IRS). This definition mandates that the child must be enrolled as a full-time student for at least five calendar months of the year, or enrolled in a government operated full-time on-farm training course. A qualifying school may be either an academic, trade, technical or mechanical one. However, on-the-job training courses, correspondence schools or online schools do not qualify as far as the IRS is concerned.  Therefore students of an online school, even if it is fully accredited and legitimate, are not considered students by the IRS and cannot be claimed as such on the parent’s tax return.

Assuming the child qualifies as a student in the view of the IRS, the next step is to determine whether or not they meet the threshold of a qualifying child. A qualifying child may be a son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of those listed previously. For a college student as defined above, the qualifying child must be under the age of twenty-four and younger than you and your spouse (if filing jointly). There are also three more stipulations that must be met in order for your child in college to qualify: (a) the child cannot have provided half or more of his or her support through the year in question; (b) the child cannot be filing a joint tax return on his or her own behalf; and (c) the child had to have lived with the parent filing at home for at least half of the calendar year. There is an exception to this last qualifier for special circumstances.

If your child in college meets all of the above terms and conditions, you should then proceed to the worksheet provided in the instructions of the Form 1040 used to determine whether or not you can claim the child as a dependent. Step two of the work sheet determines whether or not the child can be claimed as a dependent based upon three more conditions. These additional conditions are: (a) the child must be a US citizen, resident or resident alien or one of Canada or Mexico with an exception for adopted children; (b) the child should not be married, though again there are exceptions to this rule; and (c) the parent, or person wanting to claim the child as a dependent, cannot be claimed as a dependent by anyone else. This last relates to qualifying as a dependent to someone else, regardless of whether or not that someone else makes the claim. If you can be a dependent to someone else you are not allowed to claim anyone else as your own dependent.

On January 12, 2010, Haiti – already the poorest and least developed country in the Western Hemisphere – was hit by a massive 7.0 Mw earthquake. This resulted in one of the largest humanitarian disasters in recent history, with more than 225,000 people being killed, 300,000 be injured and more than a million people being left homeless. To make it worse, as of January 24 there had been 52 aftershocks measured at 4.5 Mw or higher, resulting in ongoing mass panic and destruction. The earthquake destroyed much of the country’s infrastructure, including many government buildings and hospitals, making relief efforts even more difficult. The world has rallied to Haiti’s relief, with a massive influx of humanitarian aid coming in from all around the world.

As the United States tax system is designed as a progressive system, it is actively used to promote activity that the government deems beneficial to society. This means that tax credits and deductions are provided to encourage desirable behavior and tax penalties are created to discourage undesirable behavior. Among those activities that the tax code promotes is charitable donations. Generally speaking, cash contributions to properly registered charitable organizations can be deducted from a taxpayer’s annual income tax liability for the year in which the contribution was made including many of the organizations that are helping Haiti since the earthquake.

Under normal circumstances, since the earthquake occurred in January of 2010, people would not be able to deduct any charitable contributions they made on behalf of Haiti until they filed their 2010 tax returns. However, due to the devastation faced by Haiti and as a means of encouraging more active giving on behalf of Haiti, Congress enacted a special law allowing people to deduct charitable contributions for earthquake relief from their 2009 tax returns. H.R.4462, passed by Congress on January 22 allows contributions specifically earmarked for earthquake relief made between January 11, 2010, and March 1, 2010 to be deducted from the taxpayer’s 2009 tax return.

Since the earthquake and the subsequent legislation occurred after the 2009 tax forms had already been produced and released, in order to claim this deduction all qualified donations are to be treated as though they were made on December 31, 2009. As is the case with all itemized deductions, the taxpayer must file a “long form” 1040 (or 1040NR) as well as itemize their deductions on Schedule A to be attached to the form 1040. The other requirements are essentially the same as any other charitable contribution deduction, namely it must made to a qualifying charity. However, it is important to note that in order to qualify for the 2009 deduction, the specific fund donated to must be explicitly designated for Haiti earthquake relief.   

Special allowances have also been made to allow people to claim the deduction if the contributions was made over the phone or through text messaging as well. Basically any phone bill or receipt that shows the name of the organization donated to, the date and the amount of the donation will satisfy the recordkeeping requirements of the IRS.

The rise of the Internet has resulted in a boom of home businesses, usually based on some sort of Internet related activity. At the same time there has been a proliferation of outfits promoting what the Internal Revenue Service (IRS) defines as “abusive home-based business tax schemes” or schemes that sell the notion that by claiming a home-based business you can then write off many of your regular household expenses as business expenses. This is most assuredly not the case and since these schemes have become so prevalent, the IRS is now aggressively auditing and investigating business deductions based on home business expenses.

The basic guidelines for the tax treatment of your home-based business are given in IRS Publication 587 (online at: www.irs.gov). This document, coupled to an extent with IRS Publication 334 (the Tax Guide for Small Business) should provide you with the information you need to differentiate between legitimately deductible business expenses and non-deductible household expenses. The first section of IRS Publication 587 provides a comprehensive list of requirements that have to be met in order to qualify for a home-based business deduction and they are comprehensive. Just as an example, the area defined as the business area has to pass the “exclusive use test”, meaning that the area set aside for your home office has to be used exclusively for this purpose and cannot be used by either yourself or other members of the household for any other purpose.

Further, even if your home office meets all the initial qualifying tests, the possible deduction may be only partial in nature. Contrary to the claims of some of the online promoters of abusive tax schemes, there is no way to claim your home mortgage payments or whole utility bill as a business deduction if you live in the home in question. IRS Publication 587 provides a simple to follow flow chart (Figure A) that can walk you, step-by-step, through the various tests for qualification; but even if you do qualify it does not mean that the whole expense can be written deducted. One of the examples given in the publication specifically notes that if one room of your house is used for the business and otherwise qualifies and your house has ten rooms, then you can only claim ten percent of the household expenses as a deduction.

The IRS is actively pursuing abusive home-based business tax schemes today and regardless of the advice you received from some online promoter, it is you – not the promoter – that will be held liable for making false claims on your business return. In that the IRS is actively campaigning to stamp out this form of tax evasion, the penalties can be quite high and egregious abuse may even result in criminal prosecution and imprisonment. Therefore it is a good idea to study the relevant IRS publications as opposed to the claims made by promoters before deciding whether or not to attempt to claim deductions based on your home business. Further, as the IRS is actively pursing this matter, even if all of your deductions are completely legal and correct, just filing them significantly increases your chances of being audited.