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.

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.

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.

One of the most daunting aspects of the American tax system is just the simple fact that it changes each year. Some of these changes are built into the legislation that enacted the measure, which is why many limits and income restrictions change every year. Other changes stem from the fact that the progressive tax system used by the United States is specifically designed to perform more functions than merely raising revenue for the federal government. Instead, it is used to promote activity that the political leadership views as desirable, discourage activity that it does not like and to mitigate the effects of various economic problems and trends in society. This last purpose means that in times of economic distress or turmoil, there are often a lot more changes than happen when things are running smoothly and that has certainly been the case over the last few years.

In an effort to stimulate the overall economy, as well help particular sectors that have been hard hit in the recent downturn, there are a lot of tax changes that have been implemented for 2009 and 2010 that taxpayers should be familiar with. If the taxpayer is using a professional tax preparation service, the service should be aware of all of the new changes, but otherwise it is up to the taxpayer to find out about them. Though some of the new measures are relatively minor and not worth the trouble for many taxpayers, other measures can result in real savings for many average people and should be used.

For example, the American Recovery and Reinvestment Act of 2009 (ARRA) is part of the overall stimulus program being implemented by the federal government to help mitigate the effects of the ongoing recession. This act provides a number of tax breaks that apply to people who are buying homes, people that have purchased new cars, people that have made their homes more energy efficient, people paying for higher education as well as people that have recently become unemployed and used unemployment compensation. The exact details of these various programs can be found on the website of the Internal Revenue Service (www.irs.gov) and elsewhere online.

Another example of recent changes that many common people can benefit from are the increased amounts being offered for standard deductions. This is a real plus for people that do not regularly itemize their deductions, but do claim standard ones as appropriate. The basic deduction amounts have increased for married couples filing jointly, singles, and heads of household. Similarly, a new standard deduction has been introduced for state and local sales taxes and excise taxes paid during the purchase of a new vehicle after February 16, 2009. The standard deduction for state and local real estate taxes has also been increased in 2009.

The ARRA also included the Making Work Pay tax credit which is likely to have a profound effect on many people’s taxes because it lowered the amount of withholding held by employers. The basic idea was to permit workers to receive more of their wages immediately as opposed to waiting for their refunds. However, this also means that some people that usually receive refunds may not for 2009, or people that usually owe may owe more than normal this year.

The American tax code is extremely complicated, and though this means that it can be a pain to file your annual return, it also means that there are a lot of ways to either increase the amount of your refund or decrease the amount of your tax liability. Despite this, most people are aware of at least some of the basic deductions and credits they can claim, such as dependents and certain tax credits like the Earned Income Tax Credit (EITC). Nevertheless, there are a number of deductions that can save a lot of money that some people may overlook, some of which do not involve itemizing your deductions.

If there is a deduction that can be claimed that does not require one to itemize, they are technically known as adjustments to your income. The amount after these adjustments is known as your adjusted gross income (AGI), which plays a big role in determining what can or cannot be claimed. Adjustments like dependents are well known, but there are some other adjustments that are frequently overlooked. One example of this is contributions to a retirement plan like an IRA, 401(k), or similar plan. Another adjustment that is commonly overlooked is interest on student loans, up to a limit of $2,500 as long as the loan qualifies. There are other adjustments as well, such as capital losses and some business expenses.

The real catch behind many deductions is that in order to claim them, you have to file the “long form” 1040 and itemize all of your deductions on Schedule A. This can be a time consuming and annoying process for many people, so they just opt not to itemize their deductions. Nevertheless, itemization can really make an enormous difference in the amount of money owed, either an IRS refund back to you or as a liability owed by you to the IRS. Either way, itemizing is frequently well worth the additional time and hassle involved, especially if you hire a tax professional to do the hard work on your behalf.

Even when people decide it is worth the effort to itemize their deductions, there are many deductions that are commonly overlooked. Some of the most common deductions over looked include: interest paid on a home mortgage, interest paid on a home equity loan (or second mortgage), state and local taxes or sales taxes, medical expenses, and personal casualty or theft losses (including amounts lost through financial schemes and scams). As is usually the case with anything done by the IRS, there are many restrictions and strict guidelines that have to be followed in order to claim these deduction legally, so if you are not using professional services, you should take the time to carefully read IRS Publication 17, which describes most of these matters in good details and tells taxpayers where to look for more detailed information.

There are many tax breaks – adjustments, deductions, and credits – that can be claimed, so there are many potential tax breaks to be found. The real issue is determining which ones you qualify for and being careful to claim them correctly. Remember that you are liable for any mistakes on your return, so it is in your best interest to pay close attention to what you claim.

The 1099 series of forms are known as “information returns” and required by the Internal Revenue Service (IRS) to be issued by almost all non-employer payers – people, organizations, or institutions that pay money to American taxpayers – in the United States. These information returns show the amount of money paid to the taxpayer as well as other relevant information related to the payments, such as withheld amounts and other details. The information on the 1099 is then entered on the taxpayer’s personal or business income tax return to document the amount of money earned through these alternative income methods. Basic wages, salaries, and tips are not reported on 1099 forms, but on employer issued W-2 forms. Every 1099 is issued in triplicate, with one copy being held by the payer, one copy being filed directly with the IRS and one copy being sent to the person that received the payment.

There are almost twenty different types of 1099 forms that are issued for different types of income, as well as a number of other forms that are also used to report certain payments though they are not 1099s. Some forms of 1099 are much more common than others. For example, a 1099R reports income earned in various retirement plans and arrangements like IRS, 401(k)s, and various qualified plans and are therefore received annually by anyone with some sort of retirement plan. On the opposite end of the spectrum, the 1099OID is fairly uncommon and relates to money earned by purchasing bonds at a rate lower than their eventual redemption value, a rather complex taxable amount that only really applies to people with complex investment structures.

In general, most 1009s are issued by financial institutions, investment firms, and brokerages, though there may be occasions when individuals are required to issue 1099 forms. For example, if a person uses a contractor and pays him or her and the amount exceeds $600, that person has to issue a 1099MISC (miscellaneous), to that contractor for the amount paid. Frequently landscaping and other household maintenance and improvement workers operate as independent contractors, in which case the customer has to issue a 1099-MISC for the amount paid to that contractor. More often than not, if a contractor requires a 1099MISC they will notify the client of this fact in advance and show them how to proceed. However, if this is not the case, the client can find all of the relevant information on the IRS website: www.irs.gov.

Since a copy of every 1099 is sent directly to the IRS, these documents play a key role in determining whether or not the taxpayer is reporting everything earned properly or not. When an audit is initiated, the IRS will compare all of the taxpayers 1099s to all of the amounts claimed on their return. If there is a disparity – either more or less money reported on 1099s than claimed on the individual return – then the taxpayer is usually in trouble. For this reason it is important to ensure that all 1099s owed are duly issued before the end of the calendar year. If a person is expecting a 1099 and does not receive one, it is very much in their best interest to contact the payer to ensure that the 1099 was issued and to request a copy of it.