Interview: Jeff Schnepper
I had the opportunity to interview Jeff Schnepper, MSN’s tax expert, for LifeHack last week. My write up covers what Jeff told me about tax misconceptions and reducing tax worries:
The most common misconception people have about taxes is that everybody else is cheating and getting away with something….giving them the “right” to fudge. Cheating is wrong and I’ve found that the taxpayers I work with understand, and want to do the right thing. The problem is that the law changes every year, and sometimes three and four times in a single year. The professionals are overwhelmed and the average taxpayer completely lost. It’s not that people are cheating – they’re making errors because they don’t know the rules.
Changes for the 2008 Tax Laws
As we’re all in a rush to prepare last year’s tax return, it’s worth going over the changes that occurred to the tax laws that are applicable for your 2008 returns quickly.
- Stimulus Payments Are Tax-Free
You need to report your stimulus payments as the recovery rebate credit on your federal income tax return, but you don’t owe any taxes on it. It is important to remember to record it: if you’re eligible for a further recovery rebate credit because you had a child in 2008 or did not receive a stimulus check, your income tax return will affect whether you can claim it.
- AMT Exemption Increased
The Alternative Minimum Tax levels increased slightly in 2008. For married couples, it’s $69,950 — or $34,975 if you file separately. If you are single or a head of household, it’s $46,200.
- Get Green Tax Breaks
There are several tax breaks if you’ve gone green over the last year, including the residential energy-efficient property credit and the alternative motor vehicle credit.
- Standard Deduction Increased
The basic standard deduction went up in 2008. It’s now $10,900 for married couples — or $5,450 if you’re filing separately. It’s also $5,450 if you’re single. It’s $8,000 for heads of household.
- Tax Relief for Disaster Areas
If you lived in the Midwest and were affected by the major storms, tornadoes and floods that hit Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska and Wisconsin, you may be eligible for some tax relief.
- Standard Mileage Rates Increased
For business mileage, the rates are 50.5 cents per mile driven from Jan. 1, 2008, to June 30, 2008 and 58.5 cents per mile driven from July 1, 2008 to Dec. 31, 2008. For medical or moving mileage expenses, the rates are 19 cents per mile driven from Jan. 1, 2008, to June 30, 2008 and 27 cents per mile driven from July 1, 2008 to Dec. 31, 2008. For charitable mileage deducations, the rate is 14 cents per mile for the entirety of 2008.
Some good tips from Bank of America
A few days ago, I received a pleasant email from Bank of America with some advice for tax season, several of which were very useful.
One was a page on itemizing deductions. Like many people, whether or not to itemize deductions or take the standard deduction is a confusing choice. The short answer is that if you have large (several thousand dollars or more) expenses in the following categories, then you should consider it:
- Medical expenses more than 7.5% of your adjusted gross income
- Mortgage interest
- Charitable contributions
- State and local income taxes, general sales tax on retail purchases, as well as real estate and property taxes. Not all of these can be combined, though.
- Things like gambling losses, tools, and dues that exceed 2% of your adjusted gross income
Normally, I throw away nearly all email from banks. At best, it’s notifying me of new terms of service, and at worst it’s an offer for yet another credit card. This time I had a pleasant surprise. (I would link to their article, but unfortunately it seems nearly impossible to link to the web pages: they aren’t available on their normal web site, and the links don’t seem to work unless clicked-through from the email newsletter they sent to me.)
The Government Is Making Your 2009 Tax Return Interesting
President Obama is scheduled to sign a hefty economic stimulus program on Tuesday. It’s loaded down with tax credits, as well as some major changes to the current tax laws. The average taxpayer will come out ahead with all of these added benefits — the idea is that we’ll all have more money to cover our bills and maybe help keep this consumption-based economy going.
But the plan is also over 1,000 pages long. Even if you’re used to filing your taxes yourself, that’s a bit much as far as dry bureaucratic reading goes. I have a feeling that next spring, the IRS is going to get plenty of extra questions about how to claim and record the tax benefits that will go into effect on Tuesday.
Just so you know: the IRS offers free telephone assistance, Monday through Friday, 7:00 a.m. to 10 p.m. Individuals should call (800) 829-1040. Businesses should call (800) 829-4933.
Credits: Like Deductions, Only Better
If you’re at all like us, you spend all year round saving receipts in order to write off certain expenses as deductions. Education, business, whatever — if it’s deductible, we’re happy.
But while we’re obsessing over deductions, it’s easy to forget all about tax credits. That’s a downright shame, too: dollar for dollar, we’re better off trying to get more tax credits than deductions. Income tax deductions reduce taxable income. A $500 deduction can bring your actual bill down by between $50 and $175, depending on your tax bracket. But a $500 tax credit will flat out reduce your tax bill by $500.
Furthermore, there’s an upper limit on the tax deductions you can claim. If you zero out your tax bill with tax deductions, don’t bother collecting any more receipts. But some tax credits are refundable: even if you don’t owe any taxes, you can get money back.
10 Common Tax Credits
- Earned Income Tax Credit
- Saver’s Tax Credit
- Child Tax Credit
- Adoption Tax Credit
- Child and Dependent Care Tax Credit
- Education Tax Credits
- Social Security Tax Credit
- Foreign Tax Credit
- AMT Credit
- First-Time Homebuyer Credit
There are plenty of less well-known tax credits available. You can pick up a credit for making your home more energy efficient, for being a senior citizen and far more. It’s worth reading up about your own situation to make sure that you’re not missing out on any potential tax credits.
The Cutest Last-Minute Tax Deduction
TurboTax is running a competition to find the cutest last-minute tax deduction — that is, the cutest baby born in December, just in time to get Mom and Dad a tax deduction for 2008.
It’s narrowed down to five contestants you can vote for on the Cutest Tax Deduction website. Personally, I voted for Noah, who really was last-minute. He was born December 30. The winner will receive a $5,000 U.S. Savings Bond.
Grossing Up: Covering the Taxes for a Bonus
When you get a bonus at work, you’re supposed to pay taxes on it. You automatically lose a good chunk of that bonus, making it a little less useful than your employer intended. In light of this fact, some employers gross up pay. If your employer grosses up your pay, she adds enough money to your check to cover the taxes on your bonus. The bonus isn’t (officially) any bigger, but you no longer have to worry about paying the taxes on it. In reality, however, your bonus really is bigger and you’re still paying the same percentage of taxes.
I’ve never tried to convince an employer to gross up a bonus for me. But I try pretty hard to think about my checks in terms of the fact that I only get to use about half of the money I’m supposedly getting.
Grossing up has a poor reputation these days, making it less appealing. Many CEOs have taken advantage of grossing up to get their companies to pay the taxes on bonuses and severance packages. Don’t Mess With Taxes has a great post on the subject.
While I’m not a huge fan of grossing up, I think that there’s some value in thinking about our standard paychecks in terms of grossing up. What are we really getting? The amount beyond that number is really just grossing up our pay to cover the taxes on that real amount. It’s pretty easy to get an inflated sense of our incomes when we don’t take taxes into account, but if we think about half of our income as grossing up our pay, we get a better picture of what’s going on.
Refund Anticipation Loans: Bad News
I’ve got an article up at Investopedia about the bad news known as a refund anticipation loan. The headline writer had a little bit more vehemence than I might have used, but it’s absolutely true. Take a look at Refund Anticipation Loans: Ripoff Or Royal Screwjob?.
You’ll never even consider a refund anticipation loan again.
You Can Start eFiling Right Now
The Free File program allows taxpayers to prepare file their tax returns online, for free. The only catch is that your adjusted gross income must be $56,000 or less for 2008. That figure varies by year. Even if your income is under $56,000, though, make sure that you don’t have any complications in your taxes before you start your tax preparation. Free File only offers the most commonly filed Federal tax forms. Furthermore, you have your choice of Free File providers — and not all providers offer even all of the common forms.
There is a way to make use of Free File, no matter what your income is, if you’re willing to do without preparation software. About halfway down the page is an option that reads “I want to fill in the tax forms and file them online without tax software and click “Choose Tax Forms.” You’ll be able to enter your data, do some basic math, sign your return electronically and eFile your return. It doesn’t seem like a bad option, though if you feel that your taxes are a little too complicated, it might make sense to go with another filing option.
You can eFile your taxes with most common tax preparation software, for free.
New Mailing Address Replaces Dallas
If you’ve been mailing payments to the IRS’s Dallas address, you won’t be able to do that after tomorrow. The IRS is closing that address and has listed a new address in Charlotte. If you’ve been sending business payments to Charlotte, you’ve been bumped to Cincinnati. The IRS has a full notice, complete with addresses.