Uncle Sam’s great annuity deal may soon be going away

August 29, 2010

Just last month, I posted an explanation of how repaying Social Security can offer an amazing annuity deal for individuals near age 70. Now this great deal may be going away soon, according to this Kiplinger article.

Quick summary: If you started collecting SS benefits before age 70, and are now between the ages of about 65 and 72, then repaying the Social Security benefits you’ve already received and re-applying for benefits at the higher level you’re now eligible for can offer a tremendous deal. Doing this is–for all practical purposes–the same as buying a lifetime, inflation-adjusted annuity. Except that buying this product through Social Security can return up to 50% more in monthly income than the identical product on the commercial market. Of course, results will vary based on your age and other factors, but you can quickly determine how much you’ll benefit from this option by visiting my Social Security Repayment Calculator.

Keeping Good Records Reduces Stress at Tax Time

August 24, 2010

From the IRS….

You may not be thinking about your tax return right now, but summer is a great time to start planning for next year and to make sure your records are organized.  Maintaining good records now can make filing your return a lot easier and it will help you remember transactions you made during the year.

Here are a few things the IRS wants you to know about recordkeeping.

Keeping well-organized records also ensures you can answer questions if your return is selected for examination or prepare a response if you receive an IRS notice. In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, you should keep any and all documents that may have an impact on your federal tax return.

Individual taxpayers should usually keep the following records supporting items on their tax returns for at least three years:

  • Bills
  • Credit card and other receipts
  • Invoices
  • Mileage logs
  • Canceled, imaged or substitute checks or any other proof of payment
  • Any other records to support deductions or credits you claim on your return

You should normally keep records relating to property until at least three years after you sell or otherwise dispose of the property. Examples include:

  • A home purchase or improvement
  • Stocks and other investments
  • Individual Retirement Arrangement transactions
  • Rental property records

If you are a small business owner, you must keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later. Examples of important documents business owners should keep Include:

  • Gross receipts: Cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips and Forms 1099-MISC
  • Proof of purchases: Canceled checks, cash register tape receipts, credit card sales slips and invoices
  • Expense documents: Canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash slips for small cash payments
  • Documents to verify your assets: Purchase and sales invoices, real estate closing statements and canceled checks

For more information about recordkeeping, check out IRS Publications 552, Recordkeeping for Individuals, 583, Starting a Business and Keeping Records, and Publication 463, Travel, Entertainment, Gift, and Car Expenses. These publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

I think the key piece for most people to realize is this: “In most cases, the IRS does not require you to keep records in any special manner.”

Many people get very stressed out about whether they’re keeping track of things the “right” way. But any reasonable way that works for you is the “right” way. It also helps if it makes sense to your accountant…but on the other hand if you want to pay somebody like me to sift through your shoe-box, I guess I should be happy to have the extra income ;-)

By keeping track of your expenses in a way that’s clear and easily organized, you not only take the pressure off in the case of an audit, but you also save yourself a lot of time, hassle, and even money when it comes time to put everything together at the end of the year. And with so many accounts providing online access, and free, convenient tools like mint.com available to help tie everything together, keeping decent records throughout the year is becoming easier all the time.

And if you need help devising a system, summer and fall (far away from the craziness of tax season) is a good time to talk to your tax accountant for advice.

Five Tax Tips for Recently Married Taxpayers

August 17, 2010

From the IRS…

Are you getting married this summer?  If you recently got married or are planning a wedding, the last thing on your mind is taxes.  However, there are some important steps you need to take to avoid stress at tax time. Here are five tips from the IRS for newlyweds to keep in mind.

  1. Notify the Social Security Administration Report any name change to the Social Security Administration, so your name and Social Security Number will match when you file your next tax return. Informing the SSA of a name change is quite simple. File a Form SS-5, Application for a Social Security Card, at your local SSA office. The form is available on SSA’s website at www.socialsecurity.gov, by calling 800-772-1213 or at local offices.
  2. Notify the IRS If you have a new address you should notify the IRS by sending Form 8822, Change of Address. You may download Form 8822 from IRS.gov or order it by calling 800–TAX–FORM (800–829–3676).
  3. Notify the U.S.Postal Service You should also notify the U.S. Postal Service when you move so it can forward any IRS correspondence.
  4. Notify Your Employer Report any name and address changes to your employer(s) to make sure you receive your Form W-2, Wage and Tax Statement, after the end of the year.
  5. Check Your Withholding If both you and your spouse work, your combined income may place you in a higher tax bracket. You can use the IRS Withholding Calculator available on IRS.gov to assist you in determining the correct amount of withholding needed for your new filing status. The IRS Withholding Calculator will even provide you with a new Form W-4, Employee’s Withholding Allowance Certificate, you can print out and give to your employer so they can withhold the correct amount from your pay.

Naturally, they leave out the most important tip: Plan on filing jointly! In almost every case, joint filing results in a lower overall tax bill. Many newly married couples don’t file together right away because they’re “not ready to merge our finances.” But filing a joint return doesn’t really require you to merge your finances, you just have to report all income on one form and figure out how you want to divide up any refund or liability.

The one major downside that affects a very small number of filers would be if one spouse has either a significant debt being collected by the IRS or includes fraudulent information on the return without the other spouse’s knowledge. In this case, filing jointly may expose both spouses to collections or other action by the IRS. However, the IRS does offer Injured Spouse Relief and Innocent Spouse Relief specifically to assist spouses caught in either of these situation. You should definitely consult with a professional about your options if you think this may affect you.

Also, if you’ve filed separately in the past, but now think you’d be better off filing jointly, you can go back and amend your return to take advantage of joint filing status. You can do this for up to 3 years after filing your tax return.

However, if you’ve filed jointly, and later decide you’d be better off filing separately, the IRS does not allow you to make this change after the filing deadline has passed for the year you want to change. So it’s important to know the possible situations where it might make sense to file separate. Those situations would be when one spouse has very large medical expenses or employee expenses, or both spouses have incomes well into the six figure range. If you’re in any of these situations, you should at least run the numbers for separate filing to see if it makes sense in your case.

Seven Facts about the Nonbusiness Energy Property Credit

August 13, 2010

If you’re lucky enough to still own a home in this economy, the IRS offers some tips for claiming various credits for energy-efficient home improvements. Lower your utility bills, help the environment, AND save on your taxes, what could be better?

Thinking about making some energy saving improvements to your home this summer? Taking some energy saving steps now may lead to bigger tax savings next year. The Nonbusiness Energy Property Credit, a tax credit for making energy efficient improvements to homes was increased as part of the American Recovery and Reinvestment Act of 2009.

Here are seven things the IRS wants you to know about the Nonbusiness Energy Property Credit:

  1. The new law increases the credit rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 claimed for 2009 and 2010 combined.
  2. The credit applies to improvements such as adding insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems.
  3. To qualify as “energy efficient” for purposes of this tax credit, products generally must meet higher standards than the standards for the credit that was available in 2007.
  4. Manufacturers must certify that their products meet new standards and they must provide a written statement to the taxpayer such as with the packaging of the product or in a printable format on the manufacturers’ Website.
  5. Qualifying improvements must be placed into service after December 31, 2008, and before January 1, 2011.
  6. The improvements must be made to the taxpayer’s principal residence located in the United States.
  7. To claim the credit, attach Form 5695, Residential Energy Credits to either the 2009 or 2010 tax return. Taxpayers must claim the credit on the tax return for the year that the improvements are made.

Homeowners who have been considering some energy efficient home improvements may find these tax credits will get them bigger tax savings next year.

For more information on this and other key tax provisions of the Recovery Act, visit IRS.gov/recovery.

Form 5695, Residential Energy Credits ( PDF)

One nice thing about the latest version of this credit is that, unlike earlier versions of several years ago, many relatively simple, low-cost energy improvements qualify for the credit. So even if you can’t afford to convert your entire home to run off of breezes and sunshine, you can still benefit from more common upgrades like energy efficient windows and even insulation.

Personally, I’ve found the most useful overview of the tax credits, along with the criteria for each type of item that potentially qualifies, can be found at the EnergyStar website.

A couple important things to be aware of…

First, just because something is advertised as “energy efficient”, or even is a certified EnergyStar appliance, doesn’t mean it necessarily qualifies for a credit. For example, many common household appliances don’t qualify for a tax credit no matter efficient they are, so meeting the EnergyStar criteria won’t help with your tax bill. Sorry gamers, you’re not going to be able to sell your significant other on that big, new flat-screen because it’s EnergyStar and you’ll get a big tax credit for it.  If you’re considering a home improvement or upgrade, check out the EnergyStar website to find out what qualifies and how much you might save. (And even if it doesn’t qualify for a tax break, consider the more energy efficient option anyway for other good reasons.)

Second, many of these credits are “non-refundable” credits, meaning if you don’t have a tax liability before the credit is applied, then the credit won’t save you anything because they can’t make your tax liability negative. So if you have a relatively modest income and a lot of other credits and deductions (often the case if you have several dependents), then these credits might not benefit you. This is something you might want to consult with a tax advisor about if you’re not sure how your specific situation will be impacted and the credit is a deciding factor in your purchase.

Nine Tips for Taxpayers Who Owe Money to the IRS

August 11, 2010

Many people thinking about taxes at this time of year are people who owe money to the IRS and can’t afford to pay it right now. The following is from the IRS… (my comments follow)

Did you end up owing taxes this year? The vast majority of Americans get a tax refund from the IRS each spring, but those who receive a bill may not know that the IRS has a number of ways for people to pay. Here are nine tips for taxpayers who owe money to the IRS.

  1. If you get a bill this summer for late taxes, you are expected to promptly pay the tax owed including any penalties and interest. If you are unable to pay the amount due, it is often in your best interest to get a loan to pay the bill in full rather than to make installment payments to the IRS.
  2. You can also pay the bill with your credit card. The interest rate on a credit card or bank loan may be lower than the combination of interest and penalties imposed by the Internal Revenue Code. To pay by credit card contact one of the following processing companies: Official Payments Corporation at 888-UPAY-TAX (alsowww.officialpayments.com/fed) or Link2Gov at 888-PAY-1040 (alsowww.pay1040.com) or RBS WorldPay, Inc at 888-9PAY-TAX (alsowww.payUSAtax.com).
  3. You can pay the balance owed by electronic funds transfer, check, money order, cashier’s check or cash. To pay using electronic funds transfer you can take advantage of the Electronic Federal Tax Payment System by calling 800-555-4477 or online at www.eftps.gov.
  4. An installment agreement may be requested if you cannot pay the liability in full. This is an agreement between you and the IRS to pay the amount due in monthly installment payments. You must first file all returns that are required and be current with estimated tax payments.
  5. If you owe $25,000 or less in combined tax, penalties and interest, you can request an installment agreement using the Online Payment Agreement application at IRS.gov.
  6. You can also complete and mail an IRS Form 9465, Installment Agreement Request, along with your bill in the envelope that you have received from the IRS.  The IRS will inform you usually within 30 days whether your request is approved, denied, or if additional information is needed. If the amount you owe is $25,000 or less, provide the highest monthly amount you can pay with your request.
  7. You may still qualify for an installment agreement if you owe more than $25,000, but a Form 433F, Collection Information Statement, is required to be completed before an installment agreement can be considered. If your balance is over $25,000, consider your financial situation and propose the highest amount possible, as that is how the IRS will arrive at your payment amount based upon your financial information.
  8. If an agreement is approved, a one-time user fee will be charged.  The user fee for a new agreement is $105 or $52 for agreements where payments are deducted directly from your bank account.  For eligible individuals with incomes at or below certain levels, a reduced fee of $43 will be charged.
  9. Taxpayers who have a balance due, may want to consider changing their W-4, Employee’s Withholding Allowance Certificate, with their employer. There is a withholding calculator available on IRS.gov to help taxpayers determine the amount that should be withheld.

For more information about installment agreements and other payment options visit IRS.gov.  IRS Publications 594, The IRS Collection Process and 966, Electronic Choices to Pay All Your Federal Taxes also provide additional information regarding your payment options.  These publications and Form 9465 can be obtained from IRS.gov or by calling 800-TAX-FORM (800-829-3676).


  • Publication 594, The IRS Collection Process ( PDF)
  • Publication 966, Electronic Choices to Pay All Your Federal Taxes (PDF)
  • Form 9465, Installment Agreement ( PDF)

The IRS really does not like to play banker, so they strongly encourage people to take out loans rather than set up payments plans. However, using the IRS “loan” option is sometimes the best option. If you’re approved for an installment plan (which is pretty much automatic for debts under $25k as long as you’ve filed your past returns), then the late payment penalty fee is generally reduced. With this reduction, and the current low interest rates, your annual fees for penalties and interest may amount to as little as 7%. Many individuals will have a hard time finding a loan at 7% or less. So don’t ignore the option of an IRS payment plan–just make sure if you get a payment plan with the IRS that you stick with it and file all your returns on time while paying off the payment plan!!

By far the most important thing to realize if you owe money to the IRS…the longer you wait, the worse it’s gonna get.

Next most important: File your taxes on time. Get an extension if you can’t file on time, and file by the extended deadline. Even if you can’t pay, file your taxes on time to reduce late filing penalties, which are far worse than late payment penalties.

IRS will stop aiding the issue of high cost loans to poor

August 6, 2010

The IRS announced this week that they’ll no longer be providing something called the “debt indicator” to tax preparers.

Most people have never heard of this item. (In fact, while I was aware of the concept, I didn’t even know this specific term before the announcement.) This is an indicator of a taxpayer’s creditworthiness that is used by tax preparation firms to determine eligibility for Refund Anticipation Loans (RALs) and Refund Anticipation Checks (RACs). RALs are essentially very high-cost loans frequently used by low-income taxpayers to get fast access to their tax refunds. And by high-cost, we’re talking about taxpayers paying hundreds of dollars to get their refunds a week or two faster than waiting for the IRS to issue the refund.

So you’re likely to see fewer advertisements next season offering instant tax refunds. And I think this is a great thing. Many low income taxpayers are not financially savvy enough to understand what a terrible deal these loans are, and many unscrupulous tax preparers use them as a way to lure in clients, and make some extra cash by getting a cut of the fees on these high cost loans.

Of course, there are more steps that need to be taken to help the people who have used these products in the past. Many low income individuals don’t have access to bank accounts and need considerable financial education. But getting the IRS out of the business of aiding the selling of horrible financial products to these individuals is certainly a step in the right direction.