Most income is taxable income but there are some examples of non-taxable income and we’ll look at both.

Taxable Income

There are many types of taxable income. The income you earn from working as an employee is taxable, as is the income you earn when you are self-employed, or the income you receive as a business owner.

You are supposed to report income from wages, fees, commissions, tips, stock options and even fringe benefits. The fringe benefits you receive, even if you don’t receive cash, are taxable as income. Realize, too, that even if fringe benefits are given to someone else, or used by someone else, you are considered the recipient.

Investment income is also considered taxable. This includes income from the sale of investments; you pay capital gains on this income. You also pay taxes on income from interest earned on deposits, as well as from dividends paid out. Gains on collectibles sold (which includes physical metals) are also reported as taxable income.

You are also supposed to report and pay taxes on income from royalties. This includes royalties from copyrights, patents, and properties that produce mineral, oil and gas. Realize, too, that you pay taxes on bartering income. You will need to figure your gain for what you received in barter, although you can offset the income with the bartering services or items you provided.

Non-Taxable Income

There are a few income sources that aren’t taxable, here are some of them:
• Some disability insurance payments: While payments from a policy paid for by your employer are taxable, you don’t have to pay taxes on payments when you receive them from a plan that you pay for with after-tax dollars.
• Gift receipt: You don’t have to pay income taxes when you receive a gift. Taxes on gifts are paid by the giver – although the giver doesn’t have to pay taxes until the gift exceeds the exemption amount. Understand, though, that a prize isn’t a gift, and you pay taxes when you win a prize.
• Life insurance payout: You don’t pay taxes when you are the beneficiary of a life insurance policy.
• Municipal bond interest: When you invest in municipal bonds, they are most often tax-free at the federal level – and even usually at the state level (if you live in the state of issuance).

TurboTax will ask you questions related to your income to help you include your reportable income on your taxes.  If you still have questions, only TurboTax will let you speak to CPAs, tax attorneys, and IRS enrolled agents while you prepare your taxes, free.

We don’t commonly associate the Olympics with taxes, but this year, the two will at last collide. In order to secure the 2012 games, London was required to award special tax exemptions to some of the personnel. But why were these exemptions necessary – and what do they cover? Moreover, why are British taxpayers reportedly on the hook for over $2 million in stadium upgrades after the games are over?

We examine these Olympic tax issues in greater detail below:

Who Is Exempt?

Source

Despite assumptions to the contrary, the tax exemptions reportedly will apply only to “a small number of non-residents who are directly involved in the delivery of the games”, according to HM Revenue & Customs. HM adds that “for most people working or supplying to London 2012, there will be no specific tax exemptions in place, and normal tax laws apply.”

It appears, according to the BBC, that these exemptions – which officially took effect on January 1, 2011 – were necessary in order to secure the participation of key foreign professionals, including:

• Competitors
• Journalists
• Representatives of foreign governments, official Olympic bodies like the International Olympic Committee, and host cities for future games
• Equipment technicians
• Team officials
• Referees and judges

Similar exemptions have reportedly been extended to “officially designated Olympic partners who provide a commercial service to the game.” Additionally, performers at the opening and closing ceremonies will not be taxed on performance or rehearsal payments, and the London Organising Committee (largely responsible for putting the event together) will not pay any corporate taxes in connection with the Olympics.

The Rules to Qualify

Source

In addition to being members of the above parties, those seeking the Olympic tax exemptions must meet the following criteria:

• Must be “neither resident nor ordinarily resident” in the UK during the 2012-13 financial year.
• Can only exempt income that is “wholly and exclusively” earned from taking part in the Olympic games
• Can only exempt income earned between March 30, 2012 and November 2012

The only exception to the March-November time frame is for staff working as employees/contractors for Olympic broadcasters, who will receive a longer exemption period (April 6, 2011 to April 5, 2013.)

Stadium Upgrades

Source

There is another tax aspect of the 2012 Olympics: taxpayer-funded upgrades to London’s Olympic Stadium. Started in 2007 and finished in 2011, the stadium will apparently require over £2 million in repairs after the games conclude to make the pitch usable for Premiere League football (soccer) games. For unknown reasons, the field (built with the Olympics in mind) currently installed was not designed to Premiere League standards, which mandate under soil heating technology for regulation football games.

Without publicly funded upgrades to remedy the situation, the DailyMail explains, neither West Ham nor any other public club will be able to play at the £486 million stadium.

The repairs would have fallen on West Ham if its long-term tenancy agreement was not cancelled amidst legal problems. Now, the burden falls squarely on the Olympic Park Legacy Company to transform the stadium – and to make matters worse (from a public standpoint) the team could simply end up renting the stadium anyway.

These questions are explored below:

Bonuses Are Considered “Supplemental Wages”

Bonus Taxes

If you read the tax code, you will notice that the Internal Revenue Service goes to great lengths to categorize different types of income and treat them differently. Bonuses are another example of this. In the eyes of the IRS, bonuses are typically categorized as “supplemental wages.” As a University of Minnesota summary explains:

“The IRS defines supplemental wages as compensation paid in addition to the employee’s regular wages that includes, but is not limited to, severance or dismissal pay, vacation pay, back pay, bonuses, moving expenses, overtime, taxable fringe benefits, and commissions.”

As such, bonuses (like other supplemental wages) are treated differently than ordinary wage or salary income. There are two ways of taxing bonuses: the percentage method and the aggregate method. Which method gets applied to your bonus? Let’s find out.

The Percentage Method

(source)

The IRS specifies a flat “supplemental rate” of 25%, meaning that any supplemental wages (including bonuses) should be taxed in that amount. If you receive a $5,000 bonus, under this rule, $1,250 (25% of $5,000) goes straight to the IRS. Using this approach, the amount of your bonus – whatever it is – is “singled out” from the rest of your income and taxed directly. Employers frequently choose the percentage method because it’s easy and mindless to tax the entire bonus at a uniform rate.

In most cases, this is ideal from your standpoint as the bonus receiver and taxpayer, too. The aggregate method (described below), in addition to being more time-consuming and laborious for employers, can take a bigger tax bite out of your bonus payments.

The Aggregate Method

(source)

Unlike the much simpler percentage method, the aggregate method is when your employer adds the amount of your bonus (say, $5,000) to your most recent regular paycheck. Then, they determine the normal withholding amount based on IRS withholding tables for the sum of both amounts, subtract what was already withheld from your last paycheck, and withhold the rest from the bonus amount.

The problem with this approach is that instead of being taxed at a flat 25% – and having that 25% rate apply only to the bonus amount – you get taxed at what is almost certainly a higher rate on the combined amount of your normal pay and the bonus. The result: a higher overall tax obligation for the same amount of income.

Here is a free bonus calculator based on the aggregate method. Use it to determine your bonus-related tax obligation should your employer choose this approach.

Bonuses Exceeding $1 Million

(source)

What about high-end corporate bonuses, like those exceeding $1 million or more? These are singled out for higher taxes. If you receive a bonus of more than $1 million, your employer must withhold 35% of the amount above $1 million, as well as the standard 25% of the amount below $1 million. Of course, as discussed above, employers are not limited to the percentage method. They can, at their discretion, use the aggregate method for the bonus amount below $1 million.

In short: if you dislike the eye-popping bonuses top executives receive, you can take comfort in knowing how large a bite the IRS takes!

Why Does It Seem Like Bonuses Get Taxed More?

Employees often complain that their bonus checks have seemingly been taxed at much higher rates than their ordinary income. Yet, as The Street shows us by way of example, this is actually an illusion:

“If you make $2,500 a month but get a $5,000 midyear bonus, your withholding will be computed as if you received a single wage payment of $7,500 for the monthly payroll period. Then that $7,500 is annualized, or assumed to be part of your yearly salary. So if you earned $7,500 a month, you’d be making $90,000 annually versus $30,000. But at $90,000, your tax rate jumps to the 31% tax bracket vs. the 28%.

Under this annualized method, you would end up taking home even less of your bonus because you’d be withheld at much higher rates.”

What happened here is that your employer used the aggregate method to calculate your bonus withholdings instead of the simpler and smaller percentage method. The IRS didn’t apply a higher rate – your higher tax payment is simply a byproduct of the withholding method your employer chose.

Are you lucky enough to get a bonus this year?  Which tax method will your employer use? 

Tax Tip: If your bonus puts you in a higher tax bracket this year and you expect to make less next year, see if your employer can defer your bonus to lower your tax bill this year.

I was curious, though -what was the significance of this announcement? What do new tax forms mean for us as taxpayers? How can this be helpful for you and with our taxes and finances?

What is the Statistics of Income Division?

First off, what is the Statistics of Income Division of the IRS? Before the announcement I had never heard of them so I had to find out. They are the division takes the data received with tax filings through the years and releases data for the public.

The division includes economists, mathematical statisticians, and IT professional who complete numerous studies, one of which is the Personal Wealth Study. The division combs through the data every 3 years and shares what they’ve gathered.

That’s not the only study that they work on. I checked the IRS’ tax statistics page and found dozens of tax reports, including:

• IRS Compliance with Issuing Refunds
• Estate Taxes
• Gift Taxes

If you’re a fan of numbers, they probably have a study that would pique your interest.

SOI’s Latest Announcement

Once the study is complete, the publication will include three main parts:

• Individual Statistics Branch: This portion will mostly be what interests you the most. It’s focused on analyzing individual tax returns using 1040, 1040A, and 1040EZ.
• Corporation Statistics Branch: As the name suggests, this branch digs into tax forms relating to corporations, such as the 1120 (1120, 1120S, and 1120-F) series.
• Special Studies Branch: For those studies that fall outside of the two above mentioned areas, the SOI has a branch that pores over data such as gift taxes and international tax filers.

If you look at the PDF file included with news announcement, you’ll see in red the proposed data that they SOI will be using for the report. It’s expected the results will be released in 2012 or 2013.

Thoughts on the 2010 Forms and Schedules

Have you ever heard of the Statistics of Income Division before? Did you know about the valuable data and studies they head? What are your thoughts on the proposed forms and schedules for 2010?

What about you? What’s your dream place to live in the United States? Are you a laid back person that enjoys the mountains or do you prefer the hustle of the city? Are you more of a beach bum or do you much rather hang out at the ski slopes?

Before you just pack up and move, it’s good to see how your day to day living will be in your dream spot and that means running the numbers. I thought it would be fun to see what the cost of living would be in different parts of the country. I was curious to see what are the most and least expensive cities in America.

Most and Least Expensive U.S. Cities to Live In

High Cost of Living

According to Kiplinger, here are the 10 most expensive US cities to live in:

1. New York City, NY
2. Honolulu, HI
3. San Francisco, CA
4. Santa Ana, CA
5. Stamford, CT
6. Fairbanks, AK
7. Washington, D.C.
8. Oakland, CA
9. Los Angeles, CA
10. San Diego, CA

Looks like the West Coast and all its beautiful weather comes at a steep price.

Low Cost of Living

According to Kiplinger, here are the 10 least expensive US cities to live in:

1. Fort Smith, AR
2. Pueblo, CO
3. Harlingen, TX
4. McAllen, TX
5. Johnson City, TN
6. Conway, AR
7. Springfield, IL
8. Covington, KY
9. Louisville, KY
10. Omaha, NE

Kiplinger notes that a New Yorker would have to make $127,935 a year to have the same standard of living as someone earning $50,000 in Fort Smith, Ark.

Home Sweet Home

Renting a place is a great option for those looking to try a new place to live. The average rent can vary place to place and depending on the size of the city, you can even notice a difference in neighborhoods.

What if you’re looking for something more permanent, like buying a home? Purchasing a house can make the gap even more noticeable. How big is the difference? If you wanted to get a home outside of Atlanta, GA you can find a family sized four bedroom house for just under $100,000.  Looking for something a bit more Mid-Atlantic? Chapel Hill, NC has a four bedroom house for about $380,000.

I find it interesting to see what you can get around the country for certain amount of money, so I try to keep up with the NY Times Real Estate page for when they run the series.

Bills, Bills, Bills

No matter where you live in the United States (or anywhere really), you’ll have to made due on your monthly expenses. However your location can play a huge role on how expensive or inexpensive your bills will be.

That was the case for us when we deciding whether or not to move from Virginia to North Carolina a few years back. We found housing to be much more reasonable, but the gas prices to be a bit more expensive. after running the numbers, we saw that it was cheaper for us to move than to stay.

Using the handy cost of living calculator gave  us a chance to get an idea of what areas to consider and what area to take off our list. Asking friends and family who lived around also helped us get a realistic perspective as well.

Deciding on the Right Location

So how do you decide on where your American Dream location is? I’d start by narrowing down what part of the country you enjoy the most and ask yourself why you love it. If you’re more of an urban cat and love having a diversity of culture, music, art, and entertainment, then looking into the big metropolitan areas like Chicago, Los Angeles, and New York City. However, you should also look at some good sized college towns and cities that may offer you the same perks without the hefty price tag.

The good news is that you can always move

Source

Business Insider has previously reported on 20 Tax Facts That Will Astonish You. We’ve taken the time to expound on a few of the most interesting ones. Take a look below:

1. The IRS has more employees than there are people in Flint, Michigan (106K vs. 102K).

2. You could fill Dallas with the number of accountants Americans hire to help with taxes each year (over a million).

3. Americans spend $28 billion and 8 billion hours each year doing their taxes.

4. In 1915, a Chicago lawyer said the tax form was “so complicated that it is utterly impossible to understand its meaning save by consulting a palmist.” (Back then, the tax code was 400 pages long.)

5. The number of pages in the tax code has increased 16, 775% in the past century.

According to The Economist, the code, which was 400 pages long in 1913, is now about 70,000. Nina Olson, the national taxpayer advocate since 2001, has said there there have been “something like 579 changes” to it in the last year alone.

6. 84% of people think it is not at all acceptable to cheat on your taxes.

And yet a surprisingly high percentage of people do. According to Rutgers University Law Professor Stuart P. Green, “as many as 30 to 40% of Americans” don’t pay all of their taxes. The difference between the amount of tax due to the federal government and the amount actually paid is probably around $300 billion this year.

7. 90% of people who employ babysitters and housekeepers end up cheating on your their taxes.

The New York Times reported on the “nanny tax” in 2009. Zoe Baird, President Bill Clinton’s first nominee for attorney general, Caroline Kennedy (who was running the for the New York senate) and Treasury secretary Timothy Geither have all suffered public controversy due to evasion of the tax. According to the Times, “In 1997, taxpayers filed 310, 367 household employee tax payment forms with the Internal Revenue Service. By 2006, the latest year for which data are available, the number was down to 225, 441.

8. Tax rates are declining for everyone, but especially the top 1%.

9. So how come rich people are paying more taxes than ever? Because they are gaining wealth faster than the tax rate is declining!

10. 47% of Americans pay no federal income taxes.

CNN reported this in 2009. 71 million people were estimated not to have to pay taxes in 2009. This is because of the February 2009 economic recovery package that cost about $787 billion. It’s mostly people that make up to $30,000, and half of households that make between $30,000 and $40,000.

11. A $100K earner takes home 62% in New York. She would take home 72% in Dallas.

12. The 400 best-compensated Americans earned an average of $345 million apiece (2007).

13. The average federal income tax rate for these 400 was 17%. This is down from 26% in 1992.

14. NYC has the highest corporate income tax in the world.

15. Thanks to big loopholes, GE paid no taxes on U.S. operating income of $5.1 billion. Actually, they claimed a $3.2 billion tax benefit.

According to The New York Times, G.E “has been cutting the percentage of its American profits paid to the Internal Revenue Service for years, resulting in a far lower rate than at most multinational companies.” G.E.’s tax department is known as “the world’s best tax law firm”; it concentrated most of its profits offshore, altogether reporting that its tax burden was 7.4% of its profits.

16. Business Insider pays more in taxes than GE.

17. Over 100 companies on the S&P 500 paid less than 20 percent in federal taxes. (The corporate tax rate is supposed to be 35 percent.) The Atlantic expounds: “While the federal corporate tax rate is nominally 35 percent, Leonhardt learns that 115 of S&P 500 companies have paid a total corporate tax rate–which includes federal, state, local, and foreign taxes–of less than 20 percent over the last five years. Thanks to loopholes–like spending a lot of money on new equipment and buildings–many companies can get past these.

18. Nicolas Cage owes around $14.6 million in back taxes. That’s more than his last movie, Drive Angry 3D, earned on opening weekend.

In 2010, he sued his accountant for letting him run up to $14 million in tax debt. These were unpaid gift taxes; Cage claimed he gave more than $1.8 million in taxes to people between 2004 and 2009. (Federal law requires that a 35% tax needs to be paid on gifts over $13,000.)

19. The top income tax rate in Sweden is 56.5%.

The Guardian reports that Swedes have the second highest tax burden in the world after Denmark, and that 48.2% of its Gross Domestic Product goes toward taxes. Most people pay anywhere between 49 and 60 percent of their income to the government.

20. There are $5 million in tax-free gift exemptions, up from $1 million previously.

The Wall Street Journal reports that, until the end of 2012, the exemption is $5 million for individuals and $10 million for couples. According to the WSJ, “it is linked with the estate tax, in order to prevent the wealthy from draining their estates before death to avoid levies.”

Check Your Status

There are two possible ways you can be classified: employee or contractor. It makes a big difference, so pay attention to which one you are. As an employee you will have taxes taken directly out of your paycheck and then get a W-2 at the end of the year. Not so if you’re a contractor. Instead you get paid the full amount and are then responsible for paying income and payroll taxes on what you earned. This can trip people up if they get surprised with a tax bill come April. Learn more about how tax implications of life changes like a job change can be handled easily with tax software.

If you are an employee that means you’ll be filling out a W-4 when you start work. This form tells your employer how much money to withhold from your paycheck. Filling this out properly will ensure you’re only giving Uncle Sam as much as he needs, making your paycheck larger. Also, if you worked last year and got a refund for the entire amount that was withheld and expect the same this year, you can claim exempt and not have any income tax withheld.

Keep Good Records

It’s easy to think that just because you may have part-time employment there’s little to keep track of, but it pays to keep good records. Keep your pay stubs, track cash tips (yes, that is taxable income), and any expenses related to your work. This will help ensure you and your employer are on the same page come tax time. Mistakes can happen and the more records you keep, the easier it will be to catch it before it becomes a hassle.

Create Automatic Savings

While a seasonal job may not make you rich, you should still put some of that money to work by saving it. If your employer has direct deposit you should set it up and direct part of your paycheck into a savings account. Even if it’s just $25 per paycheck, over the course of the summer you’ll then have a nice little savings account set aside. If you don’t have direct deposit just swing by the bank and set up a savings account and then create an automatic and recurring transfer from checking into savings. If you put this savings on autopilot you’ll never forget to pay yourself first.

Take Advantage of Retirement Accounts

For students and young adults retirement is about the last thing on their mind, but it shouldn’t be. The magic of compound interest needs time to work, and the more time you have the more your money can grow. So even though retirement may be forty years away it’s not too early to tuck a little away into a retirement account. For one, there are tax benefits. Traditional IRAs or a 401(k) give you a tax break up front on the contributions. Or go with a Roth IRA and your money has the luxury of growing for years and then withdrawn completely tax-free. It may not be the most exciting use of money now, but you will thank yourself when you’re older.

What kind of story are we looking for? Specifically, let us know how TurboTax impacted your life…did you get a bigger refund than you expected? Find a deduction or credit you weren’t aware of before? Send your child to summer camp? Go on vacation for the first time in years because of that refund? Pay off bills you couldn’t catch up with before? Did you do your taxes for the first time ever?

We want to hear about all about it. Tell us your story.

Read the official rules.

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Our property taxes for our town home are due by the end of December every year. We get a letter from our county and municipality during the summer to let us know what our tax obligation is. By having a portion of our mortgage payments allocated for the bill, we’re able to have it taken care of painlessly.

What are Property Taxes?

Curious to find out more about property taxes, I decided to check online and dig around a bit. Property taxes are used as a source of revenue for local government.The revenue is used for public services such as fire, police, and school funding. Property tax is determined by the assessed value of your piece of real estate and the current rate in your location.

Most Expensive Places for Property Taxes

CNN had a fascinating piece on some of the most expensive counties in the United States for property taxes. It may come as no surprise to many to see that the Northeast had the highest property taxes in the nation.

• New York
• New Jersey
• Connecticut
• New Hampshire

Since tax rates can change through the years, it’s helpful to check lists like the one CNN has regularly.

Learning How Much You Owe

If you’re curious to see what your municipality’s current tax rate is or if you want to see what your house is assessed for, go online to your local government’s tax/revenue department’s site. We used the site for the city of Raleigh and we were able to see our past tax bills as well. It’s quickest and easiest way to stop on top of it.

Due to the downturn in real estate with some areas of the country, it doesn’t hurt to check to make sure your assessment is accurate. You may be able to dispute your tax bill and get it lowered if you can prove that property value has decreased since the last assessment.

Your Property Taxes

I’d love to see how much everyone is paying with their property taxes. What is your local property tax rate? Does your escrow account take care of the annual payments or do you take care of it yourself?

The jobs part of that prescription may be hard to find these days, but there are many places that fit the rest of the bill. Some of the cheapest places to live in America include Omaha, Detroit, Indianapolis, Cincinnati, Pittsburgh, Minneapolis- St. Paul, Cleveland, Oklahoma City and Houston.

The thing that many places on that list have in common is that they are in the heart of America. Think rolling hills and farm land, as opposed to coastal and mountains. Not exactly the sunny weather you had in mind, perhaps, but the tax climate in most of those places is quite temperate, and contributes to the inexpensive cost of living. Property taxes for homeowners, income taxes, sales taxes, gasoline taxes — they all play a part in determining your overall cost of living.

The state with the best tax climate for you depends on your circumstances. If your income is high, consider the states that have no income taxes: think Florida, Texas and the state of Washington. If you are a shopper, your sprees will cost less in a state with no sales tax, such as Oregon, New Hampshire or Delaware. Concerned about rising property taxes? California’s Proposition 13 limits property taxes to 1% of the original cost of the property, plus a small inflation factor. Drive a lot? You’ll like the lower gasoline taxes in Alaska, New Jersey and Georgia, the lowest in the nation. If you are a smoker, you’ll pay high cigarette taxes everywhere, but less in Missouri, Virginia and Louisiana.

The source of your income is also important when deciding which state has the lowest taxes. Pensioners with income from federal, state or local pensions will pay no tax on that income in Alabama, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Mississippi, New York and Pennsylvania. But income from other sources may be taxed: Kansas taxes Social Security income if your total income is over $75,000 and Massachusetts and Kansas tax all income from private-sector retirement sources.

If you are retired from the military, you might want to move to one of the many states that don’t tax retired military pay. Those states include Alabama, Alaska, Hawaii, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Nevada, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, South Dakota, Tennessee, Wisconsin and Wyoming.

If you aren’t yet retired and you contribute to an IRA, you might steer clear of New Jersey, Massachusetts and Pennsylvania, since those states don’t allow a deduction for IRA contributions.

So where is the best place for you to live? For most of us, the truth is that there’s no place like home. That’s why half of Americans live within 50 miles of where they were born.

Ask for additional time to pay: It’s nearly that easy. You can request an additional 60 to 120 days to pay what you owe. You can call the IRS or go to the Online Payment Agreement and submit your information. This is a good solution if you have a first quarter bonus coming in or just needed time to rearrange some of your assets to free up the cash.

Apply for the Installment Plan: You can use this option to pay off a tax debt of up to $25,000 over as long as 60 months. You can use the same Online Payment Agreement link or apply by using Form 9465. Your application is subject to approval but it’s guaranteed if the amount owed is not over $10,000, you have a clean record for the prior five years (all taxes paid with or prior to the return due date), you agree to pay it in full within three years, and the IRS determines you can’t pay in full immediately.

Pay by credit card or debit card: Since the penalty can be as much as 1/2%/mo and interest is currently 4% annually, you may have a credit card that offers a lower rate, perhaps even a zero percent teaser rate for a year. With average credit card rates still at 14% in addition to the 2%+ fee from the card service provider, the IRS route still seems best in most cases. The fee to pay with a debit card is less than $4, but if you have the cash to debit, why not just cut the check?

401(k) loan: The rules for these loans allow you to borrow up to 50% of your vested balance for five years. The current rate (based on the common “Prime+1/2%) is about 3.75%. There are risks, however. Should you lose your job, your loan balance is subtracted from your account and the amount is deemed as distributed. Taxes and 10% penalty are then due which results in yet another debt to the IRS.

The IRA shuffle: You can’t borrow from your IRA, but did you know that if you wish to transfer the funds from one account to another, you have 60 days to do this? In effect, this is the same as a 60 day loan. So long as the money is deposited into a different account on or before day day 60, there’s no tax or penalty. You should only consider this option if you are certain of having the money within the 60 days, otherwise, there’s a high price to pay, both tax and a 10% penalty.

HELOC: The home equity line of credit is to be used as a last resort, it puts your house at risk if you default. With most HELOCs tied to the Prime Rate plus a bit of an adder the rate will be in the 4%-5% range. Not a bad cost to borrow and you avoid any penalty. If you choose this type of loan, try to pay it off quickly, the bill’s minimum payment will likely reflect interest only. Don’t let a single year’s tax bill turn into 10 years of payments.

Now that you’ve decided how to pay the tax man, take a look at How to Adjust Your Tax Withholding for the New Year. Understanding and making changes to your withholding this year will prevent you from owing so much in April 2012.

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Jan. 10: Employees who work for tips should report their December tips of $20 or greater to their employer. Note – as this is a monthly event, I’ll not repeat it eleven more times. If the 10th is a Saturday or Sunday, the report is due on the Monday the day or two after.

Jan. 18: Fourth quarter estimated taxes are due. This applies to those who either don’t have taxes withheld through employer withholding or have not held enough through the year. You may have withheld enough to pay tax on your ordinary income, but a big gain in the stock market might put you into tax penalty territory, this was your chance to avoid that.

Jan. 31: If you missed the Jan 18th date for final tax payment of 2010, by filing your return today, you can avoid penalties for underpayment. Also by this date, businesses must send notices of any payments made during the year, items such as rent, royalties, interest, retirement plan distributions, etc.

Feb. 15: Anyone who claimed “exempt” on their W4 submitted to their employer last year must submit a current W4 to continue the exemption or claim a normal level of withholding. For Businesses, a number of other 1099 items are due to the recipients today, 1099-B, 1099-S, and 1099-Misc all due today.

March 15: Corporate tax returns are due today. Lucky you, you get an extra month.

April 18: Just because the 15th is the date we recall, doesn’t mean it’s the actually due date every year for your return. This year the 15th is a DC holiday. In 2011, Washington, D.C., will celebrate Emancipation Day on April 15, so the due date for most of the country is April 18. I say ‘most’ because this is Patriots Day in Massachusetts so any taxpayers sending their return this way get an extra day. First quarter estimated taxes are also due  today.

June 15: If you are a US citizen working outside the US or Puerto Rico your return is due today. Second quarter estimated taxes are also due today.

September 15: Third quarter estimates taxes are due today. Businesses that filed for a six month extension from March 15  have to file now.

October 17: Individuals who requested an automatic extension have to file today. This date is especially important for those who converted from a traditional to a Roth IRA in 2010. You have the ability to recharacterize by the due date of your return including extension. If that April 18th date approaches and you’re not sure if you might wish to recharacterize any or all of that converted Roth, this extension is the right thing for you.

You can see, even though the IRS is most busy around the classic April tax season, they still keep busy nearly every month of the year.

Salary, Wages, and W-4s

Have you noticed that your net pay on your paychecks is smaller than your gross pay? Why is it that? As you’ve probably seen, some of that money is allocated for various things such as Social Security, Medicare, retirement, health insurance, and , of course, taxes.

How does your employer know how much to take out?

Based on your answers on the W-4 you filed out when you were first hired, the Human Resources department automatically deducts a certain portion of your pay to cover your tax obligations for the year. In the United States the tax system is pay as you go, so as the year progresses and you earn income, you employer has a portion of your paycheck allocated for taxes.

If you’re self-employed you have to withhold your own taxes and pay your estimated taxes throughout the year yourself.

Reasons You’d Want to Change Your Withholdings

There are several good reasons why you would want to go ahead and change your tax withholding for 2011.

• You want to reduce the big tax refund you received. Some people prefer to get their money throughout the year so they can spend, save, or invest it the way they want to.
• You have a change in filing status. If you got married or divorced, your filing status affects your taxes and you may want to update your W-4.
• You have a child. When you change the number of dependents you have, your tax obligations can change. Make sure you have the proper amount withheld.

If you have any questions as to whether or not you should change your W-4, have a brief appointment with your company’s Human Resource department to get more information. They’ll be happy to help you out.

How to Change Your Withholding

Why is it important to have the correct tax withholdings? You’re expected to pay 90% of your tax obligation as you earn it throughout the year. If you’re not sure what you’re withholding should be, the IRS has an online calculator to help you figure out how to properly fill your W-4.

Changing your W-4 is as simple as going to your HR department and requesting a new form. Follow the guidelines (and use the online calculator if needed) and fill out the form accordingly. When completed, submit it to Human Resources so they can have the your paychecks reflect the new amount.

Thoughts on Tax Withholdings

How many of you have adjusted your tax withholdings? Are you planning on doing so this year? Why or why not?

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Tip 1: Don’t Overpay your Social Security Tax

If you have two or more employers during any year, each is required to withhold the Social Security (or FICA) tax up to the annual earnings cap. (In both 2010 and 2011, the cap is $106,800). If your total earned income from two or more jobs exceeds $106,800, you will have excess FICA withheld. The only way to have that money returned to you is to properly file your 1040, including the excess on line 69.

Tip #2: Don’t Forget – Unemployment Compensation is Taxable

Surprise! Any unemployment benefits you receive are taxable. Although the law for 2009 allowed up to $2,400 of unemployment benefits to be tax-free, no such provision exists for 2010 or 2011. As such, expect to report all of your unemployment benefits on line 19 on your Form 1040 – and to pay tax on all of it. Hey, at least there’s no FICA or Medicare tax on unemployment compensation.

Tip #3: Deduct your Job Search Expenses

If you spent money looking for a new job in the same profession as your old job, some of those expenses are tax deductible. Deductible expenses include copying and mailing of your resume, as well as employment and outplacement agency fees. Furthermore, if you travel to look for a new job, you can write off the travel expenses necessary to get there and back. Of course, you can only deduct the travel expenses if the trip is primarily to look for a new job. If you fly to St. Lucia on holiday and briefly inquire about a position behind the bar, you can’t deduct your vacation. Note that job search expenses are only deductible as a miscellaneous itemized deduction. In other words, you only save tax dollars to the extent all of your miscellaneous itemized deductions — including, for example, your purchase of TurboTax — exceed 2% of your adjusted gross income (AGI). If they do and you itemize, you’ll save money as a result of your job search expenses. Otherwise, you won’t.

Tip # 4: Write off those Moving Expenses

Moving expenses related to a new job are tax deductible if they meet certain conditions. First, you must have moved a ways, usually out of your immediate metropolitan area. Specifically, your new job must be at least 50 miles farther from your old home than your old job was from your old home. If you just landed your first job, your new job must be at least 50 miles from your old home.

In addition, you must stay at your new job for at least 75% of the next year (or two years if you will be self-employed). If something unavoidable happens, such as a disability or a lay-off, this second condition is waived. Deductible moving expenses include the costs to move you, your family, and your things. You cannot deduct house-hunting trips or real estate commissions. The moving expense deduction can be a valuable one for, unlike job search expenses, the moving expense deduction is an “above the line” deduction. This means you don’t need to itemize to take advantage of the tax deduction and save real money on your taxes.

Congratulations on the new job. By following these tips, you’ll be sure to maximize the amount of that new salary you’ll get to keep.

Today, however, I’d like to discuss sales tax. You know, the extra you wind up paying at the register on most purchases. Typically, the states will charge this on non-food or drug items, although prepared foods that you eat in a restaurant or get for takeout usually are taxed as well. There was recently a bit of controversy when New York decided that a whole bagel had no sales tax, but a sliced bagel was “prepared” and therefore taxed. Some states offer small exclusions for clothing, so long as you’re buying an item below a certain cutoff, $175 in my state, there may be no tax.

The highest 5 state sales taxes are as follows:

• California – 8.25%
• Indiana – 7%
• Rhode Island – 7%
• Mississippi – 7%
• New Jersey – 7%
• Tennessee – 7%

This is state only and ignores the local taxes some cities add, or additional tax on particular transactions such as hotel room rental.

One important decision to make on your tax return, specifically, your ‘Schedule A – Itemized deductions’ is between deducting your state income tax or sales tax paid throughout the year. The lucky folk in Alaska and New Hampshire enjoy paying no state income tax and no sales tax, so that section of Schedule A comes up blank. But those in Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming all have no income tax, and therefore should take the sales tax deduction. The IRS allows you to keep all of your receipts throughout the year and claim the actual amount, or you may use the online calculator for the IRS approved amount based on your income.

Even if your state has an income tax, you may find that in a year of high spending, furnishing a new home for instance, that your sales tax deduction is still worth more than the deduction for income tax. It may be time well spend to add up all those receipts.

Here’s some information to get you started and help you make the right choices for your situation.

What’s a W-4?

Whenever you start a new job, one of the forms you get from the Human Resources Department is your W-4, also known as Employee’s Withholding Allowance Certificate. This form is filled out by you based on your current circumstances and it helps employers know how much to withhold every paycheck for your taxes.

The goal is make sure you’re not paying too much or too little of your hard earned money to the government.

Do You Need to Change Your W-4?

As a rule of thumb, you should review and/or update your W-4 whenever your tax obligations. Possible changes include:

• marriage
• a change in the amount of itemized deductions
• a change in the number of dependents

It is easy to update your form and it should take a total of 10 minutes or so. You can do it by hand or you can use the withholding calculator the IRS provides on their site. You can also check out Topic 753 to see what other circumstances can affect your W-4.

Different Tax Brackets

Right now that are several tax brackets that the United States uses based on income and filing status. They are currently:

Source: IRS CFR 601.602

If you’re curious about your personal tax obligation, check out the IRS’ tax table to give you an idea. If you have any questions, speak with your Human Resource representative for specific instruction.

Thoughts on Raises and W-4s

How many of you received raises in the last year? How do you plan on using or spending it? When was the last time you’ve reviewed and or adjusted your W-4s?

First, even though this is bonus money, it is still considered taxable income by the IRS. You will need to pay federal income taxes on this money.

How Taxes on Bonuses Get Withheld

If your employer pays you the bonus through their regular payroll system, they should handle the tax withholding as they normally do. But don’t be surprised to see taxes of 25% withheld from this bonus money. Why? IRS guidelines typically require taxes of 25% to be withheld from income that is considered a supplemental wage. Bonus money is usually considered supplemental.

Keep in mind that just because 25% is withheld, you might not owe that much on this money. The IRS just requires it upfront via the withholding. You may get a percentage of it back when you file your return next April.

If your employer pays you with cash or in some way outside of their normal payroll system (e.g. hefty gift card), this isn’t an invitation to become a tax evader. You should simply report this bonus as income on Line 7 of your Form 1040. With that in mind, make sure you set aside some of the bonus for taxes.

Tax-Deferred Automatic Contributions and Bonuses

If you have money being automatically contributed to a 401(k), health savings account, or other tax-advantaged savings vehicle, then be careful with bonuses. Your employer will likely continue to contribute to these accounts with the bonus payout using the original contribution percentage that you set up. So if you already automatically contribute 5% of your gross income to your 401(k), your employer will probably take 5% of your bonus money and put it in your 401(k). If you are not careful, you could exceed your annual maximum allowable tax-deductible contributions to your 401(k). Most employers should be tracking this information for you, but some may not. Check into it.

Reduce Your Current Year Taxes with Bonus Money

If you spend your bonus on the right things, you could end up getting a tax savings equal to the taxes that you have to pay on the bonus income. Here are some tax-advantaged ways to use your bonus money:

• More Retirement Savings – Use your bonus money for additional retirement plan contributions. You could do this through your 401(k) or 403(b) at work. Just make sure you get the money into your account prior to the end of the year. If you don’t have an employer plan, you could make a traditional IRA contribution. With an IRA you have until the date you file your taxes to make the initial contribution.

• Green Home Improvements – Does your home need upgrading? Energy-efficient home improvements will provide you with a tax credit of up to $1,500 or 30% of the cost of the improvements. Qualifying improvements include things like adding insulation, replacing windows, and adding energy-efficient doors.

• Give it Away – If you were fortunate enough to get a bonus this year, you may desire to share some of that bonus with those people or organizations in need. Giving money to a qualifying charitable organization will provide you with a tax deduction as long as you itemize deductions on your return.

• Make Pre-Payments – If you have a mortgage, consider making your January mortgage payment in December. This will add to the amount of mortgage interest you paid in the year. Like charitable contributions, mortgage interest is deductible if you itemize. You should also consider making your property tax payments prior to year end, as this will give you another deduction.

Congratulations again on your holiday bonus. Have fun spending it wisely!