12/24/08: It's Tax Time Again
By Benny L. Kass
"The avoidance of taxes is the only intellectual pursuit that carries any reward"
John Maynard Keynes
(First in a Series)
2009. The parties are over, the children are enjoying their new toys, and you are looking at your bank statement. Should you file your federal income tax return now, to get an early return, or should you wait the 102 days and file on April 15th. Or should you request the automatic extension, so while you will have to pay any tax you owe in April, the final return does not have to be filed until October 15th.
These are questions which only you can answer. But regardless of when you decide to file, you should start preparing now. Every year, the IRS circulates a large publication, entitled "1040 Instructions" which is available on their website. According to the IRS, the average time required to complete and file Form 1040 (the most commonly used income tax return form) is 26.4 hours - an alleged decrease from last year's 33.5 hours. The bulk of this time - 15.1 hours - involves only record keeping.
By the end of this month, you will be receiving many forms from your employer and from your lender. By law, any lender (private or commercial) that receives $600 or more in mortgage interest must send the borrower Form 1098. Although in recent years, most consumers were not paying points to buy down a mortgage loan, any points that were paid must also be listed on this form.
When you get Form 1098, don't just put it in your "tax file". Review it carefully, since the same information has been transmitted to the IRS. Get an amortization table - available on the internet or in local bookstores - and make sure that all of your payments have been properly credited. This is especially important for those of you who have been making extra principal payments over the years, so as to reduce your loan obligation as quickly as possible.
Did you buy your first home after April 8, 2008? If you did not own any other principal residence during the three year period ending on the date of purchase, you may want to consider taking the up-to-$7,500 tax credit. But unless Congress changes this, there are strings attached to the credit - it ultimately has to be repaid. There are also income limitations on this credit. If your modified adjusted gross income is $95,000 or more (or $170,000 for married couples filing a joint tax return) you cannot take advantage of this credit.
It is interesting to note that even if you plan to buy that first home before July 1 of this year, you have the option to take the credit on either your 2008 or 2009 tax return. Thus, you have to do the numbers to determine if it's even worth taking the credit, and if so, which tax year works best for you,.
If you live in the District of Columbia, and just bought your first home last year, you also have the option of taking a full $5000 tax credit - and this does not have to be repaid.
Every year, there is always something new in the tax law. Sometimes, it will cost you more money. For example, the credit for non-business energy property has expired and does not apply in 2008.
But once in a while you get a break. For example, if you do not itemize your deductions, and have paid state and local real estate taxes in 2008, you can increase the standard deduction by up to $500 (or $1,000 if married filing jointly).
I am always asked - especially by homeowners who for the first time will be able to itemize their tax deductions - what's the best way to start. My suggestion: go to the IRS website, and download a number of their helpful publications.
Recently, the IRS announced that it has significantly updated "Your Federal Income Tax". According to the IRS, Publication 17 includes important changes for 2008, "including information on the new recovery rebate credit, new first-time homebuyer credit, and an additional standard deduction for real estate taxes." This publication, which is in its 65th year, now contains more than 900 interactive links.
Other publications which may assist you include: #1 - Your Rights as a Taxpayer; #502 -Medical and Dental Expenses; #504 - Divorced or Separated Individuals; #523 - Selling Your Home and #530 - Tax Information for First Time Homebuyers.
A complete list can be found at www.irs.gov, click on Forms and Publications.
Finally, beware of scam-emails or phone calls. The IRS periodically issues a warning not to provide any personal and financial information - such as name, Social Security number, bank account and credit card or even PIN numbers - to anyone calling or emailing claiming to represent the IRS. That agency makes it very clear: we do not send taxpayers e-mails about their accounts. And the only way to get a tax refund or to arrange for a direct deposit is to file a tax return. For more information, see "Suspicious e-mails and identity Theft" in the IRS website.
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