Updated March 31, 2006
by: Annette M. Hall
The Internal Revenue Service invited civic-minded individuals to help improve the nation's tax agency by applying to be members of the Taxpayer Advocacy Panel. The panel provides a forum for citizens from each state to make suggestions regarding IRS decision making. Applications were received until April 29, 2005. The TAP Report as submitted to congress is now available.
The 2006 tax season is just about to get underway, employers were required to have employee W-2's into your hot little hands by today - now the race is on. Before we look at this years tax tips, lets take a moment to review.
According to the Internal Revenue Service refunds in the amount of $279,799,934, were issued in 2004. Somehow that doesn't seem like much but when numbers get that large, they tend to lose their meaning. [State by state break down.]
Special rules for victims of HurricanesKatrina, Rita and Wilma will ease the eligibility requirements for the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC), allowing people more options to qualify for substantial tax refunds. The Internal Revenue Service has created a special online tool to assist taxpayers.
For this filing season, hurricane victims who experienced smaller earned incomes in 2005 can elect to compute their EITC and ACTC using their larger 2004 earned incomes. The option could result in a larger tax refund.
The option is limited to individuals who lived in the Hurricanes Katrina, Rita, or Wilma disaster areas. The 2004 earned income also must be higher than the 2005 income to exercise the income option.
The Internal Revenue Service today reminded tax professionals that they can help clients receive critical tax relief from the Earned Income Tax Credit and there are IRS tools to help them prepare accurate EITC claims.
For the 2005 tax year, the EITC income limits also increased significantly, especially for married taxpayers who file jointly. The maximum credit amount also increased to $4,400. And, a number of new provisions seek to ease the burden on victims of hurricanes Katrina, Rita and Wilma.
Tax professionals prepared 71 percent of the 21.1 million EITC claims for tax year 2004 EITC recipients received more than $39 billion in tax relief. Each year, millions of Americans who work but earn modest incomes fail to claim the EITC. The complex tax credit also is prone to error by people who mistakenly claim the refund.
The IRS has issued a new publication explaining changes to the tax law and relief provisions available to those affected by Hurricanes Katrina, Rita and Wilma. Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma, is now available online and paper copies will be available in about two weeks.
This new publication will list the disaster areas for each hurricane and explain which areas are eligible for administrative relief from the IRS and which areas receive special tax breaks under recently enacted provisions of the tax law.
The publication provides information for individuals regarding how to claim unreimbursed losses, the tax favored use of retirement savings, and new rules regarding charitable giving.
If you are a single or married taxpayer, who does not own a home and has W-2 income under $35,000, your tax return will be pretty straight-forward. You could easily save yourself a large chunk of money by completing your own tax return and be relatively certain it's done correctly.
However, when you start adding in variables, the complexity of your return increases and with it the chances you are missing money-saving tax credits. The IRS won't kick it back and tell you, "Hey, you could have deducted your mortgage interest on your home."
Something as simple as having children can complicate your return. For example: Those who received the advance Child Tax Credit in in 2003 and attempted to do their 2004 tax return, were confused to say the least. Many tax returns were rejected because by the time April rolled around, people couldn't remember if they had received a check back in August or not. The IRS was tracking those figures though and individuals who failed to claim the credit saw their returns rejected. This year fortunately the child tax credit was not paid in advance and much of the confusion has been eliminated.
If you aren't sure whether you qualify for the Child Tax Credit, pay a visit to the IRS website. They have made it very simple to find out.
If you own a business, run a farm, are serving in the military, have large charitable deductions or own your own home, you may find that the cost of hiring a professional to complete your taxes will be well worth the cost. The tax law changes every year, and just keeping up with them can be a full-time job.
If you're looking for free face-to-face help, check with places like the salvation army, senior centers, or your public library, many of which provide free services for low income families and senior citizens. Or call the IRS toll-free number 1 (800) 829-1040.
It's always a good practice to review last years tax return along-side the current years return. Are the figures similar? If there is a large discrepancy, did you forget something? Is there a mathematical error or is there a reasonable explanation for the difference?
All tax preparers are not created equal and mistakes do happen. Even though you pay to have someone prepare your tax return, you could still end up paying fines and penalties if your income is under-reported or your return is improperly prepared. Be sure you know the policy of your preparer before you hire one, not after the fact. Most tax preparers will pay any penalties assessed by the IRS due to their error but leave you to pay any outstanding tax liability. Some tax firms offer insurance, which will cover any errors, be sure you are clear on the terms before you need to make a claim.
If you've prepared your own taxes in the past, and you have reason to believe that you may have missed important deductions, you have three years to file an amended return. It may be cost effective to pay someone to look over your return. Some companies offer free services to check for errors, it might be worthwhile to call around.
Your tax situation may change from year to year. It is better to contact a tax consultant before you have trouble with the IRS. If you are starting a new business, do yourself a favor and make an appointment to see a tax professional. Having a tax plan in place and keeping proper records from the very beginning can save you time, money and piece of mind.
The top ten filing mistakes according to the IRS are:
The Internal Revenue Service released the Winter 2004-2005 issue of the Statistics of Income Bulletin. The Bulletin includes an article on preliminary data from individual income tax returns for 2003. Taxpayers filed 130.6 million U.S. individual income tax returns for 2003. Adjusted Gross Income (AGI) reported on Tax Year 2003 returns totaled $6.2 trillion for 2003, while taxable income was $4.2 trillion and total income tax was $750 billion.
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