Taxes – Page 4

What if you owe money on your taxes?

Taxes are due on Monday. Did you owe money this year? I did, and it wasn’t a happy surprise.

It’s fine if you have the money, but what if you don’t have the money to pay by the due date? Let’s look at three possible scenarios:

Failure to File:
The worst thing that you can do is not file your federal taxes at all. Remember, filing isn’t the same as paying. It’s important to file your taxes by the deadline to avoid the penalty. How late you file determines the fine. It can be up to 25%.

You might be afraid to file your taxes if you don’t have the money to pay. After all, that’s admitting you owe a debt. But, you won’t be kidding anyone – trust me.

If you have the money to pay by the deadline, you are all set. If that is not possible, then work out a payment plan to keep the penalty fees as low as possible.

Failure to Pay:
Failure to pay means that you filed your returns on time, but didn’t make the payment in full by the tax deadline. The IRS will add a monthly percentage to what you owe each and every month until the amount is paid in full, but it is substantially better than the first penalty.

Interest:
Lastly, interest is charged on the amount you owe if you don’t pay by the due date. At first, the IRS charges 4% but they increase the interest rate every three months.

Preventing a Big Tax Bill
Have your tax preparer look at your withholdings and make any adjustments necessary to owe less next year. If you do your taxes yourself, you might want to consider consulting an accountant.

Remember: you don’t want to over withhold your taxes – that gives the federal government a loan for free. Instead, you want to withhold just the right amount, so if you do owe, it’s a very small amount, and if you get return it’s a very small return.

Why a big tax refund is a bad idea

Why is a big tax refund a bad idea? I’ve given you three reasons below. Let me know in the comments section if you can think of more.

Loaning your money for free to someone who doesn’t need it. What if I told you that you were going to loan someone $2,000 this year, and you weren’t going to charge interest. On top of that – you are going to wait a year to get it back, and ask for it in writing. Are you laughing at my question? If you are getting a tax refund this year, that is exactly what you have done! You loaned the government a portion of your paycheck every week, you didn’t receive any interest on that loan, and now you have to fill out a tax form to get it back.

Putting your money to work. The average tax return in 2008 was $2,683. So, you are not alone in doing this, but you should make sure it doesn’t happen again. When you see your tax preparer, ask him to adjust your withholdings so that you will not get a huge refund. I know you don’t want to owe $2,000 in taxes. Instead, aim to have the correct amount of taxes withheld. This way, you can have that extra money earning interest in your savings account, or saving you interest by going towards extra payments on your debt. That is how you make your money work for you.

You get less money with a tax refund. Are you worried that you won’t have the big check every spring for that special purchase? You might assume that a tax refund is a good savings plan. It’s not – good savings plans pay interest. Put the extra money in your own savings account instead. Divide your tax refund by the number of times you get paid each year. Then, have that amount automatically deducted from your paycheck and put into a savings account. If you want to have $2,500 saved in a year, that means you need to save about $48 a week. You are probably thinking that you don’t have an extra $48. Trust me; you will not miss money that’s not in your paycheck. Besides, if you’ve adjusted your tax withholdings, you’ll have more take-home pay.

The high price of instant tax refunds

It’s that time of year: holiday bills are arriving and you’re not sure you have the money to pay them. If you live on the east coast, you can add in unexpected snow removal costs. Where will you get the extra money? You might think that your tax refund is where you’ll get the money you need. That’s a good thought, but don’t sign up for an instant refund.

Some tax preparers or quick cash companies will tempt you with faster returns. They give you part of your tax refund ahead of time as a loan. Don’t do it! This is one of those money drains that isn’t worth the cost. All loans have fees and interest. With quick income tax return loans, the fees and rates can be outrageous. Let’s face it: companies who lend money are in the business of making money. It wouldn’t be worth their time and effort to give you a cheap loan. I strongly urge you to skip the quick cash and speed up the refund process with these three suggestions.

If you are expecting a refund, then by all means get your taxes done and filed as soon as possible. The quicker you file, the quicker you get your money back.
You can speed up the process by having your tax preparer file your tax returns electronically, which can save you the mail time.
Have the refund direct deposited to your bank account and again save the mail time.

If you do these three things, you can have your refund back in your hands in weeks. Then you will have the money you need and keep more of it in your pocket.

Careful Giving

With the end of the year coming up, people are being asked to make donations to many organizations While others are planning ahead for the end of the tax year Either way, you need to make sure the charity that you are donating to is legitimate.

With many people out there to scam people, choosing a charitable organization can be challenging Here’s what you need to look for:

Find out whether they have a 501(c) tax status if you are planning to deduct this on your IRS tax return.

Find out how much of each dollar is used for the cause, versus how much is used for administration expenses The higher the dollar amount used for the cause the better.

To find out this information go to www.Give.org to do your research before making your donation Once you have decided to make your donation, then you need to make sure you have the proper documentation for tax purposes.

For monetary donations, a cancelled check would be your receipt For non-cash items such as food, clothing, household items, furniture etc, you will need to make an itemized list of the items and the value Make sure to get a receipt from the organization that you are making the donation to Attach this to your itemized list and keep with your tax records.

Fact-Checking Charities

With the holiday season coming up, charities are increasing their requests for donations If you want to give (and I’m sure you do), make sure your money goes to those in need.

Unfortunately, it’s fairly easy to set up a charity, and fundraisers can legally keep most of the money donated to the cause Before you donate, find out whether the charity is legitimate You should also find out how your money will be spent.

You can start your research at www.Give.org (associated with the Better Business Bureau) This organization researches charitable organizations to find out how they use the funds they receive.

Here are some tips to help in your research:

Find out if the charitable organization has a 501(c) status (IRS code for non-profit organizations) Non-profits have stricter requirements, and your donation will be deductible on your tax return.
Find about how much of each dollar is being used for the cause versus administration costs The more administrative costs, the less of each dollar is being used for those in need Look for the low administrative costs.
For cash donations, request a receipt to use as documentation on your tax returns All donations over $500 will require additional paperwork, so speak with your tax preparer ahead of time.
When donating non-cash items such as food, clothing, furniture, etc, You will need an itemized list of the items you donated and the total value Most charities will ask you to value your own items Make sure you get a receipt for your donations with the charity’s information on it.

Do your research and chose the organization(s) wisely This is a great way to help out others who are less fortunate than you during this holiday season.

Start Preparing Your Taxes in October

I know that you’re seeing holiday shopping displays at the stores If you are like me, you’re thinking, “Is it time to think about that already? Halloween hasn’t come yet!” Yes, it’s that time – not to prepare for Christmas, but to prepare for year-end.

For me, October is a time when I set up a meeting with my tax preparer and start year-end planning With three quarters of the year gone by, I have a good idea of where the year stands financially.

You can start now by taking the time to meet with your tax preparer Gather up your information on income and donations, profit and loss statements, and any new financial circumstances or events Did you have more out-of-pocket medical expenses this year? Mortgage changes? Defaulted loans?

After your tax preparer has reviewed your information, you can ask him what you can do before December 31 to improve your tax returns Here are some questions you could ask:

Should you pay your January bills in December
Do you need to make more donations?
Should you hold off on the major purchase?
Should you contribute more to my retirement accounts?
Should you do renovations / improvements to your home to take advantage of the tax credits that might not be there next year?

Don’t wait until mid-December when you are crazed with the holidays, or worse yet, January, when it’s too late to take action for 2010.

Lending to a Friend

A friend of mine recently asked about lending money to a friend. I have always said that if you can afford to lend money to a friend, then give the money as a gift. If the gift is repaid, that’s an unexpected bonus.

But, you should never lend money to friend, especially money that you need to pay your own expenses. I say this because when people lend money to a friend, they often never get the money back, That’s not because your friend isn’t trustworthy, or sincere. It’s a matter of need. Think about it: If your friend can’t afford to pay a bank loan or rent, then how will he be able to pay you? Especially before you need the money yourself? Unfortunately, lending to a friend often means the friendship is lost along with the money.

It’s difficult to watch a friend drowning in debt or suffering without a car or apartment, but two drowning people are not better than one. There may be better ways to help out than putting yourself at risk.

Back to my friend. Unfortunately, she had already lent a substantial amount of money. She had also done everything possible to set up the loan legally with a contract, lien against the borrower’s home, and a formal payment plan. It sounded OK, so, I asked what the problem was. She said that her friend had filed for bankruptcy. That’s a problem.

My friend did everything right and took all the steps to protect herself, and now she will be out a large amount of money that she needs to cover her own expenses. She could never have afforded to give this amount as a gift, but that’s what it became. Will she get her money back? Probably not. In this economy, her friend’s home may not sell and when it does, it probably won’t sell for enough money to cover the loan.

My friend learned a very hard lesson in life. Their friendship will probably never be the same because of the damage that was done. Before you lend money to someone, think about all the possible outcomes and then make your choice.

Give to the Victims – Not the Scammers

With the recent events in the world, you may want to make a charitable donation to help the cause. When disasters occur, they tend to go hand in hand with scammers.

The best way for you to donate and help is to research the charities before you give. Some charities may want monetary donations, others may want specific items.

Whatever you chose to do, make sure that your donation is being put to the best use for the cause and not lining someone’s pockets.

First you need to choose a charitable organization. Even if you have a specific cause in mind, there could be many organizations claiming to support the same goals you do.

Second, you will want more information about a charity, and how they use their funds, go to www.give.org. Here’s what you need to know:

Find out how much of each dollar is used for the cause, versus how much is used for administrative expenses. The higher the amount used for the cause the better.
Find out whether they have a 501(c) (3) tax status if you are planning to deduct this donation on your IRS tax return.

Now that you have selected the charity of your choice, you will to decide whether you will be making a donation of money or specific items to the charity. Check to see what they suggest is best for what you want to accomplish.

For monetary donations, you should always use a check / debit card or credit card so that there is a record of the transaction. This is the easiest way so that you have proper documentation.

If you are donating specific items, you will need to have a record of what you are donating. For non-cash items, you can use the purchase receipt, itemized list along with documentation from the charity. Please check with your tax preparer, so that you have the proper documentation.