Archive for the 'Tax Information' Category

Does it seem like personal income tax has been around forever? In fact, income taxation is a relatively recent event in US history and was even declared unconstitutional at one point. Here we present the historical highlights of the development of personal income tax in the United States. Keep in mind this is now one of your largest expenses.

1862
The US government imposes income taxes on citizens to pay for the Civil War. This period of taxation lasts until the law is repealed in 1872.

1894
A law taxing all personal income in excess of $4,000 at a rate of 2% is enacted but rejected by the US Supreme Court as unconstitutional.

1909
A new amendment allowing personal income taxation is proposed and ratified as the 16th Amendment by 36 states in 1913. Tax on personal income is now required by law.

1943
The government begins withholding taxes from paychecks, or “paying itself first”. This steady stream of income is required to wage World War II.

1952
The IRS reorganizes, finding that its former system of political appointment is ineffective.

1996
President Clinton creates a special commission to reorganize the IRS as it is, errr, ineffective.

2007
Only 56 days until you have to file a personal income tax return. Good luck.

If you are confused as to which records are important to keep and for how long, this may help. You need to keep records of all of your earnings, usually some type of 1099 form. You also need to hold onto records of expense if you plan to itemize deductions or claim exclusions or credits. Remember to send copies, never originals, to the IRS if asked for backup. Below we list the typical types of tax records.

How long to keep your records?

The IRS typically has three years to audit your tax return, so keep anything relevant at least that long. If you underreport income, they have six years to audit you. If you don’t file or file falsely, they have forever. We list general guidelines.

Though studies estimate that only about 1% of all tax returns are actually audited each year, your lifetime chances of being questioned by the IRS are closer to 50%. If your tax return is audited, it’s important to know your rights. Refer to IRS Publication 1, Your Rights as a Taxpayer, to read about the rules the IRS must follow during the audit. It’s good to know that you are guaranteed the following liberties:

• Ask for explanations
• Record interviews
• Submit only the specific documents the IRS requests
• Legal representation at IRS hearings
• End an interview to consult a professional or do research
• Appeal findings
• Ask for an installment plan

Changes in legislation for 2007 just might put more money in your pocket. The government has made decisions regarding taxation and retirement account contributions that you may find valuable in the coming year.

Higher Limits on Roth IRA Income

Single tax filers with incomes below $114,000 now qualify for a Roth, as do married couples with incomes below $166,000. The income limits previously were $110,000 and $160,000. Also new this year, you may choose to have your tax refund directly deposited into your IRA account. Heretofore your only choices were to deposit your refund check to a bank checking or savings account. You can complete IRS Form 8888 to have your refund directly deposited into a maximum of three different IRA or bank accounts.

Increased 401(k) Contribution Limits

The maximum contribution that you can make annually to your 401(k) was increased from $15,000 to $15,500. The maximum for individuals over the age of 50 was raised from $20,000 to $20,500. If you contribute the maximum allowed automatically, be sure to adjust your 2007 contribution to take advantage of the extra $500 you can save this year.

Tuition Break Extended

Individuals with incomes below $65,000 and married couples with incomes below $130,000 can deduct up to $4,000 in tuition and education expenses for dependents or themselves. This break had expired after the 2005 tax year, but Congress voted to extend the break for the 2006 and 2007 tax years.

Sales Tax Break Continued

Congress passed legislation to extend the sales tax deduction for 2007. If you itemize your tax return, you can choose to deduct your state income tax on your federal return or your state sales tax. This is a major bonus for folks in states with no income tax.

PMI May Be Deductible
A new law permits homeowners who need to carry private mortgage insurance (PMI) to deduct their premium costs if their income is below $100,000. This break is only good for new mortgages in 2007; paying PMI on an old mortgage won’t qualify you for the deduction. Be aware that this new deduction is only good for 2007.

Federal judges ruled illegal the 3 percent federal excise tax on long-distance phone service. Service providers were ordered to stop charging the tax by August 1, although federal excise tax on local phone service still applies.

You may qualify for at least $30 from the government as your share of the $15 billion dollar telephone tax refund. Businesses and heavy cell phone users may qualify for a good bit more. Approximately 146 million individuals and 14 million businesses are expected to be issued a refund.

For individuals, the IRS will give you a flat amount ranging from $30 to $60, depending on the number of exemptions on your return. You write the amount on a line on your tax return and that’s it. A more complicated, but possibly more rewarding way, to get your break is to add up your taxes on 41 months of phone bills (billed between March 1, 2003, and July 31, 2006) and file a separate form (Form 8913). If you are a heavy phone user who keeps good records your refund could be sizable. If you have not saved your records, it may prove worthwhile to contact your service provider and ask the charge for copies of past bills. If you are not required to file a return, you may also claim the refund by filing Form 1040EZ-T.

Businesses do not have the flat refund option. Instead businesses have a choice to file for actual taxes paid over the 41 months or to submit two monthly phone bills (April 2006 and September 2006) to estimate taxes paid for the entire period. State and local telephone taxes are not part of the refund program.