Tax Planning

Parents of new graduates might not be eligible to claim their children as dependents anymore. The kids are grown up now and become "independent" for tax purposes upon reaching age 19 and no longer in school full-time or upon reaching age 23. Parents may want to review their tax projections to see the impact of having one less dependent and adjust their withholding or estimated tax payments accordingly. Read More...

Persons who have just graduated from high school or college may be eligible for various tax deductions or tax credits to help lower their federal income tax on their 2012 tax return. Read More...

New grads who are starting a new job may be eligible to receive employee benefits provided by their employer. Each employer customizes their benefits package, so the type of benefits offered will vary from employer to employer. Typical employee benefits include the opportunity to purchase coverage under a group health insurance plan, to purchase coverage under a group life insurance plan, or to receive subsidies for mass transit or college tuition. Some employers also offer a group retirement plan to foster long-term savings. Each of these benefits comes with tax incentives that help make these benefits more affordable to workers. Read More...

Persons graduating from high school or college may be starting to work for the first-time, or starting their first full-time job with benefits. This is a good time to learn (or to review) how wage income is taxed, what a paycheck is, how to read a paycheck, and how to set an appropriate level of tax withholding when starting a new job. Read More...

After filing your tax return with the IRS and state tax agencies, you should keep copies of that return and any documents or data relating to that tax return. At minimum, the documents should be kept at least three years, or possibly longer depending on which states you filed in.

What documents are essential to keep? The list of documents you'll need to retain varies depending on your tax situation. But here's a short list of important documents:

• Copy of the tax return itself, including all forms and schedules;
• Proof of filing such as a certified mail receipt or electronic filing acknowledgement.
• Proof of tax payments such as EFTPS confirmation receipts or canceled checks;
• Any tax documents issued by third parties such as W-2 and 1099 forms;
• Any summaries of income and expense, such as for business income or rental income, along with a back up copy of any accounting data files (such as Excel spreadsheets or Quickbooks files).
• Receipts for tax deductions, especially for charitable donations and property tax statements.

My recommendation is to have two copies of this document set, one existing in its original form on paper and a second copy in electronic format such as PDF or scanned image files.

Make a PDF copy of your tax return. Most tax software will let you save a copy of your federal and state tax returns in a portable document format (PDF). This makes it easy to open, share, read or print our tax return should the need arise. Be sure to keep the PDF backed up in a safe location.

Store your tax return and related documents in an easy to remember place. For myself, I create one file folder for each year, and into that folder goes a print out of my tax return along with any tax documents such as W-2s and 1099s. You could do the same thing electronically by scanning your tax return and documents.

Store paper documents separate from electronic documents. If one set of documents gets lost or destroyed, there's a chance the other documents might still be safe.

Consider saving electronic documents on CD-ROM. If your computer crashes or becomes unusable, the data from the CD-ROM can be retrieved and accessed. Also, CDs can be easily stored away in a secure, fire-proof location.

Apply passwords to electronic documents. PDF and scanned image files can be easily opened in any number of software programs. So to protect your tax documents, you may want to secure the files with a password. For example, you could create a ZIP archive folder of your tax returns and documents with a password, or you could encrypt your files using OpenPGP utilities.

Make a backup of your tax data file. If you're using desktop tax software, make a backup of the data file and store it in a safe location along with the tax software CD-ROM or installation program you downloaded.

People should keep their tax returns, and any documents related to their tax returns, for at least three years, as that's the amount of time the IRS has to audit a tax return. This time period is called the statute of limitations, and sets a limit on how long documents need to be kept in order to prove the accuracy of a tax return.

Some states have a longer statute of limitations. Montana, for example, requires people to retain their tax papers for at least 5 years. So the general rule is to retain tax returns and documents for at least as long as your state's statute of limitations on audits.

But before you start tossing out older tax returns, you might want to scan in your older tax returns for electronic storage before shredding your paper documents. I mention this because every few years I encounter a situation where the IRS or a state tax agency claims that a person didn't file a tax return, and having an actual copy of that return return proves very handy.

Tax Freedom Day this year arrived on the same day as the filing deadline, April 17th. Unfortunately for me, I had forgotten all about tax freedom day in the hectic busyness of tax deadline day. But the folks at the Tax Foundation didn't forget.

What's a tax freedom day, you ask? It's an intuitively graspable measure of the tax burden on Americans. Pretend you start earning income on January 1st and save every penny. We can further pretend that you'll earn exactly the same amount of income each day of the year. Tax freedom day would be that day when all your accumulated earnings for the year would be sufficient to fully pay your entire federal, state and local tax bills.

The Tax Foundation has computed that tax freedom day for the year 2012 is on April 17th, representing that on-average Americans pay 29.2% of their income on federal, state and local taxes combined. Tax Freedom Day comes earlier or later in different states, reflecting differences in state income tax, sales tax and property tax policies. The earliest tax freedom day in the year occurs in Tennessee (March 31st) and the last tax freedom day this year occurs in Connecticut on May 5th.

If America's tax system was designed so that there were no budget deficits, then this year's tax freedom day would occur on May 14th instead of April 17th.

Charts, graphs and additional data are available from the Tax Foundation's tax freedom day page.

The Senate on April 16th, 2012, voted against a legislative proposal that would have implemented a 30% minimum effective tax rate on taxpayers reporting at least $1 million of income. The Paying a Fair Share Act (S. 2230) proposed that a surtax, in addition to the regular income tax and alternative minimum tax, be applied to any taxpayer (other than a corporation) whose adjusted gross income was in excess of $1 million (a threshold amount to be indexed annually for inflation).

The 30% surtax, called the "fair share tax," would be computed on a base amount of adjusted gross income less a prorated deduction for charity. The math for the proposed fair share tax looks something like this:

{30% x [ AGI - charitable deduction x (itemized deductions after limitation/itemized deductions before limitation) ] - (regular income tax + alternative minimum tax + payroll taxes - various tax credits) } x { [AGI - 1 million] / 1 million }

It appears the fair share tax here functions to increase the effective tax rate to at least 30%,  after taking into account all federal taxes such as the regular tax, AMT and payroll taxes. It also moves the tax calculation away from taxable income (after deductions) to adjusted gross income (after above-the-line deductions but before itemized deductions). There are also two prorations occurring in the fair share tax, a prorated amount of charitable donations are allowed in computing the 30% surtax, and the entire surtax is itself prorated to reflect the amount by which a person's adjusted gross income exceeds the $1 million threshold amount.

The Paying a Fair Share Act of 2012 would have raised about $46.714 billion in new tax revenues over a ten-year period according to estimates from the Joint Committee on Taxation (JCX-33-12).

Senators voted 51 in favor and 45 against the Paying a Fair Share Act, but because this bill required a 3/5ths majority, the bill was prevented from moving forward in the legislative process (Senate vote number 65).

The House of Representatives on April 19th, 2012, voted in favor of passing the Small Business Tax Cut Act (HR 9).

The bill proposes a new tax deduction for small businesses with 500 or fewer full-time-equivalent employees. The proposed deduction would enable small businesses to take a deduction of 20% of net income, with the amount not to exceed 50% of wages paid to employees who are non-owners of the business. This would be a one-year only deduction for the first tax year of the business following December 31, 2011, that is for the year 2012 in most cases.

This new deduction appears to be modeled on the Section 199 deduction in that the businesses are able to obtain a federal tax deduction without incurring additional out-of-pocket expenses.

The deduction is targeted specifically as domestic business revenues, as opposed to a business's global revenues, and further targets small businesses with 499 or fewer employees who are not significant owners of the business. (So small businesses whose only employees are the owners of the firm won't qualify for the proposed deduction.)

The math for the proposed deduction for domestic business income of qualified small business goes something like this:

20% x (domestic gross receipts - (cost of goods sold and other expenses, deductions or losses related to domestic gross receipts)), the resulting product must be less than or equal to 50% of W-2 wages paid to non-owners.

The Small Business Tax Cut Act is estimated to reduce federal tax revenues by about $45.95 billion, according to the Joint Committee on Taxation (JCX-30-12).

"The $46-billion measure faces a veto threat from President Obama and is unlikely to get a vote in the Democrat-controlled Senate," observes tax publisher CCH in their Weekly Report.

The Small Business Tax Cut Act passed the House with 235 representatives voting in favor of the proposal and 173 representatives voting against the proposal (Roll 177).

Today is the deadline for filing tax returns with the Internal Revenue Service. Here's a collection of resources to make tax day a little more efficient.

If you're worried about time, the first thing you should do is file an extension. This gives you extra time to finish your tax return. You can file your extension online in a few minutes, or you can download and mail in Form 4868. You can also use Form 4868 to mail in a check to the IRS.

For mailing tax returns, be sure to use enough postage, There are different mailing addresses for tax returns with payments and those for refunds. Envelopes that are postmarked on April 17th are considered filed on time by the IRS. You may want to use certified mail so you have proof that your mailed your tax return on time.

You can electronically file your tax return using a tax software program. This will provide you with confirmation that your tax return was submitted to the IRS and that the IRS's computers received your data.

Be sure to make a backup copy of your tax return. Many software programs will let you save your tax return in a PDF file format. And you may want to make a backup of any data files.