Roth IRA Early Withdrawal and Penalty

TaxSmarty has been flooded with similar questions asking the following: “I have a Roth IRA account and need to withdrawal money early. What is that going to cost me?”

Any distributions of investment gains taken from your Roth IRA prior to age 59 1/2 are considered early withdrawals.

Look at the term “investment gains”. What does this mean? Investment gains are the monies earned (interest, dividends or capital gains) from your original contribution. The next question is – Why is this important?

It is because if you withdraw any money YOU contributed (original contribution) it is tax free. The reason is that you contributed to you Roth IRA with after-tax funds. No need to pay tax twice on your money!

Be careful that you don’t withdraw the “investment gains”. This is where it gets a bit tricky. If you withdraw any investment gains prior to age 59 1/2, then you'll owe income taxes and a 10% early withdrawal penalty on those funds, the “investment gains”

Here is an example:

At age 21, you open a Roth IRA and contribute $5,000. You never make any additional contributions.
Fifteen years later, you decide to close the account. It's now worth $15,000.
How much of that $15,000 do you get to keep?

By closing the account early, you don't owe any taxes or penalties on $5,000 of the $15,000.

Why is this?

Because you can withdraw your original contribution any time both tax-free and penalty-free.

But the remaining $10,000 is considered an investment gain. As a result, it's subject to income taxes and a 10% Roth IRA early withdrawal penalty.

To recap:

An early withdrawal of your original contribution is always tax-free and penalty-free.

An early withdrawal of your investment gains prior to age 59 1/2 is subject to a 10% Roth IRA early withdrawal penalty as well as applicable income taxes.

The 5 Year Rule:

Even if you reach age 59 1/2, you still need to meet one more requirement before you can withdraw investment gains tax-free and penalty free.

What is this requirement?

It is the federal tax code's “5 year rule”.

This means your Roth IRA needs to be funded for at least 5 tax years before you can make tax-free and penalty-free withdrawals.


Here is an Example:

You are 59 yrs old and you decided to convert your Traditional IRA to a Roth. You do that in the year 2007, paying the applicable income taxes required by such a conversion. The funds continue to grow and in 2010, at age 62, you decide to withdraw those funds.

Will you be able to withdraw tax free since you pass the age of 59 ½?

No!

You still haven't met the 5 year rule for that portion of your money which you the converted. You converted in 2007 and 2010 is only 3 yrs. You need to wait two more years before you can withdraw all the money tax and penalty free. The original contributions can still be withdrawn tax-free and penalty-free but not the investment gains.

Early Withdrawal Exceptions:

There other cases when you can withdraw investment gains from your Roth IRA without having to pay taxes and penalties that are specifically listed in the tax code. They are as follows:

1. IRA owner's disability. (This can be a very narrow definition, so don't consider a Roth IRA distribution for a disability until you review IRS Code Section 72(m)(7) and IRS Publication 590.)
2. IRA owner's death.
3. Withdrawals are a series of "substantially equal periodic payments" made over the life expectancy of the IRA owner.
4. Paying for unreimbursed medical expenses that exceed 7 1/2% of your adjusted gross income (AGI).
5. Paying medical insurance premiums after the IRA owner has received unemployment compensation for more than 12 weeks.
6. Paying the costs of a first-time home purchase (subject to a lifetime limit of $10,000).
7. Paying for the qualified expenses of higher education for the IRA owner and/or eligible family members.
8. Paying back taxes because of an Internal Revenue Service levy placed against the IRA.

TaxSmarty online software can guide you through these tax speed bumps. It is easy and will ensure your Roth IRA distributions are handled properly. Check us out for free at www.taxsmarty.com.

Tax Write-Off Ideas

Our tax customers often ask us: “What can I deduct to lower my tax bill”? Below we have listed 46 ideas that may work for you. To take full advantage of the ideas that could benefit you, use TaxSmarty.com online tax software powered by CompleteTax. It will be your guide to ensure you receive the best benefits from the IRS !!

1. Fees paid to a tax preparation service like your accountant or TaxSmarty online software fee

2. Fees paid for an IRS Audit

3. Rehab treatment services like Alcohol and Drug

4. Fees paid to have items that you donate to charity appraised (valued)

5. Fees paid to have items valued that were lost in a casualty such as a fire or flood

6. Theft or Casualty losses

7. Phones (this is related to using your phone for work as required by your employer that is not your only (read: personal) phone line into your home)

8. Do you travel for business? – cleaning or laundering service while traveling

9. Certain closing costs for buying or selling a rental property or refinancing that property

10. Home computer depreciation if the computer is used for business or taxable investing

11. Contact lenses, hearing devices and prescription eyeglasses

12. Prescription expenses for contraception

13. Expenses associated with searching for a new job in your present occupation, including money spent for resume prep and employment outplacement agencies.

14. Labor Union Dues

15. Employer required expenses for education, maintaining your licenses, improving skills etc.

16. Your contributions to a state run disability fund.

17. Moving expenses (related to moving for work)

18. Money paid for self employment tax

19. Paid Foreign taxes

20. Fees paid for a safe deposit box that holds investments (i.e. stock certificates)

21. Childbirth preparation class expenses if the instruction is related to obstetrical care

22. Expenses paid for foster care

23. Gambling “losses” (deductible as an itemized deduction up to the amount of gambling winnings claimed)

24. Expenses paid to a hospital for services like: lab work, therapy, nursing services, and surgery

25. Home energy improvements such as a qualified HVAC system, insultation, windows and doors, etc. (this is a good one because it's a credit directly deducted from taxes paid as opposed to a deduction from taxable income)

26. Impairment-related work expenses for a disabled individual

27. Investment advisory fees

28. Separately billed IRA trustee admin fees

29. Expenses due to having lead paint removed from your home

30. Fees incurred in connection with collecting or obtaining alimony

31. Long-term care insurance premiums

32. Travel expenses incurred from having to travel and perhaps be lodged away from home due to medical reasons

33. Prepayment penalties and late fees for your mortgage

34. Expenses related to charitable activities such as travel or supplies purchased by you used in your charitable activities

35. Health insurance premiums

36. Monies paid for penalties associated with early savings withdrawals

37. Personal liability insurance for wrongful acts as an employer

38. Points (and other applicable closing costs) for home mortgage or investment property refinancing

39. Expenses for work-required clothing

40. Taxes associated with the sale or purchase of Real Estate

41. Certain seller-paid closing costs paid on your behalf

42. Special equipment if you are disabled

43. Special schools and separately stated fees for medical care included in tuition

44. Personal property taxes charged by your state on cars and boats

45. Professional association fees and subscriptions to professional journals

46. Theft or embezzlement losses

This list is not exhaustive, nor are all of these items necessarily in the tax code. It is a collection of items for you to consider and consult with a qualified tax preparer to determine their applicability to your situation. Your friends at TaxSmarty.com look for ways to save money from time to time, so for our customers and blog readers, this list is an attempt to provide some ideas for this very thing.

I don't know if it is worth filing? Should I File a Tax Return?

This is a big question. Do I or don’t I? Your friends at TaxSmarty.com answer this question below. Make sure you read the last sentence, then decide.

Your filing status is determined on the last day of the tax year. Generally, your filing status depends on whether you're considered unmarried or married. Marital status is determined by state law with one important exception: For federal tax purposes, same sex marriages are not considered legal marriages. Your options for filing are:

* Single. You can file as Single if you have never been legally married under U.S. laws, you are legally separated or divorced according to the laws of your state, or were widowed before the last tax year and did not remarry during the tax year.

*Married Filing Jointly. You can file as Married Filing Jointly if you are married as of the last day of the tax year, whether or not you're living together, or if your spouse died during the tax year and you did not remarry.

* Married Filing Separately. You can file as Married Filing Separately if you are married as of the last day of the year.

* Head of Household. You can file as Head of Household if you are single, divorced, or otherwise unmarried at the end of the tax year, and (1) you paid more than 50% to keep a home for the entire tax year for a parent who was a dependent OR (2) you paid more than 50% to keep a home for the entire tax year with your dependent. Filing as Head of Household can be tricky; special rules and exceptions apply.
Qualifying Widow(er) With Dependent Child.

* You can file as a qualifying widow(er) with dependent child for two years following the year your spouse died.

Your age is calculated as of the last day of the tax year -- with one exception. If you turn 65 on Jan. 1, 2011, you're considered to be age 65 on the last day of 2010. And while it generally isn't a good thing to age a little faster, this allows you to use the higher income thresholds to determine whether you must file a return.

Taking those three factors into consideration, you determine whether you must file as follows:

* If you file as single and you're under the age of 65, you must file a return if your gross income is at least $9,350; if you are 65 or older, you must file a return if your gross income is at least $10,750.

* If you file as married filing jointly, and both spouses are under the age of 65, you must file a return if your gross income is at least $18,700; if both spouses are 65 or older, you must file a return if your income is at least $20,900. If one spouse is 65 or older, you must file a return if your income is at least $19,800.

* If you file as married filing separately, you must file a return if your gross income is at least $3,650, no matter what your age.

* If you file as head of household and you are under the age of 65, you must file a return if your gross income is at least $12,000; if you are 65 or older, you must file a return if your gross is at least $13,400.

* If you file as qualifying widow(er) and you are under the age of 65, you must file a return if your gross income is at least $15,050; if you are 65 or older, you must file a return if your gross is at least $16,150.

Special considerations apply for certain additional taxpayers:

* A child who is under the age of 19 or who is a full-time student under the age of 24 earning only interest and dividends may report that income on his or her own return or on a parent's return. For 2010, the amount of taxable investment income a child can have without it being subject to tax at the parent's rate has increased to $1,900. If a child earns income by performing services, from babysitting to acting, the income is reportable. A parent can elect to include the child's income on the parent's return. If this election is made, the child does not have to file a return.

* Self-employed persons must file a return if your gross income meets the age, income and filing status criteria above, or if your net earnings from self-employment totaled $400 or more. Self-employed persons who have church employee income of $108.28 or more must also file a return.

* If you are a resident alien for the entire year, you must file a tax return following the same rules that apply to U.S. citizens. If you are a nonresident alien or a dual-status taxpayer, different rules may apply. Check Publication 519 for more information.

* Even if you don't have to file, there are circumstances under which filing a federal income tax return makes sense. You may be entitled to a refund if you had federal income tax withheld from your pay or made estimated tax payments or if you qualify for one of a number of credits, including the Making Work Pay Credit, Government Retiree Credit, earned income tax credit, child tax credit, the American opportunity credit, first time homebuyer credit or health care coverage credit.

Still not sure whether you should file? Consider this statistic from the 2010 filing season: Out of the 139 million returns filed, 108 million were due a refund. The total amount of refunds due was $316 billion, making the average refund over $2,900. Don't lose out.

TaxSmarty
Taxes have never been this easy!

Help with completing your W-4 Form

We often get questions on how to correctly fill out the W-4 form, specifically line 5 - Number of Allowance. This seems straight forward but usually isn't. The easy way to remember how to fill this out correctly is the LESS allowances you claim on the W-4, the more federal tax will be withheld from your paycheck. Example: Claim 0 allowances and more tax is withheld than claiming 5 allowances. The IRS provides a worksheet to help you claim the proper number of allowances, which will take into account any itemized deductions you may be entitled to claim. Note that this does not guarantee a refund if you claim less allowances. If you claim 5 allowances based on the worksheet and then, when your complete your federal tax return and only have 2 exemptions (you and your spouse) and don't hit the itemized deduction threshold, you may very well end up writing the IRS a check. Everyone loves a refund or at least not owing tax. Use TaxSmarty.com to get your best tax results.

www.taxsmarty.com

What! No more IRS forms in the mail??

What! No more IRS forms in the mail?? That is just wrong!
Yes it is true. If you are a paper filer, well then your life just became more of a hassle to file your Federal taxes. Sure the IRS will save $10 million dollars, savings that will not be passed on to you. You have to find your own forms. What if the paper filers said: “hey, if I have to be inconvenienced to file the Federal forms, then I am just not going to file.” (that is another debate).

Stay out of trouble and file your Federal forms on time.

You can still file by logging on to the IRS website and downloading the forms to manually fill out or you can use an online tax preparation service. Since 1996, M&R Accounting PLL has been helping clients achieve the best results when filing. Our customers wanted a simple, easy and secure way to complete their own taxes. We developed TaxSmarty.com.

TaxSmarty.com is designed to help you complete the necessary tax forms with easy to answer questions. Complete the questionnaire and Tax Smarty.com/Complete Tax will complete the forms for you. It is that easy. You can use TaxSmarty.com for FREE. We will not collect any fees if you are not happy with results.

You Win with TaxSmarty.com.
Powered by CompleteTax®

Some helpful tax tips as we head into the heart of tax filing season

By now almost everyone has received their W-2's, 1099's and other tax documents and are ready (or getting ready) to file.  TaxSmarty would like to take this opportunity to review a few items that you may have missed or had questions about:

1)  Required minimum distributions from IRA's and other qualified retirement plans resume this year - if you turned 70 1/2 during 2009 you must take a required minimum distribution (RMD) by 12/31/2010.  If you turn 70 1/2 this year, you have until 4/15/2011 to take your RMD.

2)  Remember that if you were laid off after Aug. 31, 2008 but before Jan. 1, 2010, you were entitled to a COBRA subsidy from your former employer of 65% of your COBRA health insurance premiums.  The original subsidy was scheduled to last nine months, but congress extended this for those workers terminated before March 1, 2010 and provides for six months of additional aid.  (Note:  Your former employer receives a tax credit from the federal government for the cost of this subsidy).

3)  The IRS is stepping up documentation requirements in order for taxpayers to claim the home buyer credit.  A signed copy of your settlement statement (or certificate of occupancy for new homes just built) must be attached to your Form 5405 in order to claim the credit.  Further, those who are claiming the $6,500 repeat buyer credit must attach proof of prior home ownership such as a 1098 or records showing property taxes paid or insurance coverage in place on a prior home.  Please note that due to the documentation requirements for this credit, you will NOT be able to e-file your return.  Because of the time the IRS needs to program their computer system to process this credit and factoring in extra processing time for paper returns, don't expect to see your refund, if you're owed one, until late March.

4)  If you have donated or would like to donate to Haiti earthquake relief efforts in Jan. or Feb. of 2010, you have the option of deducting those contributions on your 2009 return.  Remember that you still need some sort of documentation to substantiate your contribution and you have to itemize deductions to be able to receive a tax benefit from your contribution.

Please check back with us as tax season moves forward for additional helpful tax tips and updates.  Please go to TaxSmarty to access additional free tax resources such as our online tax guide, financial calculators and a tax calendar.  You can also prepare your 1040-EZ return absolutely FREE and your more complicated federal return for a very reasonable price.  Additionally, all state income tax returns are available.

Federal tax update and final tax tips as we close out 2009

As we enter the final days of 2009, many federal income tax issues remain unresolved at the federal level due to the Senate's focus on the healthcare bill. The following tax issues and expiring tax breaks are still "to be determined":

1) Federal Estate and Gift Tax - under current law, the federal estate tax is to expire for 2010 and then reappear in 2011 with a top rate of 60% and only a $1 million exemption. The generation-skipping tax will also end for a year, but the gift tax will continue with a top rate of 35%. This issue will definitely be dealt with during 2010, so stay tuned.

2) Expiring "write-offs" - Business R & D credit, college tuition deduction (NOT the Hope or Lifetime Learning Credits), direct donations of IRA distributions - these should all be extended retroactive to 1/1/2010, but it may take a little time to get this done, so stay tuned on these as well. However, the suspending of the mandatory annual IRA payout that was put into law for 2009 will most likely NOT be extended due to the general market recovery.

3) Raising of the Alternative Minimum Tax (AMT) exemptions - this is something that has now been dealt with on an annual basis for the last several years so as not to have the unintended consequences of affecting "the average joe/jane" by subjecting him/her to the alternative minimum tax that was meant for "high incomers" with a large percentage of itemized deductions. Congress has avoided overhauling this section of the tax code and will probably continue to volley this around for the next year or two.

4) Bush tax cuts set to expire - This will be a contentious issue due to the expanding federal deficit and Washington politics, especially as it relates to the top individual tax rate. At this point, we can probably expect to maintain the current tax rates for low and middle-income taxpayers, but an increase to the pre-2001 top tax rate of 39.6% from the current 35% is the most likely scenario.

5) Home Buyer's Credit - This break was extended and expanded. For all of the details, check out the official IRS release at www.irs.gov

For year-end tax tips, please see our Nov. 5 blog entry titled "Some Tax Planning Strategies as We Near the End of 2009".

For all of your tax preparation needs as we enter the 2009 filing season, please visit www.taxsmarty.com We are offering a new and improved CompleteTax® online filing program with four different levels, including a free filing option. Happy New Year!

Some tax planning strategies as we near the end of 2009

As we near the end of 2009, TaxSmarty would like to review some common but often overlooked tax planning strategies and tips to help you manage and/or reduce your 2009 (and possibly 2010) federal tax burden.

1) As a general rule, try to accelerate deductions into 2009 and defer income into 2010 since individual tax rates are not expected to change for 2010 at this point. (However, if you expect to be in a higher income tax bracket for 2010 because you received a promotion recently with a significant pay raise, you plan to sell investments or property and incur large gains, etc., you would want to do the opposite).

Here are a few ways to accelerate deductions:

* If you're just at or above the standard deduction as of now, you could pay property taxes you owe on your main (or second) home that are due in January 2010 in December 2009 or you could pay any state or local income tax estimates due in January 2010 in December 2009

* You could pre-pay your January 2010 mortgage payment in late December 2009 in order to be able to deduct an additional month's interest

* Accelerate any planned charitable contributions for 2010 into December 2009

A few tips to defer income:

* If you are lucky enough to have a bonus of some sort coming to you from your employer for 2009, as them to delay payment to you until January 2010

* If you own your own small business and report your income on the cash basis, you could delay your end-of-year billings to your clients until January 2010

2) First-time home buyers won't have to worry about closing their purchase by Nov. 30 to take advantage of the $8,000 new purchasers credit since Congress is expected to extend this tax break for several months well into 2010

3) If you are still in the market for a new vehicle, you may want to make that purchase prior to January 1, 2010 to take advantage of the special sales tax deduction on the sales tax you pay for new vehicle purchases up to $49,500 since this break is not expected to be extended by Congress into 2010. As a bonus, if you don't itemize your deductions, you can add the sales tax paid on your new vehicle purchase to your standard deduction. If you do itemize and you deduct state and local income taxes, your sales tax on your new vehicle purchase is added to that amount!

4) If you are planning on converting your traditional IRA to a Roth IRA, you may want to wait until 2010 to take advantage of a special, one-time break that allows you to spread the tax due on your regular IRA conversion over two tax years (50% of the tax split between 2011 and 2012); however, if you're likely to be in the top tax bracket, you may want to pay the tax upfront since the current top tax rate is scheduled to go up to 39.6% from 35% in 2011.

5) If you've experienced a rebound with some of your taxable investment accounts during 2009 and you had carried over losses from 2008 that you couldn't use, you could sell those investments at a gain and utilize your losses on your 2009 tax return to offset some or all of your investment income.

6) If you are looking at owing additional tax this year based on under-withholding, you still have time to increase your withholding through your employer in Nov. and Dec. to ensure that you pay at least 90% of your current year expected tax liability (or 100% of your 2008 tax liability if your adjusted gross income is less than $150,000)

These are just a few steps you can take to help your tax situation as we near year end. Please check back with the TaxSmarty Blog over the next six weeks for additional year-end tax planning tips and for updates on proposed tax legislation at the federal level.

Please visit taxsmarty.com for additional helpful tax tips.

Help in filling out your W-4 Form

What how do I fill out the W-4 form correctly


TaxSmarty is getting questions concerning “how do I to manage exemptions so I don’t owe any additional tax when I file my Federal Tax return?” This is a tough one to answer since every working person has a different scenario.

When staring a new job or changing your allowances, it is necessary to complete a W-4. On the W-4 form, one of the questions is “total number of allowances you are claiming.” What do you do? It depends on a few factors

1.Project yearly gross income
2.Number of exemption you plan to claim on your 1040
3.Deductions you use on your 1040
4.Filing Status

If being new to the work force, not being married and no deductions, completing the W-4 seems simple right? Maybe not. We see many people in this situation claiming “0” on the allowance line. Then they are wondering why they are getting a big refund. Based on using your yearly gross income you may need to claim “0” or more to balance out your withholding. It is nice to have money in your paycheck instead of waiting for it in a tax refund.

Make this decision easy by using TaxSmarty’s free tax calculator. It determines a reliable estimate on how many allowances you should claim. Follow the following link:

http://www.internet-taxprep.com/plindex.asp?welcome=ZJ1389183&page=plcalc.asp

$8000 First Time Home Buyers Tax Credit - Get your credit on your 2008 tax return!

Yes you can receive this credit even if you already filed your 2008 Federal Tax Return.

Here is how it works.

If you purchased a home in 2009 after you filed your 2008 Federal Tax Form, all you have to do is file an amended form for this year. You are in the money. It is that easy.

TaxSmarty.com can help you with the amendment and you will be waiting at your mailbox for the credit in no time. www.taxsmarty.com

Many questions have been asked – one is do I qualify for the First Time Home Buyers Tax Credit? Here is the answer:

A first time home buyer is you (single) or your spouse (if married) and did not own any other main home three years prior to buying the new home in 2009. If this is you, apply for the tax credit which is 10% of your new home’s purchase price up to $8000. If you are married and filing separately, it is $4000.

Don’t forget this IRS zinger: You must remain in your new home for 36 months or guess what… the IRS wants the $8000 back. So ensure this is your plan before applying for the First Time Home Buyers Tax Credit.

Visit www.taxsmarty.com for all of your federal and state income tax preparation and planning needs.

Forgot to file or did not receive a 2008 Stimulus Payment? You may be able to qualify for a recovery rebate credit through your 2008 tax return

For those that did not file for a 2008 Stimulus Payment , you may qualify for a recovery rebate credit in 2009. Even if you received a 2008 Stimulus Payment, you may qualify if you meet one of the following criteria:

-you did not receive a Stimulus Payment in 2008 or you received less than the
maximum of the 2008 Stimulus Payment
-your gross income was too high or too low
-you gained a qualifying child after you filed in 2008
-you were claimed as a dependent on someone else's return in 2007 but
-you will not be claimed as a dependent on 2008 return
-you received a Social Security number is 2008 and did not have one for
2007


You can get the recovery rebate on your 2008 1040, 1040A or 1040EZ. If you are using a tax software like TaxSmarty - it will ask you a question "did you receive a Stimulus Payment?"; "How much was your Stimulus Payment?" From there, Tax Smarty or your tax software will determine if you qualify for the recovery rebate credit.

NOTE: This is a CREDIT and not a separate check. You will receive this tax credit as part of your 2008 federal return (either increasing your refund or lowering the balance you owe). It's a good deal so don't miss out if you qualify.

Visit www.taxsmarty.com for more free helpful tax tips and information.

Maximize your work-related and self-employed travel deductions

If you are a person who travels significantly for your employer or if you are self-employed, you of course want to maximize your tax deductions related to your business travel or self-employment income. One simple and effective way to track your mileage and other travel-related expenses is to keep a small appointment book/calendar in your vehicle and record all of your business miles driven as you travel for business throughout the year. You can also record any tolls paid, meals and entertainment for business purposes, etc. in your appointment book/calendar in order to make sure you are tracking all of your trips and expenses as you incur them. Many people wait until the end of the year and then they end up scrambling to go back and remember all of their trips and expenses and usually end up missing a significant amount of expenses due to their lack of record-keeping. Recording these things as they occur in this simple manner can save you hundreds, if not thousands, of dollars during any given year. Plus, this will help you immensely in the event that you are audited by the IRS or your state taxing authority since this is another level of documentation that you have in addition to the receipts, itineraries, employer travel schedules, etc. that you should be keeping as well.

Please visit TaxSmarty.com for all of your income tax information, preparation and planning needs.

Did you know you can deduct up to $500 ($1000 for joint filers) for paid real estate taxes if you used the standard deduction?

Did you know you can claim up to $500 deduction for property taxes ($1000 for joint filers) if you DO NOT itemize?

It is absolutely true – for tax years 2008 and 2009 and you don’t itemize deductions (just take the standard deduction) AND you paid real estate taxes you can increase your standard deduction up to $500 single and up to $1000 for joint filers. Those sneaky IRS guys slipped this one in. Just check box 39c on page 2 of your 1040 form or if you are using the 1040A form, look at line 23c.

Check out www.taxsmarty.com for additional free tax planning resources and filing options.

Advantages of contributing to a Roth IRA

Look to contribute to a Roth IRA each year since the earnings from these tax-advantaged savings vehicles are never taxed (unlike traditional IRA's which are taxed as ordinary income at your marginal tax rate at the time you take distributions from your traditional IRA). Also, Roth IRA balances are not subjected to the required minimum distribution rules when you reach 70 1/2 years old. Therefore, if you do not need the money at that time, you can continue to let your money grow tax-free and ultimately leave a larger sum to your decedents if you so choose.


Now for some of the mechanics of the Roth IRA:

You can contribute up to $5,000 ($6,000 if age 50 or over) for 2008 and 2009. Keep in mind that your modified adjusted gross income (MAGI) has to be below $166,000 to contribute the full amounts previously mentioned. If your MAGI is between $166,000 and $176,000, then you can contribute some amount less than the full limit. If your income exceeds $176,000, they you are not eligible to contribute to a Roth IRA for 2009. In 2008, this phase-out range is $159,000 to $169,000.

For single individuals, this Roth IRA phase-out limit is lower: $105,000 to $120,000 for 2009. In 2008, a single individual’s income restriction is between $101,000 and $116,000.

Remember that you still have until April 15 of this year to make a contribution to any IRA account for 2008.

Finally, a big advantage to a Roth IRA is that you can use this as an emergency fund since you can withdrawal your principal (the amount you've actually contributed to the Roth IRA) at any time without penalty. This will allow you to garner a market rate of return on your emergency funds while possibly building a source of retirement income at the same time.

Please visit www.taxsmarty.com for more helpful tax tips and information.

Missing "cost basis" of stocks could be trouble when preparing your return, but there is help to get your through it. http://taxsmarty.blogspot.com/

Q. What happens when I don’t have a cost basis for my long or short term capital gain stock sale?

A. What a dilemma this is. Many of us have experienced this when we receive a 1099–B form with only the sold date and proceeds listed. We start to get nervous because we just increased our tax liability (sometimes substantially) and may owe the federal government money. No need to panic, however.

First off, if the cost basis (the original dollar amount paid plus any reinvested dividends or capital gains in the case of mutual funds) is not listed – CALL YOUR MONEY MANAGER OR BROKER. They can usually access your cost basis and the date purchased. This is the best course of action.

If you cannot reach them because you are working on your taxes at 11:59 pm on April 15th, you have other options. If you only purchased stand alone stocks at different dates and prices, NOT in a mutual fund, you can use the First In First Out Rule. Hopefully, you have some information on some the original purchase price of stocks and dates. With that information, you can apply these stock prices and dates as your “cost basis”. Warning: you need to use the first date you purchased stocks to compute your gain or loss as short term or long term.

If the missing cost basis information is in a mutual fund, you can use the average basis of the stocks if they were acquired at different times and use this as your cost basis. There are two methods of the average basis: double category and single category. The double category is used for stocks that are long term and short term where you need to average each category out (i.e. one average cost basis for long term and one average cost basis for short term). The single category is when all the stocks in the account are averaged for an overall cost basis since they are all either long-term or short-term sales.

Your off-the-shelf tax software or even your accountant cannot help you with this information. You need to know the cost basis to correctly complete your return. Once you have this information, just add in the information and you are on your way to completing your taxes in a manner that should pass muster with the IRS.

A website that may be helpful to you in researching historical prices is http://bigcharts.marketwatch.com/historical/

Visit www.taxsmarty.com for fee tax resources (including our online tax guide), financial calculators and filing options, including free access to a fillable IRS automatic extension form.

Do I need to claim my stimulus check received in 2008 as income on my tax return?

What do I do with the $600 of Stimulus money I received from the federal government in 2008?

Good news......Nothing! Unlike tax year 2007 where you had to claim your tax rebate, the 2008 stimulus check is tax free. Some tax software programs will ask you to fill in a question on the amount of your stimulus check, but it won’t increase your adjusted gross income (AGI). That is a good thing. So enjoy that money tax free!

"Bunching" of itemized deductions to save $$'s on your federal taxes

If you find that you are always on the cusp of the standard deduction/itemized deduction limit each year, you should work to “bunch” your deductions every other year in order to try and minimize your tax liability every other year. In the off year, you can simply claim the standard deduction since you are entitled to that amount regardless of what your deductible expenses are for that year. The most common and significant itemized deductions are home mortgage interest, property taxes, state and local income taxes, medical expenses, unreimbursed job-related expenses. charitable deductions and casualty losses.

While you don't have much control over the timing of your mortgage interest payments, you do have some control over the timing of property taxes on your personal (and a second) residence since you are typically billed by your County for property taxes in December that are not due until January. Pay this bill a few weeks early and you could push your itemized deductions over your standard deduction amount for that year. While we're talking property taxes, don't forget that even if you cannot push your total itemized deductions over your standard deduction, starting with your 2008 tax return (and recently expanded through 2009), you can deduct up to $500 (single/married filing separately/head of household) or $1,000 (married filing jointly) in property taxes paid on your main or second home over your standard deduction.

The other deduction that you have some control over is the medical deduction since you do have some control over the actual payment of these types of expenses. Unfortunately, it is very difficult to get over the 7.5% of adjusted gross income threshold that you would need to meet to deduct any of these expenses.

In short, taking advantage of additional tax deductions every other year is certainly better than never realizing the savings at all!

For more free tax tips, please visit TaxSmarty's Online Tax Guide.

What is the deal with efiling?

efile My Taxes. What Happens?

efiling is excellent. No forms to print. No W2’s to attach. Not stamps to buy plus you usually will electronically have your refund deposited in your personal checking or savings account within 7-11 business days. It sure beats waiting until the cow come home for your refund. It is all about you and your money.

How do I know the IRS accepted my efile?

Within two business days of filing your income taxes online, you will receive an email with information about your federal tax return and if it was accepted or rejected by the IRS. If you don’t get an email, you can go back to your online software or if you are using Tax Smarty.com online software you will get instructions there on what to do.

What if my efile is rejected?

If your efile is rejected – no need to panic and jump out the window. The IRS will provide you with information as to why you were rejected. It is usually a small error like incorrect social security number, birth date not matching your name. Also double check your bank information. An incorrect checking account number can trigger a reject file. We don’t want that. We want our money. If you cannot figure out the correction a helpful IRS customer service representative
(yes, I said helpful and IRS in one sentence) can get you on track. You can contact the IRS at 1-800-829-1040.

So you can Go Green and get your refund faster with efile. Using an online tax prep service like TaxSmarty.com only makes your tax life easier.

Tax provisions of the recently passed federal stimulus plan

Are you asking "how does the recenlty passed stimulus bill affect me personally right now?". If so, please check out this great summary of the tax provisions of the new "American Recovery and Investment Act of 2009" from our partners at CCH, Inc. Please click here to read this summary on how the new provisions can/will affect your tax situation, whether from a personal or business perspective.

It remains to be seen if these provisions along with some of the other "stimulus" provisions of this bill positively affect our national economy to any great degree since many government programs such as these tend to deliver much less than advertised, but we at TaxSmarty are always in favor of giving back dollars to the american people through tax cuts of some kind (preferably the simpler the better and more immediate than not!).

TaxSmarty's Tax Tip and Discussion Blog

Welcome to TaxSmarty's Tax Tips and Discussion Blog! Our goal to to provide income tax help to the "folks" so that you can minimize your tax burden and take advantage of every opportunity you have to keep more of what you earn. We will be blogging about various tips and strategies that you can use to legally minimize the income tax you pay to the federal government as well as your state and local government where applicable. We plan to make entries to our blog on a weekly basis during tax season and also plan to continue blogging throughout the remainder of the year. Before we get started with our initial blog entry, a little bit about our firm:

TaxSmarty provides an easy, accurate, secure and inexpensive way to complete your federal and state tax returns and efile those returns with the IRS and State taxing authorities using our CompleteTax system. Taxes have never been this easy!
We offer a plethora of free income tax information and planning resources on our website in addition to professional review of self-prepared income tax returns as well as a full-service preparation of income tax returns for reasonable fees. You can reach us on the web at www.taxsmarty.com or via email at info@taxsmarty.com

Markus & Rispoli Accounting, PLL is the professional services firm who owns and operates TaxSmarty. We provide quality and personal tax preparation and planning for individuals and small businesses along with accounting services such as write-up/bookkeeping, Quickbooks set-up and support, business systems evaluation and consulting, among other services. Markus & Rispoli Accounting has been providing quality and personal tax and accounting services to our clients since 1996. We are registered with the Accountancy Board of Ohio as a registered public accounting firm and our managing partner, Greg Markus, is a licensed CPA in the State of Ohio. We are committed to uncompromising business ethics and corporate social responsibility.
Tax Tip of the Week: Completing and updating your W-4 federal income tax withholding certificate to maximize your take-home pay.

Tip of the Week: Adjusting your federal W-4 to increase your take-home pay

In order to maximize your take-home pay, you should make sure that you claim all of the personal exemptions that you are entitled to on your W-4 Federal Income Tax Withholding Certificate. Many people unknowingly claim “0” or “1” when they are entitled to claim several more exemptions for their spouse, dependent children or other dependents and exemptions related to itemized deductions that a person is entitled to (e.g. mortgage interest and points, property taxes, state and local income taxes). After all, if you are receiving a large refund from the IRS or your State government, you have really just provided each of these entities with an interest-free loan. Just think – you could have used the extra money throughout the year to pay down your mortgage, credit card balances, pay cash for a large purchase or simply have earned some interest income from placing these additional funds into a savings account or CD. The W-4 form contains instructions on how to correctly calculate all of your withholdings that you are entitled to claim. This concept should also be applied to your state equivalent of the W-4 form if your state has an income tax withholding requirement.