Tracy's Tips and Your Questions

Every Friday, Tracy Byrnes joins us on the show to share her tax tips. She and I got to talking, and we want to know what questions you guys have. So here is Tracy's full list. It is really really long, so go through it, and then leave your questions and your name in the comments section. We will answer them on the air or I will have her reply here on the blog.

Happy Filing!

CC

1. Foreign tax credit

Tons of people invested in international mutual funds last year and could be missing a foreign tax credit reported on Form 1099-DIV, which details your mutual fund distributions.

Mutual funds sometimes pay foreign taxes on their overseas investments. Since your mutual fund is technically a pass-through entity, everything must get passed on to you, so your share of those paid taxes would be reported in Box 6 on your 1099-DIV.

If your 1099- DIV doesn't have a Box 6, it probably means your mutual fund didn't pay foreign taxes for the year. If you're uncertain, contact your mutual fund or broker.

But if you have a number in Box 6, then report those taxes paid as a credit on line 52 of your Form 1040 tax return. You already paid some tax on those distributions, no need to pay twice.

Now if your total foreign taxes paid are greater than $300 for a single guy or $600 for married folks, you may need for file Form 1116 Check the form’s instructions for more details.

2. Get Back for Giving

While it’s easy to include any cash contributions or other donations when tallying charitable contributions, people often forget those little out-of-pocket expenses.

To start, make sure you have a receipt from the charity you donated to or a bank record for all charitable cash donations to claim a deduction on your tax return.

Then tally the out-of-pocket and car expenses you incurred while donating your services.
You can't deduct the value of your time or services spent on charitable work, but you can deduct 14 cents per mile for the use of your car for charitable purposes. Don’t forget to include parking fees and tolls.

And any costs incurred that helped you do your good work is also deductible. So if you donated a meal to a soup kitchen, the costs of the food you used to make the dish should be part of your charitable contribution.

3. Investment and tax expenses

Don’t forget about all the money you spend your investments and tax planning.

Any attorney or accountant fee that pertains to your tax situation is deductible as a miscellaneous itemized deductions. Granted, those deductions are limited to 2% of your adjusted gross income so that means only the deductions that exceed 2% of your AGI are deductible on Schedule A. But start tallying, because every little bit helps.

So if you have a safe deposit box for your investments, you may be able to deduct the cost of the box as a miscellaneous itemized deduction. If you use the box to store taxable income-producing stocks, bonds or investment-related papers and documents, then you can deduct the cost, says the IRS. If you use it to store personal items, like jewelry, or any tax-exempt securities, forget it.

Include any cell-phone calls that pertain to your investments. If you're constantly on the phone with your broker or adviser, be sure to go through your phone bills and include those calls as part of your miscellaneous itemized deductions.

4. Job-related expenses

Job-related expenses that are not reimbursed by your employer are also considered miscellaneous itemized deductions so add them up too. Include items like uniforms, newspapers and publications that you read for work, education courses that improve your skills, work calls on your personal cell phone and passport fees for business travel.

Same goes for any job-hunting expenses, like resume preparation and career counseling. Big note: Expenses incurred while looking for your first job are not deductible.

Finally, if you switched jobs during 2007, you might have had too much Social Security tax withheld from your paychecks. The 2007 cap was $6045. When you start with a new company, human resources has no idea how much Social Security tax was withheld from your previous job and may start the withholding as if you were at zero. So be sure to check your W-2s. If you had more than $6,045 withheld, you can claim a credit for the overpaid amount on line 67 of your federal Form 1040.

5. File an extension

You have no choice. You can’t blow this off. If Uncle Sam doesn’t receive some correspondence from you by April 15, you’ll get smacked with a late filing penalty of 5% per month based on the amount of tax you didn’t pay on time. And that can add up fast.

That means either complete your tax return or file an extension -- Form 4868 – Application For Automatic Extension of Time To File U.S. Individual Tax Return -- which will then buy you an automatic six months of procrastination.

No one will think any lesser of you if you decide to extend your tax return to October 15. Just know that your tax bill is still due by April 15, regardless of your decision. Uncle Sam wants his money on time.

The easiest way to file your extension is to do it through your tax preparation program – like TurboTax or TAxCut. Otherwise just go to irs.gov and download the form. Print it out, fill it out and mail it in. Be sure to send it certified mail so you get confirmation that the IRS received it.

6. Cough up the cash

If you don’t have the cash to pay your tax bill by April 15, don’t panic. Send your return or extension in anyway and pay as much as you can. Remember, there’s a 5% per month penalty for filing your return late, but only a 0.5% per month penalty for not paying the bill on time.

Then you have options.

-The IRS will let you charge your bill though Official Payments Corp (www.officialpayments.com ) or Link2Gov Corp. (www.pay1040.com), using your American Express, MasterCard, Visa or Discover Card. The companies charge a small processing fee (no IRS fee though) but at least you’ll rack up your airline miles. Just make sure the miles outweigh the fees and corresponding interest your credit card will charge if you don’t pay your bill on time.

-If you don’t want to charge your bill, the IRS will let you go on a payment plan. Uncle Sam will pretty much let you decide on your monthly payment amount, so think it through because once you pick a number, it must be maintained over the life of the agreement.

Fill out Form 9465 – Installment Agreement Request or create your own written request. Be sure to specify the amount you can pay and the day you wish to make your payment each month. Whichever you choose, attach it to the front of your tax return.

7. Tax rebates:

Many Americans are expecting to receive a rebate check from the IRS worth anywhere between $300 and $1,200, plus an extra $300 for each child under 17, thanks to legislation from Congress and the president to inject life into the economy.

But don’t spend the money just yet. You might not be eligible.

Tax rebate checks will be mailed to about 117 million middle- and low-income taxpayers.
That means only single tax filers with adjusted gross incomes of less than $75,000 and couples filing jointly with AGIs of less that $150,000 will qualify for full rebates checks.

But if you have less than $3,000 in qualifying income, you won’t get a rebate check.
And if you owe back taxes or don’t have a valid Social Security number, no check for you either.

Most importantly, if you don’t file a tax return, you won’t get a rebate. Many folks with low incomes are not required to file a return, but will need to receive a rebate. So if you have over $3,000 in qualifying income, file a return even if you don’t have to.

8. Audit flags

So what items make the IRS perk up? Here are a few:

-If you report big numbers that are way out of line with the averages or your history, expect an inquiry. So, if you've always donated around 5 percent of your adjusted gross income to charity but bumped that amount to 10 percent this year, Uncle Sam may question your philanthropy.

-The IRS receives copies of all your W-2s, 1099s, 1098s etc. So not only does it match its copies against the ones you attach to your tax return, it ensures that the numbers reported on your return correspond as well.

-Schedule C, the form self-employed folks use, always seems to get attention. That's especially true if you have a cash business such as a tavern, since the potential to fudge numbers is pretty high. So the IRS will be looking for receipts.

-Math errors, incorrect or missing Social Security numbers for you and your dependents and the lack of required information inevitably will trigger correspondence from the IRS as well.

This is by no means an exhaustive list, so keep your receipts and follow the rules!

9. Home office

Taking the home office deduction may entice the IRS only because some taxpayers claim it erroneously.

So follow the rules.

To claim a home office deduction your home office must be used solely for work purposes. If you manage your retirement portfolio in your office or let the kids play on your computer, you cannot claim the deduction.

Also, you can't have an office anywhere else. So if you're a workaholic who likes to bring work home, you can't claim the home office deduction.

Finally, is your home office established for the "convenience of your employer?" That's accounting speak for making sure your boss needs you to have that home office. If you were hired specifically to work from home, you can qualify for the home office deduction.

Assuming you meet those requirements, deduct all the costs that relate to that space. That includes a proportionate piece of your household expenses, like your heating and electric bills, as well any improvements made to the room.

10. Laid off

Tons of people lost their jobs last year thanks to this subprime/credit crisis. Unfortunately, even unemployed people have tax issues.

If you collected unemployment benefits in 2007, you probably received Form 1099-G showing the amount paid to you so be sure to report that amount on line 19 of your Form 1040, as part of your total taxable income.

Hopefully, you had federal income tax withheld on that money. The maximum withholding rate is 15 percent so if you're in a higher tax bracket, not only will you owe more money come April 15, you may be subject to underpayment penalties too.

Now offset that income and deduct your job search. As long as you're looking for a job in the same field, your job-hunting costs can be written off as "miscellaneous itemized deductions subject to 2 percent." That means you can claim only the amount of expenses that exceed 2 percent of your adjusted gross income. Include the costs of revising your resume and transportation costs to and from all those job interviews. Also add all union and professional dues that you now pay out-of-pocket to maintain your certifications.

11. Contribute to Retirement Accounts

Don’t forget to contribute to make your retirement account contributions.

You have until April 15, 2008, to make traditional or Roth IRA contributions for 2007. Most of us can contribute up to $4,000. Though folks who were 50 or older by the end of 2007, you can contribute an extra $1,000 for a total of $5,000. Big note though: Your Roth contribution is not deductible on your 2007 tax return.

Self-employed folks, who had a retirement plan in place up by December 31, 2007, can contribute up to $45,000. They have until the tax filing deadline -- including extensions-- to make a contribution for their 2007 return. And every dime contributed can be deducted to cut your tax bill for 2007.

Regardless of the account your contribute to, be sure that you tell your broker, mutual fund company or bank that the contribution is for the 2007 tax year.

12. Alternative Minimum Tax

The dreaded Alternative Minimum Tax, or AMT, will infiltrate about 4 million homes this tax season.

The AMT began as a way to ensure that taxpayers pay a minimum amount of tax but was never indexed for inflation, which is why tons of people are getting hit.

The AMT has a completely different set of calculations than the regular tax. Under the regular tax system, you add up your total income, subtract out various deductions and personal exemptions, then calculate the tax. Against the regular tax you can claim various credits to reduce your tax even further.

AMT is calculated differently. It does not allow the standard deduction, personal exemptions, or certain itemized deductions, mortgage interest on home equity debt. Also some income which is not subject to the regular tax is added for AMT purposes.

In the end, your income is calculated under both systems you owe the bigger tax bill.

And generally folks with income of around $100,000, with a few kids who pay high state taxes are the ones that get hit the hardest.

While there’s not much you can do for 2007, if you got hit, then start to prepare for 2008.