Simply Junior

Have you ever completed your tax return to find out that you owe the federal government thousands of dollars? If so, I expect it was because you raided your pension or retirement plan. If you haven’t learned this painful lesson yet, you should read this article so that you don’t end up owing the IRS thousands.

“NEVER TAKE MONEY OUT OF YOUR RETIREMENT PLAN!” read the sign that hung in the tax accountant’s office. I knew this was an overstatement, but understood why the accountant had such a sign in his office. Too many times did I, as a tax accountant myself, have to console crying or angry clients after explaining to them that they owed the government thousands of dollars because they withdrew money from their retirement or pension plan. The worst part is that these people that withdrew were often already facing immense financial problems – job losses, foreclosures, and bankruptcies.

If you take money out of your pension or retirement plan, you will first find out that the law requires retirement plan administrators to withhold 20 percent of your money for the federal government. Most people are upset by this news and believe withholding this amount will cover their tax bill. After all, it is a lot of money. What’s important for you to know is that it’s only the beginning.

Most taxpayers still need to worry about more federal and state taxes due. If you’re in the 28 percent tax bracket, you’ll owe the federal government another 8 percent of the amount you withdraw. Worse yet, if you’re under 591/2 years of age, you’ll most likely be penalized another 10 percent. In addition, most states will tax you 5 to 10 percent.

How will this affect your tax bill? If you withdraw $20,000, the plan administer will withhold 20 percent, leaving you with $16,000. By April 15 you’ll realize that you owe another $3,600 to the federal government and $1,500 to the state. So by taking out $20,000 of retirement savings, you end up with only $10,900. Now you’re probably beginning to understand why that tax accountant hung the sign “NEVER TAKE MONEY OUT OF YOUR RETIREMENT PLAN!”

Sure, there are exceptions. There are a number of ways to avoid the 10 percent penalty – using the retirement proceeds for tuition, medical costs, or to buy your first time home (up to $10,000). Some states don’t have an income tax. And, of course, these penalties and taxes don’t apply to ROTH Individual Retirement Accounts.

What’s important to remember is that your tax advisor will be able to explain to you the financial consequences that specifically pertain to your situation. He or she may even be able to suggest alternatives, such as taking a loan out against your retirement plan. Remember, contributing to a retirement account is a wise choice, just don’t make the very unwise choice by liquidating your account before speaking to a tax professional.

• Generally most 2010 individual tax returns are due on the 31st of October 2010 unless you are granted an extension (most Accountants get an extension for their clients till the 15th of May 2011 however it is important that you request this before the 31st of October)
• Group Certificates should already be sent out to employees and the summary report is due on the 15th of August (send directly to the ATO)
• For most Business Activity Statement (BAS) lodgers (quarterly) your BASs are due this year on; June 2010 BAS 28th of July, September 2010 BAS 28th of October, December 2010 BAS 28th of February and the March 2011 BAS is due on the 28th of April. All of our clients get an extra 14 days beyond those given above if lodged by us.
• For annual BAS lodgers your 2010 annual BAS is due at the same time as you tax return.
• For other return types (ie Companies, Partnerships and Trusts) your due date can vary from the 28th of February 2011 through to the 6th of June 2011 depending on your business, lodgment history and your accountant’s lodgment schedule. If in doubt ask your Accountant or get your work in before Christmas to allow time to complete your work.

Remember if you are having trouble meeting these lodgment due dates get in touch with us or your Accountant as we can either help or request an extension of your lodgment due date to keep you out of trouble with the ATO.

Tax laws change around year end just in time to take advantage of year end planning. This year is no exception. Congress has been busy making new laws that may affect your tax bill when you file your tax return in 2006. Some taxpayers will benefit from these new laws. Inflation adjustments for personal exemptions have increased, as well as standard itemized deductions, tax bracket adjustments, and annual gift tax exemption.

One of the most favorable law changes affecting most taxpayers is the new automatic extension for taxpayers who cannot file their tax returns by the April 15th deadline. The new law became effective in November, 2005 for returns filed in 2006. Prior law gave the taxpayer an automatic extension of four months after the April 15th deadline or August 15th. If the taxpayer needed more time to file after August 15th, they could file for another extension but needed a good reason. The IRS also had to accept that reason and grant the second extension. The new law does away with the second extension and allows an automatic six month extension or until October 15th. The new automatic six month extension does not require a reason to extend. As always, the extension is for additional time to fill. All taxes owed at the time of extension should be paid.

Laws that affect the victims of hurricane Katrina have dominated this year. The IRS was set up to handle registration calls of victims of Katrina for FEMA. If anyone had to call the IRS this past summer and fall, they meet with long hold times and overworked IRS agents. There are a number of tax law provisions that have been enacted to help the victims of Katrina get back to a normal life. If these people had retirement plans, laws were relaxed to help them obtain loans from the retirement plans. Deadlines to file and pay taxes were set to February 28, 2006 for victims of Katrina. Anyone that has been affected by either hurricane Katrina, Rita or Wilma are urged to seek help from the IRS or other organizations who have aligned themselves with the IRS volunteering time to give them free assistance with their tax questions.

Taxpayers who use their personal vehicle for work either as an employee or in their own business and use the standard mileage rate will receive tax benefits from the increase of the standard mileage rate due to increased fuel prices. The mileage rate for the first eight months of 2005 will be 40.5 cents per business miles and 48.5 cents per business miles driven the last four months of 2005 when gasoline was topping $3.00 a gallon during the hurricane season. Starting in January 2006, the optional standard mileage rate will be 44.5 cents per business mile driven. Medical mileage was also adjusted. Charitable miles remained at 14 cents a mile driven except for mileage in connection with Katrina hurricane relief efforts.

The IRS has announced the Free Filing Alliance. This is an alliance with private companies who offer free tax filing for certain taxpayers who meet the eligibility requirements to e-file at no cost to them. This must be done through the IRS website and the Free Filing Alliance at the IRS website. For additional information on eligibility, check at the IRS website, http://www.irs.gov.

2011 Tax Deduction for Homeowners is a great way to save money in year 2011. If a taxpayer understands the benefits of home ownership they might decide to own a home instead of continuously paying down payment to a rental apartment.

If you own a house, here’s the steps on how to claim maximum Tax deduction for homeowners in 2011.

The deductions can be made by reducing the real estate taxes you paid in accordance to the assessment value of your property and if the local government has similar rating to its value.The public must have gained benefits from taxes they paid and not only for individuals or community. Whenever you have first or second homeowner mortgage, home equity loan, and home improvement loan in 2011 you can deduct from taxes all the interest you paid for this loan as long you are using this home as your main or secondary residence. Never deduct payments you have made from your real estate escrow account because your lender can present annual information of your payments that can show the actual amount you paid for it and can deduct to your federal income taxes. This is important point you must remember when doing Homeowner Deductions from your 2011 Tax return. A lot of people make this mistake. In the event you bought a house you can transfer all taxes you have paid and add it to its cost basis. This is the item that cannot be deducted to your taxable income.

To claim your Tax Deductions as a Homeowner in 2011, be diligent when filing.

Nearly 1.5 Million people have taken advantage of the $8,000 tax rebate since it’s conception in January 2009. The tax credit has been available to all first time home buyers. The first time home buyer is defined as anyone who has now owned their own home for three consecutive years. Oh, one more criteria for eligibility… It must be for your primary residence which is unfortunate for investors. The credit is in the form of a tax rebate for 10% of the purchase price of the home, up to a total of $8,000. One of the great benefits of the tax rebate is that is FULLY refundable to the buyer. For instance if the first time home buyer owed no taxes on their taxes, then the first time home buyer can amend their tax return and capture the full $8,000.

The tax rebate has helped improve the national home sales. The current tax rebate is set to expire on November 30, 2009. This means that the purchase must be fully closed and completed in order to qualify. It typically takes approximately 30 days to close on a home transaction with conventional bank financing. The point is that in order to be confident your purchase will qualify you should plan to be under contract to purchase your home by November 1, 2009. If you are trying to capture the $8,000 tax rebate and have not yet put your home under contract or you dont qualify for conventional financing then you need to consider finding an alternate approach. One alternate approach is to find seller financing. If the seller is providing the financing and you do not need to wait the typical 30 days for bank financing, then you can still close by December 1, 2009 without many challenges.

What about the possibility of extending the rebate past December 1, 2009? There are currently several bills in Congress that would allow the extension. Each of the bills in Congress provide alternate solutions toward the extension. Of course there is a lot of politics involved in completing the extension, from all poitical parties. Here is a brief summary of the extensions:

S1230: Senator Johnny Isakson introduced Senate Bill 1230 in June. The Bill proposes a tax credit up to $15,000 that can be split over 2 year for everyone who purchases a home for their personal residence.

HR 2619: This one proposes to extend the existing $8,000 tax credit to July 1, 2010 and adds provisions for a tax credit of up to $3,000 for homeowners who refinance. This would certainly create a ton of refinances. Is this part of the recent mortgage issue? Many Americans seem to use their home equity as an ATM machine, pulling it out and spending it. I guess that would potentially help spur the ecomony in the short term.

HR 2801 – Similar to S1230 but it extends benefits to January 1, 2011.

Several key politicians are publicly making comments about getting the extension approved by early November. Those making positive comments include Senator Bill Nelson of Florida, Senate Majority Leader Harry Reid and Senate Finance Committee Chairman Max Baucus. They are hoping to extend the rebate along with unemployment benefits at the same time.

One thing for sure is our current Government is committed to spending an unlimited amount to try and stimulate our economy. Our Leaders appear to be committed to short term gains at the expense of future generations. That said, extending the first time home buyer credit will certainly help encourage American’s to own their own home.