Saturday, July 27, 2013

Opalite Heart Key Ring

DESCRIPTION    

Opalite is one of the prettiest gemstones around. Fiery colours are hidden within the depths of this surreal crystal. Opalite changes in the light from blue to pink to gold. Opalite is said to enhance psychic abilities.
These puff hearts have been crafted into key rings to make carrying your crystals simple and safe.

Opalite puff heart measures approx 3x3cms.


GENERAL NOTES
NB: Opalite is a man-made crystal

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Leather Choker

DESCRIPTION    

Thick, black leather choker with metal fittings which simply push together. Ideal if you have difficulty doing up fiddly clasps.

Cord is approx 3mm in diameter and choker measures approx 46.5cm (18.5") closed.


GENERAL NOTES
None


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Crystal Ball And Stand (80mm) - Lisa Parker

DESCRIPTION    

A really nice crystal ball. Ideal for divination if you have the gift, or for meditation to help you focus and relax.

The 80mm ball is clear glass and accompanied by a glass stand. Beautifully presented in a picture box bearing Lisa Parker artwork.


GENERAL NOTES
None


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Monday, July 22, 2013

Coming Clean on Your Taxes

NEW YORK (Reuters) - It goes without saying that you should file your tax returns each year and pay what you owe. But if you mess up, there are ways to move beyond the problem.

Except in cases of tax fraud, the U.S. Internal Revenue Service will generally work with taxpayers to get them back into the system. You can often negotiate a payment plan, and if you are truly strapped, you may be able to cut a deal on how much you must pay. But first you must fess up to the problem.

What happens if you do not file can get ugly, but you may not realize it at first. The IRS may be slow to catch up with nonfilers, as its computers go through the laborious process of matching tax documents with returns.

At first, nothing may happen, but nonfilers cannot escape notice forever.

For Hank, it all started when he lost his job at an ad agency. He began tapping his retirement funds to pay the bills, and did not put anything aside to pay taxes on the early withdrawals. For more than five years, he neither filed a return nor paid his taxes.

"I had some depression issues, and I had a little bit of a problem with alcohol," says the Los Angeles area resident. "It was just really stupid."

Now sober for three years, Hank has filed for the years he missed and is working to negotiate down the tax bill, which he figures is, very roughly, $40,000.

"I can see that I have made some egregious errors, and it's time to grow up and be responsible," says Hank, who spoke on condition that his last name not be used.

While few people like to talk about it, Hank's story is not uncommon. "It's usually drugs, booze or women," says Don Williamson, executive director of the Kogod Tax Center at American University in Washington, D.C.

Add to that the serious financial problems that have squeezed many Americans over the past five years.

"There are tax issues people haven't dealt with because they had a home foreclosure or lost their job or withdrew money out of a retirement plan and did not pay taxes on it," says Chuck Putney, who represents taxpayers before the IRS for Putney-Klein Associates in Walnut Creek, California.

"If someone doesn't file for a year, they think they can't file the next year," he says, "and then they get into a three- or four-year funk."

FEAR, SHAME AND DENIAL

A nonfiler's first communication from the IRS is usually a notice stating the amount it believes is due. It may not be accurate, and you should not assume it is.

Rather than pay too much, you should do your returns so you can figure out the correct amount you owe.

"They'll propose a large tax due, and they won't have any allowance for deductions," Putney says. "You can always file a correct return that says you have two kids and a home mortgage."

If you deal with the problem at that point, you can avoid worse penalties, such as a claim on your assets or the seizure of your property by the IRS.

The more common reactions, however, are fear, shame and denial. "I've seen clients bring in envelopes, and they're afraid to even open them," Putney says.

Valerie, a teacher who ran into financial trouble after Hurricane Sandy, has not yet filed her New York taxes this year, although she did file her federal return. She says she was afraid.

"It just seems overwhelming, and the emotional aspect blocks me," she says. "There is shame in not getting your stuff together. It's just a monster in the closet."

In the end, Valerie overcame her fears and started to deal with the issues. By mid-May, she had found an accountant to work with, and was hoping to set up a payment plan.

The first step is to open those notices and file the back returns. If you do not have what you owe, you may be able to negotiate an agreement to make monthly payments. To do so, you first need to file your back taxes.

Another option is the Offer in Compromise program, in which you can negotiate away part of your tax deficiency. The rules governing this program are strict, though, and you will generally have to be in extremely bad financial straits to qualify.

Especially if the numbers are large, you will want tax help. Working through back taxes on your own is not for the faint of heart.

(The writer is a Reuters columnist. The opinions expressed are her own.)

(Editing by Frank McGurty and Lisa Von Ahn)


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Retirement Savings Credit Doubles Payoff

Contributors to retirement plans already know the long-term tax advantages of an individual retirement account or 401(k). Taxes are deferred, and in some cases never collected, on money put away for the golden years.

Now a tax credit will let some savers reap the rewards of their retirement thrift early.

The retirement savings contributions credit, also called the saver's credit, appears on Form 1040 and Form 1040A tax returns as a way to reward lower-wage earners who sock away retirement money.

Because the tax break is a credit instead of a deduction, it's a better deal. Tax deductions reduce taxable income, but credits come into play after you calculate how much tax you owe, and they reduce your Internal Revenue Service bill dollar for dollar. For example, if you owe $500 and you are eligible for a $250 credit, the check you have to write to Uncle Sam is cut in half.

Income limits

A filer eligible for the saver's credit could shave as much as $1,000 off his or her tax bill. The actual credit amount depends on your income, filing status and just how much you put into retirement plans.

Basically, the lower your income, the bigger your credit. The income limits that determine how large a credit you can claim are adjusted annually to keep pace with inflation. The precise credit percentages for 2012 filings are found in the table below.

As the table shows, the maximum available credit is 50 percent of contributions for filers in the lower end of the earnings ranges. There is, however, a limit on the retirement plan contribution amount you can use to figure the tax break.

Although tax law allowed you to put up to $5,000 in 2012 ($6,000 if you're age 50 or older) in your IRA, only $2,000 of that will count in figuring the saver's credit. That makes it worth at most $1,000 for single taxpayers. Of course, if you're married and you and your spouse put away at least $2,000 toward retirement, your joint return would reflect a $2,000 credit.

Which contributions count?

Contributions to traditional and Roth IRAs as well as to employer-sponsored 401(k) plans count toward computing the credit. So does money you put into a savings incentive match plan for employees, or Simple, plan; a 403(b) program; a governmental 457 plan; or a salary reduction simplified employee pension, or SEP. You can only count the money you put in your workplace account, not any matching amounts your company contributed.

The credit is based on your total contributions to all your eligible retirement accounts, not for contributions to each. So if you put $2,000 into a Roth and another $2,000 into your 401(k) at work, you still can only calculate your credit on the allowable maximum of $2,000.

Enter all your retirement saving amounts on Form 8880, Credit for Qualified Retirement Savings Contributions, and complete the form to arrive at your exact credit rate and amount. Once you get the dollar amount, transfer it to line 50 of your 1040 or line 32 if you file the 1040A. The credit isn't available for 1040EZ filers, so you might want to consider changing your choice of returns if you've been putting away retirement cash.

If your IRA contribution is to a traditional account, you may be able to get a double tax break. In addition to the saver's credit, look into whether you're eligible to deduct your IRA contributions on the front page of your 1040 or 1040A. This tax break is one of several adjustments to income that are available to all taxpayers, regardless of whether they are itemizing or taking the standard deduction, and the IRS says you can claim the retirement savings credit and deduction for your IRA contributions.

The credit also is attractive to workers who are eligible to participate in a 401(k) plan but who earn just more than one of the saver's credit income limits. By signing up for a company-sponsored account, such workers could get under the earnings cap while simultaneously boosting the potential credit amount.

Take, for example, a married employee who is the sole earner in her family and who reports adjusted gross income of $35,000 on her joint tax return. She's already eligible for a partial credit, but if she contributes $2,000 to her 401(k), she will knock her income down enough to take the maximum credit.

Some other restrictions apply

In addition to the income limits, there are a few other restrictions on who can claim the saver's credit. A taxpayer who was younger than 18 last year, a full-time student or claimed as a dependent on another's tax return can't take the retirement savings break.

The saver's credit is also what the IRS calls nonrefundable. That means you can use it to reduce your tax bill to zero, but you can't take advantage of any excess credit amount to get a refund. So if you owe no taxes, the credit is of no use to you.

Still, even if you can't take full advantage of the credit, it's not too shabby of a break when you take into account the additional tax savings you get by contributing to a retirement account in the first place.

Just remember, the key to this credit is participation in retirement accounts. If you haven't opened a retirement account yet, or have one but haven't contributed for the 2012 tax year, you have until the April tax-filing deadline to open one and put in money. The deadline is the same for either a Roth or traditional IRA.

As for your 401(k), you're locked into your credit for the 2012 tax year based on the contributions you made last year. Make sure the W-2 you got from your company reflects the correct amount of all your pension contributions so you can get the maximum credit.

If you're not yet participating in your company plan, you can improve your future saver's credit potential by signing up as soon as you're eligible. Then contribute as much as you can afford without doing major cash-flow damage to your paycheck. It could pay off at tax-filing time as well as when you retire.

More From Bankrate.com


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More States Charging Taxes for iTunes, eBooks

That $1.29 iTunes song or $9.99 e-book may be more expensive than you think.

If you live in one of the nearly 25 states that charge sales tax on digital goods or services you likely pay more for everything from downloaded music, e-books and ringtones to streaming TV shows and video.

And a growing number of states are finding ways to tax our digital diversions. While some states rely on existing sales tax laws, more than a dozen have enacted sales tax laws specifically targeting digital goods.

In July, Minnesota's residents will be the latest consumers to pay tax on digital products, under a provision of the state's tax bill passed in May.

As consumers switch to digital music, books and movies, many states discovered that they were losing out on valuable sales tax revenue and decided to do something about it, said Michael Mazerov, a senior fellow at the Center on Budget and Policy Priorities, a nonprofit think tank.

E-book sales, for example, rose 44% to $3.04 billion in 2012, according to the Association of American Publishers and the Book Industry Study Group. Meanwhile, digital music sales, were up 9.1%, with digital transactions making up a record 37% of all album purchases, according to Nielsen.

Related: Online retailers call Internet sales tax a 'nightmare'

What exactly is taxed varies widely by state. Washington state, for example, taxes digital content regardless of how it is delivered; while other states tax music and videos that are downloaded, but not when streamed through a service like Netflix or Spotify.

Here's what some residents currently pay:

iTunes: Downloaded music is one of the most commonly taxed digital goods. For example, a $12.99 album downloaded from iTunes carries a state sales tax of 52 cents in Wyoming, 78 cents in Vermont and 91 cents in Mississippi. E-books: States that tax iTunes also tax downloaded e-books. Take New Jersey, which levies a 70-cent tax on a $9.99 purchase, or Utah which imposes a tax of 47 cents.Mobile phone apps: Apps are a unique case. Some states that don't tax "digital goods" still tax apps, the same way they tax software downloaded to a computer. For example in New York, a $2.99 Angry Birds download from the iTunes store will carry a 12-cent tax. But if a New Yorker downloads music or a movie from iTunes they won't get taxed because the state doesn't tax digital goods. Netflix streaming video: Taxes on streaming content are less common. Washington state, for instance, levies 52 cents in sales tax on a $7.99 monthly Netflix streaming subscription. Florida meanwhile, which does not have a sales tax on digital goods, imposes a roughly 54-cent state tax on the same Netflix subscription under its communications services tax.

The rush among the states to tax digital content comes as federal lawmakers consider the "Marketplace Fairness Act," which would allow the 45 states (and the District of Columbia) that currently charge sales tax to require online retailers to collect taxes on purchases made by their residents.

Related: What an Internet sales tax will cost you

Currently, online sellers are only required to collect taxes in states where they have a physical presence, such as a store or a warehouse. Under the proposed law, online sellers that have sales of at least $1 million outside of states where they have physical operations could also be required to collect sales tax.

The legislation wouldn't create any new taxes on digital goods, but it would let states enforce the laws that are already in place.

Most states tax a purchaser based on where their billing address is located, but there are no firm national guidelines, said Stephen Kranz, a partner at Washington D.C.-based law firm McDermott Will & Emery who specializes in tax policy.

Tax critics, like Americans for Tax Reform, are concerned that different states will try to tax the same digital purchase. So a resident of Washington state that buys digital music while traveling in Utah could end up paying sales tax twice.

The Download Fairness Coalition, which includes tax reform groups and members of the digital industry, are pushing for additional legislation that would create national guidelines and prohibit that from happening.

Critics also argue that digital goods shouldn't be taxed the same way as physical goods since users are often paying only for a license, not "tangible physical property."

Related: Most outrageous tax cheats

"You can gift your records in your will," said Katie McAuliffe, executive director for digital liberty at Americans for Tax Reform. "You can't do that with your iTunes library."

To find out what items are taxed in your state and at what rate, contact your state's tax and revenue agency. A map with links to the 50 state tax websites can be found here.

View this article on CNNMoney

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12 Common Tax Mistakes That Waste Time and Money

Experience is simply the name we give our mistakes. – Oscar Wilde

As parents know, some lessons are best learned the hard way. Taxes, however, aren’t one of those times.

Messing up on taxes is common. In the best cases, it could mean a delayed refund. But it could also mean a smaller refund, spending extra money and time to amend your return, or in the worst case, facing an audit.

Tax software helps avoid a lot of errors – especially the math kind – but it can’t fill out personal information or replace common sense. These days, that’s where the most frequent mistakes happen.

In the video below, Money Talks News founder and CPA Stacy Johnson covers some of the most common tax errors. Check it out, and learn more on the other side….

The tax code runs thousands of pages and is constantly changing, so it’s easy to make mistakes. But experience shows we tend to make the same ones, over and over. Here’s a checklist to help you out…

1. Social Security info

What’s on your Social Security card goes on the return – if your name is wrong there or has been changed, contact the Social Security Administration. Getting your number wrong, or that of a dependent or spouse, is even worse: The number might belong to someone else. This kind of error can completely stop the whole process.

2. Math

Software can help, but not every program spells out every step of the process. In some cases you may still have to tally numbers on the side to enter totals. When you do, triple-check your work.

3. Signature

It’s like turning in homework without your name on it: no name, no credit. Make sure you sign your return – and the check, if you’re sending one. Otherwise you may face delays or penalties.

4. Wrong form

Again, software often helps here by picking the relevant forms. But sometimes using a 1040EZ won’t get you as much money as a 1040 or 1040A. And certain situations require additional forms or numbers in different places. For instance, where you claim a home office deduction differs depending on whether you are an employee, self-employed, or a business partner.

5. Paying

There are a lot of tax software options, with varying fees for preparing, filing, and amending, not to mention state returns if that applies. But if your income is under $51,000, chances are you can get your taxes prepared and filed for free. Check out 4 Ways to Get Your Taxes Done Free.

6. Going pro

If you have a simple tax situation that hasn’t changed much since last year, there’s no reason to pay a professional: All they’re going to do is use the professional version of software you can buy (or get free) yourself. Check out 9 Tips to Pick a Tax Pro– If You Need One.

7. Waiting on a check

Filing your return electronically through the IRS Free File is always free, no matter your income. But however you file, do it electronically and sign up for direct deposit and your refund will most likely hit your account in less than two weeks. Just don’t forget to triple-check your bank account number to make sure the money doesn’t end up in someone else’s account.

8. Hiding income

This can happen accidentally if you have multiple employers, or if a W2 or 1099 goes missing. So take your time, think it through, and make sure you report everything – not just from your job but also investments and anywhere else that might be reporting to the IRS. Ideally you’ll track this throughout the year so you can’t forget.

9. Missing deductions and credits

Polonius from Hamlet said, “Neither a borrower nor a lender be.” He was a jerk.

But he was right too – don’t leave money on the table, at least not for the government. Did you buy a home in the past year? Go back to school? Life changes and major purchases may mean tax benefits. And don’t forget to see if you can claim a home office deduction.

10. Taking out a refund loan

If you’re desperate for your refund money, realize the interest charges on a refund anticipation loan or check only make things worse. Read why in our story from last year, Kiss Refund Loans Goodbye, and learn about a better idea: changing your tax withholding so you get bigger paychecks year-round.

11. Procrastinating

Tax Day is April 15 – and many people have already received their refunds. From the date this article was published, you have 53 days to get the job done right. So don’t short-change yourself literally and figuratively by waiting until the last minute, and then rushing through it. That’s how you make dumb mistakes and forget things that could have lowered your bill or gotten you more back.

12. Blowing it

Once you get your refund, don’t make the mistake of misspending it. Use it wisely: to pay down debt, get tax advantages for next year, or at least do something memorable and fun. Whatever you do, don’t fritter it away. We’ll have a story next week on smart uses for your tax refund.

This article was originally published on MoneyTalksNews.com as '12 Common Tax Mistakes That Waste Time and Money'.


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How to Pay No Federal Income Tax

During the recent presidential election, tax reform was a hot-button issue. Billionaire investor Warren Buffett and Republican presidential candidate Mitt Romney both ignited fiery debates -- Buffett when he claimed the richest 1 percent of the population is not paying its fair share of taxes and Romney when he said nearly half of Americans pay no federal income tax.

According to the Tax Policy Center, 46.4 percent of Americans paid no federal income tax in 2011, a percentage that may sound alarming. But other taxes, such as those levied on property, cigarettes, gas, liquor, payroll, Social Security, and state and local taxes, ensure that virtually no one gets off scot-free.

Even so, the significant number of Americans who pay no federal income tax raises the question: How can a taxpayer reduce federal income tax liability down to nothing?

"It depends on the type of income as well as the deductions and credits you can apply," says Bob D. Scharin, senior tax analyst for the tax and accounting business Thomson Reuters.

Nontaxable income
"Not all income is taxable," Scharin says. Here are a few examples.

Municipal bonds provide tax-free interest. Many wealthy investors will allocate a good portion of their portfolio to municipal bonds to significantly lower their federal income tax liability, says Michael Knoll, professor at University of Pennsylvania Law School and co-director of the Center for Tax Law and Policy. But there's a trade-off: "Economists like to say you're paying an implicit tax because you're getting a lower return on these bonds than you would get on taxable bonds."Disability benefits could be income-tax-free if the policy premiums were paid by the individual, not the employer, says Scharin.Some Social Security benefits are tax-free, or partially taxable, depending on your income, Scharin says. But on the flip side, Knoll points out, everyone who works pays into Social Security through a payroll tax deduction, although some people argue whether it is actually a tax or a forced insurance and savings program.Foreign income is federally tax-exempt up to a maximum of $96,100 if you are employed by a multinational company and work abroad for an entire year, Scharin says. Even if you have to pay taxes to the foreign country where you live and work during this time, you may be able to get a credit for them on your U.S. tax return, he adds.Income from long-term capital gains is not taxed as federal income, but at a lower capital gains rate. That rate can actually be zero for those in the lower tax brackets, Scharin says. A married couple with adjusted gross income below $70,700 and single taxpayers below $35,350 will pay no tax on capital gains.
Deductions and credits
In addition to the types of income a person receives, the use of deductions and credits can reduce or eliminate federal income taxes. The standard deduction and personal exemptions alone can eliminate federal income tax owed, Knoll says. For example, a married couple filing jointly with two children can earn $27,100 and reduce their federal tax liability to zero just by applying the standard deduction of $11,900 and personal exemptions of $3,800 each. That's not even counting any credits, he adds, such as the earned income tax credit, which could further reduce the tax bill. And, depending on where you live and whether you're self-employed, Knoll says, you can deduct property taxes and health insurance premiums outside the standard deduction without itemizing.Credits, such as the earned income credit, are usually aimed at assisting taxpayers with modest incomes, says Scharin. The credit, up to a maximum of $5,891, is available for working adults with children who fall into the lower income brackets.Other credits include the American opportunity credit, which offers a maximum of $2,500 per year for qualified students; the saver's credit for low and moderate income taxpayers who want to save for retirement; and the child and dependent care credit for expenses paid to a care provider.For wealthier taxpayers who itemize, a qualified charitable contribution can provide an immediate federal income tax deduction of up to 50 percent of that year's adjusted gross income. Even if an individual donates a higher amount, the remainder can be carried over and deducted in subsequent tax years. For example, if someone with an income of $2 million donates $10 million one year, he can deduct $1 million on the current tax return and carry over $9 million to deduct in future years.Qualified medical expenses that exceed 7.5 percent of adjusted gross income can be deducted if the taxpayer itemizes. In a year that might include expensive capital improvements to a home to accommodate an illness or injury, for example, the tax savings could be significant, Scharin says. (The 7.5 percent threshold is for the 2012 tax year. In 2013, medical expenses must exceed 10 percent of the taxpayer's adjusted gross income.)There are other ways the ultrawealthy can reduce or avoid federal income taxes, including the use of certain trusts that will pay the income tax and pass on the assets to future generations, Knoll says. Other wealthy individuals who own a business may have a significant gross income, but because of business expenses, will reduce their taxable income to close to nothing.
Of course, the possibility of reducing taxes to zero has always been a concern for revenue raisers. That's why the alternative minimum tax, or AMT, was enacted in 1969 as a way to ensure that in most cases at least some tax is paid. A portion of income is excluded before the AMT kicks in, and the American Taxpayer Relief Act enacted this year now indexes those amounts to inflation to protect lower- and middle-income workers from this parallel tax.

Tax reform and fairness will likely always be a debatable issue because of the nature of our progressive system, in which the amount of tax owed increases according to the taxable amount, says Knoll.

In general, Scharin says, those who are making the most drastic reductions to their federal income tax liability are taking advantage of deductions and a variety of credits aimed primarily at the elderly and the poor. At the other end of the spectrum, the wealthy are giving away assets, thereby reducing their wealth.

"Nothing is simple in the tax code," says Scharin. "Often in the name of fairness, the tax code gets more complex."


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Sunday, July 21, 2013

First IRA Distributions Due by April 1

Distributions from traditional 401(k)s and IRAs become required beginning shortly after you turn age 70½, and you must pay income tax on each withdrawal. The penalty for failing to take out the correct amount by the deadline is a stiff 50 percent excise tax on the amount that should have been withdrawn. Distributions are generally due by December 31 each year, but there are special rules that apply to your very first required minimum distribution.

[Read: Claim This Last-Minute Tax Break.]

You must generally take your first required minimum distribution from your 401(k)s and IRAs by April 1 of the year after you turn 70½. For example, a retiree whose 70th birthday was July 1, 2011 and who reached age 70½ on January 1, 2012 must take his first required minimum distribution (for 2012) by April 1, 2013. But there's a catch. If you wait until the last minute to take your first required minimum distribution, your second distribution will be due by December 31 of the same year. Taking two required minimum distributions in a single year could result in an unusually large income tax bill, because both withdrawals must be reported as income on your tax return.

[Read: Smart Strategies for Taking Required Minimum Distributions.]

The amount you must withdraw from your retirement accounts is typically calculated by dividing your account balance by an IRS estimate of your life expectancy. In some cases, a spouse's age should also be factored into the calculation. A required minimum distribution must be calculated separately for each IRA, but the total amount can be withdrawn from any IRA or combination of IRAs. Retirees with multiple 403(b) accounts are also allowed to total the required minimum distributions and take the withdrawal from any account. However, required minimum distributions from 401(k) and 457(b) plans must be taken separately from each account.

You can take any number of IRA withdrawals throughout the year as long as the minimum amount is met by April 1 for your first distribution and December 31 for all subsequent distributions. Some 401(k) plans allow you to delay taking required minimum distributions past age 70½ until April 1 of the year after you actually retire, unless you own 5 percent or more of the company sponsoring the 401(k) plan. However, IRA distributions are required after age 70½ even if you are still working. Distributions that exceed the amount of the required minimum withdrawal cannot be applied to required distributions in a future year.

[Read: The Best Tax Breaks for Retirement Savers.]

Each withdrawal from your tax-deferred retirement account will be taxed at your regular income tax rate. However, retirees in the fortunate position of not needing the money in their IRA for living expenses can avoid paying income tax on their required minimum distribution by donating it to charity. Individuals age 70½ and older can satisfy their IRA distribution requirements by transferring up to $100,000 directly to an eligible charity during the calendar year of 2013, and no income tax will be due on the withdrawal. However, the deadline for making a tax-year 2012 charitable contribution from an IRA has already passed.

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10 Tips to Avoid an Audit

What are the odds of being audited by the IRS? If you make less than $200,000 a year, just over 1 in 100, according to their annual report.

Those odds are up slightly over the past six years, where the average audit rate was 0.98 percent. That’s because the IRS stepped up its game a few years ago to work on closing the tax gap, or “the amount of tax liability faced by taxpayers that is not paid on time.” That amount was $345 billion in 2001, rising to $450 billion in 2006, the last year they computed it.

With today’s historic deficits, it’s not surprising Uncle Sam is looking harder for missing cash. There’s no guaranteed way to avoid an audit, because the government admits to randomly picking thousands of people every year. But there are ways to avoid red flags – things that make your return suspect and more likely to be chosen for an audit.

In the video below, Money Talks News founder and CPA Stacy Johnson offers three tips to avoid receiving a notice from the IRS.

As Stacy suggested, always take the deductions you’re entitled to. An audit doesn’t mean you’re guilty of anything – it just means the IRS might need a closer look. Good documentation is your best defense, so stay organized and don’t throw anything out until you know you won’t need it. The IRS typically has up to three years to audit a return, although they go back further in some cases. Here’s a recap of the tips you saw in the video, along with a few more…

Many people don’t need to hire a tax professional – there’s free professional preparation for those making $51,000 a year or less. But if you do decide to pay for help, choose wisely. Check references and credentials: If the IRS suspects a tax preparer is routinely fudging numbers, they can audit all their clients.

You can and should deduct expenses related to a business, including for home office use if it applies. But expenses related to hobbies aren’t deductible. The difference: A business makes money. From the IRS page called Is Your Hobby a For-Profit Endeavor?: “An activity is presumed for profit if it makes a profit in at least three of the last five tax years.”

As Stacy mentioned, according to The Wall Street Journal, self-employeds are 10 times more likely to get audited if they file a Schedule C rather than a corporate return. The reason is partially explained by a line in this government study: “70 percent of the sole proprietor tax returns reporting losses had losses that were either fully or partially noncompliant.” In other words, people operating a hobby rather than a business are more likely to file a Schedule C.

Taxes aren’t the only factor in the decision to incorporate. Read How Should You Set Up Your Business? for more options, with pros and cons on each.

Another red flag is taking charitable deductions that look big compared to your income. In general, the IRS says you can deduct up to half your adjusted gross income. But the rules get complicated, and the bigger the deduction, the higher the audit odds. That doesn’t mean you shouldn’t take all the deductions you’re entitled to – it just means you should be prepared to back them up.

Don’t rush through your taxes – the more mistakes you make, the more your return sticks out. We’ll soon cover the most common tax mistakes, but if you can’t wait to file, don’t miss simple stuff like signing your return and double-checking your Social Security number.

Prolific U.S. bank robber Willie Sutton was credited with saying he robbed banks “because that’s where the money is.” The IRS has a similar philosophy. Last year the odds of an audit went up sharply for higher earners. Audit odds for those making more than $200,000 were about 4 percent, and for those making more than $1 million, more than 12 percent.

We’re not seriously suggesting taking a pay cut to lower your audit risk. But the more you make, the better prepared you should be.

The IRS doesn’t focus only on the rich. Folks claiming the Earned Income Tax Credit – available to “low to moderate income working individuals and families” – can also invite scrutiny. More than 27 million people claimed the EITC last year, leading to $62 billion in refunds. Because the credit is refundable – meaning the government will send you a check even if you paid no taxes – it’s ripe for abuse. Definitely take it if you’re eligible, but make sure you are. Check out the EITC page of IRS.gov for more.

Many people don’t realize income from almost any source is taxable. You may not get caught on stuff like yard sale profits, but you might on gambling winnings. And for stuff that’s been reported to the IRS by someone else – like investment and self-employment income – you almost certainly will.

Don’t assume because you didn’t get a copy of an income-reporting form, one wasn’t filed with the IRS. If your W-2, 1099, or other tax form hasn’t shown up by now, call the company that’s supposed to be sending it. Still no luck? Call the IRS at (800) 829-1040.

It’s true that the IRS uses computers to analyze returns for potential audits. But it’s not true that e-filing increases your risk. In fact, the IRS says the opposite: When you e-file, “Your chance of getting an error notice from the IRS is significantly reduced.”

It’s easier, cheaper, safer, and gets faster refunds – there’s no good reason not to file electronically.

Federal and state governments communicate, so if you get audited by one, expect to hear from the other. That’s a good reason to take just as much care in preparing a state return as the federal one.

Keep calm and carry on. An audit isn’t the end of the world. The IRS has a video series explaining the whole audit process in detail. Usually it’s a polite notice or phone call asking for some details about a few numbers on your return. It rarely requires an in-person interview or an agent showing up at your door.

If you do get selected for an audit, don’t forget about Form 911: the form to request help from the Taxpayer Advocate Service. The number might be the IRS’s idea of a joke, but the service isn’t. The taxpayer advocate service is an independent department of the IRS that helps people who can’t afford professional representation.

Have you ever been audited? Tell us about your experience below or on our Facebook page.


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3 People Who Fought the IRS & Won

When Mary Catherine Fontenot received a 1099-C form in the mail listing almost $30,000 in canceled debt income, she was alarmed. Would she owe taxes on all that income? But then she went into high gear and began researching her options. She came across a story about how discharged student loan debt can trigger a big tax bill on the Credit.com blog and wrote in the comments:

Do I have to file the 1099-C I received for $29,535? My student loans were discharged due to total disability and I don’t file taxes because Social Security is non-taxable….HELP!!!

Like many people who are no longer able to work due to total disability, Mary Catherine is on a limited income and worried there was no way she could pay the tax debt that would result if she had to include that amount in her taxable income.

Fast forward a few days and she had good news to report. Her research had paid off:

I stumbled on these same articles and looked up what the IRS calls ‘insolvent.’ I downloaded publication 4681 and did the insolvency worksheet, thus, finding out I qualify as insolvent!

She initially tried to get free help filling out Form 982 from an IRS-certified volunteer, but when they were unable to help, she turned to a tax preparation services and writes:

AARP couldn’t help me, I had to go to H&R Block in order to (fill out the paperwork to claim) insolvency. It cost me $157.75 but it worked; I don’t owe anything to the IRS! I’m very proud of myself. Thank you for your insight, it made me pursue what I thought would be the case regarding erasing my debt.

Mary Catherine’s story is inspiring, especially in light of the many complaints we have received from consumers who are struggling to understand how to deal with 1099-C forms they have received. Many of these readers are worried, and rightfully so, that debt problems they thought were finally behind them will come back to haunt them in the form of a debt to the IRS.

Don’t Back Down

Another reader who goes by the screenname “Dan” shared on the Credit.com blog how he fought back when he was sent a 1099-C for a very old debt:

I was able to get a couple of these resolved through the U.S. tax court.  It’s kind of a pain, but here’s what I did on one of the 1099-Cs I received.  I had a car repossessed in 2000, and after the bank auctioned the car off there was a difference of $12,000. They didn’t send me a 1099-C till 2011.

So I went ahead and filled my 2011 taxes ignoring the 1099-C. After a couple months I received a  ”statutory notice of deficiency” or its also called a 90-day letter. Now you have 90 days to petition the U.S. Tax Court, which I did…They settled with me without going to court after I explained that the bank didn’t follow the proper rules for filing a 1099-C. They were both done under the Court’s simplified small tax case procedure and cost $60. It’s a pain, but it seems to be the easiest way to beat a 1099-C.

A Fresh Start After Tax Liens

And it’s not just 1099-C problems that readers are tackling with success. Another reader who goes by the screenname “Dennis,” shared how he was finally able to get a tax lien removed from his credit reports thanks to the IRS Fresh Start initiative :

Had my lien removed immediately in 2011 (and) had zero problems doing it. I sent the forms to the Taxpayer Advocate folks and they handled it for me. It was new to them.

It was a simple process. The IRS sent me many copies (of the release) to send to my credit agencies and such. I also went to my local courthouse to get it marked as withdrawn on my local records as well. Process took about a month or so.

He has advice for other taxpayers who may be trying to resolve tax liens or other issues with the IRS:

Just HANG onto the copies for life. Never know when you will need them! When I got my tax lien back in 2005 it was because I didn’t file my taxes. I did my taxes and ended up getting all the money back from the IRS, (plus) interest so I hated it being on my report.

If you’re fighting a tax problem, you may feel like David up against Goliath. But we know how that story ended. Hopefully your battle with a tax issue will end in victory as well.


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What If You Can't Pay Your Taxes?

So you owe taxes--you owe big time--and you can't possibly pay the balance. You aren't alone: The number of Americans who are behind on their taxes is estimated to be anywhere from 8 to 20 million.

So what do you do if you can't pay your tax bill? You have a mix of options, depending on your situation, and the IRS would certainly recommend that you reevaluate whether you can pay or not.

"The IRS will encourage an individual to borrow on their credit cards or take out a home equity line of credit. The IRS wants to be paid, and paid first," says Mary Lou Gervie, director of forensic accounting and dispute services at Watkins Meegan, a CPA firm based in Bethesda, Md.

But if you absolutely can't pay, there are two main approaches the IRS suggests. Since everyone's situation is different and there's no one-size-fits-all strategy, it's best to consult a tax preparer or professional for advice before proceeding. Here are your options:

[Read: Are You Taking Enough Tax Deductions?]

The monthly installment. If you're behind on your taxes but feel you can pay eventually, this is probably your most appealing option.

The national media office at the Internal Revenue Service was unable to produce anyone for an interview, but the IRS did send information recommending that taxpayers who are behind either attach a letter with their tax return or fill out Form 9465--or better yet, simply go to www.irs.gov and fill out an online payment agreement application (www.irs.gov/Individuals/Online-Payment-Agreement-Application).

If you fill out the form online, you'll find out right away if you're eligible; going the snail-mail route generally takes 30 days or longer. If you owe $50,000 or less and can pay what you owe within six years, you can get a payment agreement, according to the IRS.

Why you might want to do this: Pretty obvious. You can pay the IRS monthly and no longer worry about what you owe the government.

What may be problematic: You still have plenty to worry about.

"Interest continues to accrue on the tax debt until paid in full," says Scott Estill, a former IRS senior trial attorney who is now in private practice in Littleton, Co., and specializes in helping taxpayers resolve issues with the IRS. He is also the author of "Tax This! An Insider's Guide to Standing up to the IRS" and several other tax publications.

Other than accruing interest, what's so bad about it continuing to add up? It may not end up being so dire, but it depends on the size of your debt, says Estill. "Depending upon the amount of the debt and the amount of the monthly payment, there may be situations in which negative amortization occurs, which is when the balance increases every month because the payment does not cover all of the interest on the debt," says Estill.

There are other negatives, he adds, explaining that the IRS can still file a federal tax lien against you and your property even with a payment plan in place, which can make it challenging to get a decent loan.

Estill also notes: "The IRS may require full financial disclosure of assets and liabilities, thus providing them with a road map to your assets if the installment agreement falls through by default." That is, due to missing payments.

Another concern, especially if you're self-employed and not seeing taxes removed from each paycheck: While you're paying your back taxes in a monthly installment plan, you still need to make payments on the current year so you don't fall behind. "It can be very stressful for people to come up with a fairly large amount every month," says Gervie. "It squeezes them."

In fact, if you make your monthly payment too high and fail to budget for taxes on the current year you need to pay, you might start a vicious cycle of owing the IRS indefinitely.

[Read: Lesser-Known (But Common) Tax Mistakes to Avoid.]

An offer in compromise. This is the second approach the IRS recommends if a taxpayer simply cannot pay what they owe.

In the words of the IRS, and the following is wordy but worth reading for anyone who might need to do this: "An offer in compromise allows you to settle your tax debt for less than the full amount you owe, if you meet strict requirements. This may be a legitimate option if you can't pay your full tax liability, or doing so creates a financial hardship. We consider your unique set of facts and circumstances: ability to pay; income; expenses; and asset equity. Generally, an offer will not be accepted if the IRS believes the liability can be paid in full as a lump sum or through a payment agreement. Before we can consider your offer, you must be current with all filing and payment requirements. Use the Offer in Compromise Pre-Qualifier to confirm your eligibility and prepare a preliminary proposal: http://irs.treasury.gov/oic_pre_qualifier/"

Why you might want to do this: Again, pretty obvious. You don't want to have this problem hanging over your head forever.

What may be problematic: You're spilling your financial guts to the IRS, says Estill. "Thus, the IRS will have an excellent road map to assets if the offer does not succeed," he says.

But there is also a statute of limitations the IRS has to collect a debt, and an offer in compromise extends that for an extra year, plus the time the offer was being reviewed, says Estill.

As Estill puts it, if you have a tax return for 2005 that was filed on April 15, 2006, your statute of limitations currently ends on April 15, 2016. But if your offer in compromise is rejected and it took the IRS six months to review the offer and reject it, it now has until Oct. 15, 2017, to collect the debt. So that's something to think about.

And yet another concern: "There is a five-year period of compliance required after the offer is accepted, and if the taxpayer has problems with paying a tax debt in the five years following the acceptance of the offer, it can cause the offer to be revoked and the taxpayer ends up back in the same position as pre-offer," says Estill.

Whatever you decide to do, file. It can be scary dealing with the IRS because, well, it's all-powerful. Nevertheless, file--even if you can't pay.

"It doesn't get better by hiding your head in the sand just because you don't have the money," says Benson Goldstein, senior technical manager of taxation for the American Institute of CPAs, which is headquartered in New York.

[See Avoid These 10 Common Tax Mistakes.]

Goldstein adds that if for no other reason, you should file to get that decade-long statute of limitations started.

Not that you want to drag out the experience of owing the IRS for 10 years, but if you don't file, it will take longer to resolve your tax issues. What you likely won't do is go to jail or lose your house from owing the IRS, says Estill. That is, as long as you're on the up and up when working with the agency.

"There has to be some intention to deceive or defraud the IRS before criminal elements come into play," says Estill.

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How to Earn Tax-Free Income (Really)

There are still ways to earn tax-free income. With the tax increases that took effect at the beginning of this year, such opportunities are more valuable than ever. This story is the first of our two-part series on some of the best federal-income-tax-free deals. Here goes.

Tax-Free Home Sale Gains

In one of the best tax-saving deals ever, an unmarried seller of a principal residence can exclude (pay no federal income tax on) up to $250,000 of gain, and a married joint-filing couple can exclude up to $500,000 of gain. Naturally, there are some limitations. You must pass the following tests to qualify.

Ownership Test: You must have owned the property for at least two years during the five-year period ending on the sale date.

Use Test: You must have used the property as a principal residence for at least two years during the same five-year period (periods of ownership and use need not overlap).

Joint-Filer $500,000 Exclusion Test: To be eligible for the maximum $500,000 joint-filer exclusion, at least one spouse must pass the ownership test, and both spouses must pass the use test.

Previous Sale Test: If you excluded gain from an earlier principal residence sale, you generally must wait at least two years before taking advantage of the gain exclusion deal again. If you are a married joint filer, the larger $500,000 exclusion is only available if neither you nor your spouse claimed the exclusion privilege for an earlier sale within two years of the later sale.

Prorated Exclusion

If you don’t qualify for the maximum $250,000/$500,000 gain exclusion due to failure to pass all the preceding tests, you may still qualify for a prorated exclusion (reduced) amount if you had to sell your home for job-related or health reasons or for certain other IRS-approved reasons. For instance, say you’re a married joint filer. You and your spouse used a home as your principal residence for only one year before having to move for health reasons. You would qualify for a prorated exclusion of $250,000 (half the $500,000 maximum allowance for a joint-filing couple).

Tax-Free Roth IRAs

Roth IRAs are still a great tax-saving deal. Roth accounts have two big tax advantages.

First Big Advantage: Tax-Free Withdrawals

Unlike traditional IRA withdrawals, qualified Roth IRA withdrawals are federal-income-tax-free (and usually state-income-tax-free too). What is a qualified withdrawal? In general it is one that is taken after the Roth account owner has met both of the following requirements:

You had at least one Roth IRA open for over five years.

You reached age 59 1/2, are disabled, or dead.

Second Big Advantage: Exemption from Required Minimum Distribution Rules

Unlike with a traditional IRA, the original owner of a Roth account (the person for whom the account is originally set up) isn't burdened with the obligation to start taking required minimum distributions (RMDs) after age 70 1/2 or face a stiff 50% penalty. Therefore, you can leave a Roth account untouched for as long you live. This important privilege makes the Roth IRA a great asset to leave to your heirs (to the extent you don’t need the Roth IRA money to help cover your own retirement-age living expenses).

Making Annual Roth Contributions

The idea of making annual Roth IRA contributions makes the most sense for those who believe they will pay the same or higher tax rates during retirement. Higher future taxes can be avoided on Roth account earnings because qualified Roth withdrawals are federal-income-tax-free (and usually state-income-tax-free too).

The downside is you get no deductions for Roth contributions.

So if you expect to pay lower tax rates during retirement, you might be better off making deductible traditional IRA contributions (assuming your income is low enough to permit deductible contributions), because the current deductions may be worth more to you than tax-free withdrawals later on.

The absolute maximum amount you can contribute for any tax year to a Roth IRA is the lesser of (1) your earned income for that year or (2) the annual contribution limit for that year.

Basically, earned income means wage and salary income (including bonuses), alimony received (believe it or not), and self-employment income. For 2013, the Roth contribution limit is $5,500 or $6,500 if you’ll be age 50 or older as of year-end. This assumes you’re unaffected by the AGI-based phaseout rule explained immediately below.

For 2013, eligibility to make annual Roth contributions is phased out between modified adjusted gross income (MAGI) of $112,000 and $127,000 for unmarried individuals.

For married joint filers, the 2013 phaseout range is between joint MAGI of $178,000 and $188,000.

Key Point: If your MAGI is too high for annual Roth contributions, consider converting a traditional IRA into a Roth account, as explained below.

Making Roth Conversions

A few years ago, an income restriction made individuals with MAGI above $100,000 ineligible for Roth conversions. The restriction ceased to exist in 2010. Now, even billionaires are eligible for Roth conversions. That is an important break, because conversion contributions are the only way to quickly get large amounts of money into a Roth IRA. However, it is important to keep in mind that a conversion will trigger taxable income. So you need to consider the federal income tax hit that will accompany a conversion. There may be a state income tax hit too. Consult your tax adviser before pulling the trigger on a conversion.

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