In reality, if you read the entire article, you’ll find that the odds of triggering an IRS audit are pretty much right in line with what I said in my article. What this other news article points out is that there are ways for the IRS to contact you that aren’t really audits. If you include these not-audits in the count of actual audits, then you get, not surprisingly, a much higher number of audits. In particular, the article focuses on ominous letters that IRS sends out to taxpayers, which are very much not audits. In fact, the letters cited in the article are about as far from an audit as you can get.

One of the letters informs taxpayers of a math error in their tax returns. This is not an audit. This is a notice that you messed up your math and therefore need to pay your taxes based upon the correct math. This scenario in no way results in anyone questioning your deductions or asking you to prove anything on your tax return with financial records. An audit is a re-examination of your tax return, not a request for you to fix a math error. Assuming you use tax software and take the 2011 standard deduction, there is a small chance of filing a return with a math error in it.

Another of the letters mentions the electronic system the IRS has to match reported data with the amounts listed on a tax return. I did allude in my post to the fact that the IRS matches information reported directly to it by your employer and other financial relationships with the amounts you actually report on your income tax forms. I even mentioned that this is an are where only a fool tries any funny business. Again, the result of this scenario is a letter in which the IRS in no way re-examines your return except to change the results of your calculations based upon the numbers that are reported to the Internal Revenue Service directly. This is not an audit either.

The point of my article about the low chances of being audited was not to encourage people to cheat on their taxes, nor to suggest that anyone cheat because the risk of audit is so low. Rather, I hoped to make filing income taxes a little less tense. People get so worked up about getting audited that they don’t take tax deductions or credits that they qualify for, for risk of being audited. That isn’t smart personal finance strategy, but neither is cheating.

Go into doing your taxes realizing that they can be a bit complicated, although there are tax prep software packages that help, but there is no need to walk around in fear of a potential audit. It might happen, but chances are it won’t. Just don’t freak out about it for no reason.

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Higher Tax Audit Chances? originally published at Finance Gourmet

Wait! Actually, tax day 2011 is actually on April 18th thanks to a Washington D.C. holiday being observed on April 15th.

That means all you slacker, procrastinators, and just plain still working on them taxpayers out there get a whole other weekend to work on your income taxes.

Don’t forget, you can also file for an extension. Everyone is permitted an automatic tax filing extension of six months by filling out and submitting Form 4868 – Application for Automatic Extension of Time To File U.S. Individual Income Tax Return.

You still have to pay your taxes by April 15th. An extension to file is not the same as an extension to pay.

Wondering what happens if I don’t file my income taxes?

If you can’t pay your income taxes, you can ask the IRS for a payment plan. There is a fee for setting up a payment plan, however. If you can’t pay them now, but will be able to pay within a month or two, don’t set up a payment plan. Just send the IRS a check for some of your tax bill with your tax return. The IRS will send you a bill for the rest in 30 to 60 days. Pay the balance then and the interest and penalties may be lower than the cost of setting up a payment plan (you’ll pay interest on a payment plan as well).

The current IRS interest rate for 2011 2Q is 4 percent.

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Taxes Not Due Today – April 18 not 15 originally published at Finance Gourmet

Small business tax deductions

Self-employment taxes, or SE Tax, is so high because it includes taxes that would usually be paid by the employer. In a typical employer-employee scenario, the employee pays 6.2% in Social Security Taxes. The employer withholds this amount from the employee’s paycheck. What many people don’t realize is that the employer also pays 6.2% in social security tax for the employee. (A 2011 tax deal reduced the employee portion to 4.2 percent, but it has only been extended for two months as of this update.)

A small business owner that files as a sole-proprietor is on the hook for the whole amount! The self-employment tax rate – sometimes called the SE tax rate – is 15.3%, which is 12.4% for social security taxes plus another 2.9% for Medicare taxes.

That 15.3% is on top of regular Federal Income Taxes. A successful small business owner in the 30% tax bracket, pays a blood curdling 45% tax rate. And, that is before adding in Medicare tax and state and local taxes.

In other words, a small business owner can easily end up paying 50% taxes!

Deduct Self-Employment Tax

The only good news in this whole equation is that half of the self-employment tax can be deducted when figuring adjusted gross income. Of course, this is small consolation because it results in under 2% tax savings. In order to keep from paying too much income tax, the entrepreneur needs to find bigger tax deductions and other small business tax breaks.

Depreciation Rates

Some of the biggest small business tax deductions come from the purchase of equipment for the business. Unfortunately, big purchases are often considered capital expenditures that must be depreciated over the “useful life” of the product. The best small business tax advice is to get accelerated depreciation whenever possible to get higher tax deductions now.

The only defense against high taxes from running a small business is to get as many business tax deductions as possible. The business lowers its profit for tax purposes, and passes along less income to the business owner on Schedule C – Profit and Loss From Business Operations.

Section 179 Deduction 2011

IRS Section 179 allows for better small business tax deductions and bonus depreciation in some cases. A section 179 expense allows for business expenditures to be deducted immediately, instead of depreciated. This is very useful for dated tax depreciation limits like those that apply to high-tech equipment.

For example, a freelance writer needs a netbook for his freelance writing business, with a Section 179 deduction, the small business owner deducts $200 in the year the netbook was purchased, instead of deducting a measly $40 per year for five years.

The Section 179 tax deduction rate was set to drop back to $134,000 after the special bonus depreciation and higher 179 limits increased in economic stimulus legislation expired after 2009. However, the new jobs creation legislation recently passed by Congress extends the higher ceiling for Section 179 tax deductions. The 2011 Limit for Section 179 Deductions is $250,000 for qualified capital expenditures.

Maximizing Section 179 Tax Deductions is important personal finance advice for any entrepreneur. You may also be interested in the IRS Mileage Rates for 2011 and the amount for the standard deduction 2011.

How do you save on your small business taxes?

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1. Section 179 Deduction 2009 Limits for Small Businesses, LLC, Sole-Proprietorships, and More
2. Standard Deduction 2011 and 2011 Tax Brackets

2011 Section 179 Deduction Limits for Small Businesses Taxes originally published at Finance Gourmet

On the other hand, when people choose to open their hearts and give money to help those in need, the U.S. Government thanks them in the form of the charitable tax deduction. Typically, donations to charity must be made by the end of the tax year, December 31st, in order to be deductible in that year. However, with the tragic earthquake that struck Haiti, Congress passed a law and the IRS implemented an exception to the rules for certain cash contributions for Haiti Relief.

In order to qualify, the donations must be considered “cash” donations (checks and wire transfers, and so on do count as cash). They must also be made to a qualified organization, typically a non-profit 503(c) organization in most cases. The donations must also satisfy all other normal requirements for deducting cash gifts to charities.

The deadline for making a cash donation for Haiti relief and being able to deduct it on your 2009 Federal Income Taxes is March 1, 2010 (today).

If you already made a donation, you can deduct it from your income taxes as well.

Unfortunately, one of the requirements for taking a tax deduction for a cash contribution to a charity is retaining proof of the contribution, most often, in the form of a receipt. However, in the aftermath of the Haiti tragedy, numerous new methods of making quick and easy donations to relief organization were created, including the ability to donate via text message.

A live television show broadcast nationwide ran numerous donation options across the bottom of the screen during the Haiti Relief telethon, including the option to donate $10 via text message. The $10 donation was then added to the phone bill of those who sent such a text.

Fortunately, the IRS has clarified that a phone bill from your cell phone company or other telecom provider will satisfy the record of proof requirement. This 2009 tax trick is particularly helpful for those of us who made donations upon seeing the devistation without pausing to think about the tax implications.

Be sure to hold on to your phone bill, however, for your records. If you follow smart financial advice about paying your bills automatically and opt-in for electronic statement delivery as one way to help prevent identity theft, then you need to log on to your account and print out the electronic statement to ensure that you have a printed record of your donation.

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Haiti Cash Donations Still Deductible Until March 1, 2010 (Today) originally published at Finance Gourmet

Unfortunately, many tax deductions are either too small to have very much impact on how much taxes you pay, or are too narrowly tailored to actually be a tax deduction that most people can take. Add into the mix the fact that many of the things that people “just know” are tax deductible, actually are not tax deductions until they are higher than a certain “floor”, and most searches for new tax deductible items end in dissapointment.

The good news is that some big items are deductible for almost everyone. These are the best tax deductions out there and they are good for high-income taxpayers and lower-income taxpayers alike. These include deducting mortgage interest, many educational expenses, and tax deductions for children, and the related child tax credit. One of the other biggies that can bring tax burden relief is deductible property taxes.

Deducting Property Taxes on Income Tax Forms

Many people are surprised to find out how much property taxes they pay on real estate, particularly on their primary residence. This is because a large percentage of home owners pay their property taxes via their mortgage loan.

That is, that the mortgage company collects an extra amount of money with each payment which it keeps in an escrow account. Over the year, that extra money adds up to enough cash to cover the amount of property taxes due. If it the escrow account comes up short, the mortgage company fronts the money and then increases the part of the monthly loan payment for escrow.

Even though the mortgage company handles paying the property taxes for you, it does so with your money, which means you are the still the one who paid the property taxes, and therefore, you are the one who gets the property tax deduction. Check the 1099-INT tax form the mortgage company is required to send you each year. Both the amount of mortgage interest paid for the year and the amount of property taxes paid annually should be listed.

Don’t forget about other property taxes too! The most common type of property taxes that are deductible, other than real estate property taxes, are the property taxes on cars. Automobile property taxes are deductible if they are computed based upon a percentage of the car’s value. In other words, the taxes that are levied by the state, county, or city that are a variable amount depending on how much the car is worth are deductible. Flat taxes and fees, such as a $25 annual fee,  that are the same amount no matter what the car is worth are not deductible.

Keep an eye on the mail for all tax forms, including 1099 Forms for real estate and brokerage and banking accounts. There are important tax numbers on each of these.

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How To Deduct Property Taxes originally published at Finance Gourmet

If you’re working at the last minute then you might be looking for last minute tax tips.  Of course, what many people really want to know is what happens if you don’t file your taxes by the deadline and is there anything I can do if I can’t get my taxes done?

The answer, actually, is surprisingly benign.  Filing late is a no-no and can result in all kinds of problems, not the least of which are penalties.  But, there is a ray of hope.  Instead of filing your tax return, file for an extension.  One extension is granted automatcially, so all you have to do is send in the form.  If you can’t get your taxes done by April 15, then make sure you file your request for extension in its place to avoid penalties, fees, and interest.

If you file for an extension when are your taxes due?  October 15th, a full six months later.  Whew, big relief eh?  You’ll need IRS Form 4688 Filing for an Extension.  It has instructions for using the paper form, or other electronic methods.

But, there is a catch.  Your TAX RETURNS are given an extension to September, your TAX PAYMENT is not.  In other words, if you end up owing money, you still have to pay it by April 15th even if you get an extension.  How are you supposed to know how much to pay if you haven’t done the tax return yet?  Guess.

Actually, estimate, is the correct answer, and make sure you are on the “over” side, not the “under” side.

For example, if you’ve partially completed your taxes and it looks like you would owe about $2,000 but you haven’t gotten all of your income entered in yet, then send Uncle Sam a check for $3,000, or whatever you are pretty sure will end up being too much.  You’ll get the extra back as a refund when you do finally file your income taxes which is an incentive to do them before September.

On the other hand, if it looks like maybe you’ll owe $2,000 and you are positive all of your income is accounted for, it’s just that you aren’t sure about some deductions, then send the IRS the two-grand and see if those deductions work out.  If not, no harm, no foul.  If so, you’ll get a rebate too.

If you still plan to beat the midnight deadline, make sure you know which, if any, post office in your area will be staying open late to collect tax returns.  With budget cutbacks, you can expect the post office to be a little less grand in how many collection locations it leaves open late.

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What Happens If You Don't File Your Taxes On Time originally published at Finance Gourmet

If you qualify for a deductible contribution to a traditional IRA either by meeting the income limits, or because you don’t have a retirement plan provided for you at work, then it can give you a much lower tax bill and you get to keep all of the money.  How many other deductions can claim that?

If you contribute $5,000 to your 2008 IRA, you would get a $5,000 tax deduction on your 2008 taxes.  Now, that is a deduction, not a credit, but in the 30% tax bracket, that works out to a $1,500 savings on your taxes.  For many tax payers, that is the difference between oweing money and getting a refund. You get an even bigger savings if you are a high income earner because your deductions are more valuable due to your high tax bracket.

It gets even better.  If you are married filing joint, and you can make a similar deductible contribution for your spouse, that’s $10 grand that you can sock away, and now you will save $3,000 on your taxes!

If you have an emergency fund, or some cash sitting in a brokerage account after selling some investments or real estate this year thanks to the stock market downturn, this is a huge opportunity to both earn some money on your cash ($3,000 savings on your taxes is like earning $3,000 on your $10,000 investment) and to get future growth and earnings tax defered.

You have until April 15 to mail your contribution to your broker, so there isn’t necessarily any rush, but you don’t want to be caught up opening a new IRA account if you don’t already have one.  So, open an IRA account NOW, and then worry about getting the $5,000 or $10,000 into it later.

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Last Minute Tax Tip – Make Your 2008 IRA Contribution Now originally published at Finance Gourmet

The IRS offers taxpayers a way to file their taxes online for free without having to buy any tax software like TurboTax or TaxCut.  Just go to the IRS website (www.irs.gov) and click on e-file to get started.

The free government e-file system allows taxpayers with incomes up to $54,000 to file tax returns for free online.  If you make more than $54,000, you are out of luck and will have to go another route to file your taxes.

When you are done, you can pay electronically online too.

Pay Your Taxes With Credit Card

Thinking about paying your taxes online electronically with a credit card to earn a free rewards trip?

That might not be the best move.  Sure you can earn points or miles on your credit card rewards programs, but it won’t be cheap.

The two major online payment processors, Official Payments (which is not official in anyway, it’s just their sneaky brand name), and 1040.com charge electronic filers 2.49% to make federal income tax payments via credit card.  That means a $500 payment could cost you an extra $12.45 just to use your credit card.  That’s worse than the highest ATM fees you’ll find in a bar.

That credit card fee also means that the value of any points or miles you might be getting are wiped out too, since most credit card reward programs earn points that are redeemed at about 1%.  Most cash back cards pay 1% as well, so paying a 2.49% fee to earn 1% doesn’t make much sense.

The exception to this rule is if you are in some sort of special intro period with your credit card rewards program or cash back program.

For example, if you have a new cash back credit card that pays 3% cash back on everything for the first 90 days, then you can actually come out ahead 0.51%.  Not big savings, but you do get the convenience of paying electronically for free.  However, if your cash back program has an annual limit and you expect to be hitting it, don’t waste your cash back eligibility on just getting a measly 1/2 percent.

Want MORE Tax Tips Tricks and Strategies?

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E-File 2008 Return Free – Tax Tips originally published at Finance Gourmet

IRS 2009 Standard Mileage Rate

Every year, the IRS sets the “optional standard mileage rates” that can be used to calculate the deductible cost of driving an automobile.

Contrary to popular belief, this number in no way legally binds anyone to paying this amount to reimburse you expenses you incur while driving your vehicle.  Most companies voluntarily use the same standard as it makes it easier to defend to employees (Hey, don’t look at us, the IRS sets the rate) and also because then the amount matches up if they ever have to defend the deduction they take for such a reimbursement. 

The new 2009 IRS Standard Mileage Rate is:

• 55 cents per mile for business miles driven
• 24 cents per mile for medical or moving purpose miles
• 14 cents per mile for charitable purpose miles

The charitable mileage rate isn’t actually set by the IRS, it is codified in law, so it hasn’t changed from 2008 and won’t unless Congress passes a law changing the rate.

Mid-Year Mileage Rate Change

Last year, the IRS adjusted the reimbursement rate in mid-year due to higher gasoline prices.  There is no requirement that they do so this year.

More Than Gas

One thing to always keep in mind, is that the mileage rate is not meant to cover the amount spent on gas.  While gas prices are a significant factor in the number, the mileage rate is also intended to account for wear and tear and depreciation of the automobile.

More IRS 2009 numbers coming soon.  Grab the RSS Feed to keep up to speed.

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2009 Tax Tips originally published at Finance Gourmet