Hidden Pitfalls This Tax Season
The count down to that feared April 15 deadline has begun. And much like the countdown to the end of the Mayan Calendar, a number of residents are scrambling to prepare.
Continuing with our tax tips articles, KHTS spoke with Michael Green, enrolled agent and certified financial planner, about how individuals can avoid costly mistakes this tax season.
1. Extension- Filing an extension on your tax return only allows the filer extra time to gather paperwork. If money is owed to either the State or the Federal Government there will still be fees and penalties associated with that filing.
"Extension to file is not an extension to pay," said Green. "I suggest people file a return and the extension, and try to pay what they can to avoid penalties and interest."
If individuals chose to skip filing returns this year because they may owe and can't afford to pay the amount, the money owed will be compounded in future returns. In addition, large fees and penalties may be assessed in future filings.
2. Student Tax Credit- As part of the American Recovery and Reinvestment Act, more students and parents will qualify in 2009 for the American Opportunity Credit. The new credit expands the Hope Credit to broaden qualifications.
This credit can be applied to students if they file separate from their parents and claim independent.
Parents can also apply for the credit if they are claiming the student as a dependent.
Green points out that it is important to know what kids are claiming to make sure both parents and kids don't apply for the credit.
3. Unemployment/Disability- Those who received unemployment benefits will not be taxed on that money up to $2,400.
"Filers will be taxed on any amount over $2,400, but they will only be taxed on the amount over, not the entire sum," said Green.
Disability and Workers Compensation are different from unemployment because they are not taxable.
4. Social Security- "A common misconception is that once you reach full retirement age you won't be taxed," said Green.
The misconception comes from the actual age the person retired and government formulas. If the person retired early, they may be responsible for the amount of money that is over the annual limit.
"Social Security is always potentially taxable based on income," said Green.
Because many of these tax laws vary and have strict guidelines Green recommends talking with a tax professional to make sure to maximize your return.
He also says that the IRS is streamlining processes within their systems using computer matching, and they are issuing increased numbers of audits. To avoid this, make sure all paperwork being filed matches the paperwork that will show up in the IRS's system.
To get more tips from Michael Green click here.