Federal Tax Return Preparation - Should I File On My Own Or Hire An Expert?
Sometimes people need help with their taxpreparation. Most of the time, people don't have the time or interest to dig through all the details of completing their federal and state tax preparation documents.
The advantage of hiring an tax expert or a firm is that you will not have to worry about filing the federal or the state returns. You simply have to collect all the documents (previous year's returns, W-2s, 1099's, receipts etc) and forward them along. Depending on your choice of tax preparation there will be an expense associated with it. A lot of experts charge you a basic fee for filing along with charges for any additional forms that they file depending on your situation.
A useful tip - If you anticipate that your returns aren't complicated consider using tax preparation software or file taxes online. In this way, you will be able to use the 'basic' versions of these tools for tax preparation. When it comes time to file, you can choose to file electronically or print the completed forms and mail these to the IRS. Depending on your situation, you can make the appropriate choice.
Even though it will be more expensive to hire a tax preparer people will feel that this method is more cost-effective, because it helps relieve some of the anxiety associated with tax preparation. Besides giving you peace of mind this will also help save time to do more interesting stuff.
The good news about preparing federal taxes is that the rules are the same country-wide. Its not like state returns where there are a variety of rules that you have to keep in mind before filing your return. So you can see that preparation of federal taxes are the same for everybody regardless of the state of residence or where they are living at the moment.
Wednesday, March 5, 2008
Federal Tax Issues When Selling Your Home
Once you make the decision to sell your home, there are a bevy of issues you need to keep in mind. As with most anything involving money, taxes are one such subject.
The real estate market is definitely pulling back. There is no longer any dispute about that. Still, people that have owned their homes for more than three years are sitting pretty because property appreciation was on steroids for so long. If you are one of these people or have owned your home even longer, you are sitting on a big profitable nest egg. So, what happens when you sell it?
The sale of a home is viewed as a business transaction for the most part by the IRS. Simply put, is there a profit? If there is, the profit is going to be taxed. Unlike what you would expect with a business, the tax is going be a capital gain version. The tax will be based on the sales price minus the original purchase price plus any improvement costs. Let's look at a simple example.
Assume I purchased a home in San Diego in 1995 for $300,000. I spent $50,000 over the years doing improvements. In 2008, I decide to sell and move to a less crowded area of the nation. I sell my home for $600,000. How do I look on taxes? Well, I have a profit of $250,000 [$600,000 - $350,000].
So, do I have to pay capital gains tax on the $250,000? Nope! There is a great exemption built into the tax code. As long as we are talking about my main home and I haven't sold in the previous 2 years, I can claim an exemption. For a single person, the exemption is $250,000. For married couples, it is $500,000. Not bad, eh?
This exemption is not a one time affair. It can be used time and again over the years, so you should be planning your home purchase and sales accordingly. Avoiding paying capital gains tax on hundreds of thousands of dollars definitely calls for taking the time and effort to plan out the process.
The real estate market is definitely pulling back. There is no longer any dispute about that. Still, people that have owned their homes for more than three years are sitting pretty because property appreciation was on steroids for so long. If you are one of these people or have owned your home even longer, you are sitting on a big profitable nest egg. So, what happens when you sell it?
The sale of a home is viewed as a business transaction for the most part by the IRS. Simply put, is there a profit? If there is, the profit is going to be taxed. Unlike what you would expect with a business, the tax is going be a capital gain version. The tax will be based on the sales price minus the original purchase price plus any improvement costs. Let's look at a simple example.
Assume I purchased a home in San Diego in 1995 for $300,000. I spent $50,000 over the years doing improvements. In 2008, I decide to sell and move to a less crowded area of the nation. I sell my home for $600,000. How do I look on taxes? Well, I have a profit of $250,000 [$600,000 - $350,000].
So, do I have to pay capital gains tax on the $250,000? Nope! There is a great exemption built into the tax code. As long as we are talking about my main home and I haven't sold in the previous 2 years, I can claim an exemption. For a single person, the exemption is $250,000. For married couples, it is $500,000. Not bad, eh?
This exemption is not a one time affair. It can be used time and again over the years, so you should be planning your home purchase and sales accordingly. Avoiding paying capital gains tax on hundreds of thousands of dollars definitely calls for taking the time and effort to plan out the process.
Wednesday, February 20, 2008
Do I Have To File a Federal Income Tax Return
You must file a federal income tax return if you are a citizen or resident of the United States or a resident of Puerto Rico and you meet the filing
requirements for any of the following categories that apply to you.
1. Individuals in general.
(There are special rules for surviving spouses, executors, administrators, legal representatives, U.S. citizens and residents living outside the
United States, residents of Puerto Rico, and individuals with income from U.S. possessions.)
2. Dependents.
3. Children under age 18.
4. Self-employed persons.
5. Aliens.
The filing requirements for each category are explained in this chapter.
The filing requirements apply even if you do not owe tax.
Even if you do not have to file a return, it may be to your advantage to do so. See Who Should File, later.
Caution
File only one federal income tax return for the year regardless of how many jobs you had, how many Forms W-2 you received, or how many
states you lived in during the year.
Individuals—In General
If you are a U.S. citizen or resident, whether you must file a return depends on three factors:
1. Your gross income,
2. Your filing status, and
3. Your age.
Gross income. This includes all income you receive in the form of money, goods, property, and services that is not exempt from tax. It also includes income from sources outside the United States (even if you can exclude all or part of it).
Community income. If you are married and your permanent home is in a community property state, half of any income described by state law as community income may be considered yours. This affects your federal taxes, including whether you must file if you do not file a joint return with your spouse.
Self-employed individuals. If you are self-employed, your gross income includes the amount on line 7 of Schedule C (Form 1040), Profit or Loss
From Business; line 1 of Schedule C-EZ (Form 1040ez ), Net Profit From Business; and line 11 of Schedule F (Form 1040), Profit or Loss From
Farming. See Self-Employed Persons , later, for more information about your filing requirements.
Caution
If you do not report all of your self-employment income, your social security benefits may be lower when you retire.
Filing status. Your filing status depends on whether you are single or married and on your family situation. Your filing status is determined on the last day of your tax year, which is December 31 for most taxpayers.
requirements for any of the following categories that apply to you.
1. Individuals in general.
(There are special rules for surviving spouses, executors, administrators, legal representatives, U.S. citizens and residents living outside the
United States, residents of Puerto Rico, and individuals with income from U.S. possessions.)
2. Dependents.
3. Children under age 18.
4. Self-employed persons.
5. Aliens.
The filing requirements for each category are explained in this chapter.
The filing requirements apply even if you do not owe tax.
Even if you do not have to file a return, it may be to your advantage to do so. See Who Should File, later.
Caution
File only one federal income tax return for the year regardless of how many jobs you had, how many Forms W-2 you received, or how many
states you lived in during the year.
Individuals—In General
If you are a U.S. citizen or resident, whether you must file a return depends on three factors:
1. Your gross income,
2. Your filing status, and
3. Your age.
Gross income. This includes all income you receive in the form of money, goods, property, and services that is not exempt from tax. It also includes income from sources outside the United States (even if you can exclude all or part of it).
Community income. If you are married and your permanent home is in a community property state, half of any income described by state law as community income may be considered yours. This affects your federal taxes, including whether you must file if you do not file a joint return with your spouse.
Self-employed individuals. If you are self-employed, your gross income includes the amount on line 7 of Schedule C (Form 1040), Profit or Loss
From Business; line 1 of Schedule C-EZ (Form 1040ez ), Net Profit From Business; and line 11 of Schedule F (Form 1040), Profit or Loss From
Farming. See Self-Employed Persons , later, for more information about your filing requirements.
Caution
If you do not report all of your self-employment income, your social security benefits may be lower when you retire.
Filing status. Your filing status depends on whether you are single or married and on your family situation. Your filing status is determined on the last day of your tax year, which is December 31 for most taxpayers.
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