The Advantage Advisor

According to physicist Albert Einstein, “The hardest thing in the world to understand is the income tax.”  There are some ways to make preparing for tax time easier.

First, who has to file federal income taxes?  You must file if:

 

· You’re single, under 65 and your gross income was at least $8,750. 

· You’re married, filing jointly, both under 65 and your gross income was at least $17,500.

· You’re married, filing separately and your gross income was at least $3,400.

· You’re filing head of household, you’re under 65 and your gross income was at least $11,250.

· You’re a widow or widower under 65 with a dependent child, and your income was at least $14,100.

 

For tax year 2007, the standard deduction (the base amount of income not subject to income tax) for a single person is $5,350; married filing jointly: $10,700; married filing separately: $5,350; head of household: $7,850 and qualifying widow or widower: $10,700.  If you’re blind or over 65, you can deduct an additional $1,050. 

Anyone with a low-to-moderate income may qualify for the Earned Income Tax Credit (EITC).  According to the IRS, the EITC is available for taxpayers meeting certain criteria. You have to have a social security number, be a U.S. citizen and meet income eligibility requirements.

So, how do you file your income taxes? You have two options: through the mail or online.  If your gross income is less than $54,000, you qualify for Free File, a service offered by the IRS.  To use the Free File program, you have to go to the IRS web site. The IRS will connect you with tax preparation companies that will prepare your taxes electronically for free. 

The IRS also offers tax preparation help for senior citizens and anyone making about $40,000 or less annually.  The Volunteer Income Tax Assistance Program is usually set up in community centers.

Taxes must be filed by April 15, 2008, but you can get a six month extension by filing Form 4868. The extension does not give you extra time to pay your taxes if you owe the IRS money. 

There are common mistakes you should watch out for when filing your income taxes. Make sure you enter your Social Security number correctly and your deduction totals are correct. According to the IRS, one of the most common mistakes is entering withholding and estimated tax payments on the wrong line. You also want to make sure you sign and date your return.

Don’t forget you also have to file your state income taxes and pay your local wage tax if you haven’t already done so.

One of the most common questions after filing your federal tax return is, “Where’s my refund?” The IRS will either send you a refund check or you can have your money deposited directly into your bank account.  The IRS also has a way to track your refund.  On the IRS web site, there’s a link called “Where’s My Refund?”  You can track your refund by entering your Social Security number, filing status and the exact refund amount shown on your return. 

For some advice on what do with your refund, read “Paying off debt versus saving money” on the front page.

If you want more suggestions on what to do with your refund, call Advantage CCS and speak to one of our certified counselors. They can review your budget and suggest what makes the most sense for you.  Our toll free number is (888) 511-2227.

 

IRS tax assistance: (800) 829-1040

IRS on-line: www.irs.gov

EITC information: (888) 434-8248 or on-line at www.icanefile.org

 

Understand the deductions taken out of your gross pay.

Look at your most recent paycheck. Deductions should be itemized alongside figures for your gross and net (take-home) pay.  Deductions may include federal, state, and local taxes, health and dental coverage, union dues, or savings programs such as pensions and 401ks.

If you find yourself with a particularly large refund or shortage this year, you may want to adjust the number of allowances claimed for federal income tax withholding. Remember that in Pennsylvania, most areas have a local wage tax; if this tax is not deducted from your paycheck, you will have to pay it out of pocket. There may be a penalty if you don’t pay the tax quarterly.

 

Q: Should I pay someone to prepare my tax return or try to do it myself?

 

A: I would suggest you first try to do it on your own.

Doing it yourself keeps you in full control of your finances and allows you to work on your taxes at your own pace. You will see first-hand how various parts of your financial information may impact the total bottom line.

If you want to minimize your costs you can file a paper return for free. If you meet certain income guidelines, you may qualify for the IRS’s online “Free File” program (See “Preparing your income taxes.) Also, there is tax software available.

Income tax filing may be too complicated to do on your own, particularly if you are someone who has many deductions or multiple sources of income.

A tax accountant can give you a professional review of your tax situation. An accountant could possibly reduce your tax liability and provide suggestions for reducing taxes in the future.

An accountant is going to cost money. Being organized may reduce the cost of an accountant’s services.

For more information contact:

 

Many people donate money to their churches, religious organizations and charities. However, when money is tight, it isn’t always possible for families to make a financial contribution to their church or charity. If you are in a situation where you find it difficult to donate money, consider ways you can contribute without putting more strain on your wallet.

Volunteering your time is a great way to make a contribution. Many churches and charities need help. You could volunteer to participate in a ministry or to help teach a religious education class. Inquire with your church or charity about upcoming events where volunteer help might be needed.

If you feel very strongly about making a financial contribution, consider reducing the amount you usually contribute until you become more financially stable. Or, look for another area of your budget where you can trim expenses and reallocate that money for donations.

 

So, you’ve just filled out your taxes, and it looks like Uncle Sam will be writing you a big check this year. Or, maybe you got that promotion or new job you’ve been anticipating. Whatever the reason, you finally have some extra cash and now you’re wondering, “Do I pay down my debt or save?”

Unfortunately the answer isn’t quite black-and-white. Before you take any action, assess your financial situation. Review all your expenses and set up a budget to see how much extra you can set aside each month. Make sure that you are at least making minimum payments on your debts. If you are behind, a credit counseling session, and possibly a Debt Management Program, may be able help you get back on track with a regular payment schedule.

The first thing to tackle is an emergency fund. If you have a modest amount saved for unexpected costs such as car repairs, you won’t have to rely on your credit cards. Then you can make real progress on your balances.

Next, prioritize the types of debt you have. Long-term, low-interest loans such as mortgages and student loans, while important to pay on time, are not a priority to pay off more quickly. In fact, the interest you are paying is often tax-deductible. Credit cards and other personal loans should be paid off as soon as possible to cut down on the amount spent on interest and the length of repayments. Extremely high-interest debts, such as payday loans, should be paid off immediately.

Only after eliminating your high-interest debts should you worry about investing and saving for the future. The only exception is if your employer makes matching contributions to your 401(k). In this instance, you receive an immediate 100 percent return on your investment. You’ll also want to build a cushion of three to six months’ income in case of job loss or a medical emergency.