But this year’s isn’t the only tax bill you should be thinking about. The planning and choices you make now could have a significant impact on how much you can be sheltering from Uncle Sam next year. Some decisions should be part of a normal yearly financial assessment and some you will need to address in the next month or so before you miss the boat altogether.

Here are five questions that you should be focusing on right now for 2010.

1. How much should I be contributing to my flexible spending accounts?

Health care and dependent care flexible spending accounts are some of the best deals the government has going.

These plans allow you to set aside money to pay for qualifying expenses free from federal taxes. For someone who places the IRS limit of $5,000 per year into a dependent care flexible spending account, that could mean hundreds of dollars in tax savings. But be careful how much you commit. Any unused money left in the account at the end of year is forfeited.

Individuals are generally only able to sign up for the flexible spending account as part of their employer’s open enrollment period so if you don’t sign up for it now you’ll have to wait until next year.

2. Should I choose the regular or high deductible health plan at work?

This one requires you to do some forecasting of what your medical expenses will be. Unfortunately, that will always be more art than science.

People are enticed by the high deductible plan due to the lower monthly premium they’ll have to pay out of pocket. The drawback is that you’re on the hook for a higher deductible before insurance starts covering your expenses. One medical procedure or trip to the hospital and you could find yourself with some significant bills.

If you’re young, healthy, and don’t expect a need for health services in the next year, the high deductible plan may be a good way to keep a few extra dollars in your pocket.

This is another choice you’ll need to make before your employer’s open enrollment period ends.

3. How much can I contribute to my 401(k)?

In terms of retirement planning, the answer to the above question should always be “as much as possible”. The same answer also applies when it comes to tax planning.

Traditional 401(k)s have the added benefit of reducing your taxable income. The IRS sets an annual 401(k) contribution limit of $16,500 (and higher for those over 50) so someone in the 25% bracket could save over $4,000 on their taxes by maxing out their 401(k).

If the prospect of maxing out your 401(k) seems too much, try the incremental approach of raising your contribution by 1% every three months until you get there.

4. Do I have any losers among my investments?

In light of the recent recession, odds are you have some. When selling them, the losses can be used to offset any capital gains you’ve incurred during the year or some of your taxable income.

The sale needs to be made in the year you want to take the loss for tax purposes. Preparing a plan ahead of time can help put some of those losses right back in your pocket.

5. How much do I plan on donating to charities?

Making a donation to charity may be the easiest way to lower your tax burden.

If you itemize, the money you give will offset any taxable income you have. Donations could be in the form of cash, cars, stock or any of a number of other things that a charitable organization will accept.

Give a gift to charity and keep a gift for yourself in the form of a tax write-off. What better deal is there than that?

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The letter was a notice to let us know that we now owe the IRS $485.07 because

We changed the amount of the recovery rebate credit you claimed on Line 70 of your Form 1040 because the amount entered was computed incorrectly.

While it isn’t as bad as an audit letter, it still made me feel that I didn’t something wrong with our tax return, whether it’s my fault or not. So I went back to our 2008 tax form and found on Line 70 “Recovery rebate credit“, the amount entered was $483. The problem is I didn’t enter that amount myself. It was TurboTax, the tax software I used to prepare our tax returns, which determined the amount of rebate credit we should get for us What is more frustrating is that I can’t seem to figure out how $483 is calculated even after going through related worksheets. Actually, the only information I can find that’s related to the recovery rebate credit in the return was on the Federal Information Worksheet, which has the following two lines under Recovery Rebate Credit Information:

• Estimated economic stimulus rebate calculated on your 2007 TurboTax return: $384;
• Economic stimulus payment received (before offset): $201;

The difference of $183 between the actual amount of economic stimulus payemnt we received and the amount TurboTax calculated is the penalty for not paying enough estimated taxes in 2007. Maybe I made a mistake about “before offset”, but somehow the numbers just don’t add up: How exactly is the $483 credit calculated anyway?

What should I do next? Pay the amount we are told we owe? Or disput the correction?

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Speaking of refund, if you are expecting one from the IRS, you probably wonder when it will arrive (I always want to know when it will come if there’s money for me ). If you have already made plans for the refund and want to know the status, whether it will come in as a check or be directly deposited to your bank account, there’s an easy way to do so. It is the Where’s My Refund tool from the IRS.

To check and track your refund status using Where’s My Refund, you will need to provide the following information:

• Your Social Security Number (or Individual Taxpayer Identification Number);
• Filing status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er))
• The exact whole dollar amount of your refund

If you filed electronically, which you should if the IRS owes your money, the refund information will be available 72 hours after receiving confirmation from the IRS. If you filed by mail, the the status will be updated 3 to 4 weeks after the return is mailed.

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With that being the case, it seems paying taxes by credit cards can still be an option, because fees charged by service providers, Official Payments and Link2Gov, are actually deductible, believe it or not. According to an IRS new release a couple of days ago, “credit or debit card convenience fees charged for paying federal individual income taxes electronically are deductible for some taxpayers who itemize.”

That’s a good news. However, you can’t just deduct the fee when filing tax returns:

Not everyone who pays the fees will be able to deduct them. Taxpayers first must be eligible to file a Form 1040 Schedule A to itemize their expenses. And, taxpayers must have enough miscellaneous expenses to exceed the 2 percent threshold. These expenses include items such as tax preparation costs, job search expenses and unreimbursed employee expenses.

So you will be out of luck if you do have enough miscellaneous deductions to go over the 2% threshold. Nonetheless, it’s still good to know that the IRS is relaxing previoius rules on this matter.

The deduction can only be claim for the year when the fee is paid. If you are using credit cards to pay your 2008 tax this year, you can only deduct the fee when filing your 2009 tax returns.

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The question isn’t really whether you can use plastics to pay taxes or not, but rather whether paying taxes with credit cards is worth it or not.

How Much Does It Cost to Pay Taxes by Credit Cards?

The IRS has two authorized partners which provide the convenience service of letting taxpayers pay taxes by credit cards. One is Official Payments and the other is Link2Gov. You can a major credit card, such as MasterCard, Visa, Discover, and American Express, to pay federal and state income taxes (Link2Gov only allows you to pay New York, North Dakota, Kentucky, Alabama, Kansas state taxes while Official Payments have all states available). However, as you can imagine, the service is not free. Both of them charge a convenient fee of 2.49% of the total payment with the minimum of $1. Unlike other retailers who pay the credit card transaction fees when customers use credit cards to make a payment, the government will not pay the fee, so eventually it comes down to the taxpayer. For example, if you owe $5,000 federal tax, the total payment will be $5,124.50 ($5,000 federal tax payment plus $124.50 convenient fee).

Is It Worth It to Pay Taxes by Credit Cards?

The answer to this question depends on your particular situation. For the past several years, I owed a large amount of federal tax every year, but I never used a credit card to make the payment. The reason is I don’t have a credit card with rewards outweighing the penalty (I consider the 2.49% convenient fee as penalty). Sure, I have credit cards that give me 3% cashback (such as the Chase Freedom card), but the cashback is tied to certain categories (like gas and groceries) and tax isn’t one of them. The most I can get from a credit card for any purchase is 2% from Fidelity 529 College Rewards card. That’s not enough to cover the cost. I know in the past there were cards (Citi CashReturns Card) offer something like 5% cashback during a promotional period. As far as I know, no card today will give me even 3% rebate on any purchase, even if it’s a promotional rebate rate (there are cards, for example, the Discover More card, give you a bonus after spending certain amount, but you need to make sure tax payment is treated as purchase).

So it seems that unless you have a credit card with a very generous rewards program (please let me know which one it is), paying taxes with credit cards isn’t worth it if you are looking for rewards. However, that doesn’t mean you should absolutely not use credit card to pay taxes. Despite the fee, using credit cards to pay taxes give you some breathing room if you can’t come up with the money to pay the taxes you owe on April 15 (you can always request a tax extension). Afterall, paying a fee to pay taxes on time is better than late without an extension.

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I got my TurboTax software and all the files/documents I needed and started our taxes in early February, but haven’t touched them in more than a month after I found out that, like the past couple of years, we will again owe a large amount of taxes. So there’s no motivation for me to finish it early. So I will probably do what I usually do: wait till April 15 to send out my returns by mail.

Have you filed your 2008 taxes? If not, here’s some information on where to shop for the tax software at the last minute or get answers for your tax questions.

Where to Buy Tax Software

In case you still haven’t gotten your tax software yet, there are a few places you can buy either TurboTax or TaxCut, though the deals that let you get the software for free or at a very low price  after rebates are probably gone.

• Staples: At Staples.com, you can buy TurboTax Deluxe w/State & E-File 2008 for $59.99 and get 6 computer/internet security software for free; or buy H&R Block Taxcut Premium + State & E-File 2008 for $49.99 and get 6 security software free after rebates.
• Buy.com: TaxCut 2008 Premium Federal +State + E-file for $39.99 and Intuit TurboTax 2008 Deluxe for $56.99. Both shipped for free.
• Newegg.com: TurboTax Deluxe Federal + State + E-File 2008 for $39.95 and H&R Block TaxCut 2008 Premium Federal + State + e-file for $49.99 with free shipping.
• Walmart.com: TurboTax Deluxe Federal + State + Federal E-File 2008 for $49.88 and H&R Block TaxCut 2008 Premium Federal + State + E-file for $49.99.
• Amazon.com: TurboTax Deluxe Federal + State + E-File for $41.99 and TaxCut 2008 Federal+State+Efile for $35.99. Both are download versions, so you can get them right away.
• Costco.com: TurboTax Deluxe 2008 Federal + State + E-File for $36.99.
• H&R Block and Intuit: Premium Federal + State + E-file for $49.95 or TurboTax Online Deluxe Federal + State for $89.90.

Where to Find Tax Advices

I found that the best places to get free tips and advices on taxes is, of course, IRS.gov. At IRS.gov, you can find daily tips for most issues you will have with taxes as well as latest information on American Recovery and Reinvestment Act of 2009. IRS also developed different “What if” scenarios for people facing difficult times financially. If you adjusted gross income in 2008 is $56,000 or less, you can even file your federal return for free with IRS Free File. IRS has reported that visitors to the website has increased 24% this year compared to a year ago. So be sure you check it out.

In addition, there are some other information you probably can use as well:

• Check out 2008 tax law changes to understand what and how these changes will affect your taxes;
• Before filing your taxes, go through the tax preparation checklist;
• If you haven’t received your tax rebates yet, then see  how to claim recovery rebate credit on 2008 tax return;
• And don’t forget the 11 most overlooked tax deductions.

*Photo from BuffaloBloodDonor

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The deduction is limited to the state and local sales and excise taxes paid on up to $49,500 of the purchase price of a qualified new car, light truck, motor home or motorcycle.

The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.

New cars purchase between February 16, 2009 and January 1, 2010 are eligible for this special tax break for tax payers, regardless whether he/she itemizes deductions or not. This tax break, however, can’t be claimed on 2008 return.

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If you took any premature distributions from your IRA or 401(k) last year, there are things you need to know about your withdrawals and possible tax consequences. To help better understand early withdrawal from retirement savings accounts, the IRS recently published some facts about early withdrawals:

1. Payments you receive from your Individual Retirement Arrangement before you reach age 59.5 are considered early or premature distributions.
2. Early distributions are usually subject to an additional 10% tax.
3. Early distributions must be reported to the IRS.
4. Distributions you rollover to another IRA or qualified retirement plan are not subject to the additional 10% tax if the rollover is completed within 60 days after the distribution.
5. The amount you rolled over is generally taxed when the new plan makes a distribution.
6. If you made nondeductible contributions to an IRA and later take early distributions from that same IRA, the portion of the distribution attributable to those contributions is not taxed.
7. If you received an early distribution from a Roth IRA the distribution attributable to contributions is not taxed.
8. If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.
9. There are several exceptions to avoid the additional 10% penalty on early withdrawals, such as when the distributions are used for purchase of a first home, certain medical and educational expenses or if you become disabled (check out IRS Publication 590 for more exceptions).
10. More information about early distributions from retirement plans and the additional 10% tax can be found in IRS Publication 575, Pension and Annuity Income and Publication 590, Individual Retirement Arrangements (IRAs).

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• Individuals who did not receive an economic stimulus payment.
• Those who received less than the maximum economic stimulus payment in 2008 because their qualifying or gross income was either too high or too low.
• Families who gained an additional qualifying child in 2008.
• Individuals who could be claimed as a dependent on someone else’s tax return in 2007, but who cannot be claimed as a dependent on another return in 2008.
• Individuals who did not have a valid Social Security number in 2007 but who did receive one in 2008.

Looks like we met the second criterion In order to get the credit, you will have to do it right on your 2008 federal tax return form. To help taxpayers correctly claim the Recovery Rebate Credit, the IRS has published a few tips to make the process easier for taxpayers:

1. Get your notice. Check the amount listed on Notice 1378, which the IRS mailed last year to individuals who received the economic stimulus payment.

2. Visit IRS.gov to find the amount. If you don’t have your Notice 1378, go to the “How Much Was My 2008 Stimulus Payment?” tool that is available on the IRS Web site, IRS.gov. This tool can provide the correct amount in a matter of a few seconds.

3. Call the IRS at 1-866-234-2942. If you don’t have Internet access, call the IRS. After a brief recorded announcement, select option one to find out the amount of your economic stimulus payment. You will need to provide your 2007 filing status, Social Security Number and the number of exemptions claimed on the tax return.

4. Keep the amount handy. With the amount of last year’s economic stimulus payment in hand, you will be able to enter the figure on the recovery rebate credit worksheet or in the appropriate location when your tax preparation software requests it. This number will not appear on your actual tax return but is vital to ensure the accurate determination of the recovery rebate credit amount.

5. Trust the software or the worksheet to get it right. Tax preparation software will automatically and correctly calculate the amount of the rebate recovery credit for you. The software will also properly report the credit on your tax return. If you are filing a paper return, the worksheet will guide you in calculating the proper amount of the credit. The recovery rebate credit should be reported on Line 70 of Form 1040, Line 42 of Form 1040A or Line 9 of Form 1040EZ. In order to avoid an error, use extra care when responding to the software questions or when completing the worksheet. Do not enter the stimulus payment directly on your return.

6. Most taxpayers won’t qualify for more. For most taxpayers, the correct entry for the recovery rebate credit will either be blank or zero because they have already received the money as a stimulus payment. If you complete the worksheet, and there is any question about the amount that should be reported for the recovery rebate credit, you or your preparer should enter a zero on the appropriate line above. For most people this will be the correct amount, and for the others the IRS will determine whether a recovery rebate credit is due and, if so, how much. If the IRS calculates a different credit amount than is reflected on your return, you will receive a notice that alerts you to the change.

I am using TurboTax to file our tax return this year, as we did in the previous couple of years. I haven’t got to the step to claim the credit it yet, but, like the IRS suggested, I am going to trust the software to get it rigth

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TurboTax has an online comparison page which lists features of each product to help you choose the right one . Highlights of each version are as follows:

• TurboTax Federal Free Edition – 1040EZ & Simple Returns
  - FREE preparation, FREE printing, and FREE efiling for your simple tax return. Learn more about TurboTax Federal Free Edition.
• TurboTax Deluxe (the version I am giving away) – Maximizes Your Deductions
  - Searches your tax return for over 350 tax deductions
  - Helps you get full value for donations for a bigger tax refund. Learn more about TurboTax Deluxe.
• TurboTax Premier – Investments & Rental Property
  - Calculates gains and helps you deduct investment losses
  - Searches for tax-saving rental property deductions. Learn more about TurboTax Premier.
• Home & Business – Personal and Business Tax in One
  - Uncovers refund-boosting business write-offs
  - Finds industry-specific deductions for bigger tax savings. Learn more about Home & Business.

Now that you know the differences among those products, do you think TurboTax Deluxe, the version I am giving away, is the right one for you? If so, why not enter to win a free copy ?

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• Economic stimulus payment: The economic stimulus payment is NOT taxable;
• Standard deduction increase: For 2008 tax year, married couple filing jointly will get $200 more in standard deduction over 2007, while single will get a $100 increase;
• First time homebuyer credit: If you bought your first house after April 9, 2008, you will receive up to $7,500 credit. The credit, however, is only good till June 30, 2009;
• Retirement account contribution limits: The AGI (adjusted gross income) phase out range for Roth IRA for married couple filing jointly is from $159,000 to $169,000; for singles, it is from $101,000 to $116,000;
• Exemption: The personal and dependency exemption for 2008 is $3,500, $100 than 2007;
• Dividend taxes: 0% dividend taxes for married filing jointly with $65,100 taxable income and singles with $32,550;
• Kiddie tax: Investment income greater than $1,800 is taxable if the child is under 18.

The IRS publication also includes changes in AMT exemption, mileage rates adjustments, earned income tax credit, and self-employment taxes. Check out the publication for more details on these tax law changes.

Of course, if you are using a tax preparation software, such as TurboTax or TaxCut, to file your taxes, then you don’t have to worry about these changes yourself, because the software will take care of them for your. Speaking of tax software, do you already have one for this year? If not, you can enter to win a copy of TuboTax Deluxe or TaxCut Premium 2008.

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Early this month, I read an article on The Wall Street Journal that discussed some year-end tax considerations. Two items in the article are directly related to your investments:

• Write off your losses: By getting rid of your losers after a dismal year, you can offset any capital gain from selling winning stocks/funds or from dividend or capital gain distributions. Even though stocks and funds are most likely to lose money this year, many will still make distributions that are subject to taxes. And if you have big losses (exceeding the $3,000 limit) this year, you can even carry them over to 2009 and beyond, depending on the size of your losses.
• Deal with worthless stocks: Have your bought any stocks in 2008 that are now worthless? As matter of fact, I did have a few in this category, including Washington Mutual (WM) and Freddie Mac (FRE). On one hand, it’s unfortunate that these stocks aren’t worth anything now. On the other hand, it’s lucky that I didn’t bet too much on them, so the losses are tolerable. But for those stocks, what should I do with them? For me, since I bought them in my regular, taxable brokerage account, I can declare them as “worthless” on Schedule D of Form 1040, according to the article.  That’s what I am going to do

As there are only three days left for 2008, are you planning to do any adjustments for your investments for tax reasons?

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For most investors who are in the 25% or higher tax brackets, they will be paying 15% on long-term capital gains (your profits from selling securities that you held 12 months or longer) and dividend (Bankrate). However, if you are in the 10% and 15% income tax brackets, you will get a nice tax break in 2008 and through 2010: Pay 0% long-term capital gain tax from 2008 to 2010 (USA Today). Currently people in the low income tax brackets pay 5% on long-term capital gain.

To qualify for the zero-percent tax rate, married couple filing joint return must earn a taxable income of $65,000 or less in 2008. For single taxpayer, the income limit is $32,550 or less. Taxable income is the amount of income that is subject to income taxes. It is usually calculated by subtracting your gross or adjusted gross income by any deductions, exemptions, or adjustments.

If you are doing your own taxes, keep this on your mind. It can save your a few bucks

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Now, a week later, I guess I can forget about another check and the reason for the reduced payment is my own fault. The $182 is the penalty/interests for not making enough estimated tax payment . I didn’t figure this out myself. Another letter from the IRS came yesterday, explaining how the interests are calculated together with tax payment vouchers. It isn’t that I didn’t make tax payments. I did pay $3,500 tax via EFTPS before April 15, but apparently that’s not enough. And when I went through the tax forms TurboTax made for me, I didn’t see any penalty payment!!

Well, lesson learned.

Another thing I noticed is that the government, even the IRS, didn’t really know what they are doing. In the IRS letter, they said I still own them $182.64 and asked me to pay it. Haven’t they already taken it away from me? I will make the payment if they give me the full $383.95 that we are entitled to. That said, I guess I will still have to send them a letter to tell them the penalty has already been taken.

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Mistakes and Potential Pitfalls

• Not filing because you cannot afford to pay – If you don’t file because you can’t pay the entire tax due, you will only increase the amount you will have to pay later with additional and increased penalties. If you enter into an installment arrangement with the IRS, and your return was filed on time, the late payment penalty you pay monthly on the outstanding balance will be reduced from .5% to .25%.
• Estimated taxpayers beware – Estimated tax for payers with income above $75,000 for single filers/ $150,000 for joint filers has significantly increased over the past two tax years. For 2007 you had to remit 110% of your 2006 tax liability.
• Avoid Kiddie Tax – You don’t have to wait for a savings bond to mature to report the interest. You can periodically report the interest. This is especially favorable for children in years where they have no income or are below the threshold.
• Missing, duplicate or incorrect Social Security Number – The IRS will issue a partial refund until they can verify the information on the return. They will recalculate your tax liability based on the information they have and you could wind-up with a tax bill instead of a refund.
• Filing status – Choose the best filing status for your circumstances. Some overlook head of household status, which is a more favorable rate of taxation. Qualified widows (ers) can file at joint rates for the two years following their spouses’ death.
• Moving expense to take first job – Moving expenses to get to that first job are deductible. And you get this write-off even if you don’t itemize. If you moved more than 50 miles, you can deduct the cost of getting yourself and your household goods to the new area, including 18 cents a mile (and parking fees and tolls) for driving your own car.
• Residential sale exclusion – If a seller fails to reside in a house two out of the last five years that fat $250,000 ($500,000 if filing jointly) exclusion could be lost. A prorated exclusion may be available. Under certain circumstances you can add-up the occupancy period of spouses and /or if the sale is due to unemployment, military deployment or other unforeseen circumstances.
• Student loan interest paid by mom and dad – Until recently, if parents paid back a student loan incurred by their child, no one got a tax break. Now there’s an exception. If mom and dad pay back the loan, the IRS treats it as though they gave the money to their child, who then paid the debt. So, a child who’s not claimed as a dependent can qualify to deduct up to $2,500 of student loan interest paid by mom and dad.

Overlooked Deductions

1. Out-of-pocket expenses relating to charitable activities, including the standard mileage deduction
2. Medical transportation, including standard mileage deduction and lodging expenses incurred for medical reasons while away from home
3. Legal fees incurred in connection with obtaining or collecting alimony
4. Gambling losses to the extent of gambling gains
5. Costs associated with looking for a new job in your present occupation, including fees for resume preparation and employment of outplacement agencies
6. Contraceptives, if bought with a prescription
7. Commissions and closing costs on sale of property
8. Seller-paid points on the purchase of a home
9. Education expenses to the extent required by law or your employer or needed to maintain or improve your skills
10. Mortgage pre-payment penalties and late fees

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Victims of the major storm affecting several Northeastern states on Monday, April 16 will have two additional days to file their tax returns beyond the April 17 tax deadline, the Internal Revenue Service announced today. Taxpayers directly impacted by the storm have until midnight April 19 to meet their tax filing obligations without incurring late filing and payment penalties.

All you need to do is making a mark on your return:

Affected taxpayers can mark their paper tax returns with the words “April 16 Storm.�? Taxpayers who e-file their returns can use their software’s “disaster�? feature, if available.

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I didn’t resume our tax filing process until yesterday and it took me almost the whole day to get it done. At the end, we owed about $6,000 in both federal and state taxes (. There are several factors contributed to our tax bills though we didn’t claim any dependent on our W-4s:

• We didn’t max out our 401(k) contributions: We were allowed to put $30,000 in our 401(k) accounts in 2006, however, our contributions only totaled at $23,730. That’s $6,270 short!
• We didn’t put money in child care account: The maximum pre-tax dollars we can set aside for child care is $5,000, but we didn’t put any because we didn’t send our baby to daycare.
• We pocketed more than $10,000 in interests, dividends, and capital gains from investments in our taxable accounts.
• We exceeded the income limit to make Roth IRA contributions, thus, have to withdraw almost all the $8,000 we made in 2006 and pay penalties.

Finally, our mortgage interests didn’t help too much in lowering our tax bills as the mortgage isn’t big. We paid a little more than $6,000 in interests in 2006.

Immediately after I wrote the checks, I logged on to my Fidelity 401(k) account and increased the deduction to 20%. This will guarantee that I contribute to the limit this year ($15,500 for 2007). Later on I may have to adjust the percentage so I don’t put too much in the account. My wife also made similar adjustment to her deduction. In addition, starting this year we contribute to the child care account, so this will help to lower our taxable income as well.

As for the incomes generated from our investments, I have a mixed feeling about them. On one hand, I love the idea of letting our money work for us without lifting a finger, but on the other, having to give a big chunk of the profit doesn’t make us happier. One way to deal with this situation is to reduce investments that pay lots of capital gains without scarifying the overall performance. I have already sold CSVFX, which alone distributed nearly $1,000 in capital gain last year. The next to target is CGMFX which has a turnover ratio of 300% in 2006.

For the excess contributions in our Roth IRA accounts, I have three options:

1. Pay the 6% penalty on the excess contributions year after year until I correct it;
2. Withdraw the money right away;
3. Open a non-deductible traditional IRA account and move the money into that account (account recharacterizes).

I intend to go with the last approach with a traditional IRA account, but the process will take sometime to complete.

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First of all, what is Traditional IRA and what is Roth IRA? According to IRS definitions (Publication 590), a Traditional IRA is “any IRA that is not a Roth IRA or a SIMPLE IRA,” and a Roth IRA is “an individual retirement plan that is subject to the rules that apply to a traditional IRA.” Are these definitions clear? Not at all. Therefore, a better way to understand them is by examining the key differences between these two.

Eligibility

Everyone has earned income can participate in IRA (when the income is greater than the contribution), however

• Traditional: Only eligible for age under 70.5 with no maximum income limitation;
• Roth: Only eligible when earned income is less than $114,000 for single, or $166,000 for married filing jointly, with no age limit;

Deductibility

• Traditional: If you or your spouse is not covered by employer-sponsored retirement plan such as 401(K), your contributions is deductible; Your deduction starts to decline if you (or spouse) participates in a retirement plan through employment and adjusted gross income hits certain level [for 2007, the phase-out limits are $50,000 - $60,000 (single) and $80,000 - $100,000 (joint)];
• Roth: Contributions can’t be deducted;

Tax advantages

• Traditional: Earnings grow tax-deferred, but are taxable at withdrawal;
• Roth: Both principal and earnings are tax-free if you take the distributions after age 59.5 and have established your IRA for five years or more;

Withdrawal

• Traditional: Must start to withdraw at age 70.5;
• Roth: No age limit;

Contribution limits

• Traditional: $4,000 ($5,000 for age 50 or above) in 2007 and $5,000 ($6,000 for age 50 or above) in 2008 and 2009;
• Roth: $4,000 ($5,000 for age 50 or above) in 2007 and $5,000 ($6,000 for age 50 or above) in 2008 and 2009;

From what we can see, Roth IRA offers much more flexibilities than Traditional IRA on withdrawals and long-term tax advantages (you may not pay taxes at all on earnings), though it has no immediate tax benefit at the time you make the contribution. If you are considering an IRA account, but haven’t opened one yet, you have until April 17, 2007 to set up your account and make 2006 contributions.

For more information on IRAs, check out IRS Publication 590. Fool.com also has a nice (and complete) coverage on this topic.

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For the 17th year in a row, the far Western state earned the distinction of being America’s most tax-friendly state.

Among them, Alaska ranked No. 1 with the lightest state and local taxes burden. However, with taxes along won’t tell the whole story because, even with a low tax rate, if the income is also low, then there isn’t really much to cheer about. So I put the taxes in the context of median household income. Interestingly, Alaska, whose 6.6% state and local income rate is the lowest across the country, also has the seventh highest average median household income from 2003 to 2005, according to the Census Bureau data. New Hampshire’s 8.0% tax ratio puts the state at the second place on the most tax-friendly list and its 3-year average median household income is the third highest (only behind New Jersey and Maryland) in the nation. Roundup the top 5 most tax-friendly states are:

At the other end of the spectrum, paying more can’t always be translated to earning more. Residents of Maine pay 14% of their income to the state and local government as taxes (income taxes, property taxes, sales taxes, luxury taxes, and fuel taxes, you name it), yet the 3-year average household income of the state is only $42,006, ahead of just 15 out of 50 states. Other high-tax states include:

If you can choose, what will be your choice? A place with less taxes so you can keep more, or a place with high-paying jobs though you may have to pay lots of taxes?

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So what is it exactly?

It’s the telephone tax refund. According to the IRS website,

The telephone tax refund is a one-time payment available on your 2006 federal income tax return, designed to refund previously collected federal excise taxes on long-distance or bundled service. It is available to anyone who paid such taxes on landline, wireless, or Voice over Internet Protocol (VoIP) service.

If you think that you can’t claim this refund because you currently don’t have a long-distance carrier, you may be correct if you didn’t use any long-distance service since February 28, 2003. Otherwise, you can still get the refund as it covers the period from February 28, 2003 to August 31, 2006. Instead of asking taxpayers exactly how much they have paid in the 41 months on long-distance bills, the government has created standard amount refund from $30 to $60, based on the number of exemptions taxpayers claim on their 2006 tax return:

• One exemption: $30
• Two exemptions: $40
• Three exemptions: $50
• Four exemptions or more: $60

If you are filing your returns with paper forms, here’s a list of where you can enter the claim:

• Form 1040, Line 71
• Form 1040A, Line 42
• Form 1040EZ, Line 9
• Form 1040NR, Line 69
• Form 1040NR-EZ, Line 21

Since it’s a one-time refund, get it before it’s forever gone.

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When it comes to income taxes, not just how much you earn matters, your location also plays a role, a big role. So instead of trying to squeeze a few bucks from various deductions, you may want to consider relocation if you are living in one of the cities in the nation that imposes heavy personal income taxes.

According to a CNNMoney article, people living in Manhattan, New York, pay an average of $25,875 federal personal income taxes, or about 20% of their AGI, the highest in the nation, while residents of Starr County in Texas enjoy a refund of $867, which equals to a negative 4.13% tax burden, from Uncle Sam every year. The article lists top 1o counties in the nation that have the heaviest income tax burdens as:

Factors that contribute to high income taxes include, but not limited to:

• High personal income: of course, you pay more when you earn more;
• Income from investments: however, if your investment incomes are from long-term capital gains or dividends, the impact is so bad as these distributions are taxed at a lower rate;
• State and local income taxes: since these taxes can be deducted from your federal income taxes, you can get a bigger deduction if you are living in a high income taxes state.

The article also provides a list of top 10 metropolitan areas with the highest income taxes percentage compared with AGI:

How’s your income taxes compared with others in the nation? I am living in a county that on the top 10 list, which also has the highest property taxes in the nation .

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All the tax forms, W-2s, 1099s, and 1098, for 2006 tax year have arrived and I even started the tax filing process, such as entering data from our W-2 forms, several weeks ago, but stopped all the work after TurboTax said we already owed a couple of thousands of federal taxes. There’s no reason to hurry if we have to pay the money back. With EFTPS, I plane to make some payments before the deadline so I don’t have to sign a big check on April 15th.

Once I have discussed with my wife about why we still owed taxes even after we bought the house and claimed zero dependent on our W-4s. The conclusion we got was we didn’t have enough deduction in our mortgage because the townhouse we bought wasn’t big enough .

I have done our taxes myself for several years. Maybe it’s time to go for a pro.

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Here’s the summary of the 13 overlooked deductions. For detailed explanations of each item, use the above link to read the full article.

1. State sales taxes: You must choose between deducting state income taxes or state sales taxes and, if you live in income-tax states, the income-tax deduction is a better deal.
   • Enter your state sales taxes write-off on line 5 of Schedule A and write “ST” on the dotted line to the left of that line.
2. $250 educators’ expenses: Teachers and their aides can deduct up to $250 for books and classroom supplies.
   • If you qualify, put the deduction on line 23 of the Form 1040, the line now used for the Archer medical savings account (MSA) deduction, and write “E” on the dots to the left.
   • If you also claim the MSA deduction, write “B” (for both) on the line and attach a breakdown of how much you’re claiming for each.
3. College tuition: You may qualify to deduct up to $4,000 you paid in college tuition in 2006 for yourself, your spouse or a dependent.
   • For 2006 returns, the deduction is taken on line 35 of the Form 1040, the line for the domestic production deduction. Write “T” to the left of that line.
   • If you’re claiming the production break, too, write “B” on the dotted line and attach a breakdown of how much you’re claiming for each.
4. Student loan interest paid by mom and dad: A child who’s not claimed as a dependent can qualify to deduct up to $2,500 of student loan interest paid by mom and dad.
5. Out-of-pocket charitable contributions: You can write off out-of-pocket costs you incur while doing good works. If you drove your car for charity in 2006, deduct 14 cents a mile.
6. Moving expense to take first job: If you moved more than 50 miles, you can deduct the cost of getting yourself and your household goods to the new area, including 18 cents a mile (and parking fees and tolls) for driving your own car.
7. Military reservists travel expenses: To qualify, you must travel more than 100 miles and be away from home overnight. If you qualify, you can deduct the cost of lodging and half the cost of your meals, plus 44.5 cents a mile (and any parking or toll fees) for driving your own car.
8. Child-care credit: Up to $6,000 can qualify for the child-care credit, but the old $5,000 limit still applies to reimbursement accounts. If you run the maximum $5,000 through a plan at work, but spend more for work-related child care, you can claim the credit on up to an extra $1,000.
9. Estate tax on income in respect of a decedent: You get an income-tax deduction for the amount of estate tax paid on the IRA balance. Let’s say you inherited a $100,000 IRA, and the fact that the $100,000 was included in your benefactor’s estate added $45,000 to the estate tax bill. As you withdraw the money from the IRA and pay tax on it, you also get to deduct a proportional amount of the estate tax paid.
10. State tax you paid last spring: If you owe tax when you filed your 2005 state tax return, remember to include that amount with your state-tax deduction on your 2006 return.
11. Refinancing points: When you refinance a mortgage, you have to deduct the points over the life of the loan. That means 1/30th a year if it’s a 30 year mortgage.
12. Reinvested dividends: If you have mutual fund dividends automatically invested in extra shares, each reinvestment increases your “tax basis” in the fund. When you redeem shares, the reinvested dividends should be included in your basis, thus reduce your gain.
13. Jury pay paid to employer: Some employers continue to pay employees’ full salary while they are doing their civic duty but ask that they turn over their jury fees to the corporate treasury. You’ve always had a right to deduct the amount.
    • Enter it on line 13 if you file the Form 1040A or on line 34 if you use the full-fledged 1040.

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2006 was the first year that our investments in Treasury bills were subject to federal income taxes. We have been buying I and EE bonds for several years, but they are exempted from both federal and state income taxes (federal income taxes will be imposed when the bonds are redeemed or reach maturity. Click here for more information on how I bonds are taxed). The taxes were from our weekly investments in 4-week T-bills since last May. After I logged in my account, it shows we have a total of $249.70 in interests since June 2006, which will be part of our annual passive incomes.

The access to my TreasuryDirect account, however, wasn't a smooth one.

It has been a while since I logged in my account and I couldn't remember exactly the password. I tried twice but didn't go through, so I clicked the Forget Password button. Then I faced a even bigger challenge: I have to answer three out of about 10 security questions. Not just any three, but exactly those three that I chose when I set up the account. If I were given those three questions, I might be able to come up the answers. But remember which three questions? I couldn't even remember a password!

Again, I tried several times with different combinations that I thought were possible, again all the attempts were rejected and eventually I got a screen, saying I have to call a CSR at TreasuryDirect for help.

On one hand, these enhanced security features can prevent unauthorized access to my account (and now it seems everybody is doing this), but on the other remembering all the questions and answers isn't an easy job. I use Firefox and every time I enter a new password, the browser asks me if I want the browser to remember it. I usually choose yes to save some typing. That's the convenient part. The drawback is, of course, that if I don't have to remember, I don't remember. After sometime the remembered passwords may be cleaned by the system and by that time, my memory is not fresh any more. A couple weeks ago, I also tried to access my VirtualBank account, which I haven't used for a long time (I have only about $120 in the account). All my attempts failed and I ended up getting my access suspended.

I wonder if there's any better way to manage all these user names, passwords, security questions instead of writing them all down on a piece of paper.

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I got a notice from PA state revenue office last month and in the notice there are two columns of data: one column is the numbers I provided in my PA tax return, including wages, tax withhold amount, and refund amount I requested, and everything looks OK. The other column, the numbers the revenue office provided, has nothing but zeros.

“Why all zeros? Does it mean I didn’t earn any income and didn’t pay any taxes?�?

With these questions, I called the PA revenue office yesterday and was told that indeed I didn’t have any income with the state and there was no state tax withhold, therefore, no refund. When I was directed to my own W-2 form, I realized for the first time that all my tax withhold was for the city of Philadelphia, not the state. No wonder all those zeros.

I then called the Philadelphia tax office and was told that though I am not a Philadelphia resident, I still have to pay Philadelphia local tax at a lower rate and my employer was right to withhold the tax for me and

NO REFUND!

I was hoping to invest the refund money. Now I guess I have to live with the fact. But, did I include the Phily local tax when I filled my NJ state tax? And how do I know whether or not the proper amount of tax was withheld?

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