March 2008 Financial Articles
Answers to Frequently Asked Tax Season Questions | Top
When you think about filing your tax return, do you have more questions than answers? The entire process can be confusing and frustrating, but a little information can make the experience a lot more bearable. Here are some common tax season questions, along with practical answers, from the Virginia Society of CPAs.
How can I lower my tax bill?
CPAs recommend that you make tax-savvy choices such as participating in your company’s 401(k) plan or contributing to an individual retirement account (IRA). Consider turning to a professional, such as a CPA, for the advice you need to make sound decisions designed to improve your financial situation. Your CPA may be able to help you reduce your tax bill by pointing out deductions you have missed.
How can I make the most of tax season?
Although many people dread tax time, it does provide a great opportunity to get a perspective on your financial situation. Once you’ve done the hard work of gathering your financial records and receipts, all of that information provides a great snapshot of your financial situation. Are you making the right investments to meet your long-term goals? Are you getting the best mortgage rate? Now’s the time to consider these and other important financial questions using the data you’ve put together to compile your tax return.
What information do I need?
When you’re gathering tax records, at a minimum you will need to have the W-2 forms you’ve received from your employer and any other form documenting your income (such as a 1099 interest or 1099 dividend form). You’ll also need records of mortgage interest and property taxes you have paid and receipts for items that you plan to deduct, such as unreimbursed business expenses. You should also have information about deposits you’ve made in a traditional individual retirement plan so that you can report those on your return.
What if I’m not ready on time?
It is possible to get an automatic six-month extension on filing your return. You will have to estimate what you might owe and pay any taxes due with the extension by the April 15, 2008, deadline. If the balance of the tax due is paid with the filing of your income tax return, no penalty for failure to pay will apply unless the unpaid amount is more than 10 percent of the total tax liability (unless you can show reasonable cause). You will have to pay interest on the balance due. However, the extension does give you and your CPA more time to review your situation and file an accurate return.
What if I can’t pay my taxes?
A late filing penalty will not be imposed if you fail to make a payment with your extension provided you make a good-faith estimate of your tax liability based upon the available information at the time of filing. Of course, you will be subject to interest and possible penalties. You may request a monthly installment arrangement if you can’t pay the full amount due on your tax return when you file by filing Form 9465. The Internal Revenue Service (IRS) will usually tell you within 30 days if your payment plan is accepted. You will still have to pay interest and possibly a late payment penalty. Your CPA can advise you on how to use an extension and help you negotiate a payment agreement with the IRS.
When will I get my refund?
If your return is complete and correct, you should receive your refund in about six to eight weeks from the time your return is received by the IRS. The wait should be about half that time for those who file electronically, according to the IRS. For an update, you can go to the IRS Web site, www.irs.gov, and click on “Where’s My Refund?,” or call the toll-free IRS Automated Refund Information number, (800) 829-4477 or call the IRS at (800) 829-1040.
If you have further questions, or want more details on any of these topics, be sure to consult your local CPA for expert tax advice.
The Virginia Society of Certified Public Accountants (VSCPA) is the leading professional association dedicated to enhancing the success of CPAs. Founded in 1909, the VSCPA has approximately 8,300 members who work in public accounting, industry, government and education. For more information, please visit the Press Room on the VSCPA Web site at www.vscpa.com, e-mail vscpa@vscpa.com or call (800) 733-8272. For more information on financial literacy topics like money management, or to search for a CPA in your geographic region, visit www.FinancialFitness.org.
Best Ways to Spend Your Tax Refund | Top
As the April 15 tax filing deadline nears, many people will be in the enviable position of receiving a tax refund. It’s a nice surprise to get back some of the money you paid in taxes during the year. It’s also a great opportunity to make some sound financial decisions that will reap benefits now and in the future, according to the Virginia Society of CPAs. So before you splurge all of your newfound funds, consider some of these money-wise alternatives.
Pay off your bills
If you have high-interest credit cards, hefty student loans or any other debts looming over your financial landscape, CPAs recommend that you use some if not all of your refund to pay them down as much as possible. If you pay off a credit card with a 16 percent interest rate, you’ve just gotten yourself a 16 percent return on your money — an added bonus that compares very well with most investments. Once you’ve wiped the slate clean of outstanding debt, you can use your hard-earned money to save up for dream purchases. But if you don’t lower your debts, you will instead end up wasting money on interest charges.
Save for the future
Would you like to further your own education or send a child to college? Or are you planning to buy a home during the next year or two? Perhaps you have been hoping to take a truly memorable vacation sometime down the road? No matter what your dreams, the best way to make them come true is to save regularly so that you have the cash ready when you need it. Use your tax refund to open a savings account or deposit it into an existing account. Then let the money grow until you’re ready to follow your dream.
Get a head start on retirement savings
Do you have a retirement account where you build up cash for the future? Use at least some of your refund dollars to start one or add to an existing account if you do have one. That way, your refund can grow tax free and provide a firm foundation for your retirement.
Create an emergency account
We all know it’s a good idea to set aside some money to cover unexpected emergencies, such as loss of a job, an injury or hospitalization or another unforeseen crisis. However, after paying your regular monthly bills, it can be difficult to earmark funds for an emergency. That’s why it’s a great idea to use your windfall from Uncle Sam to do it.
Splurge, but do it wisely
If you don’t have any high-interest debts and you do follow a regular savings plan and set aside money for retirement, then go ahead and splurge your refund. When you’re deciding how to spend the money, though, CPAs recommend that you consider indulgences that might be a good investment, such as updating your kitchen or bath or taking other steps that will improve your home’s resale value. They are fun choices but they will also pay you dividends in the future.
Check your withholding
Finally, remember that while it’s great to get an unexpected cash windfall, if you regularly receive large refunds every year you may be having too much money withheld for taxes from your paycheck. And that’s a bad idea, because you could be using that cash all year as part of your regular budget. If you think this may be the case, speak to your CPA about whether you need to adjust your withholding amount. Your CPA can guide you.
The Virginia Society of Certified Public Accountants (VSCPA) is the leading professional association dedicated to enhancing the success of CPAs. Founded in 1909, the VSCPA has approximately 8,300 members who work in public accounting, industry, government and education. For more information, please visit the Press Room on the VSCPA Web site at www.vscpa.com, e-mail vscpa@vscpa.com or call (800) 733-8272. For more information on financial literacy topics like money management, or to search for a CPA in your geographic region, visit www.FinancialFitness.org.
Tax Tips for Members of the Military | Top
At this time of year, people are organizing their records in preparation for filing their tax returns. This is often a challenging task, and that may be particularly true for those who are serving in the armed forces. That’s why the Virginia Society of CPAs advises that anyone who is in the military or has family members that serve our country be aware of some of the special tax breaks and programs available to them.
Breaks for those on combat zones
If you or a family member are on active duty in the military, there are important tax breaks available to you. For example, all qualifying military pay earned by enlisted personnel and warrant officers and by commissioned officers up to specific limits serving in combat zones — or hospitalized as a result of a wound or injury while serving in a combat zone — are excluded from gross income. The exclusion for hospitalization does not apply to any month that begins more than two years after the termination of combat activities in the zone.
In addition, military personnel serving in designated combat zones and civilians who are serving in support of these military members in designate combat zones, or those who are hospitalized outside the United States as a result of an injury received in a combat zone, can receive extensions on filing and paying their taxes. That means that they do not have to file or pay taxes until 180 days after their last day in the combat zone or hospitalization. The extension also generally applies to the spouses of military personnel who are serving in combat zones who wish to file a joint return.
File electronically for free
If you are in the armed forces, or a federal reservist or National Guard member, and your adjusted gross income is $54,000 or less, you are eligible for an Internal Revenue Service (IRS) program called Free File. To take advantage of this program, you or your spouse must have received a 2007 Form W-2 from one of the military services. Free File makes it possible for you to gain free access to commercial online tax preparation and electronic filing services. If you qualify, you can use these services to compile and file your tax returns online at no charge using software provided by participating tax software companies. To learn more, go to the IRS Web site at www.irs.gov and click on the “Free File” icon on the home page.
Access to Individual Retirement Accounts
Thanks to the Heroes Earned Retirement Opportunities (HERO) Act, members of the military serving in combat zones are allowed to make contributions to a traditional Individual Retirement Account (IRA) or Roth IRA based on their tax-free combat pay. Before this law took effect in 2006, soldiers who received tax-free combat pay generally did not qualify to set aside any of their earnings in tax-advantaged IRAs.
How to find help
To find out more information about how the tax laws apply to those in the armed forces, turn to IRS Publication 3, “Armed Forces’ Tax Guide,” which is available online. You can access it by going to www.irs.gov, clicking on “Individuals” and choosing the section titled “Tax Information for Members of the U.S. Armed Forces.” You can also call the IRS toll free at (800) 829-1040.
Your local CPA can also help you understand and take advantage of the breaks and accommodations created for armed forces personnel. Contact your CPA if you need help in filing your taxes or if you have other questions about your financial situation.
The Virginia Society of Certified Public Accountants (VSCPA) is the leading professional association dedicated to enhancing the success of CPAs. Founded in 1909, the VSCPA has approximately 8,300 members who work in public accounting, industry, government and education. For more information, please visit the Press Room on the VSCPA Web site at www.vscpa.com, e-mail vscpa@vscpa.com or call (800) 733-8272. For more information on financial literacy topics like money management, or to search for a CPA in your geographic region, visit www.FinancialFitness.org.
Tips for First-Time Home Buyers | Top
Given recent issues surrounding the real estate market, many potential first-time buyers may be wondering if this is a good time to buy a home. Purchasing a home can be an excellent investment, according to the Virginia Society of CPAs, but there are some important issues to consider before you do.
Set realistic price guidelines
The easiest way to decide how much house you can afford is to determine what size mortgage payment will fit into your monthly budget. As a general rule, your monthly housing cost should not exceed 25 to 30 percent of your gross monthly income if you want to qualify for a conventional mortgage. Monthly housing costs include your mortgage principal payment, interest payment, property taxes and home insurance.
To determine your possible mortgage costs, use a mortgage calculator like the one found on the Web site of the CPA profession’s 360 Degrees of Financial Literacy program at www.360financialliteracy.org. Fill in the expected mortgage amount, the interest rate and the mortgage term. When you see the monthly outlays based on different mortgage sizes and interest rates, you can determine a fairly specific range for your home price and loan rate. Once you set this range, stick to it during your house hunting so that you don’t end up spending more than you can handle.
Don’t forget the extras
When you are evaluating what monthly mortgage payment you can afford, remember the other expenses you’ll be paying each month and as you move into a new home. Utilities bills, for example, may increase if you’re moving into a larger space or if they have been previously included in your rent. You may also need to pay for items such as moving expenses, new furniture, home appliances and improvements. Make a list of all your possible one-time and ongoing expenses so you have an accurate picture of how home ownership will change your financial situation.
Review your credit situation
When you apply for a mortgage, the lender will examine your financial information to determine whether you qualify for the loan. If you have a great deal of outstanding debt or if you have missed car loan or credit card payments in the past, that could hurt your changes to get a mortgage. Before starting your home search, evaluate your current credit situation and your credit history. You have the right to receive a free credit report from each of the three credit bureaus each year. If you find any problems with your credit history or credit score, you can take steps to repair your record before you apply for a mortgage. You can also notify the credit bureau about any errors that you find and ask to have them corrected.
Remember the tax advantages
You are allowed to deduct the interest you pay on up to $1 million of debt used to buy, construct or improve your principal residence or second home ($500,000 if married filing separately). That is a tremendous advantage to homeownership that you will reap benefits from right away. In addition, you can deduct the real estate taxes you pay on your home.
Need ideas on determining how much house you can afford or on selecting the best mortgage? Your local CPA can provide you with the advice you need to make the best decisions. Turn to your CPA with any questions on home purchases or other financial decisions.
The Virginia Society of Certified Public Accountants (VSCPA) is the leading professional association dedicated to enhancing the success of CPAs. Founded in 1909, the VSCPA has approximately 8,300 members who work in public accounting, industry, government and education. For more information, please visit the Press Room on the VSCPA Web site at www.vscpa.com, e-mail vscpa@vscpa.com or call (800) 733-8272. For more information on financial literacy topics like money management, or to search for a CPA in your geographic region, visit www.FinancialFitness.org.
Savvy Steps in Shopping for a Mortgage | Top
What’s the best advice for people who are buying or refinancing a home? Get the best mortgage. According to the Virginia Society of CPAs, shopping around for the best mortgage deal you can find and being informed about the right questions to ask mortgage lenders can be the most important things that you do.
Get the facts about rates
The mortgage interest rate will affect your monthly payment amount, so as a general rule you will want to find the lowest interest rate possible. Be sure to ask, however, whether the lender is offering a fixed-rate loan or an adjustable-rate mortgage.
With a fixed rate loan, the interest rate will remain the same as long as you hold the mortgage. With an adjustable-rate loan, the rate can change based on the direction of interest rates in the credit markets.
Adjustable-rate mortgages, also known as ARMs, often offer low initial interest rates, but those rates can rise down the road, which means your monthly payment will increase. When considering ARMs, it’s important to find out how often the rate can change and by how much, as well as all other details that will affect your payments. If you select an ARM, CPAs advise that you determine that you can afford the mortgage not only right now, but also in the future.
Understand the terms
While interest rates will have a direct impact on your monthly payments, there are other important details to understand about mortgages as well. Ask, for example, about the minimum down payment that the lender requires. The loan term is another important factor. The number of years you have to pay the loan will affect your monthly payments.
What fees are involved?
Lenders usually charge fees for their mortgages. For example, most loans include points, which are typically based on a percentage of the loan amount. If you are charged two points on a $200,000 mortgage, say, that would amount to $4,000, or 2 percent of the loan amount. Typically, a loan with a higher interest rate will charge fewer points. There may be other expenses associated with the loan, as well, such as broker or underwriting fees. Be sure to ask about any additional expenses and then calculate how they will affect your up-front costs or your monthly payments.
Don’t be afraid to negotiate
Now that you’ve learned about all the loan details, remember that you can ask for better terms on any of those factors. It’s perfectly acceptable to find out if the lender would be willing to lower the points or other fees or even the interest rate. Make sure, however, that a drop in one fee isn’t accompanied by an increase in another.
Do you need private mortgage insurance?
One of the negotiable elements in buying a home is how much money you will offer for your down payment. Many lenders require that you put down 20 percent of the home sale price as your down payment. If you’re allowed to make a smaller down payment, the lender will likely require that you buy private mortgage insurance or PMI. If you are unable to keep up your mortgage payments, this insurance covers the lender’s costs. If you do need PMI to qualify for your loan, find out what the overall cost of the PMI will be and how long you will have to hold this insurance.
There are clearly many questions to be asked when you go shopping for a home mortgage. Your local CPA can help you understand them and advise you on the best mortgage options in your situation. Call on your CPA for advice on any of your financial needs.
The Virginia Society of Certified Public Accountants (VSCPA) is the leading professional association dedicated to enhancing the success of CPAs. Founded in 1909, the VSCPA has approximately 8,300 members who work in public accounting, industry, government and education. For more information, please visit the Press Room on the VSCPA Web site at www.vscpa.com, e-mail vscpa@vscpa.com or call (800) 733-8272. For more information on financial literacy topics like money management, or to search for a CPA in your geographic region, visit www.FinancialFitness.org.
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