Tax Matters - The Top Tax Defenders Blog

Are Gambling Winnings Taxable by the IRS?

Tue, 18 Jun 2013 12:00:00 GMT

Gambling winnings are completely taxable by the Internal Revenue Service. While this can be disappointing to taxpayers who win prizes or cash as a result of gambling, they may be relieved to hear that their gambling losses may be completely deductible as well. Those who win any prize of value from gambling activities should learn how to properly report them so that they can comply with the IRS standard for gambling winnings.

How Does the IRS View Gambling Winnings?

According to the IRS, gambling winnings are always taxable, regardless of the amount or the source. For example, a taxpayer who wins the lottery is required to pay federal income tax on his or her winnings. However, a taxpayer who wins a new car on a game show is also required to pay federal income tax on the value of the prize. All items of monetary value that a taxpayer wins from gambling are considered taxable.

In most cases, the institution or company that awards the prize issues a Form 1099-G at the end of the year to report the amount of taxable gambling income to the taxpayer. But, even if the taxpayer does not receive this form, he or she is still obligated to report the winnings as taxable income for that year.

How to Deduct Gambling Losses

The good news for these taxpayers is that they can often offset the amount of their taxable winnings by deducting their gambling losses. In some instances, these losses will be entirely deductible. The criterion for deducting gambling losses is that taxpayers can only write off the amount that is equal to their winnings. As an example, if a taxpayer loses $1,000 while gambling but wins $500, then he will only be able to deduct up to $500 of his losses. The IRS does not allow taxpayers to simply deduct losses when there are no winnings.

Reporting Gambling Winnings and Losses

To report gambling winnings, a taxpayer will include the amount of the prize as income on the annual tax return. Many companies allow winners to have their taxes deducted from the prize right away, which saves a lot of trouble at tax time. Those who don't elect to do this typically are required to make estimated tax payments throughout the year to cover the amount of tax they will likely owe.

A taxpayer who has gambling losses can deduct them on Schedule A under the "Miscellaneous Deductions" category. As a miscellaneous deduction, gambling losses are subject to the 2 percent limit, which means that they must exceed 2 percent of the taxpayer's adjusted gross income in order to be eligible for deduction. Since they are reported on Schedule A, a taxpayer who wants to claim gambling losses must itemize deductions.

Both gambling losses and gambling winnings can have an impact on a taxpayer's tax liability for the year. Learning how to report them properly will keep a person from receiving an unexpected tax bill later.

*Image courtesy of Flickr

What is an IRS Enrolled Agent?

Fri, 14 Jun 2013 12:00:00 GMT

If you're facing tax trouble such as a review or an audit, you may be wondering where you can turn for assistance. Many taxpayers are familiar with tax professionals such as certified public accountants (CPA) and tax attorneys, but another valuable resource for tax assistance is an IRS enrolled agent (EA). Enrolled agents are highly trained and qualified to provide tax advice and help for just about any possible situation.

Enrolled Agents vs. Accountants

While both enrolled agents and accountants can be helpful in preparing tax returns and offering tax advice, their actual job duties are very different. Accountants are trained to offer general financial advice and help on topics that may include general ledger entries, bank reconciliations, and taxes. Enrolled agents, however, are specially qualified for taxation, which means that they specialize in knowing the tax code and how it applies to various taxpayer situations. As such, enrolled agents are usually helpful for those who have complex tax situations such as individuals who operate corporations, use tax shelters, or have passive income and loss to report. Some accountants are also designated as enrolled agents.

What Does an Enrolled Agent Do?

An enrolled agent is authorized by the IRS to offer specialized tax advice and counsel for taxpayers. They may help provide audit information for tax reviews, and they may legally represent them during any audit appeal hearings. However, enrolled agents are not only valuable for assistance during auditing procedures. They can also offer tax planning advice throughout the year, especially for taxpayers who own real estate, are operating businesses, and considering investment income options.

How Do Individuals Become Enrolled Agents?

The process of becoming an enrolled agent is a lengthy one. Individuals must qualify by either working at the IRS for five years in a position that required them to know and apply the agency's tax code regulations or by taking and passing an intensive examination that covers all aspects of the IRS tax code. Along with the initial process, those who become enrolled agents must maintain their designation by taking continuing education courses that keep them up-to-date on the changing requirements of the tax law.

Enrolled agents offer both tax preparation advice and year-round help for individuals. Using an enrolled agent at tax time can make it easier for a taxpayer to prepare a return or to reduce his or her tax liability. Hiring an enrolled agent to assist with tax planning can help taxpayers prepare for the next year's return by restructuring their expenses and deductions throughout the year.

*Image courtesy of freedigitalphotos.net

IRS Tax Facts about Foreign Earned Income Exclusion

Tue, 11 Jun 2013 12:00:00 GMT

U.S. citizens who are living abroad are still required to file a federal income tax return. This is true, even if they are no longer earning any income from activities based in the U.S. However, while these individuals are obligated to file, they may not be obligated to pay any tax on their earnings. This tax break is available under a provision called the Foreign Income Exclusion. To take advantage of this arrangement, it is important to understand how to qualify for it.

What is the Foreign Income Exclusion?

The Foreign Income Exclusion allows U.S. citizens who are living in other countries to exclude a large portion of the income they receive from activities in those countries. For example, if a U.S. citizen is living in Russia and receiving earnings from a job in that country, he or she can exclude a certain amount of that income from taxation in the U.S. However, in order to claim this provision, the citizen must still file a U.S. tax return and notify the IRS that he or she is claiming the Foreign Income Exclusion. A citizen who simply fails to file a return will not be eligible for the exclusion.

What Income Qualifies for the Exclusion?

Along with filing a return each year, there are other qualifications that a citizen must meet in order to use the Foreign Income Exclusion. One qualification is that the income must be "earned," which means that it must arise from active employment as a company employee or from a self-employment venture. Citizens who are hired as independent contractors may also claim the Foreign Income Exclusion for their income. This provision does not apply to passive income such as investment earnings or sales of property.

Maximum Exclusion Amount

Another requirement for claiming the Foreign Income Exclusion is meeting the maximum threshold for the provision. Each year, the IRS sets a limit for how much income can be excluded from tax liability. In 2012, this amount was $95,100. So, a U.S. citizen who earned less than that amount could exclude his or her entire earned income from taxation in that year. A citizen who earned more than that amount could exclude up to $95,100 and then pay federal income tax on the amount that exceeded that limit.

Who Can Claim the Foreign Income Exclusion?

To use the Foreign Income Exclusion, individuals must also meet the citizenship requirement. This means that they must pass the "physical presence" test in regards to their residency in the foreign country. To meet the standards for the physical presence test, an individual must have lived in the foreign country for an entire tax year (January 1 through December 31) or have been in the foreign country for at least 330 days out of a consecutive 12-month period.

The Foreign Income Exclusion tax provision is a special consideration for those who are living and working outside of the U.S. Taxpayers who take advantage of this opportunity can save a significant amount on their annual tax bill.

*Image courtesy of freedigitialphotos.net

Tax Information for Resident, Non-Resident Aliens and Dual Status Taxpayers

Fri, 07 Jun 2013 12:00:00 GMT

Individuals who have immigrated to the United States must abide by the IRS rules for resident and non-resident aliens. While there are special considerations for these individuals who file tax returns, they are still required to submit their returns on the annual deadline along with naturalized U.S. citizens. The IRS allows for three categories of immigrants: resident aliens, non-resident aliens, and dual status taxpayers. Choosing the proper tax status is important because it directly affects the way immigrants file their returns.

Taxes for Resident Aliens

If you are considered a permanent resident, you'll have to pay income taxes on all of your earnings just as a naturalized U.S. citizen does. You'll report your income using Form 1040, Form 1040EZ, or Form 1040A, and you won't have to make any special adjustments for taxation.

Taxes for Non-Resident Aliens

However, if you are considered a non-resident alien, you'll get a small tax break. Non-resident aliens are only obligated to pay federal income tax on the money they earn in the U.S. or from activities that are performed in the U.S. For example, if you are classified as a non-resident alien, and you work part of the year in the U.S. and part of the year in your home country, then the IRS will only require you to pay tax on the income you earned during your time in the U.S. However, you'll still be required to follow whatever tax laws apply to you in your home country regarding the income you earn while there.

Taxes for Dual Status Taxpayers

Some immigrants receive dual status, meaning that they are no longer non-resident aliens, but they have not yet received a designation as a resident alien. Typically, this status is reserved for taxpayers who are in the midst of becoming residents of the U.S. If you're in this situation, you can file a tax return for the time of the year that you were a non-resident and another tax return for the time you were considered a resident.

Determining Your Residency Status for Tax Purposes

In order to be considered as a resident alien in the United States, you must either have a green card or have met the minimum residency length in the country. For tax purposes, the required residency period is at least 31 days in the past year and at least 183 days during the past three years. If you don't have a green card, but you've been in the U.S. for at least this long, you can file your tax return as a permanent resident.

Whether you're a resident alien or a non-resident alien, you need to familiarize yourself with the IRS tax laws that apply to you. If you do, you can rest assured knowing that you're complying with the tax laws.

*Image courtesy of freedigitalphotos.net

What is Tax Court?

Tue, 04 Jun 2013 12:00:00 GMT

Taxpayers who are selected for auditing by the Internal Revenue Service may not know that they have the option to appeal the agency's findings. Those who do appeal have the opportunity to defend themselves in tax court. While the idea of defending yourself against the IRS can be daunting, appearing in the tax court doesn't have to be a frightening experience. If you decide to appeal your audit findings, learning about the tax court process can help you prepare for making your case.

What is the Tax Court?

As the name implies, tax court is an actual legal court that is reserved simply for the hearing and disposition of tax-related matters. However, the "court" is not a single place where you go to defend your tax case. Rather, the court is made up of 19 judges who travel around the country to hear tax issues in various cities. When you appeal the findings of an IRS audit, your case will be heard in tax court. If your audit involves a judgment of less than $50,000, you can request that your case be assigned to small case tax court, which is reserved for smaller audit cases. While this may help you receive a decision faster, you won't have the ability to appeal the verdict if you opt for small case tax court.

Getting Your Own Legal Representation

You have the option to hire representation to defend your case in tax court, just as you would in a court of criminal law. Many taxpayers bring along their accountants, but if you decide to do so, be sure that you hire a certified public accountant (CPA) or, even better, an enrolled agent (EA). A CPA can help you put together a comprehensive case, and an EA can provide you with the tax expertise to strengthen your arguments. A tax attorney may also represent you during your tax court hearing.

How to Prove Your Case in Tax Court

The best way to prove your case in tax court is to bring supporting documentation for your claims. The burden of proof in the court rests with the IRS, so if you can substantiate your claims, the agency has the responsibility to disprove the legitimacy of your statements. As long as you have receipts that back up your income and deductions as reported, you have a good chance of winning your hearing.

Going to tax court to appeal an IRS audit can be stressful, but if you take the time to learn about what happens in an appeal hearing, you'll be better prepared to present your side and accept the judge's findings.

*Image courtesy of freedigitalphotos.net

How and When to Choose a Tax Attorney

Fri, 31 May 2013 12:00:00 GMT

If you're dealing with income tax troubles, you might be thinking about hiring a financial expert to help you. One such professional is the tax attorney, a legal advisor who is well-trained in matters relating to taxation. However, enlisting the services of a tax attorney can be costly and may not be necessary in all situations. How can you know whether you really need to hire a tax attorney or not? Here are a few guidelines to help you decide when to request help from a tax attorney.

What a Tax Attorney Does

First, it's wise to find out exactly what a tax attorney does. As the name suggests, this professional is an attorney who has received training in income tax matters. This means that the attorney can serve as both a legal advisor and a financial consultant. A tax attorney has completed both a bachelor's degree in finance or accounting and a law school degree. He or she must pass the bar exam and receive a law license in order to practice.

Tax Situations That Require a Tax Attorney

Most situations that require a tax attorney involve both legal and financial considerations. For example you may need to hire a tax attorney for criminal tax defense and advice about how to remove a tax lien or avoid wage garnishment. If you operate your own business, and you've been burdened with a problematic tax audit, a tax attorney can help you prepare your case and serve as your legal counsel during the hearing. Tax attorneys can also provide credible estate planning services such as helping you to draft a will or making arrangements to set aside funds for your funeral services.

Choosing a Qualified Tax Attorney

If you need help with one of the above situations, and you decide to request assistance from a professional, how can you choose a reputable tax attorney? A good way to select a qualified tax attorney is to inquire about his experience and background. If the attorney is keeping up with continuing education courses in order to maintain his license, then he'll be able to provide you with the most up-to-date tax advice.

Dealing with complex financial matters can be tricky. However, if you get help from a professional tax attorney, you can resolve your problems without adding an unnecessary financial burden to your household.

*Image Courtesy of Flickr

IRS Wage Garnishment Guide

Tue, 28 May 2013 12:00:00 GMT

An IRS wage garnishment is an extremely difficult process to deal with. The federal government has given the Internal Revenue Service the authority to garnish employee earnings, and the agency often resorts to this action in severe cases of back tax debt. Once the IRS begins garnishing your wages, it will generally continue to do so until the entire tax bill is paid in full, no matter how long that takes. Despite its authority, the IRS has to follow certain wage garnishment guidelines.

When Can the IRS Garnish Wages?

The only time the IRS can impose a wage garnishment is when a taxpayer owes a significant amount of back taxes and has not attempted to resolve the matter for some time. You can generally prevent a wage garnishment from happening as long as you continue to communicate with the IRS and make efforts to make payments on your account.

Even if you owe a large amount of back taxes, and you have not yet taken steps to repay it, the IRS does not have the right to simply begin garnishing your wages. Rather, the agency must send you written notices before doing so. You'll receive several letters before you get a Final Notice of Intent to Levy. In this letter, the IRS will outline the procedure for wage garnishment and the amount of time you have left before the garnishment begins.

What is the Wage Garnishment Process?

Once the wage garnishment takes effect, there are regulations in place to prevent the IRS from taking all of the money you earn. However, the agency is not required to leave you enough funds to pay your regular bills such as your rent or mortgage, car note, or utility bills. Rather, the IRS uses the number of exemptions and the marital tax status on your Form W-4 as guidelines to decide how much of your earnings to seize. You'll receive an updated form to fill out right before the garnishment begins.

How to Stop Wage Garnishment

After the IRS begins to seize your income, the only way you can stop the wage garnishment is to contact the agency and set up an installment plan for repaying your debt. This allows you to pay a little of your tax debt each month, instead of having to pay the entire amount at once.

IRS wage garnishment can make it almost impossible for you to afford your necessities each month. If you familiarize yourself with the wage garnishment guidelines, you can decide the best way to rectify this situation for you and your family.

*Image Courtesy of Flickr

Types of IRS Tax Penalties

Fri, 24 May 2013 12:00:00 GMT

Each year, the IRS assesses tax penalties on individuals, businesses and corporations. These penalties are usually related to filing errors such as a return that is submitted late, failure to remit a balance due in a timely manner, or a mistake on the return itself. Other penalties relate to the operation of charitable organizations or those imposed in suspected cases of fraud.

1. Failure to file: This penalty is imposed on taxpayers who neglect to file their tax returns on time or those who never file them at all. A simple way to avoid this penalty is to request an extension so that you can get a bit more time to gather your information and submit your return. If your extension request is approved, you'll get six more months to file your paperwork.

2. Late tax payment: The IRS imposes an additional penalty if you owe a balance due and do not submit it by midnight on the day of the filing deadline. This amount is charged in addition to the original amount you owe. Your balance will also accrue compounded interest.

3. Underpayment penalty for estimated tax: Some taxpayers, particularly small business owners, are required to submit estimated taxes throughout the year. If you are one of these individuals, you can be charged a penalty if you fail to pay enough money for your estimated taxes.

4. Incorrect reporting or fraud: This is usually the most serious IRS penalty, because it can be as high as 75 percent if the agency finds that you attempted to fraudulently submit your information. Typically, this is assessed because of a failure to report a source of taxable income or because of an exaggerated expense deduction.

5. Charitable organization: If you operate a charitable organization, your tax-exempt status is open for inspection on a regular basis. Should the IRS discover that your organization is involved in profitable transactions, you can be assessed a hefty penalty, and the agency can even revoke your tax exemption.

Depending on your income and tax filing status, you may already have to pay a balance due to the IRS. If you fall into one of the above categories, you may have to fork over an additional amount just to cover an IRS penalty. Avoid paying these additional charges by carefully preparing your tax return and double-checking it for errors or missing information.

*Image Courtesy of Flickr

Ways to Settle Your Back Taxes with the IRS

Tue, 21 May 2013 12:00:00 GMT

Do you owe back taxes to the IRS? If so, the threat of a tax lien or levy may have been hanging over your head for some time. If you own a business, you might rightly feel that the survival of your company is on the line. Thankfully, there are a few options you can explore to reach a tax settlement that will help you keep as much of your capital as possible.

Ask for an Installment Plan

An installment plan, also called a payment plan, gives you the time you need to pay your tax bill without having to come up with all the money at once. To arrange an installment, you'll need to either complete Form 9465 or contact the IRS directly. Generally, you'll get to decide how much to pay each month (as long as you pay the entire balance within three years) and the day of the month on which you want to remit it. Another benefit of IRS installment plans is that it keeps your account current with the agency. This means you won't have to deal with a failure-to-file penalty or the prospect of a tax lien.

Review Your Previous Tax Returns

Another way to reduce your tax bill is to start looking at your past returns for the last three years. Research the available business deductions you can claim and then make sure that you didn't overlook any of these expenses on your previous tax returns. If you spot a deduction that would significantly affect your tax bill, file an amended return. You can only amend a tax return by mail, so it may take eight weeks or more to have your account balance updated. If you're unsure about which deductions you can claim, many tax preparation agencies will review your past returns for you.

Explain Your Situation to the IRS

Yet another way to possibly reach a tax settlement is to speak directly to the IRS. In situations where there is a legitimate economic problem, the agency may be willing to grant you a hardship deferment. Typically, this will require a life-changing circumstance such as a job loss or a serious medical illness or injury. You'll have to submit proof that you are financially unable to remit the tax balance to get the deferment. It's important to note that if this is granted, you'll still owe the outstanding balance—you'll just be granted a reprieve from making payments on it for a limited time.

It's possible to get a tax settlement from the IRS, but doing so takes a bit of homework. Why not find out if one of the above options would ease your tax bill this year?

*Image Courtesy of Flickr

Common Small Business Tax Mistakes to Avoid

Fri, 17 May 2013 12:00:00 GMT

Owing an additional balance to the IRS at tax time can put a massive dent in your company's operating capital. Many business owners end up owing more tax than necessary simply because they make small business tax mistakes in their tax preparation or even have state sales tax issues. Here are a few tax mistakes that you'll want to avoid so that you don't pay a dime more than you need to.

1. Neglecting to Hire a Financial Professional

Nearly all entrepreneurs start out with a very small amount of money. They usually only have enough capital to pay for the most necessary expenses. One cost you should never skimp on, though, is hiring an outside financial expert. Knowing that your business' finances are in order is worth the fee you'll pay to an accountant or a bookkeeper. One reason these professionals are so valuable is that they can spot simple ways for you to cut costs and improve your bottom line. They can help guide you through the many tax credits available for businesses. In fact, the money they help you save may cover their fees and then some.

2. Overlooking Legitimate Business Expense Deductions

Every year, the IRS allows business owners to deduct many expenses to help them reduce their taxable revenue. The problem is that many entrepreneurs don't know which costs they can legally deduct. Over a few years, the deductions you miss can add up to a substantial amount of unnecessary tax you pay in. Take some time to review the IRS guidelines for deductible business expenses or ask your accountant to help you look at your regular costs to see which ones are deductible. Then keep a record of these during the year so that you don't miss any on your return.

3. Erroneously Classifying a Hobby as a Business

If you have a small side business selling collectibles or antiques on the Internet, you might be deducting the costs associated with it such as your Internet bill, the costs of mailing items to customers, or the price of the digital camera you use to take pictures for posting. However, if you spend time on a side business endeavor that consistently loses money, then the IRS may decide that your activity is a hobby. This distinction is important, because you can't deduct expenses from a hobby unless the expenses are lower than the amount of income you make from your hobby. Be sure to check the IRS guidelines before you decide to deduct these costs on your return.

Because of these mistakes, small business owners often face problems due to an IRS Audit. If you avoid making these same errors, you might be able to escape an IRS review.

*Image courtesy of Flickr

IRS Audit Appeals: How to Defend Yourself

Tue, 14 May 2013 12:00:00 GMT

Have you been hit with a notice that the Internal Revenue Service (IRS) will be "examining" your income tax return? If so, you're being audited. The fear of an IRS audit is enough to intimidate many taxpayers into complying with whatever calculations the agency comes up with. However, IRS agents can make mistakes during tax preparation too, and you shouldn't feel pressured to agree to their findings right away. The good news is that the agency makes it relatively easy for taxpayers to file an appeal of their audits.

Common Reasons for IRS Audits

Most often, the IRS decides to audit a return because of common tax audit red flags, such as discrepancies in the reporting or IRS agents suspect that a figure has been underrepresented. For example, if your income has averaged about $50,000 per year, and it suddenly drops down to $10,000, the agency may be suspicious of your reporting.

The IRS will sometimes decide to examine a return to make sure that the deductions being claimed are legitimate. A small business owner who takes a large deduction for business use of home may be asked to submit proof of this deduction by mail. If he or she does not comply, then the agency may decide to conduct an in-person audit. In very rare cases, the IRS will randomly select a tax return for auditing.

How to File an IRS Audit Appeal

If you disagree with the findings contained in the audit, the most important thing you should do is refuse to sign the report. If you sign, you have given your consent to the findings, and you will be unable to contest them later. Instead of signing the audit report, wait for the IRS to mail you a notice that explains how to submit your appeal. You typically have 30 days after the audit is completed to do this.

The way you appeal your audit depends on the amount the IRS says you owe. If you owe less than $2,500, you can just tell the auditor that you want to appeal the decision. If you owe more than that, though, you'll need to send a letter that discloses your intent to file an appeal. The IRS will also accept a completed copy of Form 12203, which you can simply download from the IRS’ website and fill out yourself.

Dealing with an IRS audit is nearly always a difficult predicament. Before you agree to the agency's findings, consider appealing your IRS audit so that you'll have time to present your side thoroughly.

*Image Courtesy of Flickr

Common IRS Tax Penalties for Small Business Owners

Fri, 10 May 2013 12:00:00 GMT

When the tax deadline approaches, many business owners may be worrying about the IRS fines and penalties they could face. Some of these fees are associated with the IRS filing process itself, but others may be assessed after an IRS review of a completed return. What are some of these fines? How can an entrepreneur avoid these penalties? Here are some small business tax suggestions for escaping the most common IRS penalties.

IRS Penalties for Late Filing or Payments

The most frequently imposed IRS penalty is the charge for late tax filing. The IRS assesses this fee on all income tax returns that are received after midnight on the day of the tax deadline. Both individuals and businesses must submit their completed returns by this date to avoid the charge. If you intend to file your paper return by mail, then you'll need to have it postmarked by midnight. If you prefer to file your return electronically, then you'll need to transmit your information before that deadline.

Another common IRS penalty is for late payments. This charge is somewhat similar to the failure to file taxes penalty, but it is only assessed for returns that carry a balance due. Taxpayers who owe money to the IRS have until the filing deadline to submit their payments, even if they have already filed their returns. If the agency does not receive a payment before midnight on the tax deadline, it will begin assessing a late payment fee and interest on the balance owed.

Tax Penalties for Errors or Fraudulent Returns

More serious IRS penalties involve those calculated on returns due to gross mistakes or fraudulent reporting. A taxpayer who neglects to include all of his or her income on a tax return could be charged a penalty of 20 percent in addition to any tax owed. However, if the IRS finds that the individual deliberately attempted to deceive agents by reporting false or incomplete information, the penalty could be as much as 75 percent on top of the total owed.

How to Avoid IRS Penalties

The easiest way to avoid IRS penalties is to file your return carefully and on time. If you have a few complex tax issues, it's better to hire a tax professional to assist you than to risk completing the return incorrectly. Should your return show a balance due, contact the IRS right away to make an arrangement to pay it in installments if you cannot afford to make a lump sum remittance.

Complying with the IRS Tax Code is the best way to avoid dealing with an IRS penalty. If you follow the agency's requirements properly, you may never have to face an IRS penalty at all.

*Image Courtesy of Flickr

Accountant vs.Tax Attorney: Which to Hire for Income Tax Help

Tue, 07 May 2013 12:00:00 GMT

When you own and operate your own business, you'll have to deal with many financial concerns over the years. Some of these issues could pose a real danger to your company, especially if they affect your ability to take on new clients or deliver your products to customers. One way to avoid many of these problems is to hire a qualified financial professional to shoulder some of your responsibilities for you. Both accountants and tax attorneys can be of great help, but how do you know which professional to hire? Here's a quick overview of the differences between the two.

What is an Accountant?

An accountant is a financial expert who performs general ledger duties and tax preparation. Typically, an accountant has a bachelor's degree or, in some cases, a master's degree in the fields of accounting or finance. The bulk of an accountant's work experience involves the general ledger, which includes calculating a business' bottom line and recording the assets and liabilities. Accountants may also perform some bookkeeping tasks, such as reconciling bank statements and keeping up with monthly expenses for income tax reporting purposes.

Certified public accountants (CPAs) are highly trained accountants who perform additional services such as financial advising and retirement planning. CPAs must pass an extremely strict state examination in order to receive their certifications and then must re-certify every few years in order to maintain their licenses. They often attend continuing education courses on a regular basis to refresh their knowledge of tax and financial matters.

What is a Tax Attorney?

Tax attorneys are both financial and legal experts. These professionals typically have finance or accounting degrees, in addition to degrees in law. They are practicing attorneys who concentrate on the legal implications of taxation and accounting. Tax attorneys are qualified to perform all of the services of accountants, but they can also serve as legal counsel. In order to obtain licenses to practice law, these professionals must pass the state administered bar exam. They must also take further courses to keep their licenses current. Some tax attorneys are also certified public accountants.

Who Should I Hire?

Depending on your circumstances, you may need both of these experts at some point during the operation of your business. If you're in need of help to calculate your income statement or to prepare your income tax return, then an accountant would offer all of the assistance you need. However, if you're dealing with a financial matter that has legal implications, such as a payroll dispute or provide IRS audit defense, then you'll need the services of a tax attorney.

Both accountants and tax attorneys offer valuable services and tax advice for a small business owner. If you avail yourself of their expertise, you may be able to avoid many of the common financial issues that could sink your business.

*Image Courtesy of Flickr

Tax Relief through the Mortgage Forgiveness Debt Relief Act

Fri, 03 May 2013 12:00:00 GMT

The Mortgage Forgiveness Debt Relief Act, which was originally passed in 2007, was recently extended through the 2012 tax year. This law provides a substantial tax break for homeowners who lost homes to foreclosures by allowing them to avoid taxation on their cancelation of debt. The federal government extended the Mortgage Forgiveness Debt Relief Act using the Emergency Economic Stabilization Act in an attempt to revamp the lagging U.S. economy.

What Does the Act Cover?

This act is only valid on canceled debt, or debt that has been forgiven by a debtor. Generally, whenever a taxpayer owes an outstanding debt to a mortgage holder, he or she is responsible for repaying the loan in full. However, in severe economic situations such as an illness or a job loss, the homeowner may not be able to repay the mortgage. In the event of a foreclosure, the mortgage lender repossesses the home and writes off the amount of the loan after the taxpayer fails to make timely payments.

In usual situations, the amount of the loan that the lender forgives would be considered taxable income to the homeowner. For example, if an individual held a $250,000 mortgage that was forgiven by the lender, then he would have to include that $250,000 in his gross income for the year and pay income tax on it. However, under the Mortgage Forgiveness Debt Relief Act, taxpayers who have canceled debt from 2007 to 2013 can exclude this amount from their taxable income.

How Does the Law Help Homeowners?

This law offers money saving tax deductions for homeowners who would normally have to pay taxes on their forgiven mortgage debt. The relief is particularly helpful for those who have suffered through foreclosure. Many people who lose their property through foreclosure may not be aware that they will owe income tax on their canceled debt at year's end and may have been unprepared for the high tax bill they would have received.

What are the Exceptions?

It's important to note, however, that the Mortgage Forgiveness Debt Relief Act is only valid on debt up to $2 million. Those who have more than $2 million of forgiven debt will have to pay tax on the canceled debt over that threshold. Taxpayers who are married, but file separate tax returns, can only exclude canceled mortgage debt up to $1 million.

The economic losses sustained during the housing market crash of 2008 caused many homeowners to lose their properties. As a result of the Mortgage Forgiveness Debt Relief Act, those taxpayers won't have to go further into debt.

*Image Courtesy of Fickr

How Debt Cancelation Affects Your Taxes

Tue, 30 Apr 2013 12:00:00 GMT

As a result of the economic crisis of recent years, many American taxpayers have applied for and received cancelation of some debts such as mortgages, car loans, and credit card bills. One thing that some citizens may not know, though, is that their canceled debt may be subject to income tax by the IRS. While the tax bill they get at the end of the year may be considerably less than the debt that was canceled, it may still put a strain on the household budget. The best way to prepare for this is to speak with a tax professiona l to find out if your canceled debt is taxable well in advance of the income tax deadline.

Which Canceled Debts are Taxable to the IRS?

According to the IRS, most personal and consumer debt cancelations are subject to income tax. One of the most common types of these debt cancelations is personal credit card debt. If you are able to convince your credit card company to write off most of your balance, you'll likely have to include the forgiven amount in your gross income for the year and pay tax on it. Another commonly canceled debt that is taxable is medical expense debt. For example, if you have an account balance that you're paying for previous hospital services, the hospital may offer you a debt reduction arrangement that drastically cuts the amount you owe. The IRS commonly requires that the amount of this forgiven medical debt be included in your gross income.

Do You Qualify to Exclude Your Canceled Debt?

However, several kinds of debt cancelations are expressly excluded from taxation. These include select student loan debt cancelations, any debt that is forgiven during bankruptcy proceedings, business debts that are forgiven, and farm debts that are canceled. Normally, the IRS would require taxpayers to include their forgiven mortgage debt in their gross income, but the government has allowed for an exception to this rule in the Mortgage Forgiveness Debt Relief Act of 2007. Under this provision, homeowners can exclude up to $2 million of mortgage debt that is forgiven by their lenders from their gross income for the year.

The relief that comes with getting a large amount of debt canceled can quickly be replaced with worry about how to pay tax on this amount. If you find out whether your canceled debt is eligible for exclusion from tax, you can save yourself unnecessary stress when it's time to pay your tax bill.

*Image Courtesy of Flickr

Types of IRS Notices: Guide to IRS Letters and Correspondence

Fri, 26 Apr 2013 12:00:00 GMT

Have you gotten a letter from the Internal Revenue Service in the mail? If you have, you may have been nervous just to see the IRS return address in the envelope corner. However, the majority of IRS correspondence that is sent out is relatively harmless. In a few cases, though, IRS notices can bring bad news such as a stressful tax audit or a tax collection. Here's a quick overview of the types of IRS notices that are commonly mailed and how you can handle IRS correspondence.

Common IRS Notices

One of the most common IRS letters is a request for additional information. This usually happens if you file a return claiming a tax deduction that the IRS wants to know more about. For example, if you deduct an unusually large medical expense, the agency may request that you submit copies of your hospital or doctor records and receipts of your payments to support your deduction. In this case, you can simply make copies and submit them by mail to the agency to resolve the matter.

Another typical IRS notice is a reminder that you need to file a past return. You might get one of these letters from the IRS if you have unfiled tax returns from a previous year. This doesn't have to spell disaster either, since your return may actually result in a refund or just a small balance due.

IRS Audit Notices

If the IRS decides to audit you, you'll usually get a letter that says your return has been “selected for examination.” This means that your most recent tax forms are being subject to further review. However, you may only have to conduct your audit by mail, in which case you won't ever have to submit to an in-office review or a home visit from an agent. If you'd rather not deal with this on your own, you can always enlist the tax services of a CPA or an Enrolled Agent.

How to Respond to an IRS Letter

There are a few things to keep in mind when you're responding to an IRS letter. First, answer the letter as quickly as possible. If you simply ignore the notice, the agency may continue with collection action against you. Secondly, make sure that you respond to the same address from which you received the letter. By doing this, you can ensure that your response gets delivered to the appropriate agency department. You'll also have to show a bit of patience after you answer the IRS notice. It may take weeks or even months for the agency to get back to you.

Getting an IRS letter in the mail doesn't have to be a traumatic experience. If you answer the letter quickly and honestly, it's likely that you can handle your IRS correspondence without additional worry.

*Image Courtesy of Flickr

Taxes and Divorce: Update Your IRS Status and Keep Your Refund

Tue, 23 Apr 2013 12:00:00 GMT

Are you going through a divorce or a marital separation? If so, the effect that this life change will have on your income tax status is likely to be one of the last things on your mind. However, it's important to consider how a divorce impacts your income tax filing, especially if you normally receive a tax refund each year. The decisions you make during your divorce proceedings can literally make the difference between receiving a refund and owing a balance due on April 15.

Choose a Tax Filing Status

Most married couples file a tax return together and use the "Married Filing Jointly" status. This filing status entitles couples to additional tax benefits such as an increased standard deduction, higher income limits for Earned Income Credit, and double the tax deduction for IRA contributions. As a general rule, your marital status on the last day of the tax year determines your eligibility to file your return as a married couple.

For example, if you are still married on December 31, then you'll have the option to file a joint return for that year. However, some divorces are so contentious that taxpayers prefer to give up the tax benefits than to file a joint tax return with their ex-spouses. If you decide to file a separate tax return, you'll have to use the "Married Filing Separately" status, which greatly reduces your available tax deductions. On the other hand, if you are already divorced by December 31, you can file as either "Single" or "Head of Household," depending on whether you have an eligible dependent such as a child or an elderly parent living with you.

Update Your Tax Withholding

After your divorce is final, you'll also need to adjust your tax withholding exemptions at work. You can do this by requesting to complete a new Form W-4, which allows you to decide how many exemptions to claim during the year. If you've previously been claiming the Married status and an exemption for both you and your spouse, change this to the Single status and one exemption for yourself. If you fail to do this quickly, you may not have enough tax withheld from your income to cover your tax liability for the year.

Going through a divorce is a stressful situation for anyone to deal with. If you take care of the necessary income tax considerations, though, you can reduce the amount of stress you'll have to endure at tax time.

*Image Courtesy of Flickr

IRS Tax Info Veterans and Military Members Need to Know

Fri, 19 Apr 2013 12:00:00 GMT

Current and former members of the United States military spend much of their life serving in defense of the country. However, these soldiers are not exempt from the income tax regulations of the Internal Revenue Service (IRS). All members of the military should take the time to find out about the tax code laws to which they are subject. According to the IRS, some kinds of military income are taxable, while some are exempt from taxation. However, most military personnel will still have to file an income tax return each year.

Which Military Income is Taxable?

Current members of the military who receive wages or a salary are subject to income tax on their pay. This means that if you are a soldier, and you receive a W-2 form at the end of the year, your income is likely taxable. This also applies to administrative support staff, food service workers, and transportation personnel who work on a military base.

There are a few exceptions to this rule, however. Soldiers and warrant officers who are currently serving in a combat zone do not have to pay tax on their income. Commissioned officers who earn less than a specified income threshold are also exempt from taxation, as are injured personnel who receive pay during a stay in a military hospital. Those who are receiving inpatient care at a hospital are also relieved of the obligation to file an income tax return for that year.

Do Veterans Have to Pay Taxes on Their Benefits?

When it comes to veterans, though, the tax law applies differently. Retired military personnel who are receiving pension income are subject to income taxes on these payments. However, other veterans' benefits are tax-free, including education assistance, disability payments, accessibility grants, and death benefits for surviving family members. Since veterans may be recipients of other types of income or may be filing joint returns with family members who earn regular income, they are still generally required to submit an income tax return each year.

What Records Do Military Personnel Need to Have for Tax Filing Purposes?

When a member of the military files a tax return, he or she needs to access information about current benefits. The Department of Veterans Affairs keeps records of the benefits and assistance paid out to veterans on its website. Before filing a tax return, military personnel can get copies of their tax records and use them to determine which of their benefits are taxable.

Armed with the proper information about their income tax status, members of the military can prepare themselves to file the correct tax forms and remain in compliance with the IRS.

*Image Courtesy of Flickr

Tax Audit Defense: What You Can Do to Protect Yourself From the IRS

Tue, 16 Apr 2013 12:00:00 GMT

If you were to ask taxpayers about their most common fear, many would say that they worry about being audited by the Internal Revenue Service. While the actual number of tax audits done each year is quite low, those who are affected by them can suffer serious financial trouble, leading to large judgments and years of back tax payments. It's far more important to do what you can to avoid a tax audit in the first place. With the proper information and preparation, your chances of being audited by Uncle Sam can become very small.

Ask Your Preparer Plenty of Questions

First, it's essential that you involve yourself in the tax preparation process as much as possible. This means that you'll have to ask your tax preparer as many questions as possible. If the person who prepares your tax forms seems unwilling or unable to answer your questions, you need to find another preparer. It's true that your tax professional's name appears on the form, but the IRS will ultimately hold you responsible for the accuracy of your return.

You should ask your tax professional about any part of the filing process that you're unfamiliar with or unsure about. For example, if your tax preparer asks you for your business expenses, you might bring in documentation for each bill that you've paid in the course of business that year. However, you may not be able to deduct all of these expenses legally. If your tax preparer simply claims all of them, you might find yourself in hot water with the IRS. Instead, ask your tax professional exactly which expenses you can claim and then find the documents you need to support them.

Always Keep Your Important Paperwork

Another way you can avoid an IRS audit is to keep copies of the relevant tax figure receipts and paperwork. These documents usually include receipts for business purchases or expenses, documents that support your itemized deductions, and all the information relating to your wages, salaries, or tips. You'll also need to keep records of paperwork that supports any other deductions such as student loan interest, educator expenses, or moving expenses. If you have to amend your original return, keep copies of the receipts that back up the adjustments you make to your forms.

An IRS audit is a rare, but very real, danger to your economic standing. By doing all you can to avoid an IRS audit, you'll reduce the likelihood that you'll have to endure one of your own.

*Image Courtesy of Flickr

Alternative Minimum Tax: How You Could Be Paying Too Much in Taxes

Fri, 12 Apr 2013 12:00:00 GMT

If you've been paying the traditional income tax for the past several years, you may not have even heard of the Alternative Minimum Tax. In reality, though, this separate tax system affects many Americans each year, including some who didn't know they were even subject to it. What is the Alternative Minimum Tax? Should you be concerned about having to pay it? Is there anything you can do to find out if it applies to your tax return?

What is the Alternative Minimum Tax?

The Alternative Minimum Tax, often abbreviated as AMT, is a separate tax code that applies to some American households. Generally, the tax is used for families or individuals who pay more than a specific amount in taxes each year. For example, if the AMT on your income is higher than the traditional tax on your income, you're probably subject to the AMT.

The AMT system was created several decades ago, but it was originally intended to affect higher-income households only. However, the system became outdated quickly, because the government did not adjust the income limits for inflation. As a result, more and more middle class and lower-middle class families began to be affected by the tax as the years went by. Unfortunately for these taxpayers, the AMT system nearly always results in a higher amount of tax due. This is largely because the AMT disallows many of the common tax deductions, including child tax credit and home mortgage interest.

How to Know If You're Subject to AMT

If you're wondering if the AMT applies to you, you can complete a simple worksheet that comes with the regular Form 1040 instructions. When you follow the tax form to prepare your return, stop at line 45 and complete the worksheet provided to find out if you are subject to the AMT. The good news is that many American taxpayers will now be exempt from the tax because the government has agreed to adjust the AMT limits for inflation. Over time, the system may eventually be relegated to upper-income households once again.

AMT Tax Considerations

If you find out that the AMT applies to you, a good place to start is by hiring a professional tax adviser who can help you navigate this special tax code. You'll be allowed to exempt part of your income from the tax, but this amount is phased out at the higher levels of income. Make sure that you pay attention to your income level so that you can accurately estimate your tax liability for the year.

The Alternative Minimum Tax can be complicated, confusing, and downright frustrating. Getting the assistance of an experienced tax professional can help you know where you stand with the AMT.

*Image Courtesy of Flickr

IRS Enrolled Agents vs. CPA: Which is Right for Your Tax Situation

Tue, 09 Apr 2013 12:00:00 GMT

Financial advisers and experts advertise their services every day. How can you tell which professional to hire for your IRS tax needs? Much of it depends on the specific kind of assistance you're looking for. Ideally, you should choose a professional who is best qualified to handle your money matters. Often, that means hiring a Certified Public Accountant (CPA) or an IRS Enrolled Agent (EA). But, how can you tell which one to choose for your financial needs?

What's the Difference Between a CPA and an EA?

First, it helps to understand the difference between the work of a CPA and the work of an EA. A CPA is qualified to handle all kinds of accounting issues, including general ledger duties, bank reconciliations, and income statements. CPAs are also skilled in preparing income tax returns, communicating with the IRS, and representing you in auditing cases. Generally, a CPA can handle just about any kind of financial issue you have.

An Enrolled Agent, however, is primarily taught to care for matters that relate to income tax preparation and auditing. For example, if you are audited by the IRS, an EA can represent you during the process and provide you with specialized advice to help you present your case. EAs are either former IRS agents who have worked for the agency for at least five years or they are accountants who have passed an intensive, two-day examination about the regulations of the IRS tax code.

Things to Consider When Making Your Decision

Now that you know the difference between an EA and a CPA, how can you decide which one to use? Here are a few things to keep in mind as you're deciding.

How often will you need assistance?
Do you need ongoing help, possibly on a monthly basis? A CPA may be the best choice for you, because these individuals can offer regular advice and assistance on a variety of financial topics. In fact, CPAs may be an ideal choice for those who are operating a business.
Are you primarily worried about tax matters?
If your biggest worry comes at tax time, then an EA may be a better selection. Since Enrolled Agents are so well versed in the IRS tax code, they can advise you about how to avoid falling into common auditing traps and how to make sure that you are well prepared for possible tax issues in the coming year.
How important is it that you develop an ongoing relationship with your adviser?
Would you prefer to establish a long-term relationship with your accountant? If so, make sure you work with an EA or a CPA who works for themselves, rather than those who are employed for large corporations. With a self-employed professional, you're far more likely to receive a higher level of customer service and to be able to speak to the same person each time you contact the agency.

Both a CPA and an EA can be helpful in financial matters. Knowing which one will best suit your needs can help you avoid any potential troubles with Uncle Sam or the IRS.

*Image Courtesy of Flickr

IRS Tax Free Gifts: Exclusions and Deductions

Fri, 05 Apr 2013 12:00:00 GMT

Taxpayers who deduct gifts on their tax returns often wind up getting audited, but that doesn't mean that the IRS disallows all deductions for gifts. In some instances, taxpayers can receive gifts without paying taxes or give gifts and claim a deduction. The key, however, is knowing the IRS rules for tax-free gifts.

Gifts That are Excluded from Taxes

Sometimes, the IRS will allow a taxpayer to receive a gift and not have to pay any taxes on its value. Generally, this only applies in cases where a taxpayer receives the benefits of a paid expense. For example, if someone directly pays an expense on your behalf, you can benefit from this "gift" without having to pay tax on its value if it is for a legitimate expense such as medical care or college tuition.

Similarly, the IRS allows taxpayers to give gifts to their spouses without their spouses having to pay tax on the gift's value. As an example, if a wife gives a husband an expensive car as a gift, he can receive that gift and not be required to pay income tax on the market value of the vehicle. This could result in a considerable savings on the tax return at the end of the year.

The IRS also allows individuals to receive gifts under a certain amount each year without paying taxes on them. This amount is referred to as the annual exclusion amount. In 2009, for example, this amount was $13,000 per taxpayer. In that year, an individual could receive a gift valued up to $13,000 and not have to pay taxes on it.

Tax-Deductible Gifts

On the other hand, what if you're the one giving the gift? Can you ever write the expense off as a deduction? The IRS allows taxpayers to deduct the cost of giving gifts in two specific situations: charity and business. However, each scenario carries a condition that must be met if you're going to deduct the expense.

If you donate anything to a qualified charitable organization, whether it’s property, cash, or possessions, you can deduct the value of these gifts on your tax return. The only requirement is that you itemize your deductions in order to claim the expense. If you give business gifts to your co-workers or colleagues, you can also write them off as deductions. However, this benefit is capped at $25, which means that you can only deduct up to $25 per gift, no matter how much more the gift may actually cost.

Giving gifts can be a great way to improve the quality of a business or personal relationship. As long as you follow the IRS rules for deducting gifts, you'll avoid facing any messy tax problems from gift giving.

*Image courtesy of Flickr

Taxpayer Name Change: How to Update Your Info with the IRS

Tue, 02 Apr 2013 12:00:00 GMT

Taxpayers who get married, get divorced, or adopt kids often deal with name changes. While these individuals may remember to use their new last names in their everyday dealings, they may forget to update the records of their names for tax purposes. Whenever a taxpayer changes a legal name, though, he or she needs to do so in a way that will not interfere with their ability to file a tax return on time.

When Taxpayers Consider a Name Change

Generally, taxpayers consider changing their names after making serious life changes such as getting married, getting divorced, or adopting a child. For example, a woman who gets married may change her last name to reflect the name of her new spouse. Some husbands may also change their names by hyphenating their names to include those of their partners. In cases of divorce, ex-spouses may decide to resume using their former last names. Parents who legally adopt children also need to adjust the legal last name of the children. They may decide to hyphenate the children's last name to include their new name or to change the last name completely to reflect their new family.

Name Changes and Income Tax Returns

A name change doesn't just affect the legal identify of a taxpayer; it also affects the name that individual uses for filing a return. It is essential that a taxpayer who has previously filed a return using his or her former name update their information with the Social Security Administration so that the SSA records show the updated name. If a taxpayer neglects to update his or her last name with the SSA, there may be filing issues at tax time. For example, if an individual files a tax return electronically, his or her refund may be delayed if the name on the tax return does not match the name in the Social Security Administration's records.

Changing a Taxpayer's Name

The process for changing a name with the Social Security Administration is actually very simple. All a taxpayer has to do is complete Form SS-5 "Application for a Social Security Card" and use the updated name that he or she wishes to use from then on. They can then submit the completed application by mail or in person at the nearest SSA office. The SSA will issue an updated Social Security card with the same number and the new name within a few weeks.

Adopted children who don't have a Social Security number yet need to obtain an Adoption Taxpayer Identification Number (ATIN). Parents can get this number by completing IRS Form W-7A and submitting it to the IRS. Once the agency issues this number, parents can use it to claim the child as a dependent until he or she receives a Social Security number of their own.

A name change doesn't have to derail a person's ability to file an income tax return. As long as taxpayers complete the process of updating a name correctly, they can rest assured knowing their tax refund won't be interrupted by an outdated Social Security record.

*Image courtesy of Flickr

How to Use an IRS Payment Plan to Resolve Tax Debt

Fri, 29 Mar 2013 12:00:00 GMT

The income tax deadline is rapidly approaching and if you owe money to the IRS, you don't have much time to come up with your balance due. But what can you do if you won't have the money you need to pay off your tax bill? One solution is to sign up for an IRS installment plan. These plans make it possible to pay off your tax balance over time, rather than all at once.

What is an IRS Payment Plan?

How does an IRS payment plan work? This option gives you the ability to decide which day of the month you'd like to submit a payment and how much you'd like to send in per month. While the IRS allows taxpayers to decide how much to pay each month, they must choose an amount that will allow them to pay the balance in full within three years.

How to Request a Payment Plan from the IRS

If you want an IRS payment plan, how do you go about getting one? By completing Form 9465 "Installment Agreement Request" and sending it along with your completed Form 1040 return. When you complete Form 9465, you'll need to enter your full name, mailing address, and Social Security number. You'll also have to the amount you'd like to pay on your balance each month.

Should you decide to submit your tax return electronically, you can complete Form 9465 electronically along with your other forms. If you'll be hiring a tax professional to prepare the forms for you, he or she can fill out Form 9465 on your behalf and help you prepare it for submission.

Taking Care of Large Debts with an IRS Payment Plan

While the vast majority of taxpayers can request a payment plan online or with their e-filed tax returns, some may not be able to do so. For example, if you owe more than $25,000 in tax debt, you'll have to request your installment plan in writing by completing Form 433F in addition to Form 9465 in order to get your request approved by the IRS. As with the smaller debts, you'll have to set up a plan that allows you to pay off your balance in full in no more than three years.

Do you owe a balance to the IRS? Are you expecting to owe a balance on your tax return this year? Consider signing up for an IRS payment plan to care for tax debt. If you do, you'll be able to pay off your account in a manner that doesn't put a crimp in your finances.

*Image courtesy of Flickr

Self Employment Income Tax Tips for Freelancers

Tue, 26 Mar 2013 12:00:00 GMT

Are you a freelancer who is dreading the income tax deadline this year? If so, your concern is understandable since freelancers are among the most frequently audited taxpayers. The good news is that you can successfully navigate your way through the income tax code and avoid the traps that catch so many of your colleagues.

Possible Tax Pitfalls for Freelancers

The federal income tax code is full of potential snares for freelancers but the two biggest problems areas are estimated taxes and risk of being audited. Generally, if you expect to owe more than $1,000 in tax during the tax year, then you'll need to make estimated tax payments. The IRS requires that self-employed taxpayers pay their own share of Social Security and Medicare taxes, as well as the portion that an employer would normally cover. The effective tax rate equals over 13 percent for these individuals.

To comply with the IRS requirements for estimated taxes, you'll need to take your total projected income, calculate the 13 percent tax, and then divide the total by four. After you've figured this amount, simply send in one portion each quarter along with the appropriate tax voucher.

Risk of auditing is another possible concern for freelancers at tax time. Since freelancers are considered self-employed, the IRS may decide to take a closer look at some of the deductions you claim. It's always advisable to keep receipts for all of your major deductions for up to three years. If you're audited by the IRS, you'll be able to use the documentation to support your claims.

How to Claim Common Freelance Tax Deductions

What are some common freelancer tax deductions you might claim on your return? One typical deduction that can trip up freelancers is business use of home, often referred to as the "home office" deduction. Despite concerns about high audit risks from this deduction, there's no reason not to claim this expense if you can legitimately do so. The key is making sure that the area you are deducting is exclusively and regularly used for business. So, if you have a room in your home set aside just for work purposes, then you can probably take the deduction.

Travel expenses are also a common write off for freelancers. However, if you spend part of your time on the road sightseeing and part of the time transacting business, then you'll have to separate the personal expenses from the business ones before you can write them off. The same is true for your dining costs on business trips.

The federal income tax code can pose all kinds of hidden dangers to freelancers, but you can sidestep many of the problem areas if you find out which deductions apply to you, back your claims up with receipts, and file your return on time this year.

*Image courtesy of Flickr