Recent news articles have brought to light the fact that almost 47% of households in the US currently have zero or negative federal tax liability. We take a closer look at this lack of liability across each income level, highlighting the percentage in each range that will not pay any taxes. Also shown is a full breakdown of who is paying the bulk of all taxes collected by the Federal Government each year.

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The opportunity to convert an existing regular IRA to a Roth IRA may be the single biggest upside to the stock market’s extended slide. The younger you are and the more aggressive your investment strategy, the more likely it is that a conversion to a Roth IRA will make sense for you.

You may already be aware of the key difference between a regular IRA and a Roth IRA.  At a very high level, a regular IRA provides for tax-deferred growth whereas a Roth IRA gives you tax-free growth. All else equal, we’d all prefer tax-free growth, of course. Here’s everything you need to know about Roth Conversions

Contributions to a Roth IRA are limited and are not deductible

Trouble is, income limitations prevent everyone from being eligible to contribute to a Roth IRA. During 2009, if you’re single and make more than $120,000 ($176,000 combined with your spouse, if you’re married), you can’t contribute a dollar to a Roth IRA. Furthermore, those who can make a Roth IRA contribution can’t deduct it – that’s your key upfront sacrifice for the many future years of tax-free growth.

A Roth Conversion allows everyone access to a Roth IRA

Let’s first define what a Roth conversion is: the transformation of your retirement account from tax-deferred to tax-free status. You effectively move money from an existing regular IRA or former employer’s 401k account into your Roth IRA. The cost to do this conversion is the payment of regular income tax on virtually the entire amount you convert.  (You’ll pay tax on 100% of the converted amount unless you previously made non-deductible contributions).

Roth Conversion restrictions are going away

Through the end of 2009, conversions are only available to those people who earn less than $100,000 and have filing statuses other than married, filing separately. However, both of those restrictions are eliminated at the end of the year. As a result, anyone who wishes to contribute to a Roth IRA but whose income level is too high can make a 2009 contribution to his/her regular IRA and simply convert part of their account in 2010.

Why converting your Roth IRA could make sense today

If you’re confident your 2009 adjusted gross income will be less than $100,000, you don’t have to wait until 2010 to convert.  Furthermore, you can take advantage of market downturn, as I referenced earlier.  Here’s a simple example:

Say you invest in stock and you accumulated 300 shares of Johnson & Johnson stock (JNJ) over the years. If you converted your shares during April of 2008, when JNJ was trading at about $67 per share, you’d have converted $20,100 of stock. Assuming you were in the 25% tax bracket, you would have owed about $5,000 in taxes on the conversion.

In April 2009, JNJ was trading at about $51 per share. If you converted the stock then, you would have converting $15,300. If you were in the same 25% tax bracket, you’d owe just over $3,800 in tax, not $5,000, for a permanent tax savings of $1,200. In either conversion, you retain ownership in the long-term potential price appreciate of JNJ, yet in the latter case you’ve successfully timed the market from a tax perspective.

It’s certainly possible that stock prices could go lower from here and that a further delayed conversion could be even more lucrative from a tax perspective.  Nonetheless, a conversion could make more sense for you today than at any time previously.

Take advantage of your youth

The big upside of voluntarily paying taxes (since you don’t have to convert), is the tax-free appreciation of your converted investments.  The longer the amount of time you have until you plan on taking your money out (ideally retirement), the greater the odds that a Roth IRA conversion will make sense.

In addition, the better your investment performance between now and retirement, the greater the upside of converting to a Roth IRA. Still, it makes sense to run the numbers.  Importantly, it seldom makes sense to convert to a Roth IRA if you don’t have the money available to pay the tax on conversion.   Using money from your IRA to pay the tax almost never makes financial sense.

Keep in mind that it’s not an all-or-nothing proposition. If you want to convert your retirement account but just don’t have the funds set aside to pay all the taxes, consider converting some of your account.  You can always do some more next year.

Michael B. Rubin is the author of Beyond Paycheck to Paycheck and the blog of the same name. He is the President of Total Candor, a financial planning education company.

You know what they say, there are two things in life you can’t avoid: death and taxes. So you’d better make sure you understand both. Death & Taxes 2010, the infographic, will show you exactly how the Obama administration is planning to spend your money. Completely updated and newly released, it contains over 500 programs and departments and almost every program that receives over 200 million dollars annually. The data is straight from the president’s 2010 budget request and will be debated, amended, and approved by Congress to begin the fiscal year. All of the item circles are proportional in size to their spending totals and the percentage change from 2009 is included to spot trends and disproportion.

If you pay taxes, then you have paid for a small part of everything you see here. “Death and Taxes” is essential reading for any responsible citizen or information junkie.

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Tax season is almost over but there’s still time to maximize the tax benefits of your 401k(s) and IRA(s). Before you can begin reaping the potential benefits however, you’ll need to ask yourself a few questions relating to your current station in life and where you’d like to be come retirement age.

1. Do you plan on working to the age when you can withdraw retirement funds penalty free or retire early?
2. Do you need the benefit of tax deductions right now due to a tough financial situation?
3. Are you in a higher tax bracket right now than you think you will be in retirement?
4. Do you think your lifestyle will be less or more expensive in retirement?

Without an answer to these tough questions, it is very challenging to know whether to invest your retirement savings through the traditional or Roth options available to you. And what about an SEP IRA? When can that come into play?

When it comes to choosing the retirement account that makes the most sense for you, there are some general tips you can follow. Your answers to the previous four questions will only enhance your ability to get the most out of these tips.

1. Get Free Money First
Before considering an IRA, you should first make sure that you are getting the maximum benefit out of your employer’s 401k plan. What this means is that before contributing funds to any IRA, you should get the maximum match from your employer in your 401k. If you’re not sure what that amount is, you have some homework to do. Once this maximum match has been achieved, you can move over to IRA’s.

2. Know Your Limits
They can change annually so it’s worth checking. For 2009, the IRS maximum allowed contribution per individual for 401k’s is $16,500, with an additional catch-up contribution for those 50 and older. For both IRA’s, it is $5,000 (combined per individual), with a catch-up contribution of an additional $1,000. In 2010 and beyond, limits are indexed to inflation.

3. Understand What a Tax Deduction is
Every dollar you contribute to a traditional 401K or IRA is a dollar taken off the top of your taxable income for the present year. For instance, if I earned $40,000 this year and maxed my traditional IRA and 401k contributions, my taxable income would be $18,500 versus $40,000 ($40,000-$16,500-$5,000 =$18,500). If I’m in the 15% tax bracket, this would shave $3,225 off of my $6,000 tax obligation for the year.

4. Understand the Term ‘After-Tax’
Both the Roth 401k and IRA options are ‘after-tax’. This means that your contributions are after taxes have already been subtracted. You are getting taxed today, for the benefit of not being taxed when you start getting distributions later on. With the traditional options, you are getting the benefit of not being taxed today, but you will be taxed on your distributions later on.

5. Understand the Trade-offs
If you plan on retiring early, opting for the traditional options versus the Roth can allow you to save your tax cuts towards this goal, if you are disciplined enough to do so. But there is always a catch, right? You will have less money in retirement because you are taxed on your distributions through the traditional.

6. Know Yourself
If you plan on traveling the world and living lavishly in retirement, it makes sense to take the tax hit now with the Roth options so that you have more money in retirement. If you plan on living humbly in retirement (after all, any mortgages should be paid off by then), then you may want to take the tax hit down the road.

7. Understand Your Current Situation
If you are making a fair wage but are drowning in debt and will be in the red for the year, then it would rarely make sense to opt for the Roth options when you could be getting the tax benefits of the traditional options today, which could be a life saver for you.

The Third Option

We’ve discussed Roth and traditional options fairly extensively, but have not yet discussed the SEP IRA. The circumstances allowing you to contribute to an SEP IRA differ from the traditional and Roth IRA options. You may open an SEP IRA if you have self-employment income from freelance or other work. Other than contribution limits, SEP’s pretty much operate in the same way as traditional IRA’s.

As we discussed in the previous IRA article, SEP’s are a highly desired option for the self-employed who have already maxed out on their traditional and Roth contributions, yet still want additional tax deduction benefits. The maximum dollar allocation is $49,000 in 2009.

For more of GE Miller’s writing, visit 20somethingfinance.

To learn more about contributing to an IRA, visit Mint’s IRA Advisor.

If anxiety over doing your taxes has reached a fever pitch, you’re not alone. The vast majority of taxpayers wait until dangerously close to midnight on April 15 to file. And one of the biggest contributors to this procrastination is a lack of understanding around exactly which form to file. We can’t necessarily making filling out your tax forms any less boring but we can give you the information you need. Here is a summary of the forms you will most likely need and what each form reports.

The most commonly used tax forms are 1040, 1040A and 1040EZ. The individual income tax return form 1040 is a standard; it is used across the board whether you make $20,000, $150,000 or more in annual income. Form 1040 is used to report wages, salaries, filing status, exemptions and itemized deductions. Form 1040A is similar to 1040 except it does not report items such as alimony received, business income, rental real estate, royalty income and other taxes such as unreported social security and Medicare tax. 1040EZ is the most basic tax return; it is primarily for single and joint filers with no dependents. The Internal Revenue Service website is the best and most reliable place to obtain all the tax related information you need. It has all the forms you need to properly file your taxes. Publication 17 is the best resource provided by the IRS to assist tax preparers. The publication summarizes important tax changes that took affect within the last year and discusses these changes in detail. Another publication that details tax law changes is Publication 553, Highlights of 2008 Tax Changes. Both of these publications can be obtained through the IRS.

W-2’s are the tax forms most of us receive. These come from our employers and report wages, tips, social security, Medicare, withheld income taxes, severance pay and other types of compensation. For the lucky ones who have won the lottery or received any type of gambling winnings of $600 ($1,200 from bingo or slot machines) or more in the past year, they will receive Form W-2G from the place that awarded the funds. Form 1099-MISC reports other forms of income such as rent or royalty payments of $10.00 or more. It also reports prizes and awards from TV and radio of $600 or more. The form can be used to report payments made to physicians or other types of medically related expenses or income from contract or freelance work. If you made any donations to a charity throughout the year you should receive a statement from the charity stating the date of the donation and the amount you contributed. This will be used as proof for your tax deduction. If you don’t receive any statement from the charity, make sure you have a canceled check or a copy of one with the name of the charity, the date and the amount donated.

Companies paying out dividends report dividend and distributions such as capital gain distributions or non-taxable distribution for those who have investments on Form 1099-DIV. Interest obtained from bank savings, checking or other interest bearing accounts is reported on Form 1099-INT which is provided by your financial institution. Commonly used schedules which are attached to tax returns are Schedules A and B (reports itemized deductions, interest and ordinary dividends), Schedule C (reports profit and loss from a business), Schedule D (reports capital gains and losses) and Form 2441 (for child and dependent care expenses).

This year, there are additional tax credits you may be eligible for. The Recovery Rebate Credit is for people who did not get a Stimulus Payment or if other circumstances changed during the previous year. If it was your first time or you will be buying a home between April 8, 2008 and July 1, 2009, you may qualify for the First-Time Homeowners credit. Also, if you earned less than $41,646 in 2008, you may qualify for the Earned Income Tax Credit. Find out more on the IRS website or talk to your accountant to see whether you qualify.

If you are the type who likes to do your own taxes, you can start by signing up for Mint.com. Mint.com automatically categorizes your transactions and allows you to tag expenses and income as tax related. Don’t forget to tag health care expenses, unreimbursed business and any interest you’ve earned. Mint.com can export your transactions so they can be imported into a spreadsheet that you can use to estimate your taxes.

Three popular software programs for doing your taxes are TaxCut from H&R Block, TaxAct, and TurboTax from Intuit. TaxCut is more for people who are already comfortable filing their own taxes or are familiar with concepts such as tax-exempt dividends and cost basis. TaxACT handles both simple and complex returns, offers a free deduction examiner, and lets you prepare, print and file your federal tax return for free. TurboTax is perhaps the most comprehensive, with easy to understand explanations that help clarify over 350 possible deductions and credits. The IRS also provides a Free File service. It allows those who earned $56,000 or less in 2008 to use their tax software and e-filing for free in either English or Spanish.

If you feel more comfortable having someone else prepare your taxes, make sure you select someone you trust professionally. This is a long-term relationship and one that is nearly as important as choosing a doctor or a lawyer. You’ll want someone who has a few years under their belt preparing tax returns for people in your particular situation. Be leery of any tax preparer who guarantees a certain amount of refund or who bases fees on a percentage of the amount of the refund. These types of tax practitioners are not working for your best interest. As the taxpayer, you will ultimately be responsible for what is on the tax return, it is extremely important to select the right person. Researching an individual through your local Better Business Bureau will reveal whether the person has had any questionable history or complaints filed against them. You can also look for individuals who are Enrolled Agents (EA), Certified Public Accountants (CPA) or Tax Attorney’s. These professionals provide tax preparation, representation before the IRS, tax planning and other financial services. For individuals who are 60 years of age or older, trained volunteers from non-profit organizations provide free tax counseling and basic income tax return preparation through the Tax Counseling for the Elderly Program (TCE), sponsored by the IRS. AARP also offers an IRS sponsored tax aid counseling program for seniors. The Volunteer Income Tax Assistance Program (VITA) also offers free tax help to low- to moderate-income (generally, $42,000 and below) people who cannot prepare their own tax returns.

Armed with this information, you can make this year the year you won’t stress out at the mere mention of tax returns. Let this year be the one where you will have all your paperwork ready, file your return early or on time and keep a smile on your face as you await a hefty refund.

(ckaroli)

It’s crunch time. We are less than a month away from the tax deadline, but if you have not filed your 2008 taxes yet, you’re definitely not alone. According to the IRS, 1 in 5 taxpayers don’t file their taxes until the final week ahead of the April 15 deadline. Last year, 27 million taxpayers waited until the final minute before the tax deadline.

Filing your taxes early is definitely encouraged, but if you’re one of the many who has not yet filed, you may be surprised to know that there are a still few ways to maximize your tax return. Some of these tips are geared towards allowing you to get your return quicker or holding onto your payment longer so that you may invest it however you decide. Other tips are actually designed to increase your tax deductions from the 2008 year.

Contribute to a Traditional IRA

For those making last minute attempts to reduce their tax payment, or get a bigger refund, you can contribute to your traditional IRA up until April 15th. You can contribute to a Roth IRA as well, but it won’t impact your tax return. Additionally, if you have an SEP or a Keogh IRA, you will get a filing extension to October 15th. To qualify for the full annual IRA deduction this year you must either:
a. not be eligible to participate in a company retirement plan
b. have adjusted gross income of less than $53,000 if you are single, or $85,000 or less for married couples filing jointly.

E-File your Taxes

If you e-file your federal return and request direct deposit, you can expect to receive your return within 10 business days. Additionally, e-filed returns are much less likely to contain errors. E-files are accepted or rejected within 48 hours and have an error rate of 1 percent versus an error rate of 20 percent for paper returns. You won’t get more money, but you’ll get it sooner so that you can invest it however you prefer.

Hold on to your Cash

Owe money on your return? File now and hold onto your cash. You can now have your payment drawn electronically on April 15. You can also use a debit or credit card (may result in a transaction fee) if you prefer. Don’t make this a strategy in future years, as those who owe over $1,000 generally have to pay a tax underpayment penalty.

Get a Second Chance at Last Year’s Stimulus

If you didn’t receive a full $1,200 (married joint filers) or $600 (individual filers) – plus $300 per child, then you may have a second chance to claim last year’s stimulus rebate. Calculate the credit using the worksheet on page 62 of your 1040 instruction package. You can then enter the amount on line 70 of your tax return.

Itemize your Taxes

The standard deduction in 2008 is $5,450 for singles and $10,900 for married couples filing jointly. But you’re not ’standard’, you’re above standard. Itemizing your tax deductions can have a huge impact on your tax return. If you are self-employed, have a home or mortgage, or have a lot of out-of-pocket medical expenses, you may have a good shot at saving more through itemized deductions than taking the standard deduction.

For more of GE Miller’s writing, visit 20somethingfinance.

Worried about an audit? After all, for those with pure souls it’s easy to screw up on your taxes unintentionally due to an incredibly complex tax code. Of course, there are those who intentionally screw up as well. All ethical matters aside, nobody wants to get audited. Here are six time-tested practices to heed when filling out your tax return that will help prevent it from looking like a smoke signal in the eyes of the IRS.

1. Consistency in your Returns:

Make sure that the taxable income numbers in your federal return match up with those in your state and local returns. Additional attention to detail will be needed if you are filing multiple state returns. The right numbers must be carried over to different sections of your return, as failure to follow directions is often one of the simplest ways for people to unintentionally screw up their return and get flagged for review.

2. Don’t Get Lazy with Deductions:

When claiming deductions, don’t get lazy. Let’s say that you drop off two bags of clothing to Goodwill. What looks more suspicious – a $500 deduction because you were too lazy to take the time to add things up, or a $473 deduction based off of a supporting list of every article of clothing you gave away? Additionally, make sure to categorize everything that you can, because a deduction list that is loaded with vague ‘miscellaneous’ or ‘other’ deductions will be a red flag because it points to you not being able to back up your claims.

3. Dust Off your Calculator:

If you are doing your own paper return, make sure to triple-check your math. Mistakes in your math are sure to make the IRS wonder if something else is amiss and they are easily avoided. Most tax software programs do the math for you and mark anything that simply doesn’t add up.

4. Fill in Everything:

Certain lines in your return are not ‘optional’, so be careful not to leave any glaring holes in your return. A blank line here or there could get you automatically flagged, especially if it leads to things not adding up.

5. Look Professional:

You wouldn’t send in a hand-written resume when job searching, so why would you send in a hand-written tax return? Unlike with resumes, messy documentation will get you noticed when it comes to your tax return. If you do file a paper return, try to have it typed out or take careful care to make everything legible. If you have no objections to using software that prints out your return or allows you to e-file, it’s definitely the way to go.

6. Declare all Eligible Income:

If you make $600 in income from any source, you should be given a 1099 form by the income payer. All 1099 income needs to be claimed on your return via the appropriate form and income of less than $600 should be claimed as ‘other’ income. If you don’t claim income under $600 you could get caught if the organization that paid you gets audited.

Also, don’t forget dividends, interest, and capital gains from your various investments. Granted, not many of us will have to worry about capital gains appreciation in 2008.

Don’t Lose too much Sleep:

The reality is that nearly 1.4 million individual returns were audited in 2008. This represents just over 1 percent of all federal returns filed for the 2007 tax year. 78% of these audits were simply paper requests asking for more information. So don’t lose too much sleep. If you take your time, do the right thing, and prepare over the course of the entire tax year, then you should be able to avoid the dreaded tax audit.

When things get as bad as they are in the current economic crisis, there’s a natural tendency to just walk away from your debt. But when it comes to taxes, doing so could eventually land you in jail. The state of affairs has been worsened by the mortgage crisis, the insolvency of banks, corporate bailouts and golden parachutes for executives. And to top it off, there is the admittance by states such as California, that some state-level tax refunds will be issued in the form of IOUs this time around. Before you give in to the temptation to just walk away, consider the implications and penalties that may ensue.

What If You Don’t File, or File Late?

Like most creditors, the IRS doesn’t think your unexpected bills, or personal financial circumstances are reason enough to abandon your debts. Especially in April. Unlike most creditors, however, the IRS has the resources of the federal government to ensure they track you down, and get the money they are looking for from you. It would therefore make sense to prioritize your finances each year in such a way that accounts for your tax liability owed, say before you take that next trip abroad, or perhaps even before any other debt for that matter.

If you fail to file a tax return on time:

-Penalties and interest will be assessed and applied to the original amount owed, which will increase the amount of tax due. Interest will continue to accrue on any outstanding balance.

-The IRS may file a substitute return for you. This return would only be based on information the IRS has from other sources, including W2 and 1099 income reported by others. As a result, additional exemptions and expenses that you would be entitled to will be overlooked, which in most cases, will lead to your tax liability being overstated.

-Once the tax owed amount is assessed, the IRS will start the collection process. The IRS has the authority to place a levy on wages or bank accounts. The IRS may also file a federal tax lien against your property.

It is important to make the distinction between the types of charges and/or penalties that may be brought up and applied to non-filers. While there are distinct implications for each type of offense, they are not mutually exclusive.

Penalties and Fees
There is a penalty for late filing of 5% of the tax not paid by the due date for each month, or part of a month, that your return is late. Generally, the maximum penalty is 25%. But if your return is more than 60 days late, the minimum penalty is $100 or the balance of the tax due on your return, whichever is smaller.

Criminal and Civil Charges
It is considered a criminal act to neglect to file a tax return when a tax liability is owed. This is not to say that the IRS will always pursue a criminal case against you. However, criminal charges may be brought against you at any time, within six years of the date that the tax return was due. The charges carry penalties of up to 1 year in prison and fines of up to $25,000, per year of not filing.

What if You Don’t Pay, or Can’t Pay?
There is a difference between choosing not to file your taxes and failing to pay your taxes on time. This typically is the distinction that is also made between those who choose not to pay taxes, and those that are unable to pay their taxes, or unable to pay their taxes in full. Effectively, not filing sends a message to the federal government of your attempt to not pay taxes: tax evasion. Failure to pay any or all of your taxes on time is typically an admission that you are not in a position to do so.

A lot of individuals are intimidated by taxes owed at the end of year, or have mismanaged money throughout the year and only begun to realize their tax situation in the eleventh hour. If you realize you are unable to pay the full amount before the April deadline, you are encouraged to contact the IRS to discuss your payment options. Filing previously late tax returns, and your 2008 tax return on time or asking for an extension to April 15th are the most important steps to take first. This will enable you to take advantage of every possible exemption, credit, and deduction possible, in an effort to minimize the amount owed for last year. The outstanding amount due for previous years, is the amount subject to penalties and interest, and is the amount to be discussed with the IRS, moving forward.

Penalties For Not Paying or Paying Late
Penalties and interest can be assessed on the taxes you owe forever. This means, that, if you were to be found to have not paid your taxes, for any year or group of years, interest on the outstanding tax liability would therefore be applied, and continue to accrue until paid in full. There are no deadlines on when the IRS may collect the amount owed (unlike the window that the IRS has to go after you for not filing).

Tax Payment Resolution
In some cases, the IRS may reduce or eliminate late penalties. The IRS, however, typically doesn’t waive interest that has accrued on unpaid tax bills. If you are unable to pay your taxes in full, it is suggested that you pursue a satisfactory resolution to this liability. The most common ways to do this include:

Short Term Extension – This is exactly what it sounds like. Based on your circumstances, the IRS may be able to reduce penalties and give an extension for you to repay your tax debt, before additional penalties, fees and interest accrue. This is typically 30-90 days.

Payment Plan – the IRS may allow for a repayment schedule, in order for the full repayment of a tax debt. This typically will be between 12-24 months and it will include interest. The IRS prefers to avoid longer repayment periods, but their main objective is to collect taxes, however possible. If the amount cannot be repaid within twelve months, an installment plan can be lengthened, based on individual circumstance.

Offer in Compromise – If the installment plan won’t work, there are other options. This settlement option is a process by which you – upon qualification – will pay the IRS, but less than 100% of what is due. The cases in which the IRS will most likely settle tax debts are:

-Doubt as to Liability – Doubt by the IRS that they may have assessed tax debt incorrectly.
-Doubt as to Collectability – Doubt by the IRS that you could ever repay the full amount owed.
-Effective Tax Administration – Tax is correct, and the amount owed could be collected, but the taxpayer would have to demonstrate that collection of the tax would create an economic hardship. They could also prove that the repayment of the tax debt would be unfair or inequitable.

What To Do and What Not To Do
The worst mistake people can make in regard to their taxes is to treat this liability as ‘just another bill.’ In most cases, if you choose to stiff the government they will find you. If you have recently come to the understanding that you are potentially liable for criminal offenses per tax law, it is suggested that you contact a tax attorney. As is the case with any other type of law, you will be afforded attorney-client privileges, by which they will not be forced to testify against you in a criminal hearing, as others would.

If you are unable to come up with the money still after trying to settle with the IRS, and even if the repayment plan is not sustainable, or even worse – you lose your job while repaying your old tax debts, there is still hope. The worst thing you could do is to pretend like not filing and not paying your taxes are problems that will go away once you ignore them. Many individuals fail to communicate with the IRS their personal circumstances, or the fact that things have changed. They may later find tax liens against their homes, or their wages garnished for taxes that had previously ignored, or even just to cover previous accrued interest. This is due to the fact that there are such broad misunderstandings on the public’s behalf regarding the collection process. So let it be clear: outstanding tax debt, unless otherwise settled, is collectible by any means necessary by the IRS, forever.

No matter how bad the situation is, the IRS will find a way to settle with you. This may not be in a way that will make you happy, but if your financial situation really is that bad, they will work out something that is at least bearable in most cases. And if you are unsure what to do, consult with experts, and if necessary an attorney. Much like the court system, the IRS will be more likely to work things out with you if you are honest, and preemptive in settling your account. Otherwise, the most ruthless collections methods in the West will be employed in order to get what is due. Keep in mind, the government has nearly 200 million adults, for which it is responsible. They do not have the time to politely ask you to pay your debts.

And, if you can avoid it, try and keep family out. Also, you should steer clear of paying your tax debts with a credit card, because then you will accrue interest on both the late payments and interest by the IRS, as well as by the credit card companies.

If you are behind, and do not know where to begin, the best thing to do is to call the IRS at 800-829-1040, and plan on being on hold for awhile, and at least be in communication with them so that you know where to begin, and so that they know that you care about resolving the debt.

Sources:

http://articles.moneycentral.msn.com/Taxes/PreparationTips/WhatIfYouCantPayTheIRS.aspx
http://www.irs.gov/businesses/small/article/0,,id=108330,00.html
http://www.irs.gov/businesses/small/article/0,,id=108330,00.html
http://www.irs.gov/newsroom/article/0,,id=201879,00.html

Whether you’ve just been laid off or have finally decided to follow your bliss, there’s no question that you need to start thinking differently about your finances. When you had a job, your checks were deposited automatically in your bank account, your taxes were taken out each pay period, your health insurance was paid for, and your employer matched your automatic contributions to your 401k. In part one we took a look at the most important and potentially confusing change, your change in tax status. But freelancers also need to handle the cost of their healthcare, plan a bit more carefully for retirement, and may even need to be concerned about whether they will be paid for their services at all.

Health Insurance

This is perhaps the scariest part of deciding to go freelance. Health care is expensive and individuals looking for health insurance don’t get the same kind of group rates that employers can offer. Many freelancers, especially when starting out, forgo health insurance entirely because of the cost. But don’t make this mistake. One motorcycle accident that puts you in the hospital could be the end of your brilliant career. And there are alternatives that can save you money on this most essential of expenses.

Full-time freelancers paying out-of-pocket for health insurance can deduct the premiums on the first page of Form 1040, says Mark Luscombe JD, CPA Principal Tax Analyst for CCH. He goes on to say that, “If the health insurance is provided through an employer, any portion of the expense that the employee is required to pay can only be deducted as a medical expense on Schedule A of Form 1040, and then only if the taxpayer itemizes deductions and the total medical expenses of the employee, including health insurance premiums paid, exceed 7.5 percent of adjusted gross income.”

Finding appropriate medical coverage might not be easy, but by researching your options thoroughly, you might be able to find good coverage with lower rates. Look into large professional organizations, more often than not, if the organization is large, it will more likely offer lower rates. Check out the Freelancers Union and see what kind of coverage they provide and if it is adequate for you. You can also call insurance companies directly, thus avoiding the middleman such as membership organizations. This can help decrease your costs. Ask your doctor for information. Since they deal with insurance everyday, they might be able to give you advice or at least lead you to the right direction. Some big wholesale stores like Costco also provide insurance at a discount as well as big name department stores. The NASE, National Association for the Self-Employed also has information on insurance. Try contacting your state insurance department; you can obtain a list of insurance companies registered in your state through them.

Retirement

The type of retirement plan freelancers choose depend on how much the freelancer can afford to put aside for retirement and how much expense they want to incur to administer the plan, according to Luscombe. He goes on to say, “The plans range from SEP IRAs and SIMPLE IRA or 401(k) plans to Keogh plans, with the contribution limits going up and the administration expense going up with each type of plan. They would be available to both full-timers and part-timers.”

Pay Refusal

Just dealing with the sporadic nature of freelance work can be an adjustment for someone accustomed to receiving a regular paycheck. You’ll want to be sure to maintain a regular savings account and it is a good idea to have a larger savings stockpiled for those times when the work dries up. But there’s a darker side to getting paid that, sadly, afflicts many freelancers. In all too many cases, you may not get paid at all.

According to Barbara Mende, Grievance and Contract Division Coordinator for the National Writers Union, The Grievance and Contract Division (GCD) gets several emails each month asking for legal help in getting publishers and clients to pay up. As she puts it, “We always say no. We’re not lawyers. We don’t even play them on TV. But most members don’t need a lawyer. They need an advocate. Our grievance officers are thoroughly trained in helping writers deal with deadbeats. And our track record is excellent. We’ve won nearly $1.5 million for members since we started keeping records.” She goes on to say; “The GO helps the member craft a demand letter, threatening to file a grievance with the NWU if the publisher doesn’t do X by Y date. The demand letter works surprisingly often. If it doesn’t, the GO will follow up with an NWU demand letter, noting the clout that comes from being part of an organization affiliated with the labor movement, and threaten such non-legal actions as publicity. That works extremely often.” She says most often, you just need to keep persisting until you get paid.

No matter what type of freelancing you specialize in, to protect yourself before initiating a project, create a contract that is detailed and dated and that the client is required to sign before work is started. The contract should list the fee the client agrees to pay for your work, the job description and any other terms agreed upon between you and the client. One other way to increase your chances of getting paid is to have your clients pay in installments. After each phase of work, have your client pay for it before proceeding to the next phase. With certain kinds of consultancies, a “retainer” fee can allow you to receive a partial payment upfront, before you’ve even begun the work. It’s fair and expected since you will be committing time to that client during which you can’t accept other work.

If you’ve got the temperament to deal with the peaks and valleys of freelancing, it can be a wonderful way to make a living. Take care of these basic financial needs and there’s no reason you can’t be successful

With unemployment rates at their highest in 15 years, there’s never been a better time to consider becoming a freelancer. Companies may not be hiring the way they once were but there’s still a huge demand for skilled workers. Programmers, web designers, writers and anyone else who can bill their services by the hour are bound to find a receptive audience. But if you’ve never freelanced before you may not be aware of what it takes to run a business. And while you may welcome the thought of setting your own hours, working in your pajamas, and playing your music as loud as you want, make no mistake about it. Freelancing is a business with very specific rules about how you should manage your finances. In this two part article, we’ll tell you what you need to know.

Taxes

One of the major differences in how you need to handle your finances is how you deal with taxes. As a freelancer, you will have a different tax status than someone who is employed full-time by a corporation. You’ll be responsible for supplying yourself with everything you need to get your work done; perhaps a computer, a phone, Internet access, a desk, and an office. On the plus side, many of these things can be claimed as business expenses and deducted from your taxes.

Depending on your filing status, you may be required to pay quarterly taxes. Estimating your taxes and keeping to a quarterly schedule may be difficult for someone who is used to having the company automatically deduct the tax before their paycheck even hits their bank account.

That’s where a good accountant comes in. When preparing to file your tax return, it is critical to select an accountant that specializes in small businesses and knows how to work with freelancers’ returns. For example, you may have heard that you can deduct a portion of your rent if you work from home, but how much is allowed? And how do you make sure your office is properly delineated from your living space. An accountant that knows what to deduct for you can help you save money and file a more accurate tax return. According to Mark Luscombe JD, CPA Principal Tax Analyst for CCH, which produces the free annual CCH Tax Guide For Journalists, freelancers need to file at a minimum, Form 1040 and Form 1040 Schedule C, depending on their particular situation. If the freelancer estimates that they will owe more than $1,000 in tax beyond any tax paid through withholding, in general they should pay quarterly estimated taxes.

Working as a freelancer essentially means you have your own business. Filing your taxes as a sole proprietor could be a good idea since it will enable you to deduct business expenses. “A sole proprietor attaches a Schedule C to the Form 1040 individual return. Schedule C is the place to set forth the income and expenses of the sole proprietorship.,” says Luscombe.

Deductions and Expenses

Tracking deductions is important, as this will help you be better prepared come tax time. Keep a record of any phone or car expenses you had that were business related. Having a separate phone account that is exclusively for business will provide a better-detailed list of related phone expenses. Make sure you have receipts for everything you plan to deduct and keep track of all expenses. If you have minor expenses under $75 it is less critical.

Use expense tracking software such as Mint.com to automatically sort transactions into categories such as groceries, gas and many others so you see exactly where your money goes and keep a record of your expenses. It’s also a good idea to have a separate credit card and bank account dedicated to business related expenses, that way you can have a documented record at the end of the year. Many credit card companies will send you a year-end summary with purchases neatly categorized so all you have to do is go through it and mark which ones were legitimate business expenses.

Requirements for home office deductions have loosened up in recent years, Luscombe says, “The home office deduction has gotten a little easier to meet – the home office is no longer required to be used by customers or clients as long as it is the principal place of any business carried on by the taxpayer. There is no dollar limit on what can be deducted, but expenses applicable to the overall home such as utilities and depreciation require an allocation between the portion of the home used for business and the portion used for personal purposes. Also, the allocable expense portion of the deduction for a home office cannot create a loss (i.e. cannot exceed business income less other business expenses). Such expenses can, however, be carried forward to future years.” It’s also important to note that any income received should be reported as income. A few examples include money won in a writing contest or funds received from grants.

Some of the common home office deductions include, equipment and office supply purchases such as computers, printers, software, hardware, office furniture, paper, and pens. Deductible business related expenses are a dedicated business telephone line and Internet connection, as well as web domain registrations and hosting fees. Also deductible are entertainment expenses such as meals or drinks for colleagues or interview subjects. Car expenses, travel expenses, and professional journals and dues, research related magazine subscriptions and books, health care and advertising expenses like brochures, business cards and flyers are also deductible.

Figuring out the depreciation value of your office equipment can be a bit more difficult.
According to the tax analyst, “Depreciation can be very complicated to determine. It depends on the depreciable basis of the asset, the depreciation method that applies under the tax law, the depreciable life of the asset, and any special rules such as bonus depreciation or small business expensing elections that may apply.” If you aren’t working with tax professional, you may want to turn to IRS Form 4562 and Publication 946 for help in determining how to depreciate an asset.

When looking for tax assistance, a reputable accountant can be found by talking to organizations, friends and colleagues in the field. Once you find a specialized accountant, interview the person and ask them how much of their time is spent preparing freelancers tax returns, see if you have a good rapport with them and find out what their fee is. These questions will help you determine if this is the right person who will meet your tax needs.

In part two you’ll learn how to deal with health insurance, retirement issues, and clients that refuse to pay.