To Save and Protect

Answers to the 10 most commonly asked questions about taxes and estate planning

YOUR TAXES

Cathy McArthur

1. Is it better to file a joint or separate tax return?
Washington, D.C., tax adviser Michael Eisenberg recommends that couples married more than six months file joint returns to increase their chances of paying fewer taxes. The six-month time period determines a relationship in tax terminology, be it married or single. “Ninety-nine percent of the time if you’re living with your spouse, you should file a joint return,” he advises. In the case of Cathy McArthur, 56, CEO and sole employee at Upper Marlboro, Maryland-based Child Care and More, who was married for 10 years, filing jointly worked well. Filing separately, though not bad, wasn’t as profitable as when she filed jointly. Not only did she not owe the government, she received a sizable refund. “We put everything together and avoided having to pay back taxes,” says McArthur. Eisenberg says, “Couples and individuals alike have to be realistic about their tax situations and file accordingly. The last thing a hardworking individual, family, or business owner needs is the IRS on their back.”

2. Are there any tax benefits that will help me save on my children’s college tuition?

One way to help offset the costs of higher education is by reducing the amount of your income tax through tax credits. To determine if you’re within the eligibility guidelines to receive a college tax benefit, check your modified adjusted gross income, or MAGI, which is a measure used by the Internal Revenue Service to determine if a taxpayer is eligible to claim certain deductions and credits. The Website Bankrate.com (www.bankrate.com) has a calculator that can help you figure out your MAGI. Just type in “1040 tax estimator” in the search field.

3. Be mindful of the tax laws and stipulations that tend to change every year.
Those eligible can claim the American Opportunity Tax Credit for tuition and other higher education fees in 2009 and 2010, which is worth up to $2,500 of the cost of qualified tuition during the taxable year. Under The Lifetime Learning Credit, an eligible person can receive a credit of up to $2,000 per return. You can also benefit from student loan interest deductions. The IRS can help you save money for your child’s college education through U.S. Savings bonds, the ESA, and 529 Plans. Go to the financial aid Website (www.finaid.org) for more information.

4. What should I do if I can’t pay my tax bill?
First of all, do not file for bankruptcy under any circumstances. Bankruptcy does not erase some types of debts such as student loans, child support payments, and overdue taxes. Another important note: file on time. There is a failure-to-pay penalty as well as a failure-to-file penalty. The best course of action is to call the IRS and work out a payment plan. You can also call the Taxpayer Advocate Service at 877-777-4778 if you feel that you’re in over your head. For more information, visit the Taxpayer Advocate section on the IRS Website (www.irs.gov/advocate). Furthermore, if you have the financial means, you can consider hiring a tax attorney. He or she will act as your advocate and might be able to assist you with negotiating a lower balance. The National Association of Tax Professionals (www.natptax.com) can help you find a tax attorney.

5. What are the first things—taxwise—I should do after getting married?

After the honeymoon, you and your spouse should sit down in front of a computer and get ready to do a little math. Visit www.irs.gov and type “withholding calculator” into the search field. The calculator will walk you through a series of questions to help you determine how you’ll need to adjust the tax the federal government withholds from each of your paychecks now that you’re married. This will apply whether you’re planning to file a joint return with your husband or not. The calculator is only as accurate as the information you provide, so be sure to have the following handy: some recent paychecks—yours and your husband’s—and last year’s tax returns for both of you.

When you return to work, request a new W-4 form from your employer. On the W-4, you’ll use the results from the IRS calculator to adjust your tax withholding. You’ll also use the form to change your name (if you’ve chosen to take a new surname). By adjusting your withholding as soon as possible after your marriage, you’ll avoid paying too much—or too little—in taxes to Uncle Sam.

6. I’m supplementing my income with a home-based side business. What tax issues should I be aware of?

The first and most important step to take when you’re operating a business out of your home is to set up a legitimate office that complies with IRS standards. In order to qualify for home-business tax deductions, the work space you choose should be used exclusively for business and have enough room for all the equipment you need.
From there, the nature of your business determines the extent of your federal tax responsibilities, according to William Perez, a federally authorized tax agent and owner of Perez Tax Associates in San Francisco. He offers the following advice:

–Develop a record-keeping system. This will help you assess how your business is doing and assist you in determining how to more accurately prepare your tax returns. Business expenses such as equipment, employee salaries, fuel taxes, and travel are considered necessary and are therefore deductible.

–Keep separate checking and credit card accounts, and if it is a business expense, report it. Entrepreneurs should steer clear of business expenses that are unrelated to business. If the purchases you make are not necessary to the operation of your business (like office supplies), then avoid creating those liabilities.

–Do your research. For more information about business tax tips, visit www.irs.gov and type “small business” in the search field.

Additional reporting by Tamara Best, Erica Dallas, DeShundra Jefferson, Arlene McKanic, and Donnell Suggs

This article originally appeared in the April 2010 issue of Black Enterprise magazine.

Pages: 1 2 3
ACROSS THE WEB