Contents at a Glance
Introduction...1
Part I: Getting Ready to File ...5
Chapter 1: Understanding the U.S. Tax System ...7
Chapter 2: Tax Return Preparation Options and Tools ...19
Chapter 3: Getting and Staying Organized ...29
Chapter 4: No Form Fits All (Or, What Kind of Taxpayer Are You?) ...41
Part II: Tackling the Various Forms...63
Chapter 5: Easy Filing: 1040EZ and 1040A...65
Chapter 6: Form 1040: Income Stuff ...85
Chapter 7: Form 1040, Part II: Adjustments to Income Stuff...117
Chapter 8: The Rest of the 1040 ...137
Part III: Filling Out Schedules and Other Forms...161
Chapter 9: Itemized Deductions: Schedule A...163
Chapter 10: Interest and Dividend Income: Schedule B (1040), Schedule 1 (1040A) ...203
Chapter 11: Business Tax Schedules: C, C-EZ, and F...217
Chapter 12: Capital Gains and Losses: Schedule D ...249
Chapter 13: Supplemental Income and Loss: Schedule E ...273
Chapter 14: Giving Credits Where Credits Are Due ...285
Chapter 15: Other Schedules and Forms to File...299
Part IV: Audits and Errors: Dealing with the IRS...315
Chapter 16: The Dreaded Envelope: IRS Notices, Assessments, and Audits ...317
Chapter 17: Fixing Mistakes the IRS Makes...337
Chapter 18: Fixing Your Own Mistakes ...353
Part V: Year-Round Tax Planning...375
Chapter 19: Tax-Wise Personal Finance Decisions...377
Chapter 20: Reducing Taxes with Retirement Accounts ...385
Chapter 21: Small Businesses and Tax Planning ...405
Chapter 22: Your Investments and Taxes...419
Chapter 23: Real Estate and Taxes ...435
Chapter 24: Children and Taxes ...451
Chapter 25: Estate Planning ...463
Part VI: The Part of Tens...473
Chapter 26: Ten Tips for Reducing Your Chances of Being Audited...475
Chapter 27: Ten (or So) Often-Overlooked Tax-Reduction Opportunities...479
Chapter 28: Ten (Plus One) Tax Tips for Military Members (and Their Families)...483
Chapter 29: Ten Interview Questions for Tax Advisors...487
Glossary ...491
Index...507
02_079010 ftoc.qxp 11/10/06 2:20 PM Page xi
Contents
Introduction ...1
What’s New in This Edition...1
Why Buy This Tax Book?...2
Your Tax Road Map ...2
Part I: Getting Ready to File ...2
Part II: Tackling the Various Forms ...3
Part III: Filling Out Schedules and Other Forms ...3
Part IV: Audits and Errors: Dealing with the IRS ...3
Part V: Year-Round Tax Planning...3
Part VI: The Part of Tens ...3
Glossary...4
Icons Used in This Book...4
Part I: Getting Ready to File...5
Chapter 1: Understanding the U.S. Tax System ...7
Figuring Out the U.S. Tax System ...8
You can reduce your taxes...9
Beyond April 15: What you don’t know can cost you...9
Understanding Your Income Tax Rates ...11
Total taxes ...11
Your marginal income tax rate ...12
Chapter 2: Tax Return Preparation Options and Tools ...19
Preparing Your Own Return...19
Using IRS Publications...20
Perusing Tax-Preparation and Advice Guides ...21
Buying Software...21
Accessing Internet Tax Resources ...22
Internal Revenue Service...22
Directories...23
Research ...23
Tax preparation sites ...23
Hiring Help ...24
Deciding whether you really need a preparer ...24
Preparers ...25
Enrolled agents (EAs) ...25
Certified public accountants (CPAs)...26
Tax attorneys ...27
Finding Tax Preparers and Advisors...27
Chapter 3: Getting and Staying Organized ...29
Keeping Good Records ...30
Ensuring a complete and accurate tax return ...30
Setting up a recordkeeping system...31
Tracking tax information on your computer ...32
Deciding when to stash and when to trash...33
Reconstructing Missing Tax Records ...33
Property received by inheritance or gift...34
Securities received by inheritance or gift ...36
Improvements to a residence ...37
Casualty losses ...37
Business records ...38
Requesting Copies of Lost Tax Returns ...38
Understanding the Cohan Rule ...39
Chapter 4: No Form Fits All (Or, What Kind of Taxpayer Are You?) ...41
What Rendition of 1040 Shall We Play? ...41
Form 1040EZ...42
Form 1040A (the short form) ...42
Form 1040 (the long form) ...43
Choosing a Filing Status ...43
Single...43
Married filing jointly ...44
Married filing separately ...45
Head of household ...48
Qualifying widow(er) with dependent child ...50
Figuring Personal and Dependent Exemptions ...51
Personal exemptions ...51
Dependent exemptions...52
Securing Social Security Numbers for Dependents ...55
Filing for children and other dependents ...55
Defining Who Is a Qualifying Child ...56
Age test ...56
Relationship test...57
Residency test...57
Support test ...57
Filing a Return for a Deceased Taxpayer...57
Must I File? ...58
When to file ...59
If you don’t file ...60
Where to file...60
How to file ...60
A Final Bit of Advice...61
Part II: Tackling the Various Forms ...63
Chapter 5: Easy Filing: 1040EZ and 1040A...65
Who Can File a 1040EZ?...65
Filling Out a 1040EZ ...66
Line 1: Total wages, salaries, and tips ...67
Line 2: Taxable interest income of $1,500 or less...67
Line 3: Unemployment compensation and Alaska Permanent Fund dividends ...67
Line 4: Adjusted gross income...67
Line 5: Deductions and exemptions...67
Line 6: Taxable income ...68
Line 7: Federal income tax withheld ...68
Line 8a: Earned income credit (EIC) ...68
Line 8b: Nontaxable combat pay election...69
Line 9: Credit for federal telephone excise tax paid ...69
Line 10: Total payments...69
Line 12a: Refund time!...70
Line 13: Amount you owe ...70
Finishing up...71
Who Can File a 1040A?...72
Completing Form 1040A ...72
Line 6: Exemptions through line 9b: Qualified dividends ...72
Line 10: Capital gain distributions ...73
Lines 11a and 11b: Total IRA distributions ...74
Lines 12a and 12b: Total pensions and annuities...74
Line 13: Unemployment compensation, Alaska Permanent Fund dividends, and jury duty fees...74
Lines 14a and 14b: Social Security benefits ...75
Line 15: Total income ...76
Line 16: Penalty on early withdrawal of savings ...76
Line 17: Your (and your spouse’s) IRA deduction...76
Line 18: Student loan interest deduction ...76
Line 19: Jury duty pay you gave your employer ...77
Line 20: Total adjustments ...77
Line 21: Adjusted gross income...77
Line 22: Successful transcription of adjusted gross income to back of Form 1040A ...77
Lines 23a and 23b: Standard deduction questions ...77
Line 24: Standard deduction ...78
Line 25: IRS subtraction quiz ...78
Line 26: Total number of exemptions times $3,300...78
Line 27: Taxable income ...78
Line 28: Find your tax...79
Line 29: Credit for child and dependent care expenses ...79
Line 30: Credit for the elderly or the disabled...79
Line 31: Education credits...79
Line 32: Retirement contributions credit ...80
Line 33: Child tax credit...80
Line 34: Total credits...80
Line 35: Another IRS subtraction problem...80
Line 36: Advance earned income payments ...80
Line 37: Total tax ...81
Line 38: Total federal income tax withheld ...81
Line 39: 2006 estimated tax payments and amount applied from 2005 return...81
Line 40a and 40b: Earned income credit and nontaxable combat pay election ...81
Line 41: Additional child tax credit ...82
Line 42: Credit for federal telephone excise tax paid ...82
Line 43: Total payments...82
Line 44: We smell refund!...82
Lines 45a and 46: What to do with your refund...83
Lines 45b–d: Direct deposit of your refund...83
Line 47: Amount you owe ...83
Line 48: Estimated tax penalty...83
Final Instructions ...84
Chapter 6: Form 1040: Income Stuff ...85
Lines 6a–6d: Exemptions...85
Lines 7–22: Income...86
Line 7: Wages, salaries, tips...86
What those W-2 boxes mean...87
Line 8a: Taxable interest income...90
Line 8b: Tax-exempt interest...90
Line 9a: Ordinary dividends income...90
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Line 9b: Qualified dividends ...91
Line 10: Taxable refunds, credits, or offsets of state and local income taxes ...91
Line 11: Alimony received (by you) ...93
Line 12: Business income (or loss) ...93
Line 13: Capital gain (or loss) ...93
Line 14: Other gains (or losses)...94
Lines 15a and 15b: Total IRA distributions ...94
Distributions before 591⁄2...97
Transfers pursuant to divorce...98
Inherited IRAs ...98
Surviving spouse ...99
Beneficiary other than a surviving spouse ...100
Withdrawal of nondeductible contributions ...101
Loss on an IRA ...101
Lines 16a and 16b: Total pensions and annuities...101
Line 17: Rental real estate, royalties, partnerships, S Corporations, trusts ...108
Line 18: Farm income (or loss) ...108
Line 19: Unemployment compensation ...108
Lines 20a and 20b: Social Security benefits ...109
Line 21: Other income...113
Line 22: Your total income...116
Chapter 7: Form 1040, Part II: Adjustments to Income Stuff ...117
Adjusted Gross Income (AGI) ...117
Line 23: Archer MSA (Medical Savings Account) deduction ...118
Line 24: Certain business expenses of reservists, performing artists, and fee-basis government officials ...119
Line 25: Health Savings Account Deduction (Form 8889) ...120
Line 26: Moving expenses (Form 3903) ...120
Line 27: One-half of self-employment tax ...121
Line 28: Self-employed SEP, SIMPLE, and qualified plans...121
Line 29: Self-employed health insurance deduction ...124
Line 30: Penalty for early withdrawal of savings...124
Lines 31a and b: Alimony paid...125
Line 32: You and your spouse’s IRA deduction ...127
Your spouse’s IRA deduction ...132
Line 33: Student loan interest deduction ...133
Line 34: Jury pay returned to your employer ...135
Line 35: Domestic production activities deduction (Form 8903)...135
Line 36: Total adjustments ...136
Line 37: Adjusted gross income...136
Chapter 8: The Rest of the 1040 ...137
Tax and Credits...137
Line 38: Adjusted gross income...137
Line 39a...138
Line 39b ...138
Line 40: Itemized deductions (from Schedule A) or your standard deduction ...138
Line 41: Subtract line 40 from line 38...139
Line 42: Exemptions ...139
Line 43: Taxable income ...140
Line 44: Tax ...140
Capital gains and qualified dividends tax worksheet ...142
Line 45: Alternative Minimum Tax (Form 6251) ...144
Line 46: Add lines 44 and 45...146
Credits: Lines 47 to 55 ...146
Line 47: Foreign tax credit (Form 1116)...146
Line 49: Credit for the elderly or the disabled (Schedule R) ...147
Line 50: Education credits (Form 8863)...147
Line 51: Retirement savings contributions credit ...149
Line 52: Residential energy credits (Form 5695) ...149
Line 53: Child tax credit...150
Line 54: Form 8396, Form 8839, and Form 8859...150
Line 55: Other credits ...151
Line 56: Total credits...152
Line 57: Subtract line 56 from line 46...152
Other Taxes...152
Line 58: Self-employment tax (Schedule SE) ...153
Line 59: Social Security and Medicare tax on unreported tip income (Form 4137)...153
Line 60: Tax on IRAs, other retirement plans, and other tax-favored accounts (Form 5329) ...153
Line 61: Advance earned income credit payments ...154
Line 62: Household employment taxes (Schedule H)...154
Line 63: IRS pop quiz...154
Payments...154
Line 64: Federal income tax withheld ...154
Line 65: Estimated tax payments...155
Line 66a and 66b: Earned income credit (EIC) and nontaxable combat pay election...155
Line 67: Excess Social Security and RRTA tax withheld ...156
Line 68: Additional child tax credit (Form 8812)...156
Line 69: Amount paid with extension request (Form 4868)...156
Line 70: Other payments ...156
Line 71: Credit for federal telephone excise tax paid ...157
Line 72: Total payments...157
Refund or Amount You Owe ...157
Line 73: The amount that you overpaid ...157
Line 74a: Amount that you want refunded to you...158
Line 75: Amount of line 73 you want applied to your 2007 estimated tax ...159
Line 76: The gosh darn AMOUNT YOU OWE line ...159
Line 77: Estimated tax penalty (Form 2210) ...159
Finishing Up ...160
Part III: Filling Out Schedules and Other Forms ...161
Chapter 9: Itemized Deductions: Schedule A ...163
The Standard Deduction ...163
Older than 65 or blind...164
Standard deduction for dependents ...164
Itemized Deductions ...165
Separate returns and limits on deductions...166
But if you change your mind...167
Lines 1–4: Medical and Dental Costs ...167
Medical and dental expense checklist...167
Deductible travel costs...171
Special medical expense situations ...171
Meals and lodging ...172
Insurance premiums ...172
Reimbursements and damages ...173
Special schooling...173
Nursing home...173
Improvements to your home ...174
Figuring your medical and dental deduction...174
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Lines 5–9: Taxes You Paid ...174
Line 5: State and local income taxes ...175
Line 6: Real estate taxes ...175
When you buy or sell real estate...175
The downside of property tax refunds and rebates ...176
Line 7: Personal property taxes...176
Line 8: Other taxes (foreign income taxes) ...177
Lines 10–14: Interest You Paid ...177
Lines 10–11: Home mortgage interest and points reported to you on Form 1098 ...178
Line 12: Points not reported to you on Form 1098...181
Line 13: Investment interest...181
Lines 15–18: Gifts to Charity ...182
Qualifying charities ...182
Nonqualifying charities ...183
Contributions of property ...184
Charitable deduction limits ...186
Line 17: (For the world’s great humanitarians) ...187
Line 19: Casualty and Theft Losses...187
Victims of terrorist attacks or military action...188
Do you have a deductible loss? ...189
Figuring the loss ...189
Lines 20–26: Job Expenses and Most Other Miscellaneous Deductions...191
Line 20: Unreimbursed employee expenses ...191
Line 21: Tax preparation fees...198
Line 22: Other expenses — investment,safe-deposit box, and so on ...199
Lines 23–26: Miscellaneous math ...200
Line 27: Other Miscellaneous Deductions ...200
Line 28: Total Itemized Deductions...201
Chapter 10: Interest and Dividend Income:
Schedule B (1040), Schedule 1 (1040A)...203
Part I, Lines 1–4: Interest Income ...205
Understanding Form 1099-INT ...205
Completing lines 1–4 ...206
Interest-free loans...211
Part II, Lines 5–6: Dividend Income...212
Line 5: Name, payer, and amount ...212
Line 6: Total dividends...212
Your 1099-DIV: Decoding those boxes ...213
Reduced tax rates on dividends ...214
Part III, Lines 7–8: Foreign Accounts and Trusts...215
Chapter 11: Business Tax Schedules: C, C-EZ, and F ...217
Schedule C-EZ ...217
Schedule C ...218
Basic Information (A–E) ...219
Accounting Method Stuff (F–H)...219
Part I, Lines 1–7: Income ...220
Line 1: Gross receipts or sales...220
Line 2: Returns and allowances ...221
Line 3: Subtraction quiz...221
Line 4: Cost of goods sold ...221
Line 5: Gross profit ...222
Line 6: Other income...222
Line 7: Gross income...222
Part II, Lines 8–27: Expenses...222
Line 8: Advertising ...223
Line 10: Commissions and fees...225
Line 11: Contract labor ...225
Line 12: Depletion...226
Line 13: Depreciation ...226
Line 14: Employee benefit programs ...235
Line 15: Insurance (other than health)...235
Line 16a: Mortgage interest...235
Line 16b: Other interest...235
Line 17: Legal and professional services...236
Line 18: Office expense ...236
Line 19: Pension and profit-sharing plans ...236
Lines 20a and b: Rent or lease ...236
Line 21: Repairs and maintenance ...237
Line 22: Supplies...238
Line 23: Taxes and licenses ...238
Lines 24a–b: Travel, meals, and entertainment...238
Line 25: Utilities ...238
Line 26: Wages...238
Line 27: Other expenses ...239
Line 28: Total expenses...239
Line 29: Tentative profit (loss)...239
Line 30: Form 8829...239
Line 31: Net profit (or loss) ...239
Lines 32a and b: At-risk rules...239
Start-up expenses ...240
Operating Loss ...240
Schedule F: Profit or Loss from Farming ...241
Figuring out Schedule F ...242
Identifying tax issues specific to farmers...246
Chapter 12: Capital Gains and Losses: Schedule D...249
Collectibles and Real Estate ...249
What Part of Schedule D?...250
Schedule D: Columns ...250
Calculating Your Adjusted Basis ...252
What’s the starting point? ...253
Part I, Lines 1–7a and b: Short-Term Capital Gains and Losses — Assets Held One Year or Less ...255
Line 2: Enter your short-term totals, if any, from Schedule D-1, Line 2 ...255
Line 3: Total short-term sales price amounts ...255
Line 4: Short-term gain from Form 6252, and short-term gain or <loss> from Forms 4684, 6781, and 8824...255
Line 5: Net short-term gain or <loss> from partnerships, S Corporations, estates, and trusts from Schedule(s) K-1...256
Line 6: Short-term capital loss carry-over...256
Line 7: Net short-term gain or <loss>...256
Part II, Lines 8–15: Long-Term Capital Gains and Losses — Assets Held More than One Year...256
Line 8: Columns (a), (b), (c), (d), (e), and (f) ...256
Line 9: Enter your long-term totals, if any, from Schedule D-1, Line 9...257
Line 10: Total long-term sales price amounts ...257
Line 11: Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and long-term gain or <loss> from Forms 4684, 6781, and 8824 ...257
Line 12: Net long-term gain or <loss> from partnerships, S Corporations, estates, and trusts from Schedule(s) K-1...259
Line 13: Capital gain distributions ...259
Line 14: Long-term capital loss carry-over...259
Line 15: Combine lines 8–14 in column (f) ...260
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Part III, Lines 16-22: Summary of Parts I and II ...260
Line 16: Combine lines 7 and 15 ...260
Line 17: Comparing lines 15 and 16...260
Line 18: 28 percent gains ...260
Line 19: 25 percent gains ...260
Line 20...260
Line 21: Capital losses...261
Line 22: Qualified dividends...261
Using Schedule D When You Sell Your Home ...261
Computing your profit ...264
Reporting a profit that exceeds the exclusion ...265
Following the home office and rental rules...265
Use Schedule D for Other Issues Involving Stocks (Worthless and Otherwise) ...266
Worthless securities ...266
Wash sales ...267
Small business stock...267
Stock options ...267
Short sales...269
Stock for services ...270
Appreciated employer securities ...270
Using Schedule D for Nonbusiness Bad Debts ...271
Day traders...271
Mark-to-market traders ...272
Chapter 13: Supplemental Income and Loss: Schedule E ...273
Part I: Income or Loss from Rental Real Estate and Royalties ...273
Line 1: Kind and location of each real estate property ...274
Line 2: Vacation home questions...274
Lines 3–4: Income ...274
Lines 5–18: Expenses ...274
Lines 19–26 ...276
IRS math quiz ...279
The tax shelter rules ...279
Part II: Income or Loss from Partnerships and S Corporations ...280
Line 27: The at-risk and other tax shelter rules ...281
Lines 28–32: Name . . . and so on! ...281
Part III: Income or Loss from Estates and Trusts...282
Lines 33–37: Name . . . and so on! ...283
Part IV: Lines 38–39: Income or Loss from Real Estate Mortgage Investment Conduits (REMIC)...283
Part V: Summary ...283
Chapter 14: Giving Credits Where Credits Are Due...285
Child- and Dependent-Care Expenses: Form 2441 (1040) and Schedule 2 (1040A) ...286
Parts I and II ...287
Part III...288
Credit for the Elderly or the Disabled: Schedule R (1040) and Schedule 3 (1040A)...288
Education Credits (Form 8863) ...289
Child Tax Credit...290
Retirement Savings Contributions Credit (Form 8880) ...291
Residential Energy Credits (Form 5695)...291
Adoption Credit (Form 8839)...292
Understanding the adoption credit and exclusion rules ...292
Figuring out Form 8839 ...293
Alternative Motor Vehicle Credit (Form 8910) ...294
Earned Income Credit (EIC) ...294
Chapter 15: Other Schedules and Forms to File ...299
Estimated Tax for Individuals (Form 1040-ES) ...299
Calculating your Safe Harbor estimated tax payments ...299
Completing and filing your Form 1040-ES ...300
Moving Expenses (Form 3903) ...301
Nondeductible IRAs (Form 8606)...303
Part I: Traditional IRAs ...303
Part II: Conversions from traditional IRAs to Roth IRAs ...305
Part III: Distributions from Roth IRAs ...305
Forms 8615 and 8814, the Kiddie Tax ...306
Form 8829, Expenses for Business Use of Your Home ...307
Measuring your home office ...308
Figuring your allowable home office deduction...309
Determining your home office’s depreciation allowance...309
Deducting what’s left ...310
Form W-4, Employee Withholding ...310
Household Employment Taxes: Schedule H (the Nanny Tax) ...311
Schedule SE: Self-Employment Tax Form ...313
Part IV: Audits and Errors: Dealing with the IRS ...315
Chapter 16: The Dreaded Envelope: IRS Notices, Assessments, and Audits ...317
Finding Strength in Numbers...317
Understanding the IRS Notice Process...318
Receiving your typical notice ...318
Deciphering a notice ...319
Assessing Assessment Notices...320
General assessment notices — the CP series forms and other notices...321
Income verification notice — Form CP-2501...321
Request for your tax return — Forms CP-515 and CP-518 ...322
We are proposing changes to your tax return — CP-2000 ...323
Backup withholding notice ...323
Federal tax lien notice — Form 668(F) ...323
Collection Due Process Hearing...324
Property levy notice — Form 668-A(c)...324
Wage levy notice — Form 668-W(c) ...325
Handling Nonassessment Notices...326
Paying interest on additional tax ...326
Receiving a delinquent tax return notice ...327
What You Must Know about Audits...327
Surviving the Four Types of Audits ...328
Office audits ...328
Field audits...329
Correspondence audits ...330
Random statistical audits...331
Questioning Repetitive Audits...331
Getting Ready for an Audit...331
Winning Your Audit...333
Understanding the Statute of Limitations on Audits ...333
Extending the statute of limitations...334
The statute of limitations on tax collection is . . . ...334
Appealing the results of an audit ...335
Receiving a Statutory Notice of Deficiency...335
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Chapter 17: Fixing Mistakes the IRS Makes...337
Pointing the Finger: Common IRS Flubs ...337
Fixing IRS Mistakes: Just the Facts, Ma’am...339
Sending a Simple Response to a Balance Due Notice...340
Sending Generic Responses to Generic Notices ...341
Misapplied payments...341
Misunderstood due date ...341
Wrong income ...343
Exempt income ...343
Double-counted income ...343
Lost return...344
Lost check ...344
Tax assessed after statute of limitations...345
Partially corrected error ...345
Erroneous refund...345
Data processing error ...346
Incorrect 1099 ...346
Wrong year ...346
Never received prior notices ...346
Getting Attention When the IRS Ignores You ...347
Getting to know your local Taxpayer Advocate ...347
Meeting the criteria for a Taxpayer Advocate case ...347
Contacting the local Taxpayer Advocate ...348
Finding Your Refund When It Doesn’t Find You ...348
How to locate your refund ...349
Uncashed refund checks ...349
Interest on refunds ...350
Refunds and estimated tax payments ...350
Joint refunds ...350
Joint estimated payments ...350
Deceased taxpayer ...350
Statute of limitations...350
Protective claims...351
Refund offset program ...351
Chapter 18: Fixing Your Own Mistakes ...353
Amending a Return ...353
More expenses than income (net operating losses)...354
The tax benefit rule ...355
When You Can’t Pay Your Taxes ...355
Requesting an installment agreement ...356
Making an offer ...358
Declaring bankruptcy ...359
Planning ahead to avoid these problems ...360
Abating a Penalty ...360
The Internal Revenue Manual (IRM) ...360
Court cases that define reasonable cause ...361
Excuses that won’t fly...362
IRS rulings and announcements ...363
Penalty appeals...364
Abating Interest ...366
When interest is incorrectly charged ...366
Erroneous refunds...366
IRS delays ...367
When the IRS doesn’t send a bill ...368
When the IRS sends a bill ...368
Protecting Yourself with Innocent Spouse Relief ...368
Getting innocent spouse relief: Determining if you’re eligible under the new rules ...369
Receiving relief by separation of liability...370
Obtaining equitable relief...370
Additional innocent spouse rules ...371
The Taxpayer Bill of Rights...371
The Taxpayer Bill of Rights — Parts 2 and 3 ...372
Part V: Year-Round Tax Planning ...375
Chapter 19: Tax-Wise Personal Finance Decisions ...377
Taxing Mistakes ...378
Seeking advice after a major decision ...378
Failing to withhold enough taxes ...378
Overlooking legal deductions ...379
Passing up retirement accounts ...379
Ignoring tax considerations when investing...379
Not buying a home ...379
Ignoring the financial aid tax system ...380
Neglecting the timing of events you can control ...380
Not using tax advisors effectively ...381
Comprehending the Causes of Bad Tax Decisions...381
“Financial planners” and brokers’ advice ...381
Advertising ...382
Advice from publications ...382
Overspending...383
Financial illiteracy ...383
Chapter 20: Reducing Taxes with Retirement Accounts...385
Identifying Retirement Account Benefits ...385
Contributions are (generally) tax-deductible ...386
Special tax credit for lower-income earners ...386
Tax-deferred compounding of investment earnings ...386
Don’t go overboard ...388
Naming the Types of Retirement Accounts ...388
Employer-sponsored plans ...389
Self-employed plans ...390
Individual Retirement Accounts (IRAs)...392
Annuities...396
Taxing Retirement Account Decisions ...397
Prioritizing retirement contributions ...397
Transferring existing retirement accounts ...397
Taking money out of retirement accounts ...398
Chapter 21: Small Businesses and Tax Planning ...405
Organizing Your Business Accounting ...405
Leave an “audit” trail ...407
Separate business from personal finances ...407
Keep current on income and payroll taxes ...407
Minimizing Your Small-Business Taxes ...408
Depreciation versus deduction ...409
Cars ...410
Travel, meal, and entertainment expenses ...410
Home alone or outside office space? ...410
Independent contractors versus employees ...411
Insurance and other benefits...412
Retirement plans ...413
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To Incorporate or Not to Incorporate ...413
Liability protection...413
Corporate taxes ...414
S Corporations ...415
Limited liability companies (LLCs) ...416
Other incorporation issues ...416
Where to get advice ...416
Investing in Someone Else’s Business ...417
Buying or Selling a Business ...417
Chapter 22: Your Investments and Taxes...419
Tax-Reducing Investment Techniques...419
Buy and hold for “long-term” capital gains...420
Pay off high-interest debt ...420
Fund your retirement accounts...421
Use tax-free money market and bond funds ...421
Invest in tax-friendly stock mutual funds...423
Tax-Favored Investments to Avoid ...425
Limited partnerships ...425
Cash-value life insurance...426
Load mutual funds and the like ...427
Annuities ...428
Selling Decisions ...429
Selling selected shares...429
Selling securities with (large) capital gains ...430
Selling securities at a loss ...431
Mutual funds and the average cost method ...431
Stock options and taxes ...432
Selling securities whose costs are unknown ...433
Chapter 23: Real Estate and Taxes ...435
Surveying Real Estate Tax Breaks ...435
Mortgage interest and property tax write-offs ...436
Home ownership capital gains exclusion...437
Home office deductions...437
Purchasing Your Humble Home ...437
Exploring the tax savings in home ownership ...438
Deciding how much to spend on a home ...439
Tracking your home expenditures ...440
Reporting revenue if you sometimes rent...441
Making Tax-Wise Mortgage Decisions ...441
15-year or 30-year mortgage?...442
How large a down payment? ...443
Refinancing decisions and taxes ...444
Selling Your House ...445
Not wanting to sell at a loss ...445
Converting a home into rental property ...446
House sales, taxes, and divorce ...446
Investing in Real Estate ...446
Deciding whether real estate investing is for you...447
Enjoying rental property tax breaks ...447
Chapter 24: Children and Taxes ...451
Bringing Up Baby ...451
Getting Junior a Social Security number ...451
Childcare tax goodies ...452
Education Tax Breaks and Pitfalls...455
The (hidden) financial aid tax system ...455
College cost tax deductions...455
Education Savings Accounts: Tread carefully ...456
Section 529 plans — state tuition plans ...457
Hope Scholarship and Lifetime Learning Credits ...458
Minimizing your taxes and paying for college ...459
Taxes on Your Kids’ Investments ...460
Taxes for kids under 18 ...461
Tax-wise and not-so-wise investments for educational funds ...461
Chapter 25: Estate Planning...463
Figuring Whether You May Owe Estate Taxes...463
Understanding the federal estate tax exemption ...463
Determining your taxable estate ...464
How High Are Estate Taxes? ...464
Reducing Expected Estate Taxes (If You’re Rich) ...465
Giving it away...465
Leaving all your assets to your spouse ...467
Establishing a bypass trust ...467
Buying cash-value life insurance ...468
Setting up trusts ...469
Getting advice and help...471
