I am single, and I have always wondered why I could not file my taxes as “head of household.”  After all, I live alone, and I am the “head of my household.” 

“Head of household” is a special filing status that’s given to single taxpayers who are caring for other people.  Congress realizes that it’s often tough for single parents to make ends meet.  So, for many years, single parents have gotten more generous tax brackets and a larger standard deduction.  Head of household status also applies to those who are supporting a parent.  If you are single, and qualify as a head of household, you definitely should file as head of household.

The term “head of household” is probably an unfortunate choice of words.  According to the dictionary definition of the words, yes, a single person living alone is the head of the household.   But the definition in the tax code is what counts.

Tax law, like so many areas of the law, often defines terms very precisely and sometimes those definitions aren’t the same as what the ordinary meaning of the words would lead you to believe.  If the tax code defines a word or phrase (such as head of household), the special definition applies and it overrides the common meaning. 

Section 2(b) of the Internal Revenue Code clearly defines head of household as a single person who lives for at least half the year with a single, dependent child or a dependent parent.  (There are a number of technical provisions to explain special situations.)  There are also elaborate definitions in the tax code as to what is a qualifying dependent child or a qualifying dependent individual.  It’s quite clear though, that you must have a dependent to file as a head of household.

The tax code has been using the term “head of household” for over half a century.  Although the definition has become more technical, the meaning hasn’t changed very much.  So I doubt Congress will replace “head of household” with a more descriptive label anytime soon.

In answering this question, I wondered when Congress started giving breaks to single parents.  

In 1954, the tax code was substantially overhauled, and three separate sets of tax brackets were established for heads of households, single, and married taxpayers.  This was the first time the tax code used the words “head of household.”   Tax brackets for married taxpayers were more generous than those for single taxpayers, with head of household in between.

Before that, the 1939 code had taxpayers paying both income tax and a second income tax called “surtax.”  The rates were strictly based on income, regardless of whether you were married or had a family. 

Times were different.  It was assumed that there was only one breadwinner in each household.  Two-income households were unusual.  The tax code was structured accordingly. 

But even before the separate schedules of tax brackets for single and married taxpayers, Congress realized that a taxpayer who had a family to support needed a tax break. 

The break Congress gave back then was to increase what is now the standard deduction for married taxpayers.  Interestingly, those who were not married, but the “head of a family” got the same standard deduction as a married taxpayer.  (In 2011, the standard deduction for a married couple was $11,600, but a head of household only got $8,500.)          

There was also a primitive version of the earned income credit, which applied to everyone’s wages, regardless of income.  Finally, there was a $400 personal deduction for the taxpayer, spouse, and each dependent.  (That deduction in 2011 was $3,700.)

One of the drawbacks applying the income tax to a family unit is the constant tension between trying to help struggling families and the realization that a married couple can often live more inexpensively than two single people.  Over the years, Congress has recognized the issue and tinkered with the balance repeatedly.  There really is no easy answer, and changing family dynamics have made getting it right even more complicated.

I have my return right here.  I owe, but I can’t afford to pay.  What should I do?

Go ahead, mail in (or e-file) your return.  Pay as much as you can now.  You’ll get credit for the payment and will only owe penalties and interest on the unpaid part.  By filing now, you’ve eliminated the late filing penalty and any amount you pay reduces the interest and penalties charged.

You’ll get a bill from the IRS for the balance due.  If you can pay then, fine.  If you still can’t, you might need to file Form 9465, Installment Agreement Request.  The IRS lets you pay in payments, but on top of all the interest and penalties, they’ll charge you an extra $43 to $105 fee for a payment plan.

So, if I don’t owe, I don’t need to file for an extension, right?

Wrong.  Say that big refund you are expecting turns into owing $500.  Not only will you have to pay interest and penalties for paying late, but you’ll pay a penalty for filing late, too.  Isn’t it worth 15 minutes online to insure against the late filing penalty?

How do I get an extension of time to file?  I waited too long and now I don’t have time to finish my return.   

This one is easy. 

If you use a professional preparer, call and ask the preparer to extend your return.  Because this is a very simple transaction, many will file the extension for you without charge.  The extension request doesn’t need to be signed. 

If you are a do-it-yourselfer, go to www.irs.gov and download Form 4868.  It’s a very simple form that you can complete and mail, use an e-filing program, or use the free file program at the IRS website.  Close to tax time, the IRS website features the extension process and makes it even easier.

Form 4868 asks you to estimate your 2011 liability.  The IRS says that if your estimate is unreasonable, they may void your extension.  However, taxpayers often enter zeros and still have their extensions granted. 

If you think you owe taxes, estimate how much you owe and make a payment along with the extension request.  If you pay too much, you’ll get the excess back with you file your return, generally with interest.  If you pay too little, you’ll pay interest and penalties. 

If you are filing electronically and want to send a payment, you can have payment deducted from your checking or savings account.  Or, if you are mailing in your request, enclose your check with the extension request.

You now have until October 15 to file your return.

Most states (including Illinois and Wisconsin) extend your return automatically if you file a federal extension.  If you are extending only your state return or want to make a payment toward your state taxes, you’ll need to file a state extension though.  Each state has a form on their website.

The IRS doesn’t charge to file for an extension, but there are several costs to filing late: 

If you don’t pay by April 15 (April 17 this year), you’ll pay interest from April 15 until the date you pay the tax. 

Second, there’s a late payment penalty.  This penalty is one-half percent of the tax due.  It is charged for every month or partial month until you pay the tax.  That’s 6 percent a year, in addition to the interest.  This penalty caps out at 25 percent after about 4 years.  You can sometimes avoid this penalty if you had reasonable cause to pay late.  If you’ve paid 90 percent of your liability by April 15, you are considered to have reasonable cause. 

Third, there’s a late filing penalty.  This penalty is much steeper and is 5 percent of the amount due for each month (or part) that your return is late.  If your return is more than 60 days late, this penalty is a minimum of $135 or the amount you owe.  Again, you can sometimes avoid this if you had a good reason for filing late.  Be warned, that, even if you extend, but don’t file by October 15, this penalty sets in.

I just discovered I made a stupid mistake.  What do I have to do to fix it?  I mailed my tax return yesterday.

We are human and, no matter how much we double check, mistakes do happen.

As I don’t know what kind of a mistake you made, let me answer the question in general terms.

Typically, when you make a mistake or want to change your return (unless the IRS contacts you first), you file an amended return.  If you caught the mistake and make the correction before the return was due, you won’t be charged interest or any penalties.  You may have to pay interest or penalties though, if you file the amended return after April 15 (April 17 this year).   But if you get a refund because of the change, the IRS generally pays you interest.

Before you begin, decide if you should file an amended return.  If you accidentally omitted income, transposed a child’s social security number, checked the wrong filing status, or some other serious error, you definitely want to amend.  It’s better to get to the IRS before they get to you.  You’ll reduce interest and penalties that way.

Sometimes it’s really not worth it to amend.  Perhaps you forgot to deduct the $100 contribution you made to the local volunteer fire department.  If your marginal tax rate is 15 percent, ask yourself if filing an amended return is worth an extra $15 refund.

Taxpayers often decide not to amend a return because amending the return will extend the time the IRS gets to audit their returns.  This is known as extending the statute of limitations. 

Generally speaking, the IRS has until April 15, 2012 to audit 2008 returns.  Say that in March 2012, you discover a deduction from 2008.  If you decide to amend, the IRS now has until March 2015 (3 years after you file the amended return) to look at that 2008 return a little more closely.   

Sometimes tax laws change retroactively, and it’s in the taxpayer’s best interest to go back and amend a prior year’s return.  For example, taxpayers whose homes were built with corrosive drywall can go back, amend their returns, and claim a casualty loss.  Or, in a few cases, taxpayers are able to back and claim first-time homebuyer credits on prior-year returns.

Regardless of whether you originally filed Form 1040, 1040A, or 1040EZ, start by downloading Form 1040-X and the instructions from the IRS website, www.irs.gov.  

Form 1040-X is designed to handle a variety of different mistakes.  It’s very important to consult the instructions as to which parts of the form you’ll need to complete.  Depending on what changes you are making, there are instructions and detailed charts telling you what should be reported on each line of Form 1040-X.   Where you should send the completed return depends on the type of changes and where you live.  There’s a chart for that, too.

The IRS sets a goal of 12 weeks to process an amended return.  Because of different filing circumstances, that varies greatly and is often longer.

Often, when you amend your federal return, you must also amend your state return.  You should amend your federal return before your state return.  If the mistake was solely on the state return, you can file just an amended state return. (IL-1040-X in Illinois and Form 1X in Wisconsin)  Both of these forms and instructions are available on the state websites.

Amending a tax return can be a little tricky.  Regardless of the change you are making, the key is to follow the instructions carefully.  If it’s a simple change, you may be able to do it yourself.  If it’s more involved, consider getting professional help.

How much of a gain can I take on the sale of my house before I have to pay a capital gains tax? 

If you have lived in the house for 2 of the last 5 years, there is a special exclusion.  You can exclude $250,000 of gain if you are single and $500,000 if you are married.  You calculate the gain by first taking the amount you sold the house for, and the subtracting the price you paid, the cost of major improvements, and the costs of selling the house, such as real estate commissions.

Remember, this special rule only applies to your personal residence.  Vacation homes don’t qualify.  And if you were running a home business and took depreciation deductions, you’ll have to pay tax on those amounts.  Be sure to keep receipts for what you paid for the house and major improvements.  You’ll need these numbers so that you can exclude those amounts when calculating the exemption or any taxable gain.

I heard we have until April 17 to file federal returns this year.  Is that true, and what about state returns?

Yes.  April 15 is on Sunday, and April 16 is a holiday in Washington, DC.  States typically extend the filing deadline to match the federal deadline.  Both Illinois and Wisconsin have extended the deadline until April 17.

 

When is the best time to file a tax return?  I hear if you wait until April 15, you stand less of a chance of being audited.

Like so many other things you hear on the street, this one is an urban legend, too. 

The IRS has a minimum of three years to audit your return.  If they decide to examine your return, they have plenty of time.  If they find your return “interesting,” the “last minute rush” isn’t going to diminish the chance of an audit. 

Frankly, if you wait until the last minute to prepare (or have someone else prepare) a tax return, you are more likely to make a silly mistake, which will increase the chance of an audit.

This brings up another question, when should you prepare a tax return.  Generally speaking, February is the best time.  It generally takes several weeks into the new year before you receive all of the W-2s, 1099s and other important tax information. 

Employers are required to send you your W-2 by January 31.  Similar deadlines apply to other filings.  Shareholders in S corporations, partners in a partnership, and trust beneficiaries are used to waiting even longer for their K-1 forms.  Sometimes those forms come so late that partners and beneficiaries have to file for an extension.

Never file your return until you receive all of the tax information you are expecting from others.  If you file too early, you might get another tax statement that you had forgotten about.  At the very least, that means you’ll have to recompute your taxes.  If you have already filed, it means you’ll have to file an amended return. 

If your return doesn’t match the information reported to the IRS by others, the IRS will probably contact you.  When information doesn’t match, the IRS generally assumes that your numbers are wrong and the burden is on you to explain any differences. 

Once you have all the information, you should prepare your return as soon as possible.  If you owe tax, it gives you a little time to make arrangements to pay without paying further penalties. 

One of the classic situations I’ve seen is where a taxpayer had taxes withheld in the wrong state.  If the return is filed early, you can get a refund from the “wrong” state and use that refund to pay the “right” state.  The same thing happens when you have a refund coming from federal taxes but owe the state (or vice versa).  If you procrastinate until April 15, you’ll have to dig into your pocket to pay now, and wait for a refund! 

If you have a refund coming, by all means, file right after you prepare your return.  The sooner you file, the sooner you’ll have your money.  The quickest way to get your refund is to e-file and use direct deposit to your bank account.

If you owe, you have several different options: 

You can e-file your return now and mail your payment later with Form 1040V, which is a payment voucher.  As long as you mail the payment by April 15 (April 17 this year), there is no penalty. 

Another option if you e-file is to mark your return for automatic withdrawal from your checking or savings account.  You specify the date of withdrawal.  You can either pay now or put off paying until the payment is due. 

If you mail the return, the same options apply.  You do not need to enclose payment with the return.  You can send it later with the voucher or you can specify an automatic withdrawal.

If you use an automatic withdrawal, I recommend you set the date for early April, sometime between April 5 and April 10.  This allows you to go back and check that the withdrawal was actually made.  Occasionally, the withdrawal isn’t made, and if you wait until the last day, you end up paying interest and possibly a penalty.

If you make estimated tax payments, you can include your estimated tax payment for this year with any tax due for last year.  Or you can have a tax refund credited to this year’s estimated tax.

I bought gold bullion in 2008 and sold it in 2011.  I had a gain of $10,000.  Will I have to pay any tax on that?  I am in the 15 percent tax bracket.

Congratulations on your good fortune.

Long-term capital gains are gains from selling property that you held for at least one year.  In 2011 or 2012, if you are in the 10 or 15% tax brackets, any long-term capital gains are tax-free because they are taxed at a rate of 0%.  So had your gain come in the stock market, you wouldn’t have to pay any tax on your profit. 

Unfortunately, there are special tax rates for gain on “collectibles.”  Collectibles include stamps, coins, artwork, Scotch whiskey and any type of gems or metal.  Even though gains from this category are considered “capital,” any long-term gains are still taxed at ordinary tax rates.  In your situation, at the 15 percent rate, the gain would be subject to $1,500 in federal income tax.  If you were in the 28 percent bracket, you would have had to pay tax at a 28% rate, or $2,800. 

There is one bit of relief for the very affluent:  If you were fortunate enough to have made $171,851 last year ($209,251 if you are married), the tax rate on your collectibles gain would be limited to 28 percent rather than your higher marginal ordinary rate of 33 or 35%. 

While it’s hard to think of copper ingots and tin as collectibles, the rules apply to all types of metal that you either take physical custody of or have warehouse receipts for.  There was a bill in Congress in 2003 to treat gold, silver, and platinum the same as stocks, but the bill went nowhere, and there are no plans to make a change.

It hardly seems fair that a trader in copper pays more than someone speculating in grains, foreign currency, or oil.  But that has been the law since 1981.

It gets worse.  Let’s say that instead of a $10,000 long-term gain, you had a $10,000 long-term loss on your gold investment.  Like any other capital loss, unless you had other offsetting capital gains, you would only be able to deduct $3,000 of the loss this year, and $3,000 every year until the loss was used up.  So it would take 4 years for you to be able to fully deduct your losses.

Like other investments, if you had held the gold for less than a year, the loss would have been deductible or any income would be taxed at ordinary income tax rates.

Different rules apply to financial contracts traded on an established exchange.  And, while trading metals in your retirement account may not be specifically prohibited, but it will result in a tax disaster.  In both cases, the rules are extremely complicated.  Seek specific tax advice before you get into a situation like that.

Before you decide to buy metal or other collectibles, be sure to take into account these less favorable tax rates on collectibles.  If you need help, ask before you invest.

 

My Tax Preparer retired this year.  Now what?

Some people actually enjoy preparing their tax return.  If your return is fairly simple, that’s certainly an option.  If you do it yourself, you can still obtain the paper tax forms and instructions and file by mail.

Or maybe you’d like to try using a computer instead.  At this time of year you can’t avoid tax software commercials.  Millions of people spend quite a bit of money for these programs.  But it seems to me that very few people really benefit from them:

If you earned less than less than $57,000 last year, you can use the tax software at the IRS website for free.  And many states, including Illinois and Wisconsin, allow you to file state tax returns at their websites for free.  If you’re single, taking a standard deduction, and your only income is from your paycheck, you can do it yourself without buying any software.

If you don’t qualify for free filing, you might consider buying tax software.  Although they’ve improved, these programs are still written for “ordinary situations” and your situation might be a special case.  Despite the checklists built into the software, you still need to know how the deductions, credits and other terms apply to you. 

Remember, the tax law can get complicated in a hurry.  Taking the wrong deduction or passing one up can be costly.  But if you know what you are entitled to, and you want automatic calculations, think about buying a program.  Professionals rely on tax software to save them time.  But just remember, you’re preparing one return, not hundreds.  You can do the same thing using a paper form and a calculator for free.

If you need a professional preparer, you have a lot of options.  Obviously, it’s more expensive to use a preparer than doing it yourself, so you’ll want to be sure you’re getting your money’s worth.

Sometimes it’s hard to tell a really good provider from a mediocre one.  First and foremost, a professional preparer should care about you and be trying to help you save money this year and offer suggestions for lowering next year’s tax bite.  It’s perfectly acceptable to ask someone how long they have been preparing returns and where they learned their trade. 

You can ask respected friends, neighbors, and relatives who they use.  Many of the best preparers don’t advertise, but rely on referrals from satisfied clients.  It’s ok to ask a preparer about fees, but remember that tax returns vary greatly and complex ones cost more than simple returns.  You may be quoted a range or a minimum fee.

While it can be hard to find a good preparer, it’s easy to spot a few that you should avoid:  Some commercial preparers focus on having “fun” while filing your return.  While a preparer should put you at ease and be pleasant, your tax return is not a joke.  You worked hard for your money last year.  Paying the least amount of tax is not a laughing matter. 

If a professional preparer offers to prepare your return “for free,” ask yourself how the preparer earns a living.  Rest assured, there is a catch.

If the tax preparer offers you an “instant” refund, keep walking.  Many preparers, especially the large chains, make their money on refund anticipation loans.  They charge as much as sixty percent interest.  Does a preparer who offers you that “service” truly have your best interests at heart?  .  Do you really want their advice?

E-filed federal and state tax refunds ordinarily take about 2-3 weeks.  If you must have the money quicker, take a cash advance on your credit card. 

When you do find a good preparer, stay put!  Playing musical chairs to save a few dollars on fees is an excellent way to introduce an error on your return.  It’s much easier for a preparer who knows you and is familiar with your circumstances to be sure you got all the deductions you deserve.  Good preparers save their clients many times over the amount of their fee. 

Deducting dog food--At a local dog show, one of the presenters said dog food is deductible!  Is that a joke?  We have two Labrador retrievers.  Can we really write off their food, or is this a scam?

Some expenses are never deductible, others are always deductible, and some are deductible depending on the circumstances.  Dogs fit into that last category.

Normally you can’t deduct the cost of owning a dog or other animal, but here are several situations when you can deduct the cost of a dog and its upkeep:

If a guide dog (or other service animal) is assisting a visually or hearing-impaired person or a physically disabled person, the cost of buying, training and maintaining the dog is a deductible, medical expense.  This includes food for the dog.

A legitimate dog breeder can deduct the cost of breeding and selling dogs.  But unless the breeding operation is run in a businesslike way, with the expectation of making a profit, the IRS will disallow these expenses as nondeductible hobby losses.

For five years, Ronald and Marcelle Larson ran a small dog-breeding business out of their home.  They lavished extraordinary care on the dogs, because they wanted to produce superior, well-adjusted animals.  The Larsons believed that breeding puppies in such an atmosphere would allow them to get higher sale prices for the dogs.  But in five years of breeding Shetland sheepdogs, the Larsons never made a profit, and the IRS disallowed their deductions.  On appeal, the Larsons convinced the Tax Court that the kennel was conducted in a businesslike way, there was an honest intention to make a profit, and they backed up their expenses with receipts.  The Court ruled that the Larsons could deduct their expenses, including dog food, against the income they made from their other jobs.

If you provide services for dog owners, you may be able to deduct dog food and other costs as legitimate business expenses.  Veterinarians and dog groomers occasionally need to feed dogs while caring for them.  Kennels feed dogs as part of their service.  And in a pet shop, until they are sold, animals are considered inventory.  The retailer has to feed and care for the dogs, cats and other pets as part of the cost of doing business. 

“Lassie,” the famous collie of movie and television fame, was a valuable business asset.  In fact, there were several “Lassies” and they were used by the dogs’ owner to produce income.  Housing, training, insuring these dogs, and breeding their replacements were all deductible business expenses.  This included the salaries of several employees and, of course, the cost of dog food. 

Dogs are often used in law enforcement work such as sniffing out drugs and bombs and assisting in crowd control.  Some time ago, the IRS ruled that dog food allowances given to county law enforcement officers weren’t taxable.  The dogs were owned by the county and used to perform various police functions.  The dogs were trained to be accountable only to their handlers and lived with their officer handler.   When asked for their opinion, the IRS said this was a legitimate business expense for the county and a nontaxable, working condition fringe benefit for the officers. 

Dogs can also be used to provide security.  If you use a guard dog to protect your business, the cost of dog ownership, including dog food, is a deductible business expense.  Protecting your residence with a dog is not deductible. 

If you can justify a guard dog to protect your business, call the dog a dog.  Don’t misrepresent the dog as a “security system” or other pretense.  If you are audited, disguising your deduction will weaken your case that the dog is justified.

Robin and Anne Jenkins deducted a security guard and some other creatively-labeled, personal expenses from their tax returns.   The Jenkins’ “security guard” turned out to be the family dog.  The deductions they claimed were for dog food and a license.  The Tax Court denied their deductions and added a fraud penalty.

Pets are a personal, nondeductible expense.  Deduct your pets and you’ll end up in the doghouse. 

Managing withholding as your family gets older--We end up paying tax every April.  Each year it’s been getting worse, and this year it was fairly substantial!  Our 2 kids are getting older; our daughter is about to graduate from high school and our son from college.  Are we doing something wrong? 

As your children get older, your tax situation changes.  Are you having enough tax withheld? 

First, let’s talk about your daughter.  If she is a senior, she probably has just turned 17, and is no longer eligible for the $1000 child tax credit, even though she is still your dependent.  Eligibility for the credit is measured by your child’s age as of the last day of the year.  So if your daughter turned 17 during 2010, you couldn’t claim the credit on the tax return you just filed.  That $1000 child tax credit comes right off the bottom line and reduces (or increases) the tax you owe dollar-for-dollar.  

How about your son in college?  The child tax credit for him is long gone, but are you still claiming him as a dependent?  Generally, you can claim your children as long as they are under 19 as of the end of the year.  If your son is a full-time student for at least five months, you can still claim him, provided he is under 24.  If your son is providing more than half his support (other than scholarships) you can no longer claim him.  Disabled children may be claimed regardless of age and there are also special rules regarding dependent children who are married.

For 2011, each of your dependents is a $3700 deduction.  If you are in the 28 percent tax bracket, that’s going to reduce your taxes by about $1030 for each dependent you claim.  But, as the nest empties, the benefits also fly away and the tax bill does go up. 

You may have other circumstances increasing your tax bill.  For example, as you pay off your mortgage, the amount you pay in interest declines and your interest deduction is going to be lower.

If you haven’t done it already, it’s time to adjust how much you are having withheld from both of your paychecks.  Withholding is adjusted by filing IRS Form W-4 with your employer.  You can get the form online from the IRS or your employer will have copies.  There are similar forms for state income tax withholding.  Be sure to complete those as well.

Getting withholding right can be tricky, particularly if you have more than one paycheck.  And changing circumstances can throw the most careful estimates out of whack. 

IRS Form W-4 has a worksheet to help you estimate the correct amount to withhold.  But if you have special circumstances, like two income earners or if you itemize deductions, it can be a bit intimidating.  Alternatively, you can use the special withholding calculator on the IRS website at www.irs.gov.  It will ask you detailed questions about your situation and then will advise you as to the correct amount to have withheld.  The IRS calculator has a helpful feature that takes into account how much has already been withheld for the year.  So, particularly if it’s late in the year, the calculator can help you catch up your withholding if you haven’t had enough withheld or your circumstances have changed.  Finally, you might want to ask your tax preparer for help, if you have one.

With low inflation, there are differences of opinion as to how much you should have withheld.  In a perfect world, at tax time, you should neither owe nor get a refund.  Financial gurus generally suggest that you should owe a little at tax time, but not enough to be penalized.  That way you maximize the time value of your money.  Still others say that, especially in times of low interest rates, withholding is a good way to save.  Many people find it easier to bank that refund check than to try to save a little each payday.  You’ll have to decide what works for you.

Whistleblower rewards--I have a tax question. I know of someone who sold property in either 2007 or 2008 and then moved to Puerto Rico. “Peter” has bragged to me that he never paid, as best as I can determine, between 1.8 to 2.3 million dollars in capital gains. Peter’s not filed income tax since probably 2006 and believes by hiding in Puerto Rico for three years the statue of limitations has run out and he is free and clear. After much consideration, I am contemplating reporting Peter to the IRS, especially with the reward inducement.   Would I remain anonymous?

Puerto Rico is a United States Commonwealth and has its own system of income tax.  There are many special arrangements for those who earn income in Puerto Rico and for Puerto Ricans who earn income in the mainland U.S.  Over the years, a lot of people have tried to take improper advantage of these loopholes.

First of all, “Peter” is in for a rude awakening.  It’s true that the general statute of limitations is three years after your return is due.  So, if you filed your 2007 return on April 15, 2008, you wouldn’t have to worry about it after April 15, 2011.  But if you don’t file a tax return, or the government proves that you committed fraud, there is an unlimited statute of limitations!  Also, if you do file, and you omit 25 percent of your income, the statute of limitations goes from three years to six.  If they find out that Peter omitted millions of dollars worth of income, the IRS will be waiting for him.

Over the years, the IRS has had various “whistleblower” programs, encouraging those with information about tax cheating to come forward.  The latest version established the Whistleblower Office at the IRS in 2006.  The IRS is looking for specific, original information and facts that an informant knows about a noncompliant taxpayer rather than unsubstantiated allegations.  General hunches, educated guesses, and information that’s readily available from other sources will not be compensated.

There are two different programs; the first applies to cases where the amount of tax is $2 million or more.  Generally, these statutory rewards amount to 15-30 percent of the tax, penalties, and interest collected as a result of the information furnished to the government.  Awards may be appealed to the United States Tax Court.

In the second program, used for smaller amounts, the IRS is authorized, but not required to provide rewards to informants.  Any awards under this program are not appealable. 

To participate in either program, the informant should start by completing Form 211, Application for Award for Original Information.  This form is filed with the IRS Whistleblower Office in Washington, DC.

To receive a reward, applicants must provide identifying information for both the informant and taxpayer.  The informant must provide facts supporting the alleged tax law violation, how the informant learned of the violation, the relationship of the informant to the taxpayer, and a description of the amount owed by the taxpayer.  Finally the taxpayer must sign Form 211 under oath, stating that the information is true to the best of the informant’s knowledge. 

In either program, the name of the whistleblower is confidential.  Sometimes the IRS might need the informant to testify in a proceeding against the tax evader, in which case the informant’s identity would be exposed.  The informant is notified and consent is obtained before the government can proceed in those cases.  If that happens, you have to decide whether remaining anonymous is worth foregoing the reward.

Awards are made as soon as practical after the missing taxes are collected.  No reward will be paid unless collection is actually made.  And the rewards are subject to both federal and state income taxes. 

Sometimes, particularly in the case of divorcing couples, a party will attempt to cause an opponent trouble by making unfounded claims to the IRS.  Because the statement on Form 211 must be signed under penalty of perjury, making a knowingly false claim is not wise and can result in a severe punishment.

Car rental charges--My wife and I went to Albuquerque for a weekend.  We got a good rate on airfare and thought we were getting a good rate on a compact car.  Imagine our shock when the rental agent added over 50 percent in “taxes and fees” to our bill.   We aren’t cheapskates and pay our bills, including our taxes, but when someone quotes a price, is it even legal to jack it up like that?

It’s legal, but whether it’s moral is another question.  Travelers have always been subjected to inflated prices by the unscrupulous and given us the phrase “whatever the traffic will bear.”  One of traveling Europeans’ biggest gripes in North America is tacking on a 5-10 percent charge for sales tax.   (In Europe, posted prices typically include sales tax-like charges.) 

A few years ago, municipalities and states everywhere decided that travelers were an easy mark to tax.  Local folks typically don’t rent hotel rooms or cars at airports.  So by collecting a steep hotel tax or rental car tax, public officials can collect a lot of revenue from people who can’t vote them out of office at the next election. 

The trouble is, most of us travel at some time or other and end up having to pay these charges.  These communities aren’t really shifting the tax to somebody else, rather politicians are cleverly evading responsibility for the financial decisions they make. 

The rental car companies have seen this practice and decided to get in on the act.  They’ve added charges for such things as “concession recovery fees” (rent?), “energy recovery fees” (isn’t the customer the one who is the one buying the gasoline?) and other charges.  You don’t pay your supermarket’s rent bill or light bill through a separate charge, why should car rental be any different?  Generally, these charges are quoted as “estimates” so if the company (or the local politicians) want to raise them before you pay, they can.

Almost every city has extra charges on car rentals beyond the ordinary sales tax, but they vary widely between cities.  Generally, there are more of these extra taxes and charges at airports.  The rate one customer is charged can be quite a bit different than what another customer pays.  This is because these charges are often quoted on a per-day, per-rental or percentage charge.  For example, the tax rate on a shorter rental will be higher if there are “per-rental” extra charges like the $20.00 per rental “transportation and facilities fee” in San Francisco.  (It’s $10.00 at the nearby Oakland Airport.)

Albuquerque is not alone in having pretty steep extra charges to rent a car.  I recently checked the website of a major rental car company for the price of a two-day summer weekend compact car rental in several American cities.  These quotes included sales taxes of as much as 20 percent.  The period I checked was for Friday, July 8 through Sunday, July 10.  

In Albuquerque, the extras for this rental were 48 percent of the base rate.  The same car at Chicago’s O’Hare airport was subject to a 41 percent charge.  In San Francisco, the charges were 39 percent.  New York’s LaGuardia Airport was a relative bargain at 33 percent.  The lowest I found was Rockford, Illinois, where the extras were “only” 10 percent. 

The rental companies frequently don’t clearly identify which of these charges were their own ideas, or the name of the taxing body who thought up these fees.  And, because they are very clear that these charges are “estimates,” you really can’t compare one company’s fees to their competitors, whose extra fees and taxes often vary.  This prevents you from shopping around to get the lowest overall cost.

It doesn’t seem like it’s asking too much to be quoted a fair price that includes all charges and know it will be honored.  But unless we get a federal law mandating more transparency in car rental pricing, it doesn’t look like we are going to see an improvement any time soon. 

Tax on overtime pay--My cousin tells me that whenever he works overtime, he has to pay more in taxes than he makes for accepting the overtime.  If that’s true, why would anybody work overtime unless forced to?

This is another urban legend.  In the song, Movin’ Out, singer-songwriter Billy Joel wryly observed that “you can pay Uncle Sam with the overtime” and asked if that’s all you get for your money.

When you work overtime, (or under time, for that matter), your withholding taxes are going to be calculated based on the amount you earned during the pay period when you were working overtime, rather than your normal pay.  The withholding tables assume that you made as much money all year as you did in the overtime period.  So the amount being withheld is going to be more than usual, especially if you were paid time-and-a-half for a lot of hours.  Many people— including Billy Joel—have noticed that when you get time-and-a-half for overtime work, the amount withheld on the overtime hours is often close to that extra half-time you got paid!

Bear in mind that what is withheld from your paycheck is not the same as the tax you will be paying.  So if this was an unusual pay period and too much was withheld, you’ll get it back in the form of a bigger refund at tax time.

In our system, the more you make, the higher the rate of income tax that you pay.  Here’s how it works:  The first dollars that you earn are taxed at a 10-percent rate.  Once you earn a little more, those first dollars are still taxed at 10 percent, but the additional dollars are taxed at 15 percent.  The tax code continues to tax each additional dollar you make at increasingly higher rates.  If you are fortunate to earn an income of about $375,000, any additional income is taxed at the top rate of 35 percent.  But, even with that size income, you are still given the benefit of the lower rates on the lower brackets.  You are only taxed 35 percent on the part of your income that’s over $375,000.

So, to actually pay more in income taxes than you made in income would require you to be in at least a 101-percent tax bracket.  That’s about triple the highest current rates.  Even in Sweden, with one of the world’s highest income tax rates, the income tax tops out around 60 percent.

But aren’t there some situations where you can end up with less because you made too much and lost a benefit?

There are some fairly unusual situations where it could be counterproductive to work.  If you have a capital gain during the year and otherwise have a modest income, you’ll pay zero percent tax on the capital gain.  If your income goes above the 15-percent tax bracket, you’ll have to pay 15-percent tax on the capital gain.  So, if the overtime caused you to slide over that line, it could be costly.  If you have a large capital gain, and are potentially in a situation like that, you might want to talk to your tax planner or preparer for advice.

Another situation occurs for those receiving Medicare.  Medicare premiums are higher for upper income individuals.  If you cross the line and make more money, your higher Medicare premium could cancel out the extra income.  But this is a fairly rare circumstance.

Finally, depending on the program, you might qualify for something like a homebuyer assistance program or scholarship and lose eligibility because you made too much money.  Sometimes the lost benefit is worth more than the additional income that you made.  These situations are outside the tax code and, if they apply to you, you really have to examine them on a case-by-case basis.

Unlike those programs, most benefits given to those with lower or middle incomes are phased out as incomes rise.  For example, if you are deducting student loan interest and start making “too much,” only several cents of the deduction is eliminated for every additional dollar you earn.  Eventually, it’s entirely phased out, but at no point do you actually end up with less money than if did not earn the additional income.

Can I deduct my work clothes?  I work as a warehouseman in a distribution center. 

Generally speaking, no.  Protective clothing is an exception.  But the protective clothing has to be to protect you, not your regular clothing.

If your job requires it, you can almost always deduct work gloves, steel-toed shoes, respirators, goggles and similar gear.  You may not deduct blue jeans, flannel shirts, and similar clothes that you could wear out on the street.  (You might not wear them on the street, but because you could, the clothing isn’t deductible.)  You can’t deduct the cost of laundering them either.

Years ago, a society matron named Beverly Pevsner lost her husband and fell on hard times.  Lacking many job skills, she was able to land a job as a manager of a boutique selling designer women’s clothing.  Beverly was required to purchase and wear clothes that the shop sold.  She wore the clothes only for work, and she tried to deduct them as a business expense.  The court ruled, that, while she led a modest lifestyle and although she wore the clothes only while on the job, obviously her customers were wearing these clothes for general wear.  Because Beverly could wear the clothes for personal use, they weren’t deductible.

More recently, another court ruled that Emily Olin wasn’t able to deduct jewelry and formalwear that she wore exclusively while playing at piano concerts.  Saying the clothing was adaptable to general use, the court also disallowed her dry cleaning expenses.  

How about if you have to wear a uniform to work?

Generally, uniforms are deductible.  Wearing the uniform must be a job requirement and the uniform can’t be worn as ordinary clothing.  A maid’s uniform, for example.  The uniform has to be required by your employer.  A union requirement that painters wear a certain type of clothing won’t qualify.

Recently, several well-known retailers have started requiring their salespeople to wear black clothes.  But a dress code does not a uniform make:  The Tax Court has held that a foreman’s request that employees wear blue work clothes doesn’t make them deductible.

Sometimes, the uniform might only be a partial uniform.  For example if you are required to wear a blue golf shirt with the company name embroidered on it, the shirt qualifies as a uniform.  But if you must wear ordinary tan khakis with it, the pants don’t count as a uniform.

Army and Navy uniforms are a special case.  Uniforms worn by active-duty military personnel are not deductible.  These uniforms are considered a personal expense because the uniforms can be worn off duty and take the place of ordinary street clothes.  But if local military regulations forbid wearing fatigues while off duty, any cost of buying and maintaining the uniforms beyond the uniform allowance is deductible.

Whether the uniform can be worn as ordinary clothing is a matter of interpretation.  If a soldier’s uniform is ordinary wear, could a waitress uniform be worn while off duty?  Is a clown or Santa Claus costume “ordinary” clothing?  If clothes have the employer’s name on them, they are probably uniforms.  But pressing the issue and calling street clothes a “uniform” is probably not worth it.

I’m a nurse.  I don’t have enough miscellaneous deductions to itemize my white nurses’ uniforms.  They can be expensive.  Is there anything that I do?

The tax savvy way to do this is to have the employer to buy the uniforms, if possible.  An employer can always deduct the cost of uniforms from the first dollar, which means the uniform expense isn’t subject to the two-percent deductible on miscellaneous deductions.  The price is also paid before social security and other taxes are taken into account.   This makes it cheaper for the employer to furnish uniforms rather than asking the employee to pick up the cost.

Many fast-food workers are furnished uniforms by their employers.  These uniforms are called a “working condition fringe benefit” and aren’t taxable to the employees.  As these workers usually don’t make a lot of money anyway, providing a uniform helps the employer promote good grooming and employee morale.

Do I need to make estimated tax payments?

Most people who file a tax return receive the bulk of their income from wages, pension payments, Social Security, unemployment compensation or some other source.  Taxes are either automatically withheld or withheld upon the request of the person being paid.  But for some people, (especially the self-employed), no tax or not enough tax is being withheld to cover federal and state tax obligations.

If you don’t have at least 90 percent of your tax liability withheld, you are required to make estimated tax payments during the course of the year.  If you’re required to make estimated payments, and you ignore it—or don’t pay enough—you will be automatically charged a penalty when you file your return.  Often, the easiest way to avoid this is to simply increase the amount your employer withholds from your paycheck.  You can also ask Social Security or many other payers to withhold tax or increase the amount they are withholding.

You won’t owe a penalty if the total tax on your return is less than $1,000 or you didn’t have to pay taxes the previous year.  You also won’t owe if you had as much withheld as the total tax paid on your previous year’s return.  These exceptions are based on your total tax liability (line 60 of the return), not the amount of your refund or the balance that you owe.

When you file your tax return, you’re given credit for these estimated tax payments just like you would if they had been withheld from your paycheck.

So how do I get started?

Start by getting a copy of Form 1040-ES, which is available online at www.irs.gov.  Form 1040-ES has detailed instructions and four coupon-sized forms that you submit with your payments to the IRS.

The actual process of paying quarterly is not difficult.  Complete each coupon with your name, address, social security number and the amount you are paying.  Payments are due on April 15, June 15, September 15 and January 15.  If the payment is due on a weekend or holiday, you have until the next business day to mail it.  You may either mail it with a check made payable to United States Treasury or pay electronically.  Farmers and fisherman have a more lenient payment schedule.

Calculating the correct amount can be vexing, and is often hit-or-miss, especially if the amount of your income varies.  The instructions have two worksheets, one for regular income tax and the other for self-employment tax.  If you have your taxes professionally prepared, your preparer may be able to help, particularly the first time you calculate this.

The easiest way to avoid a penalty is to pay one-fourth of last year’s tax liability with each of the four payments.  (That’s the amount on line 60 of last year’s Form 1040.)  While simpler, this isn’t always the most accurate way to estimate your taxes, and you may still end up owing tax or end up having overpaid and have a large refund coming.  Another way to make an estimated tax payment is to apply your tax refund to next year’s taxes.

State withholding tax requirements and systems are generally similar.  For example, in Illinois, visit http://tax.illinois.gov/Individuals/FilingRequirements/EstimatedPayments.htm and download Form IL-1040ES.  For Wisconsin, visit www.revenue.wi.gov/faqs/pcs/estpay.html and use Form 1-ES.

If you made estimated payments, be sure to enter them on line 62 of Form 1040 or tell your tax preparer the dates and amounts of the payments that you made.  This is a fairly common mistake.  Often times, preparers are going by the slips of paper and other information that you hand them.  Most people do not make quarterly payments, so asking about these payments may not be on the preparer’s usual “checklist.”  If you don’t enter the payments on your return, the IRS generally catches this and will issue you a refund later.

IRS Publication 505, Tax Withholding and Estimated Tax, contains a lot of detailed information about special situations.  It also discusses other strategies for satisfying estimated tax requirements.