Consumer Blog
Tax traps for 2007
At the height of tax season, here are some things to watch for as a consumer - some of them legal, some outright scams:
- Refund anticipation loans. Much like payday loans, these short-term loans are incredibly expensive (again, APR's in the triple digits, like 300% plus) and they are used by the people who can least afford them - low-income taxpayers. See the Attorney General's recent Savvy Consumer column on this topic.
- Phishing. These are emails (or they could be phone calls) that appear to come from the IRS, telling you there's a problem with your tax return, or that you qualify for a speedy refund. They are crooks trying to get your Social Security number. Don't bite. #1 rule of identity theft is to never give out your personal info to anyone who contacts you. Only give it out when you initiate the contact.
- Your mailbox. Your tax return is a jackpot of personal information. If you file by paper, not e-file, make sure you drop your envelope in a secure mailbox, like the blue ones at the post office. Your curbside mailbox with the flag up is not a wise option for this. An ID thief would love to snatch it.
A recent Yahoo! article has more on these three topics.
Technorati Tags: fraud, loans, scams, taxes, moagoconsumer, consumer protection
Posted by on February 15, 2007 9:57 am :: Comments (3) :: Permalink
3 Responses to "Tax traps for 2007"
says:
September 28, 2007 12:16 am
Read over your 1040 to see if you got snagged by any of these common traps - and learn from experience.
Lines 8, 9 and 13
You hit the jackpot on interest, dividends and capital
gains. Too bad.
In 2006, for the fourth consecutive year, most stock funds made money - the average domestic equity fund was up 12.5 percent. At the same time, many of them used up the losses they'd been carrying forward from the 2002 bear market, which had offset previous years' gains.
That means you were probably hit with a bigger investment tax bill than you'd seen in years. Interest income and short-term gains were levied at your federal tax rate, up to 35 percent depending on your income.
Granted, long-term capital gains and qualified dividends were taxed at a modest 15 percent. But even that's a lot if you weren't expecting it.
Lesson On your equity funds, switch to tax-efficient entries, such as tax-managed or index funds. For the fixed-income portion of your portfolio, move to tax-exempt municipal bond funds. (Recently a five-year muni was yielding 3.7 percent, equivalent to 5.1 percent for someone in the 28 percent bracket, at a time when five-year T-bonds yielded just 4.6 percent.)
These changes may trigger a gains bill for 2007, but they'll almost certainly help you pay less in 2008.
Line 44 (of your 1040 or your child's)
Your kids earned a lot of interest. For decades, parents stashed cash for their kids in custodial accounts, since investment income earned by children was taxed at a lower rate. But starting in 2006, kids up to age 18 began paying taxes at their parents' rate on amounts of more than $1,700.
The result: a bigger tax bill for those who amassed accounts in the mid-five figures.
Lesson Reduce the tax bill by spending down the account in ways that benefit your kid -camp, say, or college visits. Then use the money that would've gone to those expenses to fund a 529 college savings account, which is tax-free if used for higher education.
Bonus: Your state may let you deduct your 529 contributions.
Line 45
Surprise! You get to pay the rich man's tax. The alternative minimum tax, or AMT, is a complex parallel tax code originally designed to prevent the richest households from dodging Uncle Sam. All taxpayers are technically supposed to calculate their bill two ways (the regular way and the AMT way) and pay the higher amount.
But the AMT isn't indexed to inflation, so many middle-class Americans end up in its grip. They pay considerably more, since the AMT caps or disallows favorite breaks, like the deduction for state taxes or the exemption for kids. Alas, once the AMT has you by the ankle, it's hard to shake loose.
Lesson Get a sense of whether you'll be hit again using H&R Block's AMT calculator (hrblock.com; click on Calculators). If you may fall victim, set aside some money to cover yourself. And book an appointment with a C.P.A. While you usually can't avoid the AMT, a pro may be able to help you reduce its impact.
Line 73
You got a really huge refund. What's so bad about that, you ask? By overpaying, "you made a free loan to the government," says Mark Luscombe, principal analyst at tax law publisher CCH. "And you missed out on the interest you could've earned on that money."
Lesson Ask your HR manager for a new W-4 and reduce your withholding. Remember, more exemptions means more cash in your pocket - and less in Uncle Sam's
says:
December 9, 2007 12:56 pm
could you explain to me about the income tax money refund mess. Are we going to get our income tax returns on time or how does that work
says:
February 20, 2008 10:54 am
Remember, the IRS will never contact you regarding your bank account info or personal information such as your social security number.
Learn more about tax e-mail scams
