Taxes 2009 for dummies

542 Pages·2009·3.239 MB·English

by  Eric Tyson, Margaret A Munro, David J Silverman

Taxes 2009
FOR
DUMmIES
‰
by Eric Tyson, MBA
Financial consultant and bestselling author
Margaret Atkins Munro, EA
Tax advisor
David J. Silverman, EA
Tax advisor
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Taxes 2009 For Dummies®
Published by
Wiley Publishing, Inc.
111 River St.
Hoboken, NJ 07030-5774
www.wiley.com
Copyright © 2009 by Eric Tyson, David J. Silverman, and Margaret Atkins Munro
Published by Wiley Publishing, Inc., Indianapolis, Indiana
Published simultaneously in Canada
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Manufactured in the United States of America
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About the Authors
Eric Tyson, MBA, is a bestselling author, syndicated columnist, and lecturer. He works with
and teaches people from myriad income levels and backgrounds, so he knows the fi nancial
and tax questions and concerns of real folks.
After toiling away for too many years as a management consultant to behemoth fi nancial-
service fi rms, Eric decided to take his knowledge of the industry and commit himself to
making personal fi nancial management accessible to all of us. Despite being handicapped
by a joint B.S. in Economics and Biology from Yale and an MBA from Stanford, Eric remains
a master at “keeping it simple.”
An accomplished freelance personal-fi nance writer, Eric is the author of other For Dummies
national bestsellers on Personal Finance, Investing, Real Estate Investing, and Home Buying.
He is also the author of Let’s Get Real About Money (FT Press), a comprehensive book about
optimizing one’s fi nancial habits. His work has been critically acclaimed in hundreds of publica-
tions and programs including Newsweek, the Los Angeles Times, Chicago Tribune, Kiplinger’s
Personal Finance Magazine, the Wall Street Journal, and NBC’s Today Show, ABC, CNBC, PBS’s
Nightly Business Report, CNN, FOX-TV, CBS national radio, Bloomberg Business Radio, and
Business Radio Network. You can fi nd his fi nancial insights online at www.erictyson.com.
Margaret Atkins Munro, EA, (who answers to Peggy) is a tax advisor, writer, and lecturer
with more than 30 years’ experience in various areas of taxation and fi nance with a mission
in life to make taxes understandable to anyone willing to learn. Her practice is concentrated
in the areas of family tax, small business, trusts, estates, and charitable foundations.
She is a graduate of The Johns Hopkins University and has also attended University College
Cork (Ireland) and the Pontifi cal Institute of Mediaeval Studies in Toronto, and she feels that
her ability to decipher the language in the Internal Revenue Code derives completely from
her familiarity with a variety of obscure medieval languages.
Peggy is the author of 529 & Other College Savings Plans For Dummies, and co-author of
Estate & Trust Administration For Dummies. She lectures for the IRS annually for its volunteer
tax preparer programs and speaks on a variety of tax-related topics. She has given numer-
ous interviews to the national print and radio media relating her expertise in tax issues,
especially with regard to their effects on families. You can reach her through her website at
www.taxpanacea.com.
David J. Silverman, EA, has served on the Advisory Group to the Commissioner of Internal
Revenue. David has a Certifi cate in Taxation from New York University and has been in pri-
vate practice in Manhattan for more than 25 years.
He regularly testifi es on tax issues before both the Senate Finance Committee and the House
of Representatives Committee on Ways and Means. As the result of his suggestions regard-
ing penalty reform that he made while testifying before these committees, legislation was
enacted that reduced the amount of penalties that may be assessed in a number of key areas.
David is the author of Battling the IRS, which has received critical acclaim in the New York
Times, Money, The Wall Street Journal, and numerous other publications. David has been
a contributing editor and wrote a monthly column for Smart Money magazine and is fre-
quently interviewed on national TV and radio as an expert on tax issues.
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Contents at a Glance
Introduction ................................................................................1
Part I: Getting Ready to File ........................................................7
Chapter 1: Understanding the U.S. Tax System .......................................................................................9
Chapter 2: Tax Return Preparation Options and Tools ........................................................................19
Chapter 3: Getting and Staying Organized .............................................................................................27
Chapter 4: No Form Fits All (Or, What Kind of Taxpayer Are You?) ...................................................39
Part II: Tackling the Various Forms .............................................59
Chapter 5: Easy Filing: 1040EZ and 1040A ..............................................................................................61
Chapter 6: Form 1040: Income Stuff ........................................................................................................81
Chapter 7: Form 1040, Part II: Adjustments to Income Stuff ..............................................................113
Chapter 8: The Rest of the 1040 .............................................................................................................135
Part III: Filling Out Schedules and Other Forms .........................159
Chapter 9: Itemized Deductions: Schedule A .......................................................................................161
Chapter 10: Interest and Dividend Income: Schedule B (1040), Schedule 1 (1040A) ......................201
Chapter 11: Business Tax Schedules: C, C-EZ, and F ...........................................................................215
Chapter 12: Capital Gains and Losses: Schedule D .............................................................................247
Chapter 13: Supplemental Income and Loss: Schedule E ...................................................................271
Chapter 14: Giving Credits Where Credits Are Due .............................................................................283
Chapter 15: Other Schedules and Forms to File ..................................................................................297
Part IV: Audits and Errors: Dealing with the IRS ........................313
Chapter 16: Dreaded Envelopes: IRS Notices, Assessments, and Audits .........................................315
Chapter 17: Fixing Mistakes the IRS Makes ..........................................................................................335
Chapter 18: Fixing Your Own Mistakes .................................................................................................349
Part V: Year-Round Tax Planning ..............................................371
Chapter 19: Tax-Wise Personal Finance Decisions ..............................................................................373
Chapter 20: Reducing Taxes with Retirement Accounts ....................................................................381
Chapter 21: Small-Business Tax Planning .............................................................................................399
Chapter 22: Your Investments and Taxes .............................................................................................413
Chapter 23: Real Estate and Taxes ........................................................................................................429
Chapter 24: Children and Taxes .............................................................................................................445
Chapter 25: Estate Planning....................................................................................................................457
Part VI: The Part of Tens ..........................................................467
Chapter 26: Ten Tips for Reducing Your Chances of Being Audited ................................................469
Chapter 27: Ten Overlooked Tax-Reduction Opportunities ..............................................................473
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Chapter 28: Ten Tax Tips for Military Families ....................................................................................477
Chapter 29: Ten Interview Questions for Tax Advisors ......................................................................481
Glossary ..................................................................................485
Index ......................................................................................499
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Table of Contents
Introduction .................................................................................1
What’s New in This Edition ......................................................................................................1
Why Buy This Tax Book? ..........................................................................................................2
Your Tax Road Map ...................................................................................................................3
Part I: Getting Ready to File ............................................................................................3
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 ..........................................................4
Part V: Year-Round Tax Planning ...................................................................................4
Part VI: The Part of Tens .................................................................................................4
Glossary ............................................................................................................................4
Icons Used in This Book ...........................................................................................................4
Part I: Getting Ready to File .........................................................7
Chapter 1: Understanding the U.S. Tax System ................................................................9
Figuring Out the U.S. Tax System ............................................................................................9
You can reduce your taxes ...........................................................................................10
Beyond April 15: What you don’t know can cost you ...............................................11
Understanding Your Income Tax Rates ................................................................................13
Total taxes ......................................................................................................................13
Your marginal income tax rate.....................................................................................13
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
Research .........................................................................................................................22
Tax preparation sites ....................................................................................................23
Hiring Help ................................................................................................................................23
Deciding whether you really need a preparer ...........................................................23
Unenrolled preparers ....................................................................................................24
Enrolled agents (EAs) ....................................................................................................24
Certified public accountants (CPAs) ...........................................................................25
Tax attorneys .................................................................................................................25
Finding Tax Preparers and Advisors .....................................................................................26
Chapter 3: Getting and Staying Organized .......................................................................27
Keeping Good Records ...........................................................................................................28
Ensuring a complete and accurate tax return ............................................................28
Setting up a recordkeeping system .............................................................................29
Tracking tax information on your computer ..............................................................30
Deciding when to stash and when to trash ................................................................31
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Taxes 2009 For Dummies
Reconstructing Missing Tax Records ...................................................................................31
Property received by inheritance or gift ....................................................................32
Securities received by inheritance or gift ...................................................................34
Improvements to a residence .......................................................................................35
Casualty losses ...............................................................................................................35
Business records............................................................................................................36
Requesting Copies of Lost Tax Returns ................................................................................36
Understanding the Cohan Rule ..............................................................................................37
Chapter 4: No Form Fits All (Or, What Kind of Taxpayer Are You?) ............................39
What Rendition of 1040 Shall We Play? .................................................................................39
Form 1040EZ ...................................................................................................................40
Form 1040A (the short form)........................................................................................40
Form 1040 (the long form) ............................................................................................40
Choosing a Filing Status ..........................................................................................................41
Single ...............................................................................................................................41
Married filing jointly ......................................................................................................42
Married filing separately ...............................................................................................43
Head of household .........................................................................................................46
Qualifying widow(er) with dependent child ...............................................................48
Figuring Personal and Dependent Exemptions ....................................................................48
Personal exemptions .....................................................................................................49
Dependent exemptions .................................................................................................49
Securing Social Security numbers for dependents ....................................................52
Filing for Children and Other Dependents ...........................................................................52
Defining Who Is a Qualifying Child ........................................................................................53
Age test............................................................................................................................54
Relationship test ............................................................................................................54
Residency test ................................................................................................................54
Support test ....................................................................................................................54
Filing a Return for a Deceased Taxpayer ..............................................................................55
Must I File? ................................................................................................................................56
When to file .....................................................................................................................57
If you don’t file ...............................................................................................................57
Where to file ...................................................................................................................57
How to file .......................................................................................................................57
A Final Bit of Advice ................................................................................................................58
Part II: Tackling the Various Forms ..............................................59
Chapter 5: Easy Filing: 1040EZ and 1040A ........................................................................61
Who Can File a 1040EZ? ..........................................................................................................61
Filling Out a 1040EZ .................................................................................................................62
Line 1: Total wages, salaries, and tips .........................................................................63
Line 2: Taxable interest income of $1,500 or less ......................................................63
Line 3: Unemployment compensation and Alaska Permanent Fund dividends.....63
Line 4: Adjusted gross income .....................................................................................63
Line 5: Deductions and exemptions ............................................................................63
Line 6: Taxable income..................................................................................................64
Line 7: Federal income tax withheld ............................................................................64
Line 8a: Earned Income Credit (EIC) ...........................................................................64
Line 8b: Nontaxable combat pay election ..................................................................65
Line 9: Recovery rebate credit .....................................................................................65
Line 10: Total payments ................................................................................................65
Line 11: Tax .....................................................................................................................65
Line 12a: Refund time! ...................................................................................................65
Line 13: Amount you owe ..............................................................................................66
Finishing up ....................................................................................................................67
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Table of Contents
Who Can File a 1040A? ............................................................................................................68
Completing Form 1040A ................................................................................................68
Line 6: Exemptions through line 9b: Qualified dividends .........................................68
Line 10: Capital gain distributions ...............................................................................68
Lines 11a and 11b: Total IRA distributions .................................................................70
Lines 12a and 12b: Total pensions and annuities ......................................................70
Line 13: Unemployment compensation, Alaska Permanent
Fund dividends, and jury duty pay ..........................................................................70
Lines 14a and 14b: Social Security benefits ................................................................71
Line 15: Total income ....................................................................................................72
Line 16: Educator expenses ..........................................................................................72
Line 17: Your (and your spouse’s) IRA deduction .....................................................72
Line 18: Student loan interest deduction ....................................................................72
Line 19: Tuition & fees deduction ................................................................................73
Line 20: Total adjustments ...........................................................................................73
Line 21: Adjusted gross income ...................................................................................73
Line 22: Adjusted gross income (again) ......................................................................73
Lines 23a and 23b: Standard deduction questions ....................................................74
Line 24: Standard deduction .........................................................................................74
Line 25: IRS subtraction quiz ........................................................................................74
Line 26: Total number of exemptions times $3,400 ...................................................75
Line 27: Taxable income................................................................................................75
Line 28: Find your tax ....................................................................................................75
Line 29: Credit for child and dependent care expenses ...........................................75
Line 30: Credit for the elderly or the disabled ...........................................................76
Line 31: Education credits ............................................................................................76
Line 32: Child tax credit ................................................................................................76
Line 33: Retirement contributions credit....................................................................76
Line 34: Total credits .....................................................................................................77
Line 35: Another IRS subtraction problem .................................................................77
Line 36: Advance earned income payments ...............................................................77
Line 37: Total tax ............................................................................................................77
Line 38: Total federal income tax withheld ................................................................77
Line 39: 2008 estimated tax payments and amount applied from 2007 return ......77
Line 40a and 40b: Earned income credit and nontaxable combat pay election ....78
Line 41: Additional child tax credit .............................................................................78
Line 42: Recovery rebate credit ...................................................................................78
Line 43: Total payments ................................................................................................79
Line 44: We smell refund! ..............................................................................................79
Lines 45a and 46: What to do with your refund .........................................................79
Lines 45b–d: Direct deposit of your refund ................................................................79
Line 47: Amount you owe ..............................................................................................80
Line 48: Estimated tax penalty .....................................................................................80
Final Instructions .....................................................................................................................80
Chapter 6: Form 1040: Income Stuff ...................................................................................81
Lines 6a–6d: Exemptions ........................................................................................................81
Lines 7–22: Income ..................................................................................................................82
Line 7: Wages, salaries, tips ..........................................................................................82
What those W-2 boxes mean ........................................................................................83
Line 8a: Taxable interest income .................................................................................86
Line 8b: Tax-exempt interest ........................................................................................86
Line 9a: Ordinary dividends income ...........................................................................87
Line 9b: Qualified dividends .........................................................................................87
Line 10: Taxable refunds, credits, or offsets of state and local income taxes .......88
Line 11: Alimony received (by you) .............................................................................89
Line 12: Business income (or loss) ..............................................................................89
Line 13: Capital gain (or loss) .......................................................................................90
Line 14: Other gains (or losses) ...................................................................................90
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Taxes 2009 For Dummies
Lines 15a and 15b: Total IRA distributions .................................................................90
1
Distributions before 59/ ..............................................................................................92
2
Transfers pursuant to divorce .....................................................................................93
Inherited IRAs .................................................................................................................94
Surviving spouse ............................................................................................................94
Beneficiary other than a surviving spouse .................................................................95
Withdrawal of nondeductible contributions ..............................................................96
Loss on an IRA ................................................................................................................96
Lines 16a and 16b: Total pensions and annuities ......................................................97
Line 17: Rental real estate, royalties, partnerships, S Corporations, trusts ........103
Line 18: Farm income (or loss)...................................................................................104
Line 19: Unemployment compensation .....................................................................104
Lines 20a and 20b: Social Security benefits ..............................................................105
Line 21: Other income .................................................................................................109
Line 22: Your total income ..........................................................................................112
Chapter 7: Form 1040, Part II: Adjustments to Income Stuff ........................................113
Adjusted Gross Income (AGI) ..............................................................................................113
Line 23: Educator Expenses ........................................................................................114
Line 24: Certain business expenses of reservists, performing artists,
and fee-basis government officials .........................................................................114
Line 25: Health Savings Account Deduction (Form 8889) .......................................115
Line 26: Moving expenses (Form 3903) .....................................................................116
Line 27: One-half of self-employment tax ..................................................................116
Line 28: Self-employed SEP, SIMPLE, and qualified plans .......................................116
Line 29: Self-employed health insurance deduction ................................................119
Line 30: Penalty for early withdrawal of savings .....................................................120
Lines 31a and b: Alimony paid ...................................................................................120
Line 32: You and your spouse’s IRA deduction .......................................................122
Your spouse’s IRA deduction .....................................................................................127
Line 33: Student loan interest deduction ..................................................................128
Line 34: Tuition and fees deduction ..........................................................................130
Line 35: Domestic production activities deduction (Form 8903) ..........................131
Line 36: Total adjustments .........................................................................................132
The dotted line to the left of line 36 ..........................................................................132
Line 37: Adjusted gross income .................................................................................134
Chapter 8: The Rest of the 1040 ........................................................................................135
Tax and Credits ......................................................................................................................135
Line 38: Adjusted gross income .................................................................................135
Line 39a .........................................................................................................................135
Boxes 39b and 39c .......................................................................................................136
Line 40: Itemized deductions (from Schedule A) or your standard deduction ...136
Line 41: Subtract line 40 from line 38 ........................................................................137
Line 42: Exemptions .....................................................................................................137
Line 43: Taxable income..............................................................................................138
Line 44: Tax ...................................................................................................................138
Capital gains and qualified dividends tax worksheet..............................................139
Line 45: Alternative Minimum Tax (Form 6251) .......................................................142
Line 46: Add lines 44 and 45 .......................................................................................144
Credits: Lines 47 to 55 ...........................................................................................................144
Line 47: Foreign tax credit (Form 1116) ....................................................................144
Line 48: Credit for child and dependent care expenses (Form 2441) ...................145
Line 49: Credit for the elderly or the disabled (Schedule R) ..................................145
Line 50: Education credits (Form 8863) ....................................................................146
Line 51: Retirement savings contribution credit .....................................................147
Line 52: Child tax credit ..............................................................................................148
Line 53: Form 8396, Form 8839, and Form 5695 .......................................................148
Line 54: Other credits ..................................................................................................149
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Table of Contents
Line 55: Total credits ...................................................................................................150
Line 56: Subtract line 55 from line 46 ........................................................................150
Other Taxes ............................................................................................................................150
Line 57: Self-employment tax (Schedule SE) ............................................................150
Line 58: Unreported Social Security and Medicare tax
(Form 4137 or Form 8919) .......................................................................................151
Line 59: Tax on IRAs, other retirement plans, and other
tax-favored accounts (Form 5329) .........................................................................151
Line 60a and 60b: AEIC payments and Household employment taxes .................152
Line 61: IRS pop quiz ...................................................................................................152
Payments ................................................................................................................................152
Line 62: Federal income tax withheld ........................................................................152
Line 63: Estimated tax payments ...............................................................................153
Line 64a and 64b: Earned Income Credit (EIC) and
nontaxable combat pay election ............................................................................153
Line 65: Excess Social Security and RRTA tax withheld .........................................154
Line 66: Additional child tax credit (Form 8812) .....................................................154
Line 67: Amount paid with extension request (Form 4868) ...................................154
Line 68a – 68d: Credits from Form 2439, 4136, 8801, and 8885 ........................................154
Line 69: First-time homebuyer credit (Form 5405) ..................................................155
Line 70: Recovery rebate credit .................................................................................155
Line 71: Total payments ..............................................................................................156
Refund or Amount You Owe ................................................................................................156
Line 72: The amount that you overpaid ....................................................................156
Line 73a: Amount that you want refunded to you ...................................................156
Line 74: Amount of line 72 you want applied to your 2009 estimated tax ............158
Line 75: The AMOUNT YOU OWE line .......................................................................158
Line 76: Estimated tax penalty (Form 2210) .............................................................158
Finishing Up ............................................................................................................................158
Part III: Filling Out Schedules and Other Forms ..........................159
Chapter 9: Itemized Deductions: Schedule A ................................................................161
The Standard Deduction .......................................................................................................161
Older than 65 or blind .................................................................................................162
Real estate taxes ..........................................................................................................162
Standard deduction for dependents .........................................................................163
Itemized Deductions .............................................................................................................164
Separate returns and limits on deductions ..............................................................164
But if you change your mind ......................................................................................165
Lines 1–4: Medical and Dental Costs ...................................................................................165
Medical and dental expense checklist ......................................................................167
Deductible travel costs ...............................................................................................169
Special medical expense situations ...........................................................................170
Meals and lodging ........................................................................................................170
Insurance premiums ....................................................................................................170
Reimbursements and damages ..................................................................................171
Special schooling .........................................................................................................171
Nursing home ...............................................................................................................172
Improvements to your home ......................................................................................172
Figuring your medical and dental deduction ...........................................................172
Lines 5–9: Taxes You Paid ....................................................................................................173
Line 5: State and local income or sales taxes ...........................................................173
Line 6: Real estate taxes ..............................................................................................174
When you buy or sell real estate ...............................................................................174
The downside of property tax refunds and rebates ................................................175
Line 7: Personal property taxes .................................................................................175
Line 8: Other taxes (foreign income taxes) ..............................................................175
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