Happy Tax Day!

I hope your filing went well! I don't know about you, but looking at my tax returns each year gets me motivated to save. You should capitalize on that that motivation while it is around to establish some automatic savings programs. I recommend a blend of the following:

• High Yield Savings Account - Set-up an automatic withdrawal from each of your paychecks into an online savings account. Find one that has no fees and no minimums. Even if you're just putting away $25 from each paycheck, it is good start. Or you can divvy it up like we do in my house, my fiance (the spender) pays all the major bills - rent, utilities, cell phones, etc - out of his account each month. I (the saver) match that amount with deposits into the savings account each month.
• 401(k) - The easiest and smartest way to save for retirement. If you don't already have this set up at work, talk to your HR manager today. You can take a big chunk out of next year's taxes by investing in your 401(k).
• IRA - Already doing pretty well with your 401(k)? Then it is time to max out your annual IRA contributions too. You can contribute up to $5,000 a year if you're under 50, $6,000 if you're over 50. This is another one that will make you happy next April.

It's a particularly good time to get into the business of stashing away funds for a couple reasons:

• It's a buyer's market when it comes to stocks. Talk about getting a good sale price!
• You can leverage your tax refund to set up an account.
• You can use April 15th as a reminder each year to track your progress.
• If you are one of the many who are holding off on buying a home, you can use the extra time to build up a better downpayment.

Are you feeling motivated to save?

Emily Davidson – A former TransUnion insider and a member of Credit.com's expert team. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.       

What to Do if your Can't Pay Your Tax Bill

I dinner with friends earlier this week who were lamenting their big tax bill. At almost $4,000 and right smack in the middle of their debt reduction campaign. They just didn't have the money to pay it.

If a big April 15th deadline is staring you down, don't fret. You have options. Gerri Detweiler, an expert with CreditBloggers.com and Credit.com, wrote a fantastic article about what to do if you can't pay your tax bill.

In the article, she compares the costs and consequences of:

• Paying your taxes by credit card.
• Applying for a personal loan.
• Setting up a monthly payment plan with the IRS.
• Requesting a short-term extension.
• Requesting an offer in compromise.

The only thing that is not an option is not paying your taxes at all. Tax liens are easily the meanest credit report record you can have. The lien record will remain on your credit report indefinitely if left unpaid, the only negative record that doesn't have an expiration. And even if you do pay it, the record will stay on for another 7 years from the payment date.

You may also want to consider borrowing money from relatives, requesting an advance on your paycheck or selling some things.

Emily Davidson – A former TransUnion insider and a member of Credit.com's expert team. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor

Do You Owe Taxes for Forgiven Income?

I just heard from "Missy," a woman whom I had spoken with some time ago about her debt. She is now out of debt. She's scrimped, saved, budgeted and settled her debts. But now she's run into a hurdle.

While working on her taxes, she's discovered that she may owe the IRS a big chunk of change due to debts she negotiated with her creditors.

Here's what happened: She managed to get some of her creditors to agree to accept less than the total amount owed in order to resolve her debts. In other words, they "forgave" some of the interest and penalties they had assessed. The problem is that the IRS considers forgiven debt "income" and expects you to pay taxes on that amount as if you received it.

"But they only wrote off only interest and penalties that were outrageous to begin with" argues Missy. Unfortunately, Uncle Sam doesn't care.

We are not talking about a small amount here. In Missy's case, the forgiven debt (reported by her creditors on Form 1099C) totals around $20,000. That could definitely result in a big bill from the IRS come April 15th.

Missy's tax preparer wasn't familiar with Form 982, which may allow her to avoid paying tax on that income. She must find out if she qualifies by demonstrating that she was insolvent when the debt was forgiven.  If so, Form 982 will allow her resolve the issue and avoid going back into debt to pay the IRS.

Given all the credit problems we're seeing, the IRS may be seeing a lot of Form 982s!

Gerri Detweiler – Personal finance author, radio host and credit expert. Gerri contributes budgeting, debt recovery and savings information online.

Is Paying Taxes with your Credit Card Really Rewarding?

Thinking of getting a little something back on this year’s taxes by paying with a rewards card? There are ads seemingly everywhere touting how you can quickly rack up some great rebates by doing so.

But before you jump on the bandwagon, be sure to crunch the numbers first. As tempting as it is to pile on the rewards points and air miles by charging your taxes, it is rarely as rewarding as you might think.

First off, you’ll pay for the ease of paying your taxes by credit card with a 2.49% convenience fee. This fee isn’t charged by the Internal Revenue Service. It’s charged by credit card service providers such as Pay1040.com and Official Payments.

These companies act as intermediaries between taxpayers and the IRS. They validate credit card numbers and expiration dates, obtain the authorization from card issuers and issue confirmation numbers to taxpayers.

They then forward the payment to the IRS. And a tax payment listed as “United States Treasury Tax Payment” is charged to the taxpayer’s credit card account, along with a convenience fee.

Let’s look at some examples:

If you pay a $2,000 tax bill on your favorite cash back rewards credit card, you’d wind up paying a $49.80 convenience fee. Let’s say your card pays you 1% cash rebate for every dollar you spend with the card. By charging your $2,000 tax bill, you’d earn $20 cash back, but that’s more than offset by the $49.80 convenience fee.

Paying an extra $49.80 to earn $20 doesn’t make a lot of sense does it?

And while you may earn about 50 cents cash back on the convenience fee, you’re still shelling out an almost $50 fee for roughly $20.50 in rewards. That’s a difference of $29.30. And that’s not so rewarding, is it?

What about paying your tax bill with your favorite air miles credit card?

Let’s say you have a $3,000 tax bill and you’ll earn one air mile for every dollar you charge on your taxes. Earning those 3,000 air miles might be nice, but you’ll also be charged a $74.70 convenience fee. Are you so desperate for a few thousand air miles that you would be willing to pay an almost $75 fee?

The heftier your tax payment the higher the convenience fee you’ll wind up paying.

If you’ve got a $5,000 tax bill, you’d be charged $124.50 for the convenience of paying your taxes by credit card. Use a cash back card with 1 percent rebate and you’d earn roughly $50 in rewards, $51.25, if you count cash back earned on the $124.50 convenience fee.

Once again, the rewards just don’t add up. Paying a $124.50 fee to earn $51.25 in rewards isn’t much of a deal.

Even an avid traveler eager to rack up air miles by charging a hefty tax bill may want to think twice.

Let’s say you’ve got a $10,000 tax bill, and you really like the idea of earning 10,000 air miles by charging your taxes on your favorite air mile credit card. How do you feel about paying a $249 fee? That’s the convenience fee you’ll be charged for paying a $10,000 tax bill on a credit card. For that much money, why not just book a domestic airfare yourself?

Another thing to consider when charging a tax bill with a rewards card is how quickly you’ll be able to pay the balance in full.

If you’re planning on revolving the balance from month to month, you’ll be hit with finance charges, further eroding any rewards you gain by charging your taxes.

Your best bet is to charge your taxes to a rewards card with a zero percent introductory rate for new purchases. The longer this teaser rate lasts the better – a zero percent offer for a year or more would be ideal.

Of course, the absolute best strategy is to pay off your card balance straightaway and avoid all finance charges. Also, bear in mind the IRS does offer various other payment options that may be more appealing.

This year’s tax returns are already pretty rewarding, with many Americans set to receive tax rebate checks this spring. So you may want to pass on using a not-so-rewarding rewards card to pay your taxes!

Granted, your tax rebate check could be used to offset the convenience fee and any finance charges you may pay for charging your taxes on a rewards card. But is that really how you want to spend your tax rebate money?!? I don't know about you, but I can think of a few thousand other ways that I'd rather use my check! :)

Curtis Arnold - Curtis is the CEO/Founder of CardRatings.com, a website that provides credit card ratings and reviews of over 20,000 offers. Lucy Lazarony, a freelance personal finance writer based in Florida, assisted with this article.

Tax Refund Checks: Will You Spend or Save?

Last week on this blog I recommended that any economic stimulus proposal must include some relief on credit card rates to be effective. Now I get to say "I told you so."

A survey of Angie's List members – who, mind you, are 2-person household/ homeowners/ college-educated professionals/ with an average household income just over $100,0000 (and should have money to spend) – finds that a measly 2% plan to splurge with their tax refund this year, and a third say they will use their tax check to pay down bills.

"Our members, generally speaking, are careful with their money and like to spend it wisely," said Angie Hicks, founder of Angie's List. "But like many Americans, about half of our members see 2008 as year that will be financially difficult so they're not looking at that annual tax check as 'mad money' at all this year."

Angie's List members have the following plans for their tax refunds:

• 32 percent will pay down bills
• 25 percent will invest it in home improvement
• 13 percent will save it for a rainy day
• 16 percent are unsure or didn't specify what they'll do with the money
• 11 percent will invest in the stock market or other financial sources
• 2 percent will splurge on something

What do you plan to do with your tax rebate/tax refund check this year? Take our poll!

Opinion Polls & Market Research

Funny Money Friday: Weird Tax Rules

Money doesn't have to be boring! Each week, CreditBloggers.com takes a look at the lighter side of the personal finance world in a series called Funny Money Friday.

Ugg...it's tax time. I finished my filings a few months ago and have already gone through the five stages of grief for the big checks I sent to the IRS. My fiance always waits until the last minute, though, and is going through the stress of decoding tax rules this week.

There are some real gems hidden in the 295-page Federal Income Tax handbook (pdf). One of my favorites is the Other Income section that instructs you to declare:

• Page 87 - "If you receive a bribe, include it in your income." Exactly how would this work?
  
• Page 89 - "Illegal income, such as money from dealing illegal drugs, must be included in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity" I'm sure my local meth dealer will get right on that, Uncle Sam.
• Page 90 - "If you steal property, you must report its fair market value in your income in the year you steal unless in the same year, you return it to its rightful owner." Are there actually criminals out there stupid enough to go for this?

Good luck with your taxes this weekend! If you find any other funny tax rules, post them in the comments section below. Happy Friday!

Are you Ready to Pay your Taxes?

It seems incredible to me that tax season is here already. Wasn't it just Christmas a few days ago?

Being the money geek I am, I've already finished my taxes and mailed off $1,400 to Uncle Sam.  Those payments sting a little bit, but fortunately I had some money from a holiday bonus to help pay it off. Inversely, my boyfriend always waits until April 14th to complete his filings!

Are you prepared for the sting of tax season? If you are not sure what you'll owe or get in returns this year, take a few minutes to do a quick tax estimate using this free MSN tool. If you need to write a check to the IRS this year, now is the time to think about where that money is going to come from. Let's evaluate tax payment options:

Cash - Paying your taxes directly from your checking account is certainly the simplest and cheapest option. However, be sure to check your balances and consider the impact before you sign the check. If paying your taxes with cash is going to leave you unable to pay your rent, mortgage, credit card bills, etc. consider other options. Also, remember that it can take a while for your check to be processed by the tax agencies.

Savings - Reaching into a savings account can be a smart move for paying taxes. Just be sure that you won't have to pay any special penalties or fees for the withdrawal. It can take a few days to transfer your savings to your checking account so don't wait until April 14th if you want to use this method. Avoid tapping 401(k) or IRA accounts for your taxes.

Credit Card - Taxpayers may be tempted to use a credit card for the simplicity, extended repayment period and rewards points. But those benefits are quickly lost when credit card processors charge you a 2.49% to 3.93% convenience fee for the transaction. Suddenly, that 1% cash back offer doesn't seem so appealing.

Installment Plan - The IRS offers an installment plan for consumers who can't afford to pay their balance in full. It's not cheap though: you'll be charged $105 ($52 if you are paying electronically) for a set up fee and $45 for a user fee along with a 5% interest rate and 1% monthly no-payment penalty. Even the IRS clearly explains that this installment plan isn't a great deal.

Personal Loan - Personal loans from your bank, credit union or online allow you to borrow up to $15,000 fairly affordably. A private personal loan may offer lower fees and more flexibility than the IRS installment plan. However, taxpayers with bad credit may have trouble being approved and could actually be better off with the IRS program.

Family Loan - Can a parent or relative help loan you the money you owe? If so, you might want to make the loan official using a program like Circle Lending. This system helps you manage a loan between relatives and removes a lot of the emotional landmines that come when you blend family with money.

Extra Earnings - If you know that you're going to owe some money in April, see if you can increase your income by working overtime, taking on a temporary second job or accepting more hours. Even holding a garage sale or selling a few things on eBay could help you gather the cash you need for your taxes.

How do you plan on paying for your taxes this year? Share your tips and feedback in the comments section below.

The IRS's Dirty Dozen: 12 Tax Schemes to Avoid

The IRS just released the twelve top scams to avoid this tax season. In the hope that it helps you save money and avoid grief, my translation of the IRS's explanations follows. 

1. Phony phone refunds being claimed as part of the special Telephone Excise Tax Refund available to most taxpayers this year. The IRS says it's "actively investigating" tax preparers who are preparing inflated refund requests. We may not like them, but the folks who work for the IRS are not jerks. I wouldn't want my return to look out of line in this area.
2. Abusive Roth IRAs: Don't bite if someone proposes a scheme where you shift under-valued property to Roth IRAs to save on taxes.
3. Phishing, a technique familiar to regular Creditbloggers, is used by identity thieves to acquire personal financial info from unsuspecting folks so that they can run up charges on stolen credit cards, or apply for loans in the names of those they've scammed. Sometimes pretending to be from the IRS itself, these crooks send out emails trying to trick consumers into disclosing private information. If you have any doubt about whether a contact from the IRS is authentic, call 800-829-1040.
4.   Shell corporations are becoming active in certain states to disguise ownership, avoid paying taxes, and under-report profits. The various branches of government are working together on this. Here's hoping … but really … is it so hard to find a way to do something legit?
5. Zero Wages: This scam is a little dizzying to me, probably because of all the bureaucratese it entails. Somehow,  a Form 4852 ("Substitute Form W-2") or a "corrected" Form 1099 is submitted that shows zero or little income. Sometimes, taxpayers are encouraged to rebut past wages and taxes, refer to the IRS Code sections 3401 and 3121, and include a reference to a fear of IRS retaliation for bureaucratic mistakes. Clear as mud, huh? Stay away!
6. Tax Preparer Fraud: Dishonest preparers can cause a lot of grief. They make money by skimming some of their clients' refunds and charging inflated fees. They promise huge refunds – from not only this year, but past years, too.  "If it sounds too good to be true, it probably is." Choose wisely, based on personal recommendations from people you trust.
7. American Indian Employment Credit: While there's an Indian Employment Credit available for businesses that employ Native Americans or their spouses, there is no provision for its use by employees. So Native Americans, watch out for this scam – and also for the good old standby, where you're told you aren't subject to federal income taxation. The latest variation has gone online. (See the advice on phishing, above.)
8. Trust Misuse: While some trusts makes sense for tax and probate avoidance purposes, there are plenty of scammers out there promising to reduce income taxes and raise deductions -- as well as cut estate taxes -- if you sign on the dotted line right now. Not so fast!  Take the time to get plenty of expert advice before you set up a trust.
9. Structured Entity Credits: This one, newly identified by the IRS and crooked through and through, really burns me up! According to the IRS, scammers set up partnerships to own and sell "state conservation easement credits, federal rehabilitation credits and other credits. The purported credits are the only assets owned by the partnership and once the credits are fully used, an investor receives a K-1 indicating the initial investment is a total loss, which is then deducted on the investor’s individual tax return."
10. Abuse of Charitable Organizations and Deductions: The IRS keeps its eyes on the tempting practices of using tax-exempt organizations to "improperly shield income or assets from taxation." Don't put an unrealistic price tag on what you donate, and don't expect a non-profit to let you continue to control your gift. Finally, "the IRS is noticing the return of private tuition payments being disguised as charitable contributions to religious organizations." I'm not sure how this would work, but if you're doing it, you better stop.
11. Form 843 Tax Abatement: This is another popular bureaucratese scam that, according to the IRS, "rests on faulty interpretation of the Internal Revenue Code." The filer asks for the abatement of previously assessed tax using Form 843. "Many using this scam have not previously filed tax returns and the tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses the Form 843 to list reasons for the request. Often, one of the reasons is: 'Failed to properly compute and/or calculate IRS Sec 83-Property Transferred in Connection with Performance of Service.'" I say stay away from Form 843!
12. Frivolous Arguments: Typical statements including:
    

•  The Sixteenth Amendment concerning congressional power to lay and collect income taxes was never ratified
•  Wages are not income
•  Filing a return and paying taxes are merely voluntary
•  Being required to file Form 1040 violates the Fifth Amendment right against self-incrimination and/or the Fourth Amendment right to privacy

Uncle Sam says doesn't believe these or other similar claims. "These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law."

The best piece of tax advice that I know comes down from Judge Learned Hand: "There is nothing sinister in so arranging one's affairs as to keep taxes as low as possible …" To which I add this helpful reminder from an old hippie friend of mine: "Don't do the crime if you can't do the time."

What tax advice do you have to offer – to do or not to do?!

Free Tax Preparation

If your Adjusted Gross Income was $52,000 or less in 2006, you can have your tax return prepared and e-filed for free, through the IRS's Free File program. So far, over 15.4 million returns have been filed through this program, and according to the IRS, 70 percent of all taxpayers – some 95 million of us – can take advantage of it this year.

The IRS joined forces with several tax software companies in 2003 to make the Free File service available to the public. While some of the companies have specific criteria of their own, the IRS makes it easy to find one that will fill your needs – including a company that will prepare and file your state tax returns for free, too! All you have to do is click here, and Uncle Sam will winnow down your choices to companies that best fit your needs.

Prefer to Eyeball Someone?
You can do that – and still get free tax preparation and filing help. For example:

• If you fall into the low-to-moderate income group (generally, $39,000 and below), you can take advantage of the Volunteer Income Tax Assistance Program (VITA). Trained VITA volunteers are nearby and available to help you. You'll usually find them in community and neighborhood centers, but to find the location most convenient for you, call 800-829-1040.

• Are you 60 or over? The Tax Counseling for the Elderly Program (TCE) gives free tax help to people age 60 and older who are low-to-middle income. Trained volunteers from the AARP and other non-profit organizations can give you free tax counseling and basic income tax return preparation, from February 1st through April 15th. AARP alone offers this service at over 7,400 sites nationwide. Click here to find the one closest to you, or call 800-829-1040.

• If you're in the military, there's a Volunteer Income Tax Assistance Program (VITA) available to you and your family at an office within your installation. No matter what your branch of service, you may receive free tax preparation from people who are trained to address any military-specific concerns you may have (e.g., about combat zone tax benefits). Click here for more information on free tax help for the military.

Would that getting your taxes done for free was the same as not having to pay taxes at all! No such luck, but hopefully one or another of these programs will save you some money. Let us know!

Now that taxes are done, it's time to check your credit reports

Tax season is over. The flurry of 1099, w-2 and e-filing has ended. Before you block out all tax thoughts for another 11 months, take a few minutes to think about tax related identity theft.

How many people had access to your sensitive financial information over the last few months? Your postal delivery person certainly did. And your employer. And your tax preparer. And the preparer's secretary. And possibly even the preparer's janitor.

It's possible that 10 or 20 people had access to your Social Security number and other financial data during tax season. All it takes is one person out of those 20 to steal your identity and wreck havoc on your credit. Identity thieves love tax season!

Before your seal up your 2005 tax records, order all three of your credit reports online to ensure that your financial information has not been misused. Look for unusual inquiries, new accounts, address changes and other suspicious activity on each report.

Have you experienced identity theft this tax season? Are you worried about the privacy of your financial records? Share your feedback in the comments section below.