Chartered Accountants, Tax planning, Outsouring, Audit, Bookkeeping

Question-1 : Who must file a tax return?

Whether or not you must file a return depends on your gross income, filing status, and age.

a) Gross Income

Gross income includes all income that you receive in the form of money, goods, property, and services. It does not include any income that is tax-exempt.

b) Filing Status

Your filing status is determined on the last day of the tax year, which is December 31 for calendar year taxpayers. Your filing status will be determined by whether you are single or married, and what your family situation is.

c) Age

If you are age 65 or older on the last day of the tax year, you are allowed a higher amount of gross income than other taxpayers before you are required to file a return.

Returns are to be filed by Individuals, Corporations, Partnerships etc. If you are an Individual and a US citizen then you have to file your tax return in form 1040 if any of the following conditions are met:

Filing Status	At the end of year 2007 you were	Your Gross Income was at least US$
Single	under 65 years of age 65 years or older	8,750 10,050
Married filing jointly	under 65 (both spouses) 65 or older (one spouse) 65 or older (both spouses)	17,500 18,550 19,600
Married filing separately	any age	3,400
Head of household	under 65 65 or older	11,250 12,550
Qualifying widow(er) With dependent child	under 65 65 or over	14,100 15,150

Notes

i) If you were born on January 1, 1943, you are considered to be age 65 at the end of 2007.

ii) Gross income means all income you received in the form of money, goods, property, and services that is not exempt from tax, including any income from sources outside the United States (even if you may exclude part or all of it). Do not include social security benefits unless you are married filing a separate return and you lived with your spouse at any time during 2006.

iii) If you did not live with your spouse at the end of 2007 (or on the date your spouse died) and your gross income was at least $3,300, you must file a return regardless of your age.

Question-2 : Who Should File?

Even if you are not required to file a tax return, you should if you are eligible to receive a refund. You should file if any of the following are true:

You had income tax withheld from your pay

You made estimated tax payments or had a prior year overpayment applied to this year's tax.

You qualify for the earned income credit

You qualify for the additional child tax credit

You qualify for the health coverage tax credit

Question-3 : Where and when must the return be filed?

a) If you elect to paper file your return, the address you will send your tax return to depends on the state you live in and what type of form you are filing.

b) For most taxpayers, April 15 is the due date for filing a tax return. If you use a fiscal year, a year that ends on the last day of a month other than December, your return is due the 15th day of the fourth month after the close of your fiscal year. Example: if your fiscal year ends June 30, your tax return due date would be October 15.

If the due date falls on a Saturday, Sunday, or legal holiday, the due date is extended to the next business day.

If you cannot file your return by the due date, you can request an automatic six-month extension of time to file. To request an extension, file Form 4868 no later than the due date of the tax return.

Requesting an extension of time to file does not entitle you to an extension of time to pay tax. If you do not pay tax by the due date of your return, you will owe interest on past-due tax in addition to late payment penalties.

If you are a U.S. citizen or resident and your main place of business is located outside of the United States or Puerto Rico, you are allowed an automatic extension until June 15 to file and pay tax that is due. This also applies to members of the military stationed outside the United States or Puerto Rico. If you choose to use this automatic extension, you must attach a statement to your return showing that you met the requirements for the extension.

You should file tax returns when they are due, regardless of whether you can make full payment with the return. Failure to file can be costly, and a delay in filing may result in a late penalty and interest charges that could increase your tax bill by 25% or more.

Question-4 : Can an extension be sought?

Yes. An automatic extension of 6 months can be sought by filing Form 4868 before the due date of filing the return. I.e. 4868 must be filed before 15 April 2008 in case your due date of filing is 15 April 2008.

Question-5 : Can I avail of Deductions and Credits?

Yes. Provided you qualify, you could avail of itemized deductions or opt for a Standard Deduction.

a) Deductions

Tax deductions are expenses that reduce the amount of income subject to tax. There are two types of deductions most taxpayers will qualify for:

Standard

Itemized

In addition to these two types of deductions, there are also deductions available to taxpayers who take either the standard deduction or who itemize deductions. There are over 50,000 tax deductions in tax code and regulations. Many of these deductions apply to individuals as well as businesses. The most common deductions include:

The Standard deduction

The Standard deduction is a fixed dollar amount based on your filing status.

Itemized deductions

Miscellaneous itemized deductions

Archer medical savings

Casualty and theft losses

Charitable contributions

Deductible taxes

Health savings accounts

Medical and dental expenses

Mortgage points

Employee business expenses

Student loan interest

b) Tax Credits

You could also avail of various tax credits like Earned Income Credit, Child and Dependent Care Credit etc.

A tax credit reduces the amount of tax for which you are liable. Unlike a deduction, which reduces the amount of income subject to tax, a tax credit directly reduces your tax liability.

A tax credit is usually more valuable than a tax deduction of the same dollar amount. There are two categories of tax credits:

Refundable credits

Non-refundable credits

Non-Refundable Tax Credits

Most, but not all tax credits are referred to as non-refundable credits. A non-refundable credit is a tax credit that can reduce your tax liability to zero (0), but not below. You must have tax liability on line 46 of Form 1040, line 18 of Form 1040A, or line 43 of Form 1040NR to claim a non-refundable tax credit.

Non-refundable tax credits include:

Child & Dependent Care Credit

Education Credits

Credit for the Elderly or Disabled

Child Tax Credit

Adoption Credit

Foreign Tax Credit

Residential Energy Credit

Retirement Savings Contribution Credit

Refundable Tax Credits

A refundable tax credit is a tax credit that can reduce your tax liability below zero (0). Because it is possible to receive a refund based on these types of credits, the credits are referred to as refundable.

Refundable tax credits include:

Earned Income Credit

Excess Social Security Credit

Additional Child Tax Credit

Health Coverage Tax Credit

Question-6 : Are there any exemptions available?

Yes, you can also avail Personal Exemptions based on your filing status and AGI (Adjusted Gross Income). The amount you can deduct for each exemption has increased to $3,400 for 2007. These exemptions are for you, spouse and qualifying dependents, provided these exemptions have not been claimed by another person in his or her tax return. This exemption is reduced if your AGI exceeds:

$117,300 for married persons filing separately

$156,400 for single individuals

$195,500 for heads of household and

$234,600 for married persons filing jointly or qualifying widow(er)s.

Exemptions directly reduce your taxable income. You are allowed a personal exemption for yourself, your spouse if married filing jointly, and each person you can claim as a dependent.

a) Personal Exemption

You can take a personal exemption for yourself unless another taxpayer can claim you as a dependent. Even if the other taxpayer does not take an exemption for you, you cannot claim the personal exemption.

b) Spouse's Exemption

If you file a joint return, you can claim an exemption for your spouse.

If you are filing separate returns, or as head of household, you can claim an exemption for your spouse only if you meet all of the following:

Your spouse has no gross income

Your spouse is not filing a return

Your spouse was not another taxpayer's dependent

If your spouse could be claimed as someone else's dependent, you cannot claim the exemption, even if the other taxpayer does not claim the exemption for your spouse. If your spouse died during the year and you did not remarry, you can claim an exemption for your spouse if you are filing a joint return in the year of your spouse's death.

c) Dependent Exemptions

You can claim one exemption for each person you can claim as a dependent. Even if your dependent files a return, you can still claim a personal exemption for him or her. You can take one exemption for each qualifying child or relative if the person meets three tests:

Dependent Taxpayer Test

If you could be claimed as a dependent by another taxpayer, you cannot claim anyone else as your dependent. This is true even if you have a qualifying child or relative.

Joint Return Test

You generally cannot claim a married person as a dependent if he or she files a joint return.

This test does not apply if a joint return is filed by a dependent only to claim a refund and no tax liability exists for either spouse, even if they filed separate returns.

Citizen or Resident Test

You cannot claim an exemption for a dependent unless the person is a U.S. citizen, resident alien, national, or a resident of Canada or Mexico for at least part of the year.

If you are a U.S. citizen or national who has legally adopted a child who is not a U.S. citizen, resident alien, or national, this test is met if the dependent lived as a member of your household the entire tax year.

Question-7 : What kind of penalties and interest will I be charged for paying and filing my income taxes late??

a) Interest

Interest, compounded daily, is charged on any unpaid tax from the due date of the return until the date of payment. The interest rate is the federal short-term rate plus 3%. That rate is determined every three months.

b) Late Payment Penalty

In addition, if you filed on time but didn't pay on time, you'll generally have to pay a late payment penalty of 1/2 of 1% of the tax owed for each month, or part of a month, that the tax remains unpaid after the due date, not exceeding 25%. However, you will not have to pay the penalty if you can show reasonable cause for the failure. The one-half of one percent rate increases to one percent if the tax remains unpaid after several bills have been sent to you and the IRS issues a notice of intent to levy.

Beginning January 1, 2000, if you filed a timely income tax return and are paying your tax pursuant to an installment agreement, the penalty is 1/4 of 1% for each month, or part of a month, that the installment agreement is in effect.

c) Late Filing

If you did not file on time (including extensions) and owe tax, you may owe an additional penalty for failure to file unless you can show reasonable cause. The combined penalty is 5% (4.5% late filing, 0.5% late payment) for each month, or part of a month, that your income tax return was late, up to 25%. The late filing penalty applies to the net amount due, which is the tax shown on your income tax return and any additional tax found to be due, as reduced by any credits for withholding and estimated tax and any timely payments made with the income tax return. The penalty is 15% per month, up to a maximum 75%, if the failure to file is fraudulent. Also, if your income tax return was over 60 days late, the minimum failure-to-file penalty is the smaller of $100 or 100% of the tax required to be shown on the income tax return.

d) Frivolous Returns

In addition to any other penalties, the law imposes a $500 penalty for filing a frivolous return. A frivolous return is one that does not contain the information needed to figure the correct tax or shows a substantially incorrect tax because you take a frivolous position or desire to delay or interfere with tax laws. This includes altering or striking out the preprinted language above the space where you sign.

e) Other Penalties

Other penalties may be imposed for negligence, substantial understatement of tax, reportable transaction understatements, and fraud. Criminal penalties may be imposed for willful failure to file, tax evasion, or making a false statement.

Question-8 : What is the maximum amount that I can contribute to my 401(k) retirement plan?

For 2007, the maximum amount an employee can contribute to a 401(k) plan is $10,500, except for catch-up contributions for employees age 50 or over, which adds another $2,500. There are several different limits that apply to a 401(k) plan in addition to the overall contribution limit. The maximum you can contribute will depend on your salary and the type of 401(k) plan to which you are contributing.

The maximum amount that can be contributed by the employee or employer is the lesser of 25% of compensation or $44,000 in 2007.

The rules for retirement plans are complex. Your plan administrator should have written information about your particular plan that explains these limitations as well as other regulations that apply.