What's the right level of withholding? That varies depending on your unique financial situation. People with investment income may want to withhold more to cover taxes on their other income. On the other hand, people with lots of deductions or who are expecting tax credits could lower their withholding. To obtain a more accurate level of withholding, you'll need your completed tax return, a recent paystub, and estimates for your deductions and credits for next year. You'll then be able to use the withholding calculator on the IRS Web site or the worksheets for Form W4.
What I do is get use the IRS calculator to find the number of withholding allowances, and then plug that into a paycheck calculator to see if the withholding for the year will come close to the tax I expect for next year. If I can get the withholding to be about $1,000 above the tax, I figure I've achieved a reasonable about of withholding. And by reasonable, all I mean is I've built some wiggle room into the withholding so if there's more income than expected or fewer deductions, I haven't put the client at risk for owing at the end of the year.
Mistakes happen, and you can correct any oversights on your return fairly easily. The process is calling filing an amended return, and you'll use a special form 1040X to report changes between your original and corrected tax returns.
You can amend to report income you might have missed, or to claim deductions or tax credits you might have overlooked. One thing to be aware of is that you have three years from the original deadline to claim any refunds. So if you missed a deduction or credit for 2007, you should file your amendment before April 2011.
The Treasury Department has begun sending out rebates under the Economic Stimulus Act. These one-time-only rebates were scheduled to go out starting May 2nd, but some direct deposits have already gone out to taxpayers who filed before the April 15th deadline. Here's a schedule of when to expect your rebate. Keep in mind, the Treasury is sending out rebates by direct deposit first, followed by paper checks. Also keep in mind that this schedule is only for people who filed their 2007 tax return by the April 15th deadline. For people who filed after the deadline, expect your rebate to be sent out after you receive your refund.
As I was reviewing all the information about Canadian taxes, one item definitely caught my eye. Canada will be introducing a new type of tax-free account, and I think this is an idea worth implementing here in the US as well.
Here's the details. Starting in 2009, Canadians will be able to save up to $5,000 a year in tax-free savings account. And withdrawals can be made at any time and funds used for any purpose. There don't seem to be a whole lots of limitations and restrictions, like there are with individual retirement accounts in the US. Contributions to these accounts are not tax deductible, but there's no tax on the earnings and interest. The part I really like is that withdrawals can be made at any time for any reason. That sure beats the 10% penalty Americans pay if they need to cash out their retirement plan early.
Yesterday I was digging around to find specific answers to questions about Canadian taxes, specifically about cross-border tax issues and business deductions. Still, I wanted to get a good overall grasp of Canada's tax system. So here's what I found.
Canadian Taxes: The Basics covers, as you can imagine, the essential tidbits for filing a Canadian return, such as deadlines, where to find tax forms, and various filing options.
Canada also allows various deductions against the income tax, such as for charity and retirement savings. Charitable donations are allowed "up to 75 percent of your net income." And tax-deductible contributions of up to $19,000 can be made to Registered Retirement Savings Plan.
There's also tax credits to consider as well. One new credit is the Children's Fitness Credit for enrolling kids under age 16 in a physical fitness program.
The Canadian Revenue Agency has online services available for taxpayers. Canadians can check the status of their refund, and obtain information about their retirement contribution limits, check their account balances, update their address, set up a payment plan, or disagree with a tax assessment using the CRA's my account service.
This year I've decided to learn a little more about the Canadian tax system than I have in the past, mostly because some of my clients have started working across the the US-Canada border. On the US side of things, Americans report their worldwide income to the IRS, and can claim either the foreign earned income exclusion or a foreign tax credit based on their Canadian wages. These two tax benefits help reduce or eliminate the tax bite of reporting and paying tax in two different countries. For Canadians working in the US, they can adjust their level of income tax withholding using a special provision in the Canada-US tax treaty.
But all of this deals with the US side of things. And I wanted to learn more about the Canadian side of taxes.
The first thing I looked for was information about situations where someone works in both Canada and the US. Catherine Roseberry (About.com's Guide to Mobile Office Technology) has a concise article on cross-border telecommuting. She covered a number of situations I had been wondering about, especially the case of a Canadian citizen telecommuting for a US employer.
The next thing I really needed to know was how to report self-employment income in Canada, as many of my clients work for themselves and so wouldn't be receiving T4 slips to report their Canadian compensation. Susan Ward (About.com's Guide to Canadian Small Business issues) has put together a list of small business tax deductions. Surprisingly, the list sounds very similar to what I am accustomed to advising here in the US: document your business expenses, fund retirement accounts, and give to charity. Ms. Ward also has a list of frequently asked questions about small business tax issues for Canadians.
You may want to adjust your tax withholding, especially if you are getting a sizable refund or had to pay the IRS. By adjusting how much money is deducted from your paycheck, you can ensure you are paying just enough to cover your taxes. The perennial question is how many exemptions you should claim on your paycheck? And this is a question that stumps even tax professionals. The answer depends a lot on your level of income, how many jobs you have, other income you might have, and deductions you expect to claim. The best way to get a more precise answer is to use the worksheet found in Form W-4. This worksheet will help you estimate your 2008 taxes more precisely, resulting in a better level of payroll deduction for taxes.
After you file your return, you will want to keep a copy of the return for your own records. Tax returns have a way of being useful even after you file, such as documenting your income for a loan. From a strictly tax perspective, you'll want to keep your returns for at least three years. That's how long the IRS has to audit your return. Along with the actual tax forms themselves, keep any documents concerning your income, deductions, and various tax credits.
I waste enough paper at the office printing out returns for all my clients, so I'm always looking for ways to store more records electronically. If your software provides a copy of the return in a PDF format, you could save that to your computer. I would go one extra step and put a copy on a USB drive and put that in a safe place like a safe deposit box. This way you'll have backup copies in at least a couple of places. This year I also scanned all my income documents and tax deductible receipts into a PDF file as well, so hopefully my filing is a little more environmentally-friendly this year than it has been in the past.
If you purchased desktop software this year, you should make backup copies of your tax data file as well, and keep that in a safe place along with the original installation files. This way if you need to make corrections, you'll still have the software and will won't have to recreate your return from scratch. Also, the tax data file will be useful next year, as programs can import data from last year's file to prepopulate data for the next year.
File an extension or file your return. As long as your extension is postmarked by today, the IRS will grant you an extra six months to finish up your return.
Last day to fund an IRA for tax year 2007. Saving money in an individual retirement account is a great way to save on a tax-deferred basis. Find out if a Traditional or Roth IRA is better for you, and make sure you indicate that your contribution is for last year.
Estimated tax payments are due for the first quarter 2008. Even if you aren't done with your '07 taxes, you may need to start paying in towards your 2008 tax liability.
Paying off the IRS can be a hassle, especially if you're short on cash. You can charge your taxes to your credit card, but there are pros and cons of doing so. On the one hand you'll get the IRS paid off, on the other hand you'll be stuck paying interest on your taxes. On top of any finance charges, you'll need to go through a third party processor as the IRS doesn't accept credit card payments directly. Those processors charge a fee of 2.49% of your tax bill.
Now, it may be cheaper to just set up a payment plan with the IRS. The IRS will charge you a set up fee (usually from $42 to $105), plus interest of 6% annually plus a late payment penalty of 0.5% per month. Thus penalties and interest add up to about 12% annually, which might be cheaper than the interest rate on your credit card.
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