Wednesday, March 16, 2011

Form 8453(IRS e-file Signature Authorization) vs. 8879(US Individual Income Tax Transmittal for IRS e-file Return)

Form 8453 is utilized to send information, or supporting documents, that are identified by the "check boxes" on Page 1 of the form. NOTE: W-2, W-2G, and 1099-R forms are not attached to the 8453. It is mailed to the IRS within 3 business days after receiving acknowledgment that IRS has accepted your e-filed return.

While Form 8879 specifically informs the "ERO" not to send Form 8879 to the IRS unless requested to do so. It is a signature authorization for an e-filed return and used when taxpayer authorizes the ERO to enter or generate the taxpayer's PIN on his/her e-filed returns.

Retention period for both forms is different. 8453 needs to be retained till Dec 31 of following the tax year. Whereas, completed 8879s need to be retained for a period of 3 years from the later of due date of the return or date the IRS received the return.

Wednesday, March 2, 2011

Payroll taxes - Federal and State

Payroll taxes:
Both Federal and State have payroll taxes.
Federal payroll taxes are also called FICA taxes. They are divided into Social Security and Medicare taxes.Both the employer and the employee pay both Social Security and Medicare taxes. For 2011 the Social Security rate is 6.2%. for employers and 4.2% of the employees first $106,800 in wages. The Medicare tax is 2.90% (1.45% for employee and 1.45% for employer) and there is no wage base/limit for it.

Self-employed individuals are responsible for paying both the employee and the employer portions of the Social Security tax and the Medicare tax.

California has 4 payroll taxes- Employment Training Tax(ETT), Unemployment Insurance(UI),State Disability Insurace (SDI) and Personal Income Tax(PIT). ETT and UI are paid by employers whereas SDI and PIT are withheld from employee's wages.

Tuesday, March 1, 2011

Automatic 6 month extension by filing Form 4868 - Application for automatic extension to file:

A taxpayer can get an automatic six months extension to file his/her return(s). But the return must be postmarked on or before the due date of the return. Note the extension is only for filing the return and not for any taxes due. If any taxes are due IRS might charge interest and penalties. 
When you file a federal extension form, it does not automatically extend the time that you have to file your state income tax return. Check with your state. However, CA allows automatic extension without requesting one in writing. If you have a refund coming and you are positive about it, you are ok. However, if you are unsure fill FTB 3519 and use it to estimate any taxes you might owe.

Monday, February 28, 2011

Dependent FSA vs. Dependent-Care Credit:

In a Dependent FSA you can contribute pre-tax money of upto $5,00 per year to pay for qualified expenses for your dependent. The money not only is pre-tax but it also saves payroll taxes ( 7.65% of social security & medicare). So depending upon your tax bracket, assuming you are in the 25% tax b...racket, the tax savings can be $5000* (7.65% + 25%) = $1,632.50. 
Dependent - Care Credit helps to lower your ax liability. It is calculated on Form 2441.The child and dependent care tax credit is worth 20% to 35% (depending upon your income) of your day care expenses. Some pre-requisites for taking Dependent-Care Credit:
1) BOTH spouses must be working or one must be a full time student.
2) The dependent must be under age 13 or unable to take care of himself/herself.
Tax Tip: If you have dependent care expenses in excess of $5,000 and 2 or more children you can benefit from both. You can use Dependent FSA to pay for first $5,000 of the expenses and for the additional you can get dependent care-credit (if your income is below the threshold).