The IRS has announced that it will stop collecting the federal excise tax on long distance telephone services.

The IRS has announced that it will stop collecting the federal excise tax on long distance telephone services.

The agency announced last Thursday that the tax does not apply to long-distance service as it is billed today. The tax was first imposed in 1898 to help pay for the Spanish-American War. The current rate of 3% is charged on the service amount.

Taxpayers will be able to receive a refund of all excise taxes paid on long-distance services billed since Feb. 28, 2003. Interest will also be paid on these refunds. The IRS will soon announce a simplified method that taxpayers may use to minimize administrative burden.

"So taxpayers won't have to spend time digging through old telephone bills, we're designing a straightforward process that taxpayers may use when they file their tax returns next years," said IRS Commissioner Mark W. Everson. He said that claiming a refund will be a simple process.

The IRS says that local telephone service will remain under the federal excise tax. Other state and local taxes and fees paid will also remain in affect.

"Today is a turning point in the long battle to stop the levy for a war that ended 100 years ago," said Senate Finance Committee Chairman Charles Grassley (R-Iowa). "This tax hits every telephone owner, but it doesn't pay for any specific program. It now pours billions into the U.S. Treasury every year for no reason. It's time to hang up the telephone tax."

How much you will save as a result of the new tax law, signed last week by President Bush, depends on many factors. Proponents of the new law say that the provisions will benefit almost all taxpayers. They say that not only will individual taxes be reduced, but economic growth will generate higher tax receipts as income and investments grow.

At the signing ceremony, Bush called the new law, "a victory for the American taxpayers and a lift for the economy."

Opponents of the new law say that only high-income taxpayers will see any relief. They claim that the economic growth provided by the bill is not proven and that many of the provisions will only add to the deficit.

But how will the bill affect your taxes?

The new tax law has extended the 15% tax rate for long-term capital gains and dividends for two more years. For low-income taxpayers, the rate is 0%. The extended rates are expected to expire at the end of 2010. Then the rates will revert to 20% for long-term gains and top income tax rate for dividends.

The estimated cost of this provision is $50.8 billion over the next 10 years.

Critics say that the reduced rate primarily benefit the wealthy, partly because middle-income taxpayers don't have as many investments.

The Urban-Brookings Tax policy estimates that a taxpayer with an income between $50,000 and $75,000 would save an average of $58 on his tax bill in 2009, approximately 0.4% of what his total tax liability would have been before the extension. The average tax cut would be $255, which roughly equals 2% of their tax liability. Only 23% of middle-income taxpayers have taxable investments.

The IRS has canceled the tax-exempt status of some of the nation's largest educational credit counseling services after determining that they prey on debt-ridden customers.

"These organizations have not been operating for the public good and don't deserve tax-exempt status," IRS Commissioner Mark Everson explained on Monday. "They have poisoned an entire sector of the charitable community."

A two-year investigation has resulted in the revocation, possible revocation or other termination of the tax-exempt status of 41 credit counseling agencies, said Everson.

According to Everson, many of the services offered little in the way of counseling or education. Counseling agencies must provide education and counseling to have tax-exempt status.

The 41 counseling organizations represent over 40% of the revenue in the $1 billion industry.

The remaining tax-exempt credit couseling services will be required to report on their activities. The other 740 known tax-exempt services will receive compliance inquiries.

"Depending on the responses received, additional audits may be undertaken," said the agency.

Everson explained that groups secure tax-exempt status and make cold phone calls to people in desperate financial situations. They use scare tactics to sell debt management plans that are not really geared towards reducing consumer debt. These plans are often very costly, charging consumers all types of administrative fees.

Everson recommends the 150 consumer credit counseling organizations that are approved by the Better Business Bureau. He warns that you could still find predatory agencies, no matter the endorsement.

Homeowners get some nice perks when it comes to paying their income taxes.

With tax time less than one week away, don't forget to make your homeownership work for you. You can often make deductions for repairs, mortgage interest and home-offices.

The most talked about deduction that homeowners receive involves the interest you pay on your home mortgage. This deduction is used in many ways by brokers, lenders and real estate agents as a persuasion into owning a home. For the first years of your mortgage, the deduction will probably be quite a bit of money. But remember that as time goes by, your deduction will go down.

Most mortgages front-load the interest payments. You pay more interest and less principal at first. With time, the principal amount increases as the interest amount decreases. Think of it as a thirty-year teeter totter.

At some point in the life of your mortgage, you may realize that the interest isn't enough to help you out at tax time. You may even choose to go ahead and pay off the mortgage entirely. Most loans do not include prepayment penalties, but if yours does -- they too may be tax deductible.

Until you sell a home, you don't realize how important it is to keep all those receipts for repairs on the home. Keep every improvement or repair receipt. When you sell the home, you can use these expenses to offset the profits you make on the sale. If you have to pay taxes on the profits, the receipts will help you reduce those taxes.

For example, you may put a new roof on the home or simply remodel the bathroom. It doesn't matter the nature, the cost of the improvements can be added to the price you bought the home for. You should keep a file especially for those receipts so that you can find them without searching through years of receipts.

If you relocate because of your job, you could qualify for a mortgage deduction. It doesn't have to be a new job. It could be your first job, a new job or the same job. Your job office has to be at least 50 miles away from where you live.

Many Americans working overseas may experience higher tax bills under the new law signed by President Bush. In some cases, overseas taxpayers could face tens of thousands of more dollars in taxes.

Those most affected will likely be those living in high cost areas, such as Hong Kong and Singapore. Those whose companies don't help cover the additional tax burdens of living abroad may suffer the highest increases. For companies with special relief packages for taxes, the additional costs could mean that fewer workers will be working abroad.

Under the old law, Americans working overseas could exclude up to $80,000 of foreign-earned income for 2006. Under the new law, the figure rises to $82,400. But the rate after that level is now higher than before. The new law also reduces the amount of housing costs that can be excluded or deducted.

The provision is expected to raise an estimated $2.1 billion in revenue over the next 10 years.

It is unclear how companies will react to the new law. The additional tax burden is expected to "significantly affect the cost" of overseas assignment, according to an Ernest & Young report.

Mortgage Interest can be qualified as a Tax Deduction for the qualified home and mortgage. In fact, Mortgage Interest Tax Deduction remains a huge tax breaks for homeowners. Here are the common questions and answers. Internal Revenue Services (IRS) updates the tax laws and regulations every year. Be sure to keep with the current tax laws.

How to claim mortgage interest tax deduction?

The Lender sends the Form 1098 every year. In the form 1098, you can see how much mortgage interest paid. From the form 1098, you transfer the amount to Schedule A Form 1040 of income tax form.

What is secured debt?

A home acquisition that uses mortgage, deed of trust, or land contract is a secured debt. It provides a way for repayment in case of default, establishes the ownership of the home, and records the transaction under the local state of law.

How to distinguish a qualified home?

Any property that has sleeping, cooking, and toilet facility includes house, condominium, cooperative, mobile home, house trailer, or boat. Plus, the home must be first and second home of the homeowner.

Can I deduct mortgage interest for rented out second home?

Yes, you may deduct as long as you use the home more than 14 days or 10% of the calendar year.

Am I allowed to several second home?

If you have more than one second home, you can only use one second home for tax deduction. IRS does not limit which second home to choose. In case of new home purchases, main home disqualifies, and second home sells, you may choose another home as your second home.

It is probably safe to say that most IRA owners really don't put much thought into who they designate as their IRA beneficiary, but even IRA owners who do may very well have not done their planning correctly. This is especially true in that the IRA beneficiary designation rules are so complex.

With traditional IRAs (not Roth IRAs) one must generally start taking minimum required distributions when the beneficiary reaches age 70.5. Because investments held in IRAs grow tax-free, many taxpayers try to structure their affairs so that the bulk of the funds can remain in the IRA for the longest period of time.

The number of clients who ask about these planning opportunities seems to be on the rise. The facts are typically something like this: The husband owns the majority of the couple's assets, which includes a couple of million dollars held in the husband's IRA. Both the husband and the wife own their house jointly and it is now valued between $1 or $2 million. The husband and wife are younger than 70, so they haven't begun taking minimum distributions from the IRA.

The husband wants to prepare his estate plan. His primary concern is how to leave the IRA funds to a trust so that his wife can benefit from the funds and not have any obligation to manage the funds and upon the wife's demise the funds will pass to the couple's children.

If you have an email account, you know about all the scam emails you get. Scammers are getting braver and using the IRS name in their new tactics.

IRS Warning Taxpayers About New Email Scams

The IRS has begun warning taxpayers that it is seeing a surge in tax scam emails. Many of the emails even have the hubris to use the IRS name! Brave souls, indeed. Regardless, the scams seem to fall in the area of identity theft through phishing tactics.

First and foremost, you should understand that the IRS does NOT send emails to taxpayers. Never, never, never! If you get an email from the IRS, it is a fake. Unconditionally! Do not respond to it under any circumstances. Do not click links in the body of the email. Take one action and one action only – delete it!

Since the turn of the year, the IRS has identified 99 new email scams targeted at taxpayers. All of the scams are aimed at bilking you out of your private information. Most try to do this by claiming your must provide information or your will not receive your tax refund. In some cases, the fake emails threaten you with an audit. Again, this is all false information.

Many people fall victim to the IRS scam emails because they click through to the site linked in the email. There, they find a site that appears for all intensive purposes to be the one published by the IRS. Make no mistake – this means nothing. Anyone can copy and republish a site. Yes, even the site of the IRS. It is pretty scary when you think about it. Best Buy, in fact, had major problems with this for some time.

So, where are these scammers? It should come as no surprise that few in the boundaries of the United States would have the nerve to try this. Instead, the IRS has tracked most of the scamming emails to other countries, but not necessarily the usual suspects. The countries include England, Italy, Japan, Germany, Australia and Singapore. Usual suspects include China, Aruba, Mexico, Indonesia and Argentina. Surprisingly, only a few have originated from the scam mecca of Nigeria.

The best way to beat scammers is to know the facts. The IRS does not communicate in any way with taxpayers by email. If you get an email purportedly from the IRS, it is a fake. If you have a nagging doubt, call the agency to find out if anything is up. Otherwise, delete that email!

If you own a business and have employees, you have an inherent feel for the joy of filing employee related tax documents. Alas, the IRS is cutting back on the burden.

IRS Helps Employers By Reducing Filings Required For Employees

Employees are critical to any business other than the smallest ones. That being said, the tax requirements for dealing with employees can be a pain in the derriere. The problems are many, but one particular situation puts employers in a very bad spot.

Withholdings on employee paychecks is a subject that can cause tension in a business. Inevitably, some employees will want to reduce the withholdings from their check beyond the norm. The employer, in turn, is faced with the prospect of the IRS focusing unwanted attention on the business because of such actions. In a worst case scenario, the IRS will send a lock letter setting the amount of the withholdings. This puts the employer in the bad position of telling the employee more money must be withheld – a situation sure to cause tension. Making matters worse, the employer was supposed to be able to determine when the employee was abusing the withholding process.

The IRS has issued regulations that at least relieve the employer of the burden of determining if an employee is stepping over the line on the reduction of withholdings. Whereas the employer was previously required to send a W-4 Withhold Allowance Certificate to the IRS if an employee was claiming a total exemption from withholdings or more than 10 allowances, it no longer does. As of April 14, 2006, the IRS will simply make its own determination using salary filings for the business in general.

This regulation modification by the IRS should be applauded as a significant boost to employers. No longer does an employer have to act as a detective in determining whether an employee is not paying in enough tax on paychecks. Instead, the employer can now sit back and wait for the IRS to act. If the IRS feels an employee is out of line, the agency will send a lock-in letter to the employer. The employer than has no choice but to comply. Employees are much more likely to understand this and focus their anger on the IRS instead of the employer.

A 1031 tax deferred exchange, as you know, allows you to use money from a real estate sale to acquire real estate of like kind. It also allows you delay the payment of the capital gains tax that would normally be levied on such a sale. A 1031 tax deferred exchange is a godsend for people looking to build their equity. This article details some of the things you need to know about 1031 tax deferred exchanges.

The Rules Governing a Totally Tax-Free Exchange

When you sell your property, a 1031 tax deferred exchange will allow you to acquire a property as replacement. To qualify for a totally tax-free exchange, the replacement property must be relatively equal to the value of the property that was sold. All of the equity you received from your initial sale should be used on acquiring your exchange properties. For instance, if you sold your original property for US$100,000, you must use up that same amount to acquire your replacement properties

The Rules Governing a Partial Tax-Deferred Exchange

A 1031 tax-deferred exchange does not necessarily mean that you have a totally tax-free exchange. Remember that you need to use all of the proceeds of your sale in acquiring the replacement properties to qualify for a 1031 tax-deferred exchange. Should you not do so, however, you may still qualify for a partial tax-deferred exchange. For instance, if you sold your original property for US$100,000, and you use only US$ 75,000 to acquire your replacement property, then you will be taxed on your US$ 25,000 gain.

The Disadvantages of a 1031 Tax-Deferred Exchange

As advantageous as 1031 tax deferred exchanges are, they nevertheless have a few disadvantages. One disadvantage is that you will be assessed a lower depreciation schedule when you acquire your new properties. The tax authorities will use your old taxes as a basis for this depreciation schedule. The other disadvantage is that you cannot deduct losses on your tax return if you use a 1031 tax deferred exchange. If you want to declare a loss, it will be better to make the transaction an outright sale, not an exchange.

You Don’t Have To Swap

You don’t have to swap one property for another immediately. In other words, when you sell your property, you don’t have to buy another right away. The law permits delayed exchanges. This means that that you can sell your property now, declare it 1031 tax deferred exchange, and then buy your desired property at another time.

You don’t necessarily have to swap the same number of properties either. For example, when you sell two tracts of land and place them in a1031 tax deferred exchange, it doesn’t mean that you have to get two pieces of property to qualify for the exchange. You can get one, three, or even ten properties in exchange for your two tracts of land! As long as the properties concerned are for investment purposes and are of relatively equal value, they will qualify. This means that you can diversify and expand your real estate properties without paying income taxes.

• Furnish a copy of the lock-in letter to the employee upon receipt (though the first letter in our hands said ten days).
• Impose the new IRS dictated withholding rate 60 days after the date of the letter.
• Fax (the letter actually says mail or fax) a letter on Company Letterhead to the Internal Revenue Service if the employee is no longer employed.
• Continue the lock-in process on gained employees based on the transferred W-4 and lock-in letter from a predecessor.
• Ensure safeguards are in place to prevent employees from increasing their allowances electronically.
• Maintain the withholding amount specified in the lock-in letter. There could be a penalty if the employer fails to honor the lock-in requirement and the employer could be liable for the amount of tax that should have been withheld.
• Remind employees that the notice they received tells them how to contact the IRS if they want to change the withholding status and allowances from single/zero and the information they will need to supply. That information includes: Form W-4 and worksheets; most current pay stub for each job; number of allowances claimed on current Forms W-4; and the social security numbers and dates of birth for any children and proof of any deductions they want to use to claim additional withholding allowances.

There are several chilling points in the most recent IRS article released June 30, 2006. These points are above and beyond the actual regulations issued last year with little fanfare.

• The article specifically references single/zero as the status and allowances that the lock-in letter will have on it, no other option.
• Penalties could be imposed on the employer for at least the amount of tax not collected, additional penalties and interest will, of course, be extra.