It’s that time of year, the income tax season is upon us once again. Although the Federal income tax and Kentucky State income tax deadline of April 15, 2007 is several months away, it’s never too early to begin thinking about your income taxes.
Ideally, you should think about your taxes all year round in the manner you keep your records and save your receipts. A little preparation can make tax season much easier. Even if you have a shoebox full of receipts, take heart. You can still get organized in time to file your Federal income taxes and Kentucky State income taxes.
Most of us are still waiting on W-2’s and other papers needed to prepare our 2006 Kentucky State income tax and Federal income tax forms. Don’t wait until the last minute to start gathering up your forms, receipts and income tax information. Now is the perfect time to start thinking about your income taxes and the deductions you may be entitled to. Remember, it is much less stressful to start now than to make a mad dash in the early weeks of April.
In this article I’m going to focus on Kentucky State income tax preparation and Kentucky State income tax topics. So remember, that if you live outside of Kentucky, your state tax income laws, rules and regulations may greatly vary from Kentucky’s laws.
The first step is to decide on how you want to go about preparing your Kentucky State income taxes. Some people are capable of filing their own Federal income taxes and Kentucky State income taxes and others prefer to hire a professional.
Many people frequently miss deductions they are entitled to when doing their own tax returns. If you itemize or have complex tax returns, it may be best to get some help with your taxes. Also remember, that each year’s tax needs can vary. If you have sold a home, have sold stock or other investments, or have taken a retirement lump-sum payment, for a few examples-you may want to go ahead and use a tax professional.
If you are going to do your own Federal income taxes and Kentucky State income taxes, it could be worth your while to purchase a tax preparation program such as “Turbo Tax” or “Kiplinger’s Tax Cut.” Both are available at stores nation wide at a price that is much cheaper than a professional tax preparer.
But, be warned that most of these programs only prepare your federal income tax returns and not your Kentucky State income tax returns. Most programs require you to purchase a second program specifically for your State income taxes, in this case Kentucky State income taxes. So be sure to check the box and make sure it prepares both your Federal and Kentucky State forms.
Each of these tax preparation software lines also sell different software versions ranging from basic to deluxe. The basic version, should be sufficient for most tax payers. There is also some work involved even when using the software, so for some people this may be unappealing.
If you are going to hire a tax preparer you can chose one of the larger tax preparation chains such as “H&R Block,” and other companies that are household names. But be warned that they come with a high price tag. An accountant is also another option for a tax preperation. There are also many capable small tax services and individual tax preparers that are very reasonably priced by comparison to the nationwide tax preparation chains.
It often pays to call around and get price quotes for your income tax services, based on how you filed the previous year. But remember, that due to the seriousness and consequences of improperly prepared taxes, you want to be sure your tax preparer is competent regardless of where you go. If you have any doubts as to the professionalism of your tax preparer, it’s best to go elsewhere.
Now that you’ve decided how you want to have your Federal income tax and Kentucky State income tax forms prepared, your work begins.
After receiving all W-2 forms from each member of the household’s employer(s) you may need to wait for other forms. Don’t forget that you may also be due forms from your bank or other institutions for interest received on savings or checking accounts as well as CD’s and other investments. If you have a mortgage, you may also need to wait for a tax form on the interest you paid on it. If you receive Social Security, disability payments or other government assistance, you need to wait for forms regarding them also.
Now to the second question, to itemize or take the standard deduction? This will vary for each family and may even vary by the year for some people. The 2006 Kentucky State standard deduction is $1,970 for a couple filing jointly or for a single person. If both spouses have income, it is advisable to comparehow filling out a joint Kentucky State income tax return verses two separate Kentucky State income tax returns, (as in married-filing separately compared to married-filing jointly) affects your tax rate.
It is surprising how different the total taxation amounts can be when they both filing statuses are compared. It can save many couples money to file separate Kentucky State income tax returns. But, again for others it can cost them more in taxation. If only one spouse has income, it is almost always best to file jointly.
It would be nice to say that when filing separately on their Kentucky State income tax returns, each spouse gets to deduct the full $1,970 for a total of $3,940-but this is not always true.
There are many different factors that come up in preparing separate Kentucky State tax returns for married filers. Factors that give varying results for filers are things such as: total income, each spouse’s separate income, how much taxes were withheld for each spouse, how many dependents (including children) are in the family and who gets to deduct them.
Again, if you are doing your Kentucky State income taxes yourself as a married couple, you really need to fill out the tax forms both ways-filing separately and filing together. Then compare which filing status saves you the most money.
A good tax preparer will often prepare forms both ways. Be aware that some tax preparers only prepare the forms with the filing status you tell them to. If you are unsure if your tax preparer does this, you should ask and request for them to compare which filing status is best for you. Most tax software does the comparison automatically for you or at least makes it easier and quicker to compare the two filing statuses.
As to the matter of Kentucky State income tax return deductions- itemized versus standard deductions, there are some many factors to keep in mind. Remember that for a couple filing jointly or a single person- the Kentucky State standard deduction is $1,970. If you have less than that in deductible expenses, you should obviously take the standard deduction.
It is good to save all of your possibly deductible expenses just to be safe. I always recommend totaling them and filling out the long form just in case, if you even think you will not have enough deductions since sometimes you may surprise yourself after doing the math.
Remember also, that while many of us do better taking the standard Federal income tax deduction, you don’t always do better taking the standard Kentucky State income tax deduction.
There is also a misconception abounding that if you file your Federal taxes without using itemization (using the standard deduction) that you can’t file your Kentucky State income tax returns with itemization (that you must use the standard deduction). Simply put, many people mistakenly believe that they have to file the same way on both tax returns, Federal and Kentucky State-this is not true.
You are allowed to file whichever filing status is best for you on the Federal income tax return and file differently on your Kentucky state tax return. If it is in your best financial interests, you can file using the standard deduction on your Federal return and itemize your Kentucky State tax return. In Kentucky, if you itemize your Federal tax return, you should most likely itemize your Kentucky State tax return. But itemizing your Kentucky State tax return doesn’t necesarily mean you should itemize your Federal income tax retrurn.
It is always advisable to save all medical and pharmaceutical receipts for the past year until you prepare your Kentucky State income taxes. You should save your medical receipts even if you normally take the standard deduction, because you don’t usually have enough itemized deductions. One large medical bill could easily make itemizing your deductions a good option.
But, remember, that medical bills and pharmacy expenses are not automatically deductible on Kentucky State income tax returns. First of all, you can’t just deduct the total amount of a particular medical bill.
For example, let’s say you had an emergency room visit in November 2006. You received a bill for $600.00 for this visit in December 2006, but you only made a payment of $100.00 and still owe $500.00 to the hospital. In this scenario, in your 2006 Kentucky state income tax returns (due April 15, 2007) you may able to deduct the $100.00 you actually paid, not the $500.00 still owed.
What you may be able to include on your deductible medical expenses is the $100.00, because you can only deduct what you actually paid in the calender year, not what you owed. The $500.00 remaining, which you’ll pay off in 2007, may be deductible for your 2007 Kentucky State income taxes (due April 15, 2008).
Not all medical bills are deductible from your Kentucky state income tax form. You should either ask your tax preparer, look in the Kentucky State income tax instruction booklet or website http://www.revenue.ky.gov/ or call the tax payer assistance line at 1-502-564-1600 if you are unsure which medical expenses are deductible.
A Few Examples of Some Possibly Deductible Medical expenses:
(Remember this is what you paid for them, not the part your insurance paid. But also remember that co-pays and insurance deductible amounts are deductible.)
-Medical doctor & dentist visits (as long as it’s not for cosmetic reasons as defined under Kentucky tax code)
-Medical tests such as x-rays, MRI’s, mammograms, etc…
-Hospital Care & surgeries (as long as they are not for cosmetic reasons as defined under Kentucky tax code)
-Medical devices such as: crutches, eyeglasses, wheelchairs, and false teeth, etc…
-Your millage to go to and from places of approved medical care such as doctors and hospitals (for non cosmetic procedures) Keep good records of this, or you could run into problems-you need a written log, a notebook would work for this purpose.
-Some lodging expenses (but not meals) while traveling for medical care. (see the Kentucky tax regulations)
-Medicare supplemental insurance, but NOT the basic cost of Medicare (see Kentucky state tax regulations)
Examples of NON Deductible Medical expenses:
-Over the counter, non-prescription medications such as Aspirin, Tylenol, etc…
-Over the counter supplies such as band-aids, surgical tape, bandages, etc…
-Elective cosmetic surgery (see the regulations, reconstructive surgery may be acceptable)
-Insurance premiums paid with pre-tax dollars (most employees who have insurance through work pay with pre-tax dollars, but you might want to check with your employer to be sure)
-Basic costs of Medicare premiums (but Medicaresupplement insurance premiums ARE deductible)
-Life insurance premiums
-Long-term care insurance premiums
-Funeral, burial or cremation costs
Okay, now that you’ve done your homework and math and added up your allowable medical deductions- don’t assume you can deduct the total amount. You are not allowed to deduct the total amount on your income taxes. You are allowed to deduct apercentage of your deductible medical expenses, based on your income.
You may only deduct your deductible medical expenses, if they exceed a certain amount as set by a formula. Your medical expenses must equal 7.5% of your Kentucky adjusted gross income.If your allowable medical expenses are less than this amount, you may not deduct them.
This amount is based on your Kentucky adjusted gross Income. This amount may or may not be the same as your federal adjusted gross income. And this amount may not be the same amount as box 1 in your W-2 forms.
It is very difficult to make a blanket statement about this amount, because there may be additions or subtractions from this amount on your Kentucky State tax forms on Schedule M.
But for example, let’s use a married couple with no children. This couple earns a total of $25,000 per year as stated on box 1 of their W-2 forms. The couple is filing a joint Kentucky State income tax return.
The couple has no additions or subtractions from Kentucky State tax schedule M (see schedule M for more info) so their Kentucky State adjusted income is still $25,000. (Again, some people do need to fill out schedule M, and everyone should look it over carefully before completing their Kentucky State tax return.)
So they now multiply their Kentucky adjusted income by the 7.5% medical expense rule percentage for a total of $1,875 (7.5% X $25,00 = $1,875).
This means that their Kentucky State tax deductible medical expenses must be over $1,875 for a single penny of them to be deductible on their Kentucky state tax return. If they have even a dollar less than $1,875 they can’t deduct any of their medical expenses.
Now if they have $1,875 or any amount over that-the full amount of allowable deductions is deductible.This number will vary for each family based on the 7.5% formula. This is just an example to show that you can’t always deduct all your allowed medical expenses on your Kentucky State tax return.
Now back to the itemized form. Some other examples of deductions that you may take to count toward your itemized deduction are listed below. Please note that some of these deductions may require additional tax forms in order to file for the deduction. You also may want to refer to your tax booklet for more information.
Examples of other Kentucky State Income Tax Decuctions:
-Local income taxes withheld on your W-2 forms (NOTE: Federal and Kentucky state taxes withheld are NOT deductible from your Kentucky state income tax, although Kentucky state taxes and local income taxes may be deductible on your itemized federal return.)
-Real estate taxes (but only the part that is taxes, not local fees)
-Personal property taxes on vehicles and some other items (NOTE: You can’t deduct the licensing fees, ONLY the tax part of the total fees.)
-Interest on paid on your mortgage (but not credit card account interest or consumer or auto loan interest)
-Charitable contributions to qualifying charities (see the Kentucky state tax guidelines) with a receipt (Separate contributions of $250 or more require a writtenletter or documentation by the receiving charity.)
-Some casualty or theft losses
-Unreimbursed job related expenses and equipment including uniforms (but not just dress clothes, it has to be a specific uniform or scrubs for example)
-Job searching expenses, such as resume preparation
-Tax preparation fees
Now that you have a better idea on what you can and cannot deduct from your Kentucky State income tax forms, you’ll do a better job in preparing your receipts and paperwork.
Remember, again, it’s always a good idea to keep these papers and receipts separate in a file all year round since you never know if you’ll want to itemize. If you do itemize your federal or Kentucky State income tax returns, also remember to keep your receipts used for several years. Some sources reccomend saving your recipts for at least five to seven years. If you are audited, you will need these to support your tax returns.
Another thing many Kentucky income tax payers may not be aware of is something called “Use Tax.” If you purchased an item on the Internet, by catalog or mail order, or out of the state of Kentucky or even out of the country- and you didn’t pay state taxes (the state you bought it in and/or Kentucky state taxes) of at least 6% (the standard Kentucky sales tax is 6%) to the seller-you owe use tax.
Let’s say you paid 4% sales tax in another state, you now owe Kentucky the other 2% to total 6%. If you paid no sales tax at all, you owe the full 6% as use tax on your Kentucky State income tax return. This amount is not included as income, there is a special place on the return just for use tax.
Basically this is Kentucky’s way of still taxing you 6% on all purchases you make, no matter where you make them. You include this amount on your Kentucky state tax return. Again, you should keep all receipts and credit card statements to verify this.
I know that this can be a very frustrating undertaking, going back through all your receipts and paying money you didn’t know you owed. Some may be tempted to ignore the paying of use tax to Kentucky. But it would be wise to remember that ignorance or ignoring the law is no defense.
Companies you purchase from are required to keep records as so do your credit card companies. If the state of Kentucky ever decided to audit you, you could get into serious trouble for not paying use tax. So I do urge you, for your own protection to keep track of this and pay your owed Kentucky use tax. Remember, keep good records and save them for at least five to seven years-if you use them to support your deductions or Kentucky use tax.
If you keep good, accurate records preparing for tax season should be easier. Weather or not you tackle your taxes yourself or pay a professional preparer-you still have to do this information gathering. You may not think it is worth much money in the long run to keep track of and tally your possible allowed deduction expenses, but it can save you hundreds and sometimes thousands of dollars.
Some people automatically file the standard deduction to avoid the hassle of itemized deductions, and this can be acceptable for many people who don’t have enough deductions. But for others, this can end up costing hundreds to thousands of dollars in missed tax deductions that are rightfully yours.
No one enjoys paying taxes, but they are an unfortunate part of life. Don’t be tempted to be dishonest, because it could catch up with you. Unreported income, exaggerated or false deductions can land you into a lot of legal and financial trouble costing you far more than you think you are saving. Again as Benjamin Franklin so well put it, “death and taxes are inevitable.”.