Monthly Archives: February 2009

Getting to Know the IRS Tax Return Transcript

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The importance of your income tax forms does not necessarily end after filing them. In some cases, whether you are interested in a mortgage, automobile, or bank loan to start your own business, a transcript of your last few income tax returns would often be requested for them to approve your request. This is often a way by which banks and loan officers can appraise your financial situation and determine whether or not you are eligible for the loans. It can even help you keep track of the money you have used as expenses for the past few years, or even discover any errors in the income tax that you have filed, where you could get back a substantial amount of money. In these situations, it becomes necessary to request for your old IRS transcript, as your proof.

An IRS tax return transcript is not actually a replicate of your income tax form; rather, it is a summary of all the details you may need to know about your income tax, such as other forms and documents that you have sent together with your income tax form, or any tax returns that you may have received. If you wish to make any adjustments to your income tax, you can use this form to file for an income tax adjustment form that would enable you to change the previous form you had. Naturally, the new changes will not show up on your IRS tax return transcript, and you will again need to request for an account transcript, which would then show any modifications that you have made after. This transcript will also show detailed information about its taxpayer, including current marital status, and the final adjusted gross income the taxpayer has paid.

Both of the IRS’ transcripts and the account transcripts can be requested by filling out the Form 4506-T, also known as the Request for Transcript of Tax Return form. This process is free for all taxpayers, and is very easy to obtain. However, these tax return transcripts can be sent to you by the IRS, at a maximum delivery time of two weeks only if it is for the year you had filed your tax form, or if you are requesting for tax returns up to three years previously. If you are asking for a transcript request for a tax form earlier than three years, it will take as long as a month before these can be sent to you, so it is always advisable to request for final tax return transcript copies of all the tax forms that you have filed for, and keep them in a safe place.

If however, you would like the complete details of your tax form, and would like to avail of the actual copy of the form rather than just the IRS tax return transcript, then you will need to fill out Form 4506, which requests for a copy of the tax return itself. Along with the copy of the tax form, you will also receive a copy of all the other documents that you have sent, including schedules and other tax forms needed together with it. This can take as long as up to 60 days for the information to be sent to you, and will also cost you roughly $39 for each tax form.

Tax Advantages of Home Ownership – Example

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There is a considerable tax advantage to home ownership. A homeowner pays interest on his mortgage and local property taxes on his home, while a person who rents an apartment pays rent. The latter, however, includes a sum to enable the landlord to pay the interest and tax; hence the renter pays these costs indirectly. Because of this hidden cost for the renter, the homeowner has a tax advantage over the person who rents. If his income, exemptions, and other deductions are the same as the renter’s, he will pay fewer taxes.

The homeowner may deduct from his income, when calculating his taxes, interest on his mortgage and property taxes. Rent, of course, cannot be deducted. This can best be illustrated by an example. Assume two childless couples whose circumstances are identical except that one rents and one is buying a house. Both have adjusted gross incomes of $10,000 and total deductions because of medical expenses, contributions to charity, their church, and so forth, amount to $720. The couple buying a home, however, have additional deductions of $1,920 due to interest and property taxes ($45 per month taxes and about $115 per month interest is not unreasonable for even a modest home.) The couple buying a home will take a total deduction of $2,640 while the one renting can take only $1,500. (They will take the standard 15 percent, which is higher than their $720 itemized figure.) The homeowners’ taxable income is $1,140 lower. Their actual tax liability is $217 less than that paid by the couple who rent. Moreover, the higher the tax bracket, the greater the tax advantage from home ownership. The nature of our tax laws enables the homeowner to pass part of his Interest and property taxes on to Uncle Sam.

Even if the homeowner no longer has mortgage payments to make and lives in a community which has no property taxes, he is receiving favorable tax treatment because of imputed rent income which he receives, but on which he pays no taxes. Again an example will illustrate. Assume two individuals working side by side for the Ajax Corporation, each making a salary of $10,000 per year. Each owns a home which is fully paid for, but while Mr. A lives in his, Mr. B rents his and lives with relatives. Both have a $20,000 home free and clear. Mr B receives $1,000 of net cash rental income after all expenses including his property taxes. He pays a tax on $11,000. Mr. A, in reality, should look upon his cost-free living as worth about $1,000 which he really receives as income in kind. For these two individuals to be treated equally they should both pay taxes on either $10,000 or $11,000. But Mr. A pays on $10,000 and Mr. B on $11,000. The same logic would apply if, while Mr, A invested his savings in his home, Mr. B rented and invested his savings in high-grade corporate bonds. After a time Mr. B would have interest income which is taxable, while Mr. A’s rent in­come received in kind is not.

Finally, some people can depreciate part of their homes for tax purposes. The homeowner who uses part of his home for business purposes can deduct from taxes that proportion of heat, light, repairs, maintenance, depreciation, etc., which the business use is to the total house. If one-third of the house is used for business, he can deduct one-third of those expenses. The same is true if he rents one-third of the house.