Wednesday, February 29, 2012

Change in IRS Guidance Expands Eligibility for Tuition and Fees Deduction

According to IRS data, an average of 3.75 million taxpayers claimed the Tuition and Fees Deduction annually the past few years for billions in associated costs. Those numbers could grow thanks to a change in IRS guidance that expands the qualifications for taxpayers.
The tax break, covering up to $4,000 of certain higher education costs, now includes higher education costs for those who are out of high school but did not earn a GED or diploma as well as for students currently in high school and paying for higher education classes. The IRS previously indicated that in order to claim the deduction the student had to have a GED or high school diploma.
"The recent change to the Tuition and Fees Deduction is in effect for tax year 2011, which means eligible taxpayers can claim it on their tax returns right now," said Elaine Smith, master tax advisor and enrolled agent at H&R Block. "For some taxpayers, it could be advantageous to file amended returns for tax years dating all the way back to 2008."
Generally, this is a tax deduction for tuition paid to a college, university or other accredited post-secondary school. Taxpayers might be eligible to claim the Tuition and Fees Deduction if they have a student (or are a student) who met these qualifications:

  • Paid tuition to a college for taking college-level classes while still in high school
  • Never finished high school, but is taking college-level classes through an Ability to Benefit (ATB) test-out program
  • Took college classes through an early college entrance program.

Educational tax breaks often overlookedThe Lifetime Learning Credit instead could be claimed in similar instances. This credit is worth up to $2,000 for those seeking a college or graduate degree, and those taking classes to improve job skills. This credit can only be claimed once per tax return, regardless of the number of students taking courses. But, there is no limit on how many years it can be claimed for a student. A tax professional can determine which one is a better option based on the individual situation.
One of the most overlooked credits is the American Opportunity Credit, which was extended through 2012. This credit allows eligible taxpayers to claim up to $2,500 for each of the first four years of college for each student.
"There's no reason taxpayers should be leaving money on the table," Smith said. "These educational tax breaks are too often missed."

Tuesday, February 28, 2012

Tips to avoid Common Income Tax Problems

As the April 15 income tax return filing deadline approaches, Americans are collecting their papers and looking for help. While some consumers will use software or complete their own returns, most people will get assistance from a professional tax preparer.

The Better Business Bureau encourages consumers to be careful when selecting tax preparation help. The wrong preparer could cause a lot of headaches and result in fines and extra fees to get a poorly-done job corrected.

Unfortunately, every year BBB receives thousands of complaints from consumers about problems with tax preparers. Complainants often state that they made errors in their return, resulting in fines. In some cases, the documents were never even sent to the IRS.

Taxpayers are responsible for the accuracy of information on their tax return, whether they prepare the document or hire someone else to do so.

Connecticut Better Business Bureau offers the following guidance for consumers who are looking for help with their income tax returns:

Avoid tax preparers who claim they can get you bigger refunds than the competition, or larger ones than what you've gotten in previous years.

Avoid preparers who base their fee on a percentage of the amount of a refund.

Consider whether the individual or firm will be around to answer questions about the preparation of your tax return in the months or even years after the return has been filed.

The IRS criminal investigation department reminds you to never sign blank tax forms.

Before you accept the offer, consider the cost of “instant refunds” or “refund anticipation loans” that may be offered by tax preparers or the sellers of tax preparation software. The IRS will usually direct deposit your tax refund to your bank account within a few days after your return is filed. This can turn your “instant refund” into a very high cost short-term loan.

Your BBB also offers another checklist for taxpayers who will be preparing their return themselves:

Use Free File - Let Free File do the hard work for you with brand-name tax software or online fillable forms. If you made $58,000 or less, you qualify for free tax software that is offered through a private-public partnership with manufacturers. If your income was higher or you are comfortable preparing your own tax return, you can use Free File Fillable Forms, the electronic versions of IRS paper forms. You also may be eligible for free face-to-face help at an IRS office or volunteer site. Give yourself time to weigh all the different options and find the one that best suits your needs.

Try IRS e-file - After 21 years, IRS e-file has become the safe, easy and most common way to file a tax return. According to the IRS, 70 percent of taxpayers used IRS e-file. Starting in 2011, many tax preparers will be required to use e-file and will explain your filing options to you. This is your chance to give it a try. IRS e-file is approaching 1 billion returns processed safely and securely. If you owe taxes, you have payment options to file immediately and pay by the tax deadline. Best of all, combine e-file with direct deposit and you get your refund in as few as 10 days.

Consider Direct Deposit - If you elect to have your refund directly deposited into your bank account, you’ll receive it faster than waiting for a paper check.

Always check the IRS website for any questions - The official IRS website is a great place to find everything you’ll need to file your tax return: forms, publications, tips, answers to frequently asked questions and updates on tax law changes.

Remember this number: 17 - Check out IRS Publication 17. It’s a comprehensive collection of information for taxpayers highlighting everything you’ll need to know when filing your return.

Review! Review! Review! - Don’t rush. Be sure to double-check all the Social Security Numbers and math calculations on your return, as these are the most common errors made by taxpayers.

Don’t panic - If you run into a problem, remember the IRS is here to help. Try or call toll-free at 800-829-1040

Monday, February 27, 2012

Comparing Tax Preparer Costs

From -

Taxpayer asks:
Before I got married, I used TurboTax to do my taxes. Now, my wife wants me to go somewhere to get our taxes done. I called around and got a few quotes. Some of them were as low as $150 and one guy wanted $500. How do I know who is the best one? Should I just go with the most expensive? I don’t know how to choose.

You’re clearly on the right track: researching potential tax preparers is key to finding a good one.
But don’t get caught up just on pricing. There are lots of issues to take into consideration: experience, niche (it’s important, for example, if you have a small business, to find someone who handles that sort of return), accessibility, know how and good ol’ fashioned professionalism. So keep checking out those tax pros – it’s the right thing to do. You can find some more info about what to look for when searching for a tax preparer at this prior post.
Since you asked about pricing, I won’t completely gloss over it. On the one hand, the most expensive preparer doesn’t necessarily equal the best preparer: sometimes they’re just more expensive. That’s like saying that you need to buy Cadillac when the Ford will do just fine. Remember, pricing can vary for all sorts of reasons, from geography to education to overhead to ego.
In terms of real numbers, last year, a survey conducted by the National Society of Accountants (NSA) of nearly 8,000 tax preparers indicated that the average tax preparation fee for an itemized federal form 1040 with Schedule A and a state tax return was $233. The average cost to prepare a federal form 1040 and state return without itemized deductions was $128.
Again, keep in mind that those are averages. You can expect higher prices in more expensive areas of the country (and of course, lower prices in less expensive areas of the country). Prices may also vary based on the complexity of your return, whether you require additional schedules (like dividend and interest information reported on a Schedule B, business information reported on a Schedule C, capital gains and losses on a Schedule D and/or rental income and losses reported on a Schedule E) and supporting forms (like, for example, for the child tax credit or additional charitable donation information) and whether your return has “out of the ordinary” line items (like Roth IRA conversions or homebuyer credit repayment). Add-ons, like e-filing, preparing local returns or rental rebates, may also cost you.

Sunday, February 26, 2012

Homeowners, don't miss out on tax breaks.

From -

If you own a home, it pays to know the tax breaks that could be available to you. Here are five deductions spotlighted by personal finance writer David Bakke for the Zillow real estate blog. For more specific information, see your tax preparer or call the IRS help line at (800) 829-1040.

Mortgage interest. You're generally entitled to reduce your taxable income by the amount of mortgage interest you pay, as long as you itemize deductions on your tax return. Your lender should have sent you a 1098 form in January showing exactly how much interest was paid.

Private mortgage insurance. If you're paying PMI, the amount is likely to be fully deductible as long as your adjusted gross income is $100,000 or less ($50,000 for married taxpayers filing separately). Borrowers with incomes above $100,000 may qualify for a partial deduction.

Energy-efficient home improvements. If you installed windows, doors or skylights that met the requirements of the federal Energy Star program in 2011, you could get a tax credit equal to 10% of the product's costs. Hold on to receipts and documentation in case the IRS asks.

Points. The charges you paid in points to get a mortgage are generally deductible if it was a first mortgage on the property. In the case of a refinance of a loan, all or some of the point charges might be deductible, but it gets complicated — check with your tax preparer or the IRS.

Property taxes. The amount you pay in property taxes is deductible as long as it is based on the assessed value of your property (which is usually the case). If your mortgage company collects money from you for the taxes, the amount actually paid should be on the 1098 form you receive.

Thursday, February 23, 2012

Solving the Annual AMT Puzzle


When Congress enacted the Alternative Minimum Tax (AMT) in 1969, the goal was to ensure that the wealthiest among us could no longer use deductions, credits, and exclusions to escape paying income taxes. However, because Congress neglected to require that the amount of income exempted from the AMT calculation be indexed for inflation each year, millions of middle-income taxpayers since have fallen into its clutches.
"We know that Congress never intended for the AMT to hit middle income taxpayers the way it has in recent years, yet they have been unable to agree on any kind of permanent solution," says CPA Nancy Faussett.
Over the past several years, Congress has enacted a series of AMT "patches" that raised the AMT income exemption amount. The most recent adjustment, passed in December 2010, raised the exemption amounts to $74,450 for joint filers and $48,450 for single filers for 2010 and 2011. Whether a permanent solution will be found in 2012 — a Presidential election year — remains to be seen.
"Every year, Congress discusses it, everybody seems to agree that something needs to be done, and yet nothing happens," says Faussett.
While there is no way to know what will happen to the AMT in the future, there are several ways you can ensure your individual taxpayer clients are complying with the current AMT rules while not overpaying their taxes. These include:
  • Optimizing state withholding taxes to ensure clients don't overpay or withhold too little (state taxes are not deductible for AMT purposes).
  • Recommending that clients do not prepay property taxes, as this could subject them to AMT liability.
  • Accelerating income and short-term capital gains, depending on your client's tax bracket.
Keep in mind that AMT planning requires you to look ahead several years. If a client is not subject to AMT this year but may be subject to it next year, they may need to do the opposite of the recommendations listed above.
Corporations and the AMT
Corporations joined the annual AMT dance with passage of the 1986 Tax Reform Act. "Congress applied the same logic that it applied when it enacted the individual AMT," says Faussett. "The consensus was that it was unfair to allow high income taxpayers, be they individuals or corporations, to escape paying income taxes."
Faussett suggests that, rather than relying on spreadsheets, both corporate and individual tax return preparers should use tax planning software to model "what-if" scenarios and other comparisons to avoid unpleasant AMT surprises. Failure to calculate corporate AMT exposure accurately can result in overpayment of taxes due to:
  • Improper maintenance of AMT attributes, thus limiting the ability to reduce taxes by reducing Alternative Minimum Taxable Income via preferences and adjustments or cumulative Adjusted Current Earnings.
  • Underutilization of AMT Net Operating Loss.
  • Underutilization of General Business Credit when the Tentative Minimum Tax (TMT) is not optimized.
The complexities of the Alternative Minimum Tax will likely bedevil CPAs, CFOs, and taxpayers alike for years to come. That's why tax professionals should consider incorporating tax-planning software into their practice.

Tuesday, February 21, 2012

Who Should Take a Home-Office Tax Deduction?


According to data compiled in tax year 2009, more than 4 million Americans claimed the home-office deduction on their tax returns. That’s about 3 percent of the total 140 million returns filed in 2010. The number is likely to increase this year, with business startup rates having increased substantially in 2011.
Kathy Pickering, executive director of the Tax Institute, research and analysis division of tax-services provider H&R Block (HRB), says the average home-office deduction is valued at more than $2,600. Yet many taxpayers are unclear about how to claim the deduction, or they worry that if they do, they’ll face an IRS audit. Pickering says that although the home-office deduction is scrutinized closely, it should be used by those who are eligible. She spoke recently about home-office deductions and other overlooked tax opportunities with Smart Answers columnist Karen E. Klein; edited excerpts of their conversation follow.

What advice do you give individuals running home-based businesses when it comes to accounting for their expenses—particularly home-office expenses?
We try to remind them of the things that are important. For instance, you have to be very precise that a hobby is not your business. A home office needs to be just that—an office. It can’t double as a kids’ playroom or a video game room where you happen to do your crafts.
Now, there’s an exception if you’re a licensed day-care operator and you have the children using the living room and the playroom. In that case, you can deduct all that space as part of operating your business.

According to the IRS, the home office has to be not only exclusively used for business but it also has to be your principal place of business. What does that mean in practical terms?
The office has to be where you conduct most of your business and it has to be in your house—or garage or guest house on your property. It can’t be at somebody else’s place. And if you primarily work in an office building but you check your e-mail at night in a room in your home, that doesn’t work. In that case, your home is not your principal place of business.
If you call on clients or conduct meetings off-site, but you administer the business from your home office and you have no other place to do that administrative work, you can take the home-office deduction. Just be aware that eligibility rules are very strict and we absolutely recommend that people err on the side of being conservative about taking this deduction.

How does it actually work?
It allows you to deduct a percentage of your home expenses, based on the square footage of the office as compared to the size of the entire home. So you can deduct a portion of your home’s expenses, including depreciation, rent, insurance, utilities, maintenance, and general repairs, based on the business use of that part of your home.

What caveats do you give clients on this topic?
First, the deduction for the home office cannot exceed the net annual income from the business. And second, it’s important to document. If you’re legitimately entitled to take the home office deduction, keep records that show how you use your home office and take pictures of your work space and keep them with your tax records.

What credits and tax deductions do you find are frequently overlooked by small business owners and the self-employed?
A: The small business health-care tax credit is in effect and if you’ve got 25 or fewer employees and you’re paying 50 percent of their insurance premiums, you’re eligible to take it. We have a calculator where you can go plug in your numbers and see whether it will work for you.
Unfortunately, probably a lot of small employers are not eligible for the credit the way it’s written now, because either they’re not providing insurance or they’re not paying enough of the premium.

Are there other benefits that taxpayers routinely miss out on?
We pulled in a bunch of individuals as part of a marketing campaign and looked over their previous years’ tax returns. One that we caught a lot of people missing, whether they were self-employed or not, was the American opportunity tax credit. This is the best and most generous credit for people paying higher-education costs.
You can get a credit of up to $2,500 per student for the first four years of college costs, including tuition, fees, and course materials. This can mean saving $10,000 per student and you can claim it for multiple students at the same time if you’re a parent paying for your children’s college educations.

Monday, February 20, 2012

Taxes are due on 2010 Roth IRA conversions

Fro USA Today -

Several years ago, Congress enacted a law that offered individual retirement account holders a deal that looked a lot like those "same as cash" offers you see in ads for furniture and appliances.
The law, which took effect Jan. 1, 2010, lifted income restrictions on Roth IRA conversions, allowing high-income taxpayers to convert to a Roth for the first time. It also gave IRA owners the option of delaying taxes on 2010 conversions by opting to split income from the conversion between 2011 and 2012.
Not surprisingly, a lot of people decided to defer taxes on their Roth conversions. If you chose that option, though, taxes on the first half of your conversion income are due this year. And like those "same as cash" offers, failure to pay by the deadline — which is April 17 — could leave you in a world of hurt.
Don't expect to get a notice from your IRA provider reminding you of your tax obligation. Instead, you need to refer to last year's tax records and your 2010 tax return, says Melissa Labant, tax manager for the American Institute of Certified Public Accountants. Assuming you opted to postpone your tax bill, the amount of income deferred will show up on Form 8606 of your 2010 tax return, Labant says. On line 25A, you should see the amount of income you're required to pay taxes on when you file your 2011 tax return, Labant says.
Most taxpayers will report the income on Line 16B of Form 1040, Labant says. Tax software will do this automatically. Keep in mind that the income from the conversion has been reported to the government, so if you fail to report it, "You're going to get a letter from the IRS," says Francis St. Onge, an enrolled agent in Brighton, Mich.

No turning back
Ideally, you should have prepared for this tax hit by putting aside money to pay the tax bill. Even if you did, you may be in for an unpleasant surprise when you do your taxes. A large conversion could push you into a higher marginal tax bracket, Labant says. It could also make you ineligible for some tax credits and deductions that phase out at specific income levels, she says. If you're retired, the additional income could force you to pay taxes on a portion of your Social Security benefits. "Anytime your adjusted gross income increases, there are negative consequences," Labant says.
Sadly, it's too late to negate the tax bill by reversing the conversion. Taxpayers have the option of undoing a Roth conversion through a process called recharacterization, but the deadline for recharacterizing a 2010 conversion was Oct. 15, says Maria Bruno, analyst for the Vanguard Group. "The bottom line is that the tax is due," she says. "There's not much you can do."
Another wrinkle for taxpayers who converted in 2010 is the expiration of the 2001 Bush tax cuts at the end of this year. Depending on a number of factors, including who wins the presidential election, some high-income taxpayers could end up paying higher taxes on the second portion of their 2010 conversion. Paying taxes on the entire conversion this year would protect you from that prospect, but it's not an option, Bruno says. If you elected to defer income on a 2010 Roth conversion, you're locked into a 50-50 split, she says.

Nowhere to hide
If you can't pay the taxes on your 2010 conversion, the worst thing you can do is fail to file your return, Labant says. That will trigger interest and steep failure-to-file penalties, she says.
Options for cash-strapped converters include a short-term credit card loan or an IRS installment plan. If you've run out of time and money, you can withdraw money from your Roth, but that should be your absolute last resort, says Ed Slott, author of The Retirement Savings Time Bomb and How to Defuse it in 2012. If you're under 59½, you may have to pay an early withdrawal penalty. You'll also end up paying taxes on money that's been growing tax-free, which defeats the purpose of converting to a Roth in the first place, he says.
Meanwhile, it's not too soon to start planning for next year's tax bill, St. Onge says. For example, you may want to adjust your exemptions to increase the taxes withheld from your paycheck.

Sunday, February 19, 2012

Expect a tougher income tax season, with smaller refunds and more audits


Tax filing season this year will be even a little less enjoyable than usual.
Many people will get smaller refunds than they expected, and federal and state tax authorities are stepping up enforcement to get more revenue out of existing taxes.
The biggest change for most taxpayers will be the increase in what they pay as a result of the expiration of the Making Work Pay Tax Credit.
Michael Merlino, president of Atlantic Accounting Associates with offices in Egg Harbor Township and Tuckerton, said that in 2009 and 2010 the credit was enough to offset changes in tax brackets and boost people's refunds.
"This year, they did away with it, so people are seeing less in refunds, especially if they're married," said Merlino, 57, of Egg Harbor Township.
Terry Shellock, of Camp and Shellock in Linwood, said just about everyone got the Making Work Pay Tax Credit, which was a form of stimulus under the American Recovery and Reinvestment Act of 2009.
"It was $400 if you're single and worked and made less than roughly $100,000, and $800 if married and filing jointly, earning less than $200,000," said Shellock, 54, of Ocean City.
And as a credit, the $400 or $800 came off the federal income tax due. Deductions, which reduce the income to which the tax rate is applied, are worth far less.
Debbie Camp, a CPA and Shellock's partner, said even those above the income threshold received a reduced Making Work Pay Tax Credit.
"Everybody got something, that was the whole point of it," said Camp, 44, of Egg Harbor Township. "The first three returns I did this year, their refunds were lower than last year."

Disappearing credits
The Making Work Pay Tax Credit is the most important federal tax break disappearing, but not the only one.
A federal tax credit of up to $3,400 for the purchase of a hybrid electric vehicle has been phased out, and purchasers of hybrids in 2011 will get no tax relief.
There is still a federal tax credit of as much as $7,500 for the purchase of a plug-in hybrid electric vehicle such as the Chevrolet Volt, or a plug-in electric vehicle such as the Nissan Leaf. Those, too, are on a schedule to be phased out, but there is a proposal in Washington to extend or even increase the credit for the so-far very slowly selling vehicles.
Shellock said another energy-related credit that helped many homeowners also has lost much of its value.
"We've had Residential Energy Credits the last couple of years, for energy improvements such as new roofs, upgraded doors and insulation, all kinds of heaters, and that's greatly reduced," Shellock said, and the eligible period for making improvements ended Dec. 31, 2011.
The tax credit to encourage first time homebuyers also is gone for everyone except military personnel, he said.
And for many businesses, a beneficial treatment of the deduction for improvements is disappearing.
"For restaurants and retail stores for the last couple of years, if you made improvements you could depreciate them over 15 years instead of the usual 39 years," Shellock said. "As of 2012 that's no longer available. You had to have done the improvements before the end of the year."

More, tougher audits
Federal and state governments want more revenue, but raising taxes is unpopular, so they're making a bigger effort to collect more of what is owed.
That effort is twofold, said Thomas J. Fitzpatrick, a CPA and partner in Fitzpatrick, Bongiovanni & Kelly, which has offices in Upper Township and Linwood.
First, the Internal Revenue Service is increasing the number of audits it performs on tax returns, in particular those of businesses, said Fitzpatrick, 55, of Ocean City.
"Audits have definitely increased on the federal level and also on the state level," he said.
After conducting 1,385,000 audits in both 2007 and 2008, the IRS bumped up the number of audits to 1,426,000 in 2009 and 1,580,000 in 2010.
Figures aren't out for last year, but Fitzpatrick said the number of audits has kept increasing, especially for businesses. "They're now ramping up big time."
"I've been a CPA since 1986 and I've seen very few business audits, probably a total of 15 in my entire career," he said. "Our firm likewise hasn't had many audits the last 10 years for businesses. But over the last 12 months, we've seen a significant increase in the industry, with 10 to 15 ourselves."
The second part of the tax collectors' extra efforts is conducting more aggressive, comprehensive audits - with the help of digital record keeping and information gathering and processing.
The IRS said that last year it began requiring tax preparers filing 100 or more returns to file them electronically. This year, any tax preparer filing more than 10 returns must file them electronically, which presumably is the vast majority of tax preparers.
That has put a lot more information about taxpayers in the hands of the federal and state governments, Fitzpatrick said, and they're learning how to use it to make tax collection more effective.
"In the past, a government clerk would keypunch in the main numbers from a tax return, a half dozen numbers or so. Now they're figuring out how to use computers to improve the audit system," he said.
For example, most businesses use QuickBooks to track and report their finances and taxes, which makes a far more rigorous audit easy, he said.
"Both the IRS and New Jersey know that, and have hired staff to understand QuickBooks inside and out, and now they're demanding the taxpayer or accountant provide the actual QuickBooks file," Fitzpatrick said. "That has thousands of times more information than they would have gotten before, and they can determine who did what, when and why."
Another segment of taxpayers getting special attention is the working poor, Merlino said.
"A lot of due diligence is being required of tax preparers in regard to the Earned Income Tax Credit, which is available to those with low income. There's so much fraud with the Earned Income Credit," Merlino said.
As a result, the IRS is compelling preparers to ensure people are actually eligible for the credit, "more or less making them do the job of the IRS," he said.
Fitzpatrick said the IRS sent 22,000 letters in November to tax preparers (his firm not among them), "warning them that the IRS is watching them and they'd better start doing things right."
He said the massive amounts of data now gathered and crunched allows the IRS to compare firms - for example, seeing if the tax returns prepared by one firm have a higher level of charitable contributions than others - and also compare individual preparers within firms.

Prepare to be audited
The IRS is trying to shrink the "tax gap," between the amount Americans owe and the amount they paid.
In January, it released its study of the tax gap for 2006, showing it had grown to $450 billion from $345 billion in 2001, the previous year studied. Most of the gap increase resulted from the increase of total federal taxes due to $2.7 trillion, but the compliance percentage - the share voluntarily paid - shrank about half a percentage point as well to 83 percent.
The IRS offset some of that weaker compliance by increasing the revenue from enforcement and late payments by $10 billion to $65 billion in 2006. The strengthening of the audit function, while intended to improve compliance, will probably increase that revenue further.
While the chance of being audited is increasing, it is still relatively small, at least at ordinary income levels - from about 1 percent for those earning less than $25,000, to 2 percent for those earning $200,000 to $500,000 (or reporting no adjusted gross income), to 10 percent for those earning $10 million a year or more.
All taxpayers are much more likely, though, to have the analysis of their returns or earnings result in a letter from the IRS pointing out discrepancies in reported income, errors on the return, or money owed. In 2010, 9.2 million people received such letters, according to an analysis by the Taxpayer Advocate Service.
The best way to handle an audit, Fitzpatrick said, is to get ready for it in advance.
"Once you've filed and are audited, there's not much you can do," he said. "To prepare for it properly, you need to make sure you understand the tax laws as they apply to you and what documentation will be required, before filing the tax return."
The IRS makes that easier for businesses, he said, by putting online descriptions of programs targeting various areas of compliance.
"For many industries, the IRS has publications that tell everything about that industry, and what kinds of things they think the public is getting away with," Fitzpatrick said.
He said his firm makes sure business clients are fully aware of what's in the publications relevant to their sector and what the IRS will be looking for.
"If you do things right, at least are trying to do things right, usually the government will allow for stupid mistakes or you just missing something," he said. "But if they think you're bending the rules, they can get nasty."

Saturday, February 18, 2012

Answers To The Top Five Most Common Income Tax Questions


Tax season is officially under way, and with tax season comes tax questions. Everything from the common "Can I claim my boyfriend as a dependent?" to the "How do I determine the cost basis of the stock I sold?"

-- Who can I claim as a dependent? Questions about who can be claimed as a dependent have been a top question for taxpayers for years. Taxpayers often have questions related to claiming a boyfriend, girlfriend's child, a parent who lives with them, or a child who has moved back home after college. You can claim a "qualified child" or "qualified relative" if they meet certain tests including residence, age and financial support. The easiest thing to do?

-- Are unemployment benefits taxable? With the average unemployment rate 9.7%, many taxpayers are wondering how this impacts their taxes. Unfortunately, 100% of unemployment benefits are taxable. However, if you were unemployed for part of the year, don't forget that job search and moving expenses may be tax deductible.

-- What are the tax consequences of withdrawing money from my 401K? Due to the economy, more Americans are considering withdrawing money early from a retirement account. Remember; if you have not reached age 59-1/2, you will be faced with an additional 10% tax penalty (in addition to the regular income tax on the withdrawal) for early withdraw. This may also result in the taxation of other income, like social security that wasn't taxable before and bump you into a higher tax bracket.

-- What can I deduct in a mortgage refinance? With 302,000 new homes sold and interest rates dropping in 2011 there are many people who have questions about the tax implications of refinancing their home. If that's you, there may be some good news. If the mortgage is your principal residence, you generally can only deduct, over the life of the new loan, the points you paid to refinance the loan. If the mortgage is a rental property, you may be able to deduct additional charges in connection with securing the loan like underwriting fees, appraisal fees, and attorney fees.

-- Is my social security income taxable? There are 78 million boomers nearing or already enjoying the benefits of retirement. First, congratulations! Second, if social security is the only income received then that income is not taxable. However if you receive other types of income, some of your social security benefits may be taxable.

Friday, February 17, 2012

8 ways to make tax season more tolerable.


Even if you expect a refund this year, you probably still dread the annual ritual of organizing your paperwork and searching for deductions. We have some ideas for making tax season more tolerable and potentially more profitable.
The deadline to file your 2011 income tax return with the IRS is April 17. Here's how to avoid some of those tax-time headaches:
  1. Go digital:  Taxpayers in 37 states and the District of Columbia can file their federal and state returns in one transmission to the IRS. Plus check out the Free File section of the IRS website.
  2. Start early: Even if you're organized, one or two pieces of paper, such as an earnings statement mistaken for junk mail or a misfiled receipt, may have gone astray. Or you may have questions for a tax professional or the IRS. Build in at least two weeks to accommodate those possibilities.
  3. Organize paperwork: Tax preparers and accountants say that disorganized receipts and tax forms cost their clients money. Get an accordion folder and use each section to store documents for a different category, such as, charitable contributions, W-2 forms, Form 1099s, consulting and freelance work, business and job expenses, and income and expenses from rental properties. IRS Publication 552, Record keeping for Individuals (PDF) outlines what you should keep and for how long.
  4. Consider sales taxes: Use the IRS Sales Tax Deduction Calculator to figure the amount of state and local sales tax you can claim. You can deduct either state and local sales tax, or state and local income tax on your federal form, whichever is greater. If you live in a high-income-tax state (California, Massachusetts, Minnesota, New York) don't bother, even a major house-remodeling project, four-star vacation, or new car might not produce enough sales tax to exceed your state income-tax bill. If you live in a no-income-tax state (Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming) you'll likely gain with the sales-tax deduction. Same with New Hampshire or Tennessee because they tax only interest and dividends.
  5. Asses alternative minimum tax liability: For tax year 2011, the exemption amount for AMT for individuals and heads of household has increased to $48,450 ($74,450 if married filing jointly, $37,225 if married filing separately). The IRS has a 2011 AMT Assistant that can help you figure out your potential tab.
  6. Mind the cost basis: Establishing the cost basis of old investments, including stocks and real estate can cause a migraine. The cost basis is the purchase price plus costs associated with selling the investment, and any capital improvements in the case of real estate. You pay capital gains tax on the difference between that and your selling price, so the higher the cost basis the less tax you'll owe. You can claim up to $3,000 in investment losses in a given year; the balance can be carried forward to future years. For more details click here, plus learn more about calculating cost basis, by reading IRS Publication 551 Basis of Assets (PDF).
  7. Get an extension: There's no penalty if you pay your estimated taxes by April 17 and that payment is at least 90 percent of what your final return shows. This year’s extension deadline is Oct. 15.
  8. Plan ahead: Start thinking about next year and organize your papers for 2012, or purchase software like Quicken to keep track of your receipts.

Thursday, February 16, 2012

IRS Gives Advice on Reporting Unemployment Benefits


The Internal Revenue Service offered advice Wednesday to unemployed taxpayers on how they and their tax preparers should report unemployment benefits on their tax returns.
Unemployment compensation generally includes state unemployment compensation benefits, among other types of benefits, but the tax implications depend on the type of program paying the benefits, the IRS noted. Taxpayers must report unemployment compensation on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ.
Here are four tips from the IRS about unemployment benefits.
1. You must include all unemployment compensation you receive in your total income for the year. You should receive a Form 1099-G, with the total unemployment compensation paid to you shown in box 1.
2. Other types of unemployment benefits include:
•    Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund
•    Railroad unemployment compensation benefits
•    Disability payments from a government program paid as a substitute for unemployment compensation
•    Trade readjustment allowances under the Trade Act of 1974
•    Unemployment assistance under the Disaster Relief and Emergency Assistance Act
For complete information on each of the benefits listed, see chapter 12 in IRS Publication 17, Your Federal Income Tax, or Publication 525, Taxable and Nontaxable Income.
3. You must report benefits paid to you as an unemployed member of a union from regular union dues. However, if you contribute to a special union fund and your payments to the fund are not deductible, you only need to include in your income the unemployment benefits that exceed the amount of your contributions.
4. You can choose to have federal income tax withheld from your unemployment compensation. To make this choice, complete Form W-4V, Voluntary Withholding Request, and give it to the paying office. Tax will be withheld at 10 percent of your payment. If you choose not to have tax withheld, you may have to make estimated tax payments throughout the year.
For more information on unemployment compensation see IRS Publications 17 and 525.  Forms and publications can be downloaded from the IRS Website at or can be ordered by calling 1 (800) 829-3676.

Wednesday, February 15, 2012

Tax-time retirement strategies


Putting aside a little extra money toward retirement in an individual retirement account, or IRA, would seem to be a no-brainer for the vast majority of middle-class Americans. Yet relatively few people contribute to them each year.
Although most households were eligible to make contributions to IRAs, only 14 percent of them did so in 2010, according to data from the Investment Company Institute. Just 39 percent of households own an IRA, even when you count all the IRAs created by rollovers of 401(k) assets and SEP-IRAs for the self-employed.
With tax day approaching -- the deadline for making a 2011 IRA contribution -- it's better to be among those who contributed than among those who blew it off. After all, you don't need to run the numbers on one of those ubiquitous retirement calculators to realize that every little bit helps.
Say, for example, that you're 45 now, and you put aside just $1,000 in an IRA. By the time you retire at 65, that $1,000 will be worth nearly $4,000 (assuming a 7 percent annual return). Set aside $1,000 a year from age 45 to 65, and when you retire you'll have more than $40,000 -- a tidy sum. (If you're 35 now, or 25, those numbers will come out much higher.)
While the vast majority of opportunities to get deductions for 2011 expired at year-end, you can contribute to an IRA or SEP until April 17, 2012. "You still have the opportunity to get deductions for IRAs and SEPs," says Bill Smith, managing director of the national tax office for CBIZ MHM, an accounting and management consulting company. "It's a good tax benefit and a great deferral, and if you think you are eligible, you have plenty of time to run the scenarios to see what it's going to save you in taxes."
If that has you thinking about contributing, here's what you need to know:
- How much you can contribute. The tax rules generally let you set aside $5,000 in a traditional deductible IRA or a Roth IRA; you can also split this contribution between the two in whatever proportion you like. If you're age 50 or older, you can put away an extra $1,000 for a total of $6,000 because of the rules on so-called "catch-up" contributions.
There are income limitations that prohibit high-income taxpayers with retirement plans at work from making contributions. But those income limits are higher than they used to be, so don't assume you won't qualify until you look at the numbers. If you're married and have a 401(k), for example, your ability to invest in a traditional IRA begins to phase out above adjusted gross income (AGI) of $90,000; for a Roth, the phase-out begins at AGI of $169,000. You can run your numbers on an online calculator, such as this one from Wells Fargo (
- Traditional IRAs vs. Roth IRAs. The difference between a traditional IRA and a Roth IRA is all about the tax. With a traditional IRA, you make your contributions with pre-tax dollars, and you'll owe taxes when you withdraw the funds. For tax purposes, it's the same concept as your 401(k). With a Roth IRA, you pay the taxes when the money goes in; but neither you -- nor your heirs, assuming you don't need to spend all that money in retirement -- will ever again have to pay income taxes on that money or the money that it earns within the Roth.
Which is better for you? For most people, the Roth has the advantage over the long term. That's mainly because you won't owe tax when you withdraw the funds, at which point your savings should be substantially higher. The longer your time horizon --because you're still decades from retirement or because you expect to have funds to pass on to your kids -- the better a Roth is. It will also be more valuable if your taxes in retirement are higher than they are today.
The caveat to the Roth is that you must be able to come up with the money to pay that tax hit up front. For a $5,000 contribution in the 28 percent tax bracket, that's an extra $1,400. If you'll need to raid your retirement funds to pay the tax man, it isn't worth it.
- The other Roth option. If you are covered by a retirement plan at work, you may be offered the choice of a Roth 401(k)-- an option that's been gaining ground slowly since it was introduced in 2006. For tax purposes, the basic concept of the Roth 401(k) is the same as for the Roth IRA, but the contribution limits ($17,000 for 2012) and employer matching contributions work like a regular 401(k). That means you can sock away money a whole lot faster.
If you're not sure whether your tax rate will be higher or lower in retirement than it is today (and, frankly, who is?), one smart strategy is to put part of your retirement funds in the regular 401(k) and part of them in the Roth. That way you've played both sides of the tax debate and left yourself some nice options for when it's time to retire and actually start using the money you will amass.

Tuesday, February 14, 2012

Brief Review for 2012 Income Tax Season (Individuals)

Compared to some prior years, Congress has made few tax changes this year. Following are highlights of changes and facts for the upcoming tax season.

Opening day for electronic filing. The IRS starts accepting returns for electronic filing on Jan. 17th.

Due Date of Return The end of tax season is April 17, 2012 for returns not on extension.

New Form 8949 and Schedule D All capital transactions will now be reported on the new Form 8949. Schedule D-1 is no longer used. Sales of securities in 2011 that were purchased in 2011 should have a basis on the 1099 from a broker. The preparer must indicate on Form 8949 if a basis was shown on 1099-B, not shown on 1099-B, or no 1099-B was issued. A separate form is required for each case.There is also a column to report an adjustment to basis/sales price and the reason for the adjustment. As of today the form does not show the gain or loss on each transaction. Instead columns for the total cost, sales price, and adjustments are transferred to schedule D.

Standard Mileage Rates were changed mid-year. From 01/01/2011 to 06/30/2011 the rate was 51 cents per mile; after 06/30/2011 it went up to 55.5 cents per mile. The rate for use of a vehicle to get medical care also changed in midyear. From 01/01/2011 through 06/30/2011 the rate is 19 cents a mile and is 23.5 cents a mile for the remainder of the year. The 2011 rate for use of a vehicle to do volunteer work for certain charitable organizations remains at 14 cents a mile.

Schedule SE For 2011, the FICA portion of SE tax is reduced from 12.4% to 10.4%. The Medicare (HI) portion of the SE tax remains 2.9%. As a result, the SE tax rate is reduced from 15.3% to 13.3%.

Net self-employment income is no longer reduced by the amount of the self-employed health insurance deduction.

Earned Income Credit Before 2011 preparers were required to complete Form 8867, Preparer’s EIC Checklist, and keep it in their records. Now this due diligence form must be submitted to the IRS. Paid preparers failing to meet their due diligence requirements on EITC claims face higher penalties for returns required to be filed after December 31, 2011. The United States-Korea Free Trade Implementation Act amended IRC section 6695(g) raising the amount to $500.

Alternative Minimum Tax The exemption amount has increased to $48,450 ($74,450 if married filing jointly or a qualifying widow(er); $37,225 if married filing separately).

New Form 8938 Taxpayers with foreign assets above certain thresholds may have to file this new form, Statement of Specified Foreign Financial Assets. Unmarried taxpayers living in the US need to file if the total value of specified foreign assets exceeds exceed $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. For married taxpayers living in the US the threshold is $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. The thresholds for filing are generally four times higher for taxpayers living outside the US.

PTIN's All tax preparers need to have a PTIN. The fee for renewal is $63. CPA's and enrolled agents are also required to have a PTIN although they are exempt from the competency tests which will be required.

Electronic Filing Requirements  Starting Jan. 1, 2012, the 100-return threshold will be reduced to 11 or more income tax returns that the preparer, or the preparer’s firm in the aggregate, expect to file in 2012 for individuals, trusts and estates. In 2011 over 65 million returns were prepared professionally and about 90% of them were filed electronically.

Paper Filed Returns Some IRS mailing addresses have been changed. Information can be found here

Sunday, February 12, 2012

Most tax rules stay same, but don't bet on it.

Political gridlock placed the country's tax code in a deep freeze in 2010, and, as a consequence, there are few changes that filers need worry about this tax season.
"There's not a lot that's new this year,". "It's a little unusual. I think the political winds were such that [Congress] really didn't want to do a lot of things."
While the tax code hasn't changed much, some things are different.

The standard deduction for tax filers who do not itemize has increased, as have the personal exemption amounts a filer can claim. Limits on the Alternative Minimum Tax have risen, as have the standard mileage rates business people can claim.
But what may concern tax filers more are issues relating to time -- specifically the filing deadline, and the wait to receive one's tax refund.
Last year the tax filing deadline was delayed three days. This year the deadline has been delayed two days, to Tuesday, April 17, because April 15 is a Sunday and April 16 is the Emancipation Day holiday in the District of Columbia.
With regard to refunds, some taxpayers who filed electronic income tax returns this year can expect a delay of a week and possibly two in some cases, because the Internal Revenue Service added a new security component to its computer system in a stepped-up effort to detect refund fraud.
"The government has had a tremendous increase in the number of identity-theft matters that its dealing with." Last month the Justice Department apprehended 105 people in 23 states in a nationwide crackdown on identity theft and tax refund fraud that was timed to send a message to tax cheats as the season begins, according to the Internal Revenue Service. The sweep ranged from Alaska to Florida and included 80 complaints and indictments and 58 arrests.
The problem stems from stolen Social Security numbers that are made public after a person dies.
He personally encountered the problem when he tried to file his income taxes last year -- a year after his wife died.
"Somebody had stolen her ID right before she died and when I tried to file a joint return, it wouldn't let me electronically file my return. I got flagged by the system,".
The arrests for identity theft and tax fraud are just part of an apparent IRS crackdown on fraud and compliance this tax season.
The tax agency has placed a higher emphasis on detecting fraud in two other areas: the popular Earned Income Tax Credit and the reporting of foreign financial assets, which most commonly are accounts in non-U.S. banks.
Tax preparers now must fill out a five-page document, known as form 8867, declaring the filer eligible for the Earned Income Tax Credit, which is a refundable tax credit for low to moderate-income working people.
Those not using form 8867 can be fined $100 to $500 if the tax filer is found to be ineligible for the tax credit.
Last year, about 40,750 Lucas County taxpayers got the credit and pocketed about $2,260 per recipient. But the government has declared the Earned Income Tax Credit to be an area of tax fraud, and so it is cracking down.
"The fraud is there," . "I like to see people get it who deserve it, but I don't want to see anyone take advantage of me for that."
"It's probably one of the most common fraudulent areas on a tax return. Some tax preparers don't pay much attention to it and just claim it,". "Some make up numbers for it and just give it to a client. But now at $500 per incident, that's pretty steep."

Offshore assets
For reporting foreign assets, the IRS has created a new form, 8938, designed to improve compliance by taxpayers with offshore financial assets whose totals exceed certain thresholds.
A bank account in Canada, for example, would count as offshore.
What makes the issue worth noting is it carries new, stiff penalties for those who fail to report those assets.
Those who don't file by April 17 are subject to a $10,000 penalty, and added $10,000 penalties up to $50,000 for each 30-day period a person fails to file 90 days after the IRS has notified them that they must file.
In December, IRS commissioner Doug Shulman said in a speech at an international tax forum in Washington that the tax agency was "turning up the pressure on those not paying taxes on overseas assets."
The IRS last year began "data mining" information retrieved from offshore programs, including names and account numbers from a prominent Swiss bank.
"I know a lot people who have put money offshore. Some would just go to Canada and start a savings account …," he said. "Some people have Swiss bank accounts because they're just trying to diversify their accounts. Other people put money offshore because they feared the economy would collapse and they wanted to protect themselves.
"They didn't do anything illegal. They were doing asset protection," . "But you've got to declare it."

Basic issues
Most taxpayers will care more about basic issues, although there are not a lot of changes.
For those who take the standard deduction, the limits have risen by $100 to $5,800 for single taxpayers or married taxpayers filling separately, and $11,600 for married couples filing jointly. The deduction for a head of a household is $8,500, also up by $100. Personal and dependent exemptions have risen by $50 to $3,700. Most taxpayers can take personal exemptions for themselves and an additional exemption for each eligible dependent.
Congress passed another "patch" to extend the Alternative Minimum Tax and raise its limits for the 2011 tax year. The new exemption limits on the ATM, created to counter people who have multiple tax deductions and insure that everyone pays some taxes, are $48,450 (up from $47,450) for singles and $74,450 (up from $72,450) for married couples filing jointly. It is $37,225 (up from $36,225) for a married person filing separately.
A taxpayer usually is subject to the AMT if taxable income, plus any adjustments that apply, totals more than the AMT exemption amount.
The 2011 optional standard mileage rates, which are used to calculate deductible costs of operating a vehicle for business, charitable, medical or moving purposes, went up twice in 2011. The rate was 51 cents per mile for business miles from Jan. 1 through June 30, but rose to 55.5 cents for miles driven after June 30. In 2010 the rate was 50 cents a mile. The rate for medical or moving purposes was 19 cents per mile in 2011 -- up from 16.5 cents -- while the rate for driving in service of charities stayed at 14 cents a mile.
The First Time Home buyer credit has expired for the general population but it still exists for members of the armed forces or U.S. foreign services who contracted to buy a home before May 1, 2011, and who closed on the sale before July 1, 2011. Those members of the armed or foreign services who either are buying their first home, or who are long-time homeowners buying a replacement principal residence, can claim a home buyer credit of up to $6,500 (up to $3,250 for a married individual filing separately).
Lastly, the IRS created new form 8949 to change the way capital gains and losses are reported by tax filers.
Brokers are now required to report the cost basis for stocks sold by their clients and bought in 2011. The reporting changes extended to include mutual funds and exchange-traded funds on Jan. 1 of this year. Before 2011, brokers only had to report the proceeds from stock sales.
The new reporting and form 8949 are both designed to stem falling tax revenues that have been dropping because of investors who underestimate their capital gains on their tax returns. The IRS will compare what the broker reports against what the tax filer claims.

Saturday, February 11, 2012

Not the DIY type? Tips to find a tax preparer


If your financial life is simple and you have basic computer skills, using do-it-yourself software is an “EZ’’ way to file your tax return.
But if you’re nervous about preparing your own taxes, don’t have time, had a major life or job change last year or simply think the tax laws are too complex, you’re not alone.
About 60 percent of all returns are filed by professional preparers, according to the Internal Revenue Service. Officials at H&R Block, which prepared one out of every six tax returns last year, told investors recently that the growth in the software market has come mainly from do-it-yourselfers who switched from paper to digital, not from taxpayers who switched from paid preparers.

But how do you find a tax preparer you can trust? Here are a few tips:
1. Ask around
Tax professionals say the best way to find someone is through an old-fashioned, word-of-mouth recommendation. Ask friends and family members who they use, and why they would recommend their preparer.
If you’re expecting to claim a lot of business-related expenses, ask colleagues from work or professional organizations if they know a preparer who focuses on your industry. If you have a small business make sure, at a minimum, that the person has worked a lot with small businesses, preferably within your field, advised Melissa Labant, the director of tax advocacy for the American Institute of Certified Public Accountants.

2. Make a few calls
Before committing, speak to two or three candidates and ask about their experience and their approach. Get a list of their base fees, but remember that fees may change depending on the complexity of your return and the training and education of the preparer.
Also confirm that the individual or the firm will be able to represent you before the IRS, if there are questions about your return or if you’re audited.

3. Check credentials and history
Make sure any preparer you consider has a Preparer Tax Identification Number, or PTIN, which is required by the IRS to file as a professional.
Check for complaints filed with the Better Business Bureau and your city or state consumer protection agency. And check out disciplinary issues and license status with your state board of accountancy for CPAs, state bar associations for attorneys, or the IRS Office of Professional Responsibility for enrolled agents.
Most importantly, make sure you’re comfortable with the preparer. It’s important because, even if you hire someone to prepare your return, you’re still ultimately responsible for what it says.

4. Be prepared for questions
Minkow noted that once you find the right preparer, you will likely establish a relationship that lasts for years. Accountants and other professionals may also provide advice on other aspects of your financial life, including long-term planning, investments and home buying.
5. Look for warning signs
If your preparer does any of the following, it’s a sign of a problem that should make you think twice about filing the return:
— Asks you to sign a blank return.
— Indicates that it is OK to include false or misleading information to boost your refund.
— Refuses to sign your return or include his or her PTIN.
As Minkow put it, “You do not want that person who’s working in the back of the bowling alley and telling you to go file yourself.’’

Thursday, February 9, 2012

30 Million May Be Hit by AMT This Year


Get ready to start paying higher taxes—$3,900 to $8,000 more a year on average. Unless Congress acts, some 30 million Americans will have to pay the dreaded Alternative Minimum Tax (AMT), whose rates, depending on your income, are either 26 percent or 28 percent.

According to the Congressional Budget Office, "Nearly every married taxpayer with income between $100,000 and $500,000 will owe some alternative tax."
Like many awful things, the AMT is the result of good intentions.

It was created by Congress in the 1960s to help ensure that even the most tax-savvy rich paid some minimum amount. Congress, however, did not index its definition of "rich" to inflation. The result is that an income that qualified you as rich 30 years ago subjects you to the AMT—or would, if Congress didn't authorize, every year, a "patch"—a specified amount of money a filer can deduct from his adjusted gross to stay below the AMT's threshold.

If Congress failed to approve a new patch, the permissible amount for married couples filing jointly would fall, for example, from the current $74,450 to $45,000. "A lot more people would start paying a lot more money," says Andrew Schwartz, founder of Schwartz & Schwartz, P.C., a CPA firm specializing in the tax and financial planning issues applicable to young professionals.

Right now uncertainty over when and whether Congress will approve a new patch makes tax planning difficult, he says. "For seven or eight years now," he explains, "Congress has been passing these one or two-year patches, rather than make a more permanent fix." According to him, tax planning software now in use assumes the worst: That Congress won't act.

If no new patch were approved, says Barbara Weltman, a tax and business attorney and author of J.K. Lasser's Tax Deduction for Small Business, 20 million to 30 million taxpayers not previously subject to the AMT would have to pay it. The likelihood that you'll be hit, says Schwartz, increases if you:
-Have a large family
-Realize significant long-term capital gains

Figuring out if the AMT applies to you isn't easy. You start by going to the IRS' website and using the "AMT Assistant," a tool that will determine if you must file Form 6251, an AMT worksheet.
Persons who fail to make the effort (or who misjudge their eligibility) will have to pay not just the higher tax but penalties and interest as well.

You can reduce AMT exposure by reducing your adjusted gross income. For example, you can increase the contributions you make to your 401(k) or IRA. The self-employed can claim a home office deduction. Persons with substantial portfolio can move money from taxable investments into tax-exempt bonds or bond funds.

"With the AMT," says Schwartz, "It's all about timing." Try to pay, for example, your real estate and state and local income taxes in years where your income falls outside AMT range, he advises.

There are plenty of other tax issues to worry about for 2012.

Says Weltman, "More than 50 different tax breaks expired at the end of 2011. Unless those are extended, many people will be adversely affected." As one example, she cites the tax break that applied to people filing in states without an income tax: Last year they could deduct local sales tax in lieu of state income tax.
This year they can't—unless the break is restored. "They'll be hit hard," she warns.
As for the AMT, she envisions a positive outcome: Congress, she thinks, will approve a patch—maybe not right away, but eventually. "They'll approve it either this year or retroactively in 2013 for 2012." Why? It's an election year. Nobody holding office wants an additional 30 million votes ticked off.
Plus, it's simply too early in the year to be paralyzed with fear. "We'll have to see how things shape up. It's too early to do any significant planning yet. What if you lose your job? What If your income drops?" See? There's the bright spot.

Wednesday, February 8, 2012

What's New for Federal Income Taxes

Tax laws sometimes change, expire or get extended. The list below is not exhaustive, but is a useful reminder as we file 2011 federal tax returns and plan our 2012 withholding.

Although most of us can no longer claim the First-Time Homebuyer Credit, the law granted certain members of the Armed Forces, certain members of the Foreign Service of the United States, and certain employees of the intelligence community additional time to buy a qualifying home. Remember: Taxpayers may be required to repay the First-Time Homebuyer Credit. Generally, taxpayers must repay any credit claimed if the qualifying home was sold or if the home ceased to be the taxpayer's main home. Use IRS Form 5405.Generally, taxpayers who claimed the credit for a home purchased during 2008 are required to repay the credit in 15 equal installments, beginning with their 2010 tax return. Use line 59b on Form 1040.

In most cases, you must report your capital gains and losses on the new IRS Form 8949 and report the totals on Schedule D. If you sold a covered security in 2011, your broker will send you a Form 1099-B showing your basis. This will help you complete Form 8949. Generally, a covered security is a security acquired after 2010.

The additional tax on distributions from HSAs and Archer MSAs not used for qualified medical expenses has increase to 20 percent for distributions after 2010.

If you had foreign financial assets in 2011, you may have to file new IRS Form 89238 with your return.

The Making Work Pay Credit has expired. You cannot claim it on your 2011 return.

You cannot claim the Alternative Motor Vehicle Credit for a vehicle you bought after 2010, unless the vehicle is a new fuel cell motor vehicle.

The standard mileage rate applicable to 2011 for business use of your vehicle is increased to 51 cents a mile (55.5 cents a mile after June 30, 2011). The 2011 rate for use of your vehicle to get medical care or to move is increased to 19 cents a mile (23.5 cents per mile after June 30, 2011). In addition, beginning in 2011, you may use the business rate for a vehicle used for hire, such as a taxicab.

The Adoption Tax Credit offsets qualified adoption expenses. Taxpayers who adopt a child may qualify for an enhanced adoption tax credit for tax year 2011. The amount of the tax credit is as much as $13,360 for 2011. To claim the credit for 2011, both Form 8839 and the required adoption-related documentation must be attached to the federal tax return. For that reason, claimants cannot file electronically. More information is available on

Several Education Credits are available. The American Opportunity Tax Credit is available through 2012. The credit can be up to $2,500 per eligible student and is available for the first four years of post secondary education. The student must be enrolled at least as a half-time student. Educational institutions are required to file and provide you with a Form 1098-T, Tuition Statement, for each enrolled student. Lifetime Learning Credit: In 2011, taxpayers may be able to claim a Lifetime Learning Credit of up to $2,000 per return for qualified education expenses paid for one or more students enrolled in eligible educational institutions. Tuition and Fees Deduction: Taxpayers may also be eligible to claim the tuition and fees deduction. For more information download Publication 970 (Tax Benefits for Education) at or call 1-800-TAX-FORM.

Monday, February 6, 2012

Big medical bills may add up to income tax deductions.


Taxpayers swamped by big medical bills in 2011 can get some relief when they file income tax forms this spring thanks to an overlooked deduction that is hard to reach in a typical year.
The IRS lets people deduct medical and dental expenses that surpass a certain percentage of their adjusted gross income, which is the last number on the first page of Form 1040. Taking advantage of this break requires careful record keeping and a review of the 34-page IRS Publication 502.

Who uses this break?

Deductions for medical expenses fall into a unique category compared to other tax breaks. They usually don't occur every year like write offs for mortgages or property taxes. Taxpayers also don't want to voluntarily raise them to ease their tax bill, like they would a charitable contribution.
"You can't say ... 'I think I'll get sicker this year and have higher medical expenses,'" said Jackie Perlman, a senior analyst with the Tax Institute at H&R Block.
People generally need a big medical expense to qualify. Taxpayers must spend 7.5 percent of their adjusted gross income just to reach the point where they can use this deduction. Then they need a decent expense total beyond that point for the deduction to have a meaningful impact.
For instance, someone with adjusted gross income of $50,000 would have to spend well over $3,750 in order to qualify for the deduction and use it.
This deduction is usually limited to people who itemize their returns and pay taxes.

What expenses count?

Publication 502 lays out an alphabetized expense list, starting with abortions and acupuncture. Eligible expenses also include chiropractor visits, guide dog fees, eyeglasses and insurance premiums if you don't have coverage through your employer.
The expense has to be something the patient paid out of pocket, not the portion of a bill the insurer covered. It also cannot be something the patient paid for with money set aside before taxes in a flexible spending account.
Miles traveled and other incidental expenses related to medical care can be deducted. This includes the cost per mile that you drove and airline, train or bus fees for travel to medical care. It also can cover expenses for meals and lodging if you go out of town for care.
"It's the incidental, out-of-pocket expenses that are often overlooked because they are hard to re-create after the fact," said Mark Steber, chief tax officer of Jackson Hewitt Tax Service.
Patients who start traveling for medical care should also start tracking their out-of-pocket expenses.
In general, it makes good sense to track all medical expenses every year, just in case they start piling up and you wind up qualifying for the deduction.

How much can it save me?

Any deductions have less of an impact than a tax credit, which directly lowers tax bills dollar for dollar by the amount of the credit. Deductions lower the income amount on which the tax is based.
The taxpayer's benefit largely depends on income and medical bill size. Perlman offers a hypothetical example using a married couple with $100,000 in adjusted gross income in the 25 percent tax bracket. If they have $1,000 in deductible medical expenses after they reach 7.5 percent of their adjusted gross income, they will lower their taxes by $250.
If they have $2,000 they can claim, that will lower their taxes by $500.
A small percentage of taxpayers use this benefit every year. About 10 million returns listed medical and dental deductions in 2009, according to the most recent data from the IRS. That amounted to only about 7 percent of total returns from that year.
The total may be small, but it grew 70 percent compared to 1999, when about 5.9 million returns listed the deductions.
The deduction will become harder to reach starting with 2013, when taxpayers will have to hit 10 percent of their adjusted gross income to qualify.

Sunday, February 5, 2012

Wisconsin offers new health care, day care income tax deductions

Wisconsin residents who use health savings accounts or who have children in day care will be able to take advantage of new tax breaks as they fill out their 2011 income tax returns this year. Companies that create jobs in Wisconsin also are in line for new benefits.
"One of the most important things to a lot of people is health savings accounts," said Wisconsin Department of Revenue secretary Richard Chandler.
The special accounts, set aside to cover medical expenses, have qualified for federal tax deductions but 2011 is the first year the state of Wisconsin is following suit.
People who have health insurance with high deductibles or who don't have health insurance are often those who use health savings accounts, said Mark Boebel, a partner in SVA Certified Public Accountants' tax services group, Madison.
"They are a way to put away money for medical expenses that aren't covered by insurance," he said. Boebel said the new benefit could provide up to $6,000 in additional tax deductions.
A bigger chunk of the cost of health care premiums will qualify for a state tax deduction.
In 2010, unemployed workers or workers whose employers did not pay any insurance costs could deduct 66.7 percent of their own expenses. For 2011, that deduction is 100 percent.
"You have quite a few people that are unemployed. If they're paying $10,000 (a year) for health care premiums to cover their family, an additional $3,300 of deductions would result in tax savings of anywhere from $150 to $200 over 2010," Boebel said.
Workers whose employers pay part of the cost of health insurance premiums will be able to deduct 25 percent of their 2011 expense, up from 10 percent the previous year.
For the first time, Wisconsin residents who pay for day care for their children will get a state tax break to go along with the longtime federal tax break.
"Starting in 2011, they're allowing up to a $750 deduction for one child and a $1,500 deduction if you have two or more children," Boebel said. He said those who qualify for the $1,500 could save about $125 in taxes.
The state child care deduction is on top of the state child tax credit, and the deduction will increase in the next few years, to as much as $3,000 for one child or $6,000 for more than one dependent in 2014.
Businesses that create jobs in Wisconsin may qualify for new tax credits:
• A business that moved to Wisconsin in 2011 pays no corporate income taxes for two years.
• Companies that create more jobs can receive a tax deduction of up to $4,000 per position.
• Certain types of companies that boost research spending can get a bigger tax credit for those costs, as much as five to six times more, said Kimberly Anderson, tax partner with CliftonLarsonAllen, Middleton.
A company that qualified for a $5,000 research and development tax credit in 2010 could get as much as a $30,000 tax credit, if its R&D costs increased enough, Anderson said.
"There are still a lot of companies out there that are not taking advantage of this," she said.
Investors or business owners who have long-term capital gains may be able to delay paying taxes on those gains if they pump their entire investment, including the gains, into another qualified Wisconsin business within six months.
That benefit "has to be planned," Boebel said. The money must have been put into a separate account following the sale, so it may be more of a planning tool for 2012 taxes, he said.

Saturday, February 4, 2012

4 Must-Have Tax Apps

Tax year 2011 may be over, but tax season 2012 is just getting under way. Don’t settle for less this year. There are some really great apps out there that can help you stay organized, even on the go.

1. MileBug helps you keep track of your mileage, as well as any expenses you might incur along the way. Perfect for deducting business travel! Available in the iTunes App Store for $2.99 and the Android Market for $1.99.
2. XpenseTrackerallows you to keep track of all of your business expenses in one place – including mileage. XpenseTracker allows you to export your expenses to your desktop to load into Excel. If you like to keep track of your business receipts with the camera on your phone, all photo receipts can also be exported to your computer. This all-inclusive app is available in the Apple App Store for the iPhone and iPad and, at only $4.99, is basically a steal.
3. IRS App – If you like going straight to the source with questions about taxes, this is the app for you. It’s compatible with your iPhone, iPod Touch, or iPad, providing you’re running at least iOS 4.2. And only 99¢!
4. Shoeboxed– A receipt tracker and reader that allows you to use your iPhone camera to keep track of all of your purchases. When it comes time to itemize, you’ll be ready to maximize your tax return. This app is available in the Apple App Store for the iPhone and iPad. Best of all? It’s free!

Friday, February 3, 2012

Choosing Your Income Tax Preparer

New paid preparer regulations which include registration with the IRS, testing by the IRS and continuing education will affect 350,000 paid income tax return preparers beginning in 2012. Previously there were no minimum education requirements, no testing, and no continuing education requirements for someone to prepare income tax returns for a fee.
Effective 1/1/12, individuals preparing income tax returns for compensation must obtain a PTIN (Preparer Tax Identification Number) from the IRS. In order to obtain a PTIN the individual preparing the returns must be an attorney, a certified public accountant, an IRS enrolled agent, or must be someone supervised by one of these professionals. Otherwise the preparer will be required to pass a competency test developed and administered by the IRS and must take continuing education courses annually in order to renew their PTIN with the IRS.
If you pay someone to prepare your tax return, the IRS urges you to choose that preparer wisely. Taxpayers are legally responsible for what's on their tax return even if it is prepared by someone else. So, it is important to choose carefully when hiring an individual or firm to prepare your return.
This year, the IRS wants to remind all taxpayers that they should use only preparers who sign the returns they prepare and enter their Preparer Tax Identification Numbers (PTINs).
Here are a few points to keep in mind when someone else prepares your return:
• Check the person's qualifications. In addition to making sure they have a PTIN, ask if the preparer is affiliated with a professional organization and attends continuing education classes.
• Check the preparer's history. Check to see if the preparer has a questionable history with the Better Business Bureau and check for any disciplinary actions and licensure status through the state boards of accountancy for certified public accountants; the state bar associations for attorneys; and the IRS Office of Enrollment for enrolled agents.
• Find out about their service fees. Avoid preparers who base their fee on a percentage of your refund or those who claim they can obtain larger refunds than other preparers. Under no circumstances should all or part of your refund be directly deposited into a preparer's bank account.
• Ask if they offer electronic filing. Any paid preparer who prepares and files more than 10 returns for clients must file the returns electronically, unless the client opts to file a paper return.
• Make sure the tax preparer is accessible. Make sure you will be able to contact the tax preparer after the return has been filed, even after the April due date, in case questions arise.
• Provide all records and receipts needed to prepare your return. Reputable preparers will request to see your records and receipts and will ask you multiple questions to determine your total income and your qualifications for expenses, deductions and other items.
• Never sign a blank return. Avoid tax preparers that ask you to sign a blank tax form.
• Review the entire return before signing it. Before you sign your tax return, review it and ask questions. Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.
• Make sure the preparer signs the form and includes his or her preparer tax identification number (PTIN). A paid preparer must sign the return and include his or her PTIN as required by law. Although the preparer signs the return, you are responsible for the accuracy of every item on your return. The preparer must also give you a copy of the return.

Thursday, February 2, 2012

Thanks Mitt and Newt: A Dozen Tax Tips for the Rest of Us.


While the punditocracy dives into the details and debates the vices and virtues of Mitt Romney's and Newt Gingrich's 2010 tax returns, we decided to see if we could glean any ideas that might help you with your taxes ... and maybe even save you some money.

We found a gold mine for ordinary folks who'll never need a Swiss bank account or have to file forms like the Form 926 "Return by a U.S. Transferor of Property to a Foreign Corporation" or Schedule M of Form 5471 "Transactions Between Controlled Foreign Corporation and Shareholders or Other Related Persons" that were attached to Romney's return.

Don't Forget Tax-free Interest

If you think Romney and Gingrich disagree about undocumented immigrants, their tax returns suggest that they're polar opposites when it comes to investing in municipal bonds to earn tax-free interest.

The former speaker's 2010 return shows he earned $10,754 of tax-free interest, compared with $26,655 of the taxable variety. Romney's forms show just $557 of tax-free interest and $3,295,727 of taxable interest income.

Remember, to figure the taxable-equivalent yield of a tax-free bond, divide the tax-free yield by 1 minus your marginal tax rate. Since Gingrich's marginal rate is 35%, a 3.5% tax-free yield is worth the same as a 5.38% taxable yield (3.5/0.65). Romney was hit by the alternative minimum tax in 2010, so his marginal rate was 28%. Avoiding a 28% tax makes a 3.5% tax-free rate equal to a 4.86% taxable yield (3.5/0.72).

Remember Points on a Second Home

When you buy your principal residence, points you pay to get your mortgage are fully deductible on your tax return for the year you close. When it comes to a second home (or a rental property or a refinancing), however, that cost must be amortized over the life of the loan -- 1/30th a year if you have a 30-year mortgage, for example. That can lead to relatively small -- and relatively easy-to-forget -- write offs.

But if you follow Gingrich's example, you won't miss this tax break. His return shows a $19 deduction for a portion of the $2,261 it cost him to refinance the mortgage on a rental property he owns in Whitehall, Wisc. Since the refi was in October, 2010, he got to write off one-fourth of 1/30th of the cost on that year's return.

Donate Appreciated Assets to Charity

Anyone planning a substantial charitable gift this year should take a page from Romney's playbook and consider donating appreciated securities rather than cash.

As long as you have owned the asset for more than a year, you get to deduct the full fair market value of the gift, not what you paid for it. (And neither you nor the charity ever has to pay tax on the appreciation that accrued while you owned the stock.)

Romney's 2010 return shows that he and his wife, Ann, donated $1,525,167 in cash and another $1,458,807 in non-cash gifts -- much of it appreciated stock in Domino's Pizza.

Write off Alimony Payments

Even if you don't itemize deductions, you can write off alimony paid to an ex-spouse ... as long as you also include the ex's Social Security number so the IRS can make sure he or she reports the amount as taxable income. Gingrich’s return shows that he made payments of $19,800 to one recipient in 2010. Since the Social Security number is blacked out on the publicly disclosed form, it’s unclear which of his two ex-wives received the payments.

Make the Most of Worthless Stock

The tax law allows you to deduct the loss on a stock that becomes worthless, treating it as though you sold it for $0 at the end of the year in which it lost all value. That appears to have happened to at least one of Mitt Romney's investments. His return shows a $63,511 loss on shares in an investment fund that were disposed of for $0.

Beware the Passive Loss Rule

Congress has created special rules for what it calls "passive activities," a group that includes most investments in real estate and limited partnerships.

Basically losses from such investments can only be deducted against gains from similar activities. There's an exception that allows up to $25,000 of loss from rental real estate to be deducted if you are "actively" involved in the rental.

We don't know if Gingrich is actively involved in the rental in Wisconsin, but even if he was, he would not have been permitted to deduct the $4,646 loss he reported. The $25,000 allowance gradually disappears as adjusted gross income moves between $100,000 and $150,000. With AGI of $3,142,066, Gingrich is out of luck. (He can stockpile the disallowed loss and deduct it when he sells the property.) By the way, the Romneys' return shows that the passive-loss rule blocked the deduction of over $2 million in losses from limited partnerships.

Pay the Nanny Tax

Plenty of politicians have gotten in trouble in the past for failing to pay Social Security taxes for their child-care providers and household help. For 2012, if you pay household help more than $1,800, you are required to file a Schedule H with your return and pay Social Security and Medicare taxes for your employee.

Both Romney and Gingrich included the form and paid the piper for their household help in 2010. Ann Romney reported that she paid four household employees a total of $20,603 in 2010 and paid $3,152 in taxes for them. Gingrich reported that he paid household help $14,774 and paid $2,260 in Social Security and Medicare tax.

Avoid the Underpayment Penalty

The federal income tax is on a pay-as-you-earn system and if you don't pay in enough during the year -- via withholding from paychecks or estimated tax payments -- the IRS will slap on an underpayment penalty. Generally, you avoid the penalty if your payments during the year are at least 90% of what you owe. Gingrich owed an extra $382,734 when he filed his 2010 return, 38% of his tax bill for the year. That triggered an underpayment penalty of $1,543.

Don't Overwithhold

The opposite side of the coin from the underpayment penalty is paying in too much doing the year. About 75% of all taxpayers are in this boat, and get tax refunds every spring. We think that's silly -- and we have a calculator to help you match withholding from your paychecks to what you'll owe for the year. Our calculator won't help Romney, though, because he has no wages from which to withhold. He overpays via quarterly estimated tax payments, and, boy, does he overpay! His 2010 return shows that he paid in $1,609,441 more than the $3,009,766 that he owed. He didn't ask for a refund, though. He let the IRS keep the cash as a down payment on his 2011 tax bill.

Write off Medical Insurance Premiums

A special rule allows qualifying self-employed workers to deduct 100% of their medical insurance premiums, even if they don't itemize deductions. That might have helped Romney, who reported that he paid $14,176 in self-employed health insurance premiums in 2010. But he didn't get the tax break. Rather than claim the special deduction, Romney reported the premiums as a medical expense on Schedule A, where a deduction is allowed only to the extent such expenses exceed 7.5% of adjusted gross income. Romney's $14,176 of premiums fell well short of $1,623,488 (7.5% of his AGI).