Top 10 Tips about Tax Breaks for the Military
If you are in the U. S. Armed Forces, special tax breaks may apply to you. For example, some types of pay are not taxable. Certain rules apply to deductions or credits that you may be able to claim that can lower your tax. In some cases, you may get more time to file your tax return. You may also get more time to pay your income tax. Here are the top 10 IRS tax tips about these rules:
- Deadline Extensions. Some members of the military, such as those who serve in a combat zone, can postpone some tax deadlines. If this applies to you, you can get automatic extensions of time to file your tax return and to pay your taxes.
- Combat Pay Exclusion. If you serve in a combat zone, certain combat pay you get is not taxable. You won’t need to show the pay on your tax return because combat pay is not part of the wages reported on your Form W-2, Wage and Tax Statement. If you serve in support of a combat zone, you may qualify for this exclusion.
- Earned Income Tax Credit or EITC. If you get nontaxable combat pay, you can include it to figure your EITC. Doing so may boost your credit. Even if you do, the combat pay stays nontaxable.
- Moving Expense Deduction. You may be able to deduct some of your unreimbursed moving costs. This applies if the move is due to a permanent change of station.
- Uniform Deduction. You can deduct the costs of certain uniforms that you can’t wear while off duty. This includes the costs of purchase and upkeep. You must reduce your deduction by any allowance you get for these costs.
- Signing Joint Returns. Both spouses normally must sign a joint income tax return. If your spouse is absent due to certain military duty or conditions, you may be able to sign for your spouse. In other cases when your spouse is absent, you may need a power of attorney to file a joint return.
- Reservists’ Travel Deduction. If you’re a member of the U.S. Armed Forces Reserves, you may deduct certain costs of travel on your tax return. This applies to the unreimbursed costs of travel to perform your reserve duties that are more than 100 miles away from home.
- ROTC Allowances. Some amounts paid to ROTC students in advanced training are not taxable. This applies to allowances for education and subsistence. Active duty ROTC pay is taxable. For instance, pay for summer advanced camp is taxable.
- Civilian Life. If you leave the military and look for work, you may be able to deduct some job search expenses. You may be able to include the costs of travel, preparing a resume and job placement agency fees. Moving expenses may also qualify for a tax deduction.
- Tax Help. Most military bases offer free tax preparation and filing assistance during the tax filing season. Some also offer free tax help after April 15.
If You Get an IRS Notice, Here’s What to Do
IRS Summertime Tax Tip 2015-05
Each year the IRS mails millions of notices and letters to taxpayers. If you receive a notice from the IRS, here is what you should do:
- Don’t Ignore It. You can respond to most IRS notices quickly and easily. It is important that you reply right away.
- Focus on the Issue. IRS notices usually deal with a specific issue about your tax return or tax account. Understanding the reason for your notice is important before you can comply.
- Follow Instructions. Read the notice carefully. It will tell you if you need to take any action to resolve the matter. You should follow the instructions.
- Correction Notice. If it says that the IRS corrected your tax return, you should review the information provided and compare it to your tax return.
If you agree, you don’t need to reply unless a payment is due.
If you don’t agree, it’s important that you respond to the IRS. Write a letter that explains why you don’t agree. Make sure to include information and any documents you want the IRS to consider. Include the bottom tear-off portion of the notice with your letter. Mail your reply to the IRS at the address shown in the lower left part of the notice. Allow at least 30 days for a response from the IRS.
- Premium Tax Credit. The IRS may send you a letter asking you to clarify or verify your premium tax credit information. The letter may ask for a copy of your Form 1095-A, Health Insurance Marketplace Statement. You should follow the instructions on the letter that you receive. This will help the IRS verify information and issue the appropriate refund.
- No Need to Visit IRS. You can handle most notices without calling or visiting the IRS. If you do have questions, call the phone number in the upper right corner of the notice. You should have a copy of your tax return and the notice with you when you call.
- Keep the Notice. Keep a copy of the notice you get from the IRS with your tax records.
- Watch Out for Scams. Don’t fall for phone and phishing email scams that use the IRS as a lure. The IRS first contacts people about unpaid taxes by mail – not by phone. The IRS does not initiate contact with taxpayers by email, text or social media.
IRS data breach: What the IRS is doing and steps taxpayers can take.
Scope of the scam was small. About 23 million taxpayers used the IRS online Get Transcript application this past filing season. IRS says there were 200,000 attempts to gain access to Get Transcript, and 100,000 of these succeeded. It stressed that the scammers did not gain access to other applications, such as Where's My Refund.
What IRS is doing. IRS has temporarily shut down the online version of its Get Transcript service, but it says transcripts may still be ordered using the Get Transcript by Mail service. To use the latter service, taxpayers need Social Security number (SSN) or Individual Tax Identification Number (ITIN), date of birth, and address from their latest tax return.
As for taxpayers that were affected by the scam, IRS says it is taking several steps, including marking the accounts of affected taxpayers on its core tax account system to protect them against identity theft if someone else tries to file a tax return in their name, both right now and in 2016. IRS is also sending letters to affected taxpayers with additional information and offering credit monitoring to those whose transcript information was accessed.
IRS also urged taxpayers not to call to see if they will be getting a letter, as phone lines remain extremely busy due to staffing limitations and personnel won't have access to additional information. Affected taxpayers will be receiving a letter directly advising them about the attempted or successful unauthorized access to their transcript and how to activate the protections IRS is offering them.
In the past, IRS hasn't notified victims of scammers and didn't release copies of fraudulent returns once individuals discovered they had been victimized. In response to a request made by Senator Kelly Ayotte (R-NH), IRS Commissioner Koskinen last week wrote her to say IRS has changed its policy. It will issue a procedure that will enable victims to receive, upon request, redacted copies of fraudulent returns filed in their name and SSN.
What taxpayers can do. IRS gives the common sense advice that individuals should think twice before posting publicly personal or financial information on social media or the Internet. (It's been reported that scammers can troll through vast amounts of information online, assemble the pertinent data, and then use it to impersonate taxpayers.) IRS also says individuals should also make sure their computers are up to date with the latest security software.
IRS Offers Tips for Year-End Giving
WASHINGTON Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years. Some of these changes include the following:
Special Charitable Contributions for Certain IRA Owners
This provision, currently scheduled to expire at the end of 2011, offers older owners of individual retirement accounts (IRAs) a different way to give to charity. An IRA owner, age 70½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charity. This option, created in 2006, is available for distributions from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.
To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the transfer.
Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.
Amounts transferred to a charity from an IRA are counted in determining whether the owner has met the IRA?s required minimum distribution. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.
Rules for Clothing and Household Items
To be deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances and linens.
Guidelines for Monetary Donations
To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.
Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
These requirements for the deduction of monetary donations do not change the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.
To help taxpayers plan their holiday-season and year-end giving, the IRS offers the following additional reminders:
- Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2011 count for 2011. This is true even if the credit card bill isn?t paid until 2012. Also, checks count for 2011 as long as they are mailed in 2011.
- Check that the organization is qualified. Only donations to qualified organizations are tax-deductible. IRS Publication 78, searchable and available online, lists most organizations that are qualified to receive deductible contributions. It can be found at IRS.gov under Search for Charities. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in Publication 78.
- For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. Use the 2011 Form 1040 Schedule A to determine whether itemizing is better than claiming the standard deduction.
- For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity?s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
- The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor?s tax return.
- If the amount of a taxpayer?s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.
- And, as always it?s important to keep good records and receipts.
IRS.gov has Additional information on charitable giving including:
- Charities & Non-Profits
- Publication 526, Charitable Contributions.
- On-line mini-course, Can I Deduct My Charitable Contributions?
Five Tips for Reducing Tax-Time Stress
Tax preparation doesn't need to give you a headache. There are several ways to make it easier on yourself.
1. Don't procrastinate. Resist the temptation to put off your taxes until the very last minute. Rushing to meet the filing deadline may cause you to overlook potential sources of tax savings and will likely increase your risk of making an error.
2. Visit the IRS website. More than 322 million visits were made to www.irs.gov in 2011. Make 1040 Central your first stop to check for the latest news and find answers to your questions about tax filing.
3. Contact us. Drop your tax return information off with us this year or schedule an appointment and let us prepare it for you.
4. Don?t panic if you can't pay. If you can't pay the full amount of taxes you owe by the mid-April deadline, you should still file your return by the deadline and pay as much as you can to avoid penalties and interest. More than 75 percent of taxpayers eligible for an Installment Agreement can apply using the web-based Online Payment Agreement application available at www.irs.gov. To find out more about this simple and convenient process, type Online Payment Agreement? in the search box at www.irs.gov. You can also contact the IRS to discuss your payment options.
5. Request an extension of time to file ? but pay on time. If the deadline clock is ticking, you can get an automatic six-month extension through Oct. 15. However, this extension of time to file, which must be filed or postmarked by the April 17 deadline, does not give you more time to pay any taxes due. If you have not paid at least 90 percent of the total tax due by the April deadline you may also be subject to an estimated tax penalty. You can obtain an extension through Free File at www.irs.gov/freefile. Or, file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, available for downloading at www.irs.gov or by calling 800-TAX-FORM (800-829-3676) to have a paper form mailed to you. Allow at least 10 days for mailed forms and publications.
Payroll Tax Cut Temporarily Extended into 2012
Nearly 160 million workers will benefit from the extension of the reduced payroll tax rate that has been in effect for 2011. The Temporary Payroll Tax Cut Continuation Act of 2011 temporarily extends the two percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through Feb. 29, 2012. This reduced Social Security withholding will have no effect on employees? future Social Security benefits.
Employers should implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31, 2012. For any Social Security tax over-withheld during January, employers should make an offsetting adjustment in workers? pay as soon as possible but not later than March 31, 2012.
Employers and payroll companies will handle the withholding changes, so workers should not need to take any additional action.
Under the terms negotiated by Congress, the law also includes a new recapture provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year amount). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).
This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions. The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. With the possibility of a full-year extension of the payroll tax cut being discussed for 2012, the IRS will closely monitor the situation in case future legislation changes the recapture provision.
The IRS will issue additional guidance as needed to implement the provisions of this new two-month extension, including revised employment tax forms and instructions and information for employees who may be subject to the new ?recapture? provision. For most employers, the quarterly employment tax return for the quarter ending March 31, 2012 is due April 30, 2012.
New Tax Guide Helps People Save on Their 2011 Taxes
Taxpayers can get the most out of various recovery tax benefits and get a jump on preparing their 2011 federal income tax returns by consulting a newly revised comprehensive tax guide now available on IRS.gov.
Publication 17, Your Federal Income Tax, features details on taking advantage of a wide range of tax-saving opportunities, such as the American opportunity credit for parents and college students, and the child tax credit and expanded earned income tax credit for low- and moderate-income workers. This useful 303-page guide also provides more than 5,000 interactive links to help taxpayers quickly get answers to their questions.
Publication 17 has been published annually by the IRS since the 1940s and has been available on the IRS web site since 1996. As in prior years, this publication is packed with basic tax-filing information and tips on what income to report and how to report it, figuring capital gains and losses, claiming dependents, choosing the standard deduction versus itemizing deductions, and using IRAs to save for retirement.
Besides Publication 17, IRS.gov offers many other helpful resources for those doing year-end tax planning. Many 2011 forms are already posted, and updated versions of other forms, instructions and publications are being posted almost every day. Forms already available include Form 1040, short Forms 1040A and 1040EZ, Schedule A for itemizing deductions and new Form 8949 for reporting sales of stocks, bonds and other capital assets.
Six Year-End Tips to Reduce 2011 Taxes
The IRS wants to remind all taxpayers that with the New Year fast approaching, there is still time for you to take steps that can lower your 2011 taxes. However, you usually need to take action no later than Dec. 31 in order to claim certain tax benefits.
Here are six tax-saving tips for you to consider before the calendar turns to 2012:
1. Make Charitable Contributions ? If you itemize deductions, your donations must be made to qualified charities no later than Dec. 31 to be deductible for 2011. You must have a canceled check, a bank statement, credit card statement or a written statement from the charity, showing the name of the charity and the date and amount of the contribution for all cash donations. Donations charged to a credit card by Dec. 31 are deductible for 2011, even if the bill isn't paid until 2012. If you donate clothing or household items, they must be in good used condition or better to be deductible.
2. Install Energy-Efficient Home Improvements ? You still have time this year to make energy-saving and green-energy home improvements and qualify for either of two home energy credits. Installing energy efficient improvements such as insulation, new windows and water heaters to your main home can provide up to $500 in tax savings. Homeowners going green should also check out the Residential Energy Efficient Property Credit, designed to spur investment in alternative energy equipment. The credit equals 30 percent of the cost of qualifying solar, wind, geothermal, or heat pump property. For details see Special Edition Tax Tip 2011-08, Home Energy Credits Still Available for 2011 on the IRS.gov website.
3. Consider a Portfolio Adjustment ? Check your investments for gains and losses and consider sales by Dec. 31. You may normally deduct capital losses up to the amount of capital gains, plus $3,000 from other income. If your net capital losses are more than $3,000, the excess can be carried forward and deducted in future years.
4. Contribute the Maximum to Retirement Accounts ? Elective deferrals you make to employer-sponsored 401(k) plans or similar workplace retirement programs for 2011 must be made by Dec. 31. However, you have until April 17, 2012, to set up a new IRA or add money to an existing IRA and still have it count for 2011. You normally can contribute up to $5,000 to a traditional or Roth IRA, and up to $6,000 if age 50 or over. The Saver?s Credit, also known as the Retirement Savings Contribution Credit, is also available to low- and moderate-income workers who voluntarily contribute to an IRA or workplace retirement plan. The maximum Saver?s Credit is $1,000, and $2,000 for married couples, but the amount allowed could be reduced or eliminated for some taxpayers in part because of the impact of other deductions and credits.
5. Make a Qualified Charitable Distribution ? If you are age 70½ or over, the qualified charitable distribution (QCD) allows you to make a distribution paid directly from your individual retirement account to a qualified charity, and exclude the amount from gross income. The maximum annual exclusion for QCDs is $100,000. The excluded amount can be used to satisfy any required minimum distributions that the individual must otherwise receive from their IRAs in 2011. This benefit is available even if you do not itemize deductions.
6. Don't Overlook the Small Business Health Care Tax Credit ? If you are a small employer who pays at least half of your employee health insurance premiums, you may qualify for a tax credit of up to 35 percent of the premiums paid. An employer with fewer than 25 full-time employees who pays an average wage of less than $50,000 a year may qualify. For more information see the Small Business Health Care Tax Credit page on IRS.gov.
And here is one final tip to remember: you should always save receipts and records related to your taxes. Good recordkeeping is a must because you need records to prepare your tax return, and it will help you to file quickly and accurately next year.
For more year-end tax information and to access all IRS forms and publications, visit the IRS website at http://www.irs.gov.
Make it Easy on Yourself: Choose the Simplest Tax Form
If you're among the taxpayers who still file a paper return, the IRS reminds you that it no longer mails paper tax packages, a step the agency took after continued growth in electronic filing, the availability of free options and as a way to reduce costs. If you're e-filing, the software will choose the best form for you, but if you're taking pencil to paper, make it as simple as possible by choosing the simplest tax form for your situation.
The quickest way to get forms and instructions is the IRS website at www.irs.gov. Taxpayers can also get them from a local IRS office, a participating community outlet like many libraries and post offices, or from the IRS's automated forms line at 1-800-TAX-FORM.
Here are some general rules to consider when deciding which paper tax form to file.
Use the 1040EZ if:
- Your taxable income is below $100,000
- Your filing status is single or married filing jointly
- You are not claiming any dependents
- Your interest income is $1,500 or less
Use the 1040A if:
- Your taxable income is below $100,000
- You have capital gain distributions
- You claim certain tax credits
- You claim adjustments to income for IRA contributions and student loan interest
If you cannot use the 1040EZ or the 1040A, you?ll probably need to file using the 1040. Among the reasons you must use the 1040 are:
- Your taxable income is $100,000 or more
- You claim itemized deductions
- You are reporting self-employment income
- You are reporting income from sale of property
You can gain quick and easy access to IRS forms and instructions or find out more about e-file by visiting www.irs.gov. Tax products are available 24 hours a day, seven days a week and often appear online well before they are available on paper. To view and download tax products, visit the IRS website and select Forms and Publications.
IRS Kicks Off 2012 Tax Season with Deadline Extended to April 17
WASHINGTON The Internal Revenue Service today opened the 2012 tax filing season by announcing that taxpayers have until April 17 to file their tax returns. The IRS encourages taxpayers to e-file as it is the best way to ensure accurate tax returns and get faster refunds.
The IRS also announced a number of improvements to help make this tax season easy for taxpayers. This includes new navigation features and helpful information on IRS.gov and a new pilot to allow taxpayers to use interactive video to get help with tax issues.
At the IRS, we're working hard to make the process of filing your taxes as quick and easy as possible, said IRS Commissioner Doug Shulman. Providing quality service is one of our top priorities. It not only reduces the burden on taxpayers, but also helps in filing an accurate return right from the start.
Taxpayers will have until Tuesday, April 17 to file their 2011 tax returns and pay any tax due because April 15 falls on a Sunday, and Emancipation Day, a holiday observed in the District of Columbia, falls this year on Monday, April 16. According to federal law, District of Columbia holidays impact tax deadlines in the same way that federal holidays do; therefore, all taxpayers will have two extra days to file this year. Taxpayers requesting an extension will have until Oct. 15 to file their 2011 tax returns.
The IRS expects to receive more than 144 million individual tax returns this year, with most of those being filed by the April 17 deadline.
The IRS will begin accepting e-file and Free File returns on Jan. 17, 2012. Additional details about e-file and Free File will be announced later this month. IRS Free File provides options for free brand-name tax software or online fillable forms plus free electronic filing. Everyone can use Free File to prepare a federal tax return. Taxpayers who make $57,000 or less can choose from approximately 20 commercial software providers. There?s no income limit for Free File Fillable Forms, the electronic version of IRS paper forms, which also includes free e-filing.
The IRS also reminds paid tax return preparers they must have and include a Preparer Tax Identification Number (PTIN) on all returns they prepare. All PTINs must be renewed for 2012. Tax return preparers can obtain or renew PTINs online.
The IRS continues to focus on taxpayer service. The best way for taxpayers to get answers to their questions is by visiting the IRS website at IRS.gov. The IRS has updated the front page of the IRS website to make it easier for taxpayers to get key forms, information and file tax returns. The front page also has links to taxpayer-friendly videos on the IRS YouTube channel. More improvements are planned for IRS.gov in the months ahead.
Last year, the IRS unveiled IRS2Go, its first smartphone application that lets taxpayers check on the status of their tax refund and obtain helpful tax information. The IRS reminds Apple users that they can download the free IRS2Go application by visiting the Apple App Store and Android users can visit the Android Marketplace to download the free IRS2Go app.
Individuals making $50,000 or less can use the Volunteer Income Tax Assistance program for free tax preparation and, in many cases, free electronic filing. Individuals age 60 and older can take advantage of free tax counseling and basic income tax preparation through Tax Counseling for the Elderly. Information on these programs can be found at IRS.gov.
For tax law questions or account inquiries, taxpayers can also call our toll-free number (7 a.m. to 7 p.m. local time) or visit a taxpayer assistance center, the locations of which are listed on IRS.gov.
The IRS has begun a new pilot program where taxpayers can get assistance through two-way video conferencing. The IRS is conducting a limited roll out of this new video conferencing technology at 10 IRS offices and two other sites, and may expand to further sites in the future. A list of locations is available on IRS.gov.
Check for a Refund
Once taxpayers file their federal return, they can track the status of their refunds by using the Where's My Refund tool, which taxpayers can get to using the IRS2Go phone app or from the front page of www.IRS.gov. By providing their Taxpayer Identification Numbers, filing status, and the exact whole dollar amount of their anticipated refund taxpayers can generally get information about their refund 72 hours after the IRS acknowledges receipt of their e-filed returns, or three to four weeks after mailing a paper return.
IRS Offers Top 10 Tax-Time Tips
The income tax filing season has begun and important tax documents should be arriving in your mailbox. Even though your return is not due until April, you can make tax time easier on yourself with an early start. Here are the Internal Revenue Service?s top 10 tips to ensure a smooth tax-filing process.
1. Gather your records Round up any documents you?ll need when filing your taxes: receipts, canceled checks and other documents that support income or deductions you?re claiming on your return.
2. Be on the lookout W-2s and 1099s will be coming soon; you?ll need these to file your tax return.
3. Have a question? Use the Interactive Tax Assistant available on the IRS website to find answers to your tax questions about credits, deductions, general filing questions and more.
4. Use Free File Let Free File do the hard work for you with brand-name tax software or online fillable forms. It's available exclusively at www.irs.gov. Everyone can find an option to prepare their tax return and e-file it for free. If you made $57,000 or less, you qualify to use free tax software offered through a private-public partnership with manufacturers. If you made more or are comfortable preparing your own tax return, there's Free File Fillable Forms, the electronic versions of IRS paper forms. Visit www.irs.gov/freefile to review your options.
5. Try IRS e-file IRS e-file is the safe, easy and most common way to file a tax return. Last year, 79 percent of taxpayers - 106 million people - used IRS e-file. Many tax preparers are now required to use e-file. If you owe taxes, you have payment options to file immediately and pay by the tax deadline. Best of all, the IRS issues refunds to 98 percent of electronic filers by direct deposit within 14 days, if there are no problems, and some may be issued in as few as 10 days.
6. Consider other filing options There are many options for filing your tax return. You can prepare it yourself or go to a tax preparer. You may be eligible for free face-to-face help at a volunteer site. Give yourself time to weigh all the options and find the one that best suits your needs.
7. Consider direct deposit If you elect to have your refund directly deposited into your bank account, you?ll receive it faster than a paper check in the mail.
8. Visit the official IRS website often The IRS website at www.irs.gov is a great place to find everything you need to file your tax return: forms, publications, tips, answers to frequently asked questions and updates on tax law changes.
9. Remember this number: 17 Check out IRS Publication 17, Your Federal Income Tax, on the IRS website. It?s a comprehensive resource for taxpayers, highlighting everything you?ll need to know when filing your return.
10. Review! Review! Review! Don?t rush. We all make mistakes when we rush. Mistakes slow down the processing of your return. Be sure to double check all the Social Security numbers and math calculations on your return as these are the most common errors. Don?t panic! If you run into a problem, remember the IRS is here to help. Start with www.irs.gov.
Top 10 Helpful Features on the IRS Website
Navigate your way through the tax season online and skip waiting in line. All you need is a computer and Internet access because the IRS website has a wealth of free information and online tax support. Here are the top 10 reasons to visit www.irs.gov.
1. Unlimited access - get answers 24 hours a day, seven days a week If you find yourself working on your tax return over the weekend, there?s no need to wait to get a form or an answer to a question. Visit the IRS website; it's accessible all day, every day. You'll find answers to many frequently asked questions, and the helpful Interactive Tax Assistant is a tax law resource that takes you through a series of questions and provides you with responses to tax law questions. Much of the website and many forms and publications are also available in Spanish.
2. Use Free File Let Free File do the hard work for you with brand-name tax software or online fillable forms. It's available exclusively at www.irs.gov. Everyone can find an option to prepare their tax return and e-file it for free. If you made $57,000 or less, you qualify to use free tax software offered through a private-public partnership with manufacturers. If you made more or are comfortable preparing your own tax return, there's Free File Fillable Forms, the electronic versions of IRS paper forms. Visit www.irs.gov/freefile to review your options.
3. Try IRS e-file IRS e-file is the safe, easy and most common way to file a tax return. Last year, 78 percent of taxpayers - 112 million people - used IRS e-file. Many tax preparers are now required to use e-file If you owe taxes, you have payment options to file immediately and pay by the tax deadline. Best of all, the IRS issues refunds to 98 percent of electronic filers by direct deposit within 14 days, if there are no problems, and some may be issued in as few as 10 days.
4. Check the status of your tax refund Whether you chose direct deposit or asked the IRS to mail you a check, you can check the status of your refund through Where?s My Refund?
5. Make payments electronically You can authorize an electronic funds withdrawal, use a credit or debit card, or enroll in the U.S. Treasury?s Electronic Federal Tax Payment System to pay your federal taxes. Electronic payment options are a convenient, safe and secure way to pay taxes.
6. Find out if you qualify for the Earned Income Tax Credit EITC is a tax credit for many people who earned less than $49,000 in 2011. Find out if you are eligible by answering some questions and providing basic income information using the EITC Assistant.
7. Get tax forms and publications You can view and download tax forms and publications any hour of the day or night.
8. Calculate the right amount of withholding on your W-4 The IRS Withholding Calculator can help ensure you don?t have too much or too little income tax withheld from your pay.
9. Request a payment agreement Paying your taxes in full and on time avoids unnecessary penalties and interest. However, if you cannot pay your balance in full you may be eligible to use the Online Payment Agreement Application to request an installment agreement.
10. Get information about the latest tax law changes Learn about tax law changes that may affect your tax return. Special sections of the website highlight changes that affect individual or business taxpayers.
Four Ways to Get IRS Forms and Publications
The Internal Revenue Service has free tax forms and publications on a wide variety of topics. Because of continued growth in electronic filing, the availability of free options to taxpayers and to reduce costs, the IRS discontinued the automatic mailing of paper tax packages last tax season.
If you need IRS forms and publications, here are four easy methods for getting them.
1. On the Internet You can access forms and publications on the IRS website 24 hours a day, seven days a week, at www.irs.gov.
2. IRS Taxpayer Assistance Centers There are 401 TACs across the country where IRS offers face-to-face assistance to taxpayers, and where taxpayers can pick up many IRS forms and publications. Visit www.irs.gov and go to Contact My Local Office on the Individuals page to find a list of TAC locations by state. On the Contact My Local Office page, you can also select Office Locator and enter your zip code to find the IRS walk-in office nearest you as well as a list of the services available at specific offices.
3. At convenient locations in your community During the tax filing season, many libraries and post offices offer free tax forms to taxpayers. Some libraries also have copies of commonly requested publications. Many large grocery stores, copy centers and office supply stores have forms you can photocopy or print from a CD.
4. By mail You can call 1-800-TAX-FORM (800-829-3676) Monday through Friday 7 a.m. to 7 p.m. local time ? except Alaska and Hawaii which follow Pacific time ? to order current year forms, instructions and publications as well as prior year forms and instructions by mail. You will receive your order by mail, usually within 10 days.
Ten Tips to Help You Choose a Tax Preparer
Many people look for help from professionals when it's time to file their tax return. If you use a paid tax preparer to file your return this year, the IRS urges you to choose that preparer wisely. Even if a return is prepared by someone else, the taxpayer is legally responsible for what's on it. So, it's very important to choose your tax preparer carefully.
This year, the IRS wants to remind taxpayers to use a preparer who will sign the returns they prepare and enter their required Preparer Tax Identification Number (PTIN).
Here are ten tips to keep in mind when choosing a tax return preparer:
1. Check the preparer's qualifications. New regulations require all paid tax return preparers to have a Preparer Tax Identification Number. In addition to making sure they have a PTIN, ask if the preparer is affiliated with a professional organization and attends continuing education classes. The IRS is also phasing in a new test requirement to make sure those who are not an enrolled agent, CPA, or attorney have met minimal competency requirements. Those subject to the test will become a Registered Tax Return Preparer once they pass it.
2. Check on 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.
3. Ask 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. Also, always make sure any refund due is sent to you or deposited into an account in your name. Under no circumstances should all or part of your refund be directly deposited into a preparer's bank account.
4. 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. More than 1 billion individual tax returns have been safely and securely processed since the debut of electronic filing in 1990. Make sure your preparer offers IRS e-file.
5. 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.
6. 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. Do not use a preparer who is willing to electronically file your return before you receive your Form W-2 using your last pay stub. This is against IRS e-file rules.
7. Never sign a blank return. Avoid tax preparers that ask you to sign a blank tax form.
8. 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.
9. Make sure the preparer signs the form and includes their PTIN. A paid preparer must sign the return and include their 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.
10. Report abusive tax preparers to the IRS. You can report abusive tax preparers and suspected tax fraud to the IRS on Form 14157, Complaint: Tax Return Preparer. Download Form 14157 from www.irs.gov or order by mail at 800-TAX-FORM (800-829-3676).
Eight Facts to Help Determine Your Correct Filing Status
Determining your filing status is one of the first steps to filing your federal income tax return. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household and Qualifying Widow(er) with Dependent Child. Your filing status is used to determine your filing requirements, standard deduction, eligibility for certain credits and deductions, and your correct tax.
Some people may qualify for more than one filing status. Here are eight facts about filing status that the IRS wants you to know so you can choose the best option for your situation.
1. Your marital status on the last day of the year determines your marital status for the entire year.
2. If more than one filing status applies to you, choose the one that gives you the lowest tax obligation.
3. Single filing status generally applies to anyone who is unmarried, divorced or legally separated according to state law.
4. A married couple may file a joint return together. The couple?s filing status would be Married Filing Jointly.
5. If your spouse died during the year and you did not remarry during 2011, usually you may still file a joint return with that spouse for the year of death.
6. A married couple may elect to file their returns separately. Each person?s filing status would generally be Married Filing Separately.
7. Head of Household generally applies to taxpayers who are unmarried. You must also have paid more than half the cost of maintaining a home for you and a qualifying person to qualify for this filing status.
8. You may be able to choose Qualifying Widow(er) with Dependent Child as your filing status if your spouse died during 2009 or 2010, you have a dependent child, have not remarried and you meet certain other conditions.
There?s much more information about determining your filing status in IRS Publication 501, Exemptions, Standard Deduction, and Filing Information. Publication 501 is available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676). You can also use the Interactive Tax Assistant on the IRS website to determine your filing status. The ITA tool is a tax law resource on the IRS website that takes you through a series of questions and provides you with responses to tax law questions.
Don't be Scammed by Cyber Criminals
The Internal Revenue Service receives thousands of reports each year from taxpayers who receive suspicious emails, phone calls, faxes or notices claiming to be from the IRS. Many of these scams fraudulently use the IRS name or logo as a lure to make the communication appear more authentic and enticing. The goal of these scams known as phishing is to trick you into revealing your personal and financial information. The scammers can then use your information like your Social Security number, bank account or credit card numbers to commit identity theft or steal your money.
Here are five things the IRS wants you to know about phishing scams.
1. The IRS never asks for detailed personal and financial information like PIN numbers, passwords or similar secret access information for credit card, bank or other financial accounts.
2. The IRS does not initiate contact with taxpayers by email to request personal or financial information. If you receive an e-mail from someone claiming to be the IRS or directing you to an IRS site:
Do not reply to the message.
Do not open any attachments. Attachments may contain malicious code that will infect your computer.
Do not click on any links. If you clicked on links in a suspicious e-mail or phishing website and entered confidential information, visit the IRS website and enter the search term 'identity theft' for more information and resources to help.
3. The address of the official IRS website is www.irs.gov. Do not be confused or misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov. If you discover a website that claims to be the IRS but you suspect it is bogus, do not provide any personal information on the suspicious site and report it to the IRS.
4. If you receive a phone call, fax or letter in the mail from an individual claiming to be from the IRS but you suspect they are not an IRS employee, contact the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you. Report any bogus correspondence. You can forward a suspicious email to firstname.lastname@example.org.
5. You can help shut down these schemes and prevent others from being victimized. Details on how to report specific types of scams and what to do if you've been victimized are available at www.irs.gov. Click on "phishing" on the home page.
Six Important Facts about Dependents and Exemptions
Even though each individual tax return is different, some tax rules affect every person who may have to file a federal income tax return. These rules include dependents and exemptions. The IRS has six important facts about dependents and exemptions that will help you file your 2011 tax return.
1. Exemptions reduce your taxable income. There are two types of exemptions: personal exemptions and exemptions for dependents. For each exemption you can deduct $3,700 on your 2011 tax return.
2. Your spouse is never considered your dependent. On a joint return, you may claim one exemption for yourself and one for your spouse. If you?re filing a separate return, you may claim the exemption for your spouse only if they had no gross income, are not filing a joint return, and were not the dependent of another taxpayer.
3. Exemptions for dependents. You generally can take an exemption for each of your dependents. A dependent is your qualifying child or qualifying relative. You must list the Social Security number of any dependent for whom you claim an exemption.
4. If someone else claims you as a dependent, you may still be required to file your own tax return. Whether you must file a return depends on several factors including the amount of your unearned, earned or gross income, your marital status and any special taxes you owe.
5. If you are a dependent, you may not claim an exemption. If someone else ? such as your parent ? claims you as a dependent, you may not claim your personal exemption on your own tax return.
6. Some people cannot be claimed as your dependent. Generally, you may not claim a married person as a dependent if they file a joint return with their spouse. Also, to claim someone as a dependent, that person must be a U.S. citizen, U.S. resident alien, U.S. national or resident of Canada or Mexico for some part of the year. There is an exception to this rule for certain adopted children. See IRS Publication 501, Exemptions, Standard Deduction, and Filing Information for additional tests to determine who can be claimed as a dependent.
For more information on exemptions, dependents and whether you or your dependent needs to file a tax return, see IRS Publication 501. The publication is available at www.irs.gov or can be ordered by calling 800-TAX-FORM (800-829-3676). You can also use the Interactive Tax Assistant at www.irs.gov to determine who you can claim as a dependent and how much you can deduct for each exemption you claim. The ITA tool is a tax law resource on the IRS website that takes you through a series of questions and provides you with responses to tax law questions.
Top Tips Every Taxpayer Should Know about Identity Theft
Identity theft often starts outside of the tax administration system when someone's personal information is unfortunately stolen or lost. Identity thieves may then use a taxpayer's identity to fraudulently file a tax return and claim a refund. In other cases, the identity thief uses the taxpayer's personal information in order to get a job. The legitimate taxpayer may be unaware that anything has happened until they file their return later in the filing season and it is discovered that two returns have been filed using the same Social Security number.
Here are the top 13 things the IRS wants you to know about identity theft so you can avoid becoming the victim of an identity thief.
1. The IRS does not initiate contact with taxpayers by email to request personal or financial information. The IRS does not send emails stating you are being electronically audited or that you are getting a refund.
2. If you receive a scam e-mail claiming to be from the IRS, forward it to the IRS at email@example.com.
3. Identity thieves get your personal information by many different means, including:
* Stealing your wallet or purse
* Posing as someone who needs information about you through a phone call or
* Looking through your trash for personal information
* Accessing information you provide to an unsecured Internet site.
4. If you discover a website that claims to be the IRS but does not begin with www.irs.gov, forward that link to the IRS at firstname.lastname@example.org.
5. To learn how to identify a secure website, visit the Federal Trade Commission at www.onguardonline.gov/tools/recognize-secure-site-using-ssl.aspx.
6. If your Social Security number is stolen, another individual may use it to get a job. That person's employer may report income earned by them to the IRS using your Social Security number, thus making it appear that you did not report all of your income on your tax return. When this occurs, you should contact the IRS to show that the income is not yours. Your record will be updated to reflect only your information. You will also be asked to submit substantiating documentation to authenticate yourself. That information will be used to minimize this occurrence in future years.
7. Your identity may have been stolen if a letter from the IRS indicates more than one tax return was filed for you or the letter states you received wages from an employer you don't know. If you receive such a letter from the IRS, leading you to believe your identity has been stolen, respond immediately to the name, address or phone number on the IRS notice.
8. If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost wallet, questionable credit card activity, or credit report, you need to provide the IRS with proof of your identity. You should submit a copy of your valid government-issued identification such as a Social Security card, driver's license, or passport along with a copy of a police report and/or a completed IRS Form 14039, Identity Theft Affidavit, which should be faxed to the IRS at 978-684-4542. Please be sure to write clearly. As an option, you can also contact the IRS Identity Protection Specialized Unit, toll-free at 800-908-4490. You should also follow FTC guidance for reporting identity theft at www.ftc.gov/idtheft.
9. Show your Social Security card to your employer when you start a job or to your financial institution for tax reporting purposes. Do not routinely carry your card or other documents that display your Social Security number.
10. For more information about identity theft including information about how to report identity theft, phishing and related fraudulent activity visit the IRS Identity Theft and Your Tax Records Page, which you can find by searching Identity Theft on the IRS.gov home page.
11. IRS impersonation schemes flourish during tax season and can take the form of e-mail, phone websites, even tweets. Scammers may also use a phone or fax to reach their victims. If you receive a paper letter or notice via mail claiming to be the IRS but you suspect it is a scam, contact the IRS at http://www.irs.gov/contact/index.html to determine if it is a legitimate IRS notice or letter. If it is a legitimate IRS notice or letter, reply if needed. If the caller or party that sent the paper letter is not legitimate, contact the Treasury Inspector General for Tax Administration at 1-800-366-4484. You may also fax the notice/letter you received, plus any related or supporting information, to TIGTA. Note that this is not a toll-free FAX number 1-202-927-7018.
12. While preparing your tax return for electronic filing, make sure to use a strong password to protect the data file. Once your return has been e-filed, burn the file to a CD or flash drive and remove the personal information from your hard drive. Store the CD or flash drive in a safe place, such as a lock box or safe. If working with an accountant, you should ask them what measures they take to protect your information.
13. If you have information about the identity thief that impacted your personal information negatively, file an online complaint with the Internet Crime Complaint Center (IC3) at www.ic3.gov. The IC3 gives victims of cyber crime a convenient and easy-to-use reporting mechanism that alerts authorities of suspected criminal or civil violations. IC3 sends every complaint to one or more law enforcement or regulatory agencies that have jurisdiction over the matter.
Tax Law Changes for 2011 Federal Tax Returns
Before you file your 2011 federal income tax return in 2012, you should be aware of a few important tax changes that took effect in 2011. Check www.IRS.gov before you file for updates on any new legislation that may affect your tax return.
Due date of return. File your federal tax return by April 17, 2012. The due date is April 17, instead of April 15, because April 15 is a Sunday and April 16 is the Emancipation Day holiday in the District of Columbia.
New forms. In most cases, you must report your capital gains and losses on the new Form 8949, Sales and Other Dispositions of Capital Assets. Then, you report certain totals from that form on Schedule D (Form 1040). If you had foreign financial assets in 2011, you may have to file the new Form 8938, Statement of Foreign Financial Assets, with your return.
Standard mileage rates. The 2011 rates for mileage are different for January 1 through June 30 than for July 1 through December 31. For business use of your car, you can deduct 51 cents a mile for miles driven the first half of the year and 55 ½ cents for the second half. Medical and moving mileage are both 19 cents per mile for the early half of the year and 23 ½ cents in the latter half.
Standard deduction and exemptions increased.
- The standard deduction increased for some taxpayers who do not itemize deductions on IRS Schedule A (Form 1040). The amount depends on your filing status.
- The amount you can deduct for each exemption has increased $50 to $3,700 for 2011.
Self-employed health insurance deduction. This deduction is no longer allowed on Schedule SE (Form 1040), but you can still take it on Form 1040, line 29.
Alternative minimum tax (AMT) exemption amount increased. The AMT exemption amount has increased to $48,450 ($74,450 if married filing jointly or a qualifying widow(er); $37,225 if married filing separately).
Health savings accounts (HSAs) and Archer MSAs. The additional tax on distributions from HSAs and Archer MSAs not used for qualified medical expenses increased to 20 percent. Beginning in 2011, only prescribed drugs or insulin are qualified medical expenses.
Roth IRAs. If you converted or rolled over an amount from a traditional IRA to a Roth IRA or designated Roth in 2010 and did not elect to report the taxable amount on your 2010 return, you generally must report half of it on your 2011 return and the rest on your 2012 return.
Alternative motor vehicle credit. You can claim the alternative motor vehicle credit for a 2011 purchase only if the vehicle is a new fuel cell motor vehicle.
First-time homebuyer credit. The credit expired for most taxpayers for 2011. Some military personnel and members of the intelligence community can still claim the credit in 2011 for qualified purchases.
Health coverage tax credit. Recent legislation changed the amount of this credit, which pays qualified health insurance premiums for eligible individuals and their families. Participants who received the 65 percent tax credit in any month from March to December 2011 may claim an additional 7.5 percent retroactive credit when they file their 2011 tax return.
Mailing a return. The IRS changed the filing location for several areas. If you're mailing a paper return, see the Form 1040 instructions for the correct address.
Detailed information on these changes can be found on the IRS website ? www.irs.gov.
Seven Tips to Help Taxpayers Avoid Phony Refund Schemes Abusing Popular College Tax Credit
The Internal Revenue Service offers the following seven tips to help taxpayers avoid an emerging scheme tempting senior citizens and other taxpayers to file tax returns claiming fraudulent refunds.
These schemes promise refunds to people who have little or no income and normally don't have a tax filing requirement.
Promoters claim they can obtain for their victims, often senior citizens, a tax refund or nonexistent stimulus payment based on the American Opportunity Tax Credit, even if the victim was not enrolled in or paying for college.
Con artists falsely claim that refunds are available even if the victim went to school decades ago. In many cases, scammers are targeting seniors, people with very low incomes and members of church congregations with bogus promises of free money.
A variation of this scheme also falsely claims the college credit is available to compensate people for paying taxes on groceries.
These schemes can be quite costly for victims. Promoters may charge exorbitant upfront fees to file these claims and are often long gone when victims discover they?ve been scammed.
Taxpayers should be careful of these scams because, regardless of who prepared their tax return, the taxpayer is legally responsible for the accuracy of their tax return and must repay any refunds received in error, plus any penalties and interest. They may even face criminal prosecution.
To avoid becoming ensnared in these schemes, the IRS says taxpayers should beware of any of the following:
- Fictitious claims for refunds or rebates based on false statements of entitlement to tax credits.
- Unfamiliar for-profit tax services selling refund and credit schemes to the membership of local churches.
- Internet solicitations that direct individuals to toll-free numbers and then solicit social security numbers.
- Homemade flyers and brochures implying credits or refunds are available without proof of eligibility.
- Offers of free money with no documentation required.
- Promises of refunds for Low Income No Documents Tax Returns.
- Claims for the expired Economic Recovery Credit Program or for economic stimulus payments.
- Unsolicited offers to prepare a return and split the refund.
- Unfamiliar return preparation firms soliciting business from cities outside of the normal business or commuting area.
In recent weeks, the IRS has identified and stopped an upsurge of these bogus refund claims coming in from across the United States. The IRS is actively investigating the sources of this scheme, and its promoters can be subject to criminal prosecution.
To get the facts on tax benefits related to education, go the Tax Benefits for Education Information Center on this website.
What Employers Need to Know About Claiming the Small Business Health Care Tax Credit
If you are a small employer with fewer than 25 full-time equivalent employees that earn an average wage of less than $50,000 a year and you pay at least half of employee health insurance premiums then there is a tax credit that may put money in your pocket.
The Small Business Health Care Tax Credit is specifically targeted to help small businesses and tax-exempt organizations. The credit can enable small businesses and small tax-exempt organizations to offer health insurance coverage for the first time. It also helps those already offering health insurance coverage to maintain the coverage they already have.
Here is what small employers need to know so they don't miss out on the credit for tax year 2011:
- Qualifying businesses calculate the small business health care credit on Form 8941, Credit for Small Employer Health Insurance Premiums, and claim it as part of the general business credit on Form 3800, General Business Credit, which they would include with their tax return.
- Tax-exempt organizations can use Form 8941 to calculate the credit and then claim the credit on Form 990-T, Exempt Organization Business Income Tax Return, Line 44f.
- Businesses that couldn?t use the credit in 2011 may be eligible to claim it in future years. Eligible small employers can claim the credit for 2010 through 2013 and for two additional years beginning in 2014.
For tax years 2010 to 2013, the maximum credit for eligible small business employers is 35 percent of premiums paid and for eligible tax-exempt employers the maximum credit is 25 percent of premiums paid. Beginning in 2014, the maximum credit will go up to 50 percent of qualifying premiums paid by eligible small business employers and 35 percent of qualifying premiums paid by eligible tax-exempt organizations.Additional information about eligibility requirements and calculating the credit can be found on the Small Business Health Care Tax Credit for Small Employers page of IRS.gov.
Standard Deduction vs. Itemizing: Seven Facts to Help You Choose
Each year, millions of taxpayers choose whether to take the standard deduction or to itemize their deductions. The following seven facts from the IRS can help you choose the method that gives you the lowest tax.
1. Qualifying expenses - Whether to itemize deductions on your tax return depends on how much you spent on certain expenses last year. If the total amount you spent on qualifying medical care, mortgage interest, taxes, charitable contributions, casualty losses and miscellaneous deductions is more than your standard deduction, you can usually benefit by itemizing.
2. Standard deduction amounts -Your standard deduction is based on your filing status and is subject to inflation adjustments each year. For 2011, the amounts are:
Married Filing Jointly $11,600
Head of Household $8,500
Married Filing Separately $5,800
Qualifying Widow(er) $11,600
3. Some taxpayers have different standard deductions - The standard deduction amount depends on your filing status, whether you are 65 or older or blind and whether another taxpayer can claim an exemption for you. If any of these apply, use the Standard Deduction Worksheet on the back of Form 1040EZ, or in the 1040A or 1040 instructions.
4. Limited itemized deductions - Your itemized deductions are no longer limited because of your adjusted gross income.
5. Married filing separately - When a married couple files separate returns and one spouse itemizes deductions, the other spouse cannot claim the standard deduction and therefore must itemize to claim their allowable deductions.
6. Some taxpayers are not eligible for the standard deduction - They include nonresident aliens, dual-status aliens and individuals who file returns for periods of less than 12 months due to a change in accounting periods.
7. Forms to use - The standard deduction can be taken on Forms 1040, 1040A or 1040EZ. To itemize your deductions, use Form 1040, U.S. Individual Income Tax Return, and Schedule A, Itemized Deductions.
These forms and instructions may be downloaded from the IRS website at www.irs.gov or ordered by calling 800-TAX-FORM (800-829-3676).
Tax Scam Warning: Beware of Phony Refund Scheme Abusing Popular College Tax Credit; Senior Citizens, Working Families and Church Members Are Targets
WASHINGTON The Internal Revenue Service today warned senior citizens and other taxpayers to beware of an emerging scheme tempting them to file tax returns claiming fraudulent refunds.
The scheme carries a common theme of promising refunds to people who have little or no income and normally don't have a tax filing requirement. Under the scheme, promoters claim they can obtain for their victims, often senior citizens, a tax refund or nonexistent stimulus payment based on the American Opportunity Tax Credit, even if the victim was not enrolled in or paying for college.
In recent weeks, the IRS has identified and stopped an upsurge of these bogus refund claims coming in from across the United States. The IRS is actively investigating the sources of the scheme, and its promoters may be subject to criminal prosecution.
This is a disgraceful effort by scam artists to take advantage of people by giving them false hopes of a nonexistent refund, said IRS Commissioner Doug Shulman. We want to warn innocent taxpayers about this new scheme before more people get trapped.
Typically, con artists falsely claim that refunds are available even if the victim went to school decades ago. In many cases, scammers are targeting seniors, people with very low incomes and members of church congregations with bogus promises of free money.
The IRS has also seen a variation of this scheme that incorrectly claims the college credit is available to compensate people for paying taxes on groceries.
The IRS has already detected and stopped thousands of these fraudulent claims. Nevertheless, the scheme can still be quite costly for victims. Promoters may charge exorbitant upfront fees to file these claims and are often long gone when victims discover they've been scammed.
The IRS is reminding people to be careful because all taxpayers, including those who use paid tax preparers, are legally responsible for the accuracy of their returns, and must repay any refunds received in error.
To get the facts on tax benefits related to education, go to the Tax Benefits for Education Information Center on IRS.gov.
To avoid becoming ensnared in this scheme, the IRS says taxpayers should beware of any of the following:
- Fictitious claims for refunds or rebates based on false statements of entitlement to tax credits.
- Unfamiliar for-profit tax services selling refund and credit schemes to the membership of local churches.
- Internet solicitations that direct individuals to toll-free numbers and then solicit social security numbers.
- Homemade flyers and brochures implying credits or refunds are available without proof of eligibility.
- Offers of free money with no documentation required.
- Promises of refunds for Low Income No Documents Tax Returns.
- Claims for the expired Economic Recovery Credit Program or for economic stimulus payments.
- Unsolicited offers to prepare a return and split the refund.
- Unfamiliar return preparation firms soliciting business from cities outside of the normal business or commuting area.
This refund scheme features many of the warning signs IRS cautions taxpayers to watch for when choosing a tax preparer. For advice on choosing a competent tax professional, see Tips for Choosing a Tax Return Preparer on IRS.gov.
Six Facts for Adoptive Parents
If you paid expenses to adopt an eligible child in 2011, you may be able to claim a tax credit of up to $13,360.
Here are six things the IRS wants you to know about the expanded adoption credit.
1. The Affordable Care Act increased the amount of the credit and made it refundable, which means you can get the credit as a tax refund even after your tax liability has been reduced to zero.
2. For tax year 2011, you must file a paper tax return, Form 8839, Qualified Adoption Expenses, and attach documents supporting the adoption. Taxpayers claiming the credit will still be able to use IRS Free File or other software to prepare their returns, but the returns must be printed and mailed to the IRS, along with all required documentation.
3. Documents may include a final adoption decree, placement agreement from an authorized agency, court documents and/or the state's determination for special needs children.
4. Qualified adoption expenses are reasonable and necessary expenses directly related to the legal adoption of the child. These expenses may include adoption fees, court costs, attorney fees and travel expenses.
5. An eligible child must be under 18 years old, or physically or mentally incapable of caring for himself or herself.
6. If your modified adjusted gross income is more than $185,210, your credit is reduced. If your modified AGI is $225,210 or more, you cannot take the credit.
For more information see the Adoption Credit FAQ page available at www.irs.gov or the instructions to IRS Form 8839, which can be downloaded from the website or ordered by calling 800-TAX-FORM (800-829-3676).
Health Insurance Tax Breaks for the Self-Employed
If you're self-employed and paying for medical, dental or long-term care insurance, the IRS wants to remind you about a special tax deduction for some insurance premiums paid for you, your spouse, and your dependents.
Starting in tax year 2011, this deduction is no longer allowed on Schedule SE (Form 1040), but you can still take it on Form 1040, line 29.
You must be one of the following to qualify:
- A self-employed individual with a net profit reported on Schedule C (Form 1040), Profit or Loss From Business, Schedule C-EZ (Form 1040), Net Profit From Business, or Schedule F (Form 1040), Profit or Loss From Farming.
- A partner with net earnings from self-employment reported on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., box 14, code A.
- A shareholder owning more than 2 percent of the outstanding stock of an S corporation with wages from the corporation reported on Form W-2, Wage and Tax Statement.
The insurance plan must be established under your business.
- For self-employed individuals filing a Schedule C, C-EZ, or F, the policy can be either in the name of the business or in the name of the individual.
- For partners, the policy can be either in the name of the partnership or in the name of the partner. You can either pay the premiums yourself or your partnership can pay them and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. However, if the policy is in your name and you pay the premiums yourself, the partnership must reimburse you and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. Otherwise, the insurance plan will not be considered to be established under your business.
- For more-than-2-percent shareholders, the policy can be either in the name of the S corporation or in the name of the shareholder. You can either pay the premiums yourself or your S corporation can pay them and report the premium amounts on Form W-2 as wages to be included in your gross income. However, if the policy is in your name and you pay the premiums yourself, the S corporation must reimburse you and report the premium amounts on Form W-2 as wages to be included in your gross income. Otherwise, the insurance plan will not be considered to be established under your business.
IRS Creates Online Search Tool for Easier Check On Information About Exempt Organizations
WASHINGTON The Internal Revenue Service has launched a new online search tool, Exempt Organizations Select Check, to help users more easily find key information about tax-exempt organizations, such as federal tax status and filings.
Users can now go to one location on IRS.gov, select a tax-exempt organization, and check if the organization:
o Is eligible to receive tax-deductible charitable contributions (Publication 78 data, which is incorporated here). Users may rely on this list in determining deductibility of contributions (just as they did when Publication 78 was a separate electronic publication rather than part of Select Check).
o Has had its federal tax exemption automatically revoked under the law for not filing a Form 990-series return or notice for three consecutive years (known as the Auto-Revocation List).
o Has filed a Form 990-N (e-Postcard) annual electronic notice. (Most small organizations whose annual gross receipts are normally $50,000 or less are required to electronically submit Form 990-N, unless they choose instead to file a completed Form 990 or Form 990-EZ.)
EO Select Check also offers improved search functions. For example, users can now look for organizations eligible to receive deductible contributions by Employer Identification Number (EIN), which was previously not a searchable or sortable field in the electronic Publication 78. And data about organizations eligible to receive deductible contributions are now updated monthly, rather than quarterly.
In addition, organizations that have automatically lost their tax exemptions may now be searched by EIN, name, city, state, ZIP Code, country, exemption type, and revocation posting date, rather than only by state. EO Select Check also provides new pop-up help text to assist users in understanding the significance of auto-revocation search results, including the meaning of, and distinctions between, revocation dates and revocation posting dates.
EO Select Check offers search tips that provide suggestions on how to use the search application.
IRS Encourages Small Employers to Check Out Small Business Health Care Tax Credit
WASHINGTON ? With business tax-filing deadlines fast approaching, the Internal Revenue Service today encouraged small employers that provide health insurance coverage to their employees to check out the small business health care tax credit and then claim it if they qualify.
The recently-revamped Small Business Health Care Tax Credit page on IRS.gov is packed with information and resources designed to help small employers see if they qualify for the credit and then figure it correctly. These include a step-by-step guide for determining eligibility, examples of typical tax savings under various scenarios, answers to frequently-asked questions, a YouTube video and a webinar.
The small business health care tax credit was included in the Affordable Care Act enacted two years ago. Small employers that pay at least half of the premiums for employee health insurance coverage under a qualifying arrangement may be eligible for this credit. The credit is specifically targeted to help small businesses and tax-exempt organizations provide health insurance for their employees.
Depending upon how they are structured, eligible small employers are likely subject to one of the following three tax-filing deadlines, which fall in coming weeks:
- March 15: Corporations that file on a calendar year basis can figure the credit on Form 8941 and claim it as part of the general business credit on Form 3800, both of which are attached to their corporate income tax return.
- April 17: Individuals have until April 17 to complete and file their returns on Form 1040. This includes Sole proprietors, as well as people who have business income reported to them on Schedules K-1?partners in partnerships, S corporation shareholders and beneficiaries of estates and trusts. They also attach Forms 8941 and 3800 to their return. The resulting credit is entered on Form 1040 Line 53.
- May 15: Tax-exempt organizations that file on a calendar year basis can use Form 8941 and then claim the credit on Form 990-T, Line 44f.
Taxpayers needing more time to determine eligibility should consider obtaining an automatic tax-filing extension, usually for six months. See Form 4868 for individuals, Form 7004 and its instructions for businesses and Form 8868 for tax-exempt organizations.
Businesses that have already filed and later find that they qualified in 2010 or 2011 can still claim the credit by filing an amended return for one or both years. Corporations use Form 1120X, individuals use Form 1040X and tax-exempt organizations use Form 990-T.
Some businesses and tax-exempt organizations that already locked into health insurance plan structures and contributions may not have had the opportunity to make any needed adjustments to qualify for the credit for 2010 or 2011. These employers can still make the necessary changes to their health insurance plans so they qualify to claim the credit on 2012 returns or in years beyond. Eligible small employers can claim the credit for 2010 through 2013 and for two additional years beginning in 2014.
Additional information about eligibility requirements and figuring the credit can be found on IRS.gov.
IRS Provides Tax Relief to Victims of Hurricane Irene
WASHINGTON - The Internal Revenue Service is providing tax relief to individual and business taxpayers impacted by Hurricane Irene.
The IRS announced today that certain taxpayers in North Carolina, New Jersey, New York and Puerto Rico will receive tax relief, and other locations are expected to be added in coming days following additional damage assessments by the Federal Emergency Management Agency (FEMA).
The tax relief postpones certain tax filing and payment deadlines to Oct. 31, 2011. It includes corporations and businesses that previously obtained an extension until Sept. 15, 2011, to file their 2010 returns and individuals and businesses that received a similar extension until Oct. 17. It also includes the estimated tax payment for the third quarter of 2011, which would normally be due Sept. 15.
Full details, including the start date for the relief in various locations and information on how to claim a disaster loss by amending a prior-year tax return, can be found in tax relief announcements for individual states on this website.
The tax relief is part of a coordinated federal response to the damage caused by the hurricane and is based on local damage assessments by FEMA. For information on disaster recovery, individuals should visit disasterassistance.gov.
Tax Relief Available So Far
Filing and payment relief is currently available to taxpayers in federal disaster areas declared in North Carolina, New Jersey, New York State and Puerto Rico. The IRS expects to announce tax relief for taxpayers in other areas as damage assessments continue. The IRS encourages taxpayers and tax practitioners to monitor Tax Relief in Disaster Situations on this website for updates.
So far, IRS filing and payment relief applies to the following counties and municipalities:
- In North Carolina: Beaufort, Carteret, Craven, Dare, Hyde, Pamlico and Tyrell;
- In New Jersey: Bergen, Essex, Morris, Passaic and Somerset;
- In New York: Albany, Delaware, Dutchess, Essex, Greene, Schenectady, Schoharie and Ulster; and
- In Puerto Rico: Caguas, Canovanas, Carolina, Cayey, Loiza, Luquillo and San Juan.
IR-2011-69, June 23, 2011
WASHINGTON ? The Internal Revenue Service today announced an increase in the optional standard mileage rates for the final six months of 2011. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business and other purposes.
The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51.
In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2011. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.
"This year's increased gas prices are having a major impact on individual Americans. The IRS is adjusting the standard mileage rates to better reflect the recent increase in gas prices," said IRS Commissioner Doug Shulman. "We are taking this step so the reimbursement rate will be fair to taxpayers."
While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.
The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.
The new six-month rate for computing deductible medical or moving expenses will also increase by 4.5 cents to 23.5 cents a mile, up from 19 cents for the first six months of 2011. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.
The new rates are contained in Announcement 2011-40 on the optional standard mileage rates.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
Mileage Rate Changes
Rates 1/1 through 6/30/11
Rates 7/1 through 12/31/11
Does the IRS Have Money Waiting For You?
If you earned income in the last few years but you didn?t file a tax return because your wages were below the filing requirement, the Internal Revenue Service may have some money for you. The IRS also has millions of dollars in checks that are returned each year as undeliverable.
Here?s what you need to know about these two types of ?missing money? and how to claim it:
Some people earn income and may have taxes withheld from their wages but are not required to file a tax return because they have too little income. In this case, you can claim a refund for the tax that was withheld from your pay. Other workers may not have had any tax withheld but would be eligible for the refundable Earned Income Tax Credit, but must file a return to claim it.
- To collect this money a return must be filed with the IRS no later than three years from the due date of the return.
- If no return is filed to claim the refund within three years, the money becomes the property of the U.S. Treasury.
- There is no penalty assessed by the IRS for filing a late return qualifying for a refund.
- Current and prior year tax forms and instructions are available on the Forms and Publications page of www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
- Information about the Earned Income Tax Credit and how to claim it is also available on www.irs.gov.
Were you expecting a refund check but didn't get it?
- Refund checks are mailed to your last known address. Checks are returned to the IRS if you move without notifying the IRS or the U.S. Postal Service.
- You may be able to update your address with the IRS on the ?Where?s My Refund?? feature available on IRS.gov. You will be prompted to provide an updated address if there is an undeliverable check outstanding within the last 12 months.
- You can also ensure the IRS has your correct address by filing Form 8822, Change of Address, which is available on www.irs.gov or can be ordered by calling 800-TAX-FORM (800-829-3676).
Ten Tips for Taxpayers Who Owe Money to the IRS
While the majority of Americans get a tax refund from the Internal Revenue Service each year, there are many taxpayers who owe and some who can?t pay the tax all at once. The IRS has a number of ways for people to pay their tax bill.
The IRS has announced an effort to help struggling taxpayers get a fresh start with their tax liabilities. The goal of this effort is to help individuals and small business meet their tax obligations, without adding unnecessary burden. Specifically, the IRS has announced new policies and programs to help taxpayers pay back taxes and avoid tax liens.
Here are ten tips for taxpayers who owe money to the IRS.
- Tax bill payments If you get a bill this summer for late taxes, you are expected to promptly pay the tax owed including any penalties and interest. If you are unable to pay the amount due, it is often in your best interest to get a loan to pay the bill in full rather than to make installment payments to the IRS.
- Additional time to pay Based on your circumstances, you may be granted a short additional time to pay your tax in full. A brief additional amount of time to pay can be requested through the Online Payment Agreement application at www.irs.gov or by calling 800-829-1040.
- Credit card payments You can pay your bill with a credit card. The interest rate on a credit card may be lower than the combination of interest and penalties imposed by the Internal Revenue Code. To pay by credit card contact one of the following processing companies: Link2Gov at 888-PAY-1040 (or www.pay1040.com), RBS WorldPay, Inc. at 888-9PAY-TAX (or www.payUSAtax.com), or Official Payments Corporation at 888-UPAY-TAX (or www.officialpayments.com/fed).
- Electronic Funds Transfer You can pay the balance by electronic funds transfer, check, money order, cashier?s check or cash. To pay using electronic funds transfer, use the Electronic Federal Tax Payment System by either calling 800-555-4477 or using the online access at www.eftps.gov.
- Installment Agreement You may request an installment agreement if you cannot pay the liability in full. This is an agreement between you and the IRS to pay the amount due in monthly installment payments. You must first file all required returns and be current with estimated tax payments.
- Online Payment Agreement If you owe $25,000 or less in combined tax, penalties and interest, you can request an installment agreement using the Online Payment Agreement application at www.irs.gov.
- Form 9465 You can complete and mail an IRS Form 9465, Installment Agreement Request, along with your bill in the envelope you received from the IRS. The IRS will inform you (usually within 30 days) whether your request is approved, denied, or if additional information is needed.
- Collection Information Statement You may still qualify for an installment agreement if you owe more than $25,000, but you are required to complete a Form 433F, Collection Information Statement, before the IRS will consider an installment agreement.
- User fees If an installment agreement is approved, a one-time user fee will be charged. The user fee for a new agreement is $105 or $52 for agreements where payments are deducted directly from your bank account. For eligible individuals with lower incomes, the fee can be reduced to $43.
- Check withholding Taxpayers who have a balance due may want to consider changing their W-4, Employee?s Withholding Allowance Certificate, with their employer. A withholding calculator at www.irs.gov can help taxpayers determine the amount that should be withheld.
For more information about the Fresh Start initiative, installment agreements and other payment options visit www.irs.gov. IRS Publications 594, The IRS Collection Process, and 966, Electronic Choices to Pay All Your Federal Taxes, also provide additional information regarding your payment options. These publications and Form 9465 can be obtained from www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
Ten Tax Tips for Individuals Selling Their Home
The Internal Revenue Service has some important information to share with individuals who have sold or are about to sell their home. If you have a gain from the sale of your main home, you may qualify to exclude all or part of that gain from your income. Here are ten tips from the IRS to keep in mind when selling your home.
- In general, you are eligible to exclude the gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale.
- If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).
- You are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.
- If you can exclude all of the gain, you do not need to report the sale on your tax return.
- If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses.
- You cannot deduct a loss from the sale of your main home.
- Worksheets are included in Publication 523, Selling Your Home, to help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the gain that you can exclude.
- If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.
- If you received the first-time homebuyer credit and within 36 months of the date of purchase, the property is no longer used as your principal residence, you are required to repay the credit. Repayment of the full credit is due with the income tax return for the year the home ceased to be your principal residence, using Form 5405, First-Time Homebuyer Credit and Repayment of the Credit. The full amount of the credit is reflected as additional tax on that year?s tax return.
- When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive refunds or correspondence from the IRS. Use Form 8822, Change of Address, to notify the IRS of your address change.
For more information about selling your home, see IRS Publication 523, Selling Your Home. This publication is available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
Ten Tax Tips for Individuals Who Are Moving This Summer
Summertime is a popular time for people with children to move since school is out. Moving can be expensive, but the IRS offers 10 tax tips on deducting some of those expenses if your move is related to starting a new job or a new job location.
- Move must be closely related to start of work Generally, you can consider moving expenses incurred within one year from the date you first reported to a new location, as closely related in time to the start of work.
- Distance Test Your move meets the distance test if your new main job location is at least 50 miles farther from your former home than your previous job location was.
- Time Test You must work full time for at least 39 weeks during the first 12 months after you arrive in the general area of your new job location, or at least 78 weeks during the first 24 months if you are self-employed. If your income tax return is due before you?ve satisfied this requirement, you can still deduct your allowable moving expenses if you expect to meet the time test in the following years.
- Travel You can deduct lodging expenses for yourself and household members while moving from your former home to your new home. You can also deduct transportation expenses, including airfare, vehicle mileage, parking fees and tolls you pay to move, but you can only deduct one trip per person.
- Household goods You can deduct the cost of packing, crating and transporting your household goods and personal property. You may be able to include the cost of storing and insuring these items while in transit.
- Utilities You can deduct the costs of connecting or disconnecting utilities.
- Nondeductible expenses You cannot deduct as moving expenses: any part of the purchase price of your new home, car tags, drivers license, costs of buying or selling a home, expenses of entering into or breaking a lease, security deposits and storage charges except those incurred in transit.
- Form You can deduct only those expenses that are reasonable for the circumstances of your move. To figure the amount of your moving expense deduction use Form 3903, Moving Expenses.
- Reimbursed expenses If your employer reimburses you for the cost of the move, the reimbursement may have to be included on your income tax return.
- Update your address When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive refunds or correspondence from the IRS. Use Form 8822, Change of Address, to notify the IRS.
For more details, review IRS Publication 521, Moving Expenses, and Form 3903, Moving Expenses. IRS publications and forms are available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
Back-to-School Tips for Students and Parents Paying College Expenses
Whether you're a recent graduate going to college for the first time or a returning student, it will soon be time to get to campus and payment deadlines for tuition and other fees are not far behind. The Internal Revenue Service reminds students or parents paying such expenses to keep receipts and to be aware of some tax benefits that can help offset college costs.
Typically, these benefits apply to you, your spouse or a dependent for whom you claim an exemption on your tax return.
- American Opportunity Credit
This credit, originally created under the American Recovery and Reinvestment Act, has been extended for an additional two years 2011 and 2012. The credit can be up to $2,500 per eligible student and is available for the first four years of post secondary education. Forty percent of this credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes. Qualified expenses include tuition and fees, course related books, supplies and equipment. The full credit is generally available to eligible taxpayers whose modified adjusted gross income is below $80,000 ($160,000 for married couples filing a joint return).
- Lifetime Learning Credit
In 2011, you may be able to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses paid for a student enrolled in eligible educational institutions. There is no limit on the number of years you can claim the Lifetime Learning Credit for an eligible student, but to claim the credit, your modified adjusted gross income must be below $60,000 ($120,000 if married filing jointly).
- Tuition and Fees Deduction
This deduction can reduce the amount of your income subject to tax by up to $4,000 for 2011 even if you do not itemize your deductions. Generally, you can claim the tuition and fees deduction for qualified higher education expenses for an eligible student if your modified adjusted gross income is below $80,000 ($160,000 if married filing jointly).
- Student loan interest deduction
Generally, personal interest you pay, other than certain mortgage interest, is not deductible. However, if your modified adjusted gross income is less than $75,000 ($150,000 if filing a joint return), you may be able to deduct interest paid on a student loan used for higher education during the year. It can reduce the amount of your income subject to tax by up to $2,500, even if you don?t itemize deductions.
For each student, you can choose to claim only one of the credits in a single tax year. However, if you pay college expenses for two or more students in the same year, you can choose to take credits on a per-student, per-year basis. You can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your senior son.
You cannot claim the tuition and fees deduction for the same student in the same year that you claim the American Opportunity Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction and should consider which is more beneficial for you.
For more information, visit the Tax Benefits for Education Information Center at www.irs.gov or check out Publication 970, Tax Benefits for Education, which can be downloaded at www.irs.gov or ordered by calling 800-TAX-FORM (800-829-3676).
Nine Tips for Charitable Taxpayers
If you make a donation to a charity this year, you may be able to take a deduction for it on your 2011 tax return. Here are the top nine things the IRS wants every taxpayer to know before deducting charitable donations.
- Make sure the organization qualifies Charitable contributions must be made to qualified organizations to be deductible. You can ask any organization whether it is a qualified organization or check IRS Publication 78, Cumulative List of Organizations. It is available at www.IRS.gov.
- You must itemize Charitable contributions are deductible only if you itemize deductions using Form 1040, Schedule A.
- What you can deduct You generally can deduct your cash contributions and the fair market value of most property you donate to a qualified organization. Special rules apply to several types of donated property, including clothing or household items, cars and boats.
- When you receive something in return If your contribution entitles you to receive merchandise, goods, or services in return ? such as admission to a charity banquet or sporting event ? you can deduct only the amount that exceeds the fair market value of the benefit received.
- Recordkeeping Keep good records of any contribution you make, regardless of the amount. For any cash contribution, you must maintain a record of the contribution, such as a cancelled check, bank or credit card statement, payroll deduction record or a written statement from the charity containing the date and amount of the contribution and the name of the organization.
- Pledges and payments Only contributions actually made during the tax year are deductible. For example, if you pledged $500 in September but paid the charity only $200 by Dec. 31, you can only deduct $200.
- Donations made near the end of the year Include credit card charges and payments by check in the year you give them to the charity, even though you may not pay the credit card bill or have your bank account debited until the next year.
- Large donations For any contribution of $250 or more, you need more than a bank record. You must have a written acknowledgment from the organization. It must include the amount of cash and say whether the organization provided any goods or services in exchange for the gift. If you donated property, the acknowledgment must include a description of the items and a good faith estimate of its value. For items valued at $500 or more you must complete a Form 8283, Noncash Charitable Contributions, and attach the form to your return. If you claim a deduction for a contribution of noncash property worth more than $5,000, you generally must obtain an appraisal and complete Section B of Form 8283 with your return.
- Tax Exemption Revoked Approximately 275,000 organizations automatically lost their tax-exempt status recently because they did not file required annual reports for three consecutive years, as required by law. Donations made prior to an organization?s automatic revocation remain tax-deductible. Going forward, however, organizations that are on the auto-revocation list that do not receive reinstatement are no longer eligible to receive tax-deductible contributions.
For the list of organizations whose tax-exempt status was revoked, visit www.IRS.gov. For general information see IRS Publication 526, Charitable Contributions, and for information on determining value, refer to Publication 561, Determining the Value of Donated Property. These publications are available at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).
- Publication 78, Cumulative List of Organizations
- Publication 526, Charitable Contributions (PDF)
- Publication 561, Determining the Value of Donated Property (PDF)
- Tax Exemptions Revoked
- Charitable Contributions English | Spanish | ASL
- Fair Market Value of Charitable Donations English | Spanish | ASL
Seven Tax Tips for Recently Married Taxpayers
With the summer wedding season in full swing, the Internal Revenue Service advises the soon-to-be married and the just married to review their changing tax status. If you recently got married or are planning a wedding, the last thing on your mind is taxes. However, there are some important steps you need to take to avoid stress at tax time. Here are seven tips for newlyweds.
- Notify the Social Security Administration Report any name change to the Social Security Administration so your name and Social Security number will match when you file your next tax return. File a Form SS-5, Application for a Social Security Card, at your local SSA office. The form is available on SSA?s website at www.ssa.gov, by calling 800-772-1213 or at local offices.
- Notify the IRS if you move If you have a new address you should notify the IRS by sending Form 8822, Change of Address. You may download Form 8822 from www.IRS.gov or order it by calling 800?TAX?FORM (800?829?3676).
- Notify the U.S. Postal Service You should also notify the U.S. Postal Service when you move so it can forward any IRS correspondence or refunds.
- Notify your employer Report any name and address changes to your employer(s) to make sure you receive your Form W-2, Wage and Tax Statement, after the end of the year.
- Check your withholding If both you and your spouse work, your combined income may place you in a higher tax bracket. You can use the IRS Withholding Calculator available on www.irs.gov to assist you in determining the correct amount of withholding needed for your new filing status. The IRS Withholding Calculator will give you the information you need to complete a new Form W-4, Employee's Withholding Allowance Certificate. You can fill it out and print it online and then give the form to your employer(s) so they withhold the correct amount from your pay.
- Select the right tax form Choosing the right individual income tax form can help save money. Newly married taxpayers may find that they now have enough deductions to itemize on their tax returns. Itemized deductions must be claimed on a Form 1040, not a 1040A or 1040EZ.
- Choose the best filing status A person?s marital status on Dec. 31 determines whether the person is considered married for that year. Generally, the tax law allows married couples to choose to file their federal income tax return either jointly or separately in any given year. Figuring the tax both ways can determine which filing status will result in the lowest tax, but usually filing jointly is more beneficial.
For more information about changing your name, address and income tax withholding visit www.irs.gov. IRS forms and publications can be obtained from www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
- Form 8822, Change of Address (PDF)
- IRS Withholding Calculator
- W-4, Employee's Withholding Allowance Certificate (PDF)
- Social Security website
Getting Married? - English
Eight Tips for Taxpayers Who Receive an IRS Notice
Every year the Internal Revenue Service sends millions of letters and notices to taxpayers, but that doesn't mean you need to worry. Here are eight things every taxpayer should know about IRS notices just in case one shows up in your mailbox.
- Don't panic. Many of these letters can be dealt with simply and painlessly.
- There are number of reasons the IRS sends notices to taxpayers. The notice may request payment of taxes, notify you of a change to your account or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.
- Each letter and notice offers specific instructions on what you need to do to satisfy the inquiry.
- If you receive a correction notice, you should review the correspondence and compare it with the information on your return.
- If you agree with the correction to your account, usually no reply is necessary unless a payment is due.
- If you do not agree with the correction the IRS made, it is important that you respond as requested. Write to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the lower left part of the notice. Allow at least 30 days for a response.
- Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right corner of the notice. Have a copy of your tax return and the correspondence available when you call.
- It's important that you keep copies of any correspondence with your records.
For more information about IRS notices and bills, see Publication 594, The IRS Collection Process. Information about penalties and interest charges is available in Publication 17, Your Federal Income Tax for Individuals. Both publications are available at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Keep Good Records Now to Reduce Tax-Time Stress
You may not be thinking about your tax return right now, but summer is a great time to start planning for next year. Organized records not only make preparing your return easier, but may also remind you of relevant transactions, help you prepare a response if you receive an IRS notice, or substantiate items on your return if you are selected for an audit.
Here are a few things the IRS wants you to know about recordkeeping.
1. In most cases, the IRS does not require you to keep records in any special manner. Generally, you should keep any and all documents that may have an impact on your federal tax return. It?s a good idea to have a designated place for tax documents and receipts.
2. Individual taxpayers should usually keep the following records supporting items on their tax returns for at least three years:
- Credit card and other receipts
- Mileage logs
- Canceled, imaged or substitute checks or any other proof of payment
- Any other records to support deductions or credits you claim on your return
You should normally keep records relating to property until at least three years after you sell or otherwise dispose of the property. Examples include:
- A home purchase or improvement
- Stocks and other investments
- Individual Retirement Arrangement transactions
- Rental property records
3. If you are a small business owner, you must keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later. Examples of important documents business owners should keep Include:
- Gross receipts: Cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips and Forms 1099-MISC
- Proof of purchases: Canceled checks, cash register tape receipts, credit card sales slips and invoices
- Expense documents: Canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash slips for small cash payments
- Documents to verify your assets: Purchase and sales invoices, real estate closing statements and canceled checks
For more information about recordkeeping, check out IRS Publication 552, Recordkeeping for Individuals, Publication 583, Starting a Business and Keeping Records, and Publication 463, Travel, Entertainment, Gift, and Car Expenses. These publications are available at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).
- Publications 552, Recordkeeping for Individuals (PDF)
- Publications 583, Starting a Business and Keeping Records (PDF)
- Publication 463, Travel, Entertainment, Gift, and Car Expenses (PDF)
Record Keeping English | Spanish | ASL
Congress approved a bill on August 2 increasing the debt ceiling by $2.1 trillion, averting default and limiting the downgrade of the federal government's AAA bond rating.
The legislative package not only raised the debt limit enough to keep the government operational through 2012, it also established an ambitious and complicated deficit reduction plan that includes spending cuts, a special "super committee" that will recommend further cuts in spending, enforcement triggers, and a vote on a balanced budget amendment to the U.S. Constitution.
Below is a summary of most of the agreement's major components (as of August 4, 2011):
Debt Ceiling Increase
The current $14.3 trillion ceiling on federal borrowing would be increased by an amount between $2.1 trillion and $2.4 trillion - a sum presumed sufficient to allow the Treasury Department to operate beyond the 2012 election and into 2013.
The increase would come in two steps. The debt limit would be increased by $900 billion immediately. Of that first $900 billion, $500 billion would be subject to a congressional resolution of disapproval. To block the increase, such a resolution would presumably have to be enacted over the president's veto, a step that requires two-thirds majority votes in both chambers.
A second increase of $1.2 trillion to $1.5 trillion would be available later. The size of the second increase would be determined by actions Congress takes to curtail growth in the debt.
If by early 2012 a joint congressional committee created by the legislation has recommended, and Congress has enacted, $1.5 trillion in additional savings for fiscal 2012-2021, the second increase in the debt limit would be $1.5 trillion. Alternatively, the debt limit would be increased by $1.5 trillion if a constitutional amendment requiring a balanced budget is sent to the states for ratification.
If the joint committee recommends, and Congress enacts, savings of less than $1.5 trillion, or if no additional savings are enacted, the second debt limit increase would be $1.2 trillion. The second debt limit increase would also be subject to a congressional resolution of disapproval, which could be vetoed.
Spending Cuts - First Round
An immediate reduction in the deficit would be achieved by placing statutory caps on discretionary appropriations for fiscal years 2012 through 2021. The savings would amount to $935 billion over 10 years, according to the Congressional Budget Office, when compared with spending levels estimated in January, or $756 billion when compared with CBO's March estimate that took into account savings enacted as part of fiscal 2011 appropriations (PL 112-10).
The discretionary spending cap for fiscal 2012 would be $1.043 trillion, which is about $24 billion more than the amount set by the House-adopted budget resolution (H Con Res 34). The cap for fiscal 2013 would be $1.047 trillion. For both years, a "firewall" would be erected between security (national defense, homeland security, and related activities) and non-security accounts - meaning domestic programs could not be targeted to provide more security spending.
The caps for fiscal 2014 through fiscal 2021 would not segregate security and non-security spending.
Enforcement Mechanism for Spending Caps
If lawmakers did not adhere to the discretionary appropriations caps, a process for imposing across-the-board, automatic spending cuts from discretionary accounts would take effect after Congress adjourns for the year.
The automatic mechanism would be similar to the system of spending "sequesters" enacted as part of the 1985 Gramm-Rudman anti-deficit law (PL 99-177). Some spending, including military pay, would be exempt from the automatic cuts.
Spending Cuts - Second Round
The new joint committee could recommend specific ways to reduce the deficit by an additional $1.5 trillion by 2021. The panel would be required to consider recommendations from regular legislative committees, and to report its recommendations to both chambers, subject to up-or-down votes without amendment.
The committee would be required to report by Nov. 23, and the House and Senate would be required to act by Dec. 23.
All of the federal budget would presumably be on the table, including entitlement cuts and revenue increases.
Enforcement Triggers for Panel Recommendations
Should the enacted recommendations from the joint committee not produce at least $1.2 trillion in savings, a process for automatic spending cuts would be triggered to achieve the desired savings and spread spending cuts equally across nine fiscal years.
Any sequester would be equal to the portion of the $1.2 trillion savings target that was not achieved. The first automatic cuts would take effect Jan. 2, 2013, and would fall equally on defense and non-defense accounts, including both discretionary spending and some entitlement spending.
Programs targeting low-income individuals and families would largely be exempt from the sequester, as they were under Gramm-Rudman. Medicare cuts would be restricted to no more than 2 percent of the program's outlays, and would only affect payments to providers, not beneficiaries.
The special joint committee would be likely to look closely at entitlement spending to achieve its deficit reduction goals. The spending cuts would be subject to tough negotiations over the next four or five months.
If a sequester was triggered, some restricted automatic cuts in Medicare spending might occur. It is unclear what other entitlement spending might be subject to a sequester.
The proposal does not include immediate increases in revenue, although the joint deficit-reduction committee might consider revenue increases.
Earlier in the negotiations, Boehner proposed an increase of $800 billion in revenue. Such an increase might come either from elimination of tax breaks for individuals or corporations, or a comprehensive overhaul of the tax code might be structured to yield a net revenue increase.
The plan requires both the House and the Senate to vote on a proposed balanced-budget amendment to the Constitution by the end of the year. If two-thirds of both chambers voted to adopt this amendment - and send it to the states for ratification - the second debt limit increase would be $1.5 trillion.
IRS Announces 2012 Standard Mileage Rates, Most Rates Are the Same as in July
WASHINGTON The Internal Revenue Service today issued the 2012 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning on Jan. 1, 2012, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
- 55.5 cents per mile for business miles driven
- 23 cents per mile driven for medical or moving purposes
- 14 cents per mile driven in service of charitable organizations
The rate for business miles driven is unchanged from the mid-year adjustment that became effective on July 1, 2011. The medical and moving rate has been reduced by 0.5 cents per mile.
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.
These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical or charitable expense are in Rev. Proc. 2010-51.
Notice 2012-01 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.
Three Tips for Employers Outsourcing Their Payroll
Outsourcing payroll duties to third-party service providers can streamline business operations, but the IRS reminds employers that they are ultimately responsible for paying federal tax liabilities.
Recent prosecutions of individuals and companies who - acting under the guise of a payroll service provider - have stolen funds intended for payment of employment taxes makes it important that employers who outsource payroll are aware of the following three tips from the IRS:
1. Employer Responsibility The employer is ultimately responsible for the deposit and payment of federal tax liabilities. Even though you forward the tax payments to the third party to make the tax deposits, you - the employer - are the responsible party.
If the third party fails to make the federal tax payments, the IRS may assess penalties and interest. The employer is liable for all taxes, penalties and interest due. The IRS can also hold you personally liable for certain unpaid federal taxes.
2. Correspondence If there are any issues with an account, the IRS will send correspondence to the address of record. The IRS strongly suggests you do not change the address of record to that of the payroll service provider. That could limit your ability to stay informed of tax matters involving your business.
3. EFTPS Choose a payroll service provider that uses the Electronic Federal Tax Payment System. You can register on the EFTPS system to get your own PIN to verify the payments.
The IRS web site ? www.irs.gov has more information on the responsibilities of employers outsourcing payroll, payroll service providers and EFTPS.
- Outsourcing Payroll and Third Party Payers
- Outsourcing Payroll Duties
- EFTPS: The Electronic Federal Tax Payment System
- Publication 966 - The Secure Way to Pay Your Federal Taxes for Businesses and Individuals
The September 2011 Sales and Use Tax Report has been posted to the Department of Revenue's web site. Click on http://www.revenue.wi.gov/ise/sales/index.html to access the report. The articles in the report are as follows:
1. Reminder of the New Sales and Use Tax Laws That Go into Effect September 1, 2011
2. Motor Vehicle Dealers' Measure of Use Tax Increased to $144
3. Thank You for E-Filing
4. Multi-Level Marketing Companies and Their Distributors
IRS Issues Guidance on Tax Treatment of Cell Phones; Provides Small Business Recordkeeping Relief
WASHINGTON - The Internal Revenue Service today issued guidance designed to clarify the tax treatment of employer-provided cell phones.
The guidance relates to a provision in the Small Business Jobs Act of 2010, enacted last fall, that removed cell phones from the definition of listed property, a category under tax law that normally requires additional recordkeeping by taxpayers.
The Notice issued today provides guidance on the treatment of employer- provided cell phones as an excludible fringe benefit. The Notice provides that when an employer provides an employee with a cell phone primarily for noncompensatory business reasons, the business and personal use of the cell phone is generally nontaxable to the employee. The IRS will not require recordkeeping of business use in order to receive this tax-free treatment.
Simultaneously with the Notice, the IRS announced in a memo to its examiners a similar administrative approach that applies with respect to arrangements common to small businesses that provide cash allowances and reimbursements for work-related use of personally-owned cell phones. Under this approach, employers that require employees, primarily for noncompensatory business reasons, to use their personal cell phones for business purposes may treat reimbursements of the employees' expenses for reasonable cell phone coverage as nontaxable. This treatment does not apply to reimbursements of unusual or excessive expenses or to reimbursements made as a substitute for a portion of the employee's regular wages.
Under the guidance issued today, where employers provide cell phones to their employees or where employers reimburse employees for business use of their personal cell phones, tax-free treatment is available without burdensome recordkeeping requirements. The guidance does not apply to the provision of cell phones or reimbursement for cell-phone use that is not primarily business related, as such arrangements are generally taxable.
Details are in the memo and in Notice 2011-72, posted today on IRS.gov.
Treasury, IRS Seek Public Input on Certain Employer Provisions of the Affordable Care Act
WASHINGTON-The Treasury Department and Internal Revenue Service today requested public comment on a proposed affordability safe harbor for employers under the shared responsibility provisions included in the Affordable Care Act that will apply to certain employers starting in 2014.
Under the Affordable Care Act, employers with 50 or more full-time employees that do not offer affordable health coverage to their full-time employees may be required to make a shared responsibility payment. Notice 2011-73, posted today on IRS.gov, solicits public input and comment on a proposed safe harbor, designed to make it easier for employers to determine whether the health coverage they offer is affordable. To that end, Treasury and IRS expect to propose a safe harbor permitting employers that offer coverage to their employees to measure the affordability of that coverage by using wages that the employer paid to an employee, instead of the employee?s household income. This contemplated safe harbor would only apply for purposes of the employer shared responsibility provision, and would not affect employees? eligibility for health insurance premium tax credits.
Today?s request for comment is designed to ensure that Treasury and IRS continue to receive broad input from stakeholders on how best to implement the shared responsibility provisions in a way that is administrable, allows flexibility, and minimizes burden. By soliciting comments and feedback now, Treasury and IRS are giving all interested parties the opportunity for input before proposed regulations are issued.
There are three ways to submit comments.
- E-mail to: Notice.Comments@irscounsel.treas.gov. Include ?Notice 2011-73? in the subject line.
- Mail to: Internal Revenue Service, CC:PA:LPD:PR (Notice 2011-73), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.
- Hand deliver to: CC:PA:LPD:PR (Notice 2011-73), Courier?s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC, between 8 a.m. and 4 p.m., Monday through Friday.
The deadline for comments is December 13, 2011.
To stay current with recent tax changes, news, and financial tips like Roger G. Roth, CPA & Associates
Wisconsin Notifies Roll Your Own Cigarette Retailers of Compliance Requirements
The Wisconsin Department of Revenue has issued a notice to retailers operating a roll your own (RYO) machine reminding them to comply with their legal obligations. Revenue agents will also be going on-site to the RYO retailers to ensure compliance with the cigarette tax law and regulations. ( Revenue Issues Notice to Roll Your Own (RYO) Retailers to Follow the Law, Wis. Dept. Rev., 09/23/2011 .)
Compliance requirements. The Department estimates there are approximately 50 to 100 RYO machines in Wisconsin. Under Wisconsin law, if a retailer or the retailer's customer operates a RYO machine on the retailer's premises to make cigarettes with loose tobacco, the retailer is both a cigarette manufacturer and distributor. As a consequence, the retailer is required to:
- (1) Obtain both manufacturer and distributor permits from the Department of Revenue. A retailer needs the cigarette manufacturer permit because its business involves producing cigarettes with loose tobacco. A distributor permit is required so that the appropriate Wisconsin cigarette tax stamps are affixed to all cigarette packages customers take with them when they leave the retail premises.
- (2) Sell more than 50% of the RYO cigarettes wholesale to other retailers or vending machine operators, if retailers wish to continue selling RYO cigarettes directly to customers. Retailers cannot own, control, or operate these other entities.
- (3) Obtain certification from the Wisconsin Department of Justice to be placed on its approved directory of cigarettes for sale in Wisconsin to be in compliance with state law and regulations.
- (4) Obtain certification from the Wisconsin Department of Safety and Professional Services that these cigarettes meet the fire safety performance standards.
The Department encourages RYO retailers to voluntarily comply with the law. Retailers who fail to comply with state law and regulations can be subjected to fines, penalties, permit revocation, imprisonment, and/or seizure of the tobacco and other personal property used in RYO activity.
IRS Announces Pension Plan Limitations for 2012
WASHINGTON The Internal Revenue Service today announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for Tax Year 2012. In general, many of the pension plan limitations will change for 2012 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged. Highlights include:
- The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government?s Thrift Savings Plan is increased from $16,500 to $17,000.
- The catch-up contribution limit for those aged 50 and over remains unchanged at $5,500.
- The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2011. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple?s income is between $173,000 and $183,000, up from $169,000 and $179,000.
- The AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011. For singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000. For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.
- The AGI limit for the savers credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $57,500 for married couples filing jointly, up from $56,500 in 2011; $43,125 for heads of household, up from $42,375; and $28,750 for married individuals filing separately and for singles, up from $28,250.
Below are details on both the unchanged and adjusted limitations.
Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Commissioner annually adjust these limits for cost of living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415. Under Section 415(d), the adjustments are to be made pursuant to adjustment procedures which are similar to those used to adjust benefit amounts under Section 215(i)(2)(A) of the Social Security Act.
The limitations that are adjusted by reference to Section 415(d) generally will change for 2012 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. For example, the limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) will increase from $16,500 to $17,000 for 2012. This limitation affects elective deferrals to Section 401(k) plans, Section 403(b) plans, and the Federal Government?s Thrift Savings Plan.
Effective January 1, 2012, the limitation on the annual benefit under a defined benefit plan under section 415(b)(1)(A) is increased from $195,000 to $200,000.
Under section 1.415(d)-1(a)(2)(ii) of the Income Tax Regulations, the adjustment to the limitation under a defined benefit plan under section 415(b)(1)(B) is determined using a special rule. This special rule takes into account the following recent history of changes in the cost-of-living indexes: (1) the cost-of-living index for the quarter ended September 30, 2009, was less than the cost-of-living index for the quarter ended September 30, 2008; (2) the cost-of-living index for the quarter ended September 30, 2010, was greater than the cost-of-living index for the quarter ended September 30, 2009, but less than the cost-of-living index for the quarter ended September 30, 2008; and (3) the cost-of-living index for the quarter ended September 30, 2011, was greater than the cost-of-living indexes for all prior periods.
For a participant who separated from service before January 1, 2010, the limitation under a defined benefit plan under Section 415(b)(1)(B) for 2012 is computed by multiplying the participant's 2011 compensation limitation by 1.0327 in order to reflect changes in the cost-of-living index from the quarter ended September 30, 2008, to the quarter ended September 30, 2011. For a participant who separated from service during 2010 or 2011, the limitation under a defined benefit plan under Section 415(b)(1)(B) for 2012 is computed by multiplying the participant's 2011 compensation limitation by 1.0376 in order to reflect changes in the cost-of-living index from the quarter ended September 30, 2010, to the quarter ended September 30, 2011.
The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2012 from $49,000 to $50,000.
The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). After taking into account the applicable rounding rules, the amounts for 2012 are as follows:
The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) is increased from $16,500 to $17,000.
The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $245,000 to $250,000.
The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $160,000 to $165,000.
The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5 year distribution period is increased from $985,000 to $1,015,000, while the dollar amount used to determine the lengthening of the 5 year distribution period is increased from $195,000 to $200,000.
The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) is increased from $110,000 to $115,000.
The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $5,500. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $2,500.
The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost of living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, is increased from $360,000 to $375,000.
The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $550.
The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $11,500.
The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations is increased from $16,500 to $17,000.
The compensation amounts under Section 1.61 21(f)(5)(i) of the Income Tax Regulations concerning the definition of ?control employee? for fringe benefit valuation purposes is increased from $95,000 to $100,000. The compensation amount under Section 1.61 21(f)(5)(iii) is increased from $195,000 to $205,000.
The Code also provides that several pension-related amounts are to be adjusted using the cost-of-living adjustment under Section 1(f)(3). After taking the applicable rounding rules into account, the amounts for 2012 are as follows:
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for married taxpayers filing a joint return is increased from $34,000 to $34,500; the limitation under Section 25B(b)(1)(B) is increased from $36,500 to $37,500; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), is increased from $56,500 to $57,500.
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for taxpayers filing as head of household is increased from $25,500 to $25,875; the limitation under Section 25B(b)(1)(B) is increased from $27,375 to $28,125; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), is increased from $42,375 to $43,125.
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for all other taxpayers is increased from $17,000 to $17,250; the limitation under Section 25B(b)(1)(B) is increased from $18,250 to $18,750; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), is increased from $28,250 to $28,750.
The deductible amount under § 219(b)(5)(A) for an individual making qualified retirement contributions remains unchanged at $5,000.
The applicable dollar amount under Section 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) is increased from $90,000 to $92,000. The applicable dollar amount under Section 219(g)(3)(B)(ii) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $56,000 to $58,000. The applicable dollar amount under Section 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $169,000 to $173,000.
The adjusted gross income limitation under Section 408A(c)(3)(C)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $169,000 to $173,000. The adjusted gross income limitation under Section 408A(c)(3)(C)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $107,000 to $110,000.
The dollar amount under Section 430(c)(7)(D)(i)(II) used to determine excess employee compensation with respect to a single-employer defined benefit pension plan for which the special election under section 430(c)(2)(D) has been made is increased from $1,014,000 to $1,039,000.
In 2012, Many Tax Benefits Increase Due to Inflation Adjustments
WASHINGTON For tax year 2012, personal exemptions and standard deductions will rise and tax brackets will widen due to inflation, the Internal Revenue Service announced today.
By law, the dollar amounts for a variety of tax provisions, affecting virtually every taxpayer, must be revised each year to keep pace with inflation. New dollar amounts affecting 2012 returns, filed by most taxpayers in early 2013, include the following:
- The value of each personal and dependent exemption, available to most taxpayers, is $3,800, up $100 from 2011.
- The new standard deduction is $11,900 for married couples filing a joint return, up $300, $5,950 for singles and married individuals filing separately, up $150, and $8,700 for heads of household, up $200. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
- Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700, up from $69,000 in 2011.
Credits, deductions, and related phase outs.
- For tax year 2012, the maximum earned income tax credit (EITC) for low- and moderate- income workers and working families rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC rises to $50,270, up from $49,078 in 2011.The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.
- The foreign earned income deduction rises to $95,100, an increase of $2,200 from the maximum deduction for tax year 2011.
- The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.
- For 2012, annual deductible amounts for Medical Savings Accounts (MSAs) increased from the tax year 2011 amounts; please see the table below.
Medical Savings Accounts (MSAs)
Minimum annual deductible
Maximum annual deductible
Maximum annual out-of-pocket expenses
The $2,500 maximum deduction for interest paid on student loans begins to phase out for a married taxpayers filing a joint returns at $125,000 and phases out completely at $155,000, an increase of $5,000 from the phase out limits for tax year 2011. For single taxpayers, the phase out ranges remain at the 2011 levels.
Estate and Gift
For an estate of any decedent dying during calendar year 2012, the basic exclusion from estate tax amount is $5,120,000, up from $5,000,000 for calendar year 2011. Also, if the executor chooses to use the special use valuation method for qualified real property, the aggregate decrease in the value of the property resulting from the choice cannot exceed $1,040,000, up from $1,020,000 for 2011.
The annual exclusion for gifts remains at $13,000.
- The monthly limit on the value of qualified transportation benefits exclusion for qualified parking provided by an employer to its employees for 2012 rises to $240, up $10 from the limit in 2011. However, the temporary increase in the monthly limit on the value of the qualified transportation benefits exclusion for transportation in a commuter highway vehicle and transit pass provided by an employer to its employees expires and reverts to $125 for 2012.
- Several tax benefits are unchanged in 2012. For example, the additional standard deduction for blind people and senior citizens remains $1,150 for married individuals and $1,450 for singles and heads of household.
Details on these inflation adjustments can be found in Revenue Procedure 2011-52, which will be published in Internal Revenue Bulletin 2011-45 on November 7, 2011.
The subtraction for child and dependent care expenses will be claimed on the 2011 Form 1 or prorated on the 2011 Form 1NPR. It will be reported on a general subtraction line; you won't find a specific subtraction line for child care expenses. For 2011, the subtraction is limited to $750 for one qualifying person and $1,500 for more than one qualifying person. The amounts will increase each year until the subtraction is limited to $3,000 for one qualified person and $6,000 if more than one for taxable years beginning in 2014 and thereafter.
A separate form is not needed for Wisconsin as the amount of qualifying expenses is equal to the amount on line 6 of the federal Form 2441, Child and Dependent Care Expenses, subject to the limitations above.
The subtraction for child and dependent care expenses was first enacted in 2007 Act 20. The effective date was delayed in 2009 Act 28 to taxable years beginning in 2011.
The IRS reminds homeowners that they still have time this year to make energy-saving and green-energy home improvements and qualify for either of two home energy credits.
The Nonbusiness Energy Property Credit is aimed at homeowners installing energy efficient improvements such as insulation, new windows and furnaces. The credit is more limited than in the past years, but can still provide substantial tax savings.
The 2011 credit rate is 10 percent of the cost of qualified energy efficiency improvements. Energy efficiency improvements include adding insulation, energy-efficient exterior windows and doors and certain roofs. The cost of installing these items does not count.
The credit can also be claimed for the cost of residential energy property, including labor costs for installation. Residential energy property includes certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass fuel.
The credit has a lifetime limit of $500, of which only $200 may be used for windows. If the total of nonbusiness energy property credits taken in prior years since 2005 is more than $500, the credit may not be claimed in 2011.
Qualifying improvements must be placed into service to the taxpayer?s principal residence located in the United States before January 1, 2012.
Homeowners going green should also check out the Residential Energy Efficient Property Credit, designed to spur investment in alternative energy equipment.
The credit equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property.
No cap exists on the amount of credit available except for fuel cell property.
Generally, labor costs are included when figuring this credit.
Not all energy-efficient improvements qualify for these tax credits, so homeowners should check the manufacturer?s tax credit certification statement before they purchase. Taxpayers can normally rely on this certification statement which can usually be found on the manufacturer?s website or with the product packaging.
Eligible homeowners can claim both of these credits on Form 5695, Residential Energy Credits when they file their 2011 federal income tax return. Because these are credits and not deductions, they reduce the amount of tax owed dollar for dollar. An eligible taxpayer can claim these credits regardless of whether he or she itemizes deductions on Schedule A.
Tax Credits Available for Certain Energy-Efficient Home Improvements
Item #2, Residential Energy Efficient Property Credit has been corrected to replace an erroneous reference that geothermal heat pumps qualify only when installed on or in connection with a taxpayer's main home located in the United States. The error was in limiting the credit to the taxpayer?s main home. Qualified geothermal heat pumps that are installed on or in a taxpayer's home (including a taxpayer's second home) located in the United States may qualify for the credit. Only qualified fuel cell property is subject to the main home installation requirement under the Residential Energy Efficient Property Credit rules.
The IRS would like you to get some credit for qualified home energy improvements this year. Perhaps you installed solar equipment or recently insulated your home? Here are two tax credits that may be available to you:
1. The Non-business Energy Property Credit Homeowners who install energy-efficient improvements may qualify for this credit. The 2011 credit is 10 percent of the cost of qualified energy-efficient improvements, up to $500. Qualifying improvements includeadding insulation, energy-efficient exterior windows and doors and certain roofs. The cost of installing these items does not count. You can also claim a credit including installation costs, for certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass fuel. The credit has a lifetime limit of $500, of which only $200 may be used for windows. If you've claimed more than $500 of non-business energy property credits since 2005, you can not claim the credit for 2011. Qualifying improvements must have been placed into service in the taxpayer?s principal residence located in the United States before Jan. 1, 2012.
2. Residential Energy Efficient Property Credit This tax credit helps individual taxpayers pay for qualified residential alternative energy equipment, such as solar hot water heaters, solar electricity equipment and wind turbines. The credit, which runs through 2016, is 30 percent of the cost of qualified property. There is no cap on the amount of credit available, except for fuel cell property. Generally, you may include labor costs when figuring the credit and you can carry forward any unused portions of this credit. Qualifying equipment must have been installed on or in connection with your home located in the United States; fuel cell property qualifies only when installed on or in connection with your main home located in the United States.
Not all energy-efficient improvements qualify so be sure you have the manufacturer?s tax credit certification statement, which can usually be found on the manufacturer?s website or with the product packaging.
If you're eligible, you can claim both of these credits on Form 5695, Residential Energy Credits when you file your 2011 federal income tax return. Also, note these are tax credits and not deductions, so they will generally reduce the amount of tax owed dollar for dollar. Finally, you may claim these credits regardless of whether you itemize deductions on IRS Schedule A.
You can find Form 5695 on this website or order it by calling 1-800-TAX-FORM (800-829-3676).
In order to qualify for the additional deduction, the employer must have increased the number of ?full-time equivalent? employees during the year. In other words, employers must have created new jobs, not just replaced workers of existing positions. In order to be considered a ?full-time equivalent? employee, the employee must reside in Wisconsin and be required to work at least 2080 hours per year. This deduction is only available to regular, non seasonal jobs. The number of ?full-time equivalent? employees is determined based on the average employee count from your quarterly unemployment reports.
If you qualify for this deduction, it is possible to have a $2,000-$4,000 maximum deduction per additional employee added during the year. If you have any questions or believe you could qualify for the credit, contact us for additional information.
In preparation for the upcoming year-end, we would like to remind you to make sure you have a form W-9 on file for all your vendors that will receive a 1099?s from you this year. This form will ensure you have the following information needed for us to prepare their 1099: payee legal name, identification number [Federal Identification Number (EIN) or Social Security Number (TIN)], and their complete mailing address. You are required to file a 1099-MISC if, in a calendar year, you made payments of $600.00 or more to an individual, partnership, LLC or attorney(s) (regardless of entity classification), for services, rents or subcontracting services.
Also, if we prepare your payroll, please verify that we have their correct name, social security number and mailing address, so we have accurate information when preparing their W-2?s for 2012. Keep in mind that bonus pay is considered compensation and must be included in payroll calculations, for W-2 reporting purposes.
In preparation for the upcoming year-end, we would like to remind you to make sure all your vendor information is correct for any 1099?s that you may have. Please be sure to have the following information updated: payee legal name, identification number [Federal Identification Number (EIN) or Social Security Number (TIN)], and their complete mailing address. You are required to file a 1099-MISC if, in a calendar year, you made payments of $600.00 or more to an individual, partnership, LLC or attorney(s) (regardless of entity classification), for services, rents or subcontracting services.
Also, if we prepare your payroll, please verify that we have their correct name, social security number and mailing address, so we have accurate information when preparing their W-2?s for 2012. Keep in mind that bonus pay is considered compensation and must be included in payroll calculations, for W-2 reporting purposes.
Dramatic tax increases scheduled to go into effect in 2013 make 2012 tax planning imperative. The following taxes may be impacted:
· Not only are the Bush Administration tax cuts set to expire, but a new 3.8 percent surtax on investment income and a possible reinstated claw-back of itemized deductions could raise the tax rate on ordinary income to as high as an effective 44.6 percent for some taxpayers.
· Similarly, the tax rate on long-term capital gains could increase from 15 percent to 20 percent and the rate on qualified dividends from 15 percent to an effective 44.6 percent.
· Finally, if Congress doesn?t take action, the federal estate tax rate will increase from 35 percent to 55 percent and the exclusion amount will drop from $5,120,000 to $1,000,000.
This letter will suggest some ways to avoid or minimize the adverse effects of these changes. Planning for these likely tax changes is a major undertaking and many clients are beginning the process now rather than waiting for the fall elections. This is prudent because the additional time will allow you to become comfortable with the gifting process and provide time to custom design trusts for your family.
For many taxpayers it will make sense to harvest capital gains in 2012 to take advantage of the current lower rates. You would sell appreciated capital assets and immediately reinvest in the same or similar assets. You would then hold the new assets until you would otherwise have sold them, so there would be no change in your investment strategy.
Deciding whether to use the strategy is not as simple as it might appear on the surface, however, because the lower tax rates must generally be weighed against a loss of tax deferral. By harvesting the gains in 2012 you would be paying a lower tax rate, but recognizing the gains earlier. The greater the differential in tax rates and the shorter the time before the second sale the more favorable gain harvesting would be.
In some cases, the correct decision will be clear without doing any analysis. If you are currently in the 0% long-term capital gains bracket, 2012 gain harvesting would always be favorable because it would give you a free basis step up. Gain harvesting would also be more favorable if you planned to sell the stock in 2013 or 2014 anyway. The time value of the tax deferral would be small compared with the future tax savings.
At the other extreme, if you are currently in the 15% long-term capital gain bracket and plan to die with an asset and pass it on to heirs with a stepped-up basis, there is no reason to recognize the gain now. You would be incurring tax now without any offsetting future benefit. Nor would it make sense to harvest losses to create additional capital loss carryovers. These loss carryovers would be better employed to offset capital gains in the future when rates are expected to be higher.
If you do not fall into one of these categories, you will have to do a quantitative analysis to determine whether 2012 gain harvesting would work for you. The decision could be thought of as buying a future tax savings by recognizing gain in 2012. By analyzing the decision in this way, you could measure a return on the 2012 investment over time. If this return on investment exceeded your opportunity cost of capital, gain harvesting would make sense. Please contact us to find out which of your assets should be harvested in 2012.
Planning for the 3.8 Percent Medicare Surtax
For tax years beginning January 1, 2013, the tax law imposes a 3.8 percent surtax on certain passive investment income of individuals, trusts and estates. For individuals, the amount subject to the tax is the lesser of (1) net investment income (NII) or (2) the excess of a taxpayer's modified adjusted gross income (MAGI) over an applicable threshold amount.
Net investment income includes dividends, rents, interest, passive activity income, capital gains, annuities and royalties. Specifically excluded from the definition of net investment income are self-employment income, income from an active trade or business, gain on the sale of an active interest in a partnership or S corporation, IRA or qualified plan distributions and income from charitable remainder trusts. MAGI is generally the amount you report on the last line of page 1, Form 1040.
The applicable threshold amounts are shown below.
Married taxpayers filing jointly $250,000
Married taxpayers filing separately $125,000
All other individual taxpayers $200,000
A simple example will illustrate how the tax is calculated.
Example. Al and Barb, married taxpayers filing separately, have $300,000 of salary income and $100,000 of NII. The amount subject to the surtax is the lesser of (1) NII ($100,000) or (2) the excess of their MAGI ($400,000) over the threshold amount ($400,000 -$250,000 = $150,000). Because NII is the smaller amount, it is the base on which the tax is calculated. Thus, the amount subject to the tax is $100,000 and the surtax payable is $3,800 (.038 x $100,000).
Fortunately, there are a number of effective strategies that can be used to reduce MAGI and or NII and reduce the base on which the surtax is paid. These include (1) Roth IRA conversions, (2) tax exempt bonds, (3) tax-deferred annuities, (4) life insurance, (5) rental real estate, (6) oil and gas investments, (7) timing estate and trust distributions, (8) charitable remainder trusts, (9) installment sales and maximizing above-the-line deductions. We would be happy to explain how these strategies might save you large amounts of surtax.
Accelerating Ordinary Income into 2012
A final opportunity that should be noted is accelerating ordinary income into 2012. Perhaps the best way to do this would be to convert a traditional IRA to a Roth IRA in 2012, if a conversion otherwise made sense. Ordinary income could also be accelerated by selling bonds with accrued interest in 2012 or selling and repurchasing bonds trading at a premium. Finally, you might consider exercising non-qualified stock options in 2012.
Estate Tax Provisions
The estate tax exemption is currently $5,120,000 per person and will revert to $1,000,000 on January 1st, 2013 unless Congress acts. The President is suggesting a $3,500,000 exemption. The potential reduction in the estate tax exemption is resulting in many client making large gifts, in trust, for their family. In some instances the trusts are for the spouse, children and grandchildren and in others just for children and younger generations. Most experts would define the savings at 35%, 45% or 55% of the amount gifted over $1,000,000. On a $5,000,000 gift the savings would be $1,800,000 ($4,000,000*45%).
We are prepared to assist you in modeling scenarios to determine which strategies are right for you. Please don?t hesitate to call me at (608) 882-2795 to schedule an appointment to begin discussing your options.
Roger G. Roth, CPA
& Nicole M. Hamby, Partner
Job Search Expenses Can be Tax Deductible
Summertime is the season that often leads to major life decisions, such as buying a home, moving or a job change. If you are looking for a new job that is in the same line of work, you may be able to deduct some of your job hunting expenses on your federal income tax return.
Here are seven things the IRS wants you to know about deducting costs related to your job search:
1. To qualify for a deduction, your expenses must be spent on a job search in your current occupation. You may not deduct expenses you incur while looking for a job in a new occupation.
2. You can deduct employment and outplacement agency fees you pay while looking for a job in your present occupation. If your employer pays you back in a later year for employment agency fees, you must include the amount you received in your gross income, up to the amount of your tax benefit in the earlier year.
3. You can deduct amounts you spend for preparing and mailing copies of your résumé to prospective employers as long as you are looking for a new job in your present occupation.
4. If you travel to look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area to which you travelled. You can only deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity unrelated to your job search compared to the amount of time you spend looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job.
5. You cannot deduct your job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one.
6. You cannot deduct job search expenses if you are looking for a job for the first time.
7. The amount of job search expenses that you can claim is limited. To determine your deduction, use Schedule A, Itemized Deductions. Job search expenses are claimed as a miscellaneous itemized deduction and the total of all miscellaneous deductions must be more than two percent of your adjusted gross income.
For more information about job search expenses, see IRS Publication 529, Miscellaneous Deductions. This publication is available on www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
Expanded Adoption Tax Credit Still Available for Extension Filers
If you adopted a child last year and requested an extension of time to file your 2011 taxes, you may be able to claim the expanded adoption credit on your federal tax return. The Affordable Care Act temporarily increased the amount of the credit and made it refundable, which means it can increase the amount of your refund.
Here are eight things to know about this valuable tax credit:
1. The adoption credit for tax year 2011 can be as much as $13,360 for each effort to adopt an eligible child. You may qualify for the credit if you adopted or attempted to adopt a child in 2010 or 2011 and paid qualified expenses relating to the adoption.
2. You may be able to claim the credit even if the adoption does not become final. If you adopt a special needs child, you may qualify for the full amount of the adoption credit even if you paid few or no adoption-related expenses.
3. The credit for qualified adoption expenses is subject to income limitations, and may be reduced or eliminated depending on your income.
4. Qualified adoption expenses are reasonable and necessary expenses directly related to the legal adoption of the child who is under 18 years old, or physically or mentally incapable of caring for himself or herself. These expenses may include adoption fees, court costs, attorney fees and travel expenses.
5. To claim the credit, you must file a paper tax return and Form 8839, Qualified Adoption Expenses, and attach all supporting documents to your return. Documents may include a final adoption decree, placement agreement from an authorized agency, court documents and the state?s determination for special needs children. You can use IRS Free File to prepare your return, but it must be printed and mailed to the IRS. Failure to include required documents will delay your refund.
6. If you filed your tax returns for 2010 or 2011 and did not claim an allowable adoption credit, you can file an amended return to get a refund. Use Form 1040X, Amended U.S. Individual Income Tax Return, along with Form 8839 and the required documents to claim the credit. You generally must file Form 1040X to claim a refund within three years from the date you filed your original return or within two years from the date you paid the tax, whichever is later.
7. The IRS is committed to processing adoption credit claims quickly, but must also safeguard against improper claims by ensuring the standards for receiving the credit are met. If your return is selected for review, please keep in mind that it is necessary for the IRS to verify that the legal criteria are met before the credit can be paid. If you are owed a refund beyond the adoption credit, you will still receive that part of your refund while the review is being conducted.
8. The expanded adoption credit provisions available in 2010 and 2011 do not apply in later years. In 2012 the maximum credit decreases to $12,650 per child and the credit is no longer refundable. A nonrefundable credit can reduce your tax, but any excess is not refunded to you.
For more information see the ?Adoption Benefits FAQs? page available at IRS.gov or the Form 8839 instructions. The forms and instructions can be downloaded from the website or ordered by calling 800-TAX-FORM (800-829-3676).
Six Social Media Tools to Help You Get Free Tax Information
The IRS uses a variety of technologies to help you get the tax information you need. Here are six ways the IRS uses social media to share information on tax changes, initiatives, products and services:
1. IRS2Go 2.0 IRS?s smartphone application allows you to check your refund status, get tax updates and follow the IRS via Twitter. IRS2Go 2.0 is available in the Apple App store for iPhone or iPod touch devices and in the GooglePlay store for Android devices.
2. YouTube IRSvideos YouTube Channel offers short, informative clips on various tax-related topics. The videos are available in English, American Sign Language and Spanish.
3. Twitter IRS tweets include tax-related announcements, news for tax professionals and updates for job seekers. Follow us @IRSnews.
4. Facebook IRS has Facebook pages that post tax information for individuals, tax professionals, and for those needing help resolving long-standing tax issues with the IRS.
5. Audio files for Podcasts These short audio recordings provide information on tax-related topics -- one per podcast. The audio files (along with transcripts) are available on iTunes or through the Multimedia Center on IRS.gov.
6. Widgets These tools, which can be placed on websites, blogs or social media networks, direct people to visit IRS.gov for information. The widgets feature the latest tax initiatives and programs and can be found on Marketing Express, the marketing site that allows IRS partners and tax preparers to customize their IRS communications products.
IRS Can Help When Starting a Small Business
If you are opening a new business this summer, the IRS has some basic federal tax information to help you get started.
Here are some things to consider when starting a business:
- Type of Business One of the first decisions you need to make is what type of business you are going to establish. The most common types of businesses are sole proprietorship, partnership, corporation, S corporation, and Limited Liability Company. The type of business you establish determines which tax forms you will need to file.
- Types of Taxes The type of business you operate also determines what types of taxes you will pay and how you will pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.
- Employer Identification Number A business typically needs to get an Employer Identification Number to use as an identifier for tax purposes. Check IRS.gov to find out whether you will need this number, and, if so, you can apply for an EIN online.
- Recordkeeping Good records will help you keep track of deductible expenses, prepare your tax returns and support items that you report on your tax returns. Good records will also help you monitor the progress of your business and prepare your financial statements. You may choose any recordkeeping system that clearly shows your income and expenses.
- Tax Year Every business taxpayer must figure taxable income on an annual basis called a tax year. Your tax year can be either a calendar year or a fiscal year.
- Accounting Method Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.
Visit the IRS.gov website and click on the ?Businesses? tab for more information and resources, including a special section on starting a business. Publication 583, Starting a Business and Keeping Records, can also help new business owners understand their federal tax responsibilities. The publication is also available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).
With the early start of this year's hurricane season, the Internal Revenue Service encourages individuals and businesses to safeguard themselves against natural disasters by taking a few simple steps.
Create a Backup Set of Records Electronically
Taxpayers should keep a set of backup records in a safe place. The backup should be stored away from the original set.
Keeping a backup set of records ?? including, for example, bank statements, tax returns, insurance policies, etc. ?? is easier now that many financial institutions provide statements and documents electronically, and much financial information is available on the Internet. Even if the original records are provided only on paper, they can be scanned into an electronic format. With documents in electronic form, taxpayers can download them to a backup storage device, like an external hard drive, or burn them to a CD or DVD.
Another step a taxpayer can take to prepare for disaster is to photograph or videotape the contents of his or her home, especially items of higher value. The IRS has a disaster loss workbook, Publication 584, which can help taxpayers compile a room-by-room list of belongings.
A photographic record can help an individual prove the market value of items for insurance and casualty loss claims. Photos should be stored with a friend or family member who lives outside the area.
Update Emergency Plans
Emergency plans should be reviewed annually. Personal and business situations change over time as do preparedness needs. When employers hire new employees or when a company or organization changes functions, plans should be updated accordingly and employees should be informed of the changes.
Check on Fiduciary Bonds
Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider.
IRS Ready to Help
If disaster strikes, an affected taxpayer can call 1-866-562-5227 to speak with an IRS specialist trained to handle disaster-related issues.
Back copies of previously-filed tax returns and all attachments, including Forms W-2, can be requested by filing Form 4506, Request for Copy of Tax Return.
Alternatively, transcripts showing most line items on these returns can be ordered on-line, by calling 1-800-908-9946 or by using Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript or Form 4506-T, Request for Transcript of Tax Return.
"Dirty Dozen" Tax Scams
IRS Commissioner Doug Shulman recently stated "taxpayers should be careful and avoid falling into a trap with the Dirty Dozen. Scam artists will tempt people in-person, on-line and by e-mail with misleading promises about lost refunds and free money. Don't be fooled by these scams."
The Dirty Dozen are the 12 most prevalent scams detected by the IRS. Taxpayers should take precautions to avoid these and other suspicious activities of scam artists. The following scams make up the IRS's 2012 "Dirty Dozen" listing.
1. Identity Theft. Topping this year's list is identity theft. The IRS is increasingly seeing identity thieves looking for ways to use a legitimate taxpayer's identity and personal information to file a tax return and claim a fraudulent re-fund.
2. Phishing. Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure potential victims and prompt them to provide valuable personal and financial information that can be used to commit identity or financial theft.
3. Return Preparer Fraud. Questionable return preparers have been known to skim off their clients' refunds, charge inflated fees for return preparation services, and attract new clients by promising guaranteed or inflated refunds.
4. Hiding Income Offshore. Individuals continue to try to avoid paying U.S. taxes by illegally hiding income in off-shore accounts or using offshore debit cards, credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities, or insurance plans.
5. "Free Money." Scammers have been preying on low-income individuals and the elderly by posting flyers in community churches promising that tax returns can be filed with little or no documentation to receive "free money" from the IRS or Social Security Administration.
6. False/Inflated Income and Expenses. This tactic is used by scam artists who file false or misleading returns to claim refunds they are not entitled to receive. One popular scam is to report income that was never earned to obtain refundable credits.
7. False Form 1099 Refund Claims. In this scam, the perpetrator files a fake information return reporting false with-holding amounts that are subsequently used to file erroneous refund claims.
8. Frivolous Arguments. Frivolous scheme promoters encourage people to make unreasonable and unfounded claims to avoid paying taxes.
9. Falsely Claiming Zero Wages. Filing a phony wage-related or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed.
10. Abuse of Charitable Organizations and Deductions. Misuses of tax-exempt organizations include arrangements to improperly shield income or assets from taxation, attempts by donors to maintain control over donated assets or income from donated property, and overvaluation of contributed property.
11. Disguised Corporate Ownership. In this scam, domestic corporations and other entities are formed to disguise the ownership of a business. They are then used to under-report income, claim fictitious deductions, avoid the filing of tax returns, or participate in listed transactions, money laundering, financial crimes, and even terrorist financing.
12. Misuse of Trusts. Unscrupulous promoters have urged taxpayers to transfer assets into trusts, promising reduced taxable income, deductions for personal expenses, and reduced estate or gift taxes that don't deliver as promised.
Please contact us if you are concerned about these or any other questionable activity.
Use a Reverse Mortgage as a Cash Resource
When an older homeowner has significant equity in his or her residence and needs funds, but lacks the resources to make monthly payments on a conventional mortgage, a reverse mortgage might provide a solution. A reverse mortgage is so-called because the mortgage balance normally increases over the term of the loan, rather than decreasing as the balance of a conventional mortgage does. A reverse mortgage allows a homeowner to receive loan proceeds over a certain period (by borrowing against equity in the home) while continuing to live in the house. (Other loan distribution options are available.)
An older homeowner may be motivated to obtain a reverse mortgage for many reasons. These include paying off an existing mortgage; purchasing a new residence; paying taxes, medical expenses, insurance, and household upkeep costs; covering financial emergencies; supplementing monthly income; paying nursing home expenses; and providing rainy day funds.
The amount a lender will advance depends primarily on the borrower's age, equity in the home, and the interest rate. The older the homeowner, the larger the advances can be because there will probably be fewer advances than a younger homeowner would receive. Also, the more equity in the home, the larger the monthly advances can be. Finally, a lower interest rate can lead to larger advances.
In a typical case, the house will be sold at some point (normally after the borrower dies) to pay off the mortgage. Since the loan typically defers all repayment until the house is sold or the borrower dies, lending decisions may be based primarily on the home's value rather than on the borrower's creditworthiness and ability to make monthly payments as in the typical loan underwriting process.
In most cases, to qualify for a reverse mortgage, the homeowner must be at least 62 years old. He or she must also own the home outright or be able to pay off any balance with a portion of the reverse mortgage proceeds. To avoid default, the homeowner must maintain the home, pay property taxes, and provide insurance.Caution: The expenses associated with reverse mortgages are high. Homeowners could pay as much as 7% to 8% of their home's value in closing costs as well as a higher interest rate than with a regular mortgage or home equity loan.
Expanded Tax Credit for Hiring Veterans, Credit for Providing Health Care Coverage to Employees and Tax Relief
For Small Business Week, IRS Spotlights Expanded Tax Credit for Hiring Veterans, Credit for Providing Health Care Coverage to Employees and Tax Relief
WASHINGTON The Internal Revenue Service is marking Small Business Week, May 20 to 26, by encouraging small business owners to check out two key tax credits and a special relief program that could provide significant tax benefits during 2012.
Both the expanded credit for hiring veterans and the credit for employer-provided health care coverage can provide tax savings to eligible small businesses when they file their 2012 federal income tax returns. In addition, substantial relief from past payroll tax obligations is available to eligible employers who agree to reclassify their workers as employees in the future. Here are details on each of these benefits.
Expanded Tax Credit for Hiring Veterans
A law change enacted late last year now provides an expanded Work Opportunity Tax Credit (WOTC) to employers that hire eligible unemployed veterans. The credit can be as high as $9,600 per veteran for for-profit employers or up to $6,240 for tax-exempt organizations. The amount of the credit depends on a number of factors, including the length of the veteran?s unemployment before hire, hours a veteran works and the amount of first-year wages paid. Employers who hire veterans with service-related disabilities may be eligible for the maximum credit.
Certification requirements apply to these new hires. Normally, an eligible employer must file Form 8850 with the state workforce agency within 28 days after the eligible worker begins work. But under a special rule, employers have until June 19, 2012, to complete and file this form for veterans hired on or after Nov. 22, 2011, and before May 22, 2012. The 28-day rule will again apply to eligible veterans hired on or after May 22. This form can be faxed or electronically transmitted to the state workforce agency, as long as the agency is able to receive the certification forms that way.
Businesses claim the credit on their income tax return using Form 5884 and Form 3800. A separate claim procedure using Form 5884-C applies to eligible tax-exempt organizations. Details are on IRS.gov.
Credit Helps Small Employers Provide Health Care Coverage
Small employers that pay at least half of the premiums for employee health insurance coverage under a qualifying arrangement may be eligible for the small business health care tax credit. Enacted two years ago, the credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have.
Eligible small employers can claim the credit for 2010 through 2013 and for two additional years beginning in 2014. Targeted to small employers that primarily employ low-and moderate-income workers, the maximum credit, in tax-years 2010 through 2013, is 35 percent of premiums paid by small businesses and 25 percent of premiums paid by tax-exempt organizations, increasing to 50 percent and 35 percent, respectively, in 2014.
The recently-revamped Small Business Health Care Tax Credit page on IRS.gov is packed with information and resources designed to help small employers see if they qualify for the credit and then figure it correctly. These include a step-by-step guide for determining eligibility, examples of typical tax savings under various scenarios, answers to frequently-asked questions, a YouTube video and a webinar.
Many Businesses can qualify for Substantial Payroll Tax Relief
Many businesses can now resolve past worker classification issues at a low cost by voluntarily reclassifying their workers. Better yet, they don?t have to wait for an IRS audit to do so.
By prospectively reclassifying workers, making a minimal payment and meeting a few other requirements, eligible businesses can achieve greater certainty for themselves, their workers and the government. Already, 540 employers have been approved to participate in the new IRS Voluntary Classification Settlement Program (VCSP) since it was launched last September.
The VCSP is available to many businesses, tax-exempt organizations and government entities that currently treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees in the future. To be eligible, an employer must:
- Consistently have treated the workers in the past as nonemployees,
- Have filed all required Forms 1099 for the workers for the previous three years
- Not currently be under audit by the IRS or the Department of Labor or a state agency concerning the classification of these workers
Interested employers can apply for the program by filing Form 8952. Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. It?s that simple. Moreover, employers will not be audited on payroll taxes related to these workers for prior years.
Details on these and other tax benefits are on IRS.gov. In addition, the Small Business Tax Center (www.irs.gov/smallbiz) has links to a variety of useful tax tools for small business, including the Virtual Small Business Tax Workshop, a downloadable tax calendar, common forms and their instructions and help on everything from how to get an Employer Identification Number (EIN) online to how to engage with the IRS in the event of an audit.
Use Tax - Frequently Asked Questions
- 1. What is the Wisconsin use tax?
- 2. What if I already paid tax in another state?
- 3. What is taxable?
- 4. What is the use tax rate?
- 5. What are the special county tax rules?
- 6. What must I do if I buy taxable goods or services from an out-of-state mail-order company, television shopping channel, Internet seller, or Internet auction service and no Wisconsin tax is charged by the vendor?
- 7. Can an out-of-state business such as a mail-order company collect Wisconsin use tax on taxable goods that are mailed or delivered into Wisconsin?
- 8. Is a taxable service performed in another state subject to use tax?
- 9. Is there a convenient way to keep track of my taxable purchases during the year?
- 10. On what amount should the use tax be calculated?
- 11. How do I pay use tax?
- 12. What will happen if I don't pay the use tax I owe?
1. What is the Wisconsin use tax?
Use tax is the counterpart of sales tax. Use tax must be paid when Wisconsin sales tax (state, county, and stadium) is not charged and no exemption applies. If you purchase taxable items from retailers who do not collect Wisconsin sales tax or bring taxable items into Wisconsin from other states or foreign countries, you owe use tax.
2. What if I already paid tax in another state?
Wisconsin allows a credit, for sales tax properly paid in another state, against use tax due. If you properly paid sales tax in another state, the sales tax paid may be used to offset the Wisconsin use tax due. See Wisconsin Tax Bulletin #157, page 28 for further information. Foreign taxes and customs duty charges are not eligible for this credit.
3. What is taxable?
All goods and services that are taxable under Wisconsin's sales tax law are also subject to use tax. Use tax only applies when sales tax is not paid. The following types of purchases are subject to use tax: out-of-state, mail-order catalog, television shopping, auction, toll-free ?800? and Internet purchases.
Examples of taxable items include automobiles, appliances, clothing, cigarettes, furniture, jewelry, DVDs, ring tones, computers, prewritten computer software, and music or video downloads. Examples of taxable services include repair services to your motor vehicle, television, or computer.
4. What is the use tax rate?
The state use tax rate is 5% and if the item purchased is used, stored or consumed in a county that imposes county and/or stadium tax, you must also pay an additional 0.5% and/or 0.1%. See the total sales and use tax rate for each county.
State 5.0% County 0.5% Baseball stadium district 0.1% Football stadium district 0.5%
Example: You have a camera shipped to your home in Dane County. The use tax rate is 5.5% (5% state tax plus 0.5% Dane County tax).
The baseball stadium district is comprised of Milwaukee, Ozaukee, Racine, Washington, and Waukesha counties. The football stadium district is comprised of Brown County.
Click here for more information on the county and stadium sales and use taxes.
5. What are the special county tax rules?
Generally, if an item is purchased in a county that has not adopted the county tax and is later brought to a taxable county where it is used, stored, or consumed, the purchase is not subject to the county use tax.
Exceptions: Construction materials, titled items and certain purchases by nonresidents:
- ◘ Construction materials purchased in a county that has not adopted the county tax and later used to improve real property in a county that has adopted the county tax, are subject to county use tax. For more information, see Wisconsin Tax Bulletin #157 or Publication 207, Contractors.
- ◘ Purchases of motor vehicles, boats, recreational vehicles, and aircraft. These items are taxed, for county and stadium sales tax purposes, based on the county in which the item is customarily kept.
- ◘ Purchases of snowmobiles, trailers, semi-trailers and all-terrain vehicles. These items are taxed, for county and stadium sales tax purposes, based on where the buyer receives possession of the items.
- ◘ Sales of motor vehicles, aircraft and truck bodies (including semitrailers) to nonresidents who do not use the property other than to remove it from Wisconsin, are exempt from Wisconsin sales and use tax.
- ◘ Sales of boats, recreational vehicles, snowmobiles, trailers and all-terrain vehicles to nonresidents are subject to Wisconsin sales and use tax.
For more information, see Reporting Sales Tax on Sales of Motor Vehicles, Boats, Snowmobiles, Recreational Vehicles, Trailers, Semitrailers, All-Terrain Vehicles, and Aircraft.
6. What must I do if I buy taxable goods or services from an out-of-state mail-order company, television shopping channel, Internet seller, or Internet auction service and no Wisconsin tax is charged by the vendor?
If you buy the goods or services for use in Wisconsin, you must report and pay the use tax as explained in Question 11 below.
7. Can an out-of-state business such as a mail-order company collect Wisconsin use tax on taxable goods that are mailed or delivered into Wisconsin?
Yes. If the business has registered to collect Wisconsin use tax, it must collect the tax from you. If the business is not registered, then you must report and pay the tax yourself.
When an out-of-state retail business has a physical presence (such as a store or warehouse) in Wisconsin, it is required by law to register and collect Wisconsin tax. However, mail order and Internet companies and others who advertise in Wisconsin, but do not have a physical presence in Wisconsin, may not be required to register and collect Wisconsin tax. Some out-of-state businesses, however, register and collect use tax as a courtesy to their customers.
8. Is a taxable service performed in another state subject to use tax?
It can be. For example, a Wisconsin resident sends a watch to another state for repair. The watch is repaired and shipped back to the Wisconsin resident. The retailer does not charge tax. The Wisconsin resident owes use tax on the total repair charge (including shipping charges billed by the retailer). Although, the repair was performed outside of Wisconsin, the Wisconsin resident took possession of the service in Wisconsin.
9. Is there a convenient way to keep track of my taxable purchases during the year?
Yes. The Wisconsin Department of Revenue has developed a free Use Tax Calculator (in an Excel spreadsheet) to help individuals and businesses track and calculate use tax owed to Wisconsin. The spreadsheet can be used by persons who have some type of spreadsheet software on their computers (Excel, QuatroPro, etc.). If you don't have the Microsoft Excel software, you can download a free viewer.
10. On what amount should the use tax be calculated?
Calculate the use tax by multiplying the total cost of the taxable goods or services purchased, including separately stated charges such as shipping and handling, by the tax rate.
11. How do I pay use tax?
Individuals have two options for paying Wisconsin use tax.
- ◘ Individuals can pay use tax on their Wisconsin income tax return (Form 1, 1A, WI-Z, or 1NPR). A line entitled ?Sales and use tax due on out-of-state purchases? on Wisconsin income tax returns allows individuals to report their annual use tax liability, or
- ◘ Individuals can report and pay use tax quarterly on the Wisconsin Form UT-5, Consumer Use Tax Return.
Businesses have two options for paying Wisconsin use tax.
- ◘ A business can pay use tax on its Wisconsin sales and use tax return, or
- ◘ A business can report and pay use tax quarterly on a Wisconsin Form UT-5, Consumer Use Tax Return.
12. What will happen if I don't pay the use tax I owe?
If you don't pay the use tax you owe, you may be subject to interest and penalties in addition to the use tax.
The Department audits businesses and enters into agreements with other states to ensure that use tax owed by individuals and businesses on out-of-state purchases is remitted to the Department.
Start Planning Now for Next Year's Tax Return
The tax deadline may have just passed but planning for next year can start now. The IRS reminds taxpayers that being organized and planning ahead can save time, money and headaches in 2013. Here are eight things you can do now to make next April 15 easier.
1. Adjust your withholding Why wait another year for a big refund? Now is a good time to review your withholding and make adjustments for next year, especially if you'd prefer more money in each paycheck this year. If you owed at tax time, perhaps you'd like next year's tax payment to be smaller. Use IRS's Withholding Calculator at www.irs.gov or Publication 919, How Do I Adjust My Tax Withholding?
2. Store your return in a safe place Put your 2011 tax return and supporting documents somewhere secure so you'll know exactly where to find them if you receive an IRS notice and need to refer to your return. If it is easy to find, you can also use it as a helpful guide for next year's return.
3. Organize your recordkeeping Establish a central location where everyone in your household can put tax-related records all year long. Anything from a shoebox to a file cabinet works. Just be consistent to avoid a scramble for misplaced mileage logs or charity receipts come tax time.
4. Review your paycheck Make sure your employer is properly withholding and reporting retirement account contributions, health insurance payments, charitable payroll deductions and other items. These payroll adjustments can make a big difference on your bottom line. Fixing an error in your paycheck now gets you back on track before it becomes a huge hassle.
5. Shop for a tax professional early If you use a tax professional to help you strategize, plan and make financial decisions throughout the year, then search now. You'll have more time when you're not up against a deadline or anxious for your refund. Choose a tax professional wisely. You are ultimately responsible for the accuracy of your own return regardless of who prepares it. Find tips for choosing a preparer at www.irs.gov.
6. Prepare to itemize deductions If your expenses typically fall just below the amount to make itemizing advantageous, a bit of planning to bundle deductions into 2012 may pay off. An early or extra mortgage payment, pre-deadline property tax payments, planned donations or strategically paid medical bills could equal some tax savings. See the Schedule A instructions for expenses you can deduct if you're itemizing and then prepare an approach that works best for you.
7. Strategize tuition payments The American Opportunity Tax Credit, which offsets higher education expenses, is set to expire after 2012. It may be beneficial to pay 2013 tuition in 2012 to take full advantage of this tax credit, up to $2,500, before it expires. For more information, see IRS Publication 970, Tax Benefits for Education.
8. Keep up with changes Find out about tax law changes, helpful tips and IRS announcements all year by subscribing to IRS Tax Tips through www.irs.gov or IRS2Go, the mobile app from the IRS. The IRS issues tips regularly during summer and tax season. Special Edition tips are sent periodically with other timely updates.
The IRS emphasizes that each household's financial circumstances are different so it's important to fully consider your specific situation and goals before making large financial decisions.
Do I owe use tax?
Use tax is the counterpart of sales tax. Use tax applies when Wisconsin state, county, or baseball or football stadium tax is not charged and no exemption applies. If you make purchases from retailers who do not collect Wisconsin sales tax or if you bring taxable items into Wisconsin from other states or from foreign countries, you owe use tax.
What is the use tax rate?
The Wisconsin state use tax rate is 5.0%, the same rate as the state sales tax.
The local use tax rate for county tax purposes is 0.5%, the same rate as the county sales tax.
The local use tax rate for the baseball stadium district is 0.1%, the same rate as the baseball stadium sales tax. The baseball stadium district is comprised of the combined geographic area of Milwaukee, Ozaukee, Racine, Washington, and Waukesha Counties.
The local use tax rate for the football stadium district is 0.5%, the same rate as the football stadium district sales tax. The football stadium district is comprised of the geographic area of Brown County.
See the total sales and use tax rate for each county and more information on the county and stadium sales and use taxes at www.revenue.wi.gov (enter ?tax rate? in search box).
Special rules for county and stadium district use taxes
If the items purchased are stored, used, or consumed in a county that has a county sales and use tax or is in the baseball or football stadium district, the applicable county and/or stadium district use tax is due, unless you first take possession of the item in a county that does not have a county sales and use tax and is also not in either the baseball or football stadium district. (Exceptions: (a) Purchases of motor vehicles, boats, recreational vehicles as defined in sec. 340.01(48r), and aircraft, are taxed for county and stadium district tax purposes based on the county in which the item is customarily kept, (b) Purchases of snowmobiles, trailers, semitrailers, and all-terrain vehicles are subject to county or baseball or football stadium district use tax when first stored, used, or consumed in a county that has a county tax or is part of the baseball or football stadium district, even if the purchaser first takes possession of the item in a Wisconsin county that does not have a county tax and is not a part of either the baseball or football stadium districts, and (c) Construction materials purchased in a county that has not adopted the county tax and later used to improve real property in a county that has adopted the county tax.
Credit for tax paid in another state
If tax was properly paid in another state on the purchase of the property, the amount of Wisconsin state, county, and/or stadium use tax due may be offset by the tax paid in the other state. Additional information about credits for taxes paid in other states is available in Wisconsin Tax Bulletin # 157 at page 28, in a tax release titled:Credit for Sales and Use Taxes Paid to Other States and Their Local Units of Government. Foreign taxes and customs duty charges are not eligible for this credit.
Why is there a use tax?
Use tax protects in-state businesses from unfair competition. When sales or use tax is not collected on taxable purchases used in your community, local businesses are operating at a competitive disadvantage.
Why don't all out-of-state businesses collect use tax?
If an out-of-state retail business has a physical presence (such as a store or warehouse) in Wisconsin, it is required by law to register and collect Wisconsin tax. However, mail order and Internet companies and others who advertise in Wisconsin, but do not have a physical presence in Wisconsin, may not be required to register and collect Wisconsin tax.
What is taxable?
Sales, licenses, leases, and rentals of the following property, items, and goods are subject to Wisconsin state, county, and stadium district sales taxes:
- A. Tangible personal property;
- B. Coins or stamps of the United States that are sold, licensed, leased, rented, or traded as collector's items above their face value;
- C. Leased tangible personal property that is affixed to real property, if the lessor has the right to remove the leased property upon breach or termination of the lease agreement, unless the lessor of the leased property is also the lessor of the real property to which the leased property is affixed;
- D. Specified digital goods, additional digital goods, and digital codes. These goods are characterized by the fact that they are transferred electronically to the purchaser (i.e., accessed or obtained by the purchaser by means other than tangible storage media). ?Specified digital goods? means ?digital audio works,? ?digital audiovisual works,? and ?digital books.? ?Additional digital goods? means greeting cards, finished artwork, periodicals, video or electronic games, and newspapers or other news or information products. See Publication 240 for a description of the products that are included.
In addition, certain services are subject to Wisconsin sales and use taxes. For a list of taxable services, see Part X.B. of Publication 201.
Following are examples of purchases which frequently result in a use tax liability.
? Mail order and Internet purchases. Businesses and individuals owe Wisconsin use tax if the business or individual buys taxable products such as cigarettes, computers, digital music or videos, electronic games, furniture, prewritten computer software, office supplies by placing a mail order or using the Internet, from a vendor who is not registered to collect Wisconsin tax.
Example: An accounting firm located in Milwaukee County, which has a county and baseball stadium tax, purchases computers, stationery, and reference books using the Internet, from out-of-state vendors who do not collect sales or use tax. These purchases, totaling $20,000, are stored or used in Milwaukee County. The accounting firm owes Wisconsin use tax of $1,120 ($20,000 × 5.6%).
? Out-of-state and out-of-country purchases. Businesses and individuals owe Wisconsin use tax if the business or individual purchases taxable products or services in another state or outside the United States, and subsequently brings the product, or the property on which a taxable service was performed, into Wisconsin. Businesses and individuals also owe Wisconsin use tax on orders placed with a vendor in another state or outside the United States, for delivery to a location in Wisconsin.
Example: A Wisconsin resident living in Brown County purchases a digital camera for $700 at a store in the State of Oregon while on vacation. Oregon does not impose a sales and use tax. The Wisconsin resident brings the camera home to Brown County, Wisconsin. The individual owes Wisconsin use tax of $38.50 ($700 × 5.5%).
Example: A Wisconsin resident living in Bayfield County is vacationing in Canada. While in Canada, the individual purchases a painting. The seller is shipping the painting to the individual's home in Bayfield County. The seller charges the individual $2,500 U.S., including shipping and handling. The individual owes $137.50 Wisconsin use tax of ($2,500 × 5.5%).
? Inventory. If a business buys inventory items without tax for resale, and then uses these items, the business owes use tax.
Example: A retailer of office furniture buys a desk and places it in its inventory. Rather than selling the desk, the retailer uses the desk in its office. The retailer owes use tax based on its purchase price of the desk.
? Give-aways. Generally, if a business purchases items without tax and then gives them away in Wisconsin, the business owes use tax.
Example: To advertise its business, an insurance agency gives pens and calendars to its Wisconsin customers. The agency's purchases of these items are subject to tax.
Use tax applies to the total purchase price you pay to the seller for taxable items, including shipping and handling charges.
How do I keep track of my purchases?
The Department of Revenue has developed a free Use Tax Calculator (in an Excel spreadsheet) to help individuals and businesses track and calculate use tax owed to Wisconsin. The spreadsheet can be used by persons who have some type of spreadsheet software on their computer (e.g., Excel, QuatroPro). If you do not have Microsoft Excel software, you can download a free viewer at http://office.microsoft.com.
How do I pay use tax?
? If you are a business registered to collect Wisconsin sales or use taxes on sales to your customers, report the amount of your taxable purchases and calculate your tax due on Form ST-12, Wisconsin Sales and Use Tax Return.
? If you are a business not registered to collect Wisconsin sales or use taxes on sales to your customers, and:
- ◘ You regularly make purchases subject to use tax, you should apply for a Consumer's Use Tax Certificate using Form BTR-101 and use Form ST-12, Wisconsin Sales and Use Tax Return to report use tax, or
- ◘ You do not make purchases subject to use tax on a regular basis, report your use tax quarterly on Form UT-5, Consumer Use Tax Return.
? If you are an individual making purchases for personal (i.e., nonbusiness) use:
- ◘ You can pay use tax on your Wisconsin income tax return (Form 1, 1A, WI-Z, or 1NPR). A special line titled ?Sales and use tax due on Internet, mail order, or other out-of-state purchases? is on Wisconsin income tax returns to allow you to report your annual use tax liability, or
- ◘ You can report and pay use tax quarterly on the Wisconsin Form UT-5, Consumer Use Tax Return.
What if I don't pay the use tax owed?
Failure to timely pay use tax is very costly. If you don't timely pay the use tax you owe, not only will you owe the tax, but in addition, you may be subject to: 18% interest per year, penalties of up to 50% of the tax owed, delinquent collection fees, late filing fees, and collection actions.
The department obtains information about purchases that are subject to use tax through audits of businesses and agreements with other states. The department uses this information when auditing businesses and individuals to ensure that use tax owed on out-of-state purchases is paid to the department.
Work at Home? You May Qualify for the Home Office Deduction
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The IRS has the following six requirements to help you determine if you qualify for the home office deduction.
1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:
* as your principal place of business, or
*as a place to meet or deal with patients, clients or customers in the normal course of your business, or
*in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.
2. For certain storage use, rental use or daycare-facility use, you are required to use the property regularly but not exclusively.
3. Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.
4. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.
5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on Form 1040 Schedule C, Profit or Loss From Business.
6. If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.
For more information see IRS Publication 587, Business Use of Your Home, available at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).
New IRS Fresh Start Initiative Helps Taxpayers Who Owe Taxes
The Internal Revenue Service has expanded its "Fresh Start" initiative to help struggling taxpayers who owe taxes. The following four tips explain the expanded relief for taxpayers.
Penalty relief Part of the initiative relieves some unemployed taxpayers from failure-to-pay penalties. Penalties are one of the biggest factors a financially distressed taxpayer faces on a tax bill.The Fresh Start Penalty Relief Initiative gives eligible taxpayers a six-month extension to fully pay 2011 taxes. Interest still applies on the 2011 taxes from April 15, 2012 until the tax is paid, but you won't face failure-to-pay penalties if you pay your tax, interest and any other penalties in full by Oct. 15, 2012.
1. The penalty relief is available to two categories of taxpayers:
* Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to this year's April 17 tax deadline.
* Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.
To qualify for this penalty relief, your adjusted gross income must not exceed $200,000 if married filing jointly or $100,000 if your filing status is single, married filing separately, head of household, or qualifying widower. Your 2011 balance due can not exceed $50,000.
Taxpayers who qualify need to complete a new Form 1127A to request the 2011 penalty relief. The new form is available on www.irs.gov or by calling 1-800-829-3676 (TAX FORM).
2. Installment agreements An installment agreement is a payment option for those who cannot pay their entire tax bill by the due date. The Fresh Start provisions give more taxpayers the ability to use streamlined installment agreements to catch up on back taxes and also more time to pay.
The new threshold for requesting an installment agreement has been raised from $25,000 to $50,000. This option requires limited financial information, meaning far less burden to the taxpayer. The maximum term for streamlined installment agreements has been raised to six years from the current five-year maximum.
If your debt is more than $50,000, you'll still need to supply the IRS with a Collection Information Statement (Form 433-A or Form 433-F). You also can pay your balance down to $50,000 or less to qualify for this payment option.
With an installment agreement, you'll pay less in penalties, but interest continues to accrue on the outstanding balance. In order to qualify for the new expanded streamlined installment agreement, you must agree to monthly direct debit payments.
You can set up an installment agreement with the IRS through the On-line Payment Agreement (OPA) page at www.irs.gov
3. Offer in Compromise Under the first round of Fresh Start in 2011, the IRS expanded the Offer in Compromise (OIC) program to cover a larger group of struggling taxpayers. An Offer in Compromise is an agreement between a taxpayer and the IRS that settles the taxpayer?s tax liabilities for less than the full amount owed.
The IRS recognizes many taxpayers are still struggling to pay their bills so the agency has been working on more common-sense changes to the OIC program to more closely reflect real-world situations.
Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement. The IRS looks at the taxpayer?s income and assets to make a determination regarding the taxpayer?s ability to pay.
4. More information A series of eight short videos are available to familiarize taxpayers and practitioners with the IRS collection process. The series "Owe Taxes? Understanding IRS Collection Efforts," is available on the IRS website, www.irs.gov.
The IRS website has a variety of other online resources available to help taxpayers meet their payment obligations.
Donations made to qualified organizations may help reduce the amount of tax you pay.
The IRS has eight essential tips to help ensure your contributions pay off on your tax return.
1. If your goal is a legitimate tax deduction, then you must be giving to a qualified organization. Also, you cannot deduct contributions made to specific individuals, political organizations or candidates. See IRS Publication 526, Charitable Contributions, for rules on what constitutes a qualified organization.
2. To deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A. If your total deduction for all noncash contributions for the year is more than $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return.
3. If you receive a benefit because of your contribution such as merchandise, tickets to a ball game or other goods and services, then you can deduct only the amount that exceeds the fair market value of the benefit received.
4. Donations of stock or other non-cash property are usually valued at the fair market value of the property. Clothing and household items must generally be in good used condition or better to be deductible. Special rules apply to vehicle donations.
5. Fair market value is generally the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.
6. Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization and the date and amount of the contribution. For text message donations, a telephone bill meets the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution and the amount given.
7. To claim a deduction for contributions of cash or property equaling $250 or more, you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash, a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more.
8. Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which generally requires an appraisal by a qualified appraiser.
Farm Income and Deductions: 10 Key Points
You are in the business of farming if you cultivate, operate or manage a farm for profit, either as an owner or a tenant. A farm includes livestock, dairy, poultry, fish, fruit and truck farms. It also includes plantations, ranches, ranges and orchards.
The IRS has 10 key points for farmers regarding federal income taxes.
1. Crop insurance proceeds You must include in income any crop insurance proceeds you receive as the result of crop damage. You generally include them in the year you receive them.
2. Sales caused by weather-related condition If you sell more livestock, including poultry, than you normally would in a year because of weather-related conditions, you may be able to postpone until the next year the reporting of the gain from selling the additional animals.
3. Farm income averaging You may be able to average all or some of your current year's farm income by allocating it to the three prior years. This may lower your current year tax if your current year income from farming is high, and your taxable income from one or more of the three prior years was low. This method does not change your prior year tax, it only uses the prior year information to determine your current year tax.
4. Deductible farm expenses The ordinary and necessary costs of operating a farm for profit are deductible business expenses. An ordinary expense is an expense that is common and accepted in the farming business. A necessary expense is one that is appropriate for the business.
5. Employees and hired help You can deduct reasonable wages paid for labor hired to perform your farming operations. This includes full-time and part-time workers. You must withhold Social Security, Medicare and income taxes for employees.
6. Items purchased for resale You may be able to deduct, in the year of the sale, the cost of items purchased for resale, including livestock and the freight charges for transporting livestock to the farm.
7. Net operating losses If your deductible expenses from operating your farm are more than your other income for the year, you may have a net operating loss. You can carry that loss over to other years and deduct it. You may get a refund of part or all of the income tax you paid for past years, or you may be able to reduce your tax in future years.
8. Repayment of loans You cannot deduct the repayment of a loan if the loan proceeds are used for personal expenses. However, if you use the proceeds of the loan for your farming business, you can deduct the interest that you pay on the loan.
9. Fuel and road use You may be eligible to claim a credit or refund of federal excise taxes on fuel used on a farm for farming purposes.
10. Farmers Tax Guide More information about farm income and deductions is in IRS Publication 225, Farmer?s Tax Guide, which is available at www.irs.gov or by calling the IRS at 800-TAX-FORM (800-829-3676).
If you make a mistake on your tax return, it can take longer to process, which in turn, may delay your refund. Here are eight common errors to avoid .
1. Incorrect or missing Social Security numbers When entering SSNs for anyone listed on your tax return, be sure to enter them exactly as they appear on the Social Security cards.
2. Incorrect or misspelling of dependent?s last name When entering a dependent?s last name on your tax return, make sure to enter it exactly as it appears on their Social Security card.
3. Filing status errors Choose the correct filing status for your situation. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household and Qualifying Widow(er) With Dependent Child. See Publication 501, Exemptions, Standard Deduction and Filing Information, to determine the filing status that best fits your situation.
4. Math errors When preparing paper returns, review all math for accuracy. Or file electronically; the software does the math for you!
5. Computation errors Take your time. Many taxpayers make mistakes when figuring their taxable income, withholding and estimated tax payments, Earned Income Tax Credit, Standard Deduction for age 65 or over or blind, the taxable amount of Social Security benefits and the Child and Dependent Care Credit.
6. Incorrect bank account numbers for direct deposit Double check your bank routing and account numbers if you are using direct deposit for your refund.
7. Forgetting to sign and date the return An unsigned tax return is like an unsigned check ? it is invalid. Also, both spouses must sign a joint return.
8. Incorrect adjusted gross income If you file electronically, you must sign the return electronically using a Personal Identification Number. To verify your identity, the software will prompt you to enter your AGI from your originally filed 2010 federal income tax return or last year's PIN if you e-filed. Taxpayers should not use an AGI amount from an amended return, Form 1040X, or a math-error correction made by IRS.
Tax Refunds May Be Applied to Offset Certain Debts
Past due financial obligations can affect your current federal tax refund. The Department of Treasury's Financial Management Service, which issues IRS tax refunds, can use part or all of your federal tax refund to satisfy certain unpaid debts.
Here are eight important facts the IRS wants you to know about tax refund offsets:
1. If you owe federal or state income taxes, your refund will be offset to pay those taxes. If you had other debt such as child support or student loan debt that was submitted for offset, FMS will apply as much of your refund as is needed to pay off the debt and then issue any remaining refund to you.
2. You will receive a notice if an offset occurs. The notice will include the original refund amount, your offset amount, the agency receiving the payment and its contact information.
3. If you believe you do not owe the debt or you are disputing the amount taken from your refund, you should contact the agency shown on the notice, not the IRS.
4. If you filed a joint return and you're not responsible for the debt, but you are entitled to a portion of the refund, you may request your portion of the refund by filing IRS Form 8379, Injured Spouse Allocation. Attach Form 8379 to your original Form 1040, Form 1040A, or Form 1040EZ or file it by itself after you are notified of an offset. Form 8379 can be downloaded from the IRS website at www.irs.gov.
5. You can file Form 8379 electronically. If you file a paper tax return you can include Form 8379 with your return, write "INJURED SPOUSE" at the top left of the Form 1040, 1040A or 1040EZ. IRS will process your allocation request before an offset occurs.
6. If you are filing Form 8379 by itself, it must show both spouses' Social Security numbers in the same order as they appeared on your income tax return. You, the "injured" spouse, must sign the form. Do not attach the previously filed Form 1040 to the Form 8379. Send Form 8379 to the IRS Service Center where you filed your original return.
7. The IRS will compute the injured spouse's share of the joint return. Contact the IRS only if your original refund amount shown on the FMS offset notice differs from the refund amount shown on your tax return.
8. Follow the instructions on Form 8379 carefully and be sure to attach the required forms to avoid delays. If you don't receive a notice, contact the Financial Management Service at 800-304-3107, Monday through Friday from 7:30 a.m. to 5 p.m. (Central Time).
Injured or Innocent Spouse Tax Relief
You may be an injured spouse if you file a joint tax return and all or part of your portion of a refund was, or is expected to be, applied to your spouse?s legally enforceable past due financial obligations.
Here are seven facts about claiming injured spouse relief:
1. To be considered an injured spouse; you must have paid federal income tax or claimed a refundable tax credit, such as the Earned Income Credit or Additional Child Tax Credit on the joint return, and not be legally obligated to pay the past-due debt.
2. Special rules apply in community property states. For more information about the factors used to determine whether you are subject to community property laws, see IRS Publication 555, Community Property.
3. If you filed a joint return and you're not responsible for the debt, but you are entitled to a portion of the refund, you may request your portion of the refund by filing Form 8379, Injured Spouse Allocation.
4. You may file form 8379 along with your original tax return or your may file it by itself after you receive an IRS notice about the offset.
5. You can file Form 8379 electronically. If you file a paper tax return you can include Form 8379 with your return, write "INJURED SPOUSE" at the top left of the Form 1040, 1040A or 1040EZ. IRS will process your allocation request before an offset occurs.
6. If you are filing Form 8379 by itself, it must show both spouses' Social Security numbers in the same order as they appeared on your income tax return. You, the "injured" spouse, must sign the form.
7. Do not use Form 8379 if you are claiming innocent spouse relief. Instead, file Form 8857, Request for Innocent Spouse Relief. This relief from a joint liability applies only in certain limited circumstances. However, in 2011 the IRS eliminated the two-year time limit that applies to certain relief requests. IRS Publication 971, Innocent Spouse Relief, explains who may qualify, and how to request this relief.
For complete information on Injured and Innocent Spouse Tax Relief, visit IRS.gov.
Failure to File or Pay Penalties: Eight Facts
The number of electronic filing and payment options increases every year, which helps reduce your burden and also improves the timeliness and accuracy of tax returns. When it comes to filing your tax return, however, the law provides that the IRS can assess a penalty if you fail to file, fail to pay or both.
Here are eight important points about the two different penalties you may face if you file or pay late.
1. If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty.
2. The failure-to-file penalty is generally more than the failure-to-pay penalty. So if you cannot pay all the taxes you owe, you should still file your tax return on time and pay as much as you can, then explore other payment options. The IRS will work with you.
3. The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes.
4. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
5. If you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes.
6. If you request an extension of time to file by the tax deadline and you paid at least 90 percent of your actual tax liability by the original due date, you will not face a failure-to-pay penalty if the remaining balance is paid by the extended due date.
7. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.8. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.
Missed the Income Tax Deadline - IRS Offers Help for Taxpayers
How to Get a Transcript or Copy of a Prior Year Tax Return
There are many reasons why you should keep a copy of your federal tax return. For example, you may need it to answer an IRS inquiry. You may also need it to apply for a student loan or a home mortgage. If you can't find your tax return, the IRS can provide a copy or give you a transcript of the tax information you need.
Here's how to get your federal tax return information from the IRS:
1. Transcripts are free and you can get them for the current year and the past three years. In most cases, a transcript includes all the information you need.
2. A tax return transcript shows most line items from the tax return you originally filed. It also includes items from any accompanying forms and schedules you filed. It does not reflect any changes made after you filed your original return.
3. A tax account transcript shows any changes either you or the IRS made to your tax return after you filed it. This transcript includes your marital status, the type of return you filed, your adjusted gross income and taxable income.
4. You can get transcripts on the web, by phone or by mail. To request transcripts online, go to IRS.gov and use the Order a Transcript tool. To order by phone, call 800-908-9946 and follow the prompts.
5. To request a 1040, 1040A or 1040EZ tax return transcript by mail or fax, complete Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript. Businesses and individuals who need a tax account transcript should use Form 4506-T, Request for Transcript of Tax Return.
6. If you order online or by phone, you should receive your tax return transcript within five to 10 calendar days. You should allow 30 calendar days for delivery of a tax account transcript if you order by mail.
7. If you need an actual copy of a filed and processed tax return, it will cost $57 for each tax year. Complete Form 4506, Request for Copy of Tax Return, and mail it to the IRS address listed on the form for your area. Copies are generally available for the current year and past six years. Please allow 60 days for delivery.
8. If you live in a Presidentially declared disaster area, the IRS may waive the fee to obtain copies of your tax returns. Visit IRS.gov and select the Disaster Relief link in the lower left corner of the page for more about IRS disaster assistance.
9. Forms 4506, 4506-T and 4506T-EZ are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Six Tips on Gambling Income and Losses
Whether you roll the dice, play cards or bet on the ponies, all your winnings are taxable. The IRS offers these six tax tips for the casual gambler.
1. Gambling income includes winnings from lotteries, raffles, horse races and casinos. It also includes cash and the fair market value of prizes you receive, such as cars and trips.
2. If you win, you may receive a Form W-2G, Certain Gambling Winnings, from the payer. The form reports the amount of your winnings to you and the IRS. The payer issues the form depending on the type of gambling, the amount of winnings, and other factors. You'll also receive a Form W-2G if the payer withholds federal income tax from your winnings.
3. You must report all your gambling winnings as income on your federal income tax return. This is true even if you do not receive a Form W-2G.
4. If you're a casual gambler, report your winnings on the Other Income line of your Form 1040, U. S. Individual Income Tax Return.
5. You may deduct your gambling losses on Schedule A, Itemized Deductions. The deduction is limited to the amount of your winnings. You must report your winnings as income and claim your allowable losses separately. You cannot reduce your winnings by your losses and report the difference.
6. You must keep accurate records of your gambling activity. This includes items such as receipts, tickets or other documentation. You should also keep a diary or similar record of your activity. Your records should show your winnings separately from your losses.
To learn more about this topic, see Publication 525, Taxable and Nontaxable Income. Also, see Publication 529, Miscellaneous Deductions. Both are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Renting Your Vacation Home
A vacation home can be a house, apartment, condominium, mobile home or boat. If you own a vacation home that you rent to others, you generally must report the rental income on your federal income tax return. But you may not have to report that income if the rental period is short.
In most cases, you can deduct expenses of renting your property. Your deduction may be limited if you also use the home as a residence.
Here are some tips from the IRS about this type of rental property.
You usually report rental income and deductible rental expenses on Schedule E, Supplemental Income and Loss.
You may also be subject to paying Net Investment Income Tax on your rental income.
If you personally use your property and sometimes rent it to others, special rules apply. You must divide your expenses between the rental use and the personal use. The number of days used for each purpose determines how to divide your costs.
Report deductible expenses for personal use on Schedule A, Itemized Deductions. These may include costs such as mortgage interest, property taxes and casualty losses.
If the property is used as a home, your rental expense deduction is limited. This means your deduction for rental expenses can't be more than the rent you received. For more about this rule, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes).
If the property is used as a home and you rent it out fewer than 15 days per year, you do not have to report the rental income.
Special Tax Benefits for Armed Forces Personnel
If you're a member of the U.S. Armed Forces, the IRS wants you to know about the many tax benefits that may apply to you. Special tax rules apply to military members on active duty, including those serving in combat zones. These rules can help lower your federal taxes and make it easier to file your tax return.
Here are ten of those benefits:
1. Deadline Extensions. Qualifying military members, including those who serve in a combat zone, can postpone some tax deadlines. This includes automatic extensions of time to file tax returns and pay taxes.
2. Combat Pay Exclusion. If you serve in a combat zone, you can exclude certain combat pay from your income. You won't need to show the exclusion on your tax return because qualified pay isn't included in the wages reported on your Form W-2, Wage and Tax Statement. Some service outside a combat zone also qualifies for this exclusion.
3. Earned Income Tax Credit. You can choose to include nontaxable combat pay as earned income to figure your EITC. You would make this choice if it increases your credit. Even if you do, the combat pay remains nontaxable.
4. Moving Expense Deduction. If you move due to a permanent change of station, you may be able to deduct some of your unreimbursed moving costs.
5. Uniform Deduction. You can deduct the costs and upkeep of certain uniforms that regulations prohibit you from wearing while off duty. You must reduce your expenses by any reimbursement you receive for these costs.
6. Signing Joint Returns. Both spouses normally must sign joint income tax returns. However, when one spouse is unavailable due to certain military duty or conditions, the other may, in some cases sign for both spouses, or will need a power of attorney to file a joint return.
7. Reservists Travel Deduction. If you're a member of the U.S. Armed Forces Reserves, you may deduct certain travel expenses on your tax return. You can deduct unreimbursed expenses for traveling more than 100 miles away from home to perform your reserve duties.
8. Nontaxable ROTC Allowances. Educational and subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay such as pay received during summer advanced camp is taxable.
9. Civilian Life. After leaving the military, you may be able to deduct certain job hunting expenses. Expenses may include travel, resume preparation fees and job placement agency fees. Moving expenses may also be deductible.
10. Tax Help. Most military bases offer free tax preparation and filing assistance during the tax filing season. Some also offer free tax help after April 15.
Tips for Taxpayers Who Travel for Charity Work
Do you plan to travel while doing charity work this summer? Some travel expenses may help lower your taxes if you itemize deductions when you file next year. Here are five tax tips the IRS wants you to know about travel while serving a charity.
1. You must volunteer to work for a qualified organization. Ask the charity about its tax-exempt status. You can also visit IRS.gov and use the Select Check tool to see if the group is qualified.
2. You may be able to deduct unreimbursed travel expenses you pay while serving as a volunteer. You can't deduct the value of your time or services.
3. The deduction qualifies only if there is no significant element of personal pleasure, recreation or vacation in the travel. However, the deduction will qualify even if you enjoy the trip.
4. You can deduct your travel expenses if your work is real and substantial throughout the trip. You can't deduct expenses if you only have nominal duties or do not have any duties for significant parts of the trip.
5. Deductible travel expenses may include:
- Air, rail and bus transportation
- Car expenses
- Lodging costs
- The cost of meals
- Taxi fares or other transportation costs between the airport or station and your hotel
Keep Tax and Financial Records Safe in Case of a Natural Disaster
Hurricanes, tornadoes, floods and other natural disasters are more common in the summer. The IRS encourages you to take a few simple steps to protect your tax and financial records in case a disaster strikes.
Here are five tips from the IRS to help you protect your important records:
1. Backup Records Electronically. Keep an extra set of electronic records in a safe place away from where you store the originals. You can use an external hard drive, CD or DVD to store the most important records. You can take these with you to keep your copies safe. You may want to store items such as bank statements, tax returns and insurance policies.
2. Document Valuables. Take pictures or videotape the contents of your home or place of business. These may help you prove the value of your lost items for insurance claims and casualty loss deductions. Publication 584, Casualty, Disaster and Theft Loss Workbook, can help you determine your loss if a disaster strikes.
3. Update Emergency Plans. Review your emergency plans every year. You may need to update them if your personal or business situation changes.
4. Get Copies of Tax Returns or Transcripts. Visit IRS.gov to get Form 4506, Request for Copy of Tax Return, to replace lost or destroyed tax returns. If you just need information from your return, you can order a transcript online.
5. Count on the IRS. The IRS has a Disaster Hotline to help people with tax issues after a disaster. Call the IRS at 1-866-562-5227 to speak with a specialist trained to handle disaster-related tax issues.
Job Search Expenses May Lower Your Taxes
Summer is often a time when people make major life decisions. Common events include buying a home, getting married or changing jobs. If you're looking for a new job in your same line of work, you may be able to claim a tax deduction for some of your job hunting expenses.
Here are seven things the IRS wants you to know about deducting these costs:
1. Your expenses must be for a job search in your current occupation. You may not deduct expenses related to a search for a job in a new occupation. If your employer or another party reimburses you for an expense, you may not deduct it.
2. You can deduct employment and job placement agency fees you pay while looking for a job.
3. You can deduct the cost of preparing and mailing copies of your résumé to prospective employers.
4. If you travel to look for a new job, you may be able to deduct your travel expenses. However, you can only deduct them if the trip is primarily to look for a new job.
5. You can't deduct job search expenses if there was a substantial break between the end of your last job and the time you began looking for a new one.
6. You can't deduct job search expenses if you're looking for a job for the first time.
7. You usually will claim job search expenses as a miscellaneous itemized deduction. You can deduct only the amount of your total miscellaneous deductions that exceed two percent of your adjusted gross income.
Tax Tips if You're Starting a Business
If you plan to start a new business, or you've just opened your doors, it is important for you to know your federal tax responsibilities. Here are five basic tips from the IRS that can help you get started.
1. Type of Business. Early on, you will need to decide the type of business you are going to establish. The most common types are sole proprietorship, partnership, corporation, S corporation and Limited Liability Company. Each type reports its business activity on a different federal tax form.
2. Types of Taxes. The type of business you run usually determines the type of taxes you pay. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.
3. Employer Identification Number. A business often needs to get a federal EIN for tax purposes. Check IRS.gov to find out whether you need this number. If you do, you can apply for an EIN online.
4. Recordkeeping. Keeping good records will help you when it's time to file your business tax forms at the end of the year. They help track deductible expenses and support all the items you report on your tax return. Good records will also help you monitor your business' progress and prepare your financial statements. You may choose any recordkeeping system that clearly shows your income and expenses.
5. Accounting Method. Each taxpayer must also use a consistent accounting method, which is a set of rules that determine when to report income and expenses. The most common are the cash method and accrual method. Under the cash method, you normally report income in the year you receive it and deduct expenses in the year you pay them. Under the accrual method, you generally report income in the year you earn it and deduct expenses in the year you incur them. This is true even if you receive the income or pay the expenses in a future year.
Tax Tips for Newlyweds
Late spring and early summer are popular times for weddings. Whatever the season, a change in your marital status can affect your taxes. Here are several tips from the IRS for newlyweds.
- It's important that the names and Social Security numbers that you put on your tax return match your Social Security Administration records. If you've changed your name, report the change to the SSA. To do that, file Form SS-5, Application for a Social Security Card. You can get this form on their website at SSA.gov, by calling 800-772-1213 or by visiting your local SSA office.
- If your address has changed, file Form 8822, Change of Address to notify the IRS. You should also notify the U.S. Postal Service if your address has changed. You can ask to have your mail forwarded online at USPS.com or report the change at your local post office.
- If you work, report your name or address change to your employer. This will help to ensure that you receive your Form W-2, Wage and Tax Statement, after the end of the year.
- If you and your spouse both work, you should check the amount of federal income tax withheld from your pay. Your combined incomes may move you into a higher tax bracket. Use the IRS Withholding Calculator tool at IRS.gov to help you complete a new Form W-4, Employee's Withholding Allowance Certificate. See Publication 505, Tax Withholding and Estimated Tax, for more information.
- If you didn't qualify to itemize deductions before you were married, that may have changed. You and your spouse may save money by itemizing rather than taking the standard deduction on your tax return. You'll need to use Form 1040 with Schedule A, Itemized Deductions. You can't use Form 1040A or 1040EZ when you itemize.
- If you are married as of Dec. 31, that's your marital status for the entire year for tax purposes. You and your spouse usually may choose to file your federal income tax return either jointly or separately in any given year. You may want to figure the tax both ways to determine which filing status results in the lowest tax. In most cases, it's beneficial to file jointly.
Reduce Your Taxes with Miscellaneous Deductions
If you itemize deductions on your tax return, you may be able to deduct certain miscellaneous expenses. You may benefit from this because a tax deduction normally reduces your federal income tax.
Here are some things you should know about miscellaneous deductions:
Deductions Subject to the Two Percent Limit. You can deduct most miscellaneous expenses only if they exceed two percent of your adjusted gross income. These include expenses such as:
- Unreimbursed employee expenses.
- Expenses related to searching for a new job in the same profession.
- Certain work clothes and uniforms.
- Tools needed for your job.
- Union dues.
- Work-related travel and transportation.
Deductions Not Subject to the Two Percent Limit. Some deductions are not subject to the two percent of AGI limit. Some expenses on this list include:
- Certain casualty and theft losses. This deduction applies if you held the damaged or stolen property for investment. Property that you hold for investment may include assets such as stocks, bonds and works of art.
- Gambling losses up to the amount of gambling winnings.
- Losses from Ponzi-type investment schemes.
Many expenses are not deductible. For example, you can?t deduct personal living or family expenses. Report your miscellaneous deductions on Schedule A, Itemized Deductions. Be sure to keep records of your deductions as a reminder when you file your taxes in 2014.
Helpful Tax Tips if You're Moving this Summer
If you make a work-related move this summer, you may be able to deduct the costs of the move. This may apply if you move to start a new job or to work at the same job in a new job location. The IRS offers the following tips on moving expenses you may be able to deduct on your tax return.
In order to deduct moving expenses, you must meet these three requirements:
1. Your move closely relates to the start of work. Generally, you can consider moving expenses within one year of the date you first report to work at a new job location. Additional rules apply to this requirement.
2. You meet the distance test. Your new main job location must be at least 50 miles farther from your former home than your previous main job location was. For example, if your old main job location was three miles from your former home, your new main job location must be at least 53 miles from that former home.
3. You meet the time test. After you move, you must work full time at your new job location for at least 39 weeks during the first year. Self-employed individuals must meet this test and also work full time for a total of at least 78 weeks during the first 24 months upon arriving in the general area of their new job location. If your income tax return is due before you have satisfied this requirement, you can still deduct your allowable moving expenses if you expect to meet the time test.
See Publication 521, Moving Expenses, for more information about these rules. If you can claim this deduction, here are a few more tips from the IRS:
- Travel. You can deduct transportation and lodging expenses for yourself and household members while moving from your former home to your new home. You cannot deduct the cost of meals during the travel.
- Household goods. You can deduct the cost of packing, crating and transporting your household goods and personal property. You may be able to include the cost of storing and insuring these items while in transit.
- Utilities. You can deduct the costs of connecting or disconnecting utilities.
- Nondeductible expenses. You cannot deduct as moving expenses any part of the purchase price of your new home, the costs of buying or selling a home, or the cost of entering into or breaking a lease. See Publication 521 for a complete list.
- Reimbursed expenses. If your employer reimburses you for the costs of a move for which you took a deduction, you may have to include the reimbursement as income on your tax return.
- Update your address. When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive mail from the IRS. File Form 8822, Change of Address, to notify the IRS.
- Tax form to file. To figure the amount of your deduction for moving expenses, use Form 3903, Moving Expenses.
Give Withholding and Payments a Check-up to Avoid a Tax Surprise
Some people are surprised to learn they're due a large federal income tax refund when they file their taxes. Others are surprised that they owe more taxes than they expected. When this happens, it's a good idea to check your federal tax withholding or payments. Doing so now can help avoid a tax surprise when you file your 2013 tax return next year.
Here are some tips to help you bring the tax you pay during the year closer to what you'll actually owe.
Wages and Income Tax Withholding
- New Job. Your employer will ask you to complete a Form W-4, Employee's Withholding Allowance Certificate. Complete it accurately to figure the amount of federal income tax to withhold from your paychecks.
- Life Event. Change your Form W-4 when certain life events take place. A change in marital status, birth of a child, getting or losing a job, or purchasing a home, for example, can all change the amount of taxes you owe. You can typically submit a new Form W4 anytime.
- IRS Withholding Calculator. This handy online tool will help you figure the correct amount of tax to withhold based on your situation. If a change is necessary, the tool will help you complete a new Form W-4.
Self-Employment and Other Income
- Estimated tax. This is how you pay tax on income that's not subject to withholding. Examples include income from self-employment, interest, dividends, alimony, rent and gains from the sale of assets. You also may need to pay estimated tax if the amount of income tax withheld from your wages, pension or other income is not enough. If you expect to owe a thousand dollars or more in taxes and meet other conditions, you may need to make estimated tax payments.
- Form 1040-ES. Use the worksheet in Form 1040-ES, Estimated Tax for Individuals, to find out if you need to pay estimated taxes on a quarterly basis.
- Change in Estimated Tax. After you make an estimated tax payment, some life events or financial changes may affect your future payments. Changes in your income, adjustments, deductions, credits or exemptions may make it necessary for you to refigure your estimated tax.
- Additional Medicare Tax. A new Additional Medicare Tax went into effect on Jan. 1, 2013. The 0.9 percent Additional Medicare Tax applies to an individual's wages, Railroad Retirement Tax Act compensation and self-employment income that exceeds a threshold amount based on the individual's filing status.
- Net Investment Income Tax. A new Net Investment Income Tax went into effect on Jan. 1, 2013. The 3.8 percent Net Investment Income Tax applies to individuals, estates and trusts that have certain investment income above certain threshold amounts.
Back-to-School Tax Tips for Students and Parents
Going to college can be a stressful time for students and parents. The IRS offers these tips about education tax benefits that can help offset some college costs and maybe relieve some of that stress.
American Opportunity Tax Credit. This credit can be up to $2,500 per eligible student. The AOTC is available for the first four years of post secondary education. Forty percent of the credit is refundable. That means that you may be able to receive up to $1,000 of the credit as a refund, even if you don't owe any taxes. Qualified expenses include tuition and fees, course related books, supplies and equipment. A recent law extended the AOTC through the end of Dec. 2017.
Lifetime Learning Credit. With the LLC, you may be able to claim up to $2,000 for qualified education expenses on your federal tax return. There is no limit on the number of years you can claim this credit for an eligible student.
You can claim only one type of education credit per student on your federal tax return each year. If you pay college expenses for more than one student in the same year, you can claim credits on a per-student, per-year basis. For example, you can claim the AOTC for one student and the LLC for the other student.
You can use the IRS's Interactive Tax Assistant tool to help determine if you're eligible for these credits. The tool is available at IRS.gov.
Student loan interest deduction. Other than home mortgage interest, you generally can't deduct the interest you pay. However, you may be able to deduct interest you pay on a qualified student loan. The deduction can reduce your taxable income by up to $2,500. You don't need to itemize deductions to claim it.
These education benefits are subject to income limitations and may be reduced or eliminated depending on your income.
IRS Website Explains Tax Provisions of the Health Care Law; Provides Guide to Online Resources
The IRS has launched a new Affordable Care Act Tax Provisions website at IRS.gov/aca to educate individuals and businesses on how the health care law may affect them. The new home page has three sections, which explain the tax benefits and responsibilities for individuals and families, employers, and other organizations, with links and information for each group. The site provides information about tax provisions that are in effect now and those that will go into effect in 2014 and beyond.
Topics include premium tax credits for individuals, new benefits and responsibilities for employers, and tax provisions for insurers, tax-exempt organizations and certain other business types.
Visitors to the new site will find information about the law and its provisions, legal guidance, the latest news, frequently asked questions and links to additional resources.
Several other federal agencies have a role in implementing the health care law, including the Department of Health and Human Services, which has primary responsibility. To help locate additional online resources from the Department of Health and Human Services, the Department of Labor and the Small Business Administration, the IRS has issued a new Web-based flyer - Healthcare Law Online Resources (Publication 5093).
Visit IRS.gov/aca for more information regarding the tax provisions of the Affordable Care Act.
Simplified Option for Home Office Deduction
Do you work from home? If so, you may be familiar with the home office deduction, available for taxpayers who use their home for business. Beginning this year, there is a new, simpler option to figure the business use of your home.
This simplified option does not change the rules for who may claim a home office deduction. It merely simplifies the calculation and recordkeeping requirements. The new option can save you a lot of time and will require less paperwork and recordkeeping.
Here are six facts the IRS wants you to know about the new, simplified method to claim the home office deduction.
1. You may use the simplified method when you file your 2013 tax return next year. If you use this method to claim the home office deduction, you will not need to calculate your deduction based on actual expenses. You may instead multiply the square footage of your home office by a prescribed rate.
2. The rate is $5 per square foot of the part of your home used for business. The maximum footage allowed is 300 square feet. This means the most you can deduct using the new method is $1,500 per year.
3. You may choose either the simplified method or the actual expense method for any tax year. Once you use a method for a specific tax year, you cannot later change to the other method for that same year.
4. If you use the simplified method and you own your home, you cannot depreciate your home office. You can still deduct other qualified home expenses, such as mortgage interest and real estate taxes. You will not need to allocate these expenses between personal and business use. This allocation is required if you use the actual expense method. You?ll claim these deductions on Schedule A, Itemized Deductions.
5. You can still fully deduct business expenses that are unrelated to the home if you use the simplified method. These may include costs such as advertising, supplies and wages paid to employees.
6. If you use more than one home with a qualified home office in the same year, you can use the simplified method for only one in that year. However, you may use the simplified method for one and actual expenses for any others in that year.
Eight Tips for Taxpayers Who Owe Taxes
While most taxpayers get a refund from the IRS when they file their taxes, some do not. The IRS offers several payment options for those who owe taxes.
Here are eight tips for those who owe federal taxes.
1. Tax bill payments. If you get a bill from the IRS this summer, you should pay it as soon as possible to save money. You can pay by check, money order, cashier's check or cash. If you cannot pay it all, consider getting a loan to pay the bill in full. The interest rate for a loan may be less than the interest and penalties the IRS must charge by law.
2. Electronic Funds Transfer. It's easy to pay your tax bill by electronic funds transfer. Just visit IRS.gov and use the Electronic Federal Tax Payment System. You may also use EFTPS to pay your taxes by phone at 800-555-4477.
3. Credit or debit card payments. You can also pay your tax bill with a credit or debit card. Even though the card company may charge an extra fee for a tax payment, the costs of using a credit or debit card may be less than the cost of an IRS payment plan. To pay by credit or debit card, contact one of the processing companies listed at IRS.gov.
4. More time to pay. You may qualify for a short-term agreement to pay your taxes. This may apply if you can fully pay your taxes in 120 days or less. You can request it through the Online Payment Agreement application at IRS.gov. You may also call the IRS at the number listed on the last notice you received. If you can't find the notice, call 800-829-1040 for help. There is generally no set-up fee for a short-term agreement.
5. Installment Agreement. If you can't pay in full at one time and can't get a loan, you may want to apply for a monthly payment plan. If you owe $50,000 or less, you can apply using the IRS Online Payment Agreement application. It's quick and easy. If approved, IRS will notify you immediately. You can arrange to make your payments by direct debit. This type of payment plan helps avoid missed payments and may help avoid a tax lien that would damage your credit.
Taxpayers may also apply using IRS Form 9465, Installment Agreement Request. If you owe more than $50,000, you must also complete Form 433F, Collection Information Statement. For approved payment plans the one-time user fee is $105 for standard and payroll deduction agreements. The direct debit agreement fee is $52. The fee is $43 if your income is below a certain level.
6. Offer in Compromise. The IRS Offer-in-Compromise program allows you to settle your tax debt for less than the full amount you owe. An OIC may be an option if you can't fully pay your taxes through an installment agreement or other payment alternative. The IRS may accept an OIC if the amount offered represents the most IRS can expect to collect within a reasonable time. Use the OIC Pre-Qualifier tool to see if you may be eligible before you apply. The tool will also direct you to other options if an OIC is not right for you.
7. Fresh Start. If you're struggling to pay your taxes, the IRS Fresh Start initiative may help you. Fresh Start makes it easier for individual and small business taxpayers to pay back taxes and avoid tax liens.
8. Check withholding. You may be able to avoid owing taxes in future years by increasing the taxes your employer withholds from your pay. To do this, file a revised Form W-4, Employee's Withholding Allowance Certificate, with your employer. The IRS Withholding Calculator tool at IRS.gov can help you fill out a new W-4.
Keep the Child Care Credit in Mind for Summer
If you are a working parent or look for work this summer, you may need to pay for the care of your child or children. These expenses may qualify for a tax credit that can reduce your federal income taxes. The Child and Dependent Care Tax Credit is available not only while school?s out for summer, but also throughout the year. Here are eight key points the IRS wants you to know about this credit.
1. You must pay for care so you ? and your spouse if filing jointly ? can work or actively look for work. Your spouse meets this test during any month they are full-time student, or physically or mentally incapable of self-care.
2. You must have earned income. Earned income includes earnings such as wages and self-employment. If you are married filing jointly, your spouse must also have earned income. There is an exception to this rule for a spouse who is full-time student or who is physically or mentally incapable of self-care.
3. You must pay for the care of one or more qualifying persons. Qualifying children under age 13 who you claim as a dependent meet this test. Your spouse or dependent who lived with you for more than half the year may meet this test if they are physically or mentally incapable of self-care.
4. You may qualify for the credit whether you pay for care at home, at a daycare facility outside the home or at a day camp. If you pay for care in your home, you may be a household employer. For more information, see Publication 926, Household Employer's Tax Guide.
5. The credit is a percentage of the qualified expenses you pay for the care of a qualifying person. It can be up to 35 percent of your expenses, depending on your income.
6. You may use up to $3,000 of the unreimbursed expenses you pay in a year for one qualifying person or $6,000 for two or more qualifying person.
7. Expenses for overnight camps or summer school tutoring do not qualify. You cannot include the cost of care provided by your spouse or a person you can claim as your dependent. If you get dependent care benefits from your employer, special rules apply.
8. Keep your receipts and records to use when you file your 2013 tax return next year. Make sure to note the name, address and Social Security number or employer identification number of the care provider. You must report this information when you claim the credit on your return.
Who Should File a 2012 Tax Return?
If you received income during 2012, you may need to file a tax return in 2013. The amount of your income, your filing status, your age and the type of income you received will determine whether you're required to file. Even if you are not required to file a tax return, you may still want to file. You may get a refund if you've had too much federal income tax withheld from your pay or qualify for certain tax credits.
You can find income tax filing requirements on IRS.gov. The instructions for Forms 1040, 1040A or 1040EZ also list filing requirements. The Interactive Tax Assistant tool, also available on the IRS website, is another helpful resource. The ITA tool answers many of your tax law questions including whether you need to file a return.
Even if you've determined that you don't need to file a tax return this year, you may still want to file. Here are five reasons why:
1. Federal Income Tax Withheld. If your employer withheld federal income tax from your pay, if you made estimated tax payments, or if you had a prior year overpayment applied to this year's tax, you could be due a refund. File a return to claim any excess tax you paid during the year.
2. Earned Income Tax Credit. If you worked but earned less than $50,270 last year, you may qualify for EITC. EITC is a refundable tax credit; which means if you qualify you could receive EITC as a tax refund. Families with qualifying children may qualify to get up to $5,891 dollars. You can't get the credit unless you file a return and claim it. Use the EITC Assistant to find out if you qualify.
3. Additional Child Tax Credit. If you have at least one qualifying child and you don't get the full amount of the Child Tax Credit, you may qualify for this additional refundable credit. You must file and use new Schedule 8812, Child Tax Credit, to claim the credit.
4. American Opportunity Credit. If you or someone you support is a student, you might be eligible for this credit. Students in their first four years of postsecondary education may qualify for as much as $2,500 through this partially refundable credit. Even those who owe no tax can get up to $1,000 of the credit as cash back for each eligible student. You must file Form 8863, Education Credits, and submit it with your tax return to claim the credit.
5. Health Coverage Tax Credit. If you're receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation, you may be eligible for a 2012 Health Coverage Tax Credit. Spouses and dependents may also be eligible. If you're eligible, you can receive a 72.5 percent tax credit on payments you made for qualified health insurance premiums.
American Taxpayer Relief Act of 2012
The American Taxpayer Relief Act recently signed into law has kept most taxpayers from paying higher taxes after 2012. Below are some of the changes that may affect you.
The Alternative Minimum Tax was made permanent and retroactive back to January 1, 2012.
Deductions and Credits made Permanent:
· Child Tax Credit
· Marriage Penalty Relief
· The Liberalized Child and Dependent Care Credit Rules
· Expanded Adoption Credit
· Enhanced Rules for Student Loan Deductions
Deductions and Credits Extended for 5 Years:
· Earned Income Credit
· American Opportunity Credit
Deductions and Credits Extended through 2013:
· State and Local General Sales Taxes
· Educator Expenses
· Qualified Principal Residence Indebtedness
· Mortgage Insurance Premiums
· Tuition and Fees
· Charitable Distributions of IRA?s
· Credit for Energy-Efficient Existing Homes
The 2% reduction in Social Security tax for employees and self-employed individuals expired at the end of 2012 and will not be extended for 2013. An employee?s Social Security portion of FICA will increase from 4.2% to 6.2%, with a corresponding increase in self-employment tax.
Please contact our office if we can further assist you with your 2012 tax preparation or future tax planning. You can contact us at 882-2795 or www.rgr-cpa.com.
Wisconsin Property Lottery and gaming credit publication revised.
The Wisconsin Department of Revenue has revised its publication describing the process for computing monthly permit fees and the lottery and gaming credit for manufactured and mobile homes that are subject to monthly municipal permit fees. Manufactured and mobile homes that are subject to a monthly municipal permit fee are entitled to the lottery and gaming credit if the manufactured or mobile home is used as a primary residence. The credit is deducted by the municipal clerk when determining the monthly permit fee. ( Guide to Municipal Permit Fee and Lottery and Gaming Credit for Manufactured/Mobile Homes 2013, Wis. Dept. Rev., 12/01/2011 .)
The Wisconsin Department of Revenue has updated its publication concerning federal and Wisconsin income tax reporting under the Marital Property Act. The publication is a joint effort of the Department and the Milwaukee office of the Internal Revenue Service (IRS). In the publication, the ?Federal Treatment? reflects the interpretation of Wisconsin's Marital Property Act by the Milwaukee IRS office and the ?Wisconsin Treatment? reflects the interpretation of that Act by the Department as of December 1, 2012. The portion of the publication dealing with the Wisconsin tax treatment of the child care credit has been revised. ( Wisconsin Dept. Rev. Tax Publication 113, 12/01/2012 .)
Wisconsin Personal Income Tax Publication for retirees updated.
The Wisconsin Department of Revenue has updated its publication that provides tax information of special interest to retirees. There are no substantive differences between the 2011 and 2012 versions of the publication The publication discusses who must file a Wisconsin income tax return and provisions that may affect retirees, and contains 2012 tax rate schedules. Retired taxpayers can use this information in preparing their tax year 2012 returns. The information in the publication reflects the position of the Department on laws enacted by the Wisconsin Legislature that are effective as of December 2012. ( Wisconsin Dept. Rev. Tax Publication 106, 12/01/2012 .)
Plan Now to Get Full Benefit of Saver's Credit; Tax Credit Helps Low- and Moderate-Income Workers Save for Retirement
Plan Now to Get Full Benefit of Saver's Credit; Tax Credit Helps Low- and Moderate-Income Workers Save for Retirement
WASHINGTON Low- and moderate-income workers can take steps now to save for retirement and earn a special tax credit in 2012 and the years ahead, according to the Internal Revenue Service.
The saver's credit helps offset part of the first $2,000 workers voluntarily contribute to IRAs and to 401(k) plans and similar workplace retirement programs. Also known as the retirement savings contributions credit, the saver's credit is available in addition to any other tax savings that apply.
Eligible workers still have time to make qualifying retirement contributions and get the saver's credit on their 2012 tax return. People have until April 15, 2013, to set up a new individual retirement arrangement or add money to an existing IRA and still get credit for 2012. However, elective deferrals (contributions) must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, and the Thrift Savings Plan for federal employees. Employees who are unable to set aside money for this year may want to schedule their 2013 contributions soon so their employer can begin withholding them in January.
The saver's credit can be claimed by:
- Married couples filing jointly with incomes up to $57,500 in 2012 or $59,000 in 2013;
- Heads of Household with incomes up to $43,125 in 2012 or $44,250 in 2013; and
- Married individuals filing separately and singles with incomes up to $28,750 in 2012 or $29,500 in 2013.
Like other tax credits, the saver's credit can increase a taxpayer's refund or reduce the tax owed. Though the maximum saver's credit is $1,000, $2,000 for married couples, the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.
A taxpayer's credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver's credit, and its instructions have details on figuring the credit correctly.
In tax-year 2010, the most recent year for which complete figures are available, saver's credits totaling just over $1 billion were claimed on more than 6.1 million individual income tax returns. Saver's credits claimed on these returns averaged $204 for joint filers, $165 for heads of household and $122 for single filers.
The saver's credit supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.
Other special rules that apply to the saver's credit include the following:
- Eligible taxpayers must be at least 18 years of age.
- Anyone claimed as a dependent on someone else's return cannot take the credit.
- A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.
Certain retirement plan distributions reduce the contribution amount used to figure the credit. For 2012, this rule applies to distributions received after 2009 and before the due date, including extensions, of the 2012 return. Form 8880 and its instructions have details on making this computation.
Begun in 2002 as a temporary provision, the saver's credit was made a permanent part of the tax code in legislation enacted in 2006. To help preserve the value of the credit, income limits are now adjusted annually to keep pace with inflation. For more information about this credit contact our office or visit www.IRS.gov.
IRS Offers Tax Tips for "The Season of Giving"
December is traditionally a month for giving generously to charities, friends and family. But it's also a time that can have a major impact on the tax return you'll file in the New Year. Here are some Season of Giving tips from the IRS covering everything from charity donations to refund planning:
- Contribute to Qualified Charities. If you plan to take an itemized charitable deduction on your 2012 tax return, your donation must go to a qualified charity by Dec. 31. Ask the charity about its tax-exempt status. You can also visit IRS.gov and use the Exempt Organizations SELECTCheck tool to check if your favorite charity is a qualified charity. Donations charged to a credit card by Dec. 31 are deductible for 2012, even if you pay the bill in 2013. A gift by check also counts for 2012 as long as you mail it in December. Gifts given to individuals, whether to friends, family or strangers, are not deductible.
- What You Can Deduct. You generally can deduct your cash contributions and the fair market value of most property you donate to a qualified charity. Special rules apply to several types of donated property, including clothing or household items, cars and boats.
- Keep Records of All Donations. You need to keep a record of any donations you deduct, regardless of the amount. You must have a written record of all cash contributions to claim a deduction. This may include a cancelled check, bank or credit card statement or payroll deduction record. You can also ask the charity for a written statement that shows the charity?s name, contribution date and amount.
- Gather Records in a Safe Place. As long as you're gathering those records for your charitable contributions, it's a good time to start rounding up documents you will need to file your tax return in 2013. This includes receipts, canceled checks and other documents that support income or deductions you will claim on your tax return. Be sure to store them in a safe place so you can easily access them later when you file your tax return.
- Plan Ahead for Major Purchases. If you are making major purchases during the holiday season, don't base them solely on the expectation of receiving your tax refund before the bills arrive. Many factors can impact the timing of a tax refund. The IRS issues most refunds in less than 21 days after receiving a tax return. However, if your tax return requires additional review, it may take longer to receive your refund.
Employers Hiring Veterans by Years End May Get Expanded Tax Credit
IRS Special Edition Tax Tip 2012-14
Employers planning to claim an expanded tax credit for hiring certain veterans should act soon, according to the IRS. Many businesses may qualify to receive thousands of dollars through the Work Opportunity Tax Credit, but only if the veteran begins work before the new year.
Here are six key facts about the WOTC as expanded by VOW to Hire Heroes Act of 2011.
- Hiring Deadline: Employers may be able to claim the expanded WOTC for qualified veterans who begin work on or after Nov. 22, 2011, but before Jan. 1, 2013.
- Maximum Credit: The maximum tax credit is $9,600 per worker for employers that operate for-profit businesses, or $6,240 per worker for tax-exempt organizations.
- Credit Factors: The amount of credit will depend on a number of factors. Such factors include the length of the veterans unemployment before being hired, the number of hours the veteran works and the amount of the wages the veteran receives during the first-year of employment.
- Disabled Veterans: Employers hiring veterans with service-related disabilities may be eligible for the maximum tax credit.
- State Certification: Employers must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their state workforce agency. The form must be filed within 28 days after the qualified veteran starts work. For additional information about your SWA, visit the U.S. Department of Labor?s WOTC website.
- E-file: Some states accept Form 8850 electronically.
Visit the IRS.gov website and enter WOTC in the search field for forms and more details about the expanded tax credit for hiring veterans.
Beginning January 1, 2013, the standard mileage rates will be:
56.5 cents per mile for business miles
24 cents per mile for medical or moving purposes
14 cents per mile driven in service of charitable organizations
Five Important Tips on Gambling Income and Losses
Whether you roll the dice, bet on the ponies, play cards or enjoy slot machines, you should know that as a casual gambler, your gambling winnings are fully taxable and must be reported on your income tax return. You can also deduct your gambling losses?but only up to the extent of your winnings.
Here are five important tips about gambling and taxes:
1. Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse races, and casinos. It includes cash winnings and the fair market value of prizes such as cars and trips.
2. If you receive a certain amount of gambling winnings or if you have any winnings that are subject to federal tax withholding, the payer is required to issue you a Form W-2G, Certain Gambling Winnings. The payer must give you a W-2G if you receive:
- $1,200 or more in gambling winnings from bingo or slot machines;
- $1,500 or more in proceeds (the amount of winnings minus the amount of the wager) from keno;
- More than $5,000 in winnings (reduced by the wager or buy-in) from a poker tournament;
- $600 or more in gambling winnings (except winnings from bingo, keno, slot machines, and poker tournaments) and the payout is at least 300 times the amount of the wager; or
- Any other gambling winnings subject to federal income tax withholding.
3. Generally, you report all gambling winnings on the ?Other income? line of Form 1040, U.S. Federal Income Tax Return.
4. You can claim your gambling losses up to the amount of your winnings on Schedule A, Itemized Deductions, under ?Other Miscellaneous Deductions.' You must report the full amount of your winnings as income and claim your allowable losses separately. You cannot reduce your gambling winnings by your gambling losses and report the difference. Your records should also show your winnings separately from your losses.
5. Keep accurate records. If you are going to deduct gambling losses, you must have receipts, tickets, statements and documentation such as a diary or similar record of your losses and winnings. Refer to IRS Publication 529, Miscellaneous Deductions, for more details about the type of information you should write in your diary and what kinds of proof you should retain in your records.For more information on gambling income and losses, see IRS Publication 529, Miscellaneous Deductions, or Publication 525, Taxable and Nontaxable Income, both available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).