April 15th is right around the corner and we all know what that means: tax time. For many, the worst fear about taxes isn’t filling out the paperwork or paying what’s owed, it’s being audited by the IRS. So what can you do to stay off the radar? As you gather paperwork and prepare to file your personal or business taxes, keep these tips in mind to help you avoid an IRS audit.
Beware Disgruntled Employees, Exes & Neighbors
The IRS has been getting a lot of press about their whistle-blower program for good reason. It works. Informants are paid a minimum of 15% and a maximum of 30% of the amount owed by businesses or individuals. Bill Raabe, a tax expert at Ohio State University is quoted in CNNMoney as saying, “You’ll have spouses—or ex-spouses probably, as well as ex-employees turning in their employers.”
In 2008 alone, the IRS received 476 tips identifying 1,246 questionable taxpayers, according to the article. “Many claims are for substantially more than the $2 million threshold and involve business or wealthy individuals,” IRS Whistleblower Office director Stephen Whitlock is quoted as saying.
Your best bet? Keep your taxes legitimate and your tax information private.
Deductions
In general, you probably want to avoid deducting anything out of the ordinary, like claiming use of your entire house as a home office. And while they may feel like family, pets are not legal dependants as each dependant must have a valid Social Security Number.
Another way to avoid an audit is ensuring you don’t deduct the same expense on different forms. And if there is a deduction that you think may stand out, such as a large amount spent on building repairs, offer an explanation if possible.
Prove It
In terms of paperwork and documentation, do you have a record of everything? On top of IRS forms and summary reports, you’ll need to substantiate deductions. This means receipts, copies of checks or other documentation that proves a deduction was a business expense.
For business expenses, the magic dollar amount is $75. If the expense is less than $75, a simple notation somewhere will be enough substantiation. However, if the expense is higher than $75, a more detailed piece of evidence is needed, such as a receipt.
Do the Math
Check your math and cross reference numbers. Does the amount of income on one form match the number on another form or a supporting document? While the IRS system corrects some minor errors, providing correct numbers and calculations is up to you.
Plan Ahead
The IRS says it can audit you up to three years after filing your taxes, though Schnepper says most audits are conducted within 18 months of filing taxes. A lot can happen in that time, so think about how you can plan ahead. This may include saving all expense receipts, logging the miles you drive for business expenses, or taking a photo of the space you claim as a home office.
The Professionals
Lastly, consider the services of a tax professional. They know what they’re doing and can point out elements of your tax return that may get flagged for an audit. Plus, should you get audited you can look to them for help in putting together your case.
There is one bit of good news if you are selected for an audit--according to the IRS, this reduces your chances of being audited again the following year.
(Source: Legalzoom.com)
Divine Intervention?
Nobody Understands It
Monday, January 31, 2011
Monday, January 24, 2011
What's New on Your 1040...
What's New on the 2010 Form 1040
by Bill Bischoff
Monday, January 24, 2011
By now, some of you may already have your 2010 W-2 and 1099s in hand. If not, it won't be long. So it's not too soon to think about starting your 2010 Form 1040. Before you begin, there are some key changes to note. Here's what you need to know.Monday, January 24, 2011
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Even though April 15 falls on a Friday this year, the deadline for your 2010 Form 1040 is Monday April 18. Reason: Emancipation Day is a District of Columbia holiday, and it falls on April 15. So the tax filing deadline for the whole nation is deferred to April 18 . If your return won't be ready by then, you can extend the deadline all the way out to October 17 by filing Form 4868 on or before April 18.
No More Phase-Outs for Itemized Deductions and Exemptions
For years, high-income folks have seen their write-offs for the most popular itemized deduction items (including mortgage interest, state and local income and property taxes, and charitable donations) reduced by a nasty phase-out rule. Another nasty phase-out rule reduced or eliminated personal and dependent exemption deductions. Thankfully, both phase-outs were completely repealed for 2010 as part of the Bush-era tax cuts. So you can write off the full amount of your itemized deductions and exemptions on your 2010 Form 1040 without any worries and without having to fill out phase-out worksheets to penalize yourself. More good news: the recent tax cut extension legislation repealed the phase-outs for 2011 and 2012 as well.
Liberalized Adoption Credit
For 2010, the maximum adoption credit was increased to $13,170 (up from $12,150 in 2009). In addition, the credit was made 100% refundable for the 2010 tax year (previously, it was nonrefundable). That means you'll receive a check for any leftover adoption credit after your federal income tax bill has been reduced to zero. To claim the credit, fill out Form 8839 (Qualified Adoption Expenses), and enter the credit on line 71 of Form 1040.
One-Time Break for Self-Employed Individuals
Self-employed folks can generally deduct their health insurance premiums on page 1 of Form 1040 (use line 29 for 2010). The deduction reduces their federal income tax bills, which is nice. However, the self-employed have never been allowed to deduct those premiums when calculating their self-employment tax bills on Schedule SE. Good news: for 2010 only, you can deduct health insurance premiums on line 3 of Schedule SE. So those premiums will reduce both your income tax bill and your SE tax bill. Unfortunately, this break will not be available for 2011 and beyond unless Congress extends it.
Homebuyer Credit Repayment Rules Kick In
As I explained in an earlier column, you may have to repay part or all of the credit claimed for a 2008 or 2009 home purchase with your 2010 Form 1040.
In most cases, however, only those who purchased homes in 2008 will be affected. They will generally have to repay 1/15 of the credit with the 2010 Form 1040. If this rule impacts you, fill out Form 5405 (First-Time Homebuyer Credit and Repayment of the Credit), and enter the repayment amount as an addition to your tax bill on line 59 of Form 1040.
Real Estate Tax Deduction for Non-Itemizers is Gone
For 2008 and 2009, unmarried individuals who did not itemize could write off up to $500 of state and local real property taxes by claiming an increased standard deduction. Married joint-filing couples could write off up to $1,000. This add-on standard deduction deal for real estate taxes expired at the end of 2009, and it was not reinstated for 2010.
Deductions for Sales Taxes on New Vehicle Purchases Are Gone
The 2009 Stimulus Act created a temporary write-off for non-itemizers who paid state and local sales taxes on new vehicles purchased between 2/17/09 and 12/31/09. The write-off came in the form of an additional standard deduction allowance. Similarly, itemizers were allowed to claim an extra itemized deduction for such taxes. Both breaks lapsed at the end of 2009, and they were not reinstated for 2010.
Break for Unemployment Benefits Is Gone
In 2009, the first $2,400 of unemployment benefits was federal-income-tax-free. This break was not continued for 2010. Therefore, 100% of 2010 unemployment benefits generally must be reported as income on Form 1040 (use line 19).
Your Tax Preparer Might E-File Your Return This Time
Over the last few years, Congress has made tax-law changes that place increasing pressure on professional return preparers to electronically file more and more returns. As a result, your preparer might be forced to e-file your 2010 Form 1040 even if your returns for earlier years have always been done on paper. Get used to it.
Thursday, January 20, 2011
Hot Off the IRS Newswire....
IRS will start accepting returns with itemized deductions (Schedule A) on February 14th.
Tuesday, January 18, 2011
Protect Yourself from Your Stockbroker...
When you invest in stocks, you accept some risk. Your stocks may drop in value, shrinking your investment. That kind of risk is unavoidable, but other brokerage-related risks are not. The SIPC and FINRA can shield you from disaster.
First off, meet the Securities Investor Protection Corporation, or SIPC. When you shop for a brokerage, make sure that it's a member of the SIPC -- it should say so right on its website. SIPC-member brokerages protect the cash, stocks, and other securities they hold for their investors. If your brokerage goes belly-up and any cash or stocks you held in your account suddenly go missing, the SIPC can help. There's generally a maximum protection value of $500,000 per customer, which includes up to $250,000 in cash. Some brokerages offer additional protection -- just ask about that. Wealthy investors might want to split their assets between several brokerages, to avoid exceeding any single brokerage's SIPC protection limits.
Throughout your investing life, it's a good idea to periodically make sure that your brokerage is still an SIPC member. If it ever stops sending you statements, or does so sporadically, that's a big red flag.
Our watchdogNext up is the Financial Industry Regulatory Authority, or FINRA, the largest independent regulator of more than 4,500 brokerages and more than 630,000 registered securities representative. It writes and enforces rules that make life easier for us investors.
FINRA often imposes fines on its members for stepping out of line. It recently ordered Schwab (Nasdaq: SCHW) to pay investors more than $18 million after the broker glossed over one of its bond funds' true risks. It fined Goldman Sachs (NYSE: GS) $650,000 for not disclosing that two of its representatives were being investigated by the SEC. H&R Block (NYSE: HRB) got fined $200,000 for insufficiently supervising some sales of financial products, while Citigroup (NYSE: C) had to pay $1.5 million for supervision shortcomings related to a financial scam involving cemetery burial trusts.
In addition to penalizing misbehaving firms, FINRA also aims to educate investors, supporting financial literacy efforts and offering guidance on its website. It also resolves disputes and monitors brokers. Investors can look up brokers on its website, to see whether they have any marks against them.
Investing in just about anything carries some risks, but you can help your portfolio grow not only by looking for upside potential, but also by minimizing your downside potential.
(Source: Motley Fool)
First off, meet the Securities Investor Protection Corporation, or SIPC. When you shop for a brokerage, make sure that it's a member of the SIPC -- it should say so right on its website. SIPC-member brokerages protect the cash, stocks, and other securities they hold for their investors. If your brokerage goes belly-up and any cash or stocks you held in your account suddenly go missing, the SIPC can help. There's generally a maximum protection value of $500,000 per customer, which includes up to $250,000 in cash. Some brokerages offer additional protection -- just ask about that. Wealthy investors might want to split their assets between several brokerages, to avoid exceeding any single brokerage's SIPC protection limits.
Throughout your investing life, it's a good idea to periodically make sure that your brokerage is still an SIPC member. If it ever stops sending you statements, or does so sporadically, that's a big red flag.
Our watchdogNext up is the Financial Industry Regulatory Authority, or FINRA, the largest independent regulator of more than 4,500 brokerages and more than 630,000 registered securities representative. It writes and enforces rules that make life easier for us investors.
FINRA often imposes fines on its members for stepping out of line. It recently ordered Schwab (Nasdaq: SCHW) to pay investors more than $18 million after the broker glossed over one of its bond funds' true risks. It fined Goldman Sachs (NYSE: GS) $650,000 for not disclosing that two of its representatives were being investigated by the SEC. H&R Block (NYSE: HRB) got fined $200,000 for insufficiently supervising some sales of financial products, while Citigroup (NYSE: C) had to pay $1.5 million for supervision shortcomings related to a financial scam involving cemetery burial trusts.
In addition to penalizing misbehaving firms, FINRA also aims to educate investors, supporting financial literacy efforts and offering guidance on its website. It also resolves disputes and monitors brokers. Investors can look up brokers on its website, to see whether they have any marks against them.
Investing in just about anything carries some risks, but you can help your portfolio grow not only by looking for upside potential, but also by minimizing your downside potential.
(Source: Motley Fool)
Kids Can Save You on Income Taxes
Associated Press
Children can mean extra tax deductions and credits
By CAROLE FELDMAN , 01.18.11, 02:13 PM ESTWASHINGTON --
As any parent knows, the pitter patter of little feet - and bigger ones too - can be a drain on the wallet.
But when it comes to taxes, your children can mean extra deductions and credits.
First, for each dependent child, you can take a $3,650 personal exemption. The more children, the more exemptions you can take. Each personal exemption serves to reduce your income.
Children under age 19 can be claimed as dependents; those under 24 if they are full-time students. Children 24 or older who are full-time students can be claimed provided their income is less than $3,650. Age limits do not apply to disabled children.
If parents are divorced, only one may claim the child as a dependent. Child support is not taxable as income, although alimony is.
The child tax credit has been expanded and will impact more people, said Greg Rosica, tax partner at Ernst & Young. For parents to qualify for the credit of up to $1,000, their child must be under 17, must be claimed as a dependent on the parents' tax return and must have lived at home for more than half the year. Only U.S. citizens, nationals or legal residents are eligible. As with many other credits, this one begins phasing out at higher incomes.
If the credit exceeds the income tax owed, taxpayers may be eligible for the Additional Child Tax Credit, which is refundable. That means you may be able to get the money even if you don't owe taxes.
For the 2010 tax year, there's also an expanded credit for parents who adopt a child. Mark Steber, chief tax officer for Jackson Hewitt, called it ""larger and more lucrative" than prior adoption credits. The maximum credit is $13,170 for each child, up from $12,150 in 2009. "In general," the Internal Revenue Service says, "the credit is based on the reasonable and necessary expenses related to a legal adoption, including adoption fees, court costs, attorney's fees and travel expenses." Eligibility for the credit begins phasing out for taxpayers whose adjusted gross income exceeds $182,520.
In another change from 2009, the adoption credit is refundable. Thus, qualified people will get the money even if they have no tax liability. There's a special form that must be filled out, Form 8839. Documentation showing the adoption was completed also must be provided. That means taxpayers who want to claim the credit cannot file electronically.
Another credit available to many parents with lower incomes is the Earned Income Tax Credit. The maximum income a family can have and still qualify is now $48,362. Actual credit amounts vary, depending on income, family size and other factors. Though a family with three or more children typically qualifies for the largest amount, the average credit last year was about $2,000.
As children get older and outgrow their clothing, consider donating the items they can no longer wear to charity. If the charitable organization meets the criteria established by the IRS, the donation could translate into a tax deduction. But remember that used items usually sell for far less than new ones. Only the fair market value of the item is deductible, and the item must generally be in good condition.
For parents of older children, the American Opportunity Credit could provide some relief from the cost of higher education. The credit, in its second year as an expanded version of the Hope credit, is a maximum $2,500 of the cost for tuition and other higher education expenses. The credit can be used for the first four years of college, compared to the first two years for the Hope credit. Students must be enrolled at least half-time. "If you have multiple students that you're paying for, you get to claim the credit for each of them," said Kathy Pickering, executive director of the Tax Institute at H&R Block.
The credit, which is partially refundable, also phases out at higher incomes.
For those that don't qualify for the American Opportunity Credit, another option might be the tuition and fees deduction of up to $4,000. The deduction doesn't require someone to attend school at least half-time.
"You cannot use both for the same expenses," Pickering cautions.
The IRS advises that "though the credit will usually result in greater tax savings, taxpayers should calculate the effect of both on the tax return to see which is most beneficial - the tax credit or the deduction."
The tuition deduction was included in the tax law passed by Congress last month. Because it came so late in the year, the IRS said it needs time to update its systems. As a result, people claiming the tuition deduction will have to delay filing returns until mid-February.
Here's the Skinny...
This year's tax season will look a lot like last year's, with a few sweeteners added.
Most of the tax changes that were put in place in 2009 to spur the economy remained in effect in 2010, even though the recession was officially declared over. Among them: the Making Work Pay tax credit, which put a little extra money in the hands of 95 percent of U.S. taxpayers. Homebuyers and those who installed energy-efficient furnaces, windows and other items in their homes also could benefit, along with college students or their parents, schoolteachers and adoptive parents.
"There's really not much from a change perspective," said Greg Rosica, a tax partner ait Ernst & Young accounting firm.
But new sweeteners include elimination of the phase-out of itemized deductions and personal exemptions for higher-income taxpayers.
Low-income taxpayers benefit from a raise in income limits for the earned income tax credit. Congress in December also approved a patch for the alternative minimum tax that will protect about 20 million middle-income families from an additional tax bill of $3,900 or so.
The late action by Congress on the AMT and other provisions means that taxpayers who itemize deductions, teachers seeking a deduction for out-of-pocket expenses, and those filing for the tuition and fees deduction will have to wait until the Internal Revenue Service updates its systems before filing their returns. Terry Lemons, the IRS' senior spokesman, estimates the delay could last until mid-February. "We have to be very careful to make sure we have it right," he said.
Tax experts said the delay shouldn't affect taxpayers too much. "The rush of the tax filing season isn't until mid-February to begin with because people don't get all their information together to begin filing," Rosica said.
Taxpayers also will have a few extra days to file. Returns aren't due until April 18 because of Emancipation Day, celebrated April 15 in the District of Columbia.
Mark Steber, chief tax officer for Jackson Hewitt said taxpayers will have to be more vigilant this year because of the lateness of the changes.
As a result, this year, more than ever, is a good time to file electronically, Lemons said. "You're going to get a more accurate return," he said. "You're going to get the latest tax information."
Nearly 99 million tax returns were filed electronically last year, up 3 percent from the previous year. The total represents nearly 70 percent of returns filed.
About 77 percent of taxpayers received a refund on 2009 returns, averaging $2,994 each.
For the 2010 tax year, "economic factors might point to a slightly higher refund percentage," said Bob Meighan, vice president at TurboTax, which makes tax preparation software. He cited continued high unemployment.
Though the jobless rate remains close to 10 percent, the unemployed lost a key tax break. "All unemployment insurance is taxable this year," said Mark Luscombe, principal analyst at CCH, a tax preparation service. For the 2009 tax year, the first $2,400 of unemployment benefits had been excluded.
Another recession-battling tax break not renewed was the deduction for sales and excise taxes on the purchase of a new car. However, Congress did extend the state and local sales tax deduction, which primarily benefits those in areas without state and local income taxes.
Deductions reduce the income on which you are taxed. Credits reduce the amount of tax owed and generally are considered more advantageous to the taxpayer.
If you seek professional help on your return, make sure your tax preparer has registered as required with the IRS. Later this year, most tax preparers will have to pass an exam certifying their skills. Certified public accountants and some others are exempt.
"It's setting a standard of excellence for the industry," said Kathy Pickering of the Tax Institute at H&R Block.
All taxpayers can claim a $3,650 per person exemption for themselves, their spouse and each qualified dependent. That's unchanged from last year, as is the standard deduction for married couples filing jointly ($11,400) or singles ($5,700). The standard deduction for heads of households increased slightly, to $8,400.
The capital gains rate remains at a maximum of 15 percent. For those taxed overall at the 10 percent or 15 percent rate, the capital gains rate is 0.
Many tax deductions and credits are unavailable to people with higher incomes. Among them: the first-time home buyer credit; the American Opportunity credit for college tuition, related fees, books and other required course materials; and the deduction for tuition and fees.
Before 2010, wealthier people couldn't realize the full benefit of their personal exemptions and itemized deductions. That's changed for 2010, 2011 and 2012. "Overall income limits for personal and dependency exemptions and itemized deductions do not apply," the IRS said.
However, the agency noted, "for taxpayers at all income levels, limitations continue to apply to particular itemized deductions, such as medical and dental expenses, certain miscellaneous itemized deductions and casualty and theft losses." For example, only medical expenses that exceed 7.5 percent of adjusted gross income may be deducted.
Tax experts urge people to take advantage of all the deductions they are due.
For charitable deductions, people are pretty good at keeping track of cash but not as good when it comes to goods, Luscombe said. They often forget out-of-pocket expenses, including travel or transportation.
Taxpayers who are at least 70 1/2 years old could make a donation to a charity direct from their individual retirement accounts without paying taxes on the amount. But there's no double-dipping. They cannot also claim the amount as a charitable donation.
And in another change affecting retirement accounts, people could convert their traditional IRAs to Roth retirement accounts regardless of income. Taxpayers had the option of counting the amount of the conversion as taxable income in 2010 or deferring it over two years, 2011 and 2012.
Middle-class taxpayers will benefit from the patch to the alternative minimum tax, which originally was aimed at ensuring that people weren't wrongly escaping taxes by claiming deductions. The AMT is not indexed for inflation, so every year Congress passes a patch so millions more taxpayers aren't affected.
The patch for the 2010 tax year increases the exemption to $72,450 for a married couple filing a joint return and qualifying widows and widowers, up from $70,950 in 2009. For singles and heads of households, it's $47,450, up from $46,700.
Also adjusted for inflation was the maximum income level you could have and still qualify for the earned income credit, as well as the value of the credit itself. Income levels and the amount of credit are based on the number of children in the household.
During 2010, the vast majority of taxpayers benefitted from the Making Work Pay tax credit, aimed at combatting the recession. There were income limits, however, and taxpayers will have to file Schedule M to claim the credit, which is up to $400 for singles or $800 for married couples filing jointly. Since payroll withholding was adjusted so you could get the immediate benefit of the credit, you could find yourself owing money if both spouses worked or if you have more than one job.
The homebuyers' credit also continued - for part of the year. If you were a first-time home buyer and bought your home before May 1, 2010, you may qualify for a maximum $8,000 credit. There's a separate credit, too, for long-time homeowners, up to $6,500. These, too, phase out at higher income levels, and the price of the home may not be over $800,000. You also must have used the home as your primary residence for at least three years, or you'll have to repay the money.
Members of the armed forces and certain federal employees serving outside the United States have longer deadlines to buy homes and still qualify for the credit.
Again this year, there's added documentation required, such as the HUD-1 settlement statement. As a result, people claiming the credit will not be able to file electronically.
Those who bought homes in 2008 and claimed the credit owe the government some money. That credit actually was an interest-free loan and must be paid back over 15 years. Those who took the maximum credit, $7,500, will have to add $500 to their taxes due. "It might catch people unaware," said Barbara Weltman, author of tax books for J.K. Lasser.
You'll also have to file a paper return if you claim the expanded adoption credit. The maximum is $13,170 for each child, up from $12,150 in 2009.
The energy credit, worth a maximum $1,500, also remained in place. Homeowners who installed energy-efficient windows, furnaces, air conditioners or other items may qualify for a credit of 30 percent of the cost of the items. But there's a catch: The items had to be installed by Dec. 31.
College students or their parents may qualify for the American Opportunity Credit, worth $2,500 toward tuition and other qualified higher education costs. Students must be attending school at least half-time. Congress also extended the higher education tuition and fees deduction.
And a final word of advice: If you're waiting for forms to arrive in the mail, don't. The IRS decided not to mail them this year, a cost-saving measure that reflects the reality that increasing numbers of people are filing electronically.
(Source: Associated Press)
Most of the tax changes that were put in place in 2009 to spur the economy remained in effect in 2010, even though the recession was officially declared over. Among them: the Making Work Pay tax credit, which put a little extra money in the hands of 95 percent of U.S. taxpayers. Homebuyers and those who installed energy-efficient furnaces, windows and other items in their homes also could benefit, along with college students or their parents, schoolteachers and adoptive parents.
"There's really not much from a change perspective," said Greg Rosica, a tax partner ait Ernst & Young accounting firm.
But new sweeteners include elimination of the phase-out of itemized deductions and personal exemptions for higher-income taxpayers.
Low-income taxpayers benefit from a raise in income limits for the earned income tax credit. Congress in December also approved a patch for the alternative minimum tax that will protect about 20 million middle-income families from an additional tax bill of $3,900 or so.
The late action by Congress on the AMT and other provisions means that taxpayers who itemize deductions, teachers seeking a deduction for out-of-pocket expenses, and those filing for the tuition and fees deduction will have to wait until the Internal Revenue Service updates its systems before filing their returns. Terry Lemons, the IRS' senior spokesman, estimates the delay could last until mid-February. "We have to be very careful to make sure we have it right," he said.
Tax experts said the delay shouldn't affect taxpayers too much. "The rush of the tax filing season isn't until mid-February to begin with because people don't get all their information together to begin filing," Rosica said.
Taxpayers also will have a few extra days to file. Returns aren't due until April 18 because of Emancipation Day, celebrated April 15 in the District of Columbia.
Mark Steber, chief tax officer for Jackson Hewitt said taxpayers will have to be more vigilant this year because of the lateness of the changes.
As a result, this year, more than ever, is a good time to file electronically, Lemons said. "You're going to get a more accurate return," he said. "You're going to get the latest tax information."
Nearly 99 million tax returns were filed electronically last year, up 3 percent from the previous year. The total represents nearly 70 percent of returns filed.
About 77 percent of taxpayers received a refund on 2009 returns, averaging $2,994 each.
For the 2010 tax year, "economic factors might point to a slightly higher refund percentage," said Bob Meighan, vice president at TurboTax, which makes tax preparation software. He cited continued high unemployment.
Though the jobless rate remains close to 10 percent, the unemployed lost a key tax break. "All unemployment insurance is taxable this year," said Mark Luscombe, principal analyst at CCH, a tax preparation service. For the 2009 tax year, the first $2,400 of unemployment benefits had been excluded.
Another recession-battling tax break not renewed was the deduction for sales and excise taxes on the purchase of a new car. However, Congress did extend the state and local sales tax deduction, which primarily benefits those in areas without state and local income taxes.
Deductions reduce the income on which you are taxed. Credits reduce the amount of tax owed and generally are considered more advantageous to the taxpayer.
If you seek professional help on your return, make sure your tax preparer has registered as required with the IRS. Later this year, most tax preparers will have to pass an exam certifying their skills. Certified public accountants and some others are exempt.
"It's setting a standard of excellence for the industry," said Kathy Pickering of the Tax Institute at H&R Block.
All taxpayers can claim a $3,650 per person exemption for themselves, their spouse and each qualified dependent. That's unchanged from last year, as is the standard deduction for married couples filing jointly ($11,400) or singles ($5,700). The standard deduction for heads of households increased slightly, to $8,400.
The capital gains rate remains at a maximum of 15 percent. For those taxed overall at the 10 percent or 15 percent rate, the capital gains rate is 0.
Many tax deductions and credits are unavailable to people with higher incomes. Among them: the first-time home buyer credit; the American Opportunity credit for college tuition, related fees, books and other required course materials; and the deduction for tuition and fees.
Before 2010, wealthier people couldn't realize the full benefit of their personal exemptions and itemized deductions. That's changed for 2010, 2011 and 2012. "Overall income limits for personal and dependency exemptions and itemized deductions do not apply," the IRS said.
However, the agency noted, "for taxpayers at all income levels, limitations continue to apply to particular itemized deductions, such as medical and dental expenses, certain miscellaneous itemized deductions and casualty and theft losses." For example, only medical expenses that exceed 7.5 percent of adjusted gross income may be deducted.
Tax experts urge people to take advantage of all the deductions they are due.
For charitable deductions, people are pretty good at keeping track of cash but not as good when it comes to goods, Luscombe said. They often forget out-of-pocket expenses, including travel or transportation.
Taxpayers who are at least 70 1/2 years old could make a donation to a charity direct from their individual retirement accounts without paying taxes on the amount. But there's no double-dipping. They cannot also claim the amount as a charitable donation.
And in another change affecting retirement accounts, people could convert their traditional IRAs to Roth retirement accounts regardless of income. Taxpayers had the option of counting the amount of the conversion as taxable income in 2010 or deferring it over two years, 2011 and 2012.
Middle-class taxpayers will benefit from the patch to the alternative minimum tax, which originally was aimed at ensuring that people weren't wrongly escaping taxes by claiming deductions. The AMT is not indexed for inflation, so every year Congress passes a patch so millions more taxpayers aren't affected.
The patch for the 2010 tax year increases the exemption to $72,450 for a married couple filing a joint return and qualifying widows and widowers, up from $70,950 in 2009. For singles and heads of households, it's $47,450, up from $46,700.
Also adjusted for inflation was the maximum income level you could have and still qualify for the earned income credit, as well as the value of the credit itself. Income levels and the amount of credit are based on the number of children in the household.
During 2010, the vast majority of taxpayers benefitted from the Making Work Pay tax credit, aimed at combatting the recession. There were income limits, however, and taxpayers will have to file Schedule M to claim the credit, which is up to $400 for singles or $800 for married couples filing jointly. Since payroll withholding was adjusted so you could get the immediate benefit of the credit, you could find yourself owing money if both spouses worked or if you have more than one job.
The homebuyers' credit also continued - for part of the year. If you were a first-time home buyer and bought your home before May 1, 2010, you may qualify for a maximum $8,000 credit. There's a separate credit, too, for long-time homeowners, up to $6,500. These, too, phase out at higher income levels, and the price of the home may not be over $800,000. You also must have used the home as your primary residence for at least three years, or you'll have to repay the money.
Members of the armed forces and certain federal employees serving outside the United States have longer deadlines to buy homes and still qualify for the credit.
Again this year, there's added documentation required, such as the HUD-1 settlement statement. As a result, people claiming the credit will not be able to file electronically.
Those who bought homes in 2008 and claimed the credit owe the government some money. That credit actually was an interest-free loan and must be paid back over 15 years. Those who took the maximum credit, $7,500, will have to add $500 to their taxes due. "It might catch people unaware," said Barbara Weltman, author of tax books for J.K. Lasser.
You'll also have to file a paper return if you claim the expanded adoption credit. The maximum is $13,170 for each child, up from $12,150 in 2009.
The energy credit, worth a maximum $1,500, also remained in place. Homeowners who installed energy-efficient windows, furnaces, air conditioners or other items may qualify for a credit of 30 percent of the cost of the items. But there's a catch: The items had to be installed by Dec. 31.
College students or their parents may qualify for the American Opportunity Credit, worth $2,500 toward tuition and other qualified higher education costs. Students must be attending school at least half-time. Congress also extended the higher education tuition and fees deduction.
And a final word of advice: If you're waiting for forms to arrive in the mail, don't. The IRS decided not to mail them this year, a cost-saving measure that reflects the reality that increasing numbers of people are filing electronically.
(Source: Associated Press)
Friday, January 14, 2011
How Congress Screws Up the Tax Process Year after Year...
If you’re among the one-third of taxpayers who itemize deductions on their federal tax returns, the IRS says you can take your time filing your 2010 tax return. Or rather you have to take your time. The IRS won’t let itemizers (or people who claim either the college tuition or educator expense deductions) file until mid- to late-February. Why? Because Congress didn’t pass the 2010 tax act until mid-December. The IRS needs time to reprogram its computers to accommodate new tax rules—actually old rules since the tax act mainly extended last year’s law through 2012.
The situation echoes another a few years back when Congress waited until late December to “patch” the alternative minimum tax for 2007 returns. The patch boosted the AMT’s exemption and extended applicable credits, thus sparing more than 20 million taxpayers from owing additional tax. But the 4 million taxpayers still subject to the tax had to wait more than a month while the IRS rewrote its computer programs.
The IRS made sure that wouldn’t happen again this year. When the chairmen and ranking members of the Ways and Means and Senate Finance Committees told IRS Commissioner Doug Shulman back in November that they would patch the AMT for 2010, Shulman had his programmers update their computers with the promised—but not enacted—fixes. Fortunately, Congress followed through so taxpayers who owe AMT for 2010 can file whenever they’re ready—unless they want to itemize their deductions, which, of course, virtually all of them will.
Delaying tax filing is only the most tangible result of last-minute and temporary tax legislation. Over the past decade, the federal individual income tax has changed every year. Congress legislated some of the changes far in advance, but others popped up right before—or sometimes after—the new tax year started. People can’t plan when they don’t know which tax laws will apply. And they waste a lot of time and effort adapting to and complying with ever-changing rules.
The delay won’t affect procrastinators but people like me who want to file as soon as they have all of their W-2s and 1099s for the year won’t like it. I’m lazy about adjusting withholding to match my expected tax liability—it’s easier to use a safe harbor that overwithholds—so I typically get a large refund. But having already given the government a zero-interest loan during the year, I want my refund as soon as possible (in recent years so I could pay my daughter’s latest tuition bill). This year’s refund will come later than usual. Fortunately I’ve paid my last tuition bill so I can afford to wait. But there’s still the principle of getting that refund quickly.
Those of you who pay estimated taxes and haven’t already made your January payment might want to trim that payment back if you expect a refund. On the other hand, sticking with a safe harbor saves your doing the arithmetic needed to make sure you won’t get hit for underpayment.
There is one bit of good news: Because the IRS resides in the District of Columbia, which celebrates Emancipation Day on April 15 this year—a Friday—tax returns aren’t due until April 18. Itemizers may have to wait many weeks before the IRS will let them file their returns, but they’ll have three extra days to mail them.
(Source: Forbes Magazine)
The situation echoes another a few years back when Congress waited until late December to “patch” the alternative minimum tax for 2007 returns. The patch boosted the AMT’s exemption and extended applicable credits, thus sparing more than 20 million taxpayers from owing additional tax. But the 4 million taxpayers still subject to the tax had to wait more than a month while the IRS rewrote its computer programs.
The IRS made sure that wouldn’t happen again this year. When the chairmen and ranking members of the Ways and Means and Senate Finance Committees told IRS Commissioner Doug Shulman back in November that they would patch the AMT for 2010, Shulman had his programmers update their computers with the promised—but not enacted—fixes. Fortunately, Congress followed through so taxpayers who owe AMT for 2010 can file whenever they’re ready—unless they want to itemize their deductions, which, of course, virtually all of them will.
Delaying tax filing is only the most tangible result of last-minute and temporary tax legislation. Over the past decade, the federal individual income tax has changed every year. Congress legislated some of the changes far in advance, but others popped up right before—or sometimes after—the new tax year started. People can’t plan when they don’t know which tax laws will apply. And they waste a lot of time and effort adapting to and complying with ever-changing rules.
The delay won’t affect procrastinators but people like me who want to file as soon as they have all of their W-2s and 1099s for the year won’t like it. I’m lazy about adjusting withholding to match my expected tax liability—it’s easier to use a safe harbor that overwithholds—so I typically get a large refund. But having already given the government a zero-interest loan during the year, I want my refund as soon as possible (in recent years so I could pay my daughter’s latest tuition bill). This year’s refund will come later than usual. Fortunately I’ve paid my last tuition bill so I can afford to wait. But there’s still the principle of getting that refund quickly.
Those of you who pay estimated taxes and haven’t already made your January payment might want to trim that payment back if you expect a refund. On the other hand, sticking with a safe harbor saves your doing the arithmetic needed to make sure you won’t get hit for underpayment.
There is one bit of good news: Because the IRS resides in the District of Columbia, which celebrates Emancipation Day on April 15 this year—a Friday—tax returns aren’t due until April 18. Itemizers may have to wait many weeks before the IRS will let them file their returns, but they’ll have three extra days to mail them.
(Source: Forbes Magazine)
Monday, January 10, 2011
Fair is Fair...
Each year for the past decade, Nina Olsen, the National Taxpayer Advocate at the Internal Revenue Service, has issued a report to Congress on the most serious problems facing taxpayers. She usually focuses on individual provisions of the code, such as the Alternative Minimum Tax, or vexing tax administration problems. This year, Nina reached a quite different conclusion: The most serious problem encountered by taxpayers is … the Tax Code. The whole damn thing.
As the report says, “The most serious problem facing taxpayers—and the IRS—is the complexity of the Internal Revenue Code.”
Olsen estimates that individuals and businesses spend 6.1 billion hours preparing their returns. That’s equal to a year’s labor by 3 million full-time workers. Individual taxpayers are so befuddled by the Code that she reports 89 percent either pay a preparer or buy commercial software to help with the paperwork. The total cost of compliance in 2008, Olsen estimates, was $163 billion, or more than 11 percent of total income tax collections. The average out-of-pocket cost per taxpayer: $258. Something is very wrong when we have to pay a vendor $258 just to perform the most basic of civic duties.
Not only is the Tax Code massive—3.8 million words by Olsen’s count—but it is a constantly moving target. Her report estimates there have been more than 4,000 changes in the law over the past decade, and 579 last year alone. It is no wonder nobody understands it.
More troubling, all this complexity is driving people to cheat. More than 60 percent of self-employed workers (whose income tax is not withheld) either under-report income or over-report deductions. Olsen attributes at least some of this behavior to taxpayers’ belief that they are paying more than their fair share while others are avoiding tax. Nobody, she says, wants to be a “tax chump.”
Of course, complexity isn’t the only reason to rewrite the tax code. It is also hideously inefficient and grossly unfair. It picks economic winners and losers, subsidizing those activities that politicians think are “good” and penalizing those that are deemed “bad.” Often, the more money you make, the more you are rewarded. And far too often, two households making exactly the same amount of money and living in roughly similar circumstances find themselves paying wildly different amounts of tax.
Nina is wrong about one thing. She says the time to reform the tax code is now. Actually, it was long before now. But that’s no reason why President Obama and Congress shouldn’t get started.
(Source: Forbes Magazine)
As the report says, “The most serious problem facing taxpayers—and the IRS—is the complexity of the Internal Revenue Code.”
Olsen estimates that individuals and businesses spend 6.1 billion hours preparing their returns. That’s equal to a year’s labor by 3 million full-time workers. Individual taxpayers are so befuddled by the Code that she reports 89 percent either pay a preparer or buy commercial software to help with the paperwork. The total cost of compliance in 2008, Olsen estimates, was $163 billion, or more than 11 percent of total income tax collections. The average out-of-pocket cost per taxpayer: $258. Something is very wrong when we have to pay a vendor $258 just to perform the most basic of civic duties.
Not only is the Tax Code massive—3.8 million words by Olsen’s count—but it is a constantly moving target. Her report estimates there have been more than 4,000 changes in the law over the past decade, and 579 last year alone. It is no wonder nobody understands it.
More troubling, all this complexity is driving people to cheat. More than 60 percent of self-employed workers (whose income tax is not withheld) either under-report income or over-report deductions. Olsen attributes at least some of this behavior to taxpayers’ belief that they are paying more than their fair share while others are avoiding tax. Nobody, she says, wants to be a “tax chump.”
Of course, complexity isn’t the only reason to rewrite the tax code. It is also hideously inefficient and grossly unfair. It picks economic winners and losers, subsidizing those activities that politicians think are “good” and penalizing those that are deemed “bad.” Often, the more money you make, the more you are rewarded. And far too often, two households making exactly the same amount of money and living in roughly similar circumstances find themselves paying wildly different amounts of tax.
Nina is wrong about one thing. She says the time to reform the tax code is now. Actually, it was long before now. But that’s no reason why President Obama and Congress shouldn’t get started.
(Source: Forbes Magazine)
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