American Opportunity Credit Replaces the Hope Credit

If you need help paying for college, you’ll be glad to hear about the American Opportunity Credit.  The new education credit modifies and expands the Hope credit for tax years 2010 and 2011.  The plan is to make the credit permanent and index it for inflation.

The credit provides undergraduates a dollar for dollar reduction of taxes, up to $2,500 of the first $4,000 of qualifying educational expenses.  Qualified expenses have been expanded from the Hope credit rules.  In addition to tuition, they included expenditures for required course materials such as books, supplies and equipment needed for a course whether or not the materials are purchased from the school.

Unlike the Hope credit, the American Opportunity Credit can be used for all four college years and is refundable up to $ 1,000.  You can receive a refund of up to forty percent of the credit, even though you owe no tax.  The full credit is available for taxpayers with modified adjusted gross income of $80,000 or less, $160,000 or less for married couples filing jointly.  The credit is phased out for taxpayers with incomes above these levels.

Phase-Outs Eliminated in 2010

The high income phase-outs for itemized deductions and personal exemptions have been repealed for 2010.

Itemized deductions are expenses an individual taxpayer can report on their tax returns to reduce taxable income.  A personal exemption is a stated amount allowed by the government to reduce taxable income.  Individuals are allowed to claim a personal exemption for themselves and one for each dependent they support.

Both itemized deductions and personal exemptions are subject to phase-out limits.  In other words, if your income exceeds certain thresholds both the itemized deduction and your personal exemptions will be reduced.  In 2010, however, those income limits have been repealed but are scheduled to resume in 2011.

New Law Eases Cell Phone Reporting

In 1989, when the old cell phone rules were developed, cell phones were expensive and considered a luxury item used primarily by executives.  Congress decided to tax them the same way it taxes the personal uses of employer-provided automobiles.  Under this classification, called “listed property”, employers are denied a tax deduction unless they document the cell pho9ne business use and business purpose.  Employees were required to include the value of their personal use in their income.

Starting in 2010, cell phones and similar telecommunication devices used for business are no longer subject to the “listed property” reporting requirements.  This means employers may deduct the cost of providing cell phones to employees for business-related use without having to satisfy the strict substantiation requirements for listed property.

Four Tax Tips about Tip Income

If you work in an occupation where tips are part of your total compensation, you need to be aware of several facts relating to your federal income taxes. Here are four things the IRS wants you to know about tip income:

1. Tips are taxable. Tips are subject to federal income, Social Security and Medicare taxes. The value of non–cash tips, such as tickets, passes or other items of value, is also income and subject to tax.

2. Include tips on your tax return. You must include in gross income all cash tips you receive directly from customers, tips added to credit cards, and your share of any tips you receive under a tip–splitting arrangement with fellow employees.

3. Report tips to your employer. If you receive $20 or more in tips in any one month, you should report all of your tips to your employer. Your employer is required to withhold federal income, Social Security and Medicare taxes.

4. Keep a running daily log of your tip income. You can use IRS Publication 1244, Employee's Daily Record of Tips and Report to Employer, to record your tip income.

For more information see IRS Publication 531, Reporting Tip Income and Publication 1244 which are available at http://www.irs.gov or can be ordered by calling 800-TAX-FORM (800-829-3676)

Links:

• IRS Publication 1244
• IRS Publication 531

Two Tax Credits to Help Pay Higher Education Costs

There are two federal tax credits available to help you offset the costs of higher education for yourself or your dependents.  These are the American Opportunity Credit and the Lifetime Learning Credit.

To qualify for either credit, you must pay postsecondary tuition and fees for yourself, your spouse or your dependent. The credit may be claimed by the parent or the student, but not by both. If the student was claimed as a dependent, the student cannot file for the credit.

For each student, you can choose to claim only one of the credits in a single tax year. You cannot claim the American Opportunity Credit to pay for part of your daughter's tuition charges and then claim the Lifetime Learning Credit for $2,000 more of her school costs.

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.

Here are some key facts the IRS wants you to know about these valuable education credits:

1. The American Opportunity Credit

• The credit can be up to $2,500 per eligible student.
• It is available for the first four years of post-secondary education.
• Forty percent of the credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes.
• The student must be pursuing an undergraduate degree or other recognized educational credential.
• The student must be enrolled at least half time for at least one academic period.
• Qualified expenses include tuition and fees, coursed related books supplies and equipment.
• The full credit is generally available to eligible taxpayers who make less than $80,000 or $160,000 for married couples filing a joint return.

2. Lifetime Learning Credit

• The credit can be up to $2,000 per eligible student.
• It is available for all years of postsecondary education and for courses to acquire or improve job skills.
• The maximum credited is limited to the amount of tax you must pay on your return.
• The student does not need to be pursuing a degree or other recognized education credential.
• Qualified expenses include tuition and fees, course related books, supplies and equipment.
• The full credit is generally available to eligible taxpayers who make less than $60,000 or $120,000 for married couples filing a joint return.

You cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax 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 about these credits see IRS Publication 970, Tax Benefits for Education available at http://www.irs.gov or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).

How Long Do I Need to Keep My Tax Records?

There are many records and documents, such as your W-2, 1099 interest and dividend statements, and so on, that support the numbers you put on your tax return.  You’ll need these documents should the IRS select your return for audit.  Most IRS examinations go smoothly and quickly if you are well organized and can produce support for any numbers in question.  ON the other hand, audits can become a nightmare if you’re unprepared and can’t prove what’s been reported.  The first step to being prepared is to organize the records at the time you’re preparing the return and then keep them with your return.  If some records need to be stored in other locations, make a copy of the document for your tax return file.  If you get questioned, trying to reassemble records after a couple years have past by can be time consuming and stressful.

Records you should keep include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks, proofs of payment, and any other records to support deductions or credits you claim on your return.  How long you need to keep your records depends on the circumstance.  The general rule, which follows the statute of limitations, is to keep your tax records a minimum of three years.  There are a number of exceptions to the three year rule.  For example, if the document will affect a future tax return, such as the purchase of real estate, the three year rule won’t start until the transaction closes, that is when you sell real estate.  Documents, such as a medical bill, affecting only the current year can usually be destroyed after three years.

Being able to properly support your tax return is important. What to keep and how long you will need to retain your documents can be confusing.  Your tax preparer is familiar with your return and can answer your questions taking into consideration your specific situation.

IRS Reminds Small Charities to Check Their Reporting Requirements Because They May Have Gotten Simpler

WASHINGTON — The Internal Revenue Service today announced that small tax-exempt organizations may be able to shift to the simpler Form 990-N (e-Postcard) for their 2010 annual information reporting.

The IRS today issued guidance (Revenue Procedure 2011-15) that will allow more tax-exempt organizations to file the e-Postcard rather than the Form 990-EZ or the standard Form 990.

For tax years beginning on or after Jan. 1, 2010, most tax-exempt organizations whose gross annual receipts are normally $50,000 or less can file the e-Postcard. The threshold was previously set at $25,000 or less. (However, supporting organizations of any size must file the standard Form 990 or, if eligible, Form 990-EZ).

A tax-exempt organization’s annual gross receipts or total assets are used to determine which of the three versions of Form 990 it is required to file. IRS.gov contains information about which form to file.

The Pension Protection Act of 2006 made important changes to rules regarding tax-exempt organizations’ annual filing requirements, which took effect as of the beginning of 2007.

First, it mandated that small tax-exempt organizations, other than churches and church-related organizations, file an annual notice with the IRS if they were too small to file Form 990 or Form 990-EZ. (The Form 990-N was created for small tax-exempt organizations that had not previously had a filing requirement.) Second, it required all supporting organizations, regardless of their size, to file the standard Form 990 or Form 990-EZ. Finally, the law specifies that any tax-exempt organization that fails to file for three consecutive years automatically loses its federal tax-exempt status.

Any tax-exempt organization that has not yet complied with these new requirements should do so immediately. If an organization loses its exemption, it will have to reapply with the IRS to regain its tax-exempt status. Any income received between the revocation date and renewed exemption may be taxable.

How to Track Your Tax Refund

Wondering where your tax refund could be? Just watch the video to find out how to track your tax refund.

New Hiring Incentives

During 2010 the Hiring Incentives to Restore Employment (HIRE) Act gives employers a financial incentive to hire new employees by combining forgiveness for employer paid Social Security taxes along with an additional tax credit if the new employee stays on the payroll for at least 52 weeks.

To be eligible the new employee must begin full or part0time employment from February 3,2010 through December 31, 2010.  The new employee must not have been employed more than 40 hours during the 60 days prior to his or her hire date.  In addition, the new employee cannot have displaced a current employee unless the prior employee voluntarily quit or was terminated for cause.

The new law exempts employers from having to pay the 6.2 percent employer’s portion of the Social Security reported on From 941.  The employee portion of the Social Security tax must still be deducted from the employee and reported as normal.

In addition to Social Security forgiveness the new law provides for a retained worker credit.  If the qualified new hire is employed for at least 52 consecutive weeks the employer will receive an additional tax credit equal to the lesser of $1,000 or 6.2 percent of the wages paid.  During the 52 week period the employee’s pay during the last 26 weeks must be equal to at lest 80 percent of the pay during the first 26 weeks.  The law excludes domestic workers and those eligible for the foreign earned income exclusion.

Many small business owners preparing their own Form 941s have overlooked taking these new tax benefits and should talk with their tax preparer to see how to get this corrected.

Eight Facts About Filing Status

The first step to filing your federal income tax return is to determine which filing status to use. Your filing status is used to determine your filing requirements, standard deduction, eligibility for certain credits and deductions, and your correct tax. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household and Qualifying Widow(er) with Dependent Child.

Here are eight facts about the five filing status options the IRS wants you to know so that 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 2010, 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 2008 or 2009, you have a dependent child 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 http://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.

Link:

Publication 501, Exemptions, Standard Deduction, and Filing Information (PDF 196K)

How to Deal With a Federal Tax Lien

Federal Tax Liens

Whenever you owe taxes to the U.S. Treasury and don't pay, a claim against you by the federal government arises by law. (Internal Revenue Code § 6321.) This claim is called a tax lien. The existence of the government's claim is not public information-at least initially-and so it is sometimes called a "secret" or "statutory" or "automatic" lien.

The tax lien automatically attaches to just about everything you own or have a right in. If you owe interest and penalties on the tax, which is often the case, the lien covers these amounts as well.
States may also have tax lien rights.

Notice of Federal Tax Lien

If the IRS sends you a valid tax bill and you don't pay it, you may receive a written demand to pay. This paper is called a CP-501 notice, referring to the IRS number on the right-hand corner. If you don't pay within 30 days, the IRS has to the right to file a notice in the public records showing your tax debt. This paper is officially called a Notice of Federal Tax Lien. The IRS files over 500,000 notices each year in the county and/or state public records offices where you live, work, or own real estate. In the few states without county recording systems, the IRS sends the Notice of Federal Tax Lien to the secretary of state's office. The state or county fee for recording the tax lien is paid by the IRS and added to your bill.

The IRS does not check first to see if you actually own real estate before recording the lien notice. It has no reason to. Even if you don't own property now, you might later and the IRS gets first dibs on the proceeds from its sale or financing.

EXAMPLE: Joyce owes the IRS and lives in Orange County with her Aunt Mildred. The IRS records a Notice of Federal Tax Lien at the county recorder's office, even though Joyce owns no real estate. Aunt Mildred dies and leaves her home to Joyce. The IRS's lien now attaches to the house. Joyce won't be able to sell the house with a clear title without first paying off the IRS. And Joyce won't get rid of the lien by getting rid of the property. Any buyer takes the property with the IRS lien on it. And the IRS then has two sources of collection-Joyce and the property held by the buyer.

Effect of a Recorded Notice of Federal Tax Lien

Just as a recorded mortgage tells anyone who searches the public records or pulls your credit report that you owe on your home, a Notice of Federal Tax Lien shows the world that you owe the IRS.

A recorded tax lien damages your borrowing ability by scaring off potential creditors or lenders, making it difficult for you to finance any purchases or get a home loan. Tax lien notices are picked up by credit reporting agencies, such as Experian, Equifax, and TransUnion.

Neutralizing a Recorded Federal Tax /Lien

Keep in mind that the automatic, secret, or statutory tax lien and a recorded Notice of Federal Tax Lien are two distinct things.

You can't escape a valid automatic tax lien without (a) paying the tax, interest, and penalties owed, (b) eliminating it in bankruptcy, (c) reducing and paying it through an Offer in Compromise, or (d) having the time limit for collections run. An automatic tax lien will not appear in any public record, such as a county recorder's office. Hence, it's sometimes called a silent or secret tax lien.

A recorded Notice of Federal Tax Lien tells the world your secret. The best way to get rid of it is to get an IRS Certificate of Release of Federal Tax Lien. The IRS will issue a Certificate of Release if you fully pay the tax owed, discharge it in bankruptcy, or pay it through an Offer in Compromise or if the time limit for IRS collections has run out.

The IRS will not reduce the original amount shown on a tax lien as you make payments. So, if the lien starts out at $100,000 and you pay it down to $1,000, the lien will show as $100,000 until the last penny is paid. Only then will the IRS issue the Certificate of Release.

When the tax is paid in full, eliminated, or reduced and paid through an Offer in Compromise or bankruptcy or the time for collections has lapsed, the IRS must issue the Certificate of Release (Form 668Z) within 30 days. Once you get the Certificate of Release, you should record it (if the IRS doesn't) and pay the recording fee in the counties where the IRS filed the lien. Also send a copy to the major credit reporting agencies to make sure it gets into your file.

Unfortunately, the original recorded IRS lien notice is not erased by the lien release. Credit bureaus can and do report the original lien-and the release-as long as ten years after the recording.
If the IRS Records a Tax Lien

Legally, the IRS must notify you in writing and give you a chance to pay or try to prevent the lien from being recorded before sending the notice to the public records offices. But if you've moved or the notice is lost in the mail, you may never get the warning and only learn of it when you apply for credit or a loan-and are turned down.

You can appeal an IRS tax lien notice filing to the IRS ¬Appeals Office. First request a telephone conference with the manager of the IRS unit filing the lien. If the manager turns you down, fax or mail a completed Form 9423, Collection Appeal Request, to the collection office. (A copy with instructions is at the IRS website, www.irs.gov.)

The appeal request is usually decided within five business days. The appeals officer looks at whether the collectors followed correct procedures and considers the facts and circumstances of your case. The officer should telephone you, so list your work and home telephone numbers in your letter. Most taxpayers lose.

Avoiding or Eliminating a Tax Lien

A recorded tax lien can be the kiss of death on your credit rating. It may effectively prevent you from selling or refinancing real estate. It won't, however affect your right to sell personal property, such as a motor vehicle, boat, or furnishings.

The best way to deal with a tax lien is to avoid one in the first place.

For some, a tax lien is just one more black mark on their credit report and won't make it much worse. But you should respond to an IRS letter threatening a lien filing by contacting the IRS at the telephone number on the letter, or calling 800-829-1040, or calling the Taxpayer Advocate Service. Be ready to convince the IRS that you fall into the category "Will filing notice impair collection of the tax liability?" Point out that a tax lien will kill your chance of getting a bank loan, for example.

If you tried but failed to convince the IRS to forgo recording a tax lien, here are your options after the lien notice has been filed:

- Appeal the lien filing. The IRS has five business days after filing the lien to provide written notice to the taxpayer. This must include notice of the right to request a hearing within 30 days from the sixth day after the lien filing. If you win the appeal, the lien will be withdrawn; unfortunately, the fact of the lien filing will still appear on your credit report. (Internal Revenue Code §/6320.)

- Pay in full. If you don't have the funds, can you borrow from friends or relatives? It is better to owe just about anyone other than the IRS. The IRS must record a release within 30 days of full payment, but often the agency doesn't follow through. Call the IRS Centralized Lien Processing Office at 800-913-6050 to verify the release was filed. Or, obtain a copy of your credit report. If it's still in the report, call the Taxpayer Advocate Service for fastest service. (See Chapter 8.)

- Request a partial discharge. If you own several assets that are encumbered by the tax lien and want to use one to pay off the IRS, ask for a discharge from the tax lien. The IRS will likely do this.

Frederick W Daily is a tax attorney, author and former tax law professor. He has over 35 years experience in helping folks and businesses deal with the IRS disputes. He has appeared on hundreds of radio and TV programs including Good Morning America. He is regularly quoted as a tax expert in the publications such as New York Times, Wall Street Journal and Money magazine. He is the author of best selling books such as "Tax Savvy for Small Business" and "Stand Up to the IRS." For more information see http://www.taxattorneydaily.com

Article Source: http://EzineArticles.com/?expert=Frederick_Daily

Most Workers Need to File Schedule M; Making Work Pay Credit Offers Tax Savings Up to $800

 

FS-2011-03, January 2011

Once again, a special tax credit offers taxpayers an opportunity to lower their tax bill or increase their refunds on their 2010 federal tax returns. Available to both Form 1040 and Form 1040A filers, this credit is claimed on Schedule M, Making Work Pay Credit.

The Making Work Pay Credit helps millions of workers and self-employed individuals. Although income limits apply to this credit, it is refundable –– meaning that those eligible can get it even if they owe no tax.

Though all eligible taxpayers must file Schedule M to claim the Making Work Pay Credit, most workers got the benefit of this credit through larger paychecks, reflecting reduced federal income tax withholding during 2010.

Most eligible taxpayers qualify for the maximum Making Work Pay Credit of $800 for a married couple filing a joint return or $400 for other taxpayers. The credit equals 6.2 percent of earned income up to the maximum amount. Thus, any eligible couple filing a joint return whose earned income is $12,903 or more qualifies for the $800 maximum credit. This is true even if the income is earned entirely by one spouse. Other taxpayers qualify for the $400 maximum if their earned income is $6,451 or more.
For most workers, the credit is based on the taxable wages reported to them on Forms W-2. Self-employed individuals figure the credit using the net profit or loss they receive from a business or farm. Additional calculations are necessary for some taxpayers, including those who have net business losses, or foreign earned income. More information, including a worksheet, can be found in the instructions for Schedule M.

Some taxpayers are not eligible for the making work pay credit, including:

• Joint filers whose modified adjusted gross income (MAGI) is $190,000 or more.
• Other taxpayers whose MAGI is $95,000 or more.
• Anyone who can be claimed as a dependent on someone else’s return.
• A taxpayer who doesn’t have a valid social security number.
• Joint filers, if neither spouse has a valid Social Security number.
• Nonresident aliens.

Other taxpayers qualify for the credit but must reduce the amount of the credit they claim, including:

• Joint filers whose MAGI is more than $150,000 but less than $190,000.
• Other taxpayers whose MAGI is more than $75,000 but less than $95,000.
  See Schedule M and its instructions for details.

Do I have to File a Tax Return?

 

IRS Tax Tip 2011-02, January 04, 2011

You must file a federal income tax return if your income is above a certain level; which varies depending on your filing status, age and the type of income you receive.

Check the Individuals section of the IRS website at http://www.irs.gov or consult the instructions for Form 1040, 1040A, or 1040EZ for specific details that may help you determine if you need to file a tax return with the IRS this year. You can also use the Interactive Tax Assistant available on the IRS website to determine if you need to file a tax return. The ITA tool is a tax law resource that takes you through a series of questions and provides you with responses to tax law questions.

There are some instances when you may want to file a tax return even though you are not required to do so. Even if you don’t have to file, here are seven reasons why you may want to:

1. Federal Income Tax Withheld You should file to get money back if Federal Income Tax was withheld from your pay, you made estimated tax payments, or had a prior year overpayment applied to this year’s tax.
2. Making Work Pay Credit  You may be able to take this credit if you had earned income from work. The maximum credit for a married couple filing a joint return is $800 and $400 for other taxpayers.
3. Earned Income Tax Credit  You may qualify for EITC if you worked, but did not earn a lot of money.EITC is a refundable tax credit; which means you could qualify for a tax refund.
4. Additional Child Tax Credit  This refundable credit may be available to you if you have at least one qualifying child and you did not get the full amount of the Child Tax Credit.
5. American Opportunity Credit  The maximum credit per student is $2,500 and the first four years of postsecondary education qualify.
6. First-Time Homebuyer Credit  The credit is a maximum of $8,000 or $4,000 if your filing status is married filing separately. To qualify for the credit, taxpayers must have bought – or entered into a binding contract to buy – a principal residence located in the United States on or before April 30, 2010. If you entered into a binding contract by April 30, 2010, you must have closed on the home on or before September 30, 2010. If you bought a home as your principle residence in 2010, you may be able to qualify and claim the credit even if you already owned a home. In this case, the maximum credit for long-time residents is $6,500, or $3,250 if your filing status is married filing separately.
7. Health Coverage Tax Credit  Certain individuals, who are receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, or pension benefit payments from the Pension Benefit Guaranty Corporation, may be eligible for a Health Coverage Tax Credit worth 80 percent of monthly health insurance premiums when you file your 2010 tax return.

For more information about filing requirements and your eligibility to receive tax credits, visit http://www.irs.gov.

Links:

• Forms and Publications

• Earned Income Tax Credit

• First-Time Homebuyer Credit Information Center

• Health Coverage Tax Credit.

• 1040 Central

YouTube Videos:

Do I Have To File A Tax Return?  English | ASL | Text Script

Another Year of Bonus Depreciation

In September 2010, President Obama signed into law an extension of the 50 percent depreciation originally begun in 2008. The bonus depreciation is in addition to the regular depreciation which greatly increases the first year write-off. The new law is retroactive to January 1, 2010 and extends the period of time to take the 50 percent bonus depreciation until December 31, 2010.

Eligible property generally includes business property classified as accelerated cost recovery property with a depreciation period of 20 years or less. This includes:

• Water utility property

  Off-the-shelf computer software

  Qualified leasehold property

  Passenger automobile used at least 50 percent for business

The extension also includes property with a recover period of 10 years or longer, for transportation property, and for certain aircraft.

Six Important Facts about Dependents and Exemptions

Some tax rules affect every person who may have to file a federal income tax return – these rules include dependents and exemptions. Here are six important facts the IRS wants you to know about dependents and exemptions that will help you file your 2010 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 $3,650 on your 2010 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, any special taxes you owe and any advance Earned Income Tax Credit payments you received.

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 http://www.irs.gov or can be ordered by calling 800-TAX-FORM (800-829-3676). You can also use the Interactive Tax Assistant at http://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.

Links:

IRS Publication 501, Exemptions, Standard Deduction, and Filing Information

Health Insurance Deductible for Self-employed in 2010

Starting January 1, 2010, self-employed individuals may deduct the cost of health insurance premiums paid for the taxpayer and his or her immediate family as an expense when computing self-employment taxes.  Under the old law, health insurance costs could be deducted as an expense for purposes of income taxes but not self-employment.

Because health insurance premiums have increased significantly, the savings in being able to deduct the premium costs against self-employment and income should be significant; making this a nice tax break for the self employed.

Top 10 Tax Time Tips

 

IRS TAX TIP 2011-01, January 03, 2011

It’s that time of the year again. The income tax filing season has begun and important tax documents should be arriving in the mail. Even though your return is not due until April, getting an early start will make filing easier. Here are the Internal Revenue Service’s top 10 tips that will help your tax filing process run smoother than ever this year.

1. Start gathering your records Round up any documents or forms 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. 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 http://www.irs.gov. Everyone can find an option to prepare their tax return and e-file it for free. If you made $58,000 or less, you qualify for free tax software that is 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.
4. Try IRS e-file After 21 years, IRS e-file has become the safe, easy and most common way to file a tax return. Last year, 70 percent of taxpayers - 99 million people - used IRS e-file. Starting in 2011, many tax preparers will be required to use e-file and will explain your filing options to you. This is your chance to give it a try. IRS e-file is approaching 1 billion returns processed safely and securely. If you owe taxes, you have payment options to file immediately and pay by the tax deadline. Best of all, combine e-file with direct deposit and you get your refund in as few as 10 days.
5. Consider other filing options There are many different 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 an IRS office or volunteer site.Give yourself time to weigh all the different options and find the one that best suits your needs.
6. Consider Direct Deposit If you elect to have your refund directly deposited into your bank account, you’ll receive it faster than waiting for a paper check.
7. Visit the IRS website again and again The official IRS website is a great place to find everything you’ll need to file your tax return: forms, publications, tips, answers to frequently asked questions and updates on tax law changes.
8. Remember this number: 17 Check out IRS Publication 17, Your Federal Income Tax on the IRS website. It’s a comprehensive collection of information for taxpayers highlighting everything you’ll need to know when filing your return.
9. Review! Review! Review! Don’t rush. We all make mistakes when we rush. Mistakes will 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 made by taxpayers.
10. Don’t panic!  If you run into a problem, remember the IRS is here to help. Try http://www.irs.gov or call toll-free at 800-829-1040.

Links:

• Forms and Publications

• E-filing

• 1040 Central

Tax Court Approves Tuition Deduction for MBA

A taxpayer who represented herself in a Tax Court tussle with the IRS has prevailed in a surprising new decision. (Singleton-Clarke, TC Summary Opinion 2009-182) The Court allowed the tax­payer to deduct almost $15,000 of tuition incurred to attain a master's degree in business administra­tion (MBA).

Alert: The new case may open the door to deductions in similar situations. In the past, the Tax Court generally has interpreted the complicated rules on business education in favor of the IRS.

For example, if you take additional courses to better yourself at work, you may now qualify for big deductions—even if the education leads to a new degree.

1. The education is required by your employer or by law to keep your current job.

2. The education maintains or improves skills needed in your present work.

On the other hand, you can't deduct your ex­penses—whether or not you qualify under either test—if the education is needed to meet pre­existing minimum educational requirements of your current employment or if it qualifies you for a new trade or business.

This sounds simple enough, but the lines can become blurry when you apply the rules to real-life situations. In particular, it's often difficult to distinguish education that "maintains or improves" current job skills from education that qualifies you for a "new trade or business."

The Tax Court has traditionally treated course-work toward a master's degree as education that qualifies the student for a new trade or business. But there have been several noteworthy excep­tions. Here's the latest example.

New case: The taxpayer worked as a registered nurse for 24 years at a number of hospitals, medi­cal centers and long-term care facilities. In 2005, she began taking courses online from an accredited university. The taxpayer graduated with an MBA in health care management in 2008.

Here's the whole story: You can deduct the cost of education as a business expense only if you pass one of these two tests:

Although the MBA was not required for her job, the taxpayer believed the advanced degree would give her greater credibility and make her more effective in her present and future role as a quality-control coordinator.

The Tax Court ruled that the education did not qualify the taxpayer for a new trade or business. The MBA may have improved her pre-existing skill set, but she was already performing the tasks and activities of her trade or business. Therefore, the education expenses were deductible.

If you qualify under these rules, you can deduct the education expenses as business expenses. For employees, unreimbursed business expenses are deductible as miscellaneous expenses on Schedule A, subject to the 2%-of-AGI floor. Self-employed individuals deduct the expenses in full on Sched­ule C.

The expenses you may deduct as business edu­cation include:

· Tuition, books, supplies, lab fees and similar items

· Certain transportation and travel costs

· Other related expenses (e.g., costs of producing term papers or school projects).

_/However, you can't deduct personal or capital expenses, such as the cost of a new laptop or the value of leave time you use to attend classes.

Tip: If an employer pays for an employee's education expenses under a qualified educational assistance plan, the employee can receive up to $5,250 of annual tax-free reimbursements.

To slash taxes, buy assets and lease them back to your company

This strategy works especially well with real estate and other assets that are likely to appreciate in value.

It's bad enough when you have to pay tax once to the IRS. But C corporation owners are hit with a double tax whammy: first, when the corporation pays tax, and second, when Uncle Sam taxes them personally on dividends paid out by the company.

Strategy: Buy property and assets personally and lease them back to your company.

That way, the company pays you deductible lease payments instead of nondeductible dividends, and you can offset the income with depreciation or amortization deductions.

That technique works particularly well with real estate and other assets that are likely to appreciate in value.

In fact, if your company already owns a business building, you can buy it from your company now and then lease it right back.

Example: sale-leaseback deal. Suppose your company bought its building years ago and has since depreciated it down to zero. You estimate that the building and adjacent land are currently worth $1.5 million. Your company needs a quick cash infusion for proposed expansion, but money is tight.

Solution: Buy the building from your company for $1.5 million—using mostly cash you've borrowed—and lease it back. Then you begin depreciating the building all over again, using a 39-year write-off period. Your company pays the going rate for rentals in your area, but the rental income is offset by the depreciation and other related expenses.

Your, company now has the cash it needs for expansion and can deduct rental payments for a building that had previously been fully depreciated.
In comparison, your company receives no tax deduction for money paid to you as dividends. The downside is that the company must pay tax on the gain.

Fly under IRS radar. This technique can be perfectly legal, but the IRS often casts a skeptical eye on such deals. To make sure your deal is legit and satisfies IRS standards, meet these five requirements:

1.    The property's useful life must exceed the lease term.
2.    Any lease renewal is set at a market value.
3.    The buyer reasonably expects to profit from the deal.
4.    The property is sold at a fair price, and the buyer assumes the risk of losing money.
5.    A valid nontax business reason exists for the rental (e.g., leasing assets instead of owning them can release working capital).

How to Write Off Your Home Computer

Many self-employed taxpayers can deduct equipment purchases rather than capitalize them under Section 179 of the tax code. Under the Economic Stimulus act of 2008, you could elect to deduct up to $250,000 worth of capital expenditures. The American Recovery and Reinvestment Act preserved this higher write-off for 2009. It applies to most business assets, including home office computers and furniture. For 2010, the maximum drops to $125,000.

For example, if you spend $25,000 on such items and they’re used strictly for business, you scan take an immediate $25,000 deduction. If those items were used 60 percent for business, you can take a $15,000 deduction.

Ways to Obtain IRS Forms and Publications

The Internal Revenue Service has free tax forms and publications on a wide variety of topics.  Due to the continued growth in electronic filing, the availability of free options to taxpayers and efforts to reduce costs; the IRS will no longer be automatically mailing paper tax packages.

If you need IRS forms, here are four easy methods for getting the information you need.

1. On the Internet You can access forms and publications on the IRS website 24 hours a day, seven days a week, at http://www.irs.gov.
2. 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 http://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 TAC Site Search 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 7:00 am to 10:00 pm 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.

Please wait until after January 10, 2011, to order tax products for 2010.

Links:

• Publication 910, Guide to Free Tax Services (PDF 636K)
• Publication 2053A, Quick and Easy Access to IRS Tax Help and Forms (PDF 40K)
• State tax forms

Capital Gains and Dividends Get Special Treatment

The tax rate on capital gains and dividends remains at zero percent for 2010.  You will be allowed to receive dividends and take profit on the sale of long-term assets you’ve owned, and pay no tax until they push you into the 25% tax bracket.  To qualify for the zero rate you must have owned the assets over a year and be in the 10% or 15% tax brackets.

For 2010 the 25% tax bracket starts at taxable incomes greater than $67,900 for married filing jointly and $33,950 for single filers.  When your taxable income exceeds these amounts your dividends and long-term capital gains will be taxed at 15%.  Short-term gains and long-term gains on collectibles do not qualify for these special rates. 

For example, suppose you were married filing jointly and all your income was from long-term capital gains.  For 2010, you would be pushed into the 25% tax bracket when your income exceeded $67,900.  If the only taxable income you had for the year was $65,000 of dividends and long-term capital gains, none of your income would be taxed.

No Penalty for Missed Section 179 Elections

The IRS had always claimed that taxpayers must make an election (on Form 4562) to claim the Section 179 deduction for specific assets on the originally filed return for the year the assets were placed in service.  If the election was missed, the IRS wouldn’t allow the taxpayer to fix the problem by making the election on an amended return.  No more.  For taxable years 2003-2009, you can make the Section 179 election on your original return or an amended one.

Sec. 179 Expensing Gets Expansion

Hoping to spur the economy, President Obama has increased the benefits of the Code Section 179 election.  Most new equipment purchases may be depreciated over the life of the equipment or using the Sec. 179 election, expensed in the year of the purchase.

In 2009, the maximum Sec. 179 expense deduction was limited to $250,000.  Under the new law the maximum deduction has been increased to $500,000.  There are limitations to the amount of equipment that may be purchased during the year and still qualify to take a Sec. 179 election.

In 2009, the deduction began to phase out dollar for dollar after reaching $80,000 in total equipment purchases.  Under the new law this limit is increased to $2 million.

There is an additional benefit under the law. The definition of “qualifying property” has been expanded to include qualified real property, which includes qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property.  The qualified real property category is limited to a maximum of $250,000 rather than the $800,000 for other property.  The new law is effective for equipment purchases beginning January 1, 2010 and ending December 31, 2011

New Law Increases Form 1099 Reporting

While no one was paying attention, Congress quietly expanded the business information reporting requirements and slipped it into the Health Care Reform Act passed in March 2010.  The new law will impact millions of businesses.

Under the old law, businesses were required to issue 1099s in limited circumstances, primarily to non corporate taxpayers for services received. Under the new law, effective for payments beginning in 2012, businesses that pay amounts greater than $600 during the year to both corporate and non corporate taxpayers, for either services or product purchases, will be required to file a Form 1099, Information Report to each taxpayer and with the IRS.

Businesses will need to collect all the necessary reporting information including taxpayer identification number, name and address from each vendor paid over $600 in aggregate during the calendar year.  This will be a huge burden on small business.