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The high income phase-outs for itemized deductions and personal exemptions have been repealed for 2010.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  In 2010, however, those income limits have been repealed but are scheduled to resume in 2011.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.