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Facts to Help You Choose Between Standard Deduction and Itemizing

July 31, 2012 By

Millions of taxpayers are allowed to choose between itemizing their deductions or take standard deductions every tax year. The choice between the two options depends on a taxpayer’s personal preferences and requirements. To select the most appropriate method that can guarantee the lowest tax amounts, you need to consider the following key factors.

1. Qualified Expenses: The amount a taxpayer spends on some specific expenses is very important in determining whether to itemize deductions on the tax returns or not. You stand a high chance of finding itemizing beneficial if the cumulative amount spent on eligible medical care, contributions to charities, taxes, interests from mortgages,  losses due to casualties as well as miscellaneous deductions, exceed your standard deductions.

2. Standard Deduction Amounts: Standard deductions are usually set based on a taxpayer’s filing status, and vary from year to year based on the inflation levels. The amounts set by the IRS for 2011 was; $5,800 for singles, married filing jointly  was  $11,600, head of Household  $8,500, married filing separately  $5,800, qualifying widow(er)  $11,600.

3. Differences in Standard Deductions: Not all taxpayers have similar standard deductions as the amount varies with the filing status based on age say 65 years or older, physical disabilities like blindness, or if there is another taxpayer who can claim an exemption on your behalf. The Standard Deduction Worksheet which can be found on the back of Form 1040EZ, or in the instructions contained on 1040A or 1040 should be used if any of the above factors apply.

4. Limited Itemized Deductions: The practice in the past where taxpayers with adjusted gross income had limited itemized deductions was scraped.

5. Taxpayers Ineligible for Standard Deduction Not all taxpayers qualify for standard deduction. If you are a nonresident alien, have filed your tax returns for under 12 months because of alterations in the accounting times or you are a dual-status alien, you are not eligible.

6. Required Forms: The IRS Form 1040EZ contains the Standard Deduction Worksheets. There are instructions contained as well in IRS Forms 1040A or 1040. Use Form 1040, U.S. Individual Income Tax Return, and Schedule A, Itemized Deductions to itemize deductions

You can get these forms plus the instructions from the IRS website, available for download. You can also place an order for them by calling 800-TAX-FORM (800-829-3676)

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Six Things You Need To Know About the Adoption Credit

July 30, 2012 By

Many children who don’t have birth parents in their lives still can enjoy parental love through adoption. Adopting a child comes with some financial and legal obligations that adoptive parents have to meet. Did you know that you can claim up to $13,360 worth of tax credit if you incurred adoption expenses? The IRS expanded the adoption credit, and below are six facts that you need to know about it:

1. Credit Amount Increased and Refundable: The amount of the adoption credit was increased when the Affordable Care Act was passed, which also made it refundable. The significance of this is that it is now possible to get the credit as a tax refund, regardless of whether your tax liability has been reduced to zero or not.

2. Filing of Returns: You are required to file a paper tax return, the Form 8839, Qualified Adoption Expenses, and see to it that all supporting documents on the adoption are attached alongside the returns. Even though taxpayers who claim the credit can still use the IRS Free File and other tax applications by the IRS while preparing their returns, all the relevant documents and returns have to be printed and mailed to the IRS.

3. Required Documents: You are supposed to present several documents while claiming the credit including; placement agreement from a relevant and permitted body, final decree of adoption, documents from the courts and/or a determination by the state for adoptions of special needs children.

4. Qualified Adoption Expenses: The IRS has clearly spelt out what qualified and is considered as an adoption expense and what doesn’t. Qualified adoption expenses are practical and indispensable costs directly linked to the child’s adoption. They include; adoption fees, attorney expenses, court costs, and travel expenses.

5. Eligible Child: There are many kids being adopted everyday by caring people all over the country, but not all adopted children qualify for the credit. For a child to be eligible, s/he has to be below 18 years of age or unable to take care of himself or herself due to mental or physical challenges.

6. Gross Income: Potential parents with a modified AGI of over $225,210 don’t qualify to claim the credit. However, those with a modified gross income of over $185.210 can have their credits reduced.

More information about the Adoption Credit is available on the IRS website under Adoption Credit FAQ page. You can also download IRS Form 8839 from the website or order it via phone by calling 800-TAX-FORM (800-829-3676).

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What You Need to Know About the Mortgage Debt Forgiveness

July 27, 2012 By

Did you know that any IRS debt that is canceled is taxable to you? However, there are some exceptions with this provision to homeowners with mortgage debts that is either partially or fully pardoned by the IRS for the tax periods of 2007 to 2012. There are some other provisions that you need to understand on the forgiveness of the mortgage debts

To begin with, any forgiven debts are considered as taxable income, but there are some exceptions. The Mortgage Forgiveness Debt Relief Act of 2007 provides two million dollar exclusion on the forgiven debt on a taxpayer’s main principle home. If you are married and file separately, the maximum is one million dollars

Also, taxpayers can leave out debt lessened via restructuring of the mortgage and also foreclosure debt forgiveness. To be eligible, you must have used the debt to purchase, build or renovate your main residence, with the same residence having been used as the key security. Also qualifying for exclusion are proceeds of refinanced debt that were used to mainly to substantially perk up your home. You are not eligible for the exclusion if you used proceeds of refinanced debt for other reasons like paying off your credit card debt.

The special exclusion can be claimed by those who qualify by filling Form 982-Reduction of Tax Attributes Due to Discharge of Indebtedness, which should be attached to the income tax return for the specific year in which the eligible debt was pardoned.

The debt forgiven tax reprieve is not applicable to second and subsequent homes, business and rental property, car loans or credit cards. However, there are some cases where alternative tax reprieves like insolvency could apply. More information about the other tax relief provisions can be found on the IRS Form 982.

Your lender should issue Form 1099-C-Cancellation of Debt if your debt is either reduced or eliminated altogether. Legally, the form must indicate the value forgiven and the foreclosed property market value. On receipt of this form, carefully examine it and alert the lender for any false information that you spot on it. Special attention must be paid to Box 2 on the amount of forgiven debt and also Box 7 which contains the listed value of your home.

The IRS website has more information about the Mortgage Debt Relief Act 2007. Use the Interactive Tax Assistant (ITA) on the IRS website to find out if your forgiven debt is taxable. You will have to answer a number of questions and have your questions answered as well. Another great resource is Publication 4681, Cancelled Debts, Foreclosures, Repossessions and Abandonment. Copies of IRS forms and publication are available on their website for download or call 800-TAX-FORM (800-829-3676).

 

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On The Hunt for Tax Deductions: Bizarre and Illegal Attempts

July 26, 2012 By

Every taxpayer yearns for tax deductions and the zealous methods that some taxpayers have in attempt to achieve this are overwhelming. It is like everyone has something unique and unusual that he or she claims, hoping to convince the tax preparers and the IRS to reduce their tax bills. To achieve this, many turn to dependents to forge their claims. like branding the cat or dog and other pets as dependents.

There is a taxpayer who once claimed that since he “pays the salary” of an elected official, the officer was a dependent. That is not to mention of a woman who wanted the months she was pregnant as a dependent claim, despite the fact that her rights were relinquished to the child at birth.

It is also understandable that a few weeks’ break in an Arizona rental home might have done magic to your health and your overall well being. Sadly, you will need to pull another magical stunt to convince the IRS to consider the expenses as being valid medical expenses. Another bizarre claim was a guy who considered the fees paid to a divorce case as an “investment,” without specifying what type of investment it was.

Some newlyweds have categorized their wedding expenses as business entertainment costs simply because some of their clients were invited to witness the memorable union. Just because you exchanged your wedding vows in a church doesn’t make the expenses charitable contribution either.

There are some other very creative attempts that taxpayers come up with all the time, hoping to get some deductions. A man lost in a case in which he wanted the costs incurred while donating his sperm to an in vitro fertilization lab deducted. The court simply knocked it out, arguing that since the “philanthropic” sperm-donor wasn’t physically or mentally ill, conditions that would have hampered his normal procreation, the decision to head to the lab and have these procedures undertaken were totally personal and had nothing to do with any known medical condition.

The list to the creative tax deduction attempts and justifications is endless.

However, instead of wasting time and energy pushing for illegible and bizarre deductions, why not find out more about legitimate deductions on your medical costs, and other ways you can cut your tax costs. Give your tax pro an easy time next time you file the returns and spare the IRS officials the headache of trying to explain the obvious that will eventually be thrown out anyway.

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Reporting Capital Gains & Losses on Tax Form 8949

July 25, 2012 By

Reporting of capital gains and losses might appear a bit complicated in the beginning but much easier and fast once you understand how to fill Schedule D and Form 8949. A capital gain is considered as any extra amount that is generated due to a sale of a capital asset. Capital assets are things that you own, including stocks, collectibles. and personal belongings. If the transaction results in a loss, then you suffer a capital loss.

You are required by the IRS to report all capital gains to necessitate appropriate income tax payment but you can also make some tax deductions on some capital losses. A capital loss incurred as a result of selling stocks can be claimed but not one on the sale of your personal residence.

There are two varieties of capital gains and losses, long-term and short-term. Short-term capital assets are those owned for less than a year and if sold for either a higher or lower value than the purchasing price, you enjoy either a short-term capital gain or suffer a loss. On the other hand, long-term capital assets are things that you have owned for more than a year after buying them, which when sold can result in either a long-term capital gain or loss, depending on the difference between the purchasing price and the selling price.

You should seek the help of a broker when calculating capital gains or losses. Sale of stocks, mutual funds and bonds or other items that you sold through a broker are reported on your Form 1099-B, where the basis (the price you paid for an item) is recorded. If you get a 1099-B minus the basis reported, you can establish the right basis amount by checking your personal records. The basis is essentially used to determine whether a sale led to a gain or a loss. The new Form 8949 requires that you categories the items based on whether the basis was reported by the broker or not. In case it was reported for some items and not others, you might be forced to fill several Forms 8949.

The real information to be filled in Form 8949 is easy but the problem might be how to organize where to record the transactions. You need to come up with a list of all gains and loss, and then determine whether a 1099-B will be necessary for each transaction. Categorize the transactions in appropriate groups, based on whether they are short-term or long term, whether the basis was reported or not. To make your work easier, be as organized as possible.

Some of the details you need when working on the transactions include; date the asset was acquired and date sold, selling price and the purchasing price or the basis. You might need some codes, depending on the nature of transaction, but in rare cases.

With the IRS rules requiring that your broker helps you out with Form 8949, it is much easier to complete. Please have your records in order to lessen the work. Also, see to it that each 1099-B received is matched to the operation on the Form 8949. With this done, completing Schedule D will be a walk-over.

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5 Characteristics of Lousy Tax Preparers

July 24, 2012 By

Taxes are difficult, and it is the complexity that propels many taxpayers to seek specialized assistance from tax preparers. However, since the business is lucrative enough, the chances of unluckily landing and hiring a lousy and unethical tax preparer are high; this can easily raise the risk you facing an ugly tax audit later.         

With over 60% of overall tax returns preparations being handled by tax preparers, you must be very careful when hiring them and watch out for danger signs of a phony “tax pro.” There is a lot of money involved with taxes and very stringent tax laws that the IRS officials would like to head straight to the courts and have you prosecuted to not only teach you a bitter lesson, but also have you serve as an example to others who might be toying around with the idea of mutilating their taxes.

You just cannot afford mistakes like having excess exemptions, overlooking and failing to claim legitimate tax credits, and failing to note tax deductions which can save you lots of money. These mistakes might not be committed by you, but you take full responsibility since you are the one that signs all the tax forms. To ensure that you evade the raw tax preparation deals, you need to stay alert and watch out for the following key indicators of a not-so-competent tax preparer. Always, hire a licensed individual, not one who promises you heaven but has not ability to even offer hell.

1. Promises Huge Refunds: Everyone wants some refunds; that is a fact. However, as a marketing strategy, the fraudsters will passionately and assuredly promise you massive refunds even before peeking at your tax documents. These breed advertise and promise the impossible, don’t fall for the tempting offers. They might play around with the numbers on your return to come up with huge payouts, but think about the IRS reviews later and consequences.

2. Lack of Proper Credentials: Is your tax preparer competent and can that be proven? The IRS assigns every qualified tax preparer a Preparer Tax Identification Numbers (PTINs). You are likely courting problems with the taxman if your preparer doesn’t have the PTINs, demand to see it.

3. Refunds Not Deposited into Your Bank Account: Your refund is your money, and must be deposited into your account. Any other destination that doesn’t have your name on it as might be suggested by your preparer is a red flag!

4. Wants a Percentage of your Refunds as Fee: Depending on the scope and size of your tax return, decent tax preparers charge a flat fee for all services, and not some percentage of your returns. Those who prefer to go the percentage way will do anything to pump up the refund by even mishandling of financial information.

5. Review the Specialist: Before you let some stranger manage your documents, take some time to check out with the local Better Business Bureau. Avoid anyone with a tainted record, however promising he or she might be.

You can steer clear of trouble by avoiding the incompetent tax preparer. There are so many decent tax preparers out there, don’t be fall for the fake ones.

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How Military Personnel and Their Families Can Access Free Tax Help

July 23, 2012 By

Many citizens require help with their taxes, including the military and their families. The IRS has put in place an array of free tax preparation assistance to eligible members of the military as well as their spouses and families.

As members of the Volunteer Income Tax Assistance (VITA), which is collaboration between the IRS and the United State’s Armed Forces, military officers can enjoy a number of free tax-related help; tax advice, filing of tax returns, tax preparation, plus more other tax assistance that they might require. Discussed below are five major things that you need to understand about the Military VITA program, and if you are eligible, enjoy the benefits.

1. The Armed Forces Tax Council (AFTC): This is the body that is bestowed with the responsibility to watch over the operations of the military tax programmes across the globe. This body carries out outreach programmes, in conjunction with the IRS to the military officers and their families. Making up the AFTC are program coordinators that are drawn from various military units; Marine Corps, Navy, Air Force, Coast Guard and the Army.

2. Volunteer Free Tax Sites: The Volunteer Income Tax Assistance sites have trained and competent tax preparers who specialize in military-specific tax problems like the Earned Income Tax Credits guidelines and combat zone compensation.

3. Required Documentation for Help: Eligible military personnel or their families are required to present a number of military documents when seeking help from any of VITA sites. Some of the documents that must be brought include valid photo identifications, birth dates for the officer, spouse and dependents, wage earnings statements like Forms W-2, W-2G, 1099-R, any dividends and interests statements (a 1099), a copy of the previous year’s state tax returns, account numbers for direct deposits or checkbooks for routing, any daycare costs incurred and the identity number of the daycare provider, social security cards for you, spouse and dependents and any other income-expenditure details.

4. Joint Returns Filing: If you file your returns with your spouse and want to do it electronically, ensure that both of you come to sign the relevant forms. If the pair cannot make it to have the tax documents signed, acquire a valid power of attorney.

5. Special Exceptions: When using a power of attorney for spouses to sign tax documents for combat zone, there is an exception that permits the spouse filing, to e-file a joint federal tax return with only a written statement explaining that the absent spouse is in a combat zone and not able to sign.

For more information on how you can get free tax help as a military personnel, please read IRS Publication 3-Armed Forces’ Tax Guide which is available on the IRS website. Call 800-TAX-FORM (800-829-3676) to order a free copy.

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Boost your Refund with these Four Tax Credits

July 20, 2012 By

Many taxpayers glance at the amount they pay in taxes and frown, cursing Uncle Sam for being insensitive. However, aggressive complaints can never help, as the government cannot operate without your taxes. To help you pay your taxes without feeling the “pinch,” the IRS has an array of tax relief options that taxpayers can turn to, one of which being tax credits.

A tax credit is simply a dollar-for-dollar lessening of the actual amount of taxes you owe the IRS. The IRS has made some of the tax credits refundable where eligible taxpayers who claim one of the credits can get the rest as a tax refund regardless of the status of the liability, even if it has been grounded to zero.

You can increase your refund by taking advantage of the following tax credits;

1. The Earned Income Tax Credit: If your earnings from wages, farming or self-employment are less than $49,078, then this is the tax credit for you. If you have been earning more than this amount in the past, but you saw your income come down last year, you might qualify for the very first time. The amount of credit is set based on your age, the number of eligible kids and income, with the maximum set at $5,751. If you don’t have kids, you might still qualify; see the IRS Publication 596-Earned Income Credit.

2. The Child and Dependent Care Credit: Taxpayers who work or search for work but have kids aged below 13, have a disabled spouse or dependent can benefit from this credit. Review Publication 503-Child and Dependent Care Expenses for more information.

3. The Child Tax Credit: This credit has a maximum of $1,000 for every eligible child and can be claimed on top of the Child and Dependent Care Credit. Read IRS Publication 972, Child Tax Credit.

4. The Retirement Savings Contribution Credit: Also known as the Saver’s Credit, it seeks to enable low-to-moderate income earners put away some funds for their retirement. To qualify, your income has to be below a specific limit and you making contributions to an IRA or a workplace retirement plan like a 401 (k). You can get this credit on top of other applicable tax savings. See the IRS Publication 590-Individual Retirement Arrangements (IRAs) for more information.

Depending on your personal circumstances and facts, there is an array of other tax credits that might be applicable to you. Read carefully the instructions contained on tax forms to see if you are eligible. Check out the IRS website for any other additional information on these tax credits. You can also get phone support on 800-TAX-FORM (800-829-3676).

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The Affordable Care Act, when is a Penalty, a Tax?

July 19, 2012 By

There are various things that taxpayers need to understand about the Patient Protection and Affordable Care Act. Some of the main issues that have caused confusion and varied interpretations from various “learned friends” include whether “individual mandate” is a violation of the law, and if it is indeed a violation of the law, should the act be struck down altogether? What of the lawsuits timing? Finally, can the federal government expand the medical program and get state funding if they comply? The answers to these concerns are discussed below.

Under the Affordable Care Act, the “shared responsibility payment” is not a penalty but a tax. Constitutionally, the Congress is authorized to regulate all federal taxes. Unlike the penalties that are meant for unlawful acts, the payment is collected by the IRS through routine taxation. Furthermore, taxpayers have no otherwise but to purchase health insurance. There are no legal consequences for not purchasing a health insurance that the Affordable Care Act or any other law for that matter.

Those who fail to buy the health insurance have to pay a price. That doesn’t mean you will be thrown behind bars or punished as the Act prohibits the IRS from commencing any legal proceedings against you like is the case with criminal prosecution and levies.

The mandate can be categorized as a tax since it complies with Direct Tax Clause as per Article One, Section 2, and Clause 3 of the United States Constitution. There have been some other schools of thought that have attempted to categorize the mandate under the Commerce Clause (Article One, Section 8, clause 3 of the United States Constitution). However, this has been challenged because such a move would mean giving the Congress the power to control individuals just because they are doing nothing. This would be adding up to an already swollen congressional authority. What the act does is simply creating the buying of health of insurance, and not regulating it.

There have been other suggestions that the mandate be sustained under the Necessary and Proper Clause as per Article One, Section 8, Clause 18 of the United States Constitution. This as well was challenged. By a simple fact that the Clause couldn’t be categorized under the Commerce or the Necessary and Proper Clause doesn’t hold enough water to have it blocked. All that is required is that it falls under the constitution; a tax.

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How to Track Down and Deal With Lost W-2s before Filing Taxes

July 18, 2012 By

When filing your federal tax returns, there are many tax forms that you require, including the W-2. Sadly, sometimes they just don’t seem to arrive when you need them. If you don’t get your W-2s in time, instead of passively sitting back and waiting for the forms to arrive at your home, there are several things you can actively do to help track down them down.

To begin with, try finding out whether the said form was sent or not. It is an IRS requirement that W-2s and 1099s be send out by the employers and vendors before the end of January of every tax year. These forms should be in your mail box by 5th or 6th of February, if you don’t, try finding out the likely causes of the delay.

One of the likely causes of the delay can be a wrong postal address. Did you relocate or change addresses the previous year? If you did move, did you forward the new address to your new employer? If you moved and forgot to change the address with your employer, it is very likely that the form was either returned to the sender or it is still lying in the post office. To track it down, do the following.

  1. Call your present employer or the previous one, give the new address and request for your W-2 to be sent to your current address. Alternatively, ask if you can download it from the company’s online database.
  2. Does your employer engage in tax W-2 Express Service? If yes, then it is possible to directly download the W-2 into your return.
  3. You can also pay about $10 for W-2 service for the form to be generated and sent to you via mail immediately. More information about this service is available on the Missing W-2 and RapidTax websites.
  4. You can call the IRS via 800-829-1040 (800-TAX 1040) for enquiries. Please note that you should have some details ready before making that call to the IRS on filing of tax returns. Alternatively, use Form 4506-T for electronic copies of the W-2. This option is not ideal if urgency is an issue as it might take a couple of weeks.

What if You Still Don’t Get the W-2?

There are chances that despite following through the listed steps, you still cannot find your W-2. That might not be the main problem, but the likelihood that your employer, who is out of business, is not going to issue the form altogether. In the event of such an eventuality, all you have to do is find your last paystub and enter the required details to Form 4852-Substitute for W-2. By answering all the questions, you can use it instead of a W-2, and is accepted in most states.

If you don’t have your final paystub or it lacks the year-to-date details, you should find a way to make estimates on your withholdings and earnings. Get help from a tax pro like CPAs and Enrolled agents, if you cannot figure it out on your own.

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