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Easing the Cost of Higher Education and Lowering Your Tax Debt

February 25, 2011 By

If you or your dependent(s) are in college, postsecondary school, or taking classes to improve job skills, you may be eligible for some tax credits. The credits are called the American Opportunity Credit and the Lifetime Learning Credit. However, you can only claim one credit per person on your return.

The American Opportunity Credit is for up to $2,500 per student for the first four years of post-secondary education. An eligible student must be pursuing an undergraduate degree or another recognized educational credential and must be enrolled at least half time of one academic period. The credit can be applied to tuition and fees, course related books, equipment, and supplies. The credit is refundable for up to 40 percent, which could be up to $1,000. It is available to taxpayers whose taxable income is less than $80,000 or $160,000 for married couples filing jointly.

The Lifetime Learning Credit is for up to $2,000 per student for all every year of postsecondary education, including courses for job skills. For this credit, the IRS does not require that the student is in pursuit of a degree or other educational credential. The credit is limited to the amount of tax you must pay on your return. This credit also can be applied to tuition and fees, course related books, equipment, and supplies. The full credit is generally available for those taxpayers who make less than $60,000 per year or $120,000 per year for married couples filing jointly.

Remember, if you claim the tuition and fees tax deduction, you cannot also claim the American Opportunity Credit and/or the Lifetime Learning Credit. You must choose the credit or the deduction.

More information about these credits is in IRS Publication 970, Tax Benefits for Education available at http://www.irs.gov. You can also call the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).

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Don’t Mess With Moms and IRS Taxes

February 24, 2011 By

This year, the IRS (Internal Revenue Service) changed its mind when it comes to moms and taxes. Thanks to lobbying tax specialists, a new tax policy finally went into effect and breast pumps are now tax deductible for moms! When it comes to moms and taxes, don’t mess with them because one way or another, it seems like moms will win.

Last year, the IRS FSA (Flexible Spending Account) had set rules and regulations in regards to breast pumps; they were not part of an IRS tax deductible for moms who breast fed their infants. However, Dr. Regina M. Benjamin lobbied a call to action for support of breast feeding and to get breast pumps as a deductible.

As of February 10th 2011, the IRS has enacted the breast pump tax deduction law. Therefore, mothers who purchased breast pumps can now get the deductions needed towards tax breaks. Information pertaining to the appropriate changes made that now allow mothers to deduct can be located on the IRS Publication 502 (Medical and Dental Expenses). For any mother who nursed in 2010 and purchased a breast pump, make sure you get your deduction this year!

It may have taken a while, but now the IRS knows not to mess with moms and their determination. Today, it is arguably recognized that breast feeding may be an important step towards the future of children and upcoming generations. With the new tax deduction available for breast pumps, it only goes to show that indeed, the people still have the power to change policies even when it comes to taxes!

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Modifications to the IRS Tax 1040 Form and Other Changes for 2011

February 18, 2011 By

Going into the fourth week of February, many taxpayers have their W-2 forms and 1099 forms, if needed, by now. Many taxpayers are aware that there have been many changes involving the Internal Revenue Service (IRS) and tax forms, such as the 1040.

The new changes on the IRS tax 1040 form include new tax credits or deductions. One such change is that this year, the taxes owed by taxpayers are due April 18th due to the Emancipation Day (of the District of Columbia). Because it is a national holiday and falls on April 15th this year, the due date for filing, reporting taxes, and payments on taxes owed is pushed forward three days to Monday April 18th, 2011.

Thanks to the Bush-era Tax Cuts, these phase-out rule tax cuts were eliminated: the mortgage, state property tax deductions, and the personal and dependent exemption deductions. These eliminations that affected many taxpayers in recent years have not only been approved for 2010, but for the following years of 2011 and 2012. For many, this is good news because it means less IRS tax owed with the return of these deductions.

For self employed taxpayers, there is a one-time tax break for the 2010 filing year: the one time deal of deducting your insurance premiums on your tax return. This was not previously allowed for the self-employed and changed only for this filing tax year.

Another change that will shortly become “the norm” for all taxpayers is the e-file. The e-file is still just an option for everyone but not for long. In the next few years, it will be the only “option” for all taxpayers. However, is not bad news; the e-filing is beneficial for many reasons! It is safe, secure, faster, and saves planet earth because less paper means less sacrificing of trees (going green)! Taxpayers who expect refunds will receive them in about two weeks rather than the traditional paper method of 6-8 weeks (unless there are other issues or complications involved, such as injured spouse or IRS audits…).

Take note of these changes for the 2011 tax season. Maybe those extra 3 days will end up saving you some extra bucks with some extra attention!

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You Can File Your Federal Income Tax Online Soon – Love, the IRS

February 11, 2011 By

The IRS has a Valentine for you. As mentioned in our previous blog article, on Feb. 14, you can turn in any taxes which were affected by last month’s changes in tax law. After the Dec. 17 enactment of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the IRS had to update their computer systems to accommodate new tax laws and extensions of the old ones. They also had to take extra care to avoid disruption of other filing season operations. Because of these technicalities, the IRS is holding off on accepting certain federal income tax returns.

Affected filers who can begin filing on Feb. 14 include those who wish to file Schedule A itemized deductions. The IRS will begin processing both paper and e-filed returns, which include Schedule A as well as the educator expenses deduction and the Form 8917 higher education tuition and fees deductions.

For taxpayers who receive federal tax help, you may be able to complete your documents ahead of time. If you use a commercial software provider to help you file your taxes, check with your provider for specific instructions. Many software providers and preparers have announced that they will accept these affected returns immediately, but they will hold onto them to wait until the Feb. 14 filing date.

This delay does not affect some popular tax breaks such as the Earned Income Tax Credit (EITC), education tax credits, and the child tax credit. The act extended these and other deductions, like the state and local sales tax deductions, which were set to expire this year.

Last year, about nine million tax returns filed before Feb. 14 included the deductions which have been affected by the new laws in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

Unfortunately, this delay means that some taxpayers will not be able to receive and spend their refunds by Valentine’s Day for that romantic getaway or fancy dinner. However, with some creativity, there may be some cheaper alternatives to spend Valentine’s, like a romantic hike or a picnic in the park!

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Tax Tips on Tips – How the IRS Taxes Income Made in Tips

January 31, 2011 By

Taxpayers who work in a profession which relies on tips are required to pay federal income, Social Security and Medicare taxes on their tips, even though these taxes are already taken out of their paycheck from their employer. Tips are considered part of the total compensation for your work and the IRS taxes this form of income, much to the dismay of hard working taxpayers out there.

It is important to remember that non-cash tips, including valuable items such as passes and tickets, is also considered income and is taxable. When you file your tax return, you must include all of your tips as your gross income on your return. Tips are anything received directly from customers including cash, money added to credit cards, and tips split with fellow employees.

Each month, taxpayers who receive tips should report their tip income to their employer if they receive more than $20.00 per month in those tips. To keep track of your tips, you can use IRS Publication 1244, Employee’s Daily Record of Tips and Report to Employer. With this form, you can keep a running tab on how much in tips you have received to make it easier for you to put together during tax season.

For more information about reporting tips for tax purposes, see IRS Publication 531. For IRS Publication 531, Reporting Tip Income and Publication 1244, you can go to the IRS website at http://www.irs.gov or order the forms by calling the order forms and publications hotline at 800-TAX-FORM (800-829-3676).

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2011 Tax Relief: Changes in the New Tax Bill

January 12, 2011 By

2011 Tax Relief: What the New Tax Bill Changes, and What it Doesn’t

Obama’s tax bill extended many of Bush’s tax cuts for two years and provided tax reductions for everyone. The bill extends the tax brackets from last year and also included some tax incentives, including a two percent decrease in social security taxes with no effect on their social security income in later years. This decrease drops social security taxes from 6.2 to 4.2 percent being taken out of your first $106,800 of wages. It remains the same 6.2 percent for employers. Furthermore, an alternative minimum tax patch was created exempting lower income filers, which means that fewer middle class families will be hit with having to pay higher taxes. Originally, the AMT was created to insure a minimum amount of taxes paid by high income tax payers. However, each year as our average incomes increase, more middle class families have to pay this tax. As a result, the exemption, instead of cutting off at $33,750 for single taxpayers and $45,000 for married filing jointly taxpayers, will cut off at $47,450 for single taxpayers and $72,450 for those married filing jointly.

The tax credits taxpayers got for energy efficient appliances are also still available, an extension from the Bush era. Teachers can also still write off $250 of out of pocket expenses, and all taxpayers have the option of writing off sales tax instead of state income taxes.

Major differences include a requirement that any taxpayer who wishes to deduct property taxes must itemize deductions. Estates above $5 million will be taxed at 35 percent with the option of keeping the 0 percent rate with minimal base adjustments. It also includes a portability clause. If you are considering changing your estate plan to benefit from this year’s tax bill, it may be advisable to speak with a professional who can help you sort out the details. In 2013, the tax for estates above $1 million will be taxed at 55 percent.

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2011 Tax Relief Information: Tax Cuts 101

January 7, 2011 By

Slow and Steady, the Tax Cuts Win the Race

Congress took advantage of all ten years allowed by the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) and the coinciding Jobs and Growth Tax Relief Reconciliation Act of 2003 (“JGTRRA”) to come up with a plan for new tax cuts upon the expiration of these acts at the end of 2010.

First, the income tax brackets remain the same. Under the original Acts, the rates were lowered for each bracket, which means taxpayers are on average skipping out on a 3 percent increase in taxes. Also, the bill includes a one-year cut in employee social security taxes from 6.2 percent to 4.2 percent from the first $106,800 of wages. Furthermore, the income threshold for the Alternative Minimum Tax (AMT) has been raised for two years, meaning that many families will avoid this otherwise costly tax.

Capital gains rates for long-term gains was scheduled to be raised to 20 percent, but under the new bill, it will top at 15 percent with as low as 0 percent available to some taxpayers.

Regarding tax credits, this new bill means that the Making Work Pay Credit will no longer be available. This credit, in 2009 and 2010, allowed workers to claim a refundable credit of up to $400 singly and $800 for those married filing jointly. However, the Earned Income Tax Credit (EITC) will be available to more taxpayers because the eligibility income level will not increase as planned. Also, the Child Tax Credit will remain at $1,000 per child for the next two years instead of dropping to $500. The American Opportunity Tax Credit (AOTC), a partially refundable credit for students pursuing a degree, will remain at $2,500 instead of dropping to the slated $1,800.

In addition to tax cut extensions, the bill extends unemployment benefits for another 13 months.

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2011 Tax Relief Tip: Decreased Interest Rates

January 5, 2011 By

2011 Tax Relief: Interest Rates Decrease

On December 27, the IRS announced lower interest rates for the quarter beginning the calendar year of 2011. The rates for January 1, 2011 will be 3 percent for individual taxpayer overpayments, and 3 percent for underpayments. For corporate taxpayers, the rates will be 2 percent for overpayments, 3 percent for underpayments, 5 percent for large corporate underpayments, and 0.5 percent for the portion of a corporate overpayment exceeding $10,000. These percentages are in addition to the sum of the federal short term rate.

This interest rate penalty decrease may be helpful to corporate and non-corporate taxpayers because many often consider borrowing money to pay back their taxes and avoid these penalties. However, this decrease may make the penalty cheaper than the interest rate for borrowing money. In other words, the cost of getting money from another source is higher than the cost of using your own dollars to pay off your penalty. Talk to a tax professional to find out what option is best for you.

The interest rates above are computed from the federal short term rate during October 2010. These rates are down from 4 percent for non-corporate taxpayers and from 3 percent for corporate taxpayers since the quarterly interest rates computed on April 1, 2009 for each quarter until the present quarter ending December 31, 2010.

It is important to understand that this interest is compounded daily. If you have an underpayment penalty or overpayment interest, the IRS will provide an explanation code, which corresponds with a general explanation of the error.

Section 6621 of the Internal Revenue Code establishes the determination of the rate of interest for overpayments and underpayments on taxes. The announcement will appear in Internal Revenue Bulletin No. 2010-52 on December.

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