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Don’t Understand IRS Tax Terms?

April 27, 2011 By

It can be a really daunting task when it comes to learning tax “lingo;” one of the hardest things about taxes is understanding the jargon used. There is no need to be stressed about it though. You can manage to learn and grasp the tax language.

1. Credits: These are much similar to the credits you get at a local store. Once you have computed your tax bill, you can use the credit to reduce the total amount on the check you will write to Uncle Sam. Credits are generally better than deductions because they directly subtract the amount of tax you are required to pay as opposed to reducing the total some of taxed income.

2. Progressive Taxation: This is a method whereby as earning levels increase, so do the rates of taxes.

3. Adjusted Gross Income (AGI): This refers to all earnings that you receive during one whole year. It includes wages, dividends, and interest.

4. Deductions: These refer to the costs that the IRS allows you to subtract from your AGI so that you may calculate your total taxable income. Generally, the lower your income, the lower the amount of tax bills you have to pay.

5. Standard Deduction: This refers to a fixed amount that the tax payer can subtract from his/her earnings. It is determined by the status of the individual’s filing position. Due to fluctuation in inflation, the rates change each year. This method eradicates the necessity to itemize specific deductions.

6. Exemption: This is the total sum from which you subtract your earnings to reveal everyone who counts (or depends) on your income such as your spouse, children, or relatives (such as parents).

7. Withholding: This is a system whereby taxes are deducted from earnings before you receive your paycheck.

8. Taxable Income: This refers to your total income, trimmed down by all permissible deductions and exemptions. It is what you use to determine how much tax you need to pay.

9. Voluntary Compliance: This is a system where individuals report their income, file their tax return, and pay their tax debt on time.

10. Itemized Deductions: These are costs that can be subtracted from your AGI to assist you in getting a lesser amount of your income on which you must in calculating your tax bill. They include mortgage interest, medical expenses, casualty, theft loss, gambling losses, and charitable contributions. Some of these deductions must meet the IRS regulations before they are claimed, so check to make sure they fall under their guidelines.

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Federal Income Tax Help for First-Time Home Buyers

April 8, 2011 By

Anyone who bought a house for the first time during the years of 2008, 2009 or 2010 can take the First-Time Home Buyer credit. Taking this credit reduces a taxpayer’s taxes owed and increases the taxpayer’s refund amounts, depending on if the amount owed becomes less than the amount total refunded. For example, if a taxpayer owes $3,000 in taxes, getting federal income tax help through the First-Time Home Buyer credit and other tax credits and deductions will decrease the total amount owed to $1,500 (resulting in a $1,500 check from the IRS.)

However, there are some taxpayers that will be notified and required to pay back the First-Time Home Buyer credit they received. Each of the years of 2008, 2009 and 2010 have different requirements and payment guides, which affect certain taxpayers when and if it comes to having to pay back the First-Time Home Buyer credit. You will receive a notice in the mail for any information regarding this matter. Again that is only by mail; the IRS will never email or use any other form of contact except through mailing to your permanent mailing address so beware of any “scams.”

In order to qualify for the First-Time Home Buyer credit, the IRS has issued some guidelines for the qualification:

  • You have bought or entered into a legal or attorney binding agreement to buy a main house (meaning that it is your residence and not a vacation or second home no later than April 30, 2010).
  • Must have closed all legal binding buying terms and contracts and have gone into settlement no later than September 30, 2010.

More information is located on the IRS website at http://www.irs.gov

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Make Sure to Make Work Pay with Your 2011 IRS Tax Return

March 23, 2011 By

Many taxpayers are eligible for the Making Work Pay tax credit on their 2010 tax returns. This credit is based on your earned income for 2010. When filing your taxes, it is important to consider several factors to be sure that you receive the total portion of the credit for which you are eligible.

The credit is available for up to $400 for individual taxpayers, and up to $800 for taxpayers who are married filing jointly. This IRS tax credit is refundable. Many workers have already seen the benefit of the Making Work Pay tax credit in their paychecks, which is reflected in lower federal employee tax withholdings.

Taxpayers whose adjusted gross income in 2010 was over $95,000 as an individual or $190,000 married filing jointly are not eligible for the credit. Furthermore, taxpayers who can be claimed on someone else’s return as a dependent cannot claim the credit. Also, taxpayers who are nonresident aliens or do not have a social security number cannot claim the credit.

How you file for the Making Work Pay tax credit depends on which form you file for your federal income tax return. If you file a 1040 or 1040A, you will claim the credit on Schedule M. By using Schedule M, you will be able to determine whether you have already received the full benefit of the credit through the abovementioned deductions of federal withholdings from your paycheck. If not, you may be due the full amount or a portion of the amount.

If you file using 1040-EZ, use Line 8 which is on the back of the form. You will also be able to determine whether you have already received the full benefit of the credit through lowered federal deductions on your paychecks and to figure the remaining amount due. It may be beneficial to get tax help to correctly claim the credit.

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Three Changes that Can Give Tax Help

March 18, 2011 By

There is tax help that can save or break a taxpayer. This year, with so many tax cuts, breaks, and changes made by President Obama and Congress, many taxpayers are confused as to what and how this affects them. Not all of the new tax law changes are good: some are stricter and do not help get tax breaks whereas the few changes that were made indeed do help many taxpayers. Below are a few tax changes that can affect each taxpayer differently according to income and other deciding factors:

  • Inflation Adjustments – During the past few years, inflation has been low, which thanks to the tax break of increasing the Tax Bracket (income level guideline), many taxpayers are able to earn more in income than the previous year of 2009 and not be adjusted to a higher income tax bracket. Check to make sure you qualify now as there were some taxpayers who did not qualify for certain tax credits and/or deductions due to tax bracket levels (this year you may be in a different tax bracket that may entitle you more tax help and relief).
  • Extended Tax Breaks – Many of the taxes that expired in 2009 have been extended for the tax year 2010. This includes for example the Education Credit. This tax credit has been extended this year for those who have education or college expenses.
  • No Phase-Outs for High Income Taxpayers – This tax often times can be confusing for many. In the past few years, if your income exceeded certain income levels such as the Tax Bracket and other deciding factors based on both wages and AGI (Adjusted Gross Income), then personal exemptions and itemized deductions were limited down further. This year, there are no such reductions and the taxpayer who has higher income levels than that of low or medium income brackets can enjoy all of the tax write-offs that he/she is entitled to.

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The Nitty without the Gritty of the New Tax Bill and Tax Relief

March 17, 2011 By

On December 17, 2010, Congress approved a bill with which Obama extended the Bush tax cuts for everyone, including even the wealthiest Americans. Obama also added some further allowances. This tax bill will cost $900 billion. All politics aside, what does this tax bill mean for you?

Notably, the income tax brackets will remain the same, rather than going up, for at least two more years. Furthermore, the alternative minimum tax (AMT) was adjusted to allow 21 million taxpayers to avoid this tax who would have otherwise had to pay it. Had this adjustment not been made, singles making over $33,750 and married couples making $45,000 jointly would have to pay higher taxes. Additionally, your social security taxes have been reduced from 6.2% to 4.2% as an employee. The employer portion remains at 6.2%, which means that if you are self-employed, you will be paying the employer portion of 6.2% plus the lower 4.2%, which means if you make $50,000, you’ll pay $1,000 less. The deal also allows businesses to write off some capital expenses and extends unemployment for another 13 months, which is intended to benefit seven million people.

This bill also discontinued the return of a 55% estate tax after the first $1 million. Instead, it is 35% after the first $5 million. In addition, the capital gains tax of 15% remains in place, versus the scheduled rise to 20% for capital gains. Dividends would have been taxed as income. Furthermore, there is the American Opportunity Tax Credit of $2,500 if you make under $80,000 or $160,000 with your spouse, 40% of which is refundable if you have no tax liability. This may mean some tax relief for you.

The child tax credit of $1,000 has been extended, including a refundable portion for low income families. Taxpayers making under $75,000 singly and $110,000 jointly can get the full credit, and after that the credit phases out.

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IRS Tax Tips about the Child Credit

March 8, 2011 By

The IRS tax Child Credit that taxpayers can claim (provided that they have children – either their own, an adopted or foster child, or a child relative that lives with them) is worth $1,000.00 per child and can give taxpayers a tax refund depending on their income levels.

Here are the qualifications to meet the Child Credit tax criteria:

  • Any qualifying child under the age of 17- remember that this means being under the age of 17 by December 31, 2010
  • Pass the six-question test regarding age, dependent, relationship, citizenship, support and residency
  • If your Child Credit amount is greater than your income tax owed, then you qualify for the Additional Child Tax Credit
  • Any child that you the taxpayer are claiming for the Child Credit tax must have lived with you for at least six months- check with IRS Publication 972, Child Tax Credit to see if there are any exceptions to this qualification of the 6 month ruling
  • As with any taxpayer, the child also must be a registered Untied States citizen (born in any of the United States, including a U.S. National or U.S. Resident Alien child or children). Illegal aliens are not qualified to be claimed for the Child Credit tax!

However, there are limitations based on the amount of Adjusted Gross Income (AGI), and certain tax brackets. Those certain phase-outs begin for married couples at $110,000. For married couples filing separate returns, the phase-outs begin at $55,000. For any other taxpayer filings, the phase-outs begin at $75,000. The Child Tax Credit is limited to the full amount of taxes owed as well as alternative tax monies owed.

The best way to make the best of the Child Credit tax is to check with the IRS main website at www.irs.gov as this provides everything any taxpayer needs to know as well as publications, forms, and questions that require answers.

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First Time Homebuyer Credit on Your Federal Income Tax Return

March 4, 2011 By

The first time homebuyer credit is available for both first time homebuyers and for long-time residents purchasing a new home. To qualify for the credit, the taxpayer must have been at least 18 years old when he or she bought the home (or at least one person in a married couple filing jointly must be 18), and not another taxpayer’s dependent.

The maximum credits are $8,000 for married first-time homebuyers, $4,000 for single for first-time homebuyers, $6,500 for married long-time resident homebuyers, and $3,250 for single long-time resident homebuyers. Taxpayers who wish to claim the credit must file a paper return using Form 5405, First-Time Homebuyer Credit and Repayment of the Credit and provide supporting documentation. The supporting documentation must include a properly executed settlement statement, a dated certificate of occupancy for new homes, or the retail sales contract for mobile homes when there is no settlement statement.

To claim the first-time homebuyer credit on your federal income tax return, the taxpayer or married taxpayers must not have jointly or separately owned a home within the past three years. To be considered a long-time resident homebuyer, the person or couple claiming the credit must have lived in the same principal residence for five of the previous eight years. These years are counted from the date of purchase. The taxpayer must have purchased or entered into a binding contract to purchase the home on or before April 30, 2010. If they entered into a contract by this date, they must have closed the deal by September 30, 2010.

Long-time residents must attach documentation covering the abovementioned five year period including Form 1098, Mortgage Interest Statement. Members of the military and some federal employees have one extra year to buy a principal residence in the U.S. More information is available on the IRS website at www.irs.gov/recovery.

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Make Work Pay When You File Your 2010 IRS Tax Return

February 28, 2011 By

The Making Work Pay credit is still available for your 2010 tax return, even though you may currently be seeing the benefit of the payroll tax holiday. The Making Work Pay credit is easy to forget in light of the press coverage of the 2011 payroll tax holiday. The payroll tax holiday applies to your paycheck in 2011, while the Making Work Pay tax credit applies to your 2010 federal income tax return, which you are to file this year. Keep in mind that the deadline for filing is April 18, 2011.

The credit was created to benefit working and middle class taxpayers, which means it phases out as taxpayers’ income gets higher. The credit is primarily an incentive to work and taxpayers must have earned income to qualify. This means that qualifying taxpayers must have wages from work, not just income from other sources, to receive the Making Work Pay tax credit.

The Making Work Pay tax credit is a flat credit of up to $400 for individual taxpayers and $800 for those married filing jointly. Self employed persons are also eligible. The credit is also refundable, which may mean you get a few extra bucks on your tax return this year!

Remember that even if you currently see evidence of the payroll tax holiday, the Making Work Pay credit is still available for you on your 2010 tax return. The credit is usually figured on Schedule M. You can also find more details on the IRS website at http://www.IRS.gov, or you can talk to a tax specialist to see if it applies to you.

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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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Tax Relief for the Unemployed

February 22, 2011 By

Unemployment brings about special considerations, including taxes. Getting tax relief from being unemployed is available, even though unemployed taxpayers must file and claim the total amounts received during the time of unemployment; unemployment compensation is considered taxable income. The tax break that was imposed on unemployed taxpayers has ended this year. If you were unemployed and received compensation through unemployment checks during anytime of the 2010 year, you are required to report the amount in your tax return. Be sure to use Form 1099-G for Unemployment compensation. Furthermore, married couples have this option if one spouse was unemployed to adjust their withholding to cover any taxes that may be due.

There is good news: filing the taxes for when a taxpayer was unemployed qualifies them to the EITC (Earned Income Tax Credit) if the unemployment amount is less than a currently-employed earned income. If the taxpayer has dependents (child-related expenses and/or number of dependents), it greatly affects the total amount of an EITC return.

2010 incomes of taxpayer brackets that qualify for EITC

  • Earnings of less than $43,352 ($48,362 if married filing jointly) in households with three or more children.
  • Earnings of less than $40,363 ($45,373 if married filing jointly) in households with two children.
  • Earnings of less than $35,535 ($40,545 if married filing jointly) in households with one child.
  • Earnings of less than $13,460 ($18,470 if married filing jointly) in households with no children.

Although taxpayers who were unemployed must still file tax returns and are taxed on the unemployment income they received, tax relief is still available through the EITC benefits and may result in a refund. Check with www.irs.gov for more information.

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