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How to Deduct Home Refinancing Points

December 17, 2012 By

If you are currently paying off your mortgage, then you sure look forward to the day you will be notified by the lender that your mortgage has finally been fully paid and there is no more debt on your home. It is actually, not difficult to be granted a mortgage nowadays, so long as your (and spouse’s) credit ratings are good enough and you have the capability to repay the mortgage eventually. You may not even have to pay any points because of the current lower mortgage rates.

Each mortgage point is equivalent to 1% of the mortgage value and they can be used when mortgage rates are high to lower them. As much as many consider the current rates lower enough, some individuals may still require paying points to enjoy the best possible rates. The good news is that the refi points are tax deductable and you need not to worry of an increased tax liability. Wait, don’t celebrate yet; they are not deductable in one go, which is the bad news.

Instead of deducting the whole amount of refinancing points within the year paid for, you have to pay them off over the loan’s life. What really matters here is that you will eventually deduct them after repaying the mortgage in full. There are several other home loan deductions that you can take similar to the refinanced loans. The main difference lies in the fact that the mortgage interest deductions will end up lower than they were initially. This is however, not a problem as many homeowners have no issue with taking the monthly cash flow against the tax breaks because the most important thing is the final repayment amounts taxpayers have to endure.

It is exciting to eventually get the closing statement after refinancing. It is on this document that homeowners find interest paid on the loan for the duration between the time when the first payment was due and the refinancing. This value is excluded on the taxpayer’s end-year interest statement from the lenders, but it is deductible. Those who pay their property taxes directly don’t have to make payments at the refi closing.

However, if your home loan payment includes tax money and the lender is required to make the annual imbursement on your behalf, don’t forget to take note of the distributed share of the tax on the closing statement, as it is also deductible.

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Some Important Tax-Exempt Incomes and Benefits for You

December 3, 2012 By

The IRS defines gross income as any income derived from any source. This means that almost anything you earn is taxable, unless it is excluded. Taxpayers are encouraged to understand the exclusions as spelled out in the tax law for the purposes of reporting their income when filing returns. To begin with, property received from friends or family as gifts, inheritance, or bequests are not added to your income. It’s nice to know that during this holiday season, there are still certain “gifts” that the IRS can’t get their hands on. For gifts, it is the giver who should pay taxes on them and deal with all other related tax issues, and not the recipient.

Child support payments are also tax-free for both the payer and the recipient. However, alimony is taxable to the recipient and tax deductible to the payer. When you receive an employee achievement award, like an asset from your employer as an appreciation for many years of excellent service, you shouldn’t worry about including the value of the award on your income. The value is however limited to $1,600 for the whole taxable year. It must nevertheless, be tangible, as gift certificates and their equivalent are taxable.

Sick pay benefits from select insurance policies are also tax-exempt if you have to pay premiums on a health insurance cover for accidents. However, you have to pay taxes if you are compensated by your employer, or you receive funds from welfare.

Other common tax-exempt incomes include:
i. The value of employer-provided gym benefits is exempted
ii. Employer’s contribution to your health savings accounts
iii. The value of any holiday gifts from employers like a ham or turkey.
iv. De Miniminis benefits from employers also don’t count. These are low-value products and services from employers that are not worth accounting for.
v. Life insurance proceeds
vi. Employee discounts especially when purchasing an asset or service at a discounted price from the employer. The discount doesn’t count as income.
vii. The value of meals served at the workplace especially if they are for the convenience of the employer
viii. Employer-provided accommodation at the work place for his or her convenience
ix. Relocation related refunds from the employer as well as free parking or transit passes.
x. Vehicles provided at work even if you use it for personal purposes.

There are many other tax-free incomes and deductions that taxpayers are encouraged to claim from the IRS. Please talk to a tax professional or visit the IRS website and help lower your tax obligation with these tax exemptions.

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IRS Tax Deduction for Long Term Care Expenses

October 25, 2012 By

Long term medical care is any assistance given to an individual towards performing common daily activities for an extended amount of time due to health reasons. It includes activities that seek to prevent, diagnose, cure, improve, or maintain the health of an individual with chronic illness. The IRS defines chronic illness as any illness that requires substantial and consistent help to maintain the health of the individual. For an illness to qualify as a chronic illness, a licensed medical practitioner must have diagnosed in the past 12 months that the individual could not perform at least 2 of the basic functions of life, such as eating, use of toilet, bathing, and dressing without considerable help.
The IRS estimates that 70% of senior citizens will require long term medical care at some point in their lives. The IRS provides relief for long term medical care expenses in two ways – By allowing the deduction of qualifying long term medical expenses, and by providing relief for premiums paid towards long term medical care insurance.

Actual Costs
For long term medical care expenses to qualify for a tax deduction, the services must be provided through a care plan that is prescribed by a licensed practitioner. The cost will also qualify if it is generally required by an individual suffering from a given chronic disease.
The qualifying costs can only be deducted if the taxpayer opts for itemized deductions. The expenses must be in excess of 7.5% of the Adjusted Gross Income to qualify for deduction. The expenses are to be included in the Schedule A of the tax return form. Other rules that apply to itemized deductions will also apply to the long term medical care relief.

Long Term Care Insurance Premium
The IRS also provides tax relief for individuals who have a long term medical care insurance policy. However, there are various rules that apply to the qualification of the tax deductions. These rules include:
• The policy must have a guaranteed renewal.
• The policy should not include any cash surrender or allow the policy holder to borrow funds against a cash value from the insurance policy.
• Any refunds or dividends due to this policy should only be used towards reducing future premiums and should not be cashed or benefit the policyholder in any other way.
• The insurance policy should not reimburse any expenses that are covered under general medical care policies.
Besides qualifying under the above rules, the tax deduction also comes with a limit of the amount deductible. This limit is depended on the taxpayer’s age. The limits are as follows:

• $340 for those below 40 years of age
• $640 for those between 40 and 50 years
• $1,270 for those between 51 and 60 years
• $3,390 for those between 61 and 70 years of age
• $4,240 for those above the age of 70

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Energy-Efficient Home Improvements Tax Credits

August 2, 2012 By

 

An error in the Residential Energy Efficiency Property Credit that used to limit the credit to a taxpayers’ main house was corrected. The rectification of the erroneous reference that limited eligible heat pumps installed or connected to a taxpayer’s main residence in United States now opens the doors to eligible geothermal heat pumps installed on or in taxpayer’s home in the USA, including their second homes. According to the Residential Energy Efficient Property Credit rules, only eligible fuel cell property is subject to the primary home installation prerequisite.

If you installed solar requirements or insulated your home recently, there are two very important tax credits that you might qualify for. The IRS encourages eligible taxpayers to claim them and ease their tax burdens.

Non-Business Energy Property Credit

This credit seeks to benefit homeowners who have set up energy-efficient equipment in their homes. The value of the credit varies; it was 10% of the cost of the overall of the qualified energy-efficient improvement of up to $5,000 for 2011. Insulation, energy-efficient exterior doors and windows as well as some roofs are some of the qualified improvements.  Installation costs of the listed items doesn’t matter and the credit is extended to installation costs of some high-efficiency heaters and air conditioners, water heaters and stoves that are used to burn biomass fuel. Of the $500 lifetime limit of the credit, only $200 can be used for windows.

Homeowners who have claimed over $500 of energy credits not related to their businesses from 2005 are not eligible for the 2011 credit. Also, to be eligible, the improvements must have been installed and operational by Jan. 1, 2012.

Residential Energy Efficient Property Credit 

This is a tax credit that aims to assist individual taxpayers pay for their qualified energy equipment like solar electricity systems, hot water heaters and wind turbines. The value of the credit is 30% of the eligible property and runs through 2016, without a cap on the credit amount available other than for the fuel cell property. It is possible to include the costs of labor when determining the credit and any unutilized portions of the credit can be carried forward. The eligible system, including the fuel cell property has to be installed on or connected with your home which must be in the USA.

Please note that the tax credit is not open to all energy-efficient improvements. Therefore, ensure that you get tax credit certification statement from the manufacturer, usually available on their websites or on the product packaging.

The two tax credits can be claimed on Form 5695- Residential Energy Credits. These credits are not deductions, and therefore they can lessen the tax amount you owe the IRS dollar for dollar. They can also be claimed regardless of itemization of the deductions on the IRS Schedule A.  Form 5695 is available for downloads from the IRS website. You can also order by calling 1-800-TAX-FORM (800-829-3676).

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Tax Perks Available to Parents

June 15, 2012 By

Becoming a parent comes with certain perks. Parents are eligible for a host of tax deductibles and credits:

  • One of these is the Child Tax Credit, which offers up to $1,000 per qualifying child. A qualifying child is one who is under the age of 17 at the end of the tax year, claimed as your dependent, and living with you for more than half of the year.
  • Another credit is The Child and Dependent Care Credit, which if you and your child qualify, can be very valuable. It’s designed to offset against baby sitting and daycare costs incurred so that you can work (or look for work) and amounts to up to 35% of your qualifying expenses. The child must be below thirteen years of age, and should not be under a spouse’s care. Income restrictions apply, too, along with other rules. Note, too, that this credit is available if you pay someone to care for a non-child dependent, too, such as an elderly parent.
  • The Earned Income Tax Credit can be of great help to low-income working folk. Sadly, it is rarely claimed, owing to its rampant complexity and restrictions. It’s claimed by only a fifth of working folk, at an average of $2,200. You don’t even need to have children to qualify, though the amount creditable increases with the number of children.

The tax credits mentioned above are not exclusive to the married parents. It is important to realize this fact, as most single parents tend to miss out on credits they qualify for, as they’re under the impression that only the married qualify.
Single Parents

Single parents are a significant cohort in our population. In 2011, 27 % of all American children lived with only one parent.

If you happen to be single and a parent, you should consider switching to “Head of household” for tax purposes, as it shall cut your tax bill. The Heads of households in 2011 are eligible for exemptions of $3,700 for themselves and each qualifying child against their taxable income. Say you have three children? That’s a total reduction of your tax burden by $14,800.

Short End of the Stick
With respect to tax code, single parents get the short end of the stick. For example, in home sale exclusion, the person is offered the chance to exclude up to $250,000 of the qualifying gain from the sale of a home from taxable income. This potentially large tax break is doubled to $500,000 exclusion for married couples, exclusively. A single parent may be a head of a household of three, four or five people, but still enjoys the benchmark exclusion for a single person, which hardly seems fair.

The limits for married couples filing jointly are far higher than for singles and heads of households, despite the possibility that single parents may be supporting much larger families, and may be incurring much higher expenses, sans the benefit of a double income. However, in some cases, such as when the single filer earns lower income than a married couple may end up with a higher dependent credit.

The tax system may seem unfair, but your hands are tied. As such, you ought to make sure you take advantage of all the tax breaks available to you as it may save you lots of money.

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4 Tax Deductions of Which You May Not be Fully Aware

April 11, 2012 By

Tax deductions reduce the amount of income to be taxed and by extension, reduce the amount of taxes payable. There are many tax deductions that one can claim and these deductions can be found on the IRS website. One needs to ensure that they claim all deductions that they qualify for so as to save as much on their taxes as they possibly can. Below is information about 4 tax deductions that you can easily claim in your returns:

Donations to Charity

Most taxpayers are aware that donations to charity are tax deductible. However, many people are not fully aware about the rules appertaining to donations of non-cash items. You can donate food stuff, clothes, bedding, cars, toys, stocks, mutual funds, retirement funds, artifacts and many more items and receive a tax deduction against such donations. However, there are various rules that apply to non-cash donations for qualification as a tax deduction:

  • To claim the deduction, you must itemize your deductions as opposed to going for the standard deduction.
  • Secondly, the value of all donations you are claiming must not exceed 30-50% of your Adjusted Gross Income (AGI). The cap ranges between 30% and 50% depending on the charity that you are donating to.
  • Another requirement for the qualification of non cash donations for tax deduction is that such donations must be made to a qualifying institution. The IRS maintains a database of the qualified charities on their website and you can check whether an organization that you are seeking to donate to is qualified.
  • For non-cash donations exceeding a value of $250, you will need an acknowledgment from the charity organization indicating the value of the items donated.
  • Non-cash donations above $500 will require the taxpayer to file Form 8283 “Non-cash Charity Contribution Form”.
  • Non-Cash donations above $50,000 will require a valuation of the items by a qualified appraiser before claiming the deduction.

Job Search Costs

Expenses relating to a job hunt are generally tax deductible. These expenses include communication costs, costs of sending CVs to prospective companies and travel expenses to a new state or town in search of a job of for a job interview. However, if you relocate to a new town in search of a job, you cannot deduct the cost of relocation as part of the job-hunt expenses. When claiming travel expenses relating to a job hunt, various rules apply for accommodation and meals and one needs to verify the qualification of various costs before claiming.

Medical Expenses

Various medical expenses are tax deductible for taxpayers who itemize their deductions. There are some specific medical related expenses that are tax deductible and that you may not be aware of:

  • You can deduct contributions made to a Health Savings Account (HSA) even if you are not itemizing your tax deductions.
  • Medical costs for a sex change may be tax deductible if the sex change is due to “Gender Identity Disorder” or other recognized disorders.
  • Costs of rehabilitation from addictions are generally tax deductible. This includes alcoholism and drug addiction. However, only the medical aspects of the rehabilitation expense are tax deductible.
  • In 1999, the IRS approved tax deduction of medication costs for treating smoking addictions. Prior to this, medication to control smoking habits was not deductible as it was considered a lifestyle choice.
  • Treatment of diseases and conditions using drugs that are illegal such as Marijuana and Heroin is not tax deductible even if such drugs are prescribed by a qualified medical practitioner.
  • Costs of attending a conference about a chronic disease that you, your spouse or your dependent suffers from is tax deductible.
  • Some medical costs for alternative treatment such as acupuncture are tax deductible

Casualty and Theft Losses

Losses caused by sudden events such as a disaster, break and entry of your home, car accidents, home fires, terrorist attacks, staff embezzlement, losses due to identity and information theft, ransom, credit card theft, black mail, and extortion are tax deductible. For the loss to qualify, the event must happen suddenly and unexpectedly. The event that led to the loss must be illegal according to U.S law. Therefore, losses due to a court order eviction and losses from wear and tear of assets will not qualify under this deduction. Misplacement of items does not also qualify for this deduction. To claim the deduction, you will need to subtract any insurance compensation or financial help you receive in relation to the loss. You also need to subtract $100 from the amount of loss before claiming.

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411 on the IRS’s Free File Program

April 6, 2012 By

2012 marks the tenth anniversary of the Free File program. This program allows millions of taxpayers to file their taxes and returns online electronically and at no cost. The tax filing form is accessible via the Internal Revenue Service (IRS) website, but the service or program is a partnership between the tax software industry, Uncles Sam, and the Internal Revenue Service. IRS and the Free File Alliance had set the original objective of the program as making e-filing available to as many taxpayers as possible. This is especially for those who might not be able to make payments for tax preparation and electronic filing services. The aim has evolved to making software that makes tax preparation free and making e-filing available for free to 70 percent of taxpayers. This number is determined by calculating the number of taxpayers making less than or equal to a predetermined income level. In 2005, when the Free File started commanding the income eligibility limit, the e-filing level stood at 50,000 dollars.

To attain the 70 percent threshold, the IRS and Free File administrators have pushed up the number of taxpayers who can use the free online filing services by jolting up the income level every year. The system is comparable to other tax-related figures, such as standard deduction and personal exemption amounts. The Free File amount does not enlist an inflation adjustment technique such as one where the dollar value rises causing the tax to go up each year. The income level that makes a taxpayer eligible slowly and steadily increases every year, but this year has seen the income threshold go down a bit.

In 2011, the IRS attained the 70 percent mark by allowing taxpayers with adjusted gross income of 57,000 dollars, or less, to use the Free File. This is 500 dollars less than the previous year’s threshold. This has been due to several speculations, such as a weak economy that made people earn less money. The trend has been under observation since 2005, where the income eligibility threshold has increased by a very little margin or at least stayed at the same level year after year.

More people are, however, filing their taxes online at no cost. In fact, according to the IRS, 2011 taxes will record more refunds.

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Gifts, Morals, and Federal Income Taxes: Where Does One Draw the Line?

April 5, 2012 By

Months even after a celebrity couple divorces, there are several news-making headlines about them and their much publicized marriage life and divorce. Recently, a certain Kardashian clan member announced that she had donated her wedding gifts to a charity of her choice, in their name. Gifts given to the famous couple were paid from the wedding guests’ pockets, while the donation was made from the fashionista’s checkbook, so when the tax man comes knocking, the charitable deduction is hers alone. In this instance, the guests cannot claim any deductions, since the bride accepted the gifts; it matters not whether they were gifts in cash. Once the gifts changes hands, they became her property and by her giving it out to a charity organization and receiving a receipt for it, the transfer process became a legal deal in the eyes of tax law.

The couple chose to split the gifts received during the wedding into two. Each of them took a share of what their respective guests had presented to them. For the bride, her guest list exceeded well over four hundred individuals. This would definitely have proved very difficult to return every gift, which included items like a candy jar valued at 375 dollars, a sugar bowl worth at least 710 dollars, and a set of 20 napkins rings worth 3,000 dollars. Such gifts cannot be given out as donations for charity due to prohibitive tax rules. She opted to keep the gifts and instead, cut a check to charity to offset any lingering guilt.

From a moral view, it may look like it was a way to look and act noble because she could not give back the gifts, but from a tax view, the cunning Kardashian is free and clear to take the deduction, regardless of how unfair or “distasteful” it may look to her guests. In theory, the guest’s cash is being donated, so the couple has no bone to pick with the taxman; it is viewed not as a generous and purely gracious gesture, but rather, a strategic financial move. The logic behind this is that any relationship between the wedding gifts and the charitable foundation stems from the couple. Gifts are free of tax deductions, and when the sly celebrity took them, any value was lost in her own assets. This happens despite the fact that she made a check to a charity in the eyes of any tax law.

Although the famous (or should I say infamous) star made the donation in other people’s names, the check was from her personal account. The individual that directly donates the gifts is the one that the charity acknowledges the one that claims tax deductions.

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IRS Tax Time Tips

April 3, 2012 By

As the tax deadline approaches fast and faster, many people are seen waiting in line to file their annual tax returns. The IRS website has greatly simplified the filing process by providing information on its official website. In this regard, people need not wait for a lengthy period in order to file their returns. IRS tax payment plans and other important information are now accessible online. All that an individual needs is a computer with internet access. Listed below are just but a few of the reasons for visiting the IRS official website, www.irs.gov.

        i.            Free file usage: Free file does all the hard work for an individual with fillable online forms or tax software. This important tool is available on the IRS website, www.irs.gov. It offers taxpayers with the option of preparing and e-filing their tax returns for free. Only individuals with gross incomes below $57,000 are eligible to use this free software.

      ii.            Unlimited online help and support round the clock.  The IRS website is accessible twenty fours a day, seven days a week. The online support system has virtually all answers to a variety of frequently asked questions. Also, the Interactive Tax Assistant, a resourceful ax law tool, guides users through key questions and provides accurate responses to questions regarding tax law. Furthermore, the website’s information can be accessed in Spanish.

    iii.            Tax refund status can be checked online. The IRS website has a portal called “Where’s My Refund?,” which can be used to check the status of one’s refund, no matter the mode of payment; whether payment is done by the IRS mailing the check or depositing the refund directly into the taxpayer’s account.

    iv.            IRS e-file: This is the safest, easiest, and most popular way to file an individual’s tax return. Last year, approximately seventy eight percent of eligible taxpayers used this tool. The IRS has released a new regulation which requires all tax return preparers to make use of an e-file. The main benefit of using the IRS e-file is that the refunds are issued within fourteen days and transferred as direct deposits to the taxpayer’s account.

      v.            Availability of publications and tax forms. A person can access, view and/or download important publications and tax forms any time they find it fit to do so.

    vi.            Electronic payments. Through the IRS website a person can authorize withdrawal of funds electronically, use a debit card or a credit card, or register with the U.S. Treasury’s Electronic Federal Tax Payment System, as a quick and sure way of paying federal taxes.

  vii.            Calculation of the right figure to withhold on W-4. The Withholding Calculator offered by the IRS helps make sure that an individual does not have too little or too much taxable income withheld from his/her pay package.

viii.             Check qualification for Earned Income Tax Credit (EITC). Individuals who earn less than $49,000 are qualified for this tax credit. One can find out if they qualify by providing their income information and answering a few questions on the EITC Assistant.

    ix.            Ask for a payment plan agreement. Unnecessary interests and penalties can be avoided by full and timely payment of taxes. Taxpayers that cannot clear their taxes in full are urged to make use of the Online Payment Agreement Application and obtain details on installment payment.

Finally, it is worth noting that the official website of the IRS is www.irs.gov, and should not be confused with other phishing sites that end in .com, .org or.net.

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How to Defer Taxes Using Your Real Estate Property

March 22, 2012 By

Do you own real estate property? Well, real estate can be an ideal way of deferring your taxes. There are various tax deferral opportunities that the tax system provides property owners. Some of these opportunities are explained below:

1031 Exchange

The 1031 asset exchange is named after Section 1031 of the IRS codes that provides for this exchange. Under the exchange, a taxpayer is allowed to use the proceeds of the sale of an asset to purchase a similar asset of the same of higher value without paying capital gain taxes. The most common asset that is exchanged under 1031 exchange is real estate. By exchanging your property for a more expensive one, you may get to increase your income from the property and yet avoid paying taxes on sale of initial property. For your trade-off to qualify under the 1031 exchange, it must meet the following requirements:

  • The asset must be of the same or higher value and must be of the same type such as real estate for real estate or machinery for machinery.
  • For you to use the 1031 exchange, the new property must be of commercial purposes such as for rental as opposed to being for personal use.
  • The sales proceeds of the first property need to be held by a qualifying intermediate until the proceeds are used for purchase of the new property.
  • The person making the exchange must furnish the qualifying intermediate with a list of properties that he or she is considering to buy under the exchange within 40 days of the sale of the first property.
  • The purchase of the new property must be done within 180 days from the time of sale of the initial property, or within 180 from the time a tax return is due, whichever comes first

Depreciation

The depreciation on real estate property is tax deductible. This means that a portion of the value of the property is deductible every year as depreciation and such a deduction goes towards tax savings. However, on sale of the property, the depreciation charged will be added to the capital gain so as to determine the capital gains tax.

Home Equity Loan

Another way of deferring taxes using your home is by taking a home equity loan. A home equity loan or mortgage refinancing is taking a loan against the equity portion of your house. This equity portion is the difference between the market value of your house and the outstanding house loan. Interest on the home equity loan is tax deductible.

Saving on Sale of Personal Residence

Capital gains from one’s personal residence are not taxable up to a cap of $250,000 for single filers and $500,000 for those who file jointly. To qualify as a personal residence, the taxpayer must have lived in the house for a specified amount of time within the tax year that one is claiming relief.

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