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Archive for July, 2009

Seven Tax Facts About Selling Your Home

July 30th, 2009

During summer months, some people sell their home.  Many of those individuals will make a profit on the sale and still will not have to pay a single dime of additional income tax to the IRS.
 
Here are seven tax facts about selling your home.

1. Ownership and Use Tests In general, you are eligible to exclude from your income all or part of any gain from the sale of your main home if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its sale. Refer to Publication 523, Selling Your Home, for the complete eligibility requirements as well as exceptions to the two year rule.

2. Main Home Your main home is the one in which you live most of the time.

3. Capital Gain Exclusion If you have a gain from the sale of your main home and you meet the ownership and use tests, you may be able to exclude up to $250,000 of the gain from your income or $500,000 on a joint return in most cases. The exclusion may be claimed each time that you sell your main home, but generally no more often than once every two years.

4. Reduced Exclusion If you do not meet the requirements to qualify for the $250,000 or $500,000 exclusion, you may still qualify for a reduced maximum exclusion. But you must have sold the home for other specific reasons such as serious health issues, a change in your place of employment, or certain unforeseen circumstances such as a divorce or legal separation, natural or man-made disasters resulting in a casualty to your home, or an involuntary conversion of your home.

5. Reporting the Gain
Do not report the gain of your main home on your tax return unless you have a gain and at least part of it is taxable. Report any taxable gain on Form 1040, Schedule D, Capital Gains and Losses.

6. More Than One Home If you have more than one home, you can exclude gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.

7. Loss You cannot deduct a loss from the sale of your main home. If you have a loss on the sale of your main home for which you received a Form 1099-S, Proceeds From Real Estate Transactions you must report the loss on Form 1040 Schedule D, even though the loss is not deductible.

IRS Warns Taxpayers to Beware of First-Time Homebuyer Credit Fraud

July 29th, 2009

The Internal Revenue Service announced its first successful prosecution related to fraud involving the first-time homebuyer credit and warned taxpayers to beware of this type of scheme.

On Thursday July 23, 2009, a Jacksonville, Fla.-tax preparer, James Otto Price III, pled guilty to falsely claiming the first-time homebuyer credit on a client’s federal tax return. Price faces the possibility of up to three years in jail, a fine of as much as $250,000, or both.

To date, the IRS has executed seven search warrants and currently has 24 open criminal investigations in pursuit of potential instances of fraud involving the credit. The agency has a number of sophisticated computer screening tools to quickly identify returns that may contain fraudulent claims for the first-time homebuyer credit.

 “We will vigorously pursue anyone who falsely tries to claim this or any other tax credit or deduction,” said Eileen Mayer, Chief, IRS Criminal Investigation. “The penalties for tax fraud are steep. Taxpayers should be wary of anyone who promises to get them a big refund.”

Whether a taxpayer prepares his or her own return or uses the services of a paid preparer, it is the taxpayer who is ultimately responsible for the accuracy of the return. Fraudulent returns may result not only in the required payment of back taxes but also in penalties and interest.

First-Time Homebuyer Credit

The First-Time Homebuyer Credit, originally passed in 2008 and modified in 2009, provides up to $8,000 for first-time homebuyers. The purchaser, however, must qualify as a first-time homebuyer, which for purposes of this credit means someone who has not owned a primary residence in the past three years. If the taxpayer is married, this requirement also applies to the taxpayer’s spouse. The home purchase must close before Dec. 1, 2009, to qualify, and the credit may not be claimed on the purchaser’s tax return until after the taxpayer closes and has purchased the home.

 Different rules apply for homes bought in 2008.

Six Things You Need to Know About Mortgage Workouts

July 28th, 2009

There is tax relief for struggling homeowners.  If your mortgage debt is partly or entirely forgiven at any time during 2007 through 2012, you may be able to claim special tax relief on your federal income tax return for that year.

Here are six things the IRS wants you to know about mortgage debt forgiveness.

1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude from tax up to $2 million of debt forgiven on your principal residence. The limit is $1 million for a married person filing a separate return.
 
2. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief.

3. The debt must have been used to buy, build or substantially improve your principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.

4. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax-relief provision. In some cases, other kinds of tax relief – based on insolvency, for example – may be available.

5. If your debt is reduced or eliminated you should receive a Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property given up through foreclosure.

6. Taxpayers who qualify claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attaching it to their federal income tax return for the year.

Five Tax Scams to Avoid this Summer

July 27th, 2009

Every year, The IRS releases its list of the top 12 tax scams and schemes. These scams – known annually as the Dirty Dozen – are illegal and can lead to problems for taxpayers who risk significant penalties, interest and possible criminal prosecution. Here are five scams from the 2009 Dirty Dozen list every taxpayers should be aware of this summer.

1. Phishing Phishing scams often take the form of an e-mail that appears to come from a legitimate source, including the IRS, that contain enticements for the recipient such as additional money back on their previous year’s tax return. Regardless of how official this e-mail may look and sound, the IRS never initiates unsolicited e-mail contact with taxpayers about their tax issues. The Internet-based scam artists use the personal information obtained through these e-mails and Web sites to steal the victim’s identity, access bank accounts, run up credit card charges or apply for loans in the victim’s name. If you receive an e-mail that you suspect is a phishing attempt or directs you to an imitation IRS Web site, please report them to the IRS at phishing@irs.gov. You can also visit the IRS Web site at IRS.gov and enter the keyword phishing for additional information.

2. Abuse of Charitable Organizations and Deductions The IRS continues to observe the misuse of tax-exempt organizations. This includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets. The IRS also continues to investigate various schemes where donations are highly overvalued or the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets.

3. Abusive Retirement Plans The IRS continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into IRAs or companies owned by their IRAs at less than fair market value to circumvent annual contribution limits.

4. Hiding Income Offshore Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks and brokerage accounts. Recently, the IRS provided guidance to auditors on how to deal with those hiding income offshore in undisclosed accounts. Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans.

5. Misuse of Trusts While there are many legitimate, valid uses of trusts in tax and estate planning, some promoted transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the promised tax benefits and are being used primarily as a means to avoid income tax liability and hide assets from creditors, including the IRS.

For more the full list of 2009 Dirty Dozen tax scams or to find out how to report suspected tax fraud, visit IRS.gov.

Energy Provisions of the American Recovery and Reinvestment Act of 2009

July 23rd, 2009

energy-starThe American Recovery and Reinvestment Act of 2009 (ARRA) provides energy incentives for both individuals and businesses.

Here are some of the key energy provisions in ARRA that may impact taxpayers:

Residential Energy Property Credit (Section 1121): The new law increases the energy tax credit for homeowners who make energy efficient improvements to their existing homes. The new law increases the credit rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 for improvements placed in service in 2009 and 2010.

The credit applies to improvements such as adding insulation, energy efficient exterior windows and energy-efficient heating and air conditioning systems.

A similar credit was available for 2007, but was not available in 2008. Homeowners should be aware that the standards in the new law are higher than the standards for the credit that was available in 2007 for products that qualify as “energy efficient” for purposes of this tax credit. The IRS has issued guidance that will allow manufacturers to certify that their products meet these new standards.

Until the guidance is released, homeowners generally may continue to rely on manufacturers’ certifications that were provided under the old guidance. For exterior windows and skylights, homeowners may continue to rely on Energy Star labels in determining whether property purchased before June 1, 2009, qualifies for the credit. Manufacturers should not continue to provide certifications for property that fails to meet the new standards.

Residential Energy Efficient Property Credit (Section 1122): This nonrefundable energy tax credit will help individual taxpayers pay for qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbines. The new law removes some of the previously imposed maximum amounts and allows for a credit equal to 30 percent of the cost of qualified property. See Notice 09-41.

Plug-in Electric Drive Vehicle Credit (Section 1141): The new law modifies the credit for qualified plug-in electric drive vehicles purchased after Dec. 31, 2009. To qualify, vehicles must be newly purchased, have four or more wheels, have  a gross vehicle weight rating of less than 14,000 pounds, and draw propulsion using a battery with at least four kilowatt hours that can be recharged from an external source of electricity. The minimum amount of the credit for qualified plug-in electric drive vehicles is $2,500 and the credit tops out at $7,500, depending on the battery capacity. The full amount of the credit will be reduced with respect to a manufacturer’s vehicles after the manufacturer has sold at least 200,000 vehicles.

Plug-In Electric Vehicle Credit (Section 1142): The new law also creates a special tax credit for two types of plug-in vehicles — certain low-speed electric vehicles and two- or three-wheeled vehicles. The amount of the credit is 10 percent of the cost of the vehicle, up to a maximum credit of $2,500 for purchases made after Feb. 17, 2009, and before Jan. 1, 2012. To qualify, a vehicle must be either a low speed vehicle propelled by an electric motor that draws electricity from a battery with a capacity of 4 kilowatt hours or more or be a two- or three-wheeled vehicle propelled by an electric motor that draws electricity from a battery with the capacity of 2.5 kilowatt hours. A taxpayer may not claim this credit if the plug-in electric drive vehicle credit is allowable.

Conversion Kits (Section 1143): The new law also provided a tax credit for plug-in electric drive conversion kits. The credit is equal to 10 percent of the cost of converting a vehicle to a qualified plug-in electric drive motor vehicle and placed in service after Feb. 17, 2009. The maximum amount of the credit is $4,000. The credit does not apply to conversions made after Dec. 31, 2011. A taxpayer may claim this credit even if the taxpayer claimed a hybrid vehicle credit for the same vehicle in an earlier year.

Treatment of Alternative Motor Vehicle Credit as a Personal Credit Allowed Against AMT (Section 1144): Starting in 2009, the new law allows the Alternative Motor Vehicle Credit, including the tax credit for purchasing hybrid vehicles, to be applied against the Alternative Minimum Tax. Prior to the new law, the Alternative Motor Vehicle Credit could not be used to offset the AMT. This means the credit could not be taken if a taxpayer owed AMT or was reduced for some taxpayers who did not owe AMT. 

New Clean Renewable Energy Bonds (Section 1111): The new law increases the amount of funds available to issue new clean renewable energy bonds from the one-time national limit of $800 million to $2.4 billion. These qualified tax credit bonds can be issued to finance certain types of facilities that generate electricity from renewable sources (for example, wind and solar).

Qualified Energy Conservation Bonds (Section 1112): The new law increases the amount of funds available to issue qualified energy conservation bonds from the one-time national limit of $800 million to $3.2 billion. These qualified tax credit bonds can be issued to finance governmental programs to reduce greenhouse gas emissions and other conservation purposes.

Extension of Renewable Energy Production Tax Credit (Section 1101): The new law generally extends the “eligibility dates” of a tax credit for facilities producing electricity from wind, closed-loop biomass, open-loop biomass, geothermal energy, municipal solid waste, qualified hydropower and marine and hydrokinetic renewable energy.  The new law extends the “placed in service date”   for wind facilities to Dec. 31, 2012.  For the other facilities, the placed-in-service date was extended from December 31, 2010 (December 31, 2011 in the case of marine and hydrokinetic renewable energy facilities) to Dec. 31, 2013.

Election of Investment Credit in Lieu of Production Credit (Section 1102): Businesses who place in service facilities that produce electricity from wind and some other renewable resources after Dec 31, 2008 can choose either the energy investment tax credit, which generally provides a 30 percent tax credit for investments in energy projects or the production tax credit, which can provide a credit of up to 2.1 cents per kilowatt-hour for electricity produced from renewable sources.  A business may not claim both credits for the same facility.

Repeal of Certain Limits on Business Credits for Renewable Energy Property (Section 1103): The new law repeals the $4,000 limit on the 30 percent tax credit for small wind energy property and the limitation on property financed by subsidized energy financing. The repeal applies to property placed in service after Dec. 31, 2008. 

Coordination With Renewable Energy Grants (Section 1104): Business taxpayers also can apply for a grant instead of claiming either the energy investment tax credit or the renewable energy production tax credit for property placed in service in 2009 or 2010.  In some cases, if construction begins in 2009 or 2010, the grant can be claimed for energy investment credit property placed in service through 2016, and for qualified renewable energy facilities, the grant is 30 percent of the investment in the facility and the property must be placed in service before 2014 (2013 for wind facilities). 

Temporary Increase in Credit for Alternative Fuel Vehicle Refueling Property (Section 1123): The new law modifies the credit rate and limit amounts for property placed in service in 2009 and 2010. Qualified property (other than property relating to hydrogen) is now eligible for a 50 percent credit, and the per-location limit increases to $50,000 for business property (increases to $2,000 for other/residential locations). Property relating to hydrogen keeps the 30 percent rate as before, but the per-business location limit rises to $200,000.

EITC Eligibility Rules Outlined

July 22nd, 2009

The Earned Income Tax Credit (EITC) is a tax credit for people who work but do not earn high incomes. The EITC is a valuable tool helping eligible taxpayers to lower their taxes or to claim a refund. The IRS wants all eligible taxpayers to claim this credit.

Many taxpayers who qualify for EITC may also be eligible for free tax preparation and electronic filing by participating tax professionals and volunteers. Taxpayers and tax professionals should review the rules before attempting to claim the EITC.

Do You Qualify for EITC?

To qualify, you must meet certain requirements and file a U.S. Individual Income Tax Return. As described below, some EITC rules apply to everyone. There are also special rules for people who have children and for those who do not.

Individuals and families must meet certain general requirements:

  • You must have earned income.
  • You must have a valid Social Security number for yourself, your spouse (if married filing jointly) and your qualifying child.
  • Investment income is limited to $2,950.
  • Your filing status cannot be “married filing separately.”
  • Generally, you must be a U.S. citizen or resident alien all year.
  • You cannot be a qualifying child of another person.
  • You cannot file Form 2555 or Form 2555-EZ (related to foreign earned income).

Your income cannot exceed certain limitations. For Tax Year 2008, you must have adjusted gross income of less than:

  • $38,646 ($41,646 if married filing jointly) with two or more qualifying children.
  • $33,995 ($36,995 if married filing jointly) with one qualifying child.
  • $12,880 ($15,880 if married filing jointly) with no qualifying children.

If you claim a child, he or she must meet three eligibility tests:

  • Residency Test — The child must have lived with you in the United States for more than half of 2008.
  • Relationship Test — The child must be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them. Your child includes:
    • A foster child who was placed with you by an authorized placement agency, or by judgment, decree, or other order of any court of competent jurisdiction
    • A legally adopted child or a child lawfully placed with you for legal adoption
  • Age test — At the end of 2008, the child must have been under age 19, a full-time student under age 24 or any age if permanently and totally disabled at anytime during 2008.

Your qualifying child cannot be used by more than one person to claim EITC. If a child meets the rules to be a qualifying child of more than one person, only one person can treat that child as a qualifying child and claim EITC.

If you don’t have a child, you must meet three additional tests:

  • At the end of 2008, you must have been at least age 25, but under age 65.
  • You cannot qualify as the dependent of another person.
  • You must have lived in the United States for more than half of 2008.

Credit Limits for 2008 Tax Year

Income and family size determine the amount of the EITC. The Earned Income Credit Table, which shows the credit amounts, is included in the Instruction booklet for Form 1040 and in Publication 596, Earned Income Credit.

For tax year 2008, the maximum credit amounts are:

  • Two or more children — $4,824
  • One child — $2,917
  • No children — $438

Combat Zone Pay

Members of the military have the option to include their tax exempt combat zone pay when computing their earned income for EITC. The combat pay remains exempt for federal taxes. However, families should be aware that they must include all of the combat pay or none of it. For example, if the inclusion of combat pay would push a taxpayer’s adjusted gross income above the EITC income limit, taxpayers should leave it out of their EITC calculations. If, however, the inclusion of combat pay would enable a taxpayer to obtain a higher refund, then combat pay should be included.

On-Line Tools

If you are in doubt about your eligibility, you or your tax preparer may use the new EITC Assistant on the IRS Web site. The EITC Assistant, available in English and Spanish, will help you determine your eligibility by answering a few simple questions. For tax professionals, there is an electronic tool kit at EITC Central.

Avoid Common Errors

You are responsible for the accuracy of your tax return. The rules for EITC can be complicated, so you should seek assistance if you are unsure of your eligibility.

Some common EITC errors are:

  • Claiming a child who is not a qualifying child.
  • Filing as “single” or “head of household” when the taxpayer actually is married.
  • Reporting incorrect income amounts.
  • Missing or Incorrect Social Security numbers — for both taxpayers and qualifying children.

The IRS continues to work on ways to reduce these errors. If you receive a letter from the IRS requesting additional information about your EITC, please reply immediately to avoid delaying your EITC refund. If you need assistance or if you have questions, you should call the number included in the IRS letter.

Beware of Scams

A deliberate error can have lasting impact on your eligibility to claim EITC. Beware of scams that claim to increase your EITC refund. Scams that create fictitious qualifying children or inflate income levels to get the maximum EITC could leave you with a penalty. If your EITC claim was reduced or denied after tax year 1996 for any reason other than a mathematical or clerical error, you must file Form 8862, Information To Claim Earned Income Credit After Disallowance, with your next return if you wish to claim the credit.

How to Claim EITC

Publication 596, Earned Income Credit, explains the process. The publication is available on this Web site or by calling 1-800-829-3676. Publication 596 also is available in Spanish. The Instructions for Form 1040 can help you determine your eligibility.

The instructions contain a worksheet and the earned income credit table to help you determine the amount of your credit. If you are claiming the EITC with a qualifying child, you must complete Schedule EIC and attach it to your tax return. Schedule EIC provides IRS with information about your qualifying children, including their names, ages, SSNs, relationship to you and the amount of time they lived with you during the year.

IRS Reminds Taxpayers to Take Advantage of Recovery Act Benefits

July 21st, 2009

With 2009 now half over, the Internal Revenue Service reminds taxpayers to take advantage of theReal estate numerous tax breaks made available earlier this year in the American Recovery and Reinvestment Act (ARRA).

The recovery law provides tax incentives for first-time homebuyers, people purchasing new cars, those interested in making their homes more energy efficient and parents and students paying for college. But all of these incentives have expiration dates so taxpayers should take advantage of them while they can.

First-Time Homebuyer Credit

The Recovery Act extended and expanded the first-time homebuyer tax credit for 2009.

Taxpayers who didn’t own a principal residence during the past three years and  purchase a home this year before Dec. 1 can receive a credit of up to $8,000 on either an original or amended 2008 tax return, or a 2009 return. But the purchase must close before Dec. 1, 2009, and an eligible taxpayer cannot claim the credit until after the closing date. This credit phases out at higher income levels, and different rules apply to home purchases made in 2008.

New Vehicle Purchase Incentive

ARRA also provides a tax break to taxpayers who make qualified new vehicle purchases after Feb. 16, 2009, and before Jan. 1, 2010.

Qualifying taxpayers can deduct the state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. There is no limit on the number of vehicles that may be purchased, and you may claim the deduction for taxes paid on multiple purchases. But the deduction per vehicle is limited to the tax on up to $49,500 of the purchase price of each qualifying vehicle and phases out for taxpayers at higher income levels. This deduction is available regardless of whether a taxpayer itemizes deductions on Schedule A.

Energy-Efficient Home Improvements

The Recovery Act also encourages homeowners to make their homes more energy efficient. The credit for nonbusiness energy property is increased for homeowners who make qualified energy-efficient improvements to existing homes. The law increases the rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to a total of $1,500 for improvements placed in service in 2009 and 2010.

Qualifying improvements include the addition of insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems.

Tax Credit for First Four Years of College 

The American opportunity credit is designed to help parents and students pay part of the cost of the first four years of college. The new credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. Tuition, related fees, books and other required course materials generally qualify. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

Certain Computer Technology Purchases Allowed for 529 Plans

ARRA adds computer technology to the list of college expenses (tuition, books, etc.) that can be paid for by a qualified tuition program (QTP), commonly referred to as a 529 plan. For 2009 and 2010, the law expands the definition of qualified higher education expenses to include expenses for computer technology and equipment or Internet access and related services to be used by the designated beneficiary of the QTP while enrolled at an eligible educational institution. Software designed for sports, games or hobbies does not qualify, unless it is predominantly educational in nature.

Making Work Pay and Withholding

The Making Work Pay Credit lowered tax withholding rates this year for 120 million American households. However, particular taxpayers who fall into any of the following groups should review their tax withholding rates to ensure enough tax is withheld, including multiple job holders, families in which both spouses work, workers who can be claimed as dependents by other taxpayers and pensioners. Failure to adjust your withholding could result in potentially smaller refunds or in limited instances may cause you to owe tax rather than receive a refund next year. So far in 2009, the average refund amount is $2,675, and 79 percent of all returns received a refund.

Eight Cool Reasons to visit IRS.gov/Espanol this Summer

July 20th, 2009

Tax information can be difficult to understand in any language but it can be even more difficult if it is not in your first language. To assist Spanish speaking taxpayers, the IRS provides a wide range of free products and services on its Spanish Language web site IRS.gov/Espanol.

Here are eight features you can find on IRS.gov “en español” this summer:

  1. Get answers 24 hours a day seven days a week Whether you need a form or have tax questions, IRS.gov/Espanol has a wealth of information. IRS.gov/Espanol is accessible all day, every day for individuals and businesses.
  2. Get tax forms and publications You can view and download several tax forms and publications in Spanish directly from IRS.gov/Espanol at any hour of the day or night.
  3. Find out all about electronic filing You can e-file your 2008 federal income tax return through October 15, 2009 from the comfort of your home.  E-file is fast, easy and free for some taxpayers, and available in English or Spanish.
  4. Check the status of your tax refund Whether you chose direct deposit or asked the IRS to mail you a check, you can check the status of your refund through the online tool “¿Dónde está mi reembolso?” on our secure Web site.
  5. Find out if you qualify for the Earned Income Tax Credit EITC is a refundable tax credit for people who work but don’t earn much income. Find out if you are eligible by answering some questions and providing basic income information using the “Asistente EITC.”
  6. Protect yourself from identity theft Learn how identity theft affects your taxes and how you can protect yourself from common scams.
  7. Find answers to the “What Ifs” of an economic downturn The Internal Revenue Service recognizes that many people may be having difficult times financially. There can be a tax impact to events such as job loss, debt forgiveness or tapping a retirement fund. Find answers to these questions and more by typing the keyword “Qué pasa si” into the search box.
  8. Get up-to-date at the “Multimedia Center” Video tax tips and audio podcasts on various IRS topics can be found in English and in Spanish with keyword “Centro Multimediático.”

Seven Tips for Students with a Summer Job

July 17th, 2009

Many students get a summer job during their time off from school. Here are the top seven things the IRS wants everyone to know about income earned while working a summer job.

1. Taxpayers fill out a W-4 when starting a new job. This form is used by employers to determine the amount of tax that will be withheld from your paycheck. Taxpayers with multiple summer jobs will want to make sure all their employers are withholding an adequate amount of taxes to cover their total income tax liability. To make sure your withholding is correct, visit the Withholding Calculator on IRS.gov.

2. Whether you are working as a waiter or a camp counselor, you may receive tips as part of your summer income. All tip income you receive is taxable income and is therefore subject to federal income tax.

3. Many students do odd jobs over the summer to make extra cash. Earnings you received from self-employment are subject to income tax. These earnings include income from odd jobs like baby-sitting and lawn mowing.

4. If you have net earnings of $400 or more from self-employment, you will also have to pay self-employment tax. This tax pays for your benefits under the Social Security system. Social Security and Medicare benefits are available to individuals who are self-employed the same as they are to wage earners who have Social Security tax and Medicare tax withheld from their wages. The self-employment tax is figured on Form 1040, Schedule SE.

5. Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.

6. Special rules apply to services you perform as a newspaper carrier or distributor. You are a direct seller and treated as self-employed for federal tax purposes if you meet the following conditions:

• You are in the business of delivering newspapers.
• All your pay for these services directly relates to sales rather than to the number of hours worked.
• You perform the delivery services under a written contract which states that you will not be treated as an employee for federal tax purposes.

7. Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.

Economic Stimulus Payments: Especially for Military Combat Personnel

July 16th, 2009

military-swordFor federal tax purposes, the U.S. Armed Forces includes officers and enlisted personnel in all regular and reserve units controlled by the Secretaries of Defense, the Army, Navy and Air Force. The Coast Guard and National Guard are also included, but not the U.S. Merchant Marine or the American Red Cross.

Normally, combat pay is not counted as income and is not taxable. For the purposes of receiving an economic stimulus payment, however, military personnel serving in combat zones have the option of including their nontaxable combat pay on their 2007 or 2008 income tax returns if it helps their eligibility for the 2008 economic stimulus payments.

To receive the stimulus payment this year, combat zone personnel or their spouses must file a tax year 2007 income tax return by Oct. 15, 2008. Otherwise, they can claim the economic stimulus payment on next year’s income tax return.

Military personnel who normally would not file an income tax return because their 2007 income is not taxable can file a simple Form 1040A with the IRS if they want to receive the economic stimulus payment. They should report their nontaxable combat pay on line 40b of the Form 1040A to show at least $3,000 in qualifying income. The Department of Defense lists the amount of excluded combat pay, along with the designation, “Code Q,” in box 12 of Form W-2.

The IRS has developed Package 1040A-3, an 8-page publication containing tax tips, a sample Form 1040A and a blank Form 1040A. The package contains everything needed to file the return immediately.

Basic Eligibility Requirements
  • You have, or your family has, at least $3,000 in qualifying income from, or in combination with, Social Security benefits, certain Veterans Affairs benefits, Railroad Retirement benefits and earned income. Supplemental Security Income (SSI) does not count as qualifying income for the stimulus payment.
  • You are not a dependent or eligible to be a dependent on someone else’s federal tax return. (The same must be true of any family members claimed on your return.)

Due to a new law change, the spouses and children of married military personnel are not required to have valid Social Security Numbers.

To Claim Your Payment

If you normally don’t file a federal tax return but must file one this year solely to claim your economic stimulus payment, you should file by Oct. 15, 2008, to ensure that you receive the payment this year. Find out where to send your tax return.

It will generally take a minimum of eight weeks after you file your return to get your stimulus payment.