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Archive for February, 2013

Important Reminders about Tip Income

February 28th, 2013

If your pay from your job includes tips, the IRS has a few important reminders about tip income:

  • Tips are taxable. Individuals must pay federal income tax on any tips they receive. The value of non-cash tips, such as tickets, passes or other items of value are also subject to income tax.
  • Include all tips on your return. You must include all tips that you receive during the year on your income tax return. This includes tips you received directly from customers, tips added to credit cards and your share of tips received under a tip-splitting agreement with other employees.
  • Report tips to your employer. If you receive $20 or more in cash tips in any one month, you must report your tips for that month to your employer. Your employer is required to withhold federal income, Social Security and Medicare taxes on the reported tips.
  • Keep a daily log of tips. You can use IRS Publication 1244, Employee’s Daily Record of Tips and Report to Employer, to record your tips.

    Courtesy of the Internal Revenue Service.

Save Money with the Child Tax Credit

February 27th, 2013

If you have a child under age 17, the Child Tax Credit may save you money at tax-time. Here are some facts the IRS wants you to know about the credit.

  • Amount.  The  non-refundable Child Tax Credit may help reduce your federal income tax by up to $1,000 for each qualifying child you claim on your return.
  • Qualifications.  For this credit, a qualifying child must pass seven tests:

1. Age test.  The child must have been under age 17 at the end of 2012.

2. Relationship test.  The child must be your son, daughter, stepchild, foster child, brother, sister, stepbrother, or stepsister. A child may also be a descendant of any of these individuals, including your grandchild, niece or nephew. You would always treat an adopted child as your own child. An adopted child includes a child lawfully placed with you for legal adoption.

3. Support test.  The child must not have provided more than half of their own support for the year.

4. Dependent test.  You must claim the child as a dependent on your federal tax return.

5. Joint return test.  The child cannot file a joint return for the year, unless the only reason they are filing is to claim a refund.

6. Citizenship test.  The child must be a U.S. citizen, U.S. national or U.S. resident alien.

7. Residence test.  In most cases, the child must have lived with you for more than half of 2012.

  • Limitations.  The Child Tax Credit is subject to income limitations, and may be reduced or eliminated depending on your filing status and income.
  • Additional Child Tax Credit.  If you qualify and get less than the full Child Tax Credit, you could receive a refund even if you owe no tax with the refundable Additional Child Tax Credit.
  • Schedule 8812.  If you qualify to claim the Child Tax Credit make sure to check whether you must complete and attach the new Schedule 8812, Child Tax Credit, with your return. If you qualify to claim the Additional Child Tax Credit, you must complete and attach Schedule 8812.

IRS Publication 972, Child Tax Credit, can provide you with more details. View it online at IRS.gov or request it by calling 800-TAX-FORM (800-829-3676). You can also use the Interactive Tax Assistant tool on the IRS website to check if you can claim the credit. The ITA is a resource that can help answer tax law questions.

Courtesy of the Internal Revenue Service.

The 7 Tax Deductions You Shouldn’t Overlook

February 22nd, 2013

The good thing about taxes is they’re only filed once a year. The bad thing is it’s almost impossible to remember which tax deductions you qualify for each year.

“Credits come and go. It’s hard to remember,” says Bob Wheeler, a certified public accountant in Santa Monica, Calif.

While the IRS does all it can to help taxpayers determine which itemized deductions to apply to their taxes, there are enough possible tax deductions that it’s easy to miss some, experts say.

The good news is that for most people who haven’t had major life changes — having a child, losing a job, buying a house, getting married, etc. — filing taxes shouldn’t be too hard, says Mark Steber, chief tax officer at Jackson Hewitt Tax Service.

“The bottom line for most taxpayers is that 2012 should mostly represent 2011, because there weren’t many tax law changes,” Steber says.

Here are some of the tax deductions you don’t want to overlook:

Medical costs

These include health insurance premiums, dental care, glasses, counseling, therapy, and miles driven to medical appointments, Wheeler says. The medical expenses must add up to more than 7.5% of your adjusted gross income (AGI) for 2012 taxes. In 2013, that figure rises to 10% of AGI, he says. Long-term care insurance is deductible, subject to specific dollar amounts depending on age, says Gail Rosen, a CPA in Martinsville, N.J. Weight-loss programs are deductible if undertaken as treatment for a disease diagnosed by a physician, she says.

Housing

Deducting mortgage interest is a no-brainer, but other costs when buying a house can be deducted from taxes, including private mortgage insurance, points paid on an original mortgage, and energy credits. “Once you get past a mortgage and a W-2, it just gets a whole lot more complicated,” says Wheeler.

Education

Student loan interest is commonly missed, Steber says. Parents contributing to a child’s college education can choose to take a tuition and fee deduction of up to $4,000, or can take tax credits, he says. The American Opportunity Tax Credit is for up to $2,500 per student for the first three years of college, and the Lifetime Learning Credit is for up to $2,000 per family for every additional year of college or graduate school, Rosen says.

Non-cash charitable contributions

Deducting a cash contribution to a charity is easy enough, but too often people don’t accurately value non-cash contributions such as clothes, Steber says. Determine fair-market value and don’t value them for less than they’re worth, he recommends. Other charitable deductions include expenses paid of behalf of a charity, and donating appreciated stock, Rosen says.

Retirement

The American Taxpayer Relief Act of 2012 allows taxpayers to roll over funds from a regular 401(k) retirement account into a Roth account under the same plan. For people with IRAs, some miss the opportunity to contribute to it and don’t realize that it’s a deduction that doesn’t need to be funded by Dec. 31 of the tax year, says Neil Johnson, a CPA in Northbrook, Ill., who blogs about taxes at TheTaxDude.com. Taxpayers have until April 14 of the following year to fund their IRA.

Job hunting

Qualifying expenses are deductible even if they didn’t result in a new job being offered or accepted, Rosen says. These costs include resumes, postage, job counseling, employment agency fees, telephone charges, and travel for interviews that isn’t reimbursed by the prospective employer. They must exceed 2% of your AGI. To be deductible, you must be looking for work in the same trade or business that you’ve been in, she says, adding that job hunting expenses when looking for a job in a new field aren’t deductible.

Bad debt

Ever loan someone money and not get repaid? You could qualify for the non-business bad debt tax deduction for individuals, says Anisha Bailey of A.C. Bailey Tax Solutions in Beavercreek, Ohio. Individuals and married couples can claim the deduction and get a loss of up to $3,000 per year when they loan someone money and aren’t repaid, Bailey says. “This non-business bad debt loss is deducted as a short-term capital loss and they can carry forward any amounts they are not able to claim in the current year and reduce their taxable income in future years,” she wrote in an email.

Keep in mind that you should send you return securely, whether it’s by e-filing or through the mail. However you prepare your tax returns — with a computer program, hired professional or by yourself — it’s important not to rush through the process, Rosen says.

“So many people just drop off their stuff at an accountant,” she says. “Just like anything, taxes take a lot of time — whether it’s a professional or you’re doing it yourself.”

Courtesy of ABC News.

What Taxpayers Should Know about Identity Theft and Taxes

February 20th, 2013

Protecting taxpayers and their tax refunds from identity theft is a top priority for the IRS. This year the IRS expanded its efforts to better protect taxpayers and help victims dealing with this difficult issue.

When your personal information is lost or stolen, it can lead to identity theft. Identity thieves sometimes use your personal information to file a tax return to claim a tax refund. Then, when you file your own tax return, the IRS will not accept it and will notify you that a return was already filed using your name and social security number. Often, learning that your return was not accepted or receiving a contact from the IRS about a problem with your tax return is the first time you become aware that you’re a victim of identity theft.

How to avoid becoming an identity theft victim.

  • Guard your personal information. Identity thieves can get your personal information in many ways. This includes stealing your wallet or purse, posing as someone who needs information about you, looking through your trash, or stealing information you provide to an unsecured website or in an unencrypted email.
  • Watch out for IRS impersonators. Be aware that the IRS does not initiate contact with taxpayers by email or social media channels to request personal or financial information or notify people of an audit, refund or investigation. Scammers may also use phone calls, faxes, websites or even in-person contacts. If you’re suspicious that it’s not really the IRS contacting you, don’t respond. Visit our Report Phishing web page to see what to do.
  • Protect information on your computer. While preparing your tax return, protect it with a strong password. Once you e-file the return, take it off your hard drive and store it on a CD or flash drive in a safe place, like a lock box or safe. If you use a tax preparer, ask how he or she will protect your information.

How to know if you are, or might be, a victim of identity theft.

Your identity may have been stolen if the IRS notifies you that:

  • You filed more than one tax return or someone has already filed using your information;
  • You owe taxes for a year when you were not legally required to file and did not file; or
  • You were paid wages from an employer where you did not work.

Respond quickly using the contact information in the letter you received from the IRS so that we can begin to correct and secure your tax account.

Courtesy of the Internal Revenue Service.

Safeguard Your Refund – Choose Direct Deposit

February 19th, 2013

Direct deposit is the fast, easy and safe way to receive your tax refund. Whether you file electronically or on paper, direct deposit gives you access to your refund faster than a paper check.

Here are four reasons more than 80 million taxpayers chose direct deposit in 2012:

1. Security.  Every year the U.S. Postal Service returns thousands of paper checks to the IRS as undeliverable. Direct deposit eliminates the possibility of a lost, stolen or undeliverable refund check.

2. Convenience.  With direct deposit, the money goes directly into your bank account. You will not have to make a special trip to the bank to deposit the money yourself.

3. Ease.  It’s easy to choose direct deposit. When you are preparing your tax return, simply follow the instructions on the tax return or in the tax software. Make sure you enter the correct bank account and bank routing transit numbers.

4. Options.  You can deposit your refund into more than one account. With the split refund option, taxpayers can divide their refunds among as many as three checking or savings accounts and up to three different U.S. financial institutions. Use IRS Form 8888, Allocation of Refund (Including Savings Bond Purchases), to divide your refund. If you are designating part of your refund to pay your tax preparer, you should not use Form 8888. You should only deposit your refund directly into accounts that are in your own name, your spouse’s name or both if it’s a joint account.

Some banks require both spouses’ names on the account to deposit a tax refund from a joint return. Check with your bank for their direct deposit requirements.

Check the instructions in your tax form for more information about direct deposit and the split refund option. Helpful tips on both are also available in IRS Publication 17, Your Federal Income Tax. Publication 17 and IRS Form 8888 are available on IRS.gov or by calling the IRS at 1-800-TAX-FORM (1-800-829-3676).

Courtesy of the Internal Revenue Service.

EMPLOYEE VS. INDEPENDENT CONTRACTOR, UNEMPLOYMENT INSURANCE, AND EXOTIC DANCERS

February 15th, 2013

FACTS: Milano’s Inc. appeals the Kansas Department of Labor’s (KDOL) determination that its exotic dancers are employees rather than independent contractors for purposes of unemployment insurance. The KDOL held that the dancers’ tips qualified as wages. The district court and the Court of Appeals agreed with the KDOL.

ISSUES: (1) Employee vs. independent contractor and (2) exotic dancers

HELD: Court held that exotic dancers subject to a right of control by the owner of the club where they perform are employees under the “usual common law rules” incorporated into K.S.A. 44-703(i)(1)(B) of the Kansas Employment Security Law.

STATUTES: K.S.A. 44-701, -703(i), (o), -709; and K.S.A. 77-621(a), (c)

Determining Your Correct Filing Status

February 13th, 2013

It’s important to use the correct filing status when filing your income tax return. It can impact the tax benefits you receive, the amount of your standard deduction and the amount of taxes you pay. It may even impact whether you must file a federal income tax return.

Are you single, married or the head of your household? There are five filing statuses on a federal tax return. The most common are “Single,” “Married Filing Jointly” and “Head of Household.” The Head of Household status may be the one most often claimed in error.

The IRS offers these seven facts to help you choose the best filing status for you.

1. Marital Status.  Your marital status on the last day of the year is your marital status for the entire year.

2. If You Have a Choice.  If more than one filing status fits you, choose the one that allows you to pay the lowest taxes.

3. Single Filing Status.  Single filing status generally applies if you are not married, divorced or legally separated according to state law.

4. Married Filing Jointly.  A married couple may file a return together using the Married Filing Jointly status. If your spouse died during 2012, you usually may still file a joint return for that year.

5. Married Filing Separately.  If a married couple decides to file their returns separately, each person’s filing status would generally be Married Filing Separately.

6. Head of Household.  The Head of Household status generally applies if you are not married and have paid more than half the cost of maintaining a home for yourself and a qualifying person.

7. Qualifying Widow(er) with Dependent Child.  This status may apply if your spouse died during 2010 or 2011, you have a dependent child and you meet certain other conditions.

IRS e-file is the easiest way to file and will help you determine the correct filing status. If you file a paper return, the Interactive Tax Assistant at IRS.gov is a tool that will help you choose your filing status.

Courtesy of the Internal Revenue Service.

Taxable and Nontaxable Income

February 12th, 2013

Most types of income are taxable, but some are not. Income can include money, property or services that you receive. Here are some examples of income that are usually not taxable:

  • Child support payments;
  • Gifts, bequests and inheritances;
  • Welfare benefits;
  • Damage awards for physical injury or sickness;
  • Cash rebates from a dealer or manufacturer for an item you buy; and
  • Reimbursements for qualified adoption expenses.

Some income is not taxable except under certain conditions. Examples include:

  • Life insurance proceeds paid to you because of an insured person’s death are usually not taxable. However, if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
  • Income you get from a qualified scholarship is normally not taxable. Amounts you use for certain costs, such as tuition and required course books, are not taxable. However, amounts used for room and board are taxable.

All income, such as wages and tips, is taxable unless the law specifically excludes it. This includes non-cash income from bartering – the exchange of property or services. Both parties must include the fair market value of goods or services received as income on their tax return.

If you received a refund, credit or offset of state or local income taxes in 2012, you may be required to report this amount. If you did not receive a 2012 Form 1099-G, check with the government agency that made the payments to you. That agency may have made the form available only in an electronic format. You will need to get instructions from the agency to retrieve this document. Report any taxable refund you received even if you did not receive Form 1099-G.

Courtesy of the Internal Revenue Service.

Eight Tax Benefits for Parents

February 11th, 2013

Your children may help you qualify for valuable tax benefits, such as certain credits and deductions. If you are a parent, here are eight benefits you shouldn’t miss when filing taxes this year.

1. Dependents. In most cases, you can claim a child as a dependent even if your child was born anytime in 2012.   For more information, see IRS Publication 501, Exemptions, Standard Deduction and Filing Information.

2. Child Tax Credit. You may be able to claim the Child Tax Credit for each of your children that were under age 17 at the end of 2012. If you do not benefit from the full amount of the credit, you may be eligible for the Additional Child Tax Credit. For more information, see the instructions for Schedule 8812, Child Tax Credit, and Publication 972, Child Tax Credit.

3. Child and Dependent Care Credit. You may be able to claim this credit if you paid someone to care for your child or children under age 13, so that you could work or look for work. See IRS Publication 503, Child and Dependent Care Expenses.

4. Earned Income Tax Credit. If you worked but earned less than $50,270 last year, you may qualify for EITC. If you have qualifying children, you may get up to $5,891 dollars extra back when you file a return and claim it. Use the EITC Assistant to find out if you qualify. See Publication 596, Earned Income Tax Credit.

5. Adoption Credit. You may be able to take a tax credit for certain expenses you incurred to adopt a child. For details about this credit, see the instructions for IRS Form 8839, Qualified Adoption Expenses.

6. Higher education credits. If you paid higher education costs for yourself or another student who is an immediate family member, you may qualify for either the American Opportunity Credit or the Lifetime Learning Credit. Both credits may reduce the amount of tax you owe. If the American Opportunity Credit is more than the tax you owe, you could be eligible for a refund of up to $1,000. See IRS Publication 970, Tax Benefits for Education.

7. Student loan interest. You may be able to deduct interest you paid on a qualified student loan, even if you do not itemize your deductions. For more information, see IRS Publication 970, Tax Benefits for Education.

8. Self-employed health insurance deduction - If you were self-employed and paid for health insurance, you may be able to deduct premiums you paid to cover your child. It applies to children under age 27 at the end of the year, even if not your dependent. See IRS.gov/aca for information on the Affordable Care Act.

Courtesy of the Internal Revenue Service.

Missing Your W-2? Here’s What to Do

February 8th, 2013

It’s a good idea to have all your tax documents together before preparing your 2012 tax return. You will need your W-2, Wage and Tax Statement, which employers should send by the end of January. Give it two weeks to arrive by mail.

If you have not received your W-2, follow these three steps:

1. Contact your employer first.  Ask your employer – or former employer – to send your W-2 if it has not already been sent. Make sure your employer has your correct address.

2. Contact the IRS. After February 14, you may call the IRS at 800-829-1040 if you have not yet received your W-2. Be prepared to provide your name, address, Social Security number and phone number. You should also have the following information when you call:

• Your employer’s name, address and phone number;

• Your employment dates; and

• An estimate of your wages and federal income tax withheld in 2012, based upon your final pay stub or leave-and-earnings statement, if available.

3. File your return on time. You should still file your tax return on or before April 15, 2013, even if you have not yet received your W-2. File Form 4852, Substitute for Form W-2, Wage and Tax Statement, in place of the W-2. Use the form to estimate your income and withholding taxes as accurately as possible. The IRS may delay processing your return while it verifies your information.

If you need more time to file you can get a six-month extension of time. File Form 4868, Application for Automatic Extension of Time to File US Individual Income Tax Return.  If you are requesting an extension, you must file this form on or before April 15, 2013.

If you receive the missing W-2 after filing your tax return and the information on the W-2 is different from what you reported using Form 4852, then you must correct your tax return. File Form 1040X, Amended U.S. Individual Income Tax Return to amend your tax return.

Courtesy of the Internal Revenue Service.