Financial moves made throughout the year can pay off when the time comes to file returns.

Charitable contributions:

Charitable giving rises near the holidays. Charitable contributions help both charities and taxpayers. The charity gets a gift, the taxpayer a tax deduction. If you don’t have the cash to make a charitable contribution in December, but know you will after the first of the year, consider charging your donation to your credit card and pay it off in January.

Mortgage payments:

Make your January mortgage payment in December so the interest part of the payment can be written off in the tax year for which you soon will be filing.

For property owners, consider making your April property tax payment, if the cash is on hand. However, if you earn more than $100,000 and have many deductions, first check to see if you’ll be subject to the Alternative Minimum Tax (AMT). It recalculates your tax allowing fewer write-offs. If subject to the AMT, you pay the higher amount of your regular income tax or the AMT.

Bunch deductions:

Miscellaneous deductions can only be written off once they exceed 2% of your adjusted gross income. So now is always the time to be adding up receipts. If you have already paid substantial deductible expenses for, i.e., professional dues, legal and/or job-hunting expenses, you might renew all your business subscriptions for several years to get over the threshold and get more out of your deductible dollars. The same caution re: the AMT applies. Be sure to project and compare your tax under both the ordinary system and the AMT before paying.

Clean the closets: 

Old clothes, house wares and furniture are tax deductions waiting to be claimed. Donate these things to a qualified charity and you can write off their value. The deduction is limited to the current market value, around what you would pay for similar items at swap meets or thrift stores. Be careful, Congress has been cracking down on deductions of depreciated property because some taxpayers are claiming deductions for way more than the property is worth. Keep good records of what you donate. If a single item is worth more than $500, you’ll need a qualified appraisal.

Car donations:

As to donating cars, Congress passed a new law greatly restricting deductions because of abuses, i.e., people are writing off far more than the cars are worth. The new rules prescribes that the deduction be the lesser between the vehicle’s fair market value and the value the charity got when selling the car. Some charities sell these cars at auction for a fraction of the resale value, meaning the deduction you can take is for far less than the car is actually worth. An exception: If the charity is going to use the car to fulfill its charitable mission, rather than sell the car, you can claim the donation at the fair market value. Only donate a car to charity if you know what it plans to do with it.

Invest in your business: 

If you’ve got your own business, even if it’s only something on the side, numerous tax breaks are available. The so-called 179 deduction encourages buying business equipment. Normally business equipment, i.e., computers, software, etc., need to be depreciated or deducted over time. To boost spending, the government now allows 179 business expense write-offs of up to $500,000. If you need a new office chair, a new computer, a more functional phone, etc., buy it and write it off.

Don’t forget your classroom: 

Teachers can spend up to $250 per year on class supplies and deduct the amount when they file their tax returns. If a teacher is married to a teacher, the limit is $500 a year.

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2012 — New Year, New Laws and Rules

As of the start of 2012 small-business owners face dozens of new state and federal laws and regulations. 

In California, they include mandates concerning employees, including a partial ban on checking credit reports of workers and job applicants.

A guide to some 2012 new laws and regulations: 

Federal taxes 

As of January, a major decrease is in amount of the total cost of new equipment, i.e., computers, machinery and vehicles, a business can deduct the first year on its tax return.

 The deduction that had been boosted by federal stimulus bills, now drops to $125,000 from $500,000. The deduction will drop further to $25,000 in 2013, unless the law is changed. 

The IRS will have a new way to prevent businesses from not reporting all their sales income. The IRS now requires credit card processing companies and third-party pay services, i.e., PayPal, to report how much money they handle for merchants. The new rule is for businesses that process more than $20,000 per year and with over 200 transactions. This rule could greatly impact online sellers.

Accessibility rules

In 2010 the Justice Department announced rules for how the 1990 Americans With Disabilities Act will be implemented. Some rules go into effect March 15, 2012.

Under the old standards, one van-accessible parking space was required for every eight accessible parking spaces. The new rule prescribes one for every six. However, a business complying with the old rules will not have to redo the parking lot to conform to the new ones.

Another rule requires new or altered buildings to have light switches and thermostats mounted 48 inches above the floor, instead of 54 inches, as required up to now.

 Hotels and motels are now required to provide more specific details on accessible and inaccessible features in rooms. And they will have to hold their accessible guest rooms until all other rooms of the same type, i.e., those with two-double beds, have been reserved.

Also new standards exist for swimming pools, bowling alleys, etc. Small businesses may qualify for a tax credit to help with compliance costs.

California laws

Employers are banned from checking the credit of non-managerial employees and job applicants. Some exceptions, including employees handling confidential information, exist.

 Businesses are required to provide new hires with additional, detailed information about pay and other matters, i.e., how to contact the workers’ compensation insurance carrier.

 For companies that want to include social benefits in their missions, a new type of corporate structure now exists, called B  (for Benefit) corporations that don’t make decisions solely based on profit, These entities are better protected from shareholder suits.

Finally, a new law increases penalties for misclassifying employees as independent contractors.

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Deadlines for paying tuition and other fees for new and returning college students are always a concern when school opens. The IRS reminds students or parents paying college costs to keep receipts and to take advantage of the tax benefits that help offset these expenses.

The benefits apply to the student, a spouse or a dependent who the taxpayer claims as an exemption on his/her tax return.

• American Opportunity Credit (AOC): Originally created under the American Recovery and Reinvestment Act, AOC has been extended two years – 2011 and 2012. The credit can be up to $2,500 per eligible student and is available for the first four years of post secondary school. Forty percent of this credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes. Qualified expenses are tuition and fees, course related books, supplies and equipment. The full credit is available to eligible taxpayers whose modified adjusted gross income is below $80,000 ($160,000 for married couples filing a joint return).

• Lifetime Learning Credit: In 2011, you may be able to claim a Lifetime Learning Credit
of up to $2,000 for qualified education expenses paid for a student enrolled in eligible educational institutions. There is no limit on the number of years you can claim the Lifetime Learning Credit for an eligible student, but to claim the credit, your modified adjusted gross income must be below $60,000 ($120,000 if married filing jointly).

• Tuition and Fees Deduction: This deduction can reduce the amount of your income
subject to tax by up to $4,000 for 2011 even if you do not itemize your deductions. Generally, you can claim the tuition and fees deduction for qualified higher education expenses for an eligible student if your modified adjusted gross income is below $80,000 ($160,000 if married filing jointly).

• Student loan interest deduction: Generally, personal interest you pay, other than certain mortgage interest, is not deductible. However, if your modified adjusted gross income is less than $75,000 ($150,000 if filing a joint return), you may be able to deduct interest paid on a student loan used for higher education during the year. It can reduce the amount of your income subject to tax by up to $2,500, even if you don’t itemize deductions.

For each student, you can choose to claim only one of the credits in a single tax year. However, if you pay college expenses for two or more students in the same year, you can choose to take credits on a per-student, per-year basis. You can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your senior son.

You cannot claim the tuition and fees deduction for the same student in the same year that you claim the American Opportunity Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction and should consider which is more beneficial for you.

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As of late July 2011, the Internal Revenue Service will be extending help to more innocent spouses by eliminating the two-year time limit that now applies to certain relief requests.

Available only to someone who files a joint return, innocent spouse relief is designed to help a taxpayer who did not know and did not have reason to know that his or her spouse understated or underpaid an income tax liability.

IRS Commissioner Doug Shulman explained: “This change is a dramatic step to improve our process to make it fairer for an important group of taxpayers. We know these are difficult situations for people to face, and today’s change will help innocent spouses victimized in the past, present and the future.”

The change to the two-year limit is effective immediately.

Earlier this year the IRS launched a review of the equitable relief provisions of the innocent spouse program. As a result, policy and program changes will become fully operational in the fall and additional guidance will be made available.

Previously existing regulations, adopted in 2002, required that innocent spouse requests seeking equitable relief be filed within two years after the IRS first takes collection action against the requesting spouse. The time limit, adopted after a public hearing and public comment, was designed to encourage prompt resolution while evidence remained available. The IRS plans to issue regulations formally removing this time limit.

By law, the two-year election period for seeking innocent spouse relief under the other provisions of section 6015 of the Internal Revenue Code, continues to apply. The normal refund statute of limitations also continues to apply to tax years covered by any innocent spouse request.

About expanding the availability of equitable relief:
• The IRS will no longer apply the two-year limit to new equitable relief requests or requests currently being considered by the agency.
• A taxpayer whose equitable relief request was previously denied solely due to the two-year limit may reapply using IRS Form 8857, Request for Innocent Spouse Relief, if the collection statute of limitations for the tax years involved has not expired. Taxpayers with cases currently in process will be automatically treated under the new rule and need not reapply.
• The IRS will not apply the two-year limit in any pending litigation involving equitable relief, and where litigation is final, the agency will suspend collection action under certain circumstances.

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If you are you self-employed, you have many of the same options to save for retirement on a tax-deferred basis as employees participating in company plans.

Here are highlights of a few of your retirement plan options.

Savings Incentive Match Plan for Employees (SIMPLE IRA Plan)
• You can put all your net earnings from self-employment in the plan: up to $11,500 (plus an additional $2,500 if you’re 50 or older) in salary reduction contributions and either a 2% fixed contribution or a 3% matching contribution.
• Establish the plan:
• Obtain and complete:
• Form 5305-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) – for Use With a Designated Financial Institution;
• Form 5304-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) – Not for Use With a Designated Financial Institution, or
• an IRS-approved “prototype SIMPLE IRA plan” offered by many mutual funds, banks and other financial institutions, and by plan administration companies; and
• open a SIMPLE IRA through a bank or another financial institution.
• Set up a SIMPLE IRA plan at any time January 1 through October 1. If you became self-employed after October 1, you can set up a SIMPLE IRA plan for the year as soon as administratively feasible after your business starts.

Simplified Employee Pension (SEP)
• Contribute as much as 25% of your net earnings from self-employment (not including contributions for yourself), up to $49,000.
• Establish the plan:
• Obtain and complete:
• Form 5305-SEP, Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement, or
• an IRS-approved “prototype SEP plan” offered by many mutual funds, banks and other financial institutions, and by plan administration companies; and
• open a SEP-IRA through a bank or other financial institution.
Set up the SEP plan for a year as late as the due date (including extensions) of your income tax return for that year.

401(k) Plan
• Make salary deferrals up to $16,500 (plus an additional $5,500 if you’re 50 or older) of your compensation from the business either on a pre-tax basis or as a designated Roth contribution.
• Contribute up to an additional 25% of your net earnings from self-employment (not including contributions for yourself), up to $49,000 including salary deferrals.
• Tailor the plan to allow you access to the money in the plan through loans and hardship distributions.
• A one-participant 401(k) plan is sometimes referred to as a “solo-401(k),” “individual 401(k)” or “uni-401(k).” It is generally the same as other 401(k) plans, but because there are no other employees, other than the spouse, that work for the business, it is exempt from discrimination testing.

Other Defined Contribution Plans
• Profit-sharing plan: allows you to decide how much to contribute on an annual basis, up to 25% of compensation (not including contributions for yourself) or $49,000.
• Money purchase plan: requires you to contribute a fixed percentage of your income every year, up to 25% of compensation (not including contributions for yourself), according to a formula stated in the plan.

Defined Benefit Plans
• Traditional pension plan with a stated annual benefit you will receive at retirement, usually based on salary and years of service.
• Cash balance plan: benefit may also be defined based on a cash balance formula in a hypothetical individual account.
• Maximum annual benefit can be up to $195,000.
• Contributions are calculated by an actuary: based on the benefit you set and other factors (your age, expected returns on plan investments, etc.); no other annual contribution limit applies.
“Keogh plans”: Retirement plans for self-employed people were named after the law that first allowed unincorporated businesses to sponsor retirement plans. Since the law no longer distinguishes between corporate and other plan sponsors, the term is seldom used.

Dollar figures are for 2011 and are subject to annual cost-of-living adjustments.

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Generally, an amended tax return allows you to file again to correct your filing status, your income or to add deductions or credits you have missed.
These nine things are what you need from the IRS about amending a federal income tax return.

1. Use Form 1040X, Amended U.S. Individual Income Tax Return, to file an amended income tax return.

2. Use Form 1040X to correct previously filed Forms 1040, 1040A or 1040EZ. An amended return cannot be filed electronically, thus you must file it by paper.

3. Generally, you do not need to file an amended return due to math errors. The IRS will automatically make that correction. Also, do not file an amended return because you forgot to attach tax forms such as W-2s or schedules. The IRS normally will send a request asking for those.

4. Be sure to enter the year of the return you are amending at the top of Form 1040X. Generally, you must file Form 1040X within three years from the date you filed your original return or within two years from the date you paid the tax, whichever is later.

5. If you are amending more than one tax return, prepare a 1040X for each return and mail them in separate envelopes to the appropriate IRS campus. The 1040X instructions list the addresses for the campuses.

6. If the changes involve another schedule or form, you must attach that schedule or form to the amended return.

7. If you are filing to claim an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund.

8. If you owe additional 2010 tax, file Form 1040X and pay the tax before the due date to limit interest and penalty charges that could accrue on your account. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions.

9. Your state tax liability may be affected by a change made on your federal return. For information on how to correct your state tax return, contact your state tax agency.

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When it comes to filing or not fling a tax return the IRS can assess a penalty if you fail to file or file but fail to pay or both. These eight important facts from the IRS inform you about the two different penalties you may face if you do not file or pay timely.

1. If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty.

2. The failure-to-file penalty is generally more than the failure-to-pay penalty. So if you cannot pay all the taxes you owe, you should still file your tax return on time and explore other payment options in the meantime. The IRS will work with you.

3. The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes.

4. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

5. If you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes.

6. If you timely filed a request for an extension of time to file and you paid at least 90 percent of your actual tax liability by the original due date, you will not be faced with a failure-to-pay penalty if the remaining balance is paid by the extended due date.

7. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax.

8.You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of
willful neglect.

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New approach views returns as ‘entire picture’ instead of individually:

Take note high-net-worth individuals: the IRS has an eye on you. And it no longer does it return by return, but looks at the big picture instead of one-offs, The result is in the rate of audits of the wealthy has almost doubled in 2010. Detailed information about the rates of audits and their results was released in March 2011 in the 2010 IRS Data Book.

The overall odds of any given taxpayer being audited by the IRS were one in a hundred in 2009, according to a Bloomberg report. But in 2010 the overall rate edged higher to 1.11% of taxpayers being audited. But the odds on the high-net-worth folks have increased, so that now anyone with an income above $10 million is looking at an audit chance of 18.4%, up from 10.6% in 2009.

How did that happen? Well, George Clarke, an attorney at Miller & Chevalier Chartered in Washington, offered an opinion in the report. He explained that as part of its investigation into offshore tax shelters and bank havens, as well as its voluntary disclosure program for wealthy taxpayers who were willing to ’fess up’ to having used such strategies, the IRS learned a lot about how many of the wealthy approach asset management. “They learn things and then they roll those things out across the board,” he was quoted as saying.

That’s all part of the plan, according to IRS commissioner Douglas Shulman. After the creation of the IRS’s Global High Wealth Industry Group, he said in a speech before the New York Bar Association Taxation Section, “Our goal is to better understand the entire economic picture of the enterprise controlled by the wealthy individual and to assess the tax compliance of that overall enterprise.”

He added, “We cannot do this by continuing to approach each tax return in the enterprise as a single and separate entity. We must understand and analyze the entire picture.”

Earlier in March 2011 the IRS rolled out information on the 2011 offshore voluntary disclosure initiative in eight languages, for taxpayers and preparers whose native language may not be English. Penalties for the 2011 program, it says, are higher, but it “offers clear benefits” that include possible avoidance of criminal prosecution.

Excerpted from an article by Marlene Y. Satter

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If you give someone money or property during your life, you may be subject to the federal gift tax. Most gifts are not subject to the gift tax, but the IRS has put together the following eight tips to help you determine if your gift is taxable.

1) Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or to a charity. If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual exclusion for the year. For 2010, the annual exclusion is $13,000.

2) Gift tax returns do not need to be filed unless you give someone, other than your spouse, money or property worth more than the annual exclusion for that year.

3) Generally, the person who receives your gift will not have to pay any federal gift tax because of it. Also, that person will not have to pay income tax on the value of the gift received.

4) Making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions).

5) The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. The following gifts are not taxable gifts:
• Gifts that are not more than the annual exclusion for the calendar year,
• Tuition or medical expenses you pay directly to a medical or educational institution for someone,
• Gifts to your spouse,
• Gifts to a political organization for its use, and
• Gifts to charities.

6) Gift Splitting – you and your spouse can make a gift up to $26,000 to a third party without making a taxable gift. The gift can be considered as made one-half by you and one-half by your spouse. If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, even if half of the split gift is less than the annual exclusion.

7) Gift Tax Returns – you must file a gift tax return on Form 709, if any of the following apply:
• You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year.
• You and your spouse are splitting a gift.
• You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until some time in the future.
• You gave your spouse an interest in property that will terminate due to a future event.

8) You do not have to file a gift tax return to report gifts to political organizations and gifts made by paying someone’s tuition or medical expenses.

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When filing a federal income tax return, taxpayers can choose to either take the standard deduction or to itemize their deductions. The IRS has put together the following six facts to help you choose the method that yields the lowest tax.

Whether to itemize deductions on your tax return depends on how much you spent on certain expenses last year. Money paid for medical care, mortgage interest, taxes, charitable contributions, casualty losses and miscellaneous deductions can reduce your taxes. If the total amount spent on those categories is more than your standard deduction, you can usually benefit by itemizing.

1. Standard deduction amounts are based on your filing status and are subject to inflation adjustments each year: for 2010, they are…

Single $5,700
Married Filing Jointly $11,400
Head of Household $8,400
Married Filing Separately $5,700
Qualifying Widow(er) $11,400

2. Some taxpayers have different standard deductions: The standard deduction amount depends on your filing status, whether you are 65 or older, blind, or whether an exemption can be claimed for you by another taxpayer. If any of these apply, you must use the Standard Deduction Worksheet on the back of Form 1040EZ, or in the 1040A or 1040 instructions. The standard deduction amount also depends on whether you plan to claim the additional standard deduction for a loss from a disaster declared a federal disaster or state or local sales or excise tax you paid in 2010 on a new vehicle you bought before 2010. You must file Schedule L, Standard Deduction for Certain Filers to claim these additional amounts.

3. Limited itemized deductions: Your itemized deductions are no longer limited because of your adjusted gross income.

4. Married Filing Separately: When a married couple files separate returns and one spouse itemizes deductions, the other spouse cannot claim the standard deduction and therefore must itemize to claim their allowable deductions.

5. Some taxpayers are not eligible for the standard deduction: They include nonresident aliens, dual-status aliens and individuals who file returns for periods of less than 12 months due to a change in accounting periods.

6. Forms to use: The standard deduction can be taken on Forms 1040, 1040A or 1040EZ.  If you qualify for the higher standard deduction for new motor vehicle taxes or a net disaster loss, you must attach Schedule L. To itemize your deductions, use Form 1040, U.S. Individual Income Tax Return, and Schedule A, Itemized Deductions.

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If you paid someone to care for your child, spouse, or dependent last year, you may be able to claim the Child and Dependent Care Credit on your IRS income tax return. Here are 10 things to know when claiming a credit for care expenses.

1. Care must have been provided for one or more qualifying persons. A qualifying person is your dependent child age 12 or younger when the care was provided. Additionally, your spouse and certain other individuals who are physically or mentally incapable of self-care may also be qualifying persons. You must identify each qualifying person on your tax return.

2. Care must have been provided so you – and your spouse if you are married filing jointly – could work or look for work.

3. You, and your spouse if filing jointly, must have earned income from wages, salaries, tips, other taxable employee compensation or net earnings from self-employment. One spouse may be considered as having earned income if they were a full-time student or were physically or mentally unable to care for themselves.

4. Payments for care cannot be paid to your spouse, to the parent of your qualifying person, to someone you can claim as your dependent on your return, or to your child who will not be age 19 or older by the end of the year even if he or she is not your dependent. You must identify the care provider(s) on your tax return.

5. Your filing status must be single, married filing jointly, head of household or qualifying widow(er) with a dependent child.

6. The qualifying person must have lived with you for more than half of 2010. There are exceptions for the birth or death of a qualifying person, or a child of divorced or separated parents.

7. Credit can be up to 35 percent of your qualifying expenses, depending upon your adjusted gross income.

8. For 2010, you may use up to $3,000 of expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.

9. Qualifying expenses must be reduced by the amount of any dependent care benefits provided by your employer that you deduct or exclude from your income.

10. If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer and may have to withhold and pay Social Security and Medicare tax and pay federal unemployment tax.

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Taxes paid on your investments directly impact your wealth accumulation. Now is a time to take maximum advantage of the favorable investment tax rates in place through 2012. You can also generate long-term asset growth in a retirement plan while deferring taxes.

Ordinary income is taxed by the federal government at up to 35% with lower rates of 15%, 25%, 28% and 33%. Long-term capital gains on assets held more than 12 months carry a tax of 15% or less. Gains on shorter investments are taxed at your ordinary income level.

Qualified stock dividends are taxed at 15% or less if you keep the investment longer than 60 days. But bond interest is taxed as ordinary income. So, too, are regular payouts from IRAs and other retirement plans and annuities.

Let’s say your investments generate an income and capital gains of $50,000 this year. Your federal tax bill could in the highest 35% bracket and could range from $7,500 to $17,500. In lower brackets the difference can be substantial, as well.

The best types of investments for your regular account are those with low tax liability, i.e., stocks you hold for the long haul. Investments with high current tax liability, such as taxable bonds and investments held a year or less should go into your tax-deferred plan.

If your investments are entirely or mostly in stocks, equity funds or fixed-income vehicles, refer to this tax-wise review of each type of investment:

1) Common stocks: In a regular account, you have a tax shelter until you sell. And the income from high-yield stocks carries a tax benefit, as well, due to the low dividend tax. Growth stocks held for a long duration in a tax-deferred retirement plan are not taxed at capital gains rate when sold. Instead, when you withdraw the money, it’s taxed as ordinary income.

On the other hand, if you buy stocks and frequently sell at a profit in less than 12 months, you’ll be ahead in your retirement plan… the reason being “ongoing tax deferral.” The higher your tax bracket and the more active your trading, the more significant the tax deferral.

Keep in mind however that you cannot take a loss deduction in a tax-deferred account. Conversely, losses carry a tax benefit in a regular account. Loss deductions can offset taxable gains plus up to $3,000 a year of any ordinary income, including earnings. Additionally, you can carry forward annual losses beyond $3,000 to future years.

Good-quality stocks also are best held in a taxable account, if you want to leave your heirs the largest possible inheritance. Investments in the regular account when you die, qualify for a step-up in cost basis to their value at that time. Your heirs avoid paying capital gains taxes on the price appreciation during your lifetime. However, the value of those shares is still subject to estate taxes.

2) Equity funds: Mutual funds pay out most realized capital gains of all income each year. In a regular account you’re taxed on payouts even if you reinvest them. These funds usually are more attractive in retirement plans. But taxable equity-fund distributions are a good income source in a regular account when used for living expenses.

Three types of funds are sound holdings in a regular account because they typically make small annual distributions and therefore carry low tax liability. These are: 1) unmanaged exchange-traded funds (ETF); 2) index mutual funds; and 3) regular mutual funds with low portfolio turnover.

3) Real estate investment trusts (REIT), most preferred stocks, bank CDs, taxable bonds and bond funds: All these pay interest that is taxed at ordinary rates. From a tax standpoint, they’re best held in retirement plans if you don’t need the income. This is always true of zero-coupon bonds, which generate a yearly tax obligation even though you don’t actually receive the income.

4) Master limited partnerships: They generally should be held in a taxable account. There are two reasons: 1) a large chunk of the cash distributions can be tax deferred until the investment is sold, with taxes then paid at the lower capital gains rate; and 2) even in an IRA or other tax-deferred account, distributions may be taxable depending on your total annual MLP payouts.

Excerpted from: Stephen Leeb, Market Forecast

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3/20/2011

Homeowners, whose mortgage debt has been partly or entirely forgiven during the 2007 through 2012 tax years may be able to claim special tax relief and exclude the debt forgiven from your income.
Ten facts from the IRS about Mortgage Debt Forgiveness
1. Usually, debt forgiveness is considered taxable income. Under the Mortgage Forgiveness Debt Relief Act of 2007 homeowners may be able to exclude debt forgiven up to $2 million on your principal residence.
2. $1 million for a married person filing a separate return is the limit.
3. Excludable are both debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
4 To qualify, only debt used to buy, build or substantially improve your principal residence and that is secured by that residence is allowable.
5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
6. Proceeds of refinanced debt used to pay off credit card debt or for other such purposes do not qualify for the exclusion.
7. Qualified homeowners can claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
8. 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, however, other tax relief provisions may be applicable, i.e., insolvency. See IRS Form 982 for more details.
9. Homeowners with debt that was reduced or eliminated will get a year-end statement — Form 1099-C, Cancellation of Debt — from the lender. If you do not receive it for the year in which debt forgiveness was granted, contact the lender. The form must show the amount of debt forgiven and the fair market value of any foreclosed property.
10. Examine the Form 1099-C carefully and notify the lender immediately if any information shown is incorrect. Pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7
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The Internal Revenue Service released the 2011 update to the Allowable Living Expense Standards on March 1. The ALE standards are used to reduce subjectivity in determining what a taxpayer may claim as basic living expenses necessary to avoid undue hardship when the taxpayer must delay full payment of a delinquent tax. The standard allowances provide consistency and fairness in collection determinations by incorporating average expenditures for basic necessities for citizens in similar geographic areas.

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WASHINGTON — Refunds totaling more than $1.1 billion may be waiting for nearly 1.1 million people who did not file a federal income tax return for 2007, the Internal Revenue Service announced today. However, to collect the money, a return for 2007 must be filed with the IRS no later than Monday, April 18, 2011.

The IRS estimates that half of these potential 2007 refunds are $640 or more.

Some people may not have filed because they had too little income to require filing a tax return even though they had taxes withheld from their wages or made quarterly estimated payments. In cases where a return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund. If no return is filed to claim a refund within three years, the money becomes property of the U.S. Treasury.

For 2007 returns, the window closes on April 18, 2011. The law requires that the return be properly addressed, mailed and postmarked by that date. There is no penalty for filing a late return qualifying for a refund.

The IRS reminds taxpayers seeking a 2007 refund that their checks will be held if they have not filed tax returns for 2008 and 2009. In addition, the refund will be applied to any amounts still owed to the IRS, and may be used to offset unpaid child support or past due federal debts such as student loans.

By failing to file a return, people stand to lose more than a refund of taxes withheld or paid during 2007. In addition, many low-and-moderate income workers may not have claimed the Earned Income Tax Credit (EITC). The EITC helps individuals and families whose incomes are below certain thresholds, which in 2007 were $39,783 for those with two or more children, $35,241 for people with one child, and $14,590 for those with no children.

(Current and prior year tax forms and instructions are available on the Forms and Publications page of IRS.gov or by calling toll-free 1-800-TAX-FORM (1-800-829-3676). Taxpayers who are missing Forms W-2, 1098, 1099 or 5498 for 2007, 2008 or 2009 should request copies from their employer, bank or other payer. If these efforts are unsuccessful, taxpayers can get a free transcript showing information from these year-end documents by ordering on line, calling 1-800-908-9946, or by filing From 4506-T, Request for Transcript of Tax Return, with the IRS.)

Individuals Who Did Not File a 2007 Return with a Potential Refund:

*Excluding the Earned Income Tax Credit and other credits.

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The Internal Revenue Service has begun to offer help to taxpayers who are having difficulty in paying delinquent tax bills. The IRS is reducing the number of property liens and easing rules for small businesses to enter into installment agreements.

These efforts will include doubling the amount of back taxes a person can owe to $10,000 before imposing a lien. This will make it easier for people to have a lien withdrawn once a tax bill is paid or payment is started under certain installment plans. If the taxpayer meets certain income and debt requirements, he/she will be able to settle a tax debt for less than owed.

Small businesses with larger outstanding tax bills will be eligible for 24-month payment plans. In the past, a tax bill had to be less than $10,000; today it’s up to $25,000.

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March 8, 2011

Washington, D.C. – The House approved a repeal of the expanded 1099 information reporting requirements by a vote of 314-112.

The bill, H.R. 4, “”The Small Business Paperwork Mandate Elimination Act of 2011,” introduced by Rep. Dan Lungren, R-Calif., would repeal the provisions in last year’s Affordable Care Act and Small Business Jobs Act requiring businesses, including rental property owners, to file a Form 1099-MISC with the Internal Revenue Service reporting any purchases of $600 or more from another business during the calendar year.

Every Republican in the House voted to approve the bill, but 76 Democrats objected to an offset in the bill that would pay for the cost of the repeal by requiring people who had received tax credits to pay for health insurance under the health care reform bill to repay the subsidies if they end up earning too much during the year to qualify. They argued that the offset amounted to a tax increase.

“This bill would saddle hundreds of thousands of middle-income taxpayers with a hefty tax increase,” said Rep. Sander Levin, D-Mich., the ranking member on the House Ways and Means Committee. “We all favor repealing 1099, but to do so on the backs of the middle class is irresponsible. With this legislation, Republicans continue their reckless overreach, this time by gouging middle-income taxpayers.”

However, Rep. Dave Camp, R-Mich., who chairs the Ways and Means Committee, said he did not view the provision as a tax increase. “Voluntarily choosing to not enroll in government health care and thus forgoing the associated tax subsidies that one may not be eligible for might result in more government revenue according to the Joint Tax Committee, but it is not a tax increase,” he said.

He hailed the passage of the bill. “Clearly there is strong, bipartisan support to repeal the 1099 provisions so that small businesses can focus on what they do best – creating jobs,” Camp said in a statement. “With more than 70 percent of the House, including 76 Democrats, voting for repeal of the 1099 provisions, I urge the Senate to move quickly to take up and pass this legislation so we can send a bipartisan bill to the President.”

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Congress has approved and the President has signed new economic stimulus legislation, the American Recovery and Reinvestment Act of 2009. The IRS is implementing tax-related provisions of this new program as quickly as possible.

Here are some key highlights:

• Payroll Checks Increase This Spring. The Making Work Pay Tax Credit will mean $400 to $800 for many Americans. The IRS has issued new withholding tables for employers.
• $250 for Social Security Recipients, Veterans and Railroad Retirees. The Economic Recovery Payment will be paid by the Social Security Administration, Department of Veterans Affairs and the Railroad Retirement Board.
• Money Back for New Vehicle Purchases. Taxpayers who buy certain new vehicles in 2009 can deduct the state and local sales taxes they paid.

Information on other provisions of the stimulus law will be available on ww.IRS.gov as they become available.

Following are a few general questions and answers regarding the new stimulus package:

Read the rest of this entry »

How has the new Stimulus bill affected the tax credits for energy efficient home improvements?

On February 17, 2009, President Obama signed a stimulus bill (The American Recovery and Reinvestment Act of 2009) that made some significant changes to the energy efficiency tax credits.

The highlights are:

• The tax credits that were previously effective for 2009 have been extended to 2010 as well.
• The tax credit has been raised from 10% to 30%
• The tax credits that were for a specific dollar amount (ex $300 for a CAC), have been converted to 30% of the cost.
• The maximum credit has been raised from $500 to $1500 for the two years (2009–2010). However, some improvements such as geothermal heat pumps, solar water heaters, and solar panels are not subject to the $1,500 maximum.
• The $200 cap on windows has been removed.

(source: www.energystar.gov)

Refundable First-time Home Buyer Credit.

Last year, Congress provided taxpayers with a refundable tax credit that was equivalent to an interest-free loan equal to 10 percent of the purchase of a home (up to $7,500) by first-time home buyers. The provision applies to homes purchased on or after April 9, 2008 and before July 1, 2009. Taxpayers receiving this tax credit are currently required to repay any amount received under this provision back to the government over 15 years in equal installments, or, if earlier, when the home is sold. The credit phases out for taxpayers with adjusted gross income in excess of $75,000 ($150,000 in the case of a joint return). The bill eliminates the repayment obligation for taxpayers that purchase homes after January 1, 2009, increases the maximum value of the credit to $8,000, and removes the prohibition on financing by mortgage revenue bonds, and extends the availability of the credit for homes purchased before December 1, 2009. The provision would retain the credit recapture if the house is sold within three years of purchase.

The following Q&A relates to the $7,500 Tax Credit for homes purchased between April 9, 2008 and July 1, 2009: Read the rest of this entry »

Many investors will receive their year-end tax statements later than in past years, but these forms are likely to be more accurate, according to the Internal Revenue Service.
A new law, enacted last fall, changed the deadline from Jan. 31 to Feb. 15, when brokers, including brokerage firms, mutual fund companies and barter exchanges, must furnish year-end Forms 1099-B to their customers. Where a broker furnishes these forms by mail, this means that the forms must be mailed, not received by that date.

Because Feb. 15 falls on Sunday in 2009, and Monday, Feb. 16 is a federal holiday, the deadline is Feb. 17 this year. In addition, the IRS said earlier this month that for calendar-year 2008 reporting, the Feb. 17 deadline also applies to other tax information that brokers report to their customers, including such items as interest and dividends, on a combined year-end statement.
Read the rest of this entry »

1. Tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain expenses. These benefits can drastically reduce some taxpayers’ tax obligations. The Alternative Minimum Tax attempts to ensure that anyone who benefits from these tax advantages pays at least a minimum amount of tax.
2. Congress created the AMT in 1969, targeting a small number of high-income taxpayers who could claim so many deductions they owed little or no income tax
3. Because the AMT is not indexed for inflation, a growing number of middle-income taxpayers are discovering they are subject to the AMT.
4. You may have to pay the AMT if your taxable income for regular tax purposes plus any adjustments and preference items that apply to you are more than the AMT exemption amount.
5. The AMT exemption amounts are set by law for each filing status.
6. For tax-year 2008, Congress raised the alternative minimum tax exemption to the following levels
• $69,950 for a married couple filing a joint return and qualifying widows and widowers
• $46,200 for singles and heads of household
• $34,975 for a married person filing separately
7. Taxpayers may find more information about the Alternative Minimum Tax and how it impacts them by referring to IRS Form 6251, Alternative Minimum Tax —Individuals, available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

1. If you receive a letter or notice from the IRS which leads you to believe someone may have fraudulently used your Social Security Number, respond immediately to the name and address or phone number printed on the IRS notice.
2. If you receive a letter from the IRS that indicates more than one tax return was filed for you, this may be a sign that your SSN was used fraudulently.
3. Another sign that you may be the target of identity theft is an IRS letter indicating you received wages from an employer unknown to you.
4. The IRS has a department which deals specifically with identity theft issues. The IRS Identity Protection Specialized Unit is available if you have been in contact with the IRS about an identity theft issue and have not achieved a resolution
5. You can contact the IRS Identity Protection Specialized Unit by calling the Identity Theft Hotline at 800-908-4490 Monday through Friday from 8:00 am to 8:00 pm local time (Alaska and Hawaii follow Pacific Standard Time).
6. The IRS Identity Protection Specialized Unit is also available if you believe your identity may be at risk of being stolen due to a lost or stolen purse or wallet or due to questionable activity on your credit card or your credit report.
7. The IRS never initiates communication with taxpayers about their tax account through emails. If you receive an e-mail or find a Web site you think is pretending to be the IRS, forward the e-mail or Web site URL to the IRS at phishing@irs.gov
8. The IRS has many more resources available to help inform taxpayers about identity theft on the IRS Web site at IRS.gov. On IRS.gov you can access information on how to report scams and bogus IRS Web sites. You can also visit the IRS Identity Theft Resource Page, which you can find by typing Identity Theft Resource Page in the search box on the IRS.gov home page.
9. The Federal Trade Commission is also available to assist taxpayers with identity theft issues. You can reach them at 877-ID-THEFT (877-438-4338).
10. Visit OnGuardOnline.gov for protection tips from the federal government and the technology industry.

(source: www.irs.gov)

The IRS currently has a program known as an Offer-in-Compromise (OIC) which provides financially distressed taxpayers an opportunity to settle all outstanding taxes, interest and penalties for a lump sum which is less than the total amount owed. The amount of the offer will vary depending upon your income, assets, liabilities and future income prospects. Current IRS guidelines allow for this lump sum to be paid in several installments over a period as long as two years, however, the total payments tend to be higher than under a lump sum offer.

The negotiation of an offer is a lengthy process usually taking from 6 months to a year, but sometimes longer. During the time the offer is pending the IRS will not require any payments on old taxes. However, during the time an offer is pending you must pay all of your current taxes as they become due including any quarterly estimated income tax payments, and federal payroll tax deposits. If you fail to do so the IRS will immediately reject your offer, and you will not be entitled to any appeal rights. Furthermore, your deposit, discussed below, will be applied to your taxes, and if you wish to make a new offer you will need to make an additional deposit.

At the time the offer is submitted a deposit must be submitted. The amount of the deposit is 20% of the amount offered for a “lump sum” offer. For a periodic payment offer you must include the first proposed installment with the offer. While the IRS is evaluating a periodic payment offer, you must make subsequent proposed installment payments as they become due. If the offer is rejected, withdrawn, or returned the IRS keeps any deposits made, and applies them to the back taxes you owe. Read the rest of this entry »