Archive for January, 2011

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“Dependents”, “Exemptions” and Tax Benefits

Wednesday, January 26th, 2011

This area of the tax laws can become very complex, very quickly, principally due to the myriad of actual personal life situations that exist in the world today.  For example, married, single, head of household, domestic partners, taxpayers who are living together but are not married, or children, married older children living at home while attending college, divorced, separated, foster parents, adopted children, relatives, etc, etc.

Two important terms that are being presented in this article are “dependents” and “exemptions.”  A “dependent” is someone who is dependent upon you for some or all of their support.  Support in this context may be financial (money) or in-kind (food, shelter, expenses etc). An “exemption” reduces your “Taxable Income” on your tax return. Each “exemption” that you claim on your tax return is the equivalent of a $3,650 tax deduction.  Generally speaking, you are allowed one tax “exemption” for yourself, one for your spouse (married taxpayers), and one for each of your qualified “dependents” on your tax return.

Generally, you must provide more than half of the total annual support each year for a qualified person(s) before you are entitled to claim that person(s) as a dependent.  However, suppose that you and your three sisters are each providing one fourth of the total annual support for both of your elderly parents?  In this situation you should review “Multiple Support Agreements” on page 19.  

One of the best references to explain the applicable provisions fo the tax laws for these two subjects is IRS Publication 501 (“Exemptions, Standard Deduction, and Filing Information”)  Here is the link:  http://www.irs.gov/pub/irs-pdf/p501.pdf     Specifically, read pages 3-21.  You also may need to consult with your tax preparer or tax advisor.  There are three tests that must be met for “exemptions” (page 10) and five tests for a qualifying child (pages 11-21)  There are provisions in the tax laws for many (if not most) of the actual real-life situations.  You will find a section for a child who was born alive but later died, stillborn children, foster care parents, students, and either divorced or separated parents.

There are also other tax law provisions, if you are the parent of a qualifying child:  (more…)

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The American Recovery and Reinvestment Act (ARRA) of 2009

Friday, January 21st, 2011

This post is providing factual information from the Internal Revenue Service regarding the tax benefits for individuals and businesses through the provisions of “The American Recovery and Reinvestment Act (ARRA) of 2009”.  Although the law was signed by President Obama on February 17, 2009 there are still tax benefits available for tax year 2010.  There are two major sections for this post: 1) the “Making Work Pay Credit”, and 2) the other seventeen major tax benefit areas. 

“The bill is intended to provide a stimulus to the U.S. economy in the wake of the economic downturn. The bill includes federal tax cuts, expansion of unemployment benefits and other social provisions, including domestic spending in education, health care, and infrastructure, including the energy sector.” (IRS website)

  • The “Making Work Pay Credit” (please note that this is a “refundable” tax credit) 

Many working taxpayers are eligible for the Making Work Pay Tax Credit in 2010. The credit is based on earned income and is claimed on your 2010 tax return when you file your taxes in 2011.

Here are five things the IRS wants you to know about this tax credit to ensure you receive the entire amount for which you are eligible.

  1. The Making Work Pay Credit provides a refundable tax credit of up to $400 for individuals and up to $800 for married taxpayers filing joint returns.
  2. Most workers received the benefit of the Making Work Pay Credit through larger paychecks, reflecting reduced federal income tax withholding during 2010.
  3. Taxpayers who file Form 1040 or 1040A will use Schedule M to figure the Making Work Pay Tax Credit. Completing Schedule M will help taxpayers determine whether they have already received the full credit in their paycheck or are due more money as a result of the credit.
  4. Taxpayers who file Form 1040-EZ should use the worksheet for Line 8 on the back of the 1040-EZ to figure their Making Work Pay Credit.
  5. You cannot take the credit if your modified adjusted gross income is $95,000 for individuals or $190,000 if married filing jointly or more, you can be claimed as a dependent on someone else return, you do not have a valid social security number or you are a nonresident alien.

Visit http://www.irs.gov/recovery for more information about the Making Work Pay Credit. 
  
 Links:

(more…)

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Extended Tax Laws Delay in 2010 Tax Return Filing (Update)

Thursday, January 20th, 2011

The information below is an update on the December 23, 2010 article on this website for the same subject:

IRS to Start Processing Delayed Returns on Feb. 14; Most People Unaffected and Can File Now 

 WASHINGTON — The Internal Revenue Service plans a Feb. 14 start date for processing tax returns delayed by last month’s tax law changes. The IRS reminded taxpayers affected by the delay they can begin preparing their tax returns immediately because many software providers are ready now to accept these returns.

Beginning Feb. 14, the IRS will start processing both paper and e-filed returns claiming itemized deductions on Schedule A, the higher education tuition and fees deduction on Form 8917 and the educator expenses deduction. Based on filings last year, about nine million tax returns claimed any of these deductions on returns received by the IRS before Feb. 14.

People using e-file for these delayed forms can get a head start because many major software providers have announced they will accept these impacted returns immediately. The software providers will hold onto the returns and then electronically submit them after the IRS systems open on Feb. 14 for the delayed forms.

Taxpayers using commercial software can check with their providers for specific instructions. Those who use a paid tax preparer should check with their preparer, who also may be holding returns until the updates are complete.

Most other returns, including those claiming the Earned Income Tax Credit (EITC), education tax credits, child tax credit and other popular tax breaks, can be filed as normal, immediately.

The IRS needed the extra time to update its systems to accommodate the tax law changes without disrupting other operations tied to the filing season. The delay followed the Dec. 17 enactment of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which extended a number of expiring provisions including the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction.

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Tax Credits for Higher Education

Tuesday, January 18th, 2011

There are two important “tax credits” that may be available to you, if you meet all of the prerequisites.  They are the “American Opportunity Credit” and the “Lifetime Learning Credit.”  “Credits” are important tax considerations as they reduce your tax liability dollar-for-dollar, i.e. a “tax credit” of $1,000.00 will reduce your income taxes by exactly the same amount.  In contrast, a deduction that is an addition to your “itemized deductions” will increase your itemized deductions, but it will not reduce your total taxes by the same exact amount.  From page 2 of your tax return,  Total Adjusted Gross Income” less “Deductions” (Itemized or the Standard) less “Exemptions” equals “Taxable Income.”  “Taxable Income” x your marginal tax bracket rate (i.e. 10%, 15%, 25%, 28%, 33%  or 35%) will equal your “Tax.”  For example, if I am in the 25% tax bracket with the same $1,000.00 in education expenses my taxes are now only reduced by $250.00 ($1,000 x 25%). 

Finally, with the exception of part of the “American Opportunity Credit”, higher education tax credits are usually “non-refundable tax credits.”  Taxpayers with no tax liability (before the tax credit) and a $1,000.00 higher education tax credit will receive no tax refund since this is a “non refundable tax credit.”  If the same $1,000.00 tax credit was  “refundable” (which is the case for the Earned Income Tax Credit, the Child and Dependent Care Credit, the Child Tax Credit, the Retirement Savings Contributions Credit, and the Health Coverage Tax Credit) the taxpayers would receive a $1,000.00 income tax refund.

Important facts to note:

1.  Unless it is extended by Congress, 2010 is the last year to use the “American Opportunity Credit”;

2.  The credit may be claimed by either the parents or the student, but not both;

3.  Only one of the two credits may be claimed in a tax return year;

4.  The maximum American Opportunity Credit is limited to $2,500.00/year while the maximum Lifetime Learning Credit is $2,000.00/year;

5.  40% of the American Opportunity Credit is “refundable” .

Addiitonal information from the IRS for these two education expense credits follows: (more…)

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Should I Continue To Use Tax Software or Should I Contact A CPA????

Thursday, January 13th, 2011

Are you now in this situation?  I’ve been using   ______________  (fill in the name of your tax software) for several years and I am  considering engaging a CPA to prepare my tax returns each year.   Why should I engage the services of a CPA?  What facts should I consider in making this decision?

 □       Education – CPAs are required to complete a rigorous academic program before becoming qualified to sit for the CPA exam.  Most states now have a 150 semester hour requirement.  Therefore, your CPA probably has at least a Master’s degree.

 □       Certification – after completing the academic program all CPAs must successfully pass all four parts of a very demanding 20-hour professional exam.  This exam has been described as being on par with, or even tougher,  than the attorneys state bar exam.  After the completion of the exam the CPA candidate must petition the state board of public accountancy for certification.  The certification process includes a thorough criminal background investigation and a detailed review of all of the candidate’s academic and professional qualifications.  Most states require that the candidate have at least two years of experience in actual practice, one year of which can be satisfied if the candidate has a Master’s degree.

 □       Regulation – after being licensed to practice by the state board the CPA is required to continuously maintain the highest standards of professional ethics.  The academic requirements never end.  Every CPA is required to complete at least 120 hours of Continuing Professional Education (CPE) every three years and must be recertified by the state board of accounting every 1-2 years, depending on the state.  Additionally, certain CPAs who perform the attest function are required to have their practice operations reviewed by another CPA firm (Peer Review) every three years.  The results are sent to the state board of accounting.  If your CPA is a tax preparer he/she is also regulated and monitored by the Internal Revenue Service plus the state and local taxing authorities. Effective in October 2010, CPAs now are required to obtain and annually renew their Prepare Tax Identification Number (PTIN).  This number must appear on all of the tax returns that they prepare.

 □       Experience – your CPA will have spent years in developing and acquiring a wealth of technical knowledge to continuously ensure that the depth and breadth of his knowledge exceeds the demands of his/her clients. The demands of public practice are so demanding that many will specialize in the services that they offer (i.e. tax, audit, management consulting) just as their colleagues in medicine and the law have done.

 Your CPA will be prepared to review all of your financial records and files to determine the requirements for compliance with the appropriate tax laws, plus where opportunities exist to minimize your tax liability.  In a complex situation,  tax research will be required by the CPA  to determine the requirements that must be fulfilled prior to taking a specific tax position on your behalf. This includes knowing the required written documentation for each deduction or expense. He/she understands all of your rights under the law and will also be prepared to assist or represent you if any of your tax returns are audited. 

 Your CPA is also an “advisor” who can assist you in the management of your financial affairs, tax and estate planning, some legal assistance, starting a new business, improving the financial performance of an existing business, etc.

Finally, I use the following criteria when discussing this situation with any new client:

1.  If you understand all of the relevant tax law provisions and requirements for preparing your tax return using tax software, you should continue to prepare your own tax return;

2.  If there are unique requirements for the past tax year and you just need to have a few questions answered, contact me and I’ll answer your questions.  There are usually no charges unless more than 2-3 hours of my time will be required;

3.  For whatever the reasons, if I can assist you in the preparation of your tax returns each year I’d like to discuss the opportunity with you.  My goal every year is to save you more in income taxes, based upon my knowledge of the tax laws, than the fee that I am charging you for the preparation of your tax return.

Additional information on this subject from the Internal Revenue Service is presented below: (more…)

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