Archive for March, 2011

previous post: Gifts To Others, Gift Taxes, & Gift Tax Returns
next post: Are You Meeting Your Quarterly Tax Deposit Obligations?

Easy Tax Return Errors To Avoid

Wednesday, March 30th, 2011

When preparing your tax returns always assume that the IRS already has the information that was reported to them by third parties, i.e. your banks, mortgage companies, employers, investment firms, retirement account trustees, those for whom you provided services, those who paid you rent, royalties, etc.  Therefore, you should ensure that all of the information in your tax return reflects exactly the same information which is in these reports.  If you find an error, contact the report issuer and inform them of the error then request that you be provided with a “Corrected” report which will also be sent to the IRS.

Wait for the “Corrected” report to be received.  In the interim, if necessary, file a Form 4868 (“Application for an Automatic Extension of Time to File U.S. Individual Income Tax Return”).  Otherwise, if you file your tax return prematurely you’ll have to file an amended tax return for that tax year (1040-X) to correct the error.

Other common errors include: 

  • Did you consider filing your tax return electronically?  By electronically filing your tax return, many common errors may be avoided or corrected by the computer software. Depending on your income, you may even qualify to e-file for free by using IRS Free File. More information is available on the website.
  • Did you clearly print your name, social security number, and address, including zip code directly on your return? Note that if you are married but filing a separate return, do not include your spouse’s name.
  • Did you enter the names and social security numbers for yourself, your spouse, your dependents, and qualifying children for earned income credit or child tax credit, exactly as they appear on the social security cards? If there have been any name changes be sure to contact the Social Security Administration at www.ssa.gov or call at 800–772–1213.
  • Did you check the appropriate exemption boxes and enter the names and social security numbers exactly as they appear on the social security cards, for all of the dependents claimed? Is the total number of exemptions entered?
  • Did you enter income, deductions, and credits on the correct lines and are the totals correct?
  • If you show a negative amount on your return, did you put brackets around it?
  • If you are taking the standard deduction and checked any box indicating either you or your spouse were age 65 or older or blind, did you find the correct standard deduction using the worksheet in the Form 1040 Instructions or the Form 1040A Instructions?
  • Did you figure the tax correctly? If you used the tax tables, did you use the correct column for your filing status?
  • Do you have a Form W-2 (PDF) from each of your employers and did you attach Copy B of each to your return? File only one return, even if you have more than one job. Combine the wages and withholdings from all Form W-2’s, on one return.
  • Did you attach each Form 1099-R (PDF) that shows federal tax was withheld (Block #4)?
  • Did you attach all other necessary schedules and forms, in ascending order, using the sequence number order shown in the upper right–hand corner?
  • Did you use the correct mailing address from your tax form instructions?
  • Did you use a postage stamp on the envelope?
  • If you owe tax, did you enclose a check or money order made payable to the “United States Treasury” with the return and include your name, address, social security number, daytime telephone number, tax form, and tax year on the payment? For additional information, refer to Topic 158 , Ensuring Proper Credit of Payments.
  • Did you make a copy of the signed return and all schedules for your records?    (more…)

Tags: ,
Posted in Business Owners, Individual Taxpayers | Comments Off on Easy Tax Return Errors To Avoid

Gifts To Others, Gift Taxes, & Gift Tax Returns

Tuesday, March 29th, 2011

The Federal tax laws permit the tax-free giving of “gifts” to others throughout the year, subject to the annual exclusion amount limitations.  “Gifts” in this article are not the same as “charitable contributions” or donations.  For example, you can not deduct amounts which are given to politcal organizations as a “charitable donation” but a “gift”  to that organization can be made.

The 2010 annual gift exclusion limitation was $13,000.00 per recipient.  A husband and wife will have a $26,000.00 annual limitation, but read the requirements for “gift splitting” below.   It is also important to understand when a United States Gift (and Generation-Skipping Transfer) Tax Return (Federal Form 709) is required to be filed.   Unless the U.S. Congress changes the annual limits, the same annual exclusion amounts are applicable for 2011.    The IRS website provides information for Frequently Asked Questions (FAQs) on this subject.  (more…)

Tags: , ,
Posted in Individual Taxpayers | Comments Off on Gifts To Others, Gift Taxes, & Gift Tax Returns

2010 IRA Contributions

Monday, March 28th, 2011

There is still time remaining if you wish to make a contribution to your Individual Retirement Arrangements (IRA) account.  However, these contributions are subject to annual limitations and other requirements.  See IRS Publication 590.  Additionally, be sure to inform your financial advisor that your contribution is for 2010 and not 2011.  This important for the appropriate reporting of your contributions.  (more…)

Tags: ,
Posted in Individual Taxpayers, Investment & Retirement | Comments Off on 2010 IRA Contributions

Injured (not Innocent) Spouse Relief

Saturday, March 26th, 2011

This article relates to” injured spouse relief” and not “innocent spouse relief.”

You are an injured spouse if your share of the overpayment shown on your joint tax return was, or is expected to be, applied (offset) against your spouse’s legally enforceable past-due federal taxes, state income taxes, child or spousal support payments, or a federal nontax debt, such as a student loan. If you are an injured spouse, you may be entitled to receive a refund of your share of the overpayment. For more information, see Form 8379, Injured Spouse Allocation link at the end of this article.

Innocent Spouse – When you file a joint income tax return, the law makes both you and your spouse responsible for the entire tax liability. This is called joint and several liability. Joint and several liability applies not only to the tax liability you show on the return but also to any additional tax liability the IRS determines to be due, even if the additional tax is due to income, deductions, or credits of your spouse or former spouse. You remain jointly and severally liable for the taxes, and the IRS still can collect from you, even if you later divorce and the divorce decree states that your former spouse will be solely responsible for the tax.

In some cases, a spouse (or former spouse) will be relieved of the tax, interest, and penalties on a joint tax return. Three types of relief are available to married persons who filed joint returns.

  1. Innocent spouse relief.
  2. Separation of liability relief.
  3. Equitable relief.

 Married persons who did not file joint returns, but who live in community property states, may also qualify for relief. 

Insofar as the provisions for “injured spouse relief” are concerned, it is generally advantageous for married taxpayers to file a joint income tax return.  The “Married Filing Jointly” tax structure provides the lowest income taxes.  However, under certain circumstances, there are legal and financial risks associated with filing these returns, including (but not limited to) the following:

  • You may have received poor or incorrect advice from your spouse (husband or wife as appropriate) who actually completed and filed the return, with or without your knowledge;
  • You received the wrong information or advice from a friend, tax preparer, CPA, or attorney which you relied on to prepare your tax return.  Regardless of the information source, you are still held 100% accountable for all of the data and information in your tax return;
  •  You did not read and fully understand all of the information in your tax return before it was filed.  There were one or more errors in the return, and you have not yet filed an amended tax return for that tax year;
  • The person who actually prepared and filed the return intentionally committed a fraud against the U.S. Government or other illegal act (i.e. claimed the First Time Homebuyer tax credit when you did not meet all of the qualifications). (more…)

Tags: ,
Posted in Business Owners, Individual Taxpayers | Comments Off on Injured (not Innocent) Spouse Relief

Charitable Contributions

Tuesday, March 22nd, 2011

The comments in this article are related to individual taxpayers.  In addition to requirements set forth in Publication 526 (“Charitable Contributions”) businesses  should also review the provisions of Publication 542 (“Corporations”), including page 13 of the latter  publication for annual contribution limitations.

The first step in this process should include a review of Publication 78 (“Approved Charities”) and Publication 526 to determine if the organization to which you have donated, or plan to donate to, is an approved “charitable organization.”   Be sure to keep accurate records and supporting documentation as required by the regulations.

Additonal considerations and requirements are provided in the publications for:

  • “Acceptable” organizations and “unacceptable” organizations (Table 1, page 2 of Publication 526).
  • Appreciated capital assets (stocks, bonds, jewelry, stamps, coins, art etc)  tax savings can be achieved if you meet the requirements and donate these assets using their fair market value.  You do not have to first sell the asset, pay the capital gains tax, and then donate the cash.  Be sure to review the “Unrelated Use” requirement on page 12.
  • There are additional special rules and requirements if you donate a vehicle, boat or airplane (pages 8-11).
  • The value of your time, regardless of the amount and value, is not deductible.
  • There are limitations on the total amount of all charitable donations that can be made each year.  It is based on your “Adjusted Gross Income” and the type of donation.  The percentage limits are 20%, 30%, and 50%  See pages 13-15.
  • If you have exceeded the annual limitation for any tax year, the unused amounts can be carried forward in your tax return for the next five future years, if necessary.

I have observed a recurring situation for some clients in which they can not take a tax deduction for a contribution due to the tax laws.  This situation occurs when someone at work, church etc is in need of assistance.  Friends and family step up to the plate and come to the rescue.  However, the recipient is not an approved charitable organization and the donations can not be claimed.  Solution – donate to an approved charitable organization in that person’s name and have the charitable organization deliver the donations.  (more…)

Tags: ,
Posted in Business Owners, Individual Taxpayers | Comments Off on Charitable Contributions

previous post: Are Your Home Office Expenses A Tax Deduction?
next post: Injured (not Innocent) Spouse Relief