Can You Benefit From the Expanded Adoption Credit?

You may be able to take a tax credit in 2011 of up to $13,360 ($13,170 in 2010) for qualified expenses paid to adopt an eligible child. The Affordable Care Act increased the amount of the credit and made it refundable, which means it can increase the amount of your refund. Here are several things you to know about the expanded adoption credit.

1. For tax years 2010 and 2011, the credit is refundable, meaning that you can get it even if you owe no tax.

2. If you claimed the adoption credit in a prior year and have a carryover to 2010, that carryover is also fully refundable in 2010.

3. When claiming the credit, it cannot be e-filed and documents supporting the adoption must be attached. Documents may include a final adoption decree, placement agreement from an authorized agency, court documents and the state’s determination for special needs children.

4. Qualified adoption expenses are reasonable and necessary expenses directly related to the legal adoption of the child. These expenses may include adoption fees, court costs, attorney fees and travel expenses.

5. An eligible child must be under 18 years old, or physically or mentally incapable of caring for himself or herself.

6. If your modified adjusted gross income is more than $182,520, your credit is reduced. If your modified AGI is $222,520 or more, you cannot take the credit.

7. Without Congressional action, this credit will no longer be available after 2011.

If you have questions about this credit and how it might fit into your adoption plans, please give this office a call.

Read More

Tax Tips for Recently Married Taxpayers

If you, like many others during the summer months, have gotten married or plan to get married in the near future, here are some post-marriage tips to help you avoid stress at tax time.

1. Notify the Social Security Administration - Report any name change to the Social Security Administration so that your name and SSN will match when filing your next tax return. Informing the SSA of a name change is quite simple. File a Form SS-5, Application for a Social Security card at your local SSA office. The form is available on SSA’s Web site, by calling 800-772-1213, or at local offices. 
2. Notify the IRS - If you have a new address, you should notify the IRS by sending Form 8822, Change of Address. 
3. Notify the U.S. Postal Service - You should also notify the U.S. Postal Service when you move so that any IRS or state correspondence can be forwarded. 
4. Notify Your Employer - Report any name and address changes to your employer(s) to ensure receipt of a correct Form W-2, Wage and Tax Statement after the end of the year. 
5. Check Your Withholding and Estimated Tax Payments - If both you and your new spouse work, your combined income may place you in a higher tax bracket and you may have an unpleasant surprise come tax season next year. On the other hand, if only one works, filing jointly with your new spouse can provide a significant tax benefit, enabling you to reduce your withholding or estimated payments. Either way, it may be appropriate to estimate your income tax for 2011 and make any required adjustments as soon as possible.

If you need assistance projecting your joint 2011 taxes and adjusting your withholding or other prepayments, please give our office a call.

Read More

Tax Tips for Students with a Summer Job

Many students hold a summer job during their time off from school. Here are some tax issues that should be considered when working a summer job.

Completing Form W-4 When Starting a New Job – This form is used by employers to determine the amount of tax that will be withheld from your paycheck. Taxpayers with multiple summer jobs will want to make sure that all of their employers are withholding an adequate amount of taxes to cover their total income tax liability. Generally, a student who is claimed as a dependent of another with income only from summer and part-time employment can earn as much as $5,800 (the standard deduction amount) without being liable for income tax. However, if the student has other investment income, the tax determination becomes more complicated. This is because he or she is a dependent of another and subject to special rules.

Tips – For example, if the student works as a waiter or a camp counselor, he or she may receive tips as part of his or her summer income. All tip income received is taxable income and is therefore subject to federal income tax. Employees are required to report tips of $20 or more received while working with any one employer in any given month. The reporting should be made in writing to the employer by the tenth day of the month following the receipt of tips. The employer withholds FICA (Social Security and health insurance) and income taxes on these reported tips and then includes the tips and wages on the employee’s W-2. The IRS provides Form 4070A for keeping track of tips.

Cash Jobs – Many students do odd jobs over the summer and are paid in cash. Just because it is paid in cash does not mean that it is tax-free. Unfortunately, the income is taxable and may be subject to self-employment taxes (see below). These earnings include income from odd jobs like babysitting and lawn mowing.

Self-Employment Tax – When an individual works for an employer, the employer withholds FICA (Social Security taxes) and Medicare taxes from his or her pay, matches the amount dollar for dollar, and remits the combined amount to the government. When someone is self-employed, he or she is required to pay the combined employee and employer amounts on their own (referred to as self-employment tax) if the net earnings is $400 or more. This tax pays for his or her benefits under the Social Security system. Even if he or she is not liable for income tax, this 13.3% tax may apply.

Classification as an Independent Contractor – It does not happen frequently, but some employers will try to avoid paying certain payroll taxes by treating the student employee as an independent contractor. You can tell this is the case if the student receives his or her pay without any income tax or social security withholding, leaving the student holding the bag to pay the 13.3% self-employment tax and income tax liability when he or she file returns the next year after receiving a 1099-MISC instead of a W-2. If this is the case, be prepared and save some of the income to pay the taxes.

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

Newspaper Carrier or Distributor – Special rules apply to services performed as a newspaper carrier or distributor. An individual is a direct seller and treated as self-employed for federal tax purposes if he or she meets the following conditions:

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

Newspaper Carriers or Distributors Under Age 18 – Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.

Please call our office if you are the student or parent and have additional questions.

Read More

Tax Perks for the Business Traveler

Food and lodging expenses may be deducted when you are away from home for business purposes. Like everything in the tax law, to be tax deductible there are certain rules to follow and the individuals that know the rules and keep good records get the most out of these deductions.

The IRS requires that lodging expenses (and other expenses of $75 or more) be substantiated by records or other evidence. Acceptable records include diaries, logs, receipts, paid bills and expense reports. The records should disclose the amount, date, place and essential character of the expense. The following are some tips to help you stay on top of the required documentation:

• Keep good records of travel expenses.
• Maintain the records on a contemporaneous basis, i.e., make diary and log notations close to the time the expense is incurred.
• Document the business purpose and the expected business benefit.
• Retain your travel itinerary to document the business activity while away.

Travel expenses are deductible only if the individual is away from his or her "tax home"—usually considered to be one’s regular place of business—for more than one business day.

Meal expenses are deductible only if the trip is overnight or long enough that there is a need to stop for sleep or rest to properly perform one’s duties. The amount of the meal expenses must be substantiated, but instead of keeping records of the actual cost of meal expenses, a "standard meal allowance" ranging from $46 to $71 can generally be used, depending on where and when the individual travels. Generally, the deduction for unreimbursed business meals is limited to 50% of the cost that would otherwise be deductible.

Lodging expenses must be substantiated with actual receipts and are 100% deductible. Meals included in lodging expenses, such as room service or dining costs charged to a hotel room, must be separately identified, since meals have the 50% limitation as noted above.

In addition to the travel, lodging and meal expenses discussed above, the incidental costs incurred on a deductible trip such as laundry, dry cleaning, phone calls, baggage handling, and so on are fully deductible.

Employees must deduct their unreimbursed travel expenses as a miscellaneous itemized deduction which is subject to a 2% of AGI floor. They are not deductible at all to the extent the employee’s income is subject to the alternative minimum tax (AMT). That is why it is to an employee’s advantage to utilize an employer’s “accountable” reimbursement plan (under which qualified reimbursements are not taxable and not reported in the employee’s W-2 wages) rather than deducting the expenses on their tax return. On the other hand, these expenses are fully deductible as a business expense for a self-employed individual.

Taking the Spouse Along? Generally, deductions are denied for travel expenses paid or incurred for a spouse, dependent or employee of the taxpayer who accompany the taxpayer on the business trip unless the:

1. Spouse or dependent is an employee of the taxpayer, and
2. Travel of the spouse, dependent or employee is for a bona fide business purpose, and 
3. Expenses would otherwise be deductible by the spouse, dependent or employee.

Strategy - The law allows a deduction for the single rate for lodging and frequently there is no rate difference between one or two occupants. Thus, the entire lodging expense for an accompanying spouse will virtually be deductible. When traveling by car, the law does not require any allocation because the spouse is also traveling in the vehicle. Thus, if you are traveling by vehicle, the entire cost of the transportation would be deductible. That would generally also apply to taxis at the destination. The only substantial cost that is not allowed is the cost of the spouse’s meals, which, even if they were deductible, would be reduced by the 50% rule. If traveling by air or rail, the cost of the spouse’s tickets also would not be deductible.

Please give our office a call if you have questions related to business travel expenses.

Read More

Do You Have a Financial Interest or Signature with a Foreign Financial Account? Better Read This! June 30th is a Critical Date.

Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts (including bank, securities, or other types of financial accounts in a foreign country), if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship to the U.S. government each calendar year.

The government uses this reporting mechanism as a means to uncover hidden foreign accounts and ensure that investment income earned in foreign countries by U.S. taxpayers is included on their U.S. tax returns. The Treasury Department has placed a new emphasis on foreign accounts, and taxpayers with a financial connection to a foreign country should determine whether they have a reporting requirement.

Reporting is accomplished by filing a “Report of Foreign Bank and Financial Accounts”—more commonly referred to as the “FBAR”—which is due on or before June 30 of the succeeding year. Thus the FBAR filing for the 2010 year is due on June 30, 2011. This report is filed separately from the taxpayer’s income tax return, and no extensions of time are available for filing this form. In addition, taxpayers generally are required to answer “yes” or “no” to questions related to foreign bank and financial accounts on their tax returns.

Penalties for failing to comply can be severe. For non-willful violations, civil penalties up to $10,000 may be imposed; the penalty for willful violations is the greater of $100,000 or 50% of the account’s balance at the time of the violation. A reasonable cause exception to the penalty is available for non-willful violations but not for willful violations.

Overlooked Accounts – Many taxpayers overlook the fact that they have a reporting requirement in situations such as the following:

• Family Accounts – Recent immigrants to the U.S. may still have parents or other family members residing in the “old” country, and those relatives may have included them on an account in the foreign country. This is common practice for some ethnic groups. The taxpayer does not really consider the account his or hers, but it falls under the reporting requirement if he or she has signature or other authority over the account and the value exceeds $10,000. 
• Inherited Accounts – Accounts in a foreign country and inherited fall under the FBAR reporting requirement even if the funds are subsequently transferred to the U.S. The FBAR rules state that reporting is required if at any time during the year the foreign account exceeds $10,000.
• Business Accounts – An officer or board member may have signature authority over a business account held in a foreign country and overlook the need to meet the FBAR reporting requirements. 

In addition to including any reportable foreign income on one’s tax return, a taxpayer must ensure that the foreign account questions are completed correctly on the tax return and that the FBAR is filed when required.

If you should have filed the FBAR form in prior years but failed to do so, the IRS has a voluntary disclosure initiative in effect through August 31 of this year. This initiative provides for reduced penalties for those who come forward and pay back taxes and penalties on unreported foreign income for prior years.

If you have questions regarding this reporting requirement, please contact our office.

Read More

Surprised By the Kiddie Tax??

To prevent parents from placing investments in their children’s names to take advantage of the child’s lower tax rate, Congress created, several years back, what is referred to as the “Kiddie Tax”. Under the Kiddie Tax, a child’s investment income in excess of $1,900 is taxed at the parent’s tax rate rather than the child’s. These rules do not apply to married children who file a joint return with their spouse or self-supporting children.

Depending upon your circumstances, this can be either a tax return preparation nuisance or a penalty tax – or maybe both. Many insightful parents seek tax-advantaged ways to put money aside for their children’s education, first home, etc. They should not be deterred by the Kiddie tax, as there are legal ways to minimize or eliminate it. This is generally accomplished by making investments that produce tax-free income or that defer income until a year the child is no longer subject to the Kiddie Tax. If, at that time, the child is in school or just starting in the work force with little or no other income, the deferred income could then be realized with little or no income tax.

The following are examples of investments that either defer income or generate tax-free income. However, you must also consider that some of these might have a lower rate of return than a taxable investment and may not always be appropriate in the current economic climate:

• U.S. savings bonds – Interest can be deferred until the bonds are cashed.
• Municipal bonds – Generally produce tax-free interest income for Federal taxes. Most states with a state income tax also permit tax-free treatment of interest from bonds of that state or local governments within that state.
• Growth stocks – Stocks that focus more on capital appreciation than current income. The child could wait to sell them until he or she is no longer subject to the Kiddie tax.
• Mutual funds – Mutual funds that focus on growth stocks or municipal bonds. Although they might throw off some taxable income, their primary goal is capital appreciation or tax-free income.
• Unimproved real estate – That provides appreciation without current income.

If the family has a business, that family business could employ the child. The child’s earned income is not subject to the Kiddie tax rules and will generate a deduction for the family business (assuming the wages are reasonable for work actually performed). The child’s earned income can be offset by the standard deduction for a dependent, and the excess income will be taxed at the child’s rate (not the parent’s). In addition, the child would also qualify for a Traditional or Roth IRA, which provides additional income shelter.

If you have questions regarding the Kiddie Tax, please give our office a call.

Read More

Can You Write Off a Bad Debt?

Most small businesses have receivables that cannot be collected. These receivables can be from the sale of products, providing services to customers, or a combination of the two.

Whether or not a bad debt deduction will apply generally depends upon which accounting method is used (either the cash or accrual method). Why does this make a difference? Let’s look at what happens under both methods of accounting.

• Accrual – If the accrual method is used, all of your billings must be treated as income whether or not they have been collected. This means that the taxable income already includes the income from your deadbeat customers. Therefore, these items are considered a bad debt when those receivables become uncollectible and can be deducted. If the accrual method of accounting is used, bad debts are deductible. 
• Cash – On the other hand, if the cash method of accounting is used, income is not reported until it is received (unlike the accrual method). Since the income was never reported in the first place, a deduction cannot be taken if payment was never made for the goods or services that were provided. However, if you made a loan to a customer or supplier and there is a business reason for the loan, you may have a business bad debt.

Proof of Worthlessness – Proving a debt (or receivable) is worthless requires the taxpayer or business to show that the debt has become worthless and that reasonable steps were taken to collect the debt. 

Non-Business Bad Debts – Some bad debts may actually be personal debts, such as personal loans to individuals. In those cases, the bad debt is not deducted as a business expense but is treated as a short-term capital loss on Schedule D subject to the $3,000 annual loss limit.

If you still have questions, please give our office a call for additional information. 

Read More

100 Percent Write-Off for Qualified Leasehold Improvements

In an effort to get the economy back on the rails again, the 2010 Tax Relief Act permits businesses to claim a 100% depreciation deduction (100% bonus depreciation allowance) in the year that qualifying assets are placed in service. Qualified leasehold improvements clearly are eligible for this special 100% write-off.

Bonus depreciation basics - In general, a leasehold improvement qualifies for the 100% bonus depreciation allowance if it is acquired and placed in service after Sept. 8, 2010 and before Jan. 1, 2012, and the original use of the improvement commences with the taxpayer.

Qualified leasehold improvement property - Generally, qualified leasehold improvement property includes interior improvements to a building which is nonresidential real property if:

(1) The improvement is real property;

(2) The improvement is made to leased property. A lease for this purpose is defined as any grant of a right to use property, either by the lessee, sublessee or lessor of the building portion;

(3) The leased portion of the building is occupied exclusively by the lessee (or sublessee); and

(4) The improvement is placed in service more than 3 years after the date the building was first placed in service.

The following expenditures, however, do not qualify: amounts paid for the enlargement of a building, a structural component that benefits a common area, an elevator or escalator, or the internal structural framework of the building.

Whether you have already made leasehold improvements or are contemplating in doing so, and have questions on how this special write-off can fit into your business planning for 2011, please give this office a call.

Read More

Read This Before Tossing Old Tax Records

Now that your taxes have been completed for 2010, you are probably wondering what old records can be discarded. If you are like most taxpayers, you have records from years ago that you are afraid to throw away. It would be helpful to understand why the records needed to be kept in the first place.

Generally, we keep “tax” records for two basic reasons: (1) in case the IRS or a state agency decides to question the information reported on our tax returns, and (2) to keep track of the tax basis of our capital assets so that the tax liability can be minimized when we actually dispose of them.

With certain exceptions, the statute for assessing additional tax is three years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal. In addition to lengthened state statutes clouding the recordkeeping issue, the federal three-year assessment period is extended to six years if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return. And, of course, the statutes don’t begin running until a return has been filed. There is no limit where a taxpayer files a false or fraudulent return in order to evade tax.

If an exception does not apply to you, for federal purposes, most of your tax records that are more than three years old can probably be discarded; add a year or so to that if you live in a state with a longer statute.

Examples - Sue filed her 2010 tax return before the due date of April 18, 2011. She will be able to dispose of most of her records safely after April 15, 2014. On the other hand, Don files his 2010 return on June 2, 2011. He needs to keep his records at least until June 2, 2014. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than three years. Note: If a due date falls on a Saturday, Sunday or holiday, the due date becomes the next business day.

The big problem! The problem with the carte blanche discarding of records for a particular year because the statute of limitations has expired is that many taxpayers combine their normal tax records and the records needed to substantiate the basis of capital assets. They need to be separated and the basis records should not be discarded before the statute expires for the year in which the asset is disposed. Thus, it makes more sense to keep those records separated by asset. The following are examples of records that fall into that category:

• Stock acquisition data – If you own stock in a corporation, keep the purchase records for at least four years after the year the stock is sold. This data will be needed in order to prove the amount of profit (or loss) you had on the sale.
• Stock and mutual fund statements – Where you reinvest dividends. Many taxpayers use the dividends that they receive from a stock or mutual fund to buy more shares of the same stock or fund. The reinvested amounts add to the basis in the property and reduce gain when it is finally sold. Keep statements at least four years after the final sale.
• Tangible property purchase and improvement records – Keep records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least four years after the underlying property is sold.

For example, when the large $250,000 and $500,000 home exclusion was passed into law several years back, homeowners became lax in maintaining home improvement records thinking that the large exclusions would cover any potential appreciation in the home’s value. Now that the exclusion may not always be enough, records of home improvements are vital. Records can be important, so please use caution when discarding them.

Have questions about whether or not to retain certain records? Give this office a call first; it is better to make sure before discarding something that might be needed down the road.

Read More

Is Your Credit Rating Correct?

Why do you care? Well for starters, people with a better credit rating enjoy significantly lower interest rates that can add up to thousands of dollars less in interest payments over the term of the loan. For example, a fixed 30-year mortgage payment varies with respect to credit score and the interest rates corresponding to the credit score. Having a score that is two hundred points higher can offer a savings of $448 a month for the same $200,000 house loan. Good credit ratings also provide for quicker loan approvals, fairer loan terms, and more credit.

Although there are various credit ratings or scores, the FICO® score is probably the most widely used of credit bureau scores. The FICO® ranges from 300 to 850. If you have a credit score lower than 650, your options for financing, ability to get a job, rent a home, and eligibility for a lease could be significantly affected.

Your credit rating can be affected by fraud and identity theft. So it is important to not only maintain a good credit rating but to periodically check on it for fraudulent activity and errors that can adversely affect your financial security. If someone has accessed your Social Security number, very little additional information is required to commit identity fraud in your name. Identity theft typically entails establishing false bank accounts, credit cards, utilities, and loans. Early detection is the best way to mitigate lasting damage to your credit record.

If you discover an error on a credit report, you should immediately take steps to have the error corrected. The law allows you to ask for an investigation of information in your file that you dispute as inaccurate or incomplete. There is no charge for this. Some people hire a company to investigate on their behalf, but anything a credit repair clinic can do legally, you can do for yourself at little or no cost.

According to the Fair Credit Reporting Act (FCRA):

You are entitled to a free report if a company takes “adverse action” against you, like denying your application for credit, insurance, or employment. You have to ask for your report within 60 days of receiving notice of the action. The notice will give you the name, address, and phone number of the consumer reporting company. You are also entitled to one free report a year if you are unemployed and plan to look for a job within 60 days; if you are on welfare; or if your report is inaccurate because of fraud, including identity theft.

Each of the nationwide consumer reporting companies — Equifax, Experian, and TransUnion — is required to provide you with a free copy of your credit report once every 12 months, if you ask for it. The three companies have a central website, a toll-free telephone number, and a mailing address for consumers to order the free annual credit reports that the government entitles them to. To order, click on annualcreditreport.com, call 1-877-322-8228, or complete the Annual Credit Report Request.

You may order reports from each of the three consumer reporting companies at the same time, or you can stagger your requests, ordering one from each company throughout the year from the central address. Don’t contact the three nationwide consumer reporting companies individually or at another address because you may end up paying for a report that you are entitled to get for free. In fact, each consumer reporting company may charge you up to $10.50 to purchase an additional copy of your report within a 12-month period.

It doesn’t cost anything to dispute mistakes or outdated items on your credit report. Under the FCRA, both the consumer reporting company and the information provider (that is, the person, company, or organization that provides information about you to a consumer reporting company) are responsible for correcting inaccurate or incomplete information in your report. To take advantage of all your rights under the FCRA, contact the consumer reporting company and the information provider.

How to challenge an error – Although you can hire firms to do credit repair, there is nothing they can do that you cannot do yourself. Here is the simple 2-step process to challenge an error on your credit report:

STEP 1:

Tell the consumer reporting company, in writing, what information you think is inaccurate. Include copies (NOT originals) of any documents that support your position. In addition to providing your complete name and address, your letter should identify each item in your report that is being disputed; state the facts and the reasons you are disputing the information and ask that it be removed or corrected. You may want to enclose a copy of your report and circle the items in question. Send your letter by certified mail with a “return receipt requested” so you can document that the consumer reporting company received it. Keep copies of your dispute letter and enclosures.

Your letter may look something like the one below suggested by the Federal Trade Commission.

Consumer reporting companies must investigate the items you question within 30 days — unless they consider your dispute frivolous. They also must forward all the relevant data that was provided about the inaccuracy to the organization that provided the information. After the information provider receives notice of a dispute from the consumer reporting company, it is required to investigate, review the relevant information, and report the results back to the consumer reporting company. If this investigation reveals that the disputed information is inaccurate, the information provider has to notify the nationwide consumer reporting companies so they can correct it in your file.

When the investigation is complete, the consumer reporting company must give you the results in writing, too, and a free copy of your report if the dispute results in a change. If an item is changed or deleted, the consumer reporting company is not permitted to put the disputed information back in your file unless the information provider verifies that it is accurate and complete. The consumer reporting company also must send you written notice that includes the name, address, and phone number of the information provider. If you ask, the consumer reporting company must send notices of any correction to anyone who received your report in the past six months. You also can ask that a corrected copy of your report be sent to anyone who received a copy during the past two years for employment purposes.

If an investigation doesn’t resolve your dispute with the consumer reporting company, you can ask that a statement of the dispute be included in your file and in future reports. You also can ask the consumer reporting company to provide your statement to anyone who received a copy of your report in the recent past. You can expect to pay for this service.

STEP 2:

Tell the creditor or other information provider, in writing, that you dispute an item. Be sure to include copies (NOT originals) of documents that support your position. Many providers specify an address for disputes. If the provider reports the item to a consumer reporting company, it must include a notice of your dispute. And if you are correct — that is, if the information is found to be inaccurate — the information provider may not report it again.

For more detailed information, visit the FTC website Consumer Protection page. Please call this office for assistance.

Read More

Two Tax Credits to Help Pay Higher Education Costs

There are two federal tax credits available to help individuals offset the costs of higher education for themselves or their dependents. They are the American Opportunity Credit and the Lifetime Learning Credit.

To qualify for either credit, a taxpayer must pay post-secondary tuition and fees for themselves, their spouse or their dependent. The credit is claimed by the individual who claims the student as a dependent, even if someone else pays the tuition including the student. However, if the student is not claimed as a dependent of another, then the student will claim the credit.

For each student, only one of the credits can be claimed in a single tax year. For example, the American Opportunity Credit cannot be claimed to pay for part of a student’s tuition charges and then the Lifetime Learning Credit claimed for $2,000 more of the school costs.

However, if college expenses are paid for two or more students in the same year, a taxpayer can choose to take credits on a per-student, per-year basis. Thus, for example, the American Opportunity Credit can be claimed for one child and the Lifetime Learning Credit for the other.

Here are some key facts you should know about these valuable education credits:

American Opportunity Credit 

• The credit can be up to $2,500 per eligible student.
• It is available for the first four years of post-secondary education.
• Forty percent of the credit is refundable, which means that a claimant may be able to receive up to $1,000, even if they owe no taxes.
• The student must be pursuing an undergraduate degree or other recognized educational credential.
• The student must be enrolled at least half-time for at least one academic period.
• Qualified expenses include tuition and fees, course-related books, supplies and equipment.
• The full credit is generally available to eligible taxpayers who make less than $80,000 or $160,000 for married couples filing a joint return. Above those amounts, the credit quickly begins to phase out.

Lifetime Learning Credit

• The credit can be up to $2,000 per eligible student.
• It is available for all years of post-secondary education and for courses to acquire or improve job skills.
• The credit is non-refundable; thus, the maximum amount credited is limited to the amount of tax that must be paid on your return.
• The student does not need to be pursuing a degree or other recognized education credential.
• Qualified expenses include tuition and fees, course-related books, supplies and equipment.
• The full credit is generally available to eligible taxpayers who make less than $60,000 or $120,000 for married couples filing a joint return. Above those amounts, the credit quickly begins to phase out.

There is also an above-the-line tuition and fees tax deduction available, but you cannot claim the tuition and fees tax deduction in the same year the American Opportunity Tax Credit or the Lifetime Learning Credit is claimed. Choose to take either the credit or the deduction and consider which is more beneficial for you. Generally, the credits provide the greater benefit.

Please call this office if you have any questions related to education credits.

Read More

Is a Home Office Right for You?

In the current economic environment, many smaller businesses are looking for ways to cut costs. One such possible move would be to relocate from a rented office space to a home office. With today’s modern means of communications and virtual marketplace, this may be a good option for your business.

The advantages include the ability for you to deduct from your business income some home expenses, such as utilities and certain maintenance costs that are not otherwise deductible. Those expenses will include a depreciation allowance for the part of your home that is the office. A portion of your mortgage interest and real property taxes will be deducted on your business schedule rather than as itemized deductions. You will be eliminating the costs of your nondeductible commuting travel, while business travel will now generally be measured from your front door.

There are two significant downsides to a home office. First, to the extent of the depreciation taken on the home, gain when you sell it cannot be excluded under the home sale rules. Secondly, if the home office is in a separate structure, then the separate business portion does not qualify for the home gain exclusion. You should also note that the home office deduction is limited in any year that your business operates at a loss.

Generally, a self-employed individual will qualify for a home office deduction if the office is a place where the taxpayer meets with customers, patients or clients, or is used on an exclusive and regular basis for administrative or management activities of his or her trade or business, and there is no other fixed location of the business where the taxpayer conducts substantial administrative or management activities of the business. Even if a taxpayer conducts administrative activities at a fixed location outside the home, he or she is still eligible to claim a deduction as long as the administrative activities conducted at the outside location aren’t substantial. Space in the home used to store inventory for a wholesale or retail business also qualifies as business use of the home.

If you would like to learn more about how the business use of your home might affect your taxes, please give this office a call.

Read More

100 Percent Write-Off for Heavy SUVs Used Entirely for Business

The 2010 Tax Relief Act provides a limited-time 100% bonus depreciation allowance for qualified property which allows taxpayers that buy a new heavy SUV and use it entirely for business to write-off the entire purchase price in the placed-in-service year.

Heavy SUVs are vehicles with a gross vehicle weight (GVW) rating of more than 6,000 pounds which are exempt from the luxury auto dollar caps because they fall outside of the definition of a passenger auto. To deal with this “SUV tax loophole,” several years ago, Congress imposed a limit on the Sec. 179 expensing of heavy SUVs. Thus, not more than $25,000 of the cost of a heavy SUV placed in service after Oct. 22, 2004 may be expensed under Sec. 179. These rules apply, with some exceptions, to SUVs rated at 14,000 pounds GVW or less.

Under the 2010 Tax Relief Act, the bonus first-year depreciation percentage is 100% for eligible property that is generally:

1. Placed in service after Sept. 8, 2010 and before Jan. 1, 2012, and
2. Acquired by the taxpayer after Sept. 8, 2010 and before Jan. 1, 2012.

Eligible property includes heavy SUVs. Thus, a taxpayer that buys and places in service a new heavy SUV after Sept. 8, 2010 and before Jan. 1, 2012, and uses it 100% for business, may write-off its entire cost in the placed-in-service year. There is no specific rule barring this result for heavy SUVs.

Let’s say a taxpayer purchased a heavy SUV in October of 2010 for $50,000 and used the vehicle 100% for business for the rest of 2010. This taxpayer can write-off the full $50,000 cost of the vehicle on his 2010 return. If the vehicle is used less than 100% for business, the deduction is prorated. 

If you have questions related to buying a heavy SUV and how this deduction will apply to your specific tax circumstances, please give this office a call.

Read More

Is the Income Taxable or Non-Taxable?

A question that comes up frequently is whether income you received is taxable or not. Generally, most income you will receive is considered taxable, but there are situations when certain types of income are partially taxed or not taxed at all.

To help taxpayers understand the differences between taxable and non-taxable income, the Internal Revenue Service offers these common examples of items not included as taxable income:

• Adoption expense reimbursements for qualifying expenses
• Child support payments – Child support payments are reimbursements for the support of a child paid by the non-custodial parent to the custodial parent. Thus, it is not income to the recipient parent, nor is it deductible by the parent making the payments.
• Gifts, bequests and inheritances – Gift taxes are paid by the giver and inheritance taxes are paid by the estate of the deceased. Thus, the recipient is not subject to taxation on those items. There are some exceptions to that rule for income that would have been taxable to the deceased if he had received it while living, such as income from installment sale notes, earned but unpaid wages, or annuities. The most prevalent exception is when a traditional IRA is inherited. Distributions from the IRA are taxable to the beneficiary, although part of the distribution will be non-taxable if the deceased IRA owner had made contributions to the IRA that were not deductible on his or her tax returns.
• Workers' compensation benefits
• Meals and lodging for the convenience of your employer
• Compensatory damages awarded for physical injury or physical sickness
• Welfare benefits
• Cash rebates from a dealer or manufacturer – Cash rebates are considered to be a reduction in purchase price and therefore are not treated as income. If the item is used in business, be sure to reduce the depreciable basis by the rebate amount.

Some income may be taxable under certain circumstances, but not taxable in other situations. Examples of items that may or may not be included in your taxable income are:

• Life Insurance – If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds, which were paid to you because of the insured person’s death, are not taxable unless the policy was turned over to you for a price.
• Municipal Bond Interest – Generally, interest from municipal bonds is tax-free for federal purposes. However, some states only treat municipal bonds issued in their state as tax-free for state purposes.
• Social Security Income – Depending upon your total income for the year, Social Security benefits can be tax-free or partially taxable. However, no more than 85% of Social Security income is ever taxable.
• Scholarship or Fellowship Grant – If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.
• Non-Cash Income – Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income by both parties.

Generally, most other items of income—including income such as wages, salaries, tips, unemployment compensation, investment earnings and gains from the sale of assets — are fully taxable and must be included in your income unless specifically excluded by law.

Read More

Name Changes Can Complicate Filing

If you changed your name as a result of a recent marriage or divorce, you should take the necessary steps to ensure the name on your tax return matches the name registered with the Social Security Administration (SSA). A mismatch between the name shown on your tax return and the SSA records can cause problems in the processing of your return and may even delay your refund.

Here are some tips for recently married or divorced taxpayers who have a name change.

1. If you took your spouse’s last name or if both spouses hyphenate their last names, you may run into complications if you don’t notify the SSA. When newlyweds file a tax return using their new last names, IRS computers can’t match the new name with their Social Security Number (SSN).

2. If you were recently divorced and changed back to your previous last name, you’ll also need to notify the SSA of this name change.

3. Informing the SSA of a name change is easy; you will need to file a Form SS-5, Application for a Social Security Card, at your local SSA office and provide a recently-issued document as proof of your legal name change.

4. If you adopted your spouse’s children after getting married, make sure that the children have an SSN. Taxpayers must provide an SSN for each dependent claimed on a tax return. For adopted children without SSNs, the parents can apply for an Adoption Taxpayer Identification Number – or ATIN – by filing Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions, with the IRS. The ATIN is a temporary number used in place of an SSN on the tax return.

Please notify this office of any name change prior to finalizing your tax return.

Read More