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.

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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.

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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.

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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.

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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.

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