Tax Planning Archives | Page 5 of 9

Child and Dependent Care Tax Credit: It’s Still Expensive to Raise a Kid

“Back in the day, we didn’t have child tax credits, we just raised them on chewin gum and knee patches.” Well, back in the day, they didn’t have athletic club teams and every kid of activity available to drain a parent’s bank account.

But, there is a little reprieve. The Child and Dependent Care Credit can help offset some of the costs you pay for the care of your child, a dependent or a spouse. Here are 10 facts the IRS wants you to know about the tax credit for child and dependent care expenses.

1. If you paid someone to care for your child, dependent or spouse last year, you may qualify for the child and dependent care credit. You claim the credit when you file your federal income tax return.

2. You can claim the Child and Dependent Care Credit for “qualifying individuals.” A qualifying individual includes your child under age 13. It also includes your spouse or dependent who lived with you for more than half the year who was physically or mentally incapable of self-care.

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

4. You, and your spouse if you file jointly, must have earned income, such as income from a job. A special rule applies for a spouse who is a student or not able to care for himself or herself.

5. Payments for care cannot go to your spouse, the parent of your qualifying person or to someone you can claim as a dependent on your return. Payments can also not go to your child who is under age 19, even if the child is not your dependent.

6. This credit can be worth up to 35 percent of your qualifying costs for care, depending upon your income. When figuring the amount of your credit, you can claim up to $3,000 of your total costs if you have one qualifying individual. If you have two or more qualifying individuals you can claim up to $6,000 of your costs.

7. If your employer provides dependent care benefits, special rules apply. See Form 2441, Child and Dependent Care Expenses for how the rules apply to you.

8. You must include the Social Security number on your tax return for each qualifying individual.

9. You must also include on your tax return the name, address and Social Security number (individuals) or Employer Identification Number (businesses) of your care provider.

10. To claim the credit, attach Form 2441 to your tax return. If you use IRS e-file to prepare and file your return, the software will do this for you.

Take every available deduction and credit you are entitled to. It can make the difference between a refund and taxes due in April. Always check with a tax professional before making any decisions.

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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the U.S. Department of the Treasury and Internal Revenue Service, we inform you that any tax advice contained in this e-mail (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (a) avoiding penalties under the Internal Revenue Code or state tax authority, or (b) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

IRS First-Time Homebuyer Credit Repayment Tool for those with Memory Lapse

“By the time you are 80 years old, you’ve learned everything….You just have to remember it.” –George Burns

Well sometimes we intentionally forget. For example, like voluntarily having to pay the IRS for a credit we took years ago. Well, one instance, the IRS is trying to helpyou remember. The IRS now has a first-time homebuyer credit look-up tool which helps taxpayers who must repay the credit.

The IRS no longer mails reminder letters to taxpayers who have to repay the First-Time Homebuyer Credit. To help taxpayers who must repay the credit, the IRS website has a user-friendly look-up tool. Here are four reminders about repaying the credit and using the tool:

1. Who needs to repay the credit? If you bought a home in 2008 and claimed the First-Time Homebuyer Credit, the credit is similar to a no-interest loan. You normally must repay the credit in 15 equal annual installments. You should have started to repay the credit with your 2010 tax return.

You are usually not required to pay back the credit for a main home you bought after 2008. However, you may have to repay the entire credit if you sold the home or stopped using it as your main home within 36 months from the date of purchase. This rule also applies to homes bought in 2008.

2. How to use the tool. You can find the First-Time Homebuyer Credit Lookup tool at IRS.gov under the ‘Tools’ menu. You will need your Social Security number, date of birth and complete address to use the tool. If you claimed the credit on a joint return, each spouse should use the tool to get their share of the account information. That’s because the law treats each spouse as having claimed half of the credit for repayment purposes.

3. What the tool does. The tool provides important account information to help you report the repayment on your tax return. It shows the original amount of the credit, annual repayment amounts, total amount paid and the remaining balance. You can print your account page to share with your tax preparer and to keep for your records.

4. How to repay the credit. To repay the First-Time Homebuyer Credit, add the amount you have to repay to any other tax you owe on your federal tax return. This could result in additional tax owed or a reduced refund. You report the repayment on line 59b on Form 1040, U.S. Individual Income Tax Return. If you are repaying the credit because the home stopped being your main home, you must attach Form 5405, Repayment of the First-Time Homebuyer Credit, to your tax return.
Sources:

First-Time Homebuyer Credit Account Look-Up Tool
Form 5405, Repayment of the First-Time Homebuyer Credit

First-Time Homebuyer Credit Information

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The IRS Offer In Compromise Tool: Make ’em a Offer They Can’t Refuse

The IRS has a new tool that you can use when you want to settle your tax bill . The tool is a questionaire that allows you to make a compromising offer. But since this tool is used on your computer, there is one problem. You would never get the chance to use this line:

“I’d hoped that we could come here and reason together. And as a reasonable man I’m willing to do whatever is necessary to find a peaceful solution to this problem.” Don Vito Corleone (Marlon Brando) from the Godfather.

This line would have worked well if you stuffed napkins in your jowls, but since you can’t use it, let’s talk taxes. Before you can use this tool you must know your income, assets, and liabilities. So, do your homework, first before entering your name in the site. You can go through the first couple of screens to see what you need.

However, if this is too much for you, you probably are better working with a tax accountant when completing the form. Misinterpreting the terms of the site can cost you money and even qualification.

However, the most important question you can ask is whyyou are in a tax situation? Sometimes it is unavoidable circumstances like illness or loss of employment. But in my experience with people’s personal finances is that it is usually lifestyle, i.e.; spending beyond your means. It is rarely how much money a person makes. It is usually how much money a person spends that drives them into financial and tax trouble.

Therefore, the real problem is not paying off your taxes, but planning within your financial means.

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Raising Kids Have Some Tax Benefits…Get Them All

Do your kids treat you like an ATM on legs? They certainly can cost you money. Well, depending on your tax situation and tax level, your kids can also put money in your pockets and you don’t have to hire them.

Here are some tips:

1. Dependents. In most cases, you can claim a child as a dependent even if your child was born anytime during the tax year. For more information, see IRS Publication 501, Exemptions, Standard Deduction and Filing Information.

2. Child Tax Credit. You may be able to claim the Child Tax Credit for each of your children that were under age 17 at the end of the year. If you do not benefit from the full amount of the credit, you may be eligible for the Additional Child Tax Credit. For more information, see the instructions for Schedule 8812, Child Tax Credit, and Publication 972, Child Tax Credit.

3. Child and Dependent Care Credit. You may be able to claim this credit if you paid someone to care for your child or children under age 13, so that you could work or look for work. See IRS Publication 503, Child and Dependent Care Expenses.

4. Earned Income Tax Credit. If you worked but earned less, you may qualify for EITC. If you have qualifying children, you may get dollars back when you file a return and claim it. Use the EITC Assistant to find out if you qualify. See Publication 596, Earned Income Tax Credit.

5. Adoption Credit. You may be able to take a tax credit for certain expenses you incurred to adopt a child. For details about this credit, see the instructions for IRS Form 8839, Qualified Adoption Expenses.

6. Higher education credits. If you paid higher education costs for yourself or another student who is an immediate family member, you may qualify for either the American Opportunity Credit or the Lifetime Learning Credit. Both credits may reduce the amount of tax you owe. If the American Opportunity Credit is more than the tax you owe, you could be eligible for a small refund. See IRS Publication 970, Tax Benefits for Education.

7. Student loan interest. You may be able to deduct interest you paid on a qualified student loan, even if you do not itemize your deductions. For more information, see IRS Publication 970, Tax Benefits for Education.

8. Self-employed health insurance deduction – If you were self-employed and paid for health insurance, you may be able to deduct premiums you paid to cover your child. It applies to children under age 27 at the end of the year, even if not your dependent. See IRS.gov/aca for information on the Affordable Care Act.

Always check with your tax advisor because these rules may change from year to year, and your situation may be special.

Source: www.irs.gov

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IRS Small Business Tax Calendar

Running a small business is cumbersome. The last thing a business owner needs is to keep a tax calendar. However, to not know some of the small business tax deadlines can be costly. Check out the IRS site https://www.tax.gov/calendar/ for a complete calendar by month for all of your tax needs. For example:

Thu	3	Deposit payroll tax for payments on Dec 26-28 if the semiweekly deposit rule applies.
Fri	4	Deposit payroll tax for payments on Dec 29 – Jan 1 if the semiweekly deposit rule applies.
Wed	9	Deposit payroll tax for payments on Jan 2-4 if the semiweekly deposit rule applies.
Thu	10	Employers: Employees are required to report to you tips of $20 or more earned during Dec 2012
Fri	11	Deposit payroll tax for payments on Jan 5-8 if the semiweekly deposit rule applies.
Tue	15	Individuals: Pay the final installment of your 2012 estimated tax. Use Form 1040-ES.
Tue	15	Farmers and fishermen: Pay your estimated tax for 2012. Use Form 1040-ES.
Tue	15	Employers: Deposit payroll tax for Dec 2012 if the monthly deposit rule applies.
Wed	16	Deposit payroll tax for payments on Jan 9-11 if the semiweekly deposit rule applies.
Fri	18	Deposit payroll tax for payments on Jan 12-15 if the semiweekly deposit rule applies.
Thu	24	Deposit payroll tax for payments on Jan 16-18 if the semiweekly deposit rule applies.
Fri	25	Deposit payroll tax for payments on Jan 19-22 if the semiweekly deposit rule applies.
Wed	30	Deposit payroll tax for payments on Jan 23-25 if the semiweekly deposit rule applies.
Thu	31	File Form 720 for the fourth quarter of 2012.
Thu	31	Furnish Forms 1098, 1099 and W-2G to recipients for certain payments during 2012. Furnish Form W-2 to employees who worked for you during 2012.
Thu	31	File Form 730 and pay the tax on wagers accepted during Dec 2012.
Thu	31	Deposit any FUTA tax owed through Dec 2012.
Thu	31	File Form 2290 and pay the tax for vehicles first used in Dec 2012.
Thu	31	Files Forms 940, 941, 943, 944 and/or 945 if you did not deposit all taxes when due.
Thu	31	File your tax return if you did not pay your last installment of esimated tax by January 15th

Check the appropriate boxes on the site to taylor it to your needs. Whether a small business or individual, always check with your tax advisor if unsure about any tax issue.

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Home Office Tax Deduction Simplification: Sort of…

I cook at home. A few times on my birthday my wife would present me with a cooking class at Laguna Beach, California. At one of these events, I recall the chef asking us to separate the whites from the yolks of several eggs. A couple of people cracked the eggs in half and tossed the yolk back and forth until all of the whites had fallen into the bowl leaving the yolks in the shells. This of course took a couple of minutes for each egg.

After watching, the chef said, “No, I’ll show you how to do this quickly.” He then cracked an egg in his hand letting the whites run through his fingers into a bowl for about five seconds and threw the yolk into another bowl. “That’s how it is done,” he scowled. “Simplified!”

If you were ever audited for taking a home in office deduction, you my have found some broken shells in your deduction. I recall an audit of a screenwriter. The auditor challenged me on the details of the deduction. I told her the screen writer wrote a successful Disney cartoon from that office. That auditor said her kids loved the movie, and allowed the deduction.

If you want to simplify your home office deduction, look at this safe harbor from the IRS web site:

The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and record keeping burden on small businesses by an estimated 1.6 million hours annually.

“This is a common-sense rule to provide taxpayers an easier way to calculate and claim the home office deduction,” said Acting IRS Commissioner Steven T. Miller. “The IRS continues to look for similar ways to combat complexity and encourages people to look at this option as they consider tax planning in 2013.”

The new option provides eligible taxpayers an easier path to claiming the home office deduction. Currently, they are generally required to fill out a 43-line form (Form 8829) often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions. Taxpayers claiming the optional deduction will complete a significantly simplified form.

Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.

Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible.

Current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option.

The new simplified option is available starting with the 2013 return most taxpayers file early in 2014.

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Penny-wise and $20 Million Foolish in Charitable Tax Donations

Did you miss a tax deduction because you did not substantiate it correctly? Don’t feel bad, Joseph Mohamed lost a $20 million tax deduction for real estate that he donated to charities. You see, Joseph wanted to save a few bucks by preparing his own tax return, instead of giving it to a CPA. An important part of the return required Joseph to file a form for any property above $5,000. This form was to be signed by a certified independent appraiser.

Joseph not only did not sign the form, but decided to save even more money by appraising the property himself since he was a certified real estate appraiser. The overall savings of not using a CPA and an independent appraiser? Maybe about $2,000. The overall cost of not using a CPA and an independent appraiser? $20 million.

The IRS has various rules in donating non-cash items to a charity. These rule change whether the property is below $500, and above $5,000. You have to follow the rules exactly, or risk losing your deductions.

But just because you use an appraiser for $5,000 + property doesn’t mean that your appraisal would be accepted by the IRS. They may challenge the appraiser and bring in their own appraiser. I worked on a client years ago who seemed to satisfy all of the requirements for donating a Picasso. I made sure every step was satisfied in regards to the appraisal and valuation. What I didn’t know is that the appraiser he picked was the dealer he purchased the art piece from. The IRS questioned the appraiser’s objectivity and brought in their own appraiser who valued the piece much lower than the client’s appraiser.

As a CPA, I see all sorts of donations, so here are some tips:

Take pictures of what you are donating
Get a detailed receipt. If the organization will not itemize your receipt, type up a list of items and attached it to the paper. Make sure the receipt states language that you did not receive any goods or services in consideration for the donation.
It is good practice to itemize what you are donating.
If you are a business donating an inventory item, you will not be allowed the fair market value, just your inventory cost for the donation.
The same goes for artists donating their art. You are allowed to donate only the value of what the art piece cost you to create, and that does not include your labor which cannot be valued for tax purposes.

Every situation is unique, so contact your tax advisor before making any decisions.

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Additional Medicare Tax For Upper Income Earners Explained

A new Additional Medicare Tax goes into effect starting in 2013. The 0.9 percent Additional Medicare Tax applies to an individual’s wages, Railroad Retirement Tax Act compensation, and self-employment income that exceeds a threshold amount based on the individual’s filing status.

The threshold amounts are:

• $250,000 for married taxpayers who file jointly,
• $125,000 for married taxpayers who file separately, and
• $200,000 for all other taxpayers.

An employer is responsible for withholding the Additional Medicare Tax from wages or compensation it pays to an employee in excess of $200,000 in a calendar year.

The IRS and the Treasury Department have issued proposed regulations on the Additional Medicare Tax.

Self-employed individuals must be careful when making their estimated tax payments which will include these taxes if they are above the threshholds. Make sure you check with your tax professional before making any decisions.

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California Tax Changes from the Passage of Proposition 30

As of November 7, 2012, the voters of California pass Proposition 30 (Governor’s ballot initiative) to fund education, the deficit, etc. The following are the results that you should consider when doing your year-end tax planning because the some of the tax changes are retroactive to January 1, 2012:

Individual tax rates for high earners

10.3% (1% increase) on income of:	$250,001–$300,000 for single/MFS; $340,001–$408,000 for HOH; and $500,001–$600,000 for MFJ.
11.3% (2% increase) on income of:	$300,001–$500,000 for single/MFS; $408,001–$680,000 for HOH; and $600,001–$1,000,000 for MFJ.
12.3% (3% increase) on income of:	More than $500,000 for single/MFS; More than $680,000 for HOH; and More than $1,000,000 for MFJ.

Income in Excess of $1 million

In addition to these increased rates, income in excess of $1 million is also subject to the 1% mental health surcharge.

State Sales Tax Increase

This increase is not retroactive. The sales tax rate increases from 7.25 to 7.50% statewide. This does not include the local addon sales tax that differs by county.

If the alternative minimum tax increases due to the fiscal cliff, you may want to pay all of your state taxes in this year. Taxes are not deductible when computing alternative minimum taxes.

In any event, always check with a tax professional when considering any of these tips since your tax situation may be unique.

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CPA Tip: Be Careful of Phoney IRS E-mails and Sites

I find it amusing and a challenge to get bogus IRS e-mails. First of all, the IRS will never send you an e-mail stating you owe taxes, or a refund. They are paper-people. So, knowing that the e-mail is a fraud, I usually perform an easy test: I move my mouse over the hyperlinks (which say that they link to the IRS sites) and see where they REALLY link to. The site is always some bogus site that has ” IRS,” “taxes,” or some other word that sounds legitimate.

The Internal Revenue Service is issuing a warning about a new tax scam that uses a website that mimics the IRS e-Services online registration page.

The actual IRS e-Services page offers web-based products for tax preparers and payers, not the general public. The phony web page looks almost identical to the real one.

The IRS gets many reports of fake websites like this. Criminals use these sites to lure people into providing personal and financial information that may be used to steal the victim’s money or identity.

The address of the official IRS website is www.irs.gov. Don’t be misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov.

If you find a suspicious website that claims to be the IRS, send the site’s URL by email to phishing@irs.gov. Use the subject line, ‘Suspicious website’.

Be aware that the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.

If you get an unsolicited email that appears to be from the IRS, report it by sending it to phishing@irs.gov.

The IRS has information at www.irs.govthat can help you protect yourself from tax scams of all kinds. Search the site using the term “phishing.” (Source: IRS)

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