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tax credits

Education Tax Benefits

Locke's Some Thoughts on Education

Going to college can be a stressful time for students and parents. Some of the costs of your education can be offset by tax credits and reductions to income.  These credits and reductions can be complicated, so it takes a bit of coordination to keep things straight. 

More than one education tax benefit may be taken in one year, but generally the expenses must be segregated from one another in your reporting.  In other words, you couldn’t take two tax benefits based upon the exact same education expenses, with some exceptions.  For example, you can use most qualified expenses for the tax credits and apply the expense toward eliminating the 10% penalty on IRA distributions at the same time.

Generally though, most tax benefits for education can only be applied once to each expense.  Only one of the following credits may be used per student in any given year: American Opportunity Tax Credit, Lifetime Learning Credit, or Tuition and Fees Deduction.  If you have enough students with the appropriate circumstances, it is feasible that you could use all three types of benefit in a single tax year.

Listed below are the three primary tax benefits and the specifics around them:

  • American Opportunity Tax Credit.  This credit can be up to $2,500 per eligible student. The AOTC is available for the first four years of post secondary education. Forty percent of the credit is refundable. That means that you may be able to receive up to $1,000 of the credit as a refund, even if you don’t owe any taxes. Qualified expenses include tuition and fees, course related books, supplies and equipment.

    There are income limitations on this credit. Generally, your Modified Adjusted Gross Income must be less than $80,000 (if single) or $160,000 (if married) to claim the full credit. The credit is phased out above those levels and eliminated at $90,000 and $180,000 respectively.

    The AOTC is not allowed if you file Married Filing Separately, or if you are claimed as a dependent on another taxpayer’s return. In addition, the credit is not refundable if you are under age 24 and are essentially dependent upon your parents (that is, they are alive) and you are unmarried. If you are under age 18 none of the credit is refundable.

  • Lifetime Learning Credit.  With the LLC, you may be able to claim up to $2,000 for qualified education expenses on your federal tax return. There is no limit on the number of years you can claim this credit for an eligible student. The credit is 20% of the first $10,000 of education expenses for the student.

    This credit has income limitations as well. If your Modified AGI is less than $53,000 (single) or $107,000 (married filing jointly) the credit is fully available. The phaseout occurs at $63,000 and $127,000 respectively. Again, you are not allowed to use this credit if you file Married Filing Separately, or are the dependent of another taxpayer.

  • Tuition and Fees deduction. This benefit provides a reduction in your Adjusted Gross Income of up to $4,000 for modified AGI less than $65,000 (single) or $130,000 (married filing jointly), or $2,000 if your modified AGI is above those limits but less than $80,000 or $160,000 respectively. Above those limits the deduction is not available. Like the other benefits, the Tuition and Fees deduction is not available if filing MFS or you are the dependent of another taxpayer.

    One difference with this deduction is that you can include course materials in the deduction only if purchased directly from the educational institution (other benefits allow any source of purchase of course materials).

  • Student loan interest deduction. Other than home mortgage interest, you generally can’t deduct the interest you pay. However, you may be able to deduct interest you pay on a qualified student loan. The deduction can reduce your taxable income by up to $2,500. You don’t need to itemize deductions to claim it.

Get Your Kids to Help You With Your Taxes

Sometimes as parents we get overwhelmed with the costs of raising kids.  What with the high cost of soccer camp, video games, and lessons on the clarinet, it can be woefully expensive raising kids.

Sometimes though, there are surprising ways that kids can help out with costs – and your income taxes is one of those places where having kids does help.  The IRS recently published their Tax Tip 2014-11 which lists eight ways that having children can help to lower your taxes.

The actual text of Tax Tip 2014-11 follows:

Eight Tax Savers for Parents

Your children may help you qualify for valuable tax benefits.  Here are eight tax benefits parents should look out for when filing their federal tax returns this year.

  1. Dependents. In most cases, you can claim your child as a dependent.  This applies even if your child was born any time in 2013.  for more details, see 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 qualifying children under the age of 17 at the end of 2013.  The maximum credit is $1,000 per child.  If you get less than the full amount of the credit, you may be eligible for the Additional Child Tax Credit.  For more about both credits, 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 one or more qualifying persons.  Your dependent child or children under age 13 are among those who are qualified. You must have paid for care so you could work or look for work.  For more, see Publication 503, Child and Dependent Care Expenses.
  4. Earned Income Tax Credit.  If you worked but earned less than $51,567 last year, you may qualify for EITC.  If you have three qualifying children, you may get up to $6,044 as EITC when you file and claim it on your tax return.  Use the EITC Assistant tool at www.IRS.gov to find out if you qualify or see Publication 596, Earned Income Tax Credit.
  5. Adoption Credit. You may be able to claim a tax credit for certain expenses you paid to adopt a child.  For details, see the instructions for Form 8839, Qualified Adoption Expenses.
  6. Higher education credits. If you paid for higher education for yourself or an immediate family member, you may qualify for either of two education tax credits.  Both the American Opportunity Credit and the Lifetime Learning Credit 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 refund up to $1,000.  See 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 don’t itemize deductions on your tax return. For more information, see Publication 970.
  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 under the Affordable Care Act. It appies to children under age 27 at the end of the year, even if not your dependent.  See Notice 2010-38 for information.

You’re Running Out of Time If You Want to Use These 13 Tax Provisions

An assortment of United States coins, includin...

An assortment of United States coins, including quarters, dimes, nickels and pennies. (Photo credit: Wikipedia)

Every year we say goodbye to certain things that we’ve come to know and love, and certain provisions of the tax law are not excluded from this treatment.  Portions of the tax law are intentionally added with short life-spans, and others are retired from time to time as their intended use has either changed or been eliminated.

Listed below are the tax provisions (according to the Joint Committee on Taxation) that will be expiring at the end of the year – some we’ll be glad to see go, others we’ll wish would stay around a while.  Some will be extended by Congress, either at the last moment or on into the new year, as has happened in the past.

Note: This article is aimed toward individual taxpayers rather than businesses, so I’ve only listed those provisions that will have impact on individuals.  There are quite a few provisions expiring that will impact businesses and employers as well – see the link above for the complete list.

Tax Provisions Expiring at the End of 2013

  1. Credit for certain nonbusiness energy property – this provision allows individual taxpayers with a credit for the cost of “building envelope components”, which include windows, doors, insulation, some roofing, and heating and air conditioning units.  The credit has expired in the past (2011) and was extended.
  2. Credit for two- or three-wheeled plug-in electric vehicles – pretty self-explanatory, a credit that applies to the purchase of these vehicles is also expiring.  The four-wheeled variety continues to be in play.
  3. Credit for health insurance costs of eligible individuals – I believe this one is supplanted by the credits available via the Affordable Care Act.
  4. Determination of low-income housing credit rate for credit allocations with respect to nonfederally subsidized buildings – this is a credit amount that is set annually, presently at 9%, but will change in 2014.
  5. Credit for construction of new energy-efficient homes
  6. Deduction for certain expenses of elementary and secondary school teachers – this credit has been available “above the line” for educators to help reduce the costs of self-provided (out of pocket) materials and supplies for the classroom.
  7. Discharge of indebtedness on principal residence excluded from gross income of individuals – dating from the Great Recession, a qualified cancellation of indebtedness for a taxpayer’s primary home was excluded from income.  After the end of 2013, this exclusion from income provision expires.
  8. Commuter credit – extended before, this credit provides train commuters a parity with car commuters, allowing a pre-tax deferral of income to help pay the expense of transit commuting.
  9. Deductibility of mortgage insurance premiums – through the end of 2013, it is allowable to deduct these premiums along with your interest on your primary or secondary qualified residence.
  10. Deduction for state and local general sales tax – This credit is allowed to replace the state and local income tax paid by the individual if the sales taxes are greater.  Word is that this one will likely be extended, but who knows?
  11. Charitable contribution of conservation easements or property – for the rest of 2013, if a taxpayer contributes property or easement to a conservation organization, such as a local land trust, special enhanced tax breaks will be available.
  12. Deduction for qualified tuition and related expenses – This credit allows for the reduction in income, above the line, for qualified tuition payments within limits.  It has always been coordinated with the other education credits – the Lifetime Learning Credit and the American Opportunity Credit.  This one has been extended in the past as well, so maybe it will again?
  13. IRA Qualified Charitable Distributions – for individuals over age 70½ this credit allows for individuals to contribute up to $100,000 directly from an IRA to a qualified charity, and exclude the distribution from income.  This one has expired a few times in the past and has limited impact due to limited usage by taxpayers, so it’s hard to predict whether it will be extended again.

Stay tuned as we finish out the tax year, to hear which of these credits may or may not be extended.  I for one am going to be on the edge of my seat.

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Adoption Credit for Tax Year 2012 and beyond

Adoption

As you probably already know if you’re in the position to seek the adoption credit, this credit has undergone some changes for the 2012 filing season.

In the past, for tax years 2010 and 2011, the adoption credit was a refundable credit – meaning that you could receive the entire credit regardless of the amount of tax you have to pay.  For example, if you had $10,000 of adoption credit and your tax return otherwise indicates that your tax is $6,000, you were able to claim the entire credit and $4,000 would be refunded to you.  This was in addition to any overpayment you may have made on your withholding.

However, for 2012 (and beyond, unless the rules change again) the adoption credit is back to being non-refundable.  Now, in the situation described above, the maximum amount of credit that you could claim is equal to your tax, or $6,000.

The limit for adoption expenses for 2012 is $12,650 per child.  A portion of these expenses could have been incurred in a prior year, and the credit claimed for that tax year.  The total of all credits for the adoption of that child (including prior years’ credit) cannot exceed $12,650 if the adoption was finalized in 2012. Any excess credit cannot be carried over to future years.

There is also an income limit for the credit: if your Modified Adjusted Gross Income is less than $189,710 for 2012, the credit is not limited.  If your income is above that level but less than $229,710, the maximum credit is reduced pro rata from $12,650.  Above a MAGI of $229,710, the credit is eliminated.

It’s important to note that there is also an income exclusion limit for employer-provided adoption benefits – which is also equal to $12,650 per child for 2012.  This exclusion has the same MAGI limits as the credit.  Credit and exclusion can be taken for the same adoption, but not for the same expenses.

For example, if you had a adoption expenses of $18,000 for tax year 2012 and your employer provided you with adoption assistance of $10,000 for the year, you would only be able to take the credit for $8,000 (the remaining expenses).

Lastly, the adoption credit is claimed on Form 8839, Qualified Adoption Expenses.  When using this form to claim adoption credit, you are not allowed to efile your return, it must be printed and filed by mail.  However, you do not have to send along the supporting documents and adoption decree (as you did in 2010 and 2011), since the credit is no longer refundable.

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IRS Guidance for the Principal Reduction Alternative of HAMP

home again

There is a program that the Department of Treasury and HUD have established to assist financially-distressed homeowners.  Under this program, called Home Affordable Modification Program-Principal Reduction Alternative (HAMP-PRA), the principal of the borrower’s mortgage may be reduced, allowing the homeowner to (hopefully) retain his home and not lose it to foreclosure.

The IRS recently offered guidance on how the program works, in their Newswire IR-2013-8, dated January 24, 2013.  The actual text of the release is below:

IRS Announces Guidance on the Principal Reduction Alternative Offered in the Home Affordable Modification Program (HAMP)

WASHINGTON – The Internal Revenue Service today announced guidance to borrowers, mortgage loan holders and loan servicers who are participating in the Principal Reduction AlternativeSM offered through the Department of the Treasury’s and Department of Housing And Urban Development’s Home Affordable Modification Program® (HAMP-PRA®).

To help financially distressed homeowners lower their monthly mortgage payments, Treasury and HUD established HAMP, which is described at www.makinghomeaffordable.gov. Under HAMP-PRA, the principal of the borrower’s mortgage may be reduced by a predetermined amount called the PRA Forbearance Amount if the borrower satisfies certain conditions during a trial period.  The principal reduction occurs over three years.

More specifically, if the loan is in good standing on the first, second and third annual anniversaries of the effective date of the trial period, the loan servicer reduces the unpaid balance of the loan by one-third of the initial PRA Forbearance Amount on each anniversary date. This means that if the borrower continues to make timely payments on the loan for three years, the entire PRA Forbearance Amount is forgiven. To encourage mortgage loan holders to participate in HAMP-PRA, the HAMP program administrator will make an incentive payment to the loan holder (called a PRA investor incentive payment) for each of the three years in which the loan principal balance is reduced.

Guidance on Tax Consequences to Borrowers

The guidance issued today provides that PRA investor incentive payments made by the HAMP program administrator to mortgage loan holders are treated as payments on the mortgage loans by the United States government on behalf of the borrowers.  These payments are generally not taxable to the borrowers under the general welfare doctrine.

If the principal amount of a mortgage loan is reduced by an amount that exceeds the total amount of the PRA investor incentive payments made to the mortgage loan holder, the borrower may be required to include the excess amount in gross income as income from the discharge of indebtedness.  However, many borrowers will qualify for an exclusion from gross income.

For example, a borrower may be eligible to exclude the discharge of indebtedness income from gross income if (1) the discharge of indebtedness occurs (in other words, the loan is modified) before Jan. 1, 2014, and the mortgage loan is qualified principal residence indebtedness, or (2) the discharge of indebtedness occurs when the borrower is insolvent.  For additional exclusions that may apply, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals).

Borrowers receiving aid under the HAMP-PRA program may report any discharge of indebtedness income – whether included in, or excluded from, gross income – either in the year of the permanent modification of the mortgage loan or ratably over the three years in which the mortgage loan principal is reduced on the servicer’s books.  Borrowers who exclude the discharge of indebtednes income must report both the amount of the income and any resulting reduction in basis or tax attributes on Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).

Guidance on Tax Consequences to Mortgage Loan Holders

The guidance issued today explains that mortgage loan holders are required to file a Form 1099-C with respect to a borrower who realizes discharge of indebtedness income of $600 or more for the year in which the permanent modification of the mortgage loan occurs. This rule applies regardless of when the borrower chooses to report the income (that is, in the year of the permanent modification or one-third each year as the mortgage loan principal is reduced) and regardless of whether the borrower excludes some or all of the amount from gross income.

Penalty relief is provided for mortgage loan holders that fail to timely file and furnish required Forms 1099-C, as long as certain requirements described in the guidance are satisfied.

Details are in Revenue Procedure 2013-16 available on IRS.gov.

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After The Storm: Tax Breaks to Minimize Devastation of Superstorm Sandy

After Superstorm Sandy

When Superstorm Sandy made landfall in New Jersey, it is doubtful that many of the residents there, or in the other New England states, were thinking about taxes. It is in the aftermath of a major storm with the devastation clear that those in need start searching for tax breaks.

Sandy left a death toll in the double digits and estimated damage to public, residential and commercial property in the billions. Included in the statistics are hundreds of homes lost, and thousands without power. The impact is in line with other historical storms such as Ivan and Katrina. As things start to settle and the worst hit areas begin the long, tedious rebuilding process, residents will be looking to government tax breaks for help.

Immediate Relief on Tax Payments

Immediately after the disaster, the IRS made the decision to defer the individual income tax payment deadline. Those owing payments initially had a cut-off date of January 15,2013. The deadline is extended to February 1 to give anyone caught in the wake of Sandy some breathing room. In addition, the IRS has made it clear that they will provide assistance and be lenient even for those outside the area.

To coincide with the individual tax relief, the government is waiving penalties for businesses who fail to deposit federal payroll and excise taxes on time.

Taxation on Assistance

Getting funds to rebuild is one of the most challenging parts of recovering from a disaster of this magnitude whether replacing the roof or rebuilding an entire structure. For most, homeowner’s insurance will cover the repairs, though flooding wasn’t covered for many.

For work that goes beyond this coverage, victims may meet the criteria for tax-free grants and loans from FEMA. Section 139 of the federal tax code states that qualified grants and payments from the federal government or an employer are tax-free.

The tax-free status only applies for work not covered by homeowner’s insurance. In situations where funds go to pay for loss listed on the insurance policy, tax is due on federal loans or grants. In addition, money received to reimburse income is taxable in most cases.

Victims should plan to reinvest insurance payments into their business or home. If, for example, a business closes and the owner uses the insurance for personal issues, that money may be taxable. Homeowners that use money from their insurance for anything other than home repair will owe taxes, as well.

Casualty-Loss Trap

Many people will expect to make claims under the casualty-loss deduction. In this instance, that will not apply in most cases. The insurance company payout reduces the amount of the loss. The cost of loss not covered by the policy must exceed 10 percent of the taxpayer’s adjusted gross income plus a deductible in order for casualty-loss to be valid. There are other restrictions as well that make this an unlikely break for Sandy victims.

The good news is that Congress forgave the 10 percent rule in wake of Katrina and may make the same call for Sandy.

Tax laws are complex under the best circumstances. The most effective advice that anyone can give to people recovering from this devastating storm is to get professional assistance at tax time. The IRS has made adjustments in the past after a disaster and may make further changes in lieu of the mass property claims inevitable with Sandy.

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IRS Helps You Out When Your Boss Doesn’t Pay You Back For Expenses Related to Your Job

Employee Transfer
Employee Transfer (Photo credit: Wikipedia)

When you have to pay for certain expenses in order to do your job, sometimes (if you’ve got a good employer!) your company will reimburse you for those expenses.  On the other hand, sometimes they don’t reimburse you for those expenses.  Did you know that you can deduct those expenses (to a certain extent) from your income when you file your tax return?  And in some cases, when your employer reimburses you, you still need to fill out additional tax forms in order to keep from being taxed on the reimbursements.

The IRS recently published their Tax Tip 2012-54, which details how to go about deducting these expenses, and what expenses are qualified for deduction.  Below is the text of the Tax Tip in its entirety.

Employee Business Expenses

Some employees may be able to deduct certain work-related expenses.  The following facts from the IRS can help you determine which expenses are deductible as an employee business expense.  You must be itemizing deductions on IRS Schedule A to qualify.

Expenses that qualify for an itemized deduction generally include:

  • Business travel away from home
  • Business use of your car
  • Business meals and entertainment
  • Travel
  • Use of your home
  • Education
  • Supplies
  • Tools
  • Miscellaneous expenses

You must keep records to prove the business expenses you deduct.  For general information on recordkeeping, see IRS Publication 552, Recordkeeping for Individuals available on the IRS website at www.irs.gov, or by calling 1-800-TAX-FORM (800-829-3676).

If your employer reimburses you under an accountable plan, you should not include the payments in your gross income, and you may not deduct any of the reimbursed amounts.

An accountable plan must meet three requirements:

  1. You must have paid or incurred expenses that are deductible while performing services as an employee.
  2. You must adequately account to your employer for these expenses within a reasonable time period.
  3. You must return any excess reimbursement or allowance within a reasonable time period.

If the plan under which you are reimbursed by your employer is non-accountable, the payments you receive should be included in the wages shown on your Form W-2.  You must report the income and itemize your deductions to deduct these expenses.

Generally, you report unreimbursed expenses on IRS Form 2106 or IRS Form 2106-EZ and attach it to Form 1040.  Deductible expenses are then reported on IRS Schedule A, as a miscellaneous itemized deduction subject to a rule that limits your employee business expenses deduction to the amount that exceeds 2 percent of your adjusted gross income.

For more information see IRS Publication 529, Miscellaneous Deductions, which is available on the IRS website at www.irs.gov, or by calling 10800-TAX-FORM (800-829-3676).

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Tax Credits That Can Increase Your Refund

The IRS recently issued their Tax Tip 2012-41, which lists out some of the tax credits that are refundable.  Most tax credits are not refundable, meaning that if the amount of the credit is more than your tax for the year, the credit is limited only to the amount of your tax.

For example, if you had tax payable of $1,500 and then had Education Credits, Energy Credits, and/or Foreign Tax Credits amounting to more than $1,500.  Your credits will be limited to $1,500 since that’s your tax payable and the credits are not refundable.

On the other hand, there are a few credits that are refundable, as listed below in the actual text from Tax Tip 2012-41.

Four Tax Credits that Can Boost Your Refund

A tax credit is a dollar-for-dollar reduction of taxes owed.  Some tax credits are refundable meaning if you are eligible and claim one, you can get the rest of it in the form of a tax refund even after your tax liability has been reduced to zero.

Here are four refundable tax credits you should consider to increase your refund on your 2011 federal income tax return:

1.  The Earned Income Tax Credit is for people earning less than $49,078 from wages, self-employment or farming.  Millions of workers who saw their earnings drop in 2011 may qualify for the first time.  Income, age and the number of qualifying children determine the amount of the credit, which can be up to $5,751.  Workers without children may qualify as well.  For more information, see IRS Publication 596, Earned Income Credit.

2.  The Child and Dependent Care Credit is for expenses paid for the care of your qualifying children under age 13, or for a disabled spouse or dependent, while you work or look for work.  For more information, see IRS Publication 503, Child and Dependent Care Expenses.

Note: this credit was incorrectly identified in the IRS Tax Tip as refundable.  It is not refundable – sorry for the confusion.

3.  The Additional Child Tax Credit is for people who have a qualifying child.  The maximum credit is $1,000 for each qualifying child.  You can claim this in addition to the Child and Dependent Care Credit.  The Child Tax Credit is non-refundable, but if you qualify you can utilize the Additional Child Tax Credit to receive the remainder of the non-refundable credit as a refund.  See IRS Publication 972, Child Tax Credit for more details.

4.  The Retirement Savings Contributions Credit, also known as the Saver’s Credit, is designed to help low-to-moderate income workers save for retirement.  You may qualify if your income is below a certain limit and you contribute to an IRA or workplace retirement plan, such as a 401(k) plan.  The Saver’s Credit is available in addition to any other tax savings that apply.  For more information, see IRS Publication 590, Individual Retirement Arrangements (IRAs).

Note: this credit was incorrectly identified in the IRS Tax Tip as refundable.  It is not refundable – sorry for the confusion.

There are many other tax credits that may be available to you depending on your facts and circumstances.  Since many qualifications and limitations apply to various tax credits, you should carefully check your tax form instructions, the listed publications and additional information available at www.irs.gov. IRS forms and publications are available on the IRS website at www.irs.gov and by calling 800-TAX-FORM (800-829-3676).

11 Facts About the Child Tax Credit (2011)

child
Image via Wikipedia

The IRS recently issued their Tax Tip 2012-29, which provides some key points about the Child Tax Credit.

Below is the text of the tip:

The Child Tax Credit is available to eligible taxpayers with qualifying children under age 17.  The IRS would like you to know these eleven facts about the Child Tax Credit.

  1. Amount With the Child Tax Credit, you may be able to reduce your federal income tax by up to $1,000 for each qualifying child under age 17.
  2. Qualification A qualifying child for this credit is someone who meets the qualifying criteria of seven tests: age, relationship, support, dependent, joint return, citizenship and residence.
  3. Age Test To qualify, a child must have been under age 17 – age 16 or younger – at the end of 2011.
  4. Relationship Test To claim a child for purposes of the Child Tax Credit, the child must be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece, or nephew.  An adopted child is always treated as your own child.  An adopted child includes a child lawfully placed with your for legal adoption.
  5. Support Test In order to claim a child for this credit, the child must not have provided more than half of his/her own support.
  6. Dependent Test You must claim the child as a dependent on your federal tax return.
  7. Joint Return Test The qualifying child cannot file a joint return for the year (or files it only as a claim for refund). Note: this means that a qualifying child can file a joint return if only filing it for a refund – for no other purpose, no other credits, etc..
  8. Citizenship Test To meet the citizenship test, the child must be a US citizen, US national or US resident alien.
  9. Residence Test The child must have lived with you for more than half of 2011.  There are some exceptions to the residence test, found in IRS Publication 972, Child Tax Credit.
  10. Limitations The credit is limited if your modified adjusted gross income is above a certain amount.  The amount at which this phase-out begins varies by filing status.  For married taxpayers filing a joint return, the phase-out begins at $110,000.  For married taxpayers filing a separate return, it begins at $55,000.  For all other taxpayers, the phase-out begins at $75,000.  In addition, the Child Tax Credit is generally limited by the amount of the income tax and any alternative minimum tax you owe.
  11. Additional Child Tax CreditIf the amount of your Child Tax Credit is greater than the amount of income tax you owe, you may be able to claim the Additional Child Tax Credit.The Additional Child Tax Credit is not available for any of the Child Tax Credit that was reduced by MAGI Limitation (#10) – this credit is only to replace any Child Tax Credit limited by the amount of tax you owe.  In other words, although the Child Tax Credit is not a refundable credit, any amount limited by the non-refundability can be replaced by the Additional Child Tax Credit.

    The Additional Child Tax Credit is applied for via Form 8812, and the maximum additional Child Tax Credit is as follows:

    Taxpayers with one or two children.
    The lesser of:
    * The disallowed portion of the regular child tax credit, or
    * 15% of the taxpayer’s earned income in excess of $3,000

    Taxpayers with three or more children. The lesser of:
    * The disallowed portion of the regular child tax credit, or
    * The larger of:
    * 15% of earned income in excess of $3,000.
    * FICA and Medicare tax paid minus earned income credit.

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The Dirty Dozen Tax Scams for 2012

taxes
taxes (Photo credit: 401K)

Every year around this time, the IRS issues its list of the top tax scams they’ve seen, as a reminder to taxpayers to use caution during tax season to protect themselves against schemes from identity theft to return preparer fraud.

Following is the list of the Dirty Dozen Tax Scams for 2012, taken from IRS publication IR-2012-23:

Identity Theft

Topping this year’s Dirty Dozen list is identity theft.  In response to growing identity theft concerns, the IRS has embarked on a comprehensive strategy that is focused on preventing, detecting and resolving identity theft cases as soon as possible.  In addition to the law-enforcement crackdown, the IRS has stepped up its internal reviews to spot false tax returns before tax refunds are issued as well as working to help victims of the identity theft refund schemes.

Identity theft cases are among the most complex ones the IRS handles, but the agency is committed to working with taxpayers who have become victims of identity theft.

The IRS is increasingly seeing identity thieves looking for ways to use a legitimate taxpayer’s identity and personal information to file a tax return and claim a fraudulent refund.

An IRS notice informing a taxpayer that more than one return was filed in the taxpayer’s name or that the taxpayer received wages from an unknown employer may be the first tip off the individual receives that he or she has been victimized.

The IRS has a robust screening process with measures in place to stop fraudulent returns.  While the IRS is continuing to address tax-related identity theft aggressively, the agency is also seeing an increase in identity crimes, including more complex schemes.  In 2011, the IRS protected more than $1.4 billion of taxpayer funds from getting into the wrong hands due to identity theft.

In January, the IRS announced the results of a massive, national sweep cracking down on suspected identity theft perpetrators as a part of a stepped-up effort against refund fraud and identity theft.  Working with the Justice Department’s Tax Division and local US Attorneys’ offices, the nationwide effort targeted 105 people in 23 states.

Anyone who believes his or her personal information has been stolen and used for tax purposes should immediately contact the IRS Identity Protection Specialized Unit.  For more information, visit the special identity theft page at www.IRS.gov/identitytheft.

Phishing

Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information.  Armed with this information, a criminal can commit identity theft or financial theft.

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.

Return Preparer Fraud

About 60 percent of taxpayers will use tax professionals this year to prepare and file their tax returns.  Most return preparers provide honest service to their clients.  But as in any other business, there are also some who prey on unsuspecting taxpayers.

Questionable return preparers have been known to skim off their clients’ refunds, charge inflated fees for return preparation services and attract new clients by promising guaranteed or inflated refunds.  Taxpayers should choose carefully when hiring a tax preparer.  Federal courts have issued hundreds of injunctions ordering individuals to cease preparing returns, and the Department of Justice has pending complaints against many others.

In 2012, every paid preparer needs to have a Preparer Tax Identification Number (PTIN) and enter it on the returns he or she prepares.

Signals to watch for when you are dealing with an unscrupulous return preparer would include that they:

  • Do not sign the return or place a Preparer Tax Identification Number on it.
  • Do not give you a copy of your tax return.
  • Promise larger than normal tax refunds.
  • Charge a percentage of the refund amount as preparation fee.
  • Require you to split the refund to pay the preparation fee.
  • Add forms to the return you have never filed before.
  • Encourage you to place false information on your return, such as false income, expenses and/or credits.
  • Ask you to sign a blank return (added by jb)

For advice on how to find a competent tax professional, see www.irs.gov.

Hiding Income Offshore

Over the years, numerous individuals have been identified as evading US taxes by hiding income in offshore banks, brokerage accounts or nominee entities, using debits cards, credit cards or wire transfers to access the funds.  Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas.  The IRS works closely with the Department of Justice to prosecute tax evasion cases.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirement that need to be fulfilled.  US taxpayers who maintain such accounts and who do not comply with reporting and disclosure requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.

Since 2009, 30,000 individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to bring their money back into the US tax system and resolve their tax obligations.  And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore will become increasingly more difficult.

At the beginning of this year, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs.  The IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion.  This program will be open for an indefinite period until otherwise announced.

The IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95% of the cases from the 2009 program.  On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program.  That number will grow as the IRS processes the 2011 cases.

“Free Money” from the IRS & Tax Scams Involving Social Security

Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches around the country.  These schemes are also often spread by word of mouth as unsuspecting and well-intentioned people tell their friends and relatives.

Scammers prey on low income individuals and the elderly.  They build false hopes and charge people good money for bad advice.  In the end, the victims discover their claims are rejected.  Meanwhile, the promoters are long gone.  The IRS warns all taxpayers to remain vigilant.

There are a number of tax scams involving Social Security.  For example, scammers have been known to lure the unsuspecting with promises of non-existent Social Security refunds or rebates.  In another situation, a taxpayer may really be due a credit or refund but uses inflated information to complete the return.

Beware.  Intentional mistakes of this kind can result in a $5,000 penalty.

False/Inflated Income and Expenses

Including income that was never earned, either as wages or as self-employment income in order to maximize refundable credits, is another popular scam.  Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions.  This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.

Additionally, some taxpayers are filing excessive claims for the fuel tax credit.  Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit.  But other individuals have claimed the tax credit when their occupations or income levels make the claims unreasonable.  Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.

False Form 1099 Refund Claims

In this ongoing scam, the perpetrator files a fake information return, such as a a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.  In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for US citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS.

Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns.  If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.

Frivolous Arguments

Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe.  The IRS has a list of frivolous tax arguments that taxpayers should avoid.  These arguments are false and have been thrown out of court.  While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.

Falsely Claiming Zero Wages

Filing a phony information return is an illegal way to lower the amount of taxes an individual owes.  Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero.  The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.

Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation.  Taxpayers should resist any temptation to participate in any variations of this scheme.  Filing this type of return may result in a $5,000 penalty.

Abuse of Charitable Organizations and Deductions

IRS examiners continue to uncover the intentional abuse of 501(c)(3) organizations, including arrangements that improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or the income from donated property.  The IRS is investigating schemes that involve the donation of non-cash assets – including situations in which several organizations claim the full value of the same non-cash contribution.  Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at the price set by the donor.  The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new standards for qualified appraisals.

Disguised Corporate Ownership

Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business.

These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering, and financial crimes.  The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law.

Misuse of Trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts.  While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes.  Such trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

IRS personnel have seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses.  As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.

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