Secrets of a Tax Free Life

CPA and certified tax coach Robert Gambardella is the co-author of a new finance book, "Secrets of a Tax Free Life: Surprising Write-off Strategies Most Business Owners Miss."

The book features top advice from tax planners and experts from across the country.

Tips for targeting overlooked deductions:

• Deduct your children's expenses like soccer cleats and private school tuition by hiring them to work in your business.
• Know whether or not your 401k may be plotting against you and select a retirement plan that allows you to "choose" the tax rate you want to pay.
• Beat rising health care costs by lets your business reimburse you for your family's uninsured medical expenses
• Win the game without breaking the rules -avoid an audit by playing fair.

The problem today is people are wasting over a billion dollars a year in taxes they don't have to pay. Generally they are doing one of two things wrong:

1. They aren't seeking proactive advice to take advantage of every available deduction, credit and break.
2. They're just getting bad advice.

Source: http://www.wtnh.com/dpp/on_air/gmc_weekend/secrets-of-a-tax-free-life

Retired? Here's How to Cut Your Tax Bill

As many seniors learn, retirement can be as stressful and frustrating a time as any when it comes to paying taxes.

With 401(k)s, traditional and Roth IRAs, as well as Social Security benefits and working wages, there's plenty to calculate on a tax return.

So, how can the retirement crowd cut down on their tax bills? Analysts say it starts with managing your money.

"Retirees usually have a bit more control over their tax situation than other taxpayers," says Steven Gershon, a director at the Kansas City, Kansas, office of the accounting and financial service firm, CBIZ MHM. "That's because they can decide how much they might need to withdraw from their retirement plans to keep their taxes low."

Delay, Delay, Delay

Most experts agree that delaying withdrawals from a 401(k) or traditional IRA until the age of 70 1/2 years is best for taxpayers — letting these plans grow tax deferred.

Taxes on withdrawals from these plans are eventually taxed at ordinary income rates — but that can increase by more than 10 percent if withdrawals occur before age 59 1/2.

This is where a Roth IRA can help, says Mike Scholz, tax director at Wegner CPA. Funds there can be withdrawn by age 59 when needed, tax free, if they've been open for at least five years.

"If a retiree doesn't have a current Roth IRA, it's worth it to see if a rollover from an existing IRA or employer plan to one makes sense," Scholz explains. "They have tax-free growth and tax-free distributions."

And having more than one type of IRA can help taxpayers when the required minimum distributions withdrawal, RMD, for these funds hits at age 70.

"RMD management is essential," says Lee Martinson, owner of PGA Financial. "Seniors have to know to take advantage of the aggregate rule, which says that withdrawals from one can satisfy withdrawals from all your vehicles. That will lower tax bills."

One other tactic to lower taxes is to shift taxable income around to different types of lesser- taxed investment vehicles.

"Some methods are very popular, like family limited partnerships, and things like trust life insurance annuities," says Alexey Bulankov, a financial planner at McCarthy Asset Management. "There are what's called Stretch IRA's to deal with estate taxes. Seniors should weigh the benefits of all."

Besides moving money, some retirees consider moving themselves to states like Nevada and Florida, that traditionally have low or no income taxes. But times have changed, says Gary Duboff, managing director of CBIZ MHM's New York City office.

"With the economic downturn, many states are enacting or thinking about new and higher taxes on residents," Duboff explains. "It's a common approach for many retirees to move, but unexpected changes in tax law could have an impact on planning."

Another problem for retirees on the move are gift and estate taxes. Many states — 21 to be exact — do not adopt the federal rules excluding up to $5 million of estate tax assets. That could cost retirees and their heirs additional taxes if they re-locate.

It's obvious, say experts, that retirees need to check out the tax laws of any new state they might want to move to.

A Dollar Earned ...

Social Security [cnbc explains] checks are welcome income for many retirees, but benefits are often taxed if a person has substantial additional income — such as wages, dividends, or interest.

No one pays federal income tax on more than 85 percent of benefits, but the combined income threshold — benefits and other income like wages — for when the tax kicks in is low: $44,000 for couples and as little as $25,000 for some individuals.

That means retirees ought to think about pushing back any extra income.

"Seniors should postpone taking discretionary income, like capital gains, to early January of a following year, instead of December, if they can," says Larry Karmel, a partner at the tax specialty firm, Metis Group.

"With the income threshold at 85 percent, delaying the income for a time makes the benefit dollar worth more than a dollar of other income," argues Karmel.

For married couples, itemized deductions also can help off set potential taxes on benefits, says Bulankov.

"Filing jointly may enable couples to deduct all or part of the long term care insurance premiums they pay for themselves if they meet certain IRS criteria—and help minimize benefit taxation," Bulankov explains.

Looking Ahead

If retirees find the tax burden heavy now, it could get heavier with tax reform. Some proposals include flat taxes with the elimination of taxation on dividends and interest, but that could mean higher rates on wages.

Expiration of the Bush tax cuts — set for the end of 2012 — could raise rates on dividends from 15 to 39.6 percent — regular income that many seniors depend on.

Meanwhile, taxes are going up in 2013. The health care bill passed in 2010 adds a 3.8% tax on wages above $200,000 for individuals on unearned income, including interest, dividends, capital gains and other investment income. And there will be a 0.9 percent increase in Medicare taxes on all wages for the same income levels.

With all that in mind, some tax analysts worry that retirees aren't prepared for their senior years.

"The cost of retirement has grown and many people have not saved enough," says Lee Isaccson, a CPA with the accounting firm, Reznick Group. "They need to budget their costs and understand that taxes are now part of their responsibility and start making estimated payments, where as an employee, they didn't have to."

In the end, experts say, cutting down a tax bill takes work.

"Plan ahead for taxes as much as planning for a vacation," says Mike Scholz. "A little tax planning now can produce enough tax savings to actually pay for a trip."

Source: http://www.cnbc.com/id/44858101/

Tax Advantages Using a Non-Qualified Deferred Compensation Plan to Fund Retirement - A new Article by American Benefit's James Herlihy

American Benefit Corporation has just released a new article illustrating the tax advantage of using a non-qualified deferred compensation plan to fund for retirement.
Art Linkletter said in his book Old Age is Not for Sissies that old age is not for the timid. If old age isn't for the timid, imagine old age without adequate retirement income.

According to James Herlihy, while everyone should accumulate funds during their working years for retirement, the highly compensated are the most vulnerable. Their children are unlikely to get meaningful college financial aid, thereby increasing their educational costs, and government regulations limit the amount of retirement income that can be delivered by 401(k)s and pension plans. The solution is a non-qualified deferred compensation plan combined with proper planning.

The mechanics of a proper retirement plan are simple. Calculate what existing company benefit plans and Social Security will provide in estimated retirement income. If the calculation shows a retirement income deficit calculate how much would need to be deferred to a non-qualified plan in pre-tax income each year to close the gap. If an individual doesn't feel comfortable doing this calculation, his accountant can be asked for assistance or a financial planner may be hired.

While income taxes may go up in the future this may be offset by the tax deferred accumulation of funds and by moving to a state at retirement that does not have an income tax. It is not necessary to be smart to accumulate funds for retirement, but it is necessary to have discipline.

Consider an executive currently age 50 who decides to save $60,000 per year on his own with after-tax money. If he saves for 15 years, at age 65 he will have accumulated $699,794, assuming he earns 6% (3.6% after tax) per year and is in a 40% federal and state tax bracket.

Source: http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/12/19/prweb9052395.DTL

Ways to Maximize Your 401(k)

Check out Bankrate's Fundamentals of Retirement Plans package of stories posted today by my colleague and Bankrate's assistant managing editor, Barbara Whelehan. It's a terrific guide to workplace-based retirement planning and saving.

What we didn't talk about is ways to maximize your retirement savings in that all-important plan. Here are a few thoughts, most of them from Charles Epstein, principal in Epstein Financial Group and author of Paychecks for Life:

Start young. Check out this Bankrate 401(k) calculator. Let's say you start saving 10 percent of your salary when you are 25 and earning $30,000. Your employer kicks in a match -- a common employer matching formula is 50 percent of the amount an employee contributes, up to 6 percent of your total annual earnings. By the time you retire at 65, you'll have an astounding $1.4 million. Of course, that assumes that you keep your job, get 3 percent annual raises, and earn an average of 7 percent on your money. But even if you encounter some lousy years -- and who doesn't -- chances are you will have enough savings to avoid an all-kibble diet.

Don't be put off by big numbers. In the scenario above, the bottom-line difference -- that is the amount missing from your paycheck -- between saving 5 percent and saving 10 percent is less than $30 a week. As Epstein points out, the total tax break for retirement savings is about 30 percent. For instance, if you contribute $1,000 to your company's 401(k) plan and get a matching contribution of $500, you'll have $1,500 in your account. That qualifies you for a $500 reduction in your taxes, which means it costs you only $500 to add $1,500 to your retirement savings.

Watch your costs. Epstein calculates that a 0.5 percent difference in your costs can reduce your lifetime return in the scenario above by as much as $200,000. By August, your employer should be making these costs clear. Don't neglect to consider this factor.

Check out target-date funds. These mutual funds are popular 401(k) choices because they take the guess work out of managing your money by automatically adjusting your investments to something more conservative as you age. Epstein says avoid the ones that have a glide path that goes past your likely retirement date.

Consider an annuity. More employers are making annuities within your 401(k) a sensible thing to consider doing. Epstein says that right now, only a few annuities within 401(k)s are portable, but the industry and the government are working together to change that. Once you can move your in-plan annuity from employer to employer, this will be a good way to ensure you have a predictable retirement income.

Source: http://www.bankrate.com/financing/retirement/ways-to-maximize-your-401k/

Your Top Tax Questions Answered

For many Americans, 2011 was a year of big changes. Over 300,000 homes were sold, baby boomers began to retire and the unemployment rate averaged over 9 percent. To millions of Americans this meant new jobs, homes and investment strategies. As the April 17 tax deadline approaches, questions about the tax implications of these life changes are on the rise.

To help make tax season easier and ensure you get every dollar you deserve back from Uncle Sam, here are the answers to the top the five most common tax questions from TurboTax:

• If I was unemployed in 2011, are the benefits taxable? Can I write off my expenses of finding work?

Unfortunately 100 percent of unemployment benefits are taxable. So while the unemployment benefits soften the blow while you find employment, Uncle Sam still wants his cut. On the other hand, the money you spent searching for a job is an often missed tax deduction. If you actively searched for a job in the same profession as your previous one, your expenses may be deductible. The costs can include resume preparation, career placement fees, career seminars, and travel and lodging. To be eligible for the deduction, however, only your job search expenses greater than 2 percent of your adjusted gross income can be claimed. You also have to itemize your deductions.

• If I started my own business, what home office deductions can I claim?

Many small business owners who qualify for a home office deduction hesitate to take the deduction in fear that it will trigger an audit. But if you're eligible, the tax savings can be well worth the additional work required to document your eligibility. To qualify for the home office deduction, you must use part of your home exclusively and regularly 1) as your principal place of business or 2) as a place to meet with customers as part of your business or 3) where the business portion of your home is a separate structure not attached to your home.

The deduction is based on the percentage of square feet of your home office for business to total square feet. The easiest way to calculate this is to measure the square footage of your home office and calculate what percentage it is compared to the total area of your home.

Key home office deductions interest and property taxes, utilities, maintenance, and insurance. You can also include the full amount for expenses directly attributable to the business.

• My boyfriend/girlfriend moved in with me to save money. Can I claim him/her as a dependent? Who qualifies?

Who qualifies as a dependent consistently remains a confusing topic for taxpayers and an area where tax deductions are often missed. You can claim a "qualified child" or "qualified relative" if they meet certain criteria. As long as your boyfriend or girlfriend meets all the five or six tests for a qualifying relative, one of which includes living with you for the entire year, you can claim them as a dependent. The easiest way to determine if someone qualifies is to use the TurboTax step-by-step interview guidance.

• What are the tax implications if I withdrew money from my 401K?

By withdrawing funds from your 401K prior to the age of 59, taxpayers face an additional 10% tax penalty, on top of the regular income tax for early withdrawal. Additionally, you may be pushed into a higher tax bracket as a result of the additional income.

• Does refinancing my mortgage in 2011 impact my taxes?

As interest rates dropped in 2011, many homeowners took advantage of the historically low rates to refinance. If you were among them, we have good news to share with you. If the mortgage is for your primary residence, you can only deduct ratably over the term of the mortgage the points you paid to refinance the loan. If the mortgage is a rental property, you may be able to deduct additional charges in connection with securing the loan, such as underwriting fees, appraisal fees, and attorney fees.

Source: http://www.huffingtonpost.com/bob-meighan/filing-taxes-tips_b_1312916.html

Tax Tips After Retirement

Spring forward into tax season! Even after retirement there some wise tax tips from experts that can save money.

"One great strategy for seniors is to pull a little each year from pre-tax accounts like 401(k)s accounts and after-tax accounts like Roth IRAs so they can stay in a lower tax bracket," said Bill McNulty, CEO of IRAmarket. IRAmarket is a website that helps retirees and other consumers to help compare retirement accounts and learn retirement finance strategies.

Mr. McNulty said that the key is to take from a variety of accounts in order to maintain the lowest possible marginal income tax rate in retirement. "It comes as a surprise to a lot of people that the higher their tax bracket, the more income tax they have to pay on their social security benefits," he said.

In addition, for those of retirement age but not fully retired, Mr. McNulty said there are advantages. "Most don't know that they can continue to contribute to a Roth IRA after age 70," he said. "And get tax-free investment gains for their later years."

Another great tax tip is around Health Savings Accounts (HSAs). "HSAs can function like an IRA, but instead of the money growing tax free for retirement, it grows tax free for health care expenses," Mr. McNulty explained. "People should be considering saving for out-of-pocket healthcare costs in retirement." He pointed out that retirees can use a HSA to pay Medicare premiums and other qualified medical expenses.

Clarissa Hobson, a Certified Financial Planner based in Colorado Springs, Colorado, thinks people should know that long-term care insurance premiums are tax deductible. "The deductibility increases based on age," she said. "So make sure to make these deductions when filing your taxes."

In addition, Ms. Hobson said that some medical expenses that were not deductible when you were working might be after retirement. "They might be deductible once you retire if you have significantly lower earned income."

Another tip that might be useful prior to retirement is to be aware of how your income two years prior to drawing Medicare will determine Part B premiums. "Even if you go from working with a large earned income to very little income in retirement, you might have to pay higher Part B premiums for a couple years," she said. "This can also have an impact for people making Roth IRA conversions in retirement, as this income could also push up Part B premiums."

Financial advisers say that it is a common misconception that people are in a lower tax bracket after retirement, and that good planning is required to be in that tax bracket.

"Here's a retirement tax tip that you normally won't hear from Wall Street advisers," said Brian Solik, President and Founder of Wealth Preservation Strategies of New Jersey. "Many couples retire with most of their retirement money in tax-deferred accounts like 401Ks and IRAs, and without any life insurance." This might be because either their term insurance or company sponsored life insurance expired, he added.

If they have little to no money in tax-free accounts and no life insurance, Mr. Solik recommends that retirees look into withdrawing a percentage of their IRA/401K each year -- usually 10% or less -- and investing this money in a cash-value life insurance policy on one or both spouses.

"This accomplishes several important things with this transfer of money," he said. "A tax-free death benefit is available to the surviving spouse; those financial planners who don't think that having life insurance is important in retirement probably haven't spoken to many retired wives who have seen their husband's life insurance goes to zero. And the policy can be structured to allow for tax-free withdrawals of cash loans in later years if death does not occur. This technique can thus provide for tax-free money both during a life or death scenario."

One final tip is to stay on top of the latest news as laws are constantly changing that can affect who can be a beneficiary, and many other aspects to managing money and keeping taxes low after retirement.

Source: http://www.huffingtonpost.com/leann-reynolds/retirement-tax-savings_b_1367690.html

Tips To Avoid Paying Extra Interest And Taxes

On average people will pay 35 percent of their lifetime earnings to interest and 45 percent to items like taxes and healthcare coverage. That leaves just 25 percent for savings, charity contributions and fun.

Experts say there are simple ways to avoid paying extra interest and taxes.

1. Invest in vehicles where you pay the interest now

"We all agree that taxes are going up in the future, so instead of investing in things like a traditional IRA or 401k where you are saving the taxes now and paying them in the future, you want to flip that around and utilize the Roth plans that are out there," said Glenn Leach, senior mortgage banker with Cobalt Mortgage in Puyallup.

2. Owning a home is the key to wealth

"Home ownership can start the clock to ending the interest payments because there is an end date and if you do it right and actually pay off your loan, you won't have interest later on. Also, the interest you pay on your home is tax deductible. It lets you itemize on your taxes, and when you do that you also get to write off other things that you are spending money on like healthcare and business expenses," said Leach.

Interest rates are historically low and thousands are looking to re-finance their homes, but Leach warns to be careful when negotiating the terms.

"You are usually given the choice between a 15- or a 30-year loan, but you actually have all the choices that you want. If you have 23 years left on your mortgage and you want to take advantage of a low interest rate, do that, but do a new 23 year loan so that you can stay on track to pay off on time and save money as well," said Leach.

Source: http://www.king5.com/news/business/Tips-to-avoid-paying-extra-interest-and-taxes-144258495.html

IRS Kicks Off 2012 Tax Season with Deadline Extended to April 17

The Internal Revenue Service today opened the 2012 tax filing season by announcing that taxpayers have until April 17 to file their tax returns. The IRS encourages taxpayers to e-file as it is the best way to ensure accurate tax returns and get faster refunds.

The IRS also announced a number of improvements to help make this tax season easy for taxpayers. This includes new navigation features and helpful information on IRS.gov and a new pilot to allow taxpayers to use interactive video to get help with tax issues.

“At the IRS, we’re working hard to make the process of filing your taxes as quick and easy as possible,” said IRS Commissioner Doug Shulman. “Providing quality service is one of our top priorities. It not only reduces the burden on taxpayers, but also helps in filing an accurate return right from the start.”

Taxpayers will have until Tuesday, April 17, to file their 2011 tax returns and pay any tax due because April 15 falls on a Sunday, and Emancipation Day, a holiday observed in the District of Columbia, falls this year on Monday, April 16.

According to federal law, District of Columbia holidays impact tax deadlines in the same way that federal holidays do; therefore, all taxpayers will have two extra days to file this year. Taxpayers requesting an extension will have until Oct. 15 to file their 2012 tax returns.

The IRS expects to receive more than 144 million individual tax returns this year, with most of those being filed by the April 17 deadline.

The IRS will begin accepting e-file and Free File returns on Jan. 17, 2012. Additional details about e-file and Free File will be announced later this month. IRS Free File provides options for free brand-name tax software or online fillable forms plus free electronic filing. Everyone can use Free File to prepare a federal tax return. Taxpayers who make $57,000 or less can choose from approximately 20 commercial software providers. There’s no income limit for Free File Fillable Forms, the electronic version of IRS paper forms, which also includes free e-filing.
The IRS also reminds paid tax return preparers they must have and include a Preparer Tax Identification Number (PTIN) on all returns they prepare. All PTINs must be renewed for 2011. Tax return preparers can obtain or renew PTINs online.

Assistance Options
The IRS continues to focus on taxpayer service. The best way for taxpayers to get answers to their questions is by visiting the IRS website at IRS.gov. The IRS has updated the front page of the IRS website to make it easier for taxpayers to get key forms, information and file tax returns. The front page also has links to taxpayer-friendly videos on the IRS YouTube channel. More improvements are planned for IRS.gov in the months ahead.

Last year, the IRS unveiled IRS2Go, its first smartphone application that lets taxpayers check on the status of their tax refund and obtain helpful tax information. The IRS reminds Apple users that they can download the free IRS2Go application by visiting the Apple App Store and Android users can visit the Android Marketplace to download the free IRS2Go app.

Individuals making $50,000 or less can use the Volunteer Income Tax Assistance program for free tax preparation and, in many cases, free electronic filing. Individuals age 60 and older can take advantage of free tax counseling and basic income tax preparation through Tax Counseling for the Elderly. Information on these programs can be found at IRS.gov.
For tax law questions or account inquiries, taxpayers can also call our toll-free number (7 a.m. to 7 p.m. local time) or visit a taxpayer assistance center, the locations of which are listed on IRS.gov.

Virtual Service
The IRS has begun a new pilot program where taxpayers can get assistance through two-way video conferencing.  The IRS is conducting a limited roll out of this new video conferencing technology at 10 IRS offices and two other sites, and may expand to further sites in the future. A list of locations is available on IRS.gov.

Check for a Refund
Once taxpayers file their federal return, they can track the status of their refunds by using the “Where's My Refund?” tool, which taxpayers can get to using the IRS2Go phone app or from the front page of www.IRS.gov.  By providing their Taxpayer Identification Numbers, filing status, and the exact whole dollar amount of their anticipated refund taxpayers can generally get information about their refund 72 hours after the IRS acknowledges receipt of their e-filed returns, or three to four weeks after mailing a paper return.

SOURCE: http://www.irs.gov/newsroom/article/0,,id=251825,00.html

In 2012, Many Tax Benefits Increase Due to Inflation Adjustments

For tax year 2012, personal exemptions and standard deductions will rise and tax brackets will widen due to inflation, the Internal Revenue Service announced today.

By law, the dollar amounts for a variety of tax provisions, affecting virtually every taxpayer, must be revised each year to keep pace with inflation. New dollar amounts affecting 2012 returns, filed by most taxpayers in early 2013, include the following:

• The value of each personal and dependent exemption, available to most taxpayers, is $3,800, up $100 from 2011.
• The new standard deduction is $11,900 for married couples filing a joint return, up $300, $5,950 for singles and married individuals filing separately, up $150, and $8,700 for heads of household, up $200. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
• Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700, up from $69,000 in 2011.
  

Credits, deductions, and related phase outs.

• For tax year 2012, the maximum earned income tax credit (EITC) for low- and moderate- income workers and working families rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC rises to $50,270, up from $49,078 in 2011.The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.
• The foreign earned income deduction rises to $95,100, an increase of $2,200 from the maximum deduction for tax year 2011.
• The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.
• For 2012, annual deductible amounts for Medical Savings Accounts (MSAs) increased from the tax year 2011 amounts; please see the table below.
  

Medical Savings Accounts (MSAs)	Self-only coverage	Family coverage
Minimum annual deductible	$2,100	$4,200
Maximum annual deductible	$3,150	$6,300
Maximum annual out-of-pocket expenses	$4,200	$7,650

The $2,500 maximum deduction for interest paid on student loans begins to phase out for a married taxpayers filing a joint returns at $125,000 and phases out completely at $155,000, an increase of $5,000 from the phase out limits for tax year 2011. For single taxpayers, the phase out ranges remain at the 2011 levels.

Estate and Gift

For an estate of any decedent dying during calendar year 2012, the basic exclusion from estate tax amount is $5,120,000, up from $5,000,000 for calendar year 2011. Also, if the executor chooses to use the special use valuation method for qualified real property, the aggregate decrease in the value of the property resulting from the choice cannot exceed $1,040,000, up from $1,020,000 for 2011.
The annual exclusion for gifts remains at $13,000.
Other Items

• The monthly limit on the value of qualified transportation benefits exclusion for qualified parking provided by an employer to its employees for 2012 rises to $240, up $10 from the limit in 2011. However, the temporary increase in the monthly limit on the value of the qualified transportation benefits exclusion for transportation in a commuter highway vehicle and transit pass provided by an employer to its employees expires and reverts to $125 for 2012.
• Several tax benefits are unchanged in 2012. For example, the additional standard deduction for blind people and senior citizens remains $1,150 for married individuals and $1,450 for singles and heads of household.

SOURCE: http://www.irs.gov/newsroom/article/0,,id=248485,00.html

Taxable or Non-Taxable Income?

Although most income you receive is taxable and must be reported on your federal income tax return, there are some instances when income may not be taxable.

The IRS offers the following list of items that do not have to be included as taxable income:

• Adoption expense reimbursements for qualifying expenses
• Child support payments
• Gifts, bequests and inheritances
• Workers' compensation benefits (some exceptions may apply; see Publication 525, Taxable and Nontaxable Income)
• 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

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 generally not taxable unless the policy was turned over to you for a price.
  
  
• Scholarship or fellowship grant If you are a candidate for a degree, you can exclude from income amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify for the exclusion.
  
  
• 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 on Form 1040 of both parties.

All other items—including income such as wages, salaries, tips and unemployment compensation — are fully taxable and must be included in your income unless it is specifically excluded by law.

These examples are not all-inclusive. For more information, see Publication 525, Taxable and Nontaxable Income, which can be obtained at the IRS.gov website or by calling the IRS at 800-TAX-FORM (800-829-3676).

SOURCE: http://www.irs.gov/newsroom/article/0,,id=253959,00.html

Safeguard Your Refund – Choose Direct Deposit

Direct deposit is the fastest, safest way to receive your tax refund. When a taxpayer combines e-file and direct deposit, the IRS will likely issue your refund in as few as 10 days.

Here are four reasons more than 79 million taxpayers chose direct deposit in 2011:

1. Security  Thousands of paper checks are returned to the IRS by the U.S. Post Office every year as undeliverable mail. Direct deposit eliminates the possibility of your refund check being lost, stolen or returned to the IRS as undeliverable.
   
   
2. Convenience  The money goes directly into your bank account. You won’t have to make a special trip to the bank to deposit the money yourself.
   
   
3. Ease  When you’re preparing your return; simply follow the instructions on your return or in the tax software. Make sure you enter the correct bank account and bank routing numbers.
   
   
4. Options  You can deposit your refund into multiple accounts. With the split refund option, taxpayers can divide their refunds among as many as three checking or savings accounts and up to three different U.S. financial institutions. Use IRS Form 8888, Allocation of Refund (Including Savings Bond Purchases), to divide your refund. A word of caution: Some financial institutions do not allow a joint refund to be deposited into an individual account. Check with your bank or other financial institution to make sure your direct deposit will be accepted. Additionally, Form 8888 should NOT be used to designate part of your refund to pay your tax preparer.

For more information about direct deposit of your tax refund and the split refund option, check the instructions for your tax form. Helpful tips are also available in IRS Publication 17, Your Federal Income Tax. To get a copy of Publication 17 or Form 8888, visit the IRS Forms and Publications section at the IRS.gov website or call 800-TAX-FORM (800-829-3676).

SOURCE: http://www.irs.gov/newsroom/article/0,,id=253885,00.html

Five Tips for Recently Married or Divorced Taxpayers with a Name Change

If you changed your name after a recent marriage or divorce, the IRS reminds you to take the necessary steps to ensure the name on your tax return matches the name registered with the Social Security Administration. 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 five tips from the IRS for recently married or divorced taxpayers who have a name change.

1. If you took your spouse’s last name -- or if you hyphenated your 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.
   
   
2. If you 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. Simply file a Form SS-5, Application for a Social Security Card, at your local SSA office or by mail and provide a recently issued document as proof of your legal name change.
   
   
4. Form SS-5 is available on SSA’s website at http://www.socialsecurity.gov/, by calling 800-772-1213 or at local offices. Your new card will have the same number as your previous card, but will show your new name.
   
   
5. If you adopted your spouse’s children after getting married and their names changed, you'll need to update their names with SSA too. 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. Form W-7A is available on the IRS.gov website or by calling 800-TAX-FORM (800-829-3676).

SOURCE: http://www.irs.gov/newsroom/article/0,,id=253214,00.html

New Tool Available on IRS Website to Help Taxpayers Who Have to Repay Their First-Time Homebuyer Credit

The IRS has a tool to help people who have to repay their First-Time Homebuyer Credit. Reminder letters will no longer be mailed to taxpayers who have to repay the credit but you can now use an online lookup tool on the IRS website to check your repayment obligation. The following four tips will help you look up information on your First-Time Homebuyer Credit:

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 and must be repaid in 15 equal annual installments that began with your 2010 return. Also, anyone who sold their home, or stopped using it as their main home, may have to repay the entire credit whether their home was purchased in 2008, 2009 or 2010.
   
   
2. Information needed to access the tool The First-Time Homebuyer Credit Tool will provide critical account information to help you report your repayment obligation on your tax return. To access the tool you will need: your Social Security number, date of birth and complete address. If you file a joint return, you’ll only be able to access your portion of the First-Time Homebuyer Credit account information.
   
   
3. What the tool provides The tool will show the original amount of the credit, annual repayment amounts, total amount paid and the total balance left to be paid. You will be able to print your account page to share with your tax preparer and 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 an additional tax owed or a reduced refund. To repay the credit, you report the repayment on line 59b on Form 1040, U.S. Individual Income Tax Return. If you make an installment payment, you do not need to attach Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, to your tax return. However, if you are repaying the credit because the home stopped being your main home, you must attach Form 5405.

You can access the First-Time Homebuyer Credit Lookup Tool, 24 hours a day, seven days a week, visit the IRS.gov website.

SOURCE: http://www.irs.gov/newsroom/article/0,,id=253206,00.html

Check your Eligibility for EITC

The Earned Income Tax Credit is a financial boost for workers earning $49,078 or less in 2011. Four of five eligible taxpayers filed for and received their EITC last year. The IRS wants you to get what you earned also, if you are eligible.

Here are the top 10 things the IRS wants you to know about this valuable credit, which has been making the lives of working people a little easier since 1975.

1. As your financial, marital or parental situations change from year to year, you should review the EITC eligibility rules to determine whether you qualify. Just because you didn’t qualify last year doesn’t mean you won’t this year.
   
   
2. If you qualify, the credit could be worth up to $5,751. EITC not only reduces the federal tax you owe, but could result in a refund. The amount of your EITC is based on your earned income and whether or not there are qualifying children in your household. The average credit was around $2,240 last year.
   
   
3. If you are eligible for EITC, you must file a federal income tax return and specifically claim the credit – even if you are not otherwise required to file. Remember to include Schedule EIC, Earned Income Credit when you file your Form 1040 or, if you file Form 1040A, use and retain the EIC worksheet.
   
   
4. You do not qualify for EITC if your filing status is Married Filing Separately.
   
   
5. You must have a valid Social Security number for yourself, your spouse – if filing a joint return – and any qualifying child listed on Schedule EIC.
   
   
6. You must have earned income. You have earned income if you work for someone who pays you wages, you are self-employed, you have income from farming, or – in some cases – you receive disability income.
   
   
7. Married couples and single people without children may qualify. If you do not have qualifying children, you must also meet the age and residency requirements, as well as dependency rules.
   
   
8. Special rules apply to members of the U.S. Armed Forces in combat zones. Members of the military can elect to include their nontaxable combat pay in earned income for the EITC. If you make this election, the combat pay remains nontaxable.
   
   
9. It’s easy to determine whether you qualify. The EITC Assistant, an interactive tool available on the IRS website, removes the guesswork from eligibility rules. Just answer a few simple questions to find out if you qualify and estimate the amount of your EITC.
   
   
10. Free help is available at Volunteer Income Tax Assistance sites to help you prepare and claim your EITC. If you are preparing your taxes electronically, the software will figure the credit for you. To find a VITA site near you, visit the IRS.gov website.
    

For more information about the EITC, see IRS Publication 596, Earned Income Credit. You can download this publication – available in English and Spanish – from this website or order it by calling 800-TAX-FORM (800-829-3676).
SOURCE: http://www.irs.gov/newsroom/article/0,,id=253162,00.html

What to Do If You Are Missing a W-2

Make sure you have all the needed documents, including all your Forms W-2, before you file your 2011 tax return. You should receive an IRS Form W-2, Wage and Tax Statement, from each of your employers. Employers have until Jan. 31, 2012 to issue your 2011 Form W-2 earnings statement.

If you haven’t received your W-2, follow these four steps:

1. Contact your employer  If you have not received your W-2, contact your employer to inquire if and when the W-2 was mailed.  If it was mailed, it may have been returned to the employer because of an incorrect or incomplete address.  After contacting the employer, allow a reasonable amount of time for them to resend or issue the W-2.
   
   
2. Contact the IRS  If you do not receive your W-2 by Feb. 14, contact the IRS for assistance at 800-829-1040. When you call, you must provide your name, address, Social Security number, phone number and have the following information:
   
   •  Employer’s name, address and phone number
   
   •  Dates of employment
   
   •  An estimate of the wages you earned, the federal income tax withheld, and when you worked for that employer during 2011. The estimate should be based on year-to-date information from your final pay stub or leave-and-earnings statement, if possible.
   
   
3. File your return  You still must file your tax return or request an extension to file by April 17, 2012, even if you do not receive your Form W-2. If you have not received your Form W-2 in time to file your return by the due date, and have completed steps 1 and 2, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement. Attach Form 4852 to the return, estimating income and withholding taxes as accurately as possible.  There may be a delay in any refund due while the information is verified.
   
   
4. File a Form 1040X  On occasion, you may receive your missing W-2 after you file your return using Form 4852, and the information may be different from what you reported on your return. If this happens, you must amend your return by filing a Form 1040X, Amended U.S. Individual Income Tax Return.

Form 4852, Form 1040X and instructions are available on this website or by calling 800-TAX-FORM (800-829-3676).
SOURCE: http://www.irs.gov/newsroom/article/0,,id=253011,00.html

Tax Tips for the Self-employed

There are many benefits that come from being your own boss. If you work for yourself, as an independent contractor, or you carry on a trade or business as a sole proprietor, you are generally considered to be self-employed.
Here are six key points the IRS would like you to know about self-employment and self- employment taxes:

1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.
   
   
2. If you are self-employed you generally have to pay self-employment tax as well as income tax. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure self-employment tax using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.
   
   
3. You file an IRS Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business, with your Form 1040.
   
   
4. If you are self-employed you may have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year.
   
   
5. You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.
   
   
6. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.

For more information see the Self-employment Tax Center, IRS Publication 334, Tax Guide for Small Business, IRS Publication 535, Business Expenses and Publication 505, Tax Withholding and Estimated Tax, available at www.irs.gov or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).
SOURCE: http://www.irs.gov/newsroom/article/0,,id=252832,00.html

IRS Reminds Parents of Ten Tax Benefits

Your kids can be helpful at tax time. That doesn't mean they'll sort your tax receipts or refill your coffee, but those charming children may help you qualify for some valuable tax benefits. Here are 10 things the IRS wants parents to consider when filing their taxes this year.

1. Dependents In most cases, a child can be claimed as a dependent in the year they were born. For more information see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.
   
   
2. Child Tax Credit You may be able to take this credit for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. For more information see IRS Publication 972, Child Tax Credit.
   
   
3. Child and Dependent Care Credit You may be able to claim this credit if you pay someone to care for your child or children under age 13 so that you can work or look for work. See IRS Publication 503, Child and Dependent Care Expenses.
   
   
4. Earned Income Tax Credit The EITC is a tax benefit for certain people who work and have earned income from wages, self-employment or farming. EITC reduces the amount of tax you owe and may also give you a refund. IRS Publication 596, Earned Income Credit, has more details.
   
   
5. Adoption Credit You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child. If you claim the adoption credit, you must file a paper tax return with required adoption-related documents. For details, see the instructions for IRS Form 8839, Qualified Adoption Expenses.
   
   
6. Children with earned income If your child has income earned from working, they may be required to file a tax return. For more information, see IRS Publication 501.
   
   
7. Children with investment income Under certain circumstances a child’s investment income may be taxed at their parent’s tax rate. For more information, see IRS Publication 929, Tax Rules for Children and Dependents.
   
   
8. Higher education credits Education tax credits can help offset the costs of higher education. The American Opportunity and the Lifetime Learning Credits are education credits that can reduce your federal income tax dollar-for-dollar. See IRS Publication 970, Tax Benefits for Education, for details.
   
   
9. Student loan interest You may be able to deduct interest paid on a qualified student loan, even if you do not itemize your deductions. For more information, see IRS Publication 970.
   
   
10. Self-employed health insurance deduction If you were self-employed and paid for health insurance, you may be able to deduct any premiums you paid for coverage for any child of yours who was under age 27 at the end of the year, even if the child was not your dependent. For more information, see the IRS website.

Forms and publications on these topics are available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

SOURCE: http://www.irs.gov/newsroom/article/0,,id=252798,00.html

Four Tax Tips Regarding Tip Income

If your pay from work involves compensation through tips, then the IRS would like you to be aware of a few facts about tip income. Here are four key points to keep in mind:

1. Tips are taxable Tips are subject to federal income, Social Security and Medicare taxes. The value of non-cash tips, such as tickets, passes or other items of value, is also considered income and subject to tax.
   
   
2. Include tips on your tax return You must include in gross income all cash tips you receive directly from customers, tips added to credit cards, and your share of any tips you receive under a tip-splitting arrangement with fellow employees.
   
   
3. Report tips to your employer If you receive $20 or more in tips in any one month, you should report all of your tips to your employer. Your employer is required to withhold federal income, Social Security and Medicare taxes.
   
   
4. Keep a running daily log of your tip income. You can use IRS Publication 1244, Employee's Daily Record of Tips and Report to Employer, to record your tip income.

For more information see IRS Publication 531, Reporting Tip Income, and Publication 1244 which are available at www.irs.gov. Both can be ordered by calling 800-TAX-FORM (800-829-3676).

SOURCE: http://www.irs.gov/newsroom/article/0,,id=252727,00.html

Everyone is Eligible to Free File!

Everyone can prepare and e-file their federal tax returns for free using the IRS Free File Program. Free File is offered through a public-private partnership between the Internal Revenue Service and tax software companies. Free File can help you do your taxes fast; it’s safe and it doesn’t cost anything.
Free File offers two options: easy-to-use software or online fillable forms.
Free File software is for taxpayers who earn $57,000 or less

Nearly 100 million Americans – that’s 70 percent of the nation’s taxpayers – can use the free brand-name software and secure e-filing offered by private-sector companies. Software products also are available in Spanish. Each company sets its eligibility requirements, generally based on income, age or state residency. However, if your adjusted gross income was $57,000 or less in 2011, you will find at least one tax software product to use.

Here’s how it works: You must access Free File through the IRS website. At www.irs.gov/freefile, there’s an online tool which allows you to give a little information about yourself then guides you to the software for which you are eligible. Or, you can review a complete list of companies and their offerings and make a selection.

Once you select a software product, you will be directed away from the IRS website and onto that company’s website. There, the software will generally offer you a step-by-step guide through the tax preparation process.

Free File does all the hard work. You don’t need to be a tax expert; the software will help find tax breaks, such as the Earned Income Tax Credit, that you may be due. The software asks the questions; you supply the answers. It will find the right tax forms and do the math. Free File has a high satisfaction rate among its users, 98 percent recommend it to others. The IRS issues refunds to 98% of electronic filers by direct deposit within 14 days, if there are no problems, and some may be issued in as few as 10 days.

A word about security: All Free File companies use the latest in secure technology. The safety of taxpayer information is everyone’s priority. Thirty-three million taxpayers have safely and securely used Free File since it started in 2003.
Some companies provide state tax return software – sometimes for free and sometimes for a fee. Some states also have a relationship with the Free File Alliance; those states are listed on the companies’ websites.

Free File Fillable Forms Is Another Free Option


For people who make more than $57,000 or who are comfortable preparing their own tax return, the IRS offers Free File Fillable Forms. It also must be accessed through www.irs.gov/freefile. There is no software assistance with Free File Fillable Forms, but it does basic math calculations for you. It does not support state income tax returns, but it is perfect for the true do-it-yourself taxpayer who prefers paper tax returns. Free File Fillable Forms also offers free e-filing.

SOURCE: http://www.irs.gov/newsroom/article/0,,id=252519,00.html

Identity theft often starts outside of the tax administration system when someone’s personal information is unfortunately stolen or lost. Identity thieves may then use a taxpayer’s identity to fraudulently file a tax return and claim a refund. In other cases, the identity thief uses the taxpayer’s personal information in order to get a job. The legitimate taxpayer may be unaware that anything has happened until they file their return later in the filing season and it is discovered that two returns have been filed using the same Social Security number.
Here are the top 13 things the IRS wants you to know about identity theft so you can avoid becoming the victim of an identity thief.

1. The IRS does not initiate contact with taxpayers by email to request personal or financial information. The IRS does not send emails stating you are being electronically audited or that you are getting a refund.
   
   
2. If you receive a scam e-mail claiming to be from the IRS, forward it to the IRS at phishing@irs.gov.
   
   
3. Identity thieves get your personal information by many different means, including:
   
      * Stealing your wallet or purse
      * Posing as someone who needs information about you through a phone call or
         e-mail
      * Looking through your trash for personal information
      * Accessing information you provide to an unsecured Internet site.
   
   
4. If you discover a website that claims to be the IRS but does not begin with ‘www.irs.gov,’ forward that link to the IRS at phishing@irs.gov.
   
   
5. To learn how to identify a secure website, visit the Federal Trade Commission at www.onguardonline.gov/tools/recognize-secure-site-using-ssl.aspx.
   
   
6. If your Social Security number is stolen, another individual may use it to get a job.  That person’s employer may report income earned by them to the IRS using your Social Security number, thus making it appear that you did not report all of your income on your tax return.  When this occurs, you should contact the IRS to show that the income is not yours.  Your record will be updated to reflect only your information.  You will also be asked to submit substantiating documentation to authenticate yourself. That information will be used to minimize this occurrence in future years.
   
   
7. Your identity may have been stolen if a letter from the IRS indicates more than one tax return was filed for you or the letter states you received wages from an employer you don’t know.  If you receive such a letter from the IRS, leading you to believe your identity has been stolen, respond immediately to the name, address or phone number on the IRS notice.
   
   
8. If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost wallet, questionable credit card activity, or credit report, you need to provide the IRS with proof of your identity.  You should submit a copy of your valid government-issued identification – such as a Social Security card, driver’s license, or passport – along with a copy of a police report and/or a completed IRS Form 14039, Identity Theft Affidavit, which should be faxed to the IRS at 978-684-4542.  Please be sure to write clearly.  As an option, you can also contact the IRS Identity Protection Specialized Unit, toll-free at 800-908-4490.  You should also follow FTC guidance for reporting identity theft at www.ftc.gov/idtheft.
   
   
9. Show your Social Security card to your employer when you start a job or to your financial institution for tax reporting purposes.  Do not routinely carry your card or other documents that display your Social Security number.
   
   
10. For more information about identity theft – including information about how to report identity theft, phishing and related fraudulent activity – visit the IRS Identity Theft and Your Tax Records Page, which you can find by searching “Identity Theft” on the IRS.gov home page.
    
    
11. IRS impersonation schemes flourish during tax season and can take the form of e-mail, phone websites, even tweets.  Scammers may also use a phone or fax to reach their victims.  If you receive a paper letter or notice via mail claiming to be the IRS but you suspect it is a scam, contact the IRS at http://www.irs.gov/contact/index.html to determine if it is a legitimate IRS notice or letter.  If it is a legitimate IRS notice or letter, reply if needed.  If the caller or party that sent the paper letter is not legitimate, contact the Treasury Inspector General for Tax Administration at 1-800-366-4484.  You may also fax the notice/letter you received, plus any related or supporting information, to TIGTA.  Note that this is not a toll-free FAX number 1-202-927-7018.
    
    
12. While preparing your tax return for electronic filing, make sure to use a strong password to protect the data file.  Once your return has been e-filed, burn the file to a CD or flash drive and remove the personal information from your hard drive.  Store the CD or flash drive in a safe place, such as a lock box or safe.  If working with an accountant, you should ask them what measures they take to protect your information.
    
    
13. If you have information about the identity thief that impacted your personal information negatively, file an online complaint with the Internet Crime Complaint Center (IC3) at www.ic3.gov. The IC3 gives victims of cyber crime a convenient and easy-to-use reporting mechanism that alerts authorities of suspected criminal or civil violations. IC3 sends every complaint to one or more law enforcement or regulatory agencies that have jurisdiction over the matter.

SOURCE: http://www.irs.gov/newsroom/article/0,,id=252507,00.html