I was recently confronted with a frightening scenario. I did not prepare the original return but the client came to me because they couldn't find the original preparer. It was a letter from the state that she did not file her return. The preparer had taken a position that the state does not like to see. In essence, the state said she owed $15,000 on this return. The return was from 2002 and wisdom says that they can't go back past 3 years. Well, at the state it is four years. Now I immediately sent a letter stating that she had filed and a copy of the return. The state simply stated they had no record of it. A quick check of the state statute showed that the STATE'S definition of filed is that they received it. We can have her attest to the fact that she mailed it but this does not even touch (if you think about it) on whether the state actually did receive it.
This is a real problem that you should consider. How do you prove that the state or the federal government actually received it. This is extremely important because you can never close out the liability unless you did file it, and as I discovered, you can prove it. That means that 10 years later, when you and everyone involved has destroyed their records, the government can simply claim they didn't receive your return and claims all kinds of things that may or may not be accurate, leaving you with the bill.
There are two real ways of dealing with this. One way is to send each return by certified mail and keep the green card you receive back. Expensive but it would have saved this poor lady $15,000. Another easier way is to electronically file. That way there is a record of the filing and more important that the taxing agency actually RECEIVED the return.
Monday, July 6, 2009
Friday, June 12, 2009
Now is the time to buy your first home
If you are a first time buyer who bought your home this year, you can get 10% of the purchase price up to $8,000 as a credit. You can either amend this last year's return (8-12 weeks) or claim it on next year's taxes. The important thing to know hear is the definition of first time homebuyer may still include you even if you have owned a home before. Essentially, if you haven't owned a home (trailerhome, houseboat, cottage, house. Basically anything you live in and own) in the past 3 years, you are considered a first-time homebuyer and you qualify for this. You must then also live in the home for three years.
Considering the pricing and inventory in the market, now is the time to start looking. Also, you need to complete the sale by November 30, not the end of the year. This is a one-time deal that any apartment dweller should not pass up. One caveat, PAY ATTENTION to your documents at the closing. Don't be afraid to question the terms of the mortgage as to what you were promised. They will try to rush you to sign the mountain of documents but READ the mortgage. As with any deal, if you sit down to sign, you must be willing to get up and walk away if necessary. That is another reason to start the hunt now rather than wait until the deadline is hovering.
First-Time Homebuyer Credit:
For home purchases made after December 31, 2008, the new law raises the first-time homebuyer tax credit to $8,000 (from $7,500) and extends that credit to November 30, 2009. Any required repayments to IRS are eliminated after 36 months in the home. Phase-outs begin for individuals with AGI greater than $75,000 ($150,000 for MFJ) for the year of purchase. (Phase-outs apply for both 2008 and 2009.) A taxpayer who bought a home on or after April 9, 2008, and before January 1, 2009, will not qualify for the new homebuyer credit; the purchase will continue to be governed by the original 2008 first-time homebuyer credit.
Considering the pricing and inventory in the market, now is the time to start looking. Also, you need to complete the sale by November 30, not the end of the year. This is a one-time deal that any apartment dweller should not pass up. One caveat, PAY ATTENTION to your documents at the closing. Don't be afraid to question the terms of the mortgage as to what you were promised. They will try to rush you to sign the mountain of documents but READ the mortgage. As with any deal, if you sit down to sign, you must be willing to get up and walk away if necessary. That is another reason to start the hunt now rather than wait until the deadline is hovering.
First-Time Homebuyer Credit:
For home purchases made after December 31, 2008, the new law raises the first-time homebuyer tax credit to $8,000 (from $7,500) and extends that credit to November 30, 2009. Any required repayments to IRS are eliminated after 36 months in the home. Phase-outs begin for individuals with AGI greater than $75,000 ($150,000 for MFJ) for the year of purchase. (Phase-outs apply for both 2008 and 2009.) A taxpayer who bought a home on or after April 9, 2008, and before January 1, 2009, will not qualify for the new homebuyer credit; the purchase will continue to be governed by the original 2008 first-time homebuyer credit.
Thursday, June 11, 2009
What is in it for the Car Buyer
I am going to be highlighting separate parts of the new tax breaks and who can use them. I recently got a call from a car salesman. Every car salesman needs to know this credit. The complete synopsis is at the end of this post. If you have any questions, please feel free to post a comment and I will respond as soon as I can.
Bottom line, if you are looking to head to one of these dealerships that is closing and closing its inventory, keep your receipt. IF you are buying a new car, you can deduct the sales tax. Unlike a lot of tax breaks, this is above the line. OK, so what does "above-the-line" mean and why is that good. Above the line simply refers to being above the line for "Adjusted Grose Income" which means you don't have to itemize to take it. As a tax payer, you have the choice to either add up all of your deductions (ie, itemize) or take the standard deduction (last year it was 5,250 for a person or 10,500 for a married couple). So if you get a $2,000 deduction that brings your total "itemized deductions" to $4,500, you obviously are better off with the standard and that $2,000 deduction is really worthless to you. By taking it above-the-line, you essentially deduct it before you get to the itemized or standard comparison. In other words, everyone actually gets it that isn't rich (Adjusted Gross Income too high, see below).
Temporary Tax Deduction on Car PurchasesPurchasers of new vehicles will get an above-the-line deduction for the state sales taxes, local sales taxes, and excise taxes paid. To qualify, a vehicle must be newly purchased for first use by the taxpayer and must (1) be a passenger vehicle, light truck, or motorcycle with a gross weight of no more than 8,500 pounds, or (2) be a motor home.Deductible taxes cannot exceed the portion attributable to the first $49,500 of the price paid for any single vehicle.Phase-outs start for individuals with AGI greater than $125,000 ($250,000 for MFJ).
Bottom line, if you are looking to head to one of these dealerships that is closing and closing its inventory, keep your receipt. IF you are buying a new car, you can deduct the sales tax. Unlike a lot of tax breaks, this is above the line. OK, so what does "above-the-line" mean and why is that good. Above the line simply refers to being above the line for "Adjusted Grose Income" which means you don't have to itemize to take it. As a tax payer, you have the choice to either add up all of your deductions (ie, itemize) or take the standard deduction (last year it was 5,250 for a person or 10,500 for a married couple). So if you get a $2,000 deduction that brings your total "itemized deductions" to $4,500, you obviously are better off with the standard and that $2,000 deduction is really worthless to you. By taking it above-the-line, you essentially deduct it before you get to the itemized or standard comparison. In other words, everyone actually gets it that isn't rich (Adjusted Gross Income too high, see below).
Temporary Tax Deduction on Car PurchasesPurchasers of new vehicles will get an above-the-line deduction for the state sales taxes, local sales taxes, and excise taxes paid. To qualify, a vehicle must be newly purchased for first use by the taxpayer and must (1) be a passenger vehicle, light truck, or motorcycle with a gross weight of no more than 8,500 pounds, or (2) be a motor home.Deductible taxes cannot exceed the portion attributable to the first $49,500 of the price paid for any single vehicle.Phase-outs start for individuals with AGI greater than $125,000 ($250,000 for MFJ).
Saturday, February 21, 2009
Some details of Obama's Stimulus Package
Incentives for Individuals
Tax breaks and credit enhancements for individuals include a refundable “making work pay” credit, an increased First-Time-Homebuyer credit, enhanced earned income and child tax credits, a deduction for taxes paid on new vehicles, and an improved education credit. Also included in the Recovery Act is a one-year AMT patch.
Making Work Pay
The Making Work Pay Credit is a refundable income tax credit for tax years beginning in 2009 and 2010. The credit is the lesser of (1) 6.2% of the individual’s earned income, or (2) $400 ($800 for MFJ). This credit is available, in full, to workers with a modified AGI of $75,000 ($150,000 for MFJ) or less. Above that amount, the credit will be phased out at a rate of 2%.
Note: The credit does not apply to any individual whose tax return does not include a Social Security Number.
An employee can take the credit through reduced wage withholdings or in a lump sum when filing his or her annual income tax return. An employer’s share of FICA (or its 6.2% equivalent) would remain unchanged.
The credit applies to self-employment earnings to the extent that they’re considered in computing taxable income.
Economic Recovery Payment
Under the Recovery Act, certain fixed-income individuals (such as disabled veterans, railroad retirees, Social Security recipients, and certain government workers) will receive a one-time recovery payment of $250 in 2009. For individuals who receive both this payment and the Making Work Pay Credit, the Making Work Pay credit will be reduced by the $250 payment.
First-Time Homebuyer Credit
For home purchases made after December 31, 2008, the new law raises the first-time homebuyer tax credit to $8,000 (from $7,500) and extends that credit to November 30, 2009. Any required repayments to IRS are eliminated after 36 months in the home. Phase-outs begin for individuals with AGI greater than $75,000 ($150,000 for MFJ) for the year of purchase. (Phase-outs apply for both 2008 and 2009.) A taxpayer who bought a home on or after April 9, 2008, and before January 1, 2009, will not qualify for the new homebuyer credit; the purchase will continue to be governed by the original 2008 first-time homebuyer credit.
Temporary Tax Deduction on Car Purchases
Purchasers of new vehicles will get an above-the-line deduction for the state sales taxes, local sales taxes, and excise taxes paid. To qualify, a vehicle must be newly purchased for first use by the taxpayer and must (1) be a passenger vehicle, light truck, or motorcycle with a gross weight of no more than 8,500 pounds, or (2) be a motor home.
Deductible taxes cannot exceed the portion attributable to the first $49,500 of the price paid for any single vehicle.
Phase-outs start for individuals with AGI greater than $125,000 ($250,000 for MFJ).
American Opportunity Tax Credit (Hope Credit)
The Hope Credit, which is being renamed to the American Opportunity Tax Credit, has been enhanced in the following ways under the new law:
• Amount increased to a maximum of $2,500 (from $1,800) per eligible student per year
• Modified rate of 100% of the first $2,000; 25% of the next $2,000, with a maximum $2,500 per year allowed on $4,000 in qualifying payments
• Forty percent of the credit will be refundable for 2009 and 2010
• Credit will now apply for all four years of college
• Qualifying expenses will now include course materials
• Phase-out level increased to $80,000 AGI ($160,000 for MFJ)
Qualified Tuition Programs (“529 Plans”)
For 2009 and 2010, a beneficiary of a qualified tuition program can use distributions to pay for computers and computer technology (including internet). Distributions will be tax-free. Previously, these expenses were not tax-free and were included in the beneficiary’s income and subject to penalty.
Earned Income Tax Credit
For 2009 and 2010, EITC percentage will be increased to 45% of the first $12,750 of earned income for taxpayers who have three or more qualifying children.( Prior to the new law, the credit percentage was 40% of the first $12,750 for taxpayers with two or more qualifying children.) In addition, the EITC phase-out range has been adjusted upward by $1,880 to eliminate any marriage penalty for joint filers.
Child Tax Credit
For 2009 and 2010, the refundable part of the child tax credit will be increased. The income threshold will now be set at $3,000.
Unemployment Compensation
Generally, a taxpayer’s gross income must include all unemployment compensation benefits received. Under the new law, in 2009 only, up to $2,400 of unemployment compensation will be excluded from gross income for federal income tax purposes.
Transit Benefits Parity
Transit passes, van pooling, qualified parking, and other qualified transportation fringe benefits are not typically included employee income up to a certain dollar amount. Under the new law, this dollar amount will be increased to $230 per month (up from $120) for transit passes and van pooling. This increased exclusion goes into effect in March 2009. It will continue through 2010 with adjustments made for inflation.
AMT Patch
The new law provides for an alternative minimum tax (AMT) patch for 2009. The following table shows the differences in exemption from 2008 to 2009.
MT Patch Exemption Amounts
2008 2009
Joint filers and surviving spouses 69,950 70,950 (up $1,000)
Singles and heads of households 46,200 46,700 (up $500)
Residential Energy Property Credit
Under the Recovery Act, the Residential Energy Property Credit allows a credit for eligible property placed in service after December 31, 2008, and before January 1, 2011, with the following modifications to the credit that was allowed in years prior to 2008:
• Increase of residential energy property tax credit to 30% (from 10%)
• Increase of maximum cap to $1,500 aggregate amount for 2009 and 2010 installations
• Elimination of the $500 lifetime cap
Eligible property includes insulation materials, exterior windows and doors, central air conditioners,
natural gas, propane or oil water heaters and furnaces, hot water boilers, electric heat-pump water heaters, certain metal roofs and stoves, and advanced main air-circulating fans.
Residential Energy-Efficient Property Credit
Modifications to the Residential Energy-Efficient Property Credit include removal of individual dollar caps under credit regulations for solar hot water property, geothermal heat pumps, and wind energy property. In addition, a $500 credit cap is placed on all qualified fuel cell property expenditures.
Tax breaks and credit enhancements for individuals include a refundable “making work pay” credit, an increased First-Time-Homebuyer credit, enhanced earned income and child tax credits, a deduction for taxes paid on new vehicles, and an improved education credit. Also included in the Recovery Act is a one-year AMT patch.
Making Work Pay
The Making Work Pay Credit is a refundable income tax credit for tax years beginning in 2009 and 2010. The credit is the lesser of (1) 6.2% of the individual’s earned income, or (2) $400 ($800 for MFJ). This credit is available, in full, to workers with a modified AGI of $75,000 ($150,000 for MFJ) or less. Above that amount, the credit will be phased out at a rate of 2%.
Note: The credit does not apply to any individual whose tax return does not include a Social Security Number.
An employee can take the credit through reduced wage withholdings or in a lump sum when filing his or her annual income tax return. An employer’s share of FICA (or its 6.2% equivalent) would remain unchanged.
The credit applies to self-employment earnings to the extent that they’re considered in computing taxable income.
Economic Recovery Payment
Under the Recovery Act, certain fixed-income individuals (such as disabled veterans, railroad retirees, Social Security recipients, and certain government workers) will receive a one-time recovery payment of $250 in 2009. For individuals who receive both this payment and the Making Work Pay Credit, the Making Work Pay credit will be reduced by the $250 payment.
First-Time Homebuyer Credit
For home purchases made after December 31, 2008, the new law raises the first-time homebuyer tax credit to $8,000 (from $7,500) and extends that credit to November 30, 2009. Any required repayments to IRS are eliminated after 36 months in the home. Phase-outs begin for individuals with AGI greater than $75,000 ($150,000 for MFJ) for the year of purchase. (Phase-outs apply for both 2008 and 2009.) A taxpayer who bought a home on or after April 9, 2008, and before January 1, 2009, will not qualify for the new homebuyer credit; the purchase will continue to be governed by the original 2008 first-time homebuyer credit.
Temporary Tax Deduction on Car Purchases
Purchasers of new vehicles will get an above-the-line deduction for the state sales taxes, local sales taxes, and excise taxes paid. To qualify, a vehicle must be newly purchased for first use by the taxpayer and must (1) be a passenger vehicle, light truck, or motorcycle with a gross weight of no more than 8,500 pounds, or (2) be a motor home.
Deductible taxes cannot exceed the portion attributable to the first $49,500 of the price paid for any single vehicle.
Phase-outs start for individuals with AGI greater than $125,000 ($250,000 for MFJ).
American Opportunity Tax Credit (Hope Credit)
The Hope Credit, which is being renamed to the American Opportunity Tax Credit, has been enhanced in the following ways under the new law:
• Amount increased to a maximum of $2,500 (from $1,800) per eligible student per year
• Modified rate of 100% of the first $2,000; 25% of the next $2,000, with a maximum $2,500 per year allowed on $4,000 in qualifying payments
• Forty percent of the credit will be refundable for 2009 and 2010
• Credit will now apply for all four years of college
• Qualifying expenses will now include course materials
• Phase-out level increased to $80,000 AGI ($160,000 for MFJ)
Qualified Tuition Programs (“529 Plans”)
For 2009 and 2010, a beneficiary of a qualified tuition program can use distributions to pay for computers and computer technology (including internet). Distributions will be tax-free. Previously, these expenses were not tax-free and were included in the beneficiary’s income and subject to penalty.
Earned Income Tax Credit
For 2009 and 2010, EITC percentage will be increased to 45% of the first $12,750 of earned income for taxpayers who have three or more qualifying children.( Prior to the new law, the credit percentage was 40% of the first $12,750 for taxpayers with two or more qualifying children.) In addition, the EITC phase-out range has been adjusted upward by $1,880 to eliminate any marriage penalty for joint filers.
Child Tax Credit
For 2009 and 2010, the refundable part of the child tax credit will be increased. The income threshold will now be set at $3,000.
Unemployment Compensation
Generally, a taxpayer’s gross income must include all unemployment compensation benefits received. Under the new law, in 2009 only, up to $2,400 of unemployment compensation will be excluded from gross income for federal income tax purposes.
Transit Benefits Parity
Transit passes, van pooling, qualified parking, and other qualified transportation fringe benefits are not typically included employee income up to a certain dollar amount. Under the new law, this dollar amount will be increased to $230 per month (up from $120) for transit passes and van pooling. This increased exclusion goes into effect in March 2009. It will continue through 2010 with adjustments made for inflation.
AMT Patch
The new law provides for an alternative minimum tax (AMT) patch for 2009. The following table shows the differences in exemption from 2008 to 2009.
MT Patch Exemption Amounts
2008 2009
Joint filers and surviving spouses 69,950 70,950 (up $1,000)
Singles and heads of households 46,200 46,700 (up $500)
Residential Energy Property Credit
Under the Recovery Act, the Residential Energy Property Credit allows a credit for eligible property placed in service after December 31, 2008, and before January 1, 2011, with the following modifications to the credit that was allowed in years prior to 2008:
• Increase of residential energy property tax credit to 30% (from 10%)
• Increase of maximum cap to $1,500 aggregate amount for 2009 and 2010 installations
• Elimination of the $500 lifetime cap
Eligible property includes insulation materials, exterior windows and doors, central air conditioners,
natural gas, propane or oil water heaters and furnaces, hot water boilers, electric heat-pump water heaters, certain metal roofs and stoves, and advanced main air-circulating fans.
Residential Energy-Efficient Property Credit
Modifications to the Residential Energy-Efficient Property Credit include removal of individual dollar caps under credit regulations for solar hot water property, geothermal heat pumps, and wind energy property. In addition, a $500 credit cap is placed on all qualified fuel cell property expenditures.
Monday, January 12, 2009
"Death Tax" May Cause Deaths
I read an artical in the Wall Street Journal about a subject that won't affect most of you. The estate tax is a tax on wealth at the time of death. It only affects millionares.
http://online.wsj.com/article/SB123172020818472279.html
What this writer did not touch upon is a little talked about effect of the Bush Tax Cuts. Say Grandpa has $150 million. Next year, the estate tax aka the death tax, will be entirely repealed. As part of the early Bush tax cuts, it has been gradually cut back with a complete repeal in 2010 BUT then the law expires and the estate tax returns to its prior sting. This would result in a 55% tax on wealth over $1 million. So if Grandpa dies in 2010 with $150 million, no tax is levied and the heirs inherit all of his money. If Grandpa dies on January 15, 2011, the heirs lose $81.95 million. Crime shows and journalists will get a lot of juicy tales to report on as wealthy people die in December 2010. Ironically, if Obama does nothing, it will actually result in a higher tax on the rich. Yes, Obama is proposing a tax cut for the rich.
http://online.wsj.com/article/SB123172020818472279.html
What this writer did not touch upon is a little talked about effect of the Bush Tax Cuts. Say Grandpa has $150 million. Next year, the estate tax aka the death tax, will be entirely repealed. As part of the early Bush tax cuts, it has been gradually cut back with a complete repeal in 2010 BUT then the law expires and the estate tax returns to its prior sting. This would result in a 55% tax on wealth over $1 million. So if Grandpa dies in 2010 with $150 million, no tax is levied and the heirs inherit all of his money. If Grandpa dies on January 15, 2011, the heirs lose $81.95 million. Crime shows and journalists will get a lot of juicy tales to report on as wealthy people die in December 2010. Ironically, if Obama does nothing, it will actually result in a higher tax on the rich. Yes, Obama is proposing a tax cut for the rich.
Monday, January 5, 2009
Obama's Tax Rebate and Last Year's Rebates
Another season starts and it is looking a lot like last year. There is a stimulus package in Congress as I write this. The best guess for the average person's benefit is a $500 per person tax rebate ($1,000 for a couple). That is a guess since the bill has to pass the House, then the Senate, both versions matched up and passed again when finally the new President will sign it. It is anybody's guess what the final version will actually look like. I am being more diligent in asking for email addresses so that I can keep my clients up to date on this. Likely, they will use the filed return to determine the rebate and send out additional checks but there is also a plan discussed to decrease withholding as a method to return the money.
Then there is the issue of last year's rebate. Back in 2001, when Bush first took office, there was a rebate issued. The following year, there was a line added to determine whether taxpayers had received their check. If you had not received it and you were entitled to it, it was added onto your refund or taken off of your tax bill if you owed. The stimulus checks of last year are the same as that. You need to remember or bring in the letter you received reporting the amount of your check/deposit when you have this year's taxes done so that we can figure out if you are owed additional money. The way the law reads, the IRS issued rebate checks in 2008 for 2008 INCOME based upon 2007 INCOME. Of course that made it an estimate. If you ended up with 2008 income that did not qualify you for the check but received one because your 2007 income did qualify you, you will not be penalized (because they wanted you to feel comfortable in spending the money immediately). If the reverse is true, that your 2008 income DID qualify you even though you did not get a check because your 2007 income did not, then you will be able to claim that money in addition to your normal refund. Confused? Don't worry, Fireside is here to sort it all out for you. I look forward to seeing you this year.
Then there is the issue of last year's rebate. Back in 2001, when Bush first took office, there was a rebate issued. The following year, there was a line added to determine whether taxpayers had received their check. If you had not received it and you were entitled to it, it was added onto your refund or taken off of your tax bill if you owed. The stimulus checks of last year are the same as that. You need to remember or bring in the letter you received reporting the amount of your check/deposit when you have this year's taxes done so that we can figure out if you are owed additional money. The way the law reads, the IRS issued rebate checks in 2008 for 2008 INCOME based upon 2007 INCOME. Of course that made it an estimate. If you ended up with 2008 income that did not qualify you for the check but received one because your 2007 income did qualify you, you will not be penalized (because they wanted you to feel comfortable in spending the money immediately). If the reverse is true, that your 2008 income DID qualify you even though you did not get a check because your 2007 income did not, then you will be able to claim that money in addition to your normal refund. Confused? Don't worry, Fireside is here to sort it all out for you. I look forward to seeing you this year.
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