Archive for February, 2012

Have You Had A Debt Forgiven? It Could Be Reportable (Taxable) Income!

Tuesday, February 28th, 2012

The exclusive purpose for the information which is provided from this website is to disseminate information, and not to provide tax advice.

 While there are several different scenarios in which this provision of the tax laws applies, one typical situation occurs when you (A) owe money to a lender (B) and are not able to repay that debt. You don’t meet the requirements for filing under the bankruptcy laws.  B acknowledges the fact that sooner or later you will default or abandon the property (if you have not already done so).  B “forgives” (writes off the unpaid balance or destroys the mortgage note) the unpaid balance of the debt that you owe him/her.  You may now have reportable and taxable income.  The essence of the transaction is that you received something of real value – a forgiven (as in debt elimination) note.  You now longer owe B a dime!!  At the end of the year B writes off the unpaid debt as a “Bad Debt Expense” and issues you a Form 1099 C (“Cancellation of Debt”)    Here is the link to the instructions for this form:  http://www.irs.gov/pub/irs-pdf/i1099ac.pdf   In certain circumstances you may also receive a 1099 A (“Acquisition or Abandonment of Secured Property”).  If you meet the requirements, you may qualify for a partial or total exclusion of the taxable income under the provisions of the “Mortgage Forgiveness Debt Relief Act of 2007″ which applies to tax years 2007 – 2012. 

You may need to consult with the Internal Revenue Service, the issuer of the 1099 C, your tax preparer, or a tax attorney.  (more…)

Education Tax Credits – The American Opportunity Credit & The Lifetime Learning Credit

Friday, February 24th, 2012

The exclusive purpose for the information which is provided from this website is to disseminate information, and not to provide tax advice.

Education Tax Credits Help Pay Higher Education Costs 

 

Two federal tax credits may help you offset the costs of higher education for yourself or your dependents.  These are the American Opportunity Credit and the Lifetime Learning Credit.

To qualify for either credit, you must pay postsecondary tuition and fees for yourself, your spouse or your dependent. The credit may be claimed by either the parent or the student, but not both. If the student was claimed as a dependent, the student cannot file for the credit.

For each student, you may claim only one of the credits in a single tax year. You cannot claim the American Opportunity Credit to pay for part of your daughter’s tuition charges and then claim the Lifetime Learning Credit for $2,000 more of her school costs.

However, if you pay college expenses for two or more students in the same year, you can choose to take credits on a per-student, per-year basis. You can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your spouse’s graduate school tuition.

Here are some key facts the IRS wants you to know about these valuable education credits:

1.   The American Opportunity Credit

  • The credit can be up to $2,500 per eligible student.
  • It is available for the first four years of postsecondary education.
  • Forty percent of the credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes.
  • The student must be pursuing an undergraduate degree or other recognized educational credential.
  • The student must be enrolled at least half time for at least one academic period.
  • Qualified expenses include tuition and fees, coursed related books supplies and equipment.
  • The full credit is generally available to eligible taxpayers whose modified adjusted gross income is less than $80,000 or $160,000 for married couples filing a joint return.

2.   Lifetime Learning Credit

  • The credit can be up to $2,000 per eligible student.
  • It is available for all years of postsecondary education and for courses to acquire or improve job skills.
  • The maximum credited is limited to the amount of tax you must pay on your return.
  • The student does not need to be pursuing a degree or other recognized education credential.
  • Qualified expenses include tuition and fees, course related books, supplies and equipment.
  • The full credit is generally available to eligible taxpayers whose modified adjusted gross income is less than $60,000 or $120,000 for married couples filing a joint return.

If you don’t qualify for these education credits, you may qualify for the tuition and fees deduction, which can reduce the amount of your income subject to tax by up to $4,000. However, you cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction and should consider which is more beneficial for you.

For more information about these tax benefits, see IRS Publication 970, Tax Benefits for Education available at www.irs.gov or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).

Links:

 

Capital Gains and Losses

Wednesday, February 22nd, 2012

The exclusive purpose for the information which is provided from this website is to disseminate information, and not to provide tax advice.

Ten Things to Know About Capital Gains and Losses

 

Did you know that almost everything you own and use for personal or investment purposes is a capital asset? Capital assets include a home, household furnishings and stocks and bonds held in a personal account. When you sell a capital asset, the difference between the amount you paid for the asset and its sales price is a capital gain or capital loss.

Here are 10 facts from the IRS about how gains and losses can affect your federal income tax return.

1.   Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.

2.   When you sell a capital asset, the difference between the amount you sell it for and your basis – which is usually what you paid for it – is a capital gain or a capital loss.

3.   You must report all capital gains.

4.   You may only deduct capital losses on investment property, not on personal-use property.

5.   Capital gains and losses are classified as long-term or short-term. If you hold the property more than one year, your capital gain or loss is long-term. If you hold it one year or less, the gain or loss is short-term.

6.   If you have long-term gains in excess of your long-term losses, the difference is normally a net capital gain. Subtract any short-term losses from the net capital gain to calculate the net capital gain you must report.

7.   The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2011, the maximum capital gains rate for most people is 15 percent. For lower-income individuals, the rate may be 0 percent on some or all of the net capital gain. Rates of 25 or 28 percent may apply to special types of net capital gain.

8.   If your capital losses exceed your capital gains, you can deduct the excess on your tax return to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.

9.   If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.

10.   This year, a new form, Form 8949, Sales and Other Dispositions of Capital Assets, will be used to calculate capital gains and losses. Use Form 8949 to list all capital gain and loss transactions. The subtotals from this form will then be carried over to Schedule D (Form 1040), where gain or loss will be calculated.

For more information about reporting capital gains and losses, see the Schedule D instructions, Publication 550, Investment Income and Expenses or Publication 17, Your Federal Income Tax. All forms and publications are available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

  • Publication 17, Your Federal Income Tax (PDF 2015.9K)
  • Publication 550, Investment Income and Expenses (PDF 516K)

Is The Early Distribution From Your Retirement Plan Taxable???

Tuesday, February 21st, 2012

The exclusive purpose for the information which is provided from this website is to disseminate information, and not to provide tax advice.

As frustrating as it may be, the best answer to this question may be “it depends!”  It depends on what?  The facts and circumstances of your particular situation.  It can be relative simple, i.e. an IRA plan rollover that is completed in 60 days, you fulfilled all of the requirements for the rollover,  and you had no access to the funds during the 60 day time period = not taxable, or it can be somewhat more complicated, i.e. you were age 53 when you made the withdrawal but you had a significant “cost basis” in your IRA, but you did not keep the required files and records to quantitatively determine your “cost basis.”   One of the best reference documents which is available on this subject is IRS Publication 590, “Individual Retirement Arrangements”.  (http://www.irs.gov/pub/irs-pdf/p590.pdf )  (more…)

Be Aware of These Tax Scams!!

Friday, February 17th, 2012

The exclusive purpose for the information which is provided from this website is to disseminate information, and not to provide tax advice.

This article addresses some of the more common tax scams that have already been identified from actual filed complaints.  However, there are others in existence.  For many different reasons, in some cases the victims have elected not to file a report or complaint.  In summary, there are far too many unscrupulous people in the United States whose main goal in life is to continuously engage in these activities.

Dirty Dozen Tax Scams

 

The Internal Revenue Service has issued its annual “Dirty Dozen” tax scams list, reminding taxpayers to use caution during tax season to protect themselves against a wide range of schemes ranging from identity theft to return preparer fraud.

The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns.

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. The IRS Criminal Investigation Division works closely with the Department of Justice to shut down scams and prosecute the criminals behind them.

Here are five of the Dirty Dozen tax scams for 2012:

Identity theft   In response to growing identity theft concerns, the IRS has embarked on a comprehensive strategy 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 and is working to help victims of 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. 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 on this website.

Phishing    These scams are typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure potential victims into providing 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.

It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has information that can help you protect yourself from email scams.

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 must 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 will not include 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.

For advice on how to find a competent tax professional, see Tips for Choosing a Tax Preparer.

Hiding income offshore    Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then using debit 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 requirements that need to be fulfilled. U.S. 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.

“Free money” from the IRS & tax scams involving Social Security     Fliers 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 the scammer uses inflated amounts to complete the return for a larger refund they’ll run off with.

These are some of the Dirty Dozen Tax Scams for 2012. For a complete list, see IRS Releases the Dirty Dozen Tax Scams for 2012.
Links:

YouTube Videos:

The Dirty Dozen English | Spanish | ASL