TaxBrain® Blog - Online Tax Preparation News

Take Advantage of Recovery Act Benefits!

2009-07-31T11:40:00.000-07:00

With 2009 now half over, the Internal Revenue Service reminds taxpayers to take advantage of the numerous tax breaks made available earlier this year in the American Recovery and Reinvestment Act (ARRA).

The recovery law provides tax incentives for first-time homebuyers, people purchasing new cars, those interested in making their homes more energy efficient and parents and students paying for college. But all of these incentives have expiration dates so taxpayers should take advantage of them while they can.

First-Time Homebuyer Credit
The Recovery Act extended and expanded the first-time homebuyer tax credit for 2009.
Taxpayers who didn’t own a principal residence during the past three years and purchase a home this year before Dec. 1 can receive a credit of up to $8,000 on either an original or amended 2008 tax return, or a 2009 return. But the purchase must close before Dec. 1, 2009, and an eligible taxpayer cannot claim the credit until after the closing date. This credit phases out at higher income levels, and different rules apply to home purchases made in 2008.

New Vehicle Purchase Incentive
ARRA also provides a tax break to taxpayers who make qualified new vehicle purchases after Feb. 16, 2009, and before Jan. 1, 2010.

Qualifying taxpayers can deduct the state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. There is no limit on the number of vehicles that may be purchased, and you may claim the deduction for taxes paid on multiple purchases. But the deduction per vehicle is limited to the tax on up to $49,500 of the purchase price of each qualifying vehicle and phases out for taxpayers at higher income levels. This deduction is available regardless of whether a taxpayer itemizes deductions on Schedule A.

Energy-Efficient Home Improvements
The Recovery Act also encourages homeowners to make their homes more energy efficient. The credit for nonbusiness energy property is increased for homeowners who make qualified energy-efficient improvements to existing homes. The law increases the rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to a total of $1,500 for improvements placed in service in 2009 and 2010.

Qualifying improvements include the addition of insulation, energy-efficient exterior windows and energy-efficient heating and air conditioning systems.

Tax Credit for First Four Years of College
The American opportunity credit is designed to help parents and students pay part of the cost of the first four years of college. The new credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. Tuition, related fees, books and other required course materials generally qualify. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

Certain Computer Technology Purchases Allowed for 529 Plans
ARRA adds computer technology to the list of college expenses (tuition, books, etc.) that can be paid for by a qualified tuition program (QTP), commonly referred to as a 529 plan. For 2009 and 2010, the law expands the definition of qualified higher education expenses to include expenses for computer technology and equipment or Internet access and related services to be used by the designated beneficiary of the QTP while enrolled at an eligible educational institution. Software designed for sports, games or hobbies does not qualify, unless it is predominantly educational in nature.

Making Work Pay and Withholding
The Making Work Pay Credit lowered tax withholding rates this year for 120 million American households. However, particular taxpayers who fall into any of the following groups should review their tax withholding rates to ensure enough tax is withheld, including multiple job holders, families in which both spouses work, workers who can be claimed as dependents by other taxpayers and pensioners. Failure to adjust your withholding could result in potentially smaller refunds or in limited instances may cause you to owe tax rather than receive a refund next year. So far in 2009, the average refund amount is $2,675, and 79 percent of all returns received a refund.

- Source IRS Newsletter

What You Should Know About Mortgage Workouts

2009-07-24T09:48:00.000-07:00

There is tax relief for struggling homeowners. If your mortgage debt is partly or entirely forgiven at any time during 2007 through 2012, you may be able to claim special tax relief on your federal income tax return for that year.

Here are six things the IRS wants you to know about mortgage debt forgiveness.

1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude from tax up to $2 million of debt forgiven on your principal residence. The limit is $1 million for a married person filing a separate return.

2. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief.

3. The debt must have been used to buy, build or substantially improve your principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.

4. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax-relief provision. In some cases, other kinds of tax relief – based on insolvency, for example – may be available.

5. If your debt is reduced or eliminated you should receive a Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property given up through foreclosure.

6. Taxpayers who qualify claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attaching it to their federal income tax return for the year.

For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit the IRS Website. A good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments.

- Source IRS Newsletter

Tips for Students with a Summer Job

2009-07-17T22:56:00.000-07:00

Many students get a summer job during their time off from school. Here are a few things students should to know about income earned while working a summer job.

1. Taxpayers fill out a W-4 when starting a new job. This form is used by employers to determine the amount of tax that will be withheld from your paycheck. Taxpayers with multiple summer jobs will want to make sure all their employers are withholding an adequate amount of taxes to cover their total income tax liability. To make sure your withholding is correct, visit the W-4 Calculator on taxbrain.com.

2. Whether you are working as a waiter or a camp counselor, you may receive tips as part of your summer income. All tip income you receive is taxable income and is therefore subject to federal income tax.

3. Many students do odd jobs over the summer to make extra cash. Earnings you received from self-employment are subject to income tax. These earnings include income from odd jobs like baby-sitting and lawn mowing.

4. If you have net earnings of $400 or more from self-employment, you will also have to pay self-employment tax. This tax pays for your benefits under the Social Security system. Social Security and Medicare benefits are available to individuals who are self-employed the same as they are to wage earners who have Social Security tax and Medicare tax withheld from their wages. The self-employment tax is figured on Form 1040, Schedule SE.

5. Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.

6. Special rules apply to services you perform as a newspaper carrier or distributor. You are a direct seller and treated as self-employed for federal tax purposes if you meet the following conditions:

• You are in the business of delivering newspapers.
• All your pay for these services directly relates to sales rather than to the number of hours worked.
• You perform the delivery services under a written contract which states that you will not be treated as an employee for federal tax purposes.

7. Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.

8. Don't forget to file your Federal and State taxes with taxbrain.com

IRS Tips for Taxpayers Starting a New Business

2009-07-10T22:36:00.000-07:00

Anyone starting a new business this summer should be aware of their federal tax responsibilities. Here are the top seven things the IRS wants you to know if you plan on opening a new business this year.

1. First, you must decide what type of business entity you are going to establish. The type your business takes will determine which tax form you have to file. The most common types of business are the sole proprietorship, partnership, corporation and S corporation.

2. The type of business you operate determines what taxes you must pay and how you pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.

3. An Employer Identification Number is used to identify a business entity. Generally, businesses need an EIN. Visit IRS.gov for more information about whether you will need an EIN. You can also apply for an EIN online at IRS.gov.

4. Good records will help you ensure successful operation of your new business. You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes.

5. Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common tax years used.

6. Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.

7. Visit the Business section of IRS.gov for resources to assist entrepreneurs with starting and operating a new business.

- Source IRS Newsletter

Five Tax Facts about Summertime Child Care Expenses

2009-07-10T22:15:00.000-07:00

Many parents who work or are looking for work must arrange for care of their children under 13 years of age during the school vacation.

Here are five facts the IRS wants you to know about a tax credit available for child care expenses. The Child and Dependent Care Credit is available for expenses incurred during the lazy hazy days of summer and throughout the rest of the year.

1) The cost of day camp can count as an expense towards the child and dependent care credit.

2) Expenses for overnight camps do not qualify.

3) If your childcare provider is a sitter at your home or a daycare facility outside the home, you'll get some tax benefit if you qualify for the credit.

4) The actual credit can be up to 35 percent of your qualifying expenses, depending upon your income.

5) You may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.

For more information, including rules for claiming this credit for your spouse or a dependent age 13 or over who is not able to care for himself or herself, check out IRS Publication 503, Child and Dependent Care Expenses.

- Source IRS Newsletter

IRS Tax Benefits for Job Seekers

2009-07-09T09:49:00.000-07:00

Many taxpayers spend time during the summer months polishing their résumé and attending career fairs. If you are searching for a job this summer, you may be able to deduct some of your expenses on your tax return.

Here are the top six things the IRS wants you to know about deducting costs related to your job search.

1. In order to deduct job search costs, the expenses must be spent on a job search in your current occupation. You may not deduct expenses incurred while looking for a job in a new occupation.

2. You can deduct employment and outplacement agency fees you pay while looking for a job in your present occupation. If your employer pays you back in a later year for employment agency fees, you must include the amount you receive in your gross income up to the amount of your tax benefit in the earlier year.

3. You can deduct amounts you spend for preparing and mailing copies of a résumé to prospective employers as long as you are looking for a new job in your present occupation.

4. If you travel to an area to look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. You can only deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job.

5. You cannot deduct job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one.

6. You cannot deduct job search expenses if you are looking for a job for the first time

- Source IRS Newsletter

Cash for Clunkers: Obama Passes Car Allowance Rebate System (CARS)

2009-06-26T11:41:00.000-07:00

June 25, 2009 - President Obama signed into law a program NHTSA is calling the Car Allowance Rebate System (CARS). This is a government program that helps you purchase a new, more fuel efficient vehicle when you trade in a less fuel efficient vehicle.

The program was aimed at replacing older vehicles -- built in model year 1984 or later.

Here's how the plan works: Car owners could get a voucher worth $3,500 if they traded in a vehicle getting 18 miles per gallon or less for one getting at least 22 mpg. The voucher would grow to $4,500 if the new car's mileage was 10 mpg higher than the old vehicle. The mpg figures are listed on the car's window sticker.

Owners of sport utility vehicles, pickup trucks or minivans getting 18 mpg or less could receive a voucher for $3,500 if their new truck or SUV got at least 2 mpg higher than their old vehicle. The voucher would increase to $4,500 if the mileage of the new truck or SUV was at least 5 mpg higher than the older vehicle.

NHTSA will publish rules and details for the program in 30 days. They are currently working closely with manufacturers, dealers, and disposal facilities to get a workable, effective program up and running.

Visit NHTSA's Car Allowance Rebate System site, CARS.gov for updates and further information

IRS Offers Tax Credit Guidance to Businesses Hiring Unemployed Veterans and Certain Youth

2009-06-03T12:42:00.000-07:00

WASHINGTON — Businesses planning to claim the newly-expanded work opportunity tax credit (WOTC) for eligible unemployed veterans and unskilled younger workers hired during the first part of 2009 have until Aug. 17 to request the certification required for these workers, according to the Internal Revenue Service.

Newly-revised Form 8850, now available on IRS.gov, is used by employers to request certification from their state workforce agency. The American Recovery and Reinvestment Act, enacted in February, added unemployed veterans returning to civilian life and “disconnected youth” to the list of groups covered by the credit. Though eligible unemployed veterans and disconnected youth who begin work anytime during 2009 or 2010 may qualify a business for the credit, certification by the state workforce agency is required.

In general, an unemployed veteran is a person discharged or released from the military during the five years preceding the hiring date who received unemployment benefits for at least four weeks during the one-year period ending on the hiring date. A “disconnected youth” is a person age 16 to 24 on the hiring date who has not been regularly employed or attending school and who meets other requirements.

The WOTC offers tax savings to businesses that hire workers belonging to any of 12 targeted groups, including unemployed veterans and disconnected youth. The other 10 include people ages 18 to 39 living in designated communities in 43 states and the District of Columbia, Hurricane Katrina employees, recipients of various types of public assistance, and certain veterans, summer youth workers and ex-felons. The instructions for Form 8850 detail the requirements for each of these groups.

The certification requirement applies to all groups of workers except employees who were Hurricane Katrina victims. Normally, a business must file Form 8850 with the state workforce agency within 28 days after the eligible worker begins work. But under a special rule, businesses have until Aug. 17, 2009, to file this form for unemployed veterans and disconnected youth who begin work on or after Jan. 1, 2009 and before July 17, 2009. Notice 2009-28, posted today on IRS.gov, and the instructions for Form 8850 provide details on this special rule.

- Source IRS Newsletter

Tax Credit for Ford Hybrids Begins Phase-Out

2009-05-28T09:00:00.000-07:00

WASHINGTON — The tax credit for hybrid passenger automobiles and light trucks manufactured by Ford Motor Company has begun to phase out for purchases made after March 31, 2009.

Taxpayers may claim the full amount of the credit only on purchases made before April 1, 2009, because the total number of vehicles sold reached the 60,000 vehicle threshold in the last quarter of 2008. The cumulative sales of qualified Ford hybrid vehicles sold from the period of Jan. 1, 2006, to Dec. 31, 2008 is 66,157.

For vehicles purchased for use or lease on or after April 1, 2009, and on or before Sept. 30, 2009, the credit is 50 percent of the full amount. For vehicles purchased for use or lease on or after Oct. 1, 2009, and on or before March 31, 2010, the credit is 25 percent of the full amount. For vehicles purchased for use or lease on or after April 1, 2010, no credit is allowable.

The full credit amount for vehicle purchases made prior to April 1, 2009 is:

2005, 2006, 2007 Ford Escape 2WD, $2,600;
2008, 2009 Ford Escape 2WD, $3,000;
2005, 2006, 2007, 2009 Ford Escape 4WD, $1,950;
2008 Ford Escape 4WD, $2,200;
2010 Ford Fusion, $3,400;
2008, 2009 Mercury Mariner 2WD, $3,000;
2006, 2007, 2009 Mercury Mariner 4WD, $1,950;
2008 Mercury Mariner 4WD, $2,200;
2010 Mercury Milan, $3,400

Related link:

N-2009-37 - Phase-out of Credit for New Qualified Hybrid Motor Vehicles and New Advanced Lean Burn Technology Motor Vehicles

- Source IRS Newsletter

Credit and Debit Card Fees Related to Tax Payment are Deductible

2009-05-26T09:00:00.000-07:00

WASHINGTON — Credit or debit card convenience fees charged for paying federal individual income taxes electronically are deductible for some taxpayers who itemize, the Internal Revenue Service announced today.

Federal law bars the IRS from paying any fees associated with these credit or debit transactions. Card processors normally charge taxpayers for convenience fees when they use their credit or debit card to pay taxes. Fees vary but average about 2.5 percent of the tax payment.

In reassessing a previous position, the IRS decided that the convenience fees associated with the payment of federal tax, including payment of estimated tax, can be included as a miscellaneous itemized deduction. However, only those miscellaneous expenses that exceeded 2 percent of the taxpayer’s adjusted gross income can be deducted.

Not everyone who pays the fees will be able to deduct them. Taxpayers first must be eligible to file a Form 1040 Schedule A to itemize their expenses. And, taxpayers must have enough miscellaneous expenses to exceed the 2 percent threshold. These expenses include items such as tax preparation costs, job search expenses and unreimbursed employee expenses.

For details on claiming miscellaneous deductions and figuring the 2 percent limit, see Publication 529.The fees are deductible in the tax year they occur. For example, fees charged to payments made during 2009 can be claimed on the 2009 return filed next year.

Most individuals still pay their federal tax obligations by check, but last year more than 4 million taxpayers electronically paid their taxes.

There are free options available. Taxpayers can have funds electronically withdrawn from their bank accounts or use the Electronic Federal Tax Payment System (EFTPS). Payments can be made either on-line or by phone, 24 hours a day, 7 days a week. Further details on these options are in the instructions for Form 1040 and under Electronic Payment Options for Individuals on IRS.gov.

- Source IRS Newsletter

What to do if You Receive an IRS Notice

2009-05-21T09:00:00.000-07:00

It’s a moment many taxpayers dread. A letter arrives from the IRS — and it’s not a refund check. Don’t panic; many of these letters can be dealt with simply and painlessly.

Each year, the IRS sends millions of letters and notices to taxpayers to request payment of taxes, notify them of a change to their account or request additional information. The notice you receive normally covers a very specific issue about your account or tax return. Each letter and notice offers specific instructions on what you are asked to do to satisfy the inquiry.

If you receive a correction notice, you should review the correspondence and compare it with the information on your return.

Agree? If you agree with the correction to your account, usually no reply is necessary unless a payment is due.
Disagree? If you do not agree with the correction the IRS made, it is important that you respond as requested. Write to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.

Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right-hand corner of the notice. Have a copy of your tax return and the correspondence available when you call to help us respond to your inquiry.

Be sure to keep copies of any correspondence with your records.

For more information about IRS notices and bills, see Publication 594, What You Should Know about the IRS Collection Process. Information about penalties and interest charges is available in Publication 17, Your Federal Income Tax. Both publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

- Source IRS Newsletter

Top Ten Facts about Amended Returns

2009-05-19T09:00:00.000-07:00

Taxpayers who need to make a change or adjustment on a return they already filed can do so by filing an amended return. Here are the top 10 things every taxpayer should know about amending your federal tax return.

Taxpayers needing to amend their return use Form 1040X, Amended U.S. Individual Income Tax Return.
Taxpayers can use Form 1040X to correct previously filed Forms 1040, 1040A or 1040EZ. The 1040X can also be used to correct a return filed electronically.
Taxpayers should file an amended return if they discover any of the following items were reported incorrectly: filing status, dependents, total income, deductions or credits.
Generally, you do not need to file an amended return for math errors as the IRS will be ale to make the correction for you.
You also do not usually need to file an amended return because you forgot to include forms – such as W-2s or schedules – when you filed; the IRS normally requests those forms from you.
Be sure to enter the year of the return you are amending at the top of Form 1040X. Generally, you must file Form 1040X within three years from the date you filed your original return or within two years from the date you paid the tax, whichever is later.
If you are amending more than one tax return, prepare a 1040X for each return and mail them in separate envelopes to the IRS processing center for the area in which you live. The 1040X instructions list the addresses for the centers.
If the changes involve another schedule or form, attach it to the 1040X.
If you are filing to claim an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund.
If you owe additional tax for 2008, you should file Form 1040X and pay the tax as soon as possible to limit interest and penalty charges. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions.

Links:

Form 1040X, Amended U.S. Individual Income Tax Return (PDF 110K)
Form 1040X Instructions (PDF 45K)
Tax Topic 308 — Amended Returns

- Source IRS Newsletter

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Seven Facts about the New Sales Tax Deduction for Vehicle Purchases

2009-05-14T09:00:00.000-07:00

Audio: American Recovery and Reinvestment Act Vehicle Tax Deduction

Taxpayers who buy a new car or several other types of motor vehicles this year may be entitled to a special tax deduction when they file their 2009 federal tax returns next year. The tax break is part of the American Recovery and Reinvestment Act of 2009.

Here are seven things you should know about this new deduction:

State and local sales taxes paid on up to $49,500 of the purchase price of qualifying vehicles are deductible.
Qualified motor vehicles generally include new (not used) cars, light trucks, motor homes and motorcycles.
Purchases must occur after Feb. 16, 2009, and before Jan. 1, 2010.
This deduction can be taken regardless of whether or not you itemize other deductions on your tax return.
Taxpayers will claim this deduction when filing their 2009 federal income tax return next year.
The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.
The deduction may not be taken on 2008 tax returns.

Consumers who are considering buying a new car may find that this tax incentive means there may have never been a better time to buy.

For more information about the sales and excise tax deduction for motor vehicle purchases visit the official IRS web site at IRS.gov.

- Source IRS Newsletter

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Energy-Saving Steps This Year May Result in Tax Savings Next Year

2009-05-12T09:11:00.000-07:00

WASHINGON — The Internal Revenue Service today reminded individual and business taxpayers that many energy-saving steps taken this year may result in bigger tax savings next year.
The recently enacted American Recovery and Reinvestment (ARRA) of 2009 contained a number of either new or expanded tax benefits on expenditures to reduce energy use or create new energy sources.

The IRS encouraged individuals and businesses to explore whether they are eligible for any of the new energy tax provisions. More information on the wide range of energy items is available on the special Recovery section of IRS.gov. For a larger listing of ARRA’s energy-related tax benefits, see Fact Sheet 2009-10.

Tax Credits for Home Energy Efficiency Improvements Increase

Homeowners can get bigger tax credits for making energy efficiency improvements or installing alternative energy equipment.

The IRS also announced homeowners seeking these tax credits can temporarily rely on existing manufacturer certifications or appropriate Energy Star labels for purchasing qualifying products until updated certification guidelines are announced later this spring.

“These new, expanded credits encourage homeowners to make improvements that will make their homes more energy efficient,” said IRS Commissioner Doug Shulman. “People can improve their homes and save money over the long run.”

ARRA provides for a uniform credit of 30 percent of the cost of qualifying improvements up to $1,500, such as adding insulation, energy-efficient exterior windows, and energy-efficient heating and air conditioning systems. The new law replaces the old law combination available in 2007 of a 10-percent credit for certain property and a credit equal to cost up to a specified amount for other property.

The new law also raised the limit on the amount that can be claimed for improvements placed in service during 2009 and 2010 to $1,500, instead of the $500 lifetime limit under the old law.

In addition, the new law has increased the energy efficiency standards for building insulation, exterior windows, doors, and skylights, certain central air conditioners, and natural gas, propane or oil water heaters placed in service after Feb. 17, 2009.

IRS guidance issued before the enactment of ARRA will be modified in the near future to reflect the new energy efficiency standards. In the meantime, homeowners may continue to rely on manufacturers’ certifications that were provided under the old guidance and on Energy Star labels for exterior windows and skylights in determining whether property purchased before June 1, 2009, qualifies for the credit. Manufacturers should not continue to provide certifications for property that fails to meet the new standards.

The new law also eliminates the cap on the 30 percent tax credit for alternative energy equipment, such as solar water heaters, geothermal heat pumps and small wind turbines, installed in a home. The cap generally has been eliminated for these improvements beginning in the 2009 tax year. The IRS today issued Notice 2009-41, which explains the effects of this change.

Funding Options for Renewable Energy Power Plants

Business taxpayers who place in service facilities that produce electricity from wind and some other renewable resources can choose one of three options to fund the project: a tax credit based on the amount invested, a tax credit based on the energy produced or a grant.

The flexibility to choose among these options was enacted as part of ARRA.

Taxpayers may opt to claim the energy investment tax credit, which generally provides a 30 percent tax credit for investments in energy projects, instead of the production tax credit, which can provide a credit of up to 2.1 cents per kilowatt-hour for electricity produced from renewable sources.

Taxpayers making qualified investments that are placed in service after 2008 and before 2014 (or 2013 for wind facilities) can make an irrevocable election to claim the energy investment tax credit instead of the renewable electricity production tax credit. IRS will issue guidance explaining how to make the election.

Taxpayers also can claim a grant once the property is placed in service instead of claiming either the energy investment tax credit or the renewable energy production tax credit. For qualified renewable energy facilities, the grant is 30 percent of the investment in the facility as long as construction begins in 2009 or 2010 and the property is placed in service before 2014 (2013 for wind facilities). The Treasury Department will issue guidance explaining how the grant works and how to apply.

Taxpayers electing to receive the grant, created by the ARRA, will not be eligible for either of the tax credits. Proceeds from the grants are not includible in the taxpayer’s gross income, but the grant amount is subject to recapture if the property is disposed of or otherwise ceases to qualify.

For more information on the renewable electricity production tax credit under Section 45 see Notice 2008-60 and Notice 2008-48, and for more information on the energy investment tax credit under Section 48 see Notice 2008-68.

- Source IRS Newsletter

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Tax Breaks for Taxpayers Who Purchase Plug-In Electric Vehicles

2009-05-07T09:00:00.000-07:00

WASHINGTON — Plug-in electric vehicles using certain types of batteries may qualify for a new tax credit if purchased this year, the Internal Revenue Service said today.

The Emergency Economic Stabilization Act of 2008 (EESA) and the American Recovery and Reinvestment Act of 2009 (ARRA) created two new tax credits for various types of electric vehicles, which may include what are commonly referred to as neighborhood electric vehicles.

ARRA creates a tax credit for low-speed or two- or three-wheel electric vehicles, such as motor scooters, purchased after Feb. 17, 2009, and before Jan. 1, 2012. The amount of the credit is 10 percent of the cost of the vehicle, up to a maximum credit of $2,500. To qualify, a vehicle must be either a low-speed vehicle that is propelled to a significant extent by a rechargeable battery with a capacity of at least 4 kilowatt hours or be a two- or three-wheeled vehicle that is propelled to a significant extent by a rechargeable battery with a capacity of at least 2.5 kilowatt hours.

EESA created a tax credit for vehicles that have at least four wheels and draw propulsion using a rechargeable traction battery with at least four kilowatt hours of capacity. For 2009, the minimum credit is $2,500 and the credit tops out at $7,500 to $15,000, depending on the weight of the vehicle and the capacity of the battery.

During 2009, low-speed, four-wheeled vehicles manufactured primarily for use on public streets, roads and highways (neighborhood electric vehicles) may qualify both for the EESA credit and, if purchased after February 17, 2009, for the ARRA credit for low-speed electric vehicles. A taxpayer may not claim both credits for the same vehicle. Vehicles manufactured primarily for off-road use, such as for use on a golf course, do not qualify for either credit.

The Internal Revenue Service is working on guidance regarding certification procedures for both of these credits.

- Source IRS Newsletter

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E-file Hits Record 90 Million; 30 Million Filed From Home Computers

2009-05-05T11:54:00.000-07:00

WASHINGTON — The Internal Revenue Service announced today a record 90 million tax returns were filed electronically this year, led by a big increase in people using home computers.

For the first time, more than 30 million individual income tax returns were filed from home computers. By April 24, the IRS had accepted 31.2 million returns filed from home computers, up 19.3 percent from the same time last year.

IRS e-file broke the 90 million mark this year. By April 24, the IRS had accepted 90.6 million income tax returns through e-file, up almost 6 percent compared to the same time last year.

“E-file is a great option for taxpayers, and this year’s record is another sign people enjoy the speed and accuracy of e-file,” said IRS Commissioner Doug Shulman. “We remind taxpayers with extensions who haven’t filed yet that they can still take advantage of e-file.”

A higher percentage of the population is choosing to e-file this year. As of April 24, almost 70 percent of individuals chose to e-file their tax returns, compared to 61 percent for the same time last year. The IRS will continue to accept income tax returns through IRS e-file and Free File until Oct. 15.

IRS e-file is popular because it’s fast, safe and accurate. An electronically prepared and filed return has an error rate of less than 1 percent, compared to an error rate of about 20 percent for a paper prepared return.

People can receive a refund in as little as 10 days if they use electronic filing and direct deposit. Also, people who owe can also pay electronically by debiting their financial account or using a credit card.

- Source IRS Newsletter

IRS Tips on Preparing for a Disaster

2009-04-27T08:43:00.000-07:00

Planning what to do in case of a disaster is an important part of being prepared. The Internal Revenue Service encourages taxpayers to safeguard their records. Some simple steps can help taxpayers and businesses protect financial and tax records in case of disasters.

Listed below are tips for individuals and businesses on preparing for a disaster.

Recordkeeping Take advantage of paperless recordkeeping for financial and tax records. Many people receive bank statements and documents by e-mail. This method is an outstanding way to secure financial records. Important tax records such as W-2s, tax returns and other paper documents can be scanned onto an electronic format. You can copy them onto a ‘key’ or ‘jump drive’ periodically and then keep the electronic records in a safe place.
Document Valuables and Business Equipment The IRS has disaster loss workbooks for individuals and businesses that can help you compile a room-by-room list of your belongings or business equipment. This will help you recall and prove the market value of items for insurance and casualty loss claims.
Check on Fiduciary Bonds Employers who use payroll service providers should ask the provider if they have a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider.
Continuity of Operations Planning for Businesses How quickly your company can get back to business after a disaster often depends on emergency planning done today. Start planning now to improve the likelihood that your company will survive and recover. Review your emergency plans annually. Just as your business changes over time, so do your preparedness needs. When you hire new employees or when there are changes in how your company functions, you should update your plans and inform your people.
Update Emergency Plans Emergency plans should be reviewed annually. Individual taxpayers should make sure they are saving documents everybody should keep including such things as W-2s, home closing statements and insurance records. Make sure you have a means of receiving severe weather information; if you have a NOAA Weather Radio, put fresh batteries in it. Make sure you know what you should do if threatening weather approaches.
Count on the IRS In the event of a disaster, the IRS stands ready to help. The IRS has valuable information you can request if your records are destroyed. If you have been impacted by a federally declared disaster, you may receive copies or transcripts of previously filed tax returns free of charge by submitting Form 4506, Request for Copy of Tax Form, or Form 4506-T, Request for Transcript of Tax Return, clearly identified as a disaster related request.

For more information type “Preparing for a Disaster” in the search box on the IRS.gov homepage.

Links:

Disaster Assistance and Emergency Relief for Individuals and Businesses
IRS Publication 584, Casualty, Disaster and Theft Loss Workbook (PDF)
IRS Publication 584-B, Business Casualty, Disaster and Theft Loss Workbook (PDF)

- Source IRS Newsletter

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Ten Things You May Not Know about Farm Income and Deductions

2009-04-24T08:26:00.000-07:00

If you are in the business of farming, here are some things you may want to know before filing your federal tax return.

Crop Insurance Proceeds You must include in income any crop insurance proceeds you receive as the result of crop damage. You generally include them in the year you receive them.
Sales Caused by Weather-Related Condition If you sell more livestock, including poultry, than you normally would in a year because of weather-related conditions, you may be able to choose to postpone reporting the gain from selling the additional animals until the next year.
Farm Income Averaging You may be able to average all or some of your current year's farm income and refiguring your tax over the three prior years. This may give you a lower tax if your current year income from farming is high, and your taxable income from one or more of the three prior years was low.
Deductible Farm Expenses The ordinary and necessary costs of operating a farm for profit are deductible business expenses. An ordinary expense is an expense that is common and accepted in the business. A necessary expense is one that is appropriate for the business.
Employees You can deduct reasonable wages paid for labor hired to perform your farming operations.
Items Purchased for Resale You may be able to deduct the cost of livestock and other items purchased for resale in the year of sale. This cost includes freight charges for transporting the livestock to the farm.
Net Operating Losses If your deductible loss from operating your farm is more than your other income for the year, you may have a net operating loss. If you have a net operating loss this year, you can carry it to other years and deduct it. You may be able to get a refund of all or part of the income tax you paid for past years, or you may be able to reduce your tax in future years.
Repayment of Loans You cannot deduct the repayment of a loan. However, if you use the proceeds of a loan for farm business expenses, you can deduct the interest you pay on the loan.
Fuel and Road Use You may be eligible to claim a credit or refund of excise taxes on fuel used on a farm for farming purposes.
Farmers Tax Guide More information about farm income and deductions can be found in IRS Publication 225, Farmer’s Tax Guide, which can be obtained online at IRS.gov.

Links:

IRS Publication 225, Farmer's Tax Guide

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First-Time Homebuyers Options to Maximize New Tax Credit

2009-04-22T09:20:00.000-07:00

WASHINGTON — As part of the Treasury Department’s consumer outreach effort and with the April 15 individual tax filing deadline approaching, the Internal Revenue Service today began a concerted effort to educate taxpayers about additional options at their disposal to claim the new $8,000 first-time homebuyer credit for 2009 home purchases. For people who recently purchased a home or are considering buying in the next few months, there are several different ways that they can get this tax credit even if they’ve already filed their tax return.

The Treasury Department encourages taxpayers to explore these options to maximize their credit and get their money back as fast as possible.

“The new credit can get money in the pockets of first-time homebuyers quickly,” said IRS Commissioner Doug Shulman. “For people who recently purchased a home or are considering buying in the next few months, there are several different ways that they can get this tax credit even if they’ve already filed their tax return.”

First-time homebuyers represent a significant portion of existing single-family home sales. The expansion in the first-time homebuyer credit will make it easier for first-time homebuyers to enter the housing market this year.

Under the American Recovery and Reinvestment Act of 2009, qualifying taxpayers who purchase a home before Dec. 1 receive up to $8,000, or $4,000 for married individuals filing separately. People can claim the credit either on their 2008 tax returns due April 15 or on their 2009 tax returns next year.

The filing options to consider are:

File an extension — Taxpayers who haven’t yet filed their 2008 returns but are buying a home soon can request a six-month extension to October 15. This step would be faster than waiting until next year to claim it on the 2009 tax return. Even with an extension, taxpayers could still file electronically, receiving their refund in as few as 10 days with direct deposit.
File now, amend later — Taxpayers due a sizable refund for their 2008 tax return but who also are considering buying a house in the next few months can file their return now and claim the credit later. Taxpayers would file their 2008 tax forms as usual, then follow up with an amended return later this year to claim the homebuyer credit.
Amend the 2008 tax return — Taxpayers buying a home in the near future who have already filed their 2008 tax return can consider filing an amended tax return. The amended tax return will allow them to claim the homebuyer credit on the 2008 return without waiting until next year to claim it on the 2009 return.
Claim the credit in 2009 rather than 2008 — For some taxpayers, it may make more financial sense to wait and claim the homebuyer credit next year when they file the 2009 tax return rather than claiming it now on the 2008 tax return. This could benefit taxpayers who might qualify for a higher credit on the 2009 tax return. This could include people who have less income in 2009 than 2008 because of factors such as a job loss or drop in investment income.

The IRS reminds taxpayers the amount of the credit begins to phase out for taxpayers whose modified adjusted gross income is more than $75,000, or $150,000 for joint filers. Taxpayers can claim 10 percent of the purchase price up to $8,000, or $4,000 for married individuals filing separately.

IRS.gov provides more information, including guidance for people who bought their first homes in 2008. To learn more about the overall implementation of the Recovery Act, visit www.Recovery.gov.

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The IRS Rejected my E-File!?! Now What?

2009-04-20T13:35:00.000-07:00

Did you slave over mounds of documents into the wee hours of April 15th? Did you double check every number, every calculation and hit the submit button just as the clock stuck midnight? Did you eagerly await the email acknowledgement from the IRS of your return when you get it says “e-file rejected’’. Oh No! Now What!?! All of these thoughts are rushing through your head and panic sets in. I'm late filing my taxes!

First, don’t panic! E-file rejections are common. In many cases, an electronic filing error can be quickly and easily resolved. When a tax return is rejected, all it means is that there was an error in the tax return you e-filed. Tax returns can be rejected for numerous reasons, such as a misspelled name or address, incorrect w-2 information, etc.

Just log into your TaxBrain account, locate the rejected return under Completed Tax Returns and click on the return. The reason(s) the return was rejected will be listed below the Worksheet list near the bottom of the screen. Clicking the link for each reject error will take you to the corresponding form and line item of the error.

After the errors are corrected, proceed through checkout to resubmit the return. There is no charge for resubmitting a return on TaxBrain.com.

So, when you tax return is rejected do not panic. Just read the information provided with the rejection, make the necessary changes, and re-submit it for processing. You can re-transmit your corrected tax return for 5 days after the deadline without any penalty. If you can not submit your return via e-file, you can print the return and mail it. Be sure to include the “e-file rejection” notice.

Seven Things you Should Know When Selling Your Home

2009-04-20T09:09:00.000-07:00

People who sell their home may be able to exclude the gain from their income. Here are seven things every homeowner should know if they sold, or plan to sell their house.

Amount of exclusion. When you have gain from the sale of your home, you may be able to exclude up to $250,000 of the gain from your income. For most taxpayers filing a joint return, the exclusion amount is $500,000.
Ownership test. To claim the exclusion you must have owned the home for at least two years during the five year period ending on the date of the sale.
Use test. You also must have lived in the house and used it as your main home for at least two years during the five year period ending on the date of the sale.
When not to report. If you are able to exclude all of the gain from the sale of your home, you do not need to report the sale on your federal income tax return.
Reporting taxable gain. If you have gain which cannot be excluded, it is taxable and must be reported on your tax return using Schedule D.
Deducting a loss. You cannot deduct a loss from the sale of your home.
Rules for multiple homes. If you have more than one home, you may only exclude gain from the sale of your main home and must pay tax on the gain resulting from the sale of any other home. Your main home is generally the one you live in most of the time.

For more information see IRS Publication 523, Selling Your Home, available at IRS.gov.

Links:

Publication 523, Selling Your Home (PDF 194K)

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Top Ten Things You Need to Know About Making Federal Tax Payments

2009-04-17T09:50:00.000-07:00

Will you be making a payment with your federal tax return this year? If so, here is what you need to know about making tax payments correctly.

Never send cash!
If you file electronically, you can file and pay in a single step by authorizing an electronic funds withdrawal via tax preparation software or a tax professional.
You can pay by phone or online using a credit or debit card whether you file a paper return or electronically.
Electronic payment options provide an alternative to paying taxes or user fees by check or money order. You can make payments 24 hours a day, seven days a week. Visit IRS.gov and search e-pay, or refer to Publication 3611, e-File Electronic Payments for more details.
If you itemize, you may be able to deduct the convenience fee charged for paying individual income taxes with a credit or debit card as a miscellaneous itemized deduction. The deduction is subject to the 2 percent limit on Form 1040, Schedule A, Itemized Deductions.
Enclose your payment with your return, but do not staple it to the form.
If you pay by check or money order, make sure it is payable to the “United States Treasury.”
Always provide your correct name, address, Social Security number listed first on the tax form, daytime telephone number, tax year and form number on the front of your check or money order.
Complete and include Form 1040-V, Payment Voucher, when sending your payment and tax return to the IRS. This will help the IRS process your payment accurately and efficiently.
For more information, call 800-829-4477 for TeleTax Topic 158, "Ensuring Proper Credit of Payments.” You can also find out more in Publication 17, Your Federal Income Tax and Form 1040-V, both available at IRS.gov.

Links

Publication 17, Your Federal Income Tax (PDF 2,072K)

- Source IRS Newsletter

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First $2,400 of Unemployment Benefits Tax Free for 2009

2009-04-15T08:35:00.000-07:00

WASHINGTON — All or part of unemployment benefits received in 2009 will be tax free for many unemployed workers, according to the Internal Revenue Service.

“This morning we learned that a record 5.6 million people were receiving unemployment benefits in the middle of March. This underscores the need for the relief provided by the American Recovery and Reinvestment Act, which includes making the first $2,400 of unemployment insurance exempt from tax,” said IRS Commissioner Doug Shulman. “I urge all unemployed workers to take this special tax break into account as they plan their tax withholding and quarterly estimated tax payments for the year. This change offers a helping hand to millions of Americans who are out of work and struggling to make ends meet.”

Under the American Recovery and Reinvestment Act, enacted last month, every person who receives unemployment benefits during 2009 is eligible to exclude the first $2,400 of these benefits when they file their tax return next year. For a married couple, the exclusion applies to each spouse, separately. Thus, if both spouses receive unemployment benefits during 2009, each may exclude from income the first $2,400 of benefits they receive.

The new law doesn’t affect the return taxpayers are filling out now. Unemployment benefits received in 2008 and prior years remain fully taxable.

Unemployed workers can choose to have income tax withheld from their unemployment benefit payments. Withholding on these payments is voluntary. However, choosing this option may help avoid a surprise year-end tax bill or a possible penalty for having paid too little tax during the year. Those who choose this option will have a flat 10 percent tax withheld from their benefits.

Unemployed workers who expect to receive more than $2,400 in benefits this year should consider having tax withheld from their benefit payments in excess of that amount. Those unemployed workers who have already chosen to have tax taken out of their benefits, should consider the $2,400 exclusion in determining whether to continue to have tax withheld.

Use Form W-4V, Voluntary Withholding Request, or the equivalent form provided by the payer to request withholding to begin or end. Form W-4V is also available on IRS.gov.

Related Items:

IRS Information Related to the American Recovery and Reinvestment Act of 2009

- Source IRS Newsletter

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Economic Stimulus of 2009 and Your W-4: What You Need to Know

2009-04-13T09:15:00.000-07:00

Most Americans will see an increase in their paychecks due to the Making Work Pay Tax Credit (MWP) provision of the American Recovery and Reinvestment Act. To help taxpayers estimate the credit, TaxBrain recently launched a new W-4 calculator tool which reflects the new withholding amounts related to the tax credit.

View the calculator here: http://www.taxbrain.com/taxcenter/economicstimulus_w4.asp

The MWP Credit is the lesser of 6.2% of the taxpayer’s earned income or $400 ($800 if married filing jointly). The credit will be in the form of reduced federal withholdings from your pay check. If you are self-employed, you will be able to receive the benefits of the credit when you file your 2009 tax return. Recipients of Social Security, SSI, Railroad, Disability, and Veteran Retirement will receive a one-time check of $250 this year.

To qualify for the MWP Credit, you cannot be a nonresident alien, a dependent on some else’s return, or have an invalid social security number. If your employer has automatically reduced your federal tax withholding and you do not qualify for the MWP, you might need to get with your employer to increase your federal withholdings.

The W-4 calculator does not take into account the following:
1. You are an employee with more than two jobs;
2. You and your spouse both work;
3. You or your spouse receive Social Security benefits and also work.

Because the IRS withholding tables cannot take into account the situations listed above, the reduced withholding may actually lead to you owing more taxes than you expected when it is time to file your taxes. As a result, you may need to increase your federal income tax withholding for one or more of your employers in order to ensure that withholding are not reduced more than $400 for the year.

For Example:
Nick is single and holds two jobs during the year and also received social security benefits. He could receive up to $1,050 in credits during the year ($400 of reduced federal withholdings from job #1 + $400 of reduced federal withholdings from job #2 + $250 check from Social Security benefits).

Because Nick is filing single, he is only eligible for up to maximum $400 credit. So the difference between the credits received during the year ($1,050) and the amount he is eligible for ($400) will need to be paid back to the IRS when filing his return. That difference is a $650 additional tax liability on his tax return!

If you decide that you do not want your withholding to change, you should give your employer a new Form W-4.

Ten Tips for Deducting Charitable Contributions

2009-04-13T09:00:00.000-07:00

When preparing to file your federal tax return, don’t forget your contributions to charitable organizations. Your donations could add up to a sizeable tax deduction if you itemize on IRS Form 1040, Schedule A.

Here are a few tips to ensure your contributions pay off on your tax return:

Contributions must be made to qualified organizations to be deductible. You cannot deduct contributions made to specific individuals, political organizations and candidates.
You cannot deduct the value of your time or services. Nor can you deduct the cost of raffles, bingo or other games of chance.
If your contributions entitle you to merchandise, goods or services, including admission to a charity ball, banquet, theatrical performance or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.
Donations of stock or other property are usually valued at the fair market value of the property. Special rules apply to donation of vehicles.
Clothing and household items donated must generally be in good used condition or better to be deductible.
Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution.
To claim a deduction for contributions of cash or property equaling $250 or more you must obtain a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document from the organization may satisfy both the written communication requirement for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more.
If you claim a deduction of more than $500 for all contributed property, you must attach IRS Form 8283, Noncash Charitable Contributions, to your return.
Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which requires an appraisal by a qualified appraiser.
Contributions made for relief efforts in a Midwest disaster area receive special benefits. For more information, see Publication 4492-B, Information for Affected Taxpayers in the Midwest Disaster Areas.

For more information on charitable contributions, check out Publication 526, Charitable Contributions, which is available at IRS.gov.

Links:

Search for Charities or download Publication 78, Cumulative List of Organizations
Publication 526, Charitable Contributions (PDF 178K)
Publication 561, Determining the Value of Donated Property (PDF 101K)

- Source IRS Newsletter

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