tax credit
6 Year-end tax reduction tips
Wednesday, December 21st, 2011 | tax | No Comments
Use these six tax reduction tips to reduce your 2011 tax bill, but act before December 31, 2011.
- Make charitable contributions by December 31. Keep a canceled check, a bank statement, credit card statement or a written statement from the charity, showing the name of the charity and the date and amount of the contribution for all cash donations. Donations charged to a credit card by Dec. 31 are deductible for 2011, even if the bill isn’t paid until 2012. If you donate clothing or household items, they must be in good used condition or better to be deductible.
- Install energy-efficient home improvements such as insulation, new windows and water heaters to your main home for a tax credit of up to $500. The work must be finished by December 31.
- Adjust your investment portfolio and consider selling gaining and losing investments. Capital losses offset capital gains. Up to $3,000 of any excess capital loss per year offsets other income, and any leftover loss may be carried forward to reduce future tax bills.
- Contribute the maximum to retirement accounts such as 401(k) and similar workplace retirement programs by December 31 to reduce taxable income. You have until April 17, 2012, to set up a new IRA or add money to an existing IRA and still have it count for 2011. Generally, you can contribute up to $5,000 to a traditional or Roth IRA, and up to $6,000 if age 50 or over.
- Make a Qualified Charitable Distribution from your IRA to a qualified charity if you are age 70 1/2 or over. The maximum annual exclusion from gross income for QCDs is $100,000. It is available even if you do not itemize deductions.
- Take the Small Business Health Care Tax Credit if you are a small employer who pays at least half of your employee health insurance premiums. This calculation is tricky, so consult your tax professional for assistance.
Remember to save receipts and records related to your taxes so that you can make sure your return is accurate and you can get the maximum tax reduction available to you.
Chevy Volt tax credit may not be yours
Monday, June 6th, 2011 | tax | 1 Comment
The Chevy Volt, General Motors’ electric car, may bring a $7500 tax credit to the original purchaser of the car. But is that you or the dealership? Stories are surfacing that dealers are using the common practice of dealer trades to get the cars titled, claim the tax credits for themselves, and then sell the cars as ‘used’. This maneuver subverts the intent of the credit to subsidize retail consumers’ purchases of the vehicles. It also inflates the sales numbers that GM reports.
The National Legal and Policy Center reported (here and here) on this practice, and the story has been picked up by automobilemag.com and Fox Business Network. IRS Form 8936, used to claim the credit, does not contain a space to record each vehicle’s VIN, raising the possibility that the credit could be claimed twice (that’s $15,000 of our taxpayer dollars) for vehicles involved in such actions. The IRS may also disallow the credit claimed by the retail customer, forcing repayment plus penalties and interest by the taxpayers for whom the credit was intended.
If you are considering buying a Chevy Volt, Nissan Leaf, or other plug-in electric vehicle, make sure you are buying the vehicle new in order to claim the credit. If the vehicle has been previously titled, you are not eligible. We also suggest saving your paperwork. We anticipate that the IRS will demand various forms of proof that you are eligible to claim the credit. In a similar manner regarding the first-time homebuyer credit, we have seen many taxpayers’ refunds held up for many weeks while the IRS demands and examines stacks of records to ensure that the credits are paid only to those who are eligible.
Last-minute filer? Risky!
Tuesday, March 15th, 2011 | tax | No Comments
Studies have shown that people who wait until the last minute to file their tax returns make more errors and miss tax breaks. As you are gathering your records, think back through last year’s events and transactions. Make a list and ask your accountant about them. You may be surprised to find out that they have an income tax impact.
Kiplinger magazine publishes its list of the most-overlooked tax breaks:
- State sales taxes,
- Reinvested dividends,
- Out-of-pocket charitable contributions,
- Student loan interest paid by parents,
- Job-hunting costs,
- Moving expenses,
- Military reservists’ travel expenses,
- Health insurance deduction to reduce self-employment tax,
- Child care credit,
- Estate tax on income in respect of a decedent,
- State tax paid last year,
- Refinancing points,
- Jury pay turned over to your employer,
- American Opportunity credit,
- Making Work Pay credit,
- Credit for energy-saving home improvements,
- Bonus depreciation on business asset purchases,
- Stock received in a demutualization,
- Home buyer credit.
Call us with questions about any of these items, or any other events in your life in 2010. We recommend that you pull together your information and questions and get them to us now so we will have time to do our best work for you.
Making Work Pay Credit
Thursday, March 10th, 2011 | tax | No Comments
The Making Work Pay Credit is an income tax credit available to most taxpayers with earned income. We’ve talked to several folks who were unfamiliar with the Making Work Pay Credit, which is available only on your 2010 individual tax return. One of them was surprised when her refund was $400 more than she calculated, and she wanted to make sure the IRS was not mistaken before she cashed the check!
The credit is calculated as 6.2% of earned income, which for most taxpayers is W-2 wages. Self-employment income (or loss) also is factored into the earned income total. The maximum credit is $400 per person; married couples filing joint returns may be eligible for up to $800. If your earned income is more than $95,000 for single filers or $190,000 for joint filers, the credit is phased out. You are not eligible for the credit if you can be claimed as a dependent on someone else’s return.
The Making Work Pay Credit is claimed in the Payments section of the tax return, rather than the Taxes and Credits section. This may be why some filers miss claiming the credit. Form 1040 (long-form) filers also must submit Schedule M to calculate the credit. Make sure you claim it if you are eligible.
One friend who filed her own 1040-EZ return overlooked the Making Work Pay Credit, and she was surprised when her refund was greater by $400. The IRS had recalculated her overpayment to include the credit. It’s nice to know that the IRS computer adjusted her return, but will it catch them all?
As always, there are details that we cannot cover here, so check with your tax adviser to find out how the Making Work Pay Credit applies in your particular situation.
Tax filing delayed for some
Monday, December 27th, 2010 | tax | 1 Comment
The tax relief law enacted on December 17 extended current tax rates and other provisions for two years. It also retroactively extended several tax breaks that had expired at the end of 2009. As a result, the IRS must reprogram their processing systems before the agency can begin receiving tax returns that claim these breaks. The IRS will announce a specific date, which they expect to be in middle to late February. The delay affects both paper and electronic filing.
Taxpayers who fall into the following categories must wait to file:
- Those who claim itemized deductions on Form 1040 Schedule A. The tax relief law extended the deduction for state and local sales tax, which many Tennesseeans claim.
- Those who claim the Higher Education Tuition and Fees deduction, covering up to $4,000 of tuition and fees for post-secondary education. Taxpayers who claim other education credits, including the American Opportunity (modified Hope) credit and Lifetime Learning credit, are not affected by the delay.
- Educators who claim the $250 Educator Expense deduction on Form 1040 or 1040A for out-of-pocket classroom expenses.
For most taxpayers, who are not in these categories, tax filing season will begin on time in mid-January.
For answers to your questions about the tax relief law or other changes, please contact us from here, email us, or give us a call at (865) 523-8700.
Health care tax credit starts this year
Monday, December 6th, 2010 | tax | No Comments
If your company or tax-exempt organization provides group health insurance coverage to your employees, it may be eligible for a tax credit on its 2010 return. The criteria for taxable entities:
- Employ fewer than 25 “full-time equivalent” employees (FTE, explained later);
- Pay average annual wages less than $50,000 per FTE;
- Maintain a “qualifying arrangement” for which the employer pays at least 50% of the premium cost.
The IRS has released Form 8941 to claim the credit. In the instructions to the form, they provide a worksheet to help you determine your eligibility for the credit, which phases out as the number of FTEs and average wages increase. The rules are slightly different for tax-exempt entities, but all employers use Form 8941 to claim the credit.
You should consult your tax advisor to ensure you don’t get tripped up by details in the law and regulations, but here are some highlights:
- Owners and their family members are not included in the calculations (check with your tax advisor for details).
- Full-time equivalent employees (FTEs) include part-time employees. Add every employee’s total hours, then divide by 2,080 (40 x 52 weeks), then round down to calculate the number of FTEs.
- Divide the total wages by the number of FTEs to calculate the average annual wages. All wages, including overtime and those for hours worked over the 2,080 full-time hours, must be taken into account.
- A self-insured plan, Health Reimbursement Arrangement (HRA), Health Flexible Spending Arrangement (FSA), or Health Savings Account (HSA) does not constitute a qualifying arrangement. The plan must be issued by a licensed insurer.
- Plans covering leased employees and multi-employer plans may be qualifying arrangements.
- Eligible premiums are only those paid for the employees, not their spouses or dependents.
The maximum credit is 35% of the qualifying premiums (25% for tax-exempt entities). It is reduced as the number of FTEs exceeds 10 and the average annual wages exceed $25,000.
Eligibility for the credit may affect your tax planning. Project your taxable income for the year to determine if there is an income tax liability that can be offset by the credit. Its value is lost to the extent that the tax bill is less than the credit.
This credit remains in place under current law until 2014, when health care reform takes full effect.
Homebuyer credit - 2 weeks left
Tuesday, September 14th, 2010 | tax | No Comments
To claim the first-time homebuyer credit or the long-time homebuyer credit, you must close the purchase of your new principal residence by September 30, 2010, the new deadline extended by Congress from June 30, 2010. The binding contract for the purchase must be dated on or before April 30, 2010. If the residence is under construction, a certificate of occupancy must be issued before September 30.
Don’t expect much leniency if you miss the deadline, and don’t expect to receive the credit quickly. There are several reasons why:
- The sheer volume of credit claims has created a huge backlog. While some taxpayers have received approval of the credit within a few weeks, many have waited months for their credits to be processed.
- Many fraudulent and abusive claims have been filed, leading the IRS to scrutinize every claim more carefully, which takes more time.
- The IRS is requiring the submission of extra documents so they can make sure each claim is legitimate.
You can increase your chances of a less troublesome filing process by submitting the following with Form 5405 to claim the credit:
- A copy of the HUD-1 settlement statement or similar document;
- For mobile home purchases, a copy of the retail sales contract;
- For new construction, a copy of the certificate of occupancy.
- The document must include all parties’ names and signatures, property address, sales price, and date of execution.
If you are claiming the long-time homebuyer credit, you must prove that you lived in your old home at least five consecutive years in the last eight. To do this, submit for five consecutive years:
- Forms 1098 or other mortgage interest statements,
- Property tax records, or
- Homeowners insurance records.
You have three options for claiming the credit:
- If you extended your 2009 return filing date from April 15 this year, you may claim the credit on this return;
- If you have already filed your 2009 return, you may file an amended return (amended returns often receive more scrutiny); or
- You may claim the credit on your 2010 return when you file next year.
Call us to help you determine your best options for claiming the homebuyer credit and properly document your claim. If you extended your 2009 return, send us your tax information right away so we can prepare it in time for the October 15 deadline. We look forward to hearing from you.
Congress helps homebuyers
Friday, July 2nd, 2010 | tax | No Comments
Homebuyers who were unable to close before July 1 have been granted a reprieve to claim the homebuyer credit. If the contract on their house was signed before May 1, they now have until September 30 to close on the purchase.
The homebuyer credit in its present form (it’s been amended three times now) is a tax credit of 10% of the home’s purchase price, up to a limit of $8,000. It is available to buyers who have not owned a principal residence in the last three years. A similar credit, limited to $6,500, is available to “long-time residents” who have lived in their old house for 5 consecutive years in the last eight before buying their new house.
In order to claim the credit, the buyers must have bought the house or signed a binding contract before May 1, 2010. The deadline to close the deal was June 30, but many buyers could not meet the deadline because of backlogs at lenders and federal agencies, construction delays, and difficulties working out terms of short sales. The extension of the closing deadline allows three more months to settle and close those deals, but it does not change the April 30 deadline for signing contracts.
There are limits and prcoedural rules to claiming the homebuyer credit. It is reduced or eliminated as income rises, and it cannot be claimed for homes whose purchase price exceeds $800,000. Dependents and purchasers under 18 cannot claim the credit, and it is not available if the house was purchased from certain relatives. Proper documentation must accompany Form 5405. Consult your tax advisor (our number is 865-523-8700) to make sure you follow all the rules to get your credit.