In 2012, Many Tax Benefits Increase Due to Inflation Adjustments

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

By law, the dollar amounts for a variety of tax provisions, affecting virtually every taxpayer, must be revised each year to keep pace with inflation. New dollar amounts affecting 2012 returns, filed by most taxpayers in early 2013, include the following: The value of each personal and dependent exemption, available to most taxpayers, is $3,800, up $100 from 2011. The new standard deduction is $11,900 for married couples filing a joint return, up $300, $5,950 for singles and married individuals filing separately, up $150, and $8,700 for heads of household, up $200. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes. Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700, up from $69,000 in 2011.

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

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

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

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

Details on these inflation adjustments can be found in Revenue Procedure 2011-52,

What If I Lose My Job?

Seven Tax Tips for Recently Married Taxpayers

With the summer wedding season in full swing, the Internal Revenue Service advises the soon-to-be married and the just married to review their changing tax status. If you recently got married or are planning a wedding, the last thing on your mind is taxes. However, there are some important steps you need to take to avoid stress at tax time. Here are seven tips for newlyweds.

1. Notify the Social Security Administration Report any name change to the Social Security Administration so your name and Social Security number will match when you file your next tax return. File a Form SS-5, Application for a Social Security Card, at your local SSA office. The form is available on SSA’s website at www.ssa.gov, by calling 800-772-1213 or at local offices.
2. Notify the IRS if you move If you have a new address you should notify the IRS by sending Form 8822, Change of Address. You may download Form 8822 from www.IRS.gov or order it by calling 800–TAX–FORM (800–829–3676).
3. Notify the U.S. Postal Service You should also notify the U.S. Postal Service when you move so it can forward any IRS correspondence or refunds.
4. Notify your employer Report any name and address changes to your employer(s) to make sure you receive your Form W-2, Wage and Tax Statement, after the end of the year.
5. Check your withholding If both you and your spouse work, your combined income may place you in a higher tax bracket. You can use the IRS Withholding Calculator available on www.irs.gov to assist you in determining the correct amount of withholding needed for your new filing status. The IRS Withholding Calculator will give you the information you need to complete a new Form W-4, Employee's Withholding Allowance Certificate. You can fill it out and print it online and then give the form to your employer(s) so they withhold the correct amount from your pay.
6. Select the right tax form Choosing the right individual income tax form can help save money. Newly married taxpayers may find that they now have enough deductions to itemize on their tax returns. Itemized deductions must be claimed on a Form 1040, not a 1040A or 1040EZ.
7. Choose the best filing status A person’s marital status on Dec. 31 determines whether the person is considered married for that year. Generally, the tax law allows married couples to choose to file their federal income tax return either jointly or separately in any given year. Figuring the tax both ways can determine which filing status will result in the lowest tax, but usually filing jointly is more beneficial.

For more information about changing your name, address and income tax withholding visit www.irs.gov.  IRS forms and publications can be obtained fromwww.irs.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

• Form 8822, Change of Address (PDF)
• IRS Withholding Calculator 
• W-4, Employee's Withholding Allowance Certificate (PDF)
• Social Security website

YouTube Video:

Getting Married? -  English

Seven Tax Tips for Job Seekers

Many taxpayers spend time during the summer months updating their résumé and attending career fairs. The Internal Revenue Service reminds job seekers that you may be able to deduct some of the expenses on your tax return.
Here are seven things the IRS wants you to know about deducting costs related to your job search.

1. To qualify for a deduction, the expenses must be spent on a job search in your current occupation. You may not deduct expenses you incur 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 your 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.
7. The amount of job search expenses that you can claim on your tax return is limited. You can claim the amount that is more than 2 percent of your adjusted gross income.  You figure your deduction on Schedule A.

For more information about job search expenses, see IRS Publication 529, Miscellaneous Deductions. This publication is available on www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

Summer Day Camp Expenses May Qualify for a Tax Credit

Along with the lazy, hazy days of summer come some extra expenses, including summer day camp. But, the IRS has some good news for parents: those added expenses may help you qualify for a tax credit.

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 summer and throughout the rest of the year.

1. The cost of day camp may count as an expense towards the child and dependent care credit.
2. Expenses for overnight camps do not qualify.
3. Whether 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 credit can be up to 35 percent of your qualifying expenses, depending on 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 check out IRS Publication 503, Child and Dependent Care Expenses. This publication is available at www.irs.gov or by calling             800-TAX-FORM       (            800-829-3676      ).

What Happens after I File?

Now that the federal income tax filing deadline is in your rear-view mirror, what happens after you file? A lot of taxpayers have post tax-filing questions such as what records do I keep and more importantly, “Where’s my Refund?” The IRS has answers for you below.

Refund Information
You can go online to check the status of your 2010 refund 72 hours after IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after you mail a paper return. Be sure to have a copy of your 2010 tax return available because you will need to know your filing status, the first Social Security number shown on the return, and the exact whole-dollar amount of the refund. You have three options for checking on your refund:

    * Go to http://irs.gov and click on “Where’s My Refund”
    * Call 800-829-4477~24 hours a day, seven days a week, for automated refund information
    * Call 800-829-1954 during the hours shown in your tax form instructions
    * Use IRS2Go. If you have an Apple iPhone or iTouch or an Android device you can download an application to check the status of your refund.

What Records Should I Keep?
Normally, tax records should be kept for three years, but some documents — such as records relating to a home purchase or sale, stock transactions, IRAs and business or rental property — should be kept longer.

You should keep copies of tax returns you have filed and the tax forms package as part of your records. They may be helpful in amending already filed returns or preparing future returns.

Change of Address
If you move after you filed your return, send Form 8822, Change of Address, to the Internal Revenue Service. If you are expecting a paper refund check, you should also file a change of address with the U.S. Postal Service.

What If I Made a Mistake?
Errors may delay your refund or result in notices being sent to you. If you discover an error on your return, you can correct your return by filing an amended return using Form 1040X, Amended U.S. Individual Income Tax Return.

Visit the IRS website at http://www.irs.gov for more information on refunds, recordkeeping, address changes and amended returns.

Tips for Managing Your Tax Records

After you file your taxes, you will have many records that may help document items on your tax return. You will need these documents should the IRS select your return for examination. Here are five tips from the IRS about keeping good records.

1. Normally, tax records should be kept for three years.
2. Some documents — such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property — should be kept longer.
3. In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return.
4. Records you should keep include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks, proofs of payment, and any other records to support deductions or credits you claim on your return.
5. For more information on what kinds of records to keep, see IRS Publication 552, Recordkeeping for Individuals, which is available on the IRS website at http://www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

Read This if you Need More Time to Pay Your Taxes

Taxpayers who owe taxes may be relieved to know that there are some options for those who owe and can’t afford to pay the full amount right away.

Here are the top 10 things the IRS wants you to know if you need more time to pay your taxes.

1. Taxpayers who are unable to pay all taxes due are encouraged to pay as much as possible. By paying as much as possible now, the amount of interest and penalties owed will be less.
2. Based on the circumstances, a taxpayer could qualify for an extension of time to pay, an installment agreement, temporary delay or an Offer in Compromise.
3. If you cannot pay the full amount, taxpayers should immediately call the number or write to the address on the bill they receive.
4. You may want to consider financing the full payment of your tax liability through a loan. The interest rate and fees charged by a bank or credit card company are usually lower than interest and penalties imposed by the Internal Revenue Code.
5. If you cannot pay in full immediately, you may qualify for a short amount of additional time, up to 120 days, to pay in full. No fee is charged for this type of payment arrangement and this option may minimize the amount of penalties and interest you incur.
6. You may also want to consider an installment agreement. This arrangement allows you to make monthly payments after a one-time fee of $105 is paid. If you choose to pay through a Direct Debit from your bank account, the fee is reduced to $52. Lower-income taxpayers may qualify for a reduced fee of $43.
7. To apply for an installment agreement you can use the Online Payment Agreement application available on the IRS website; file a Form 9465, Installment Agreement Request; or call the IRS at the telephone number shown on your bill.
8. In some cases, a taxpayer may qualify for an offer in compromise, an agreement between the taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement.
9. Even if you set up an installment agreement, the IRS may still file a Notice of Federal Tax Lien to secure the government’s interest until you make the final payment.
10. It is important to respond to an IRS notice. If you do not pay your tax liability in full or make an alternative payment arrangement, the IRS is entitled to take collection action.

Tax-Time Errors Filers Should Avoid

Mistakes on tax returns mean they take longer to process, which in turn, may cause your refund to arrive later. The IRS cautions against these nine common errors so your refund is timely.

1. Incorrect or missing Social Security Numbers When entering SSNs for anyone listed on your tax return, be sure to enter them exactly as they appear on the Social Security cards.
2. Incorrect or misspelling of dependent’s last name When entering a dependent’s last name on your tax return, ensure they are entered exactly as they appear on their Social Security card.
3. Filing status errors Make sure you choose the correct filing status for your situation. There are five filing statuses: Single, Married Filing Jointly, Married Filing Separately, Head of Household, and Qualifying Widow(er) With Dependent Child. See Publication 501, Exemptions, Standard Deduction, and Filing Information to determine the filing status that best fits your needs.
4. Math errors When preparing paper returns, review all math for accuracy. Or file electronically; the software does the math for you!
5. Computation errors Take your time. Many taxpayers make mistakes when figuring their taxable income, withholding and estimated tax payments, Earned Income Tax Credit, Standard Deduction for age 65 or over or blind, the taxable amount of Social Security benefits, and the Child and Dependent Care Credit.
6. Incorrect bank account numbers for Direct Deposit If you are due a refund and requested direct deposit review the routing and account numbers for your financial institution.
7. Forgetting to sign and date the return An unsigned tax return is like an unsigned check – it is invalid. And, remember on joint returns both taxpayers must sign the return.
8. Incorrect Adjusted Gross Income information Taxpayers filing electronically must sign the return electronically using a Personal Identification Number. To verify their identity, taxpayers will be prompted to enter their AGI from their originally filed 2009 federal income tax return or their prior year PIN if they used one to file electronically last year. Taxpayers should not use an AGI amount from an amended return, Form 1040X, or a math error correction made by IRS.
9. Claiming the Making Work Pay Tax Credit Taxpayers who file Form 1040 or 1040A will use Schedule M to figure the Making Work Pay Tax Credit. Completing Schedule M will help taxpayers determine whether they have already received the full credit in their paycheck or are due more money as a result of the credit. Taxpayers who file Form 1040-EZ should use the worksheet for Line 8 on the back of the 1040-EZ to figure their Making Work Pay Credit.

How to Start Your Small Business Retirement Plan

The IRS Employee Plans Division will host a free webinar on April 7 to provide information on which retirement plan is right for your small business.

Claim your FREE membership now!

Seven Facts about Injured Spouse Relief

If you file a joint return and all or part of your refund is applied against your spouses’ past-due federal tax, state income tax, child or spousal support or federal nontax debt, such as a student loan, you may be entitled to injured spouse relief.

Here are seven facts the IRS wants you to know about claiming injured spouse relief:

1. To be considered an injured spouse, you must have made and reported tax payments, such as federal income tax withheld from wages or estimated tax payments, or claimed a refundable tax credit, such as the earned income credit or additional child tax credit on the joint return, and not be legally obligated to pay the past-due amount.
2. If you live in a community property state, special rules apply. For more information about the factors used to determine whether you are subject to community property laws, see IRS Publication 555, Community Property.
3. If you filed a joint return and you're not responsible for the debt, but you are entitled to a portion of the refund you may request your portion of the refund by filing Form 8379, Injured Spouse Allocation.
4. You may file form 8379 along with your original tax return or your may file it by itself after you are notified of an offset.
5. You can file the Form 8379 electronically. If you file a paper tax return you can include Form 8379 with your return, write "INJURED SPOUSE" at the top left corner of the Form 1040, 1040A, or 1040EZ. IRS will process your allocation request before an offset occurs.
6. If you are filing Form 8379 by itself, it must show both spouses' social security numbers in the same order as they appeared on your income tax return. You, the "injured" spouse, must sign the form.
7. Do not use Form 8379 if you are claiming innocent spouse relief. Instead, file Form 8857, Request for Innocent Spouse Relief.  This relief from a joint liability applies only in certain limited circumstances. IRS Publication 971, Innocent Spouse Relief, explains who may qualify, and how to request this relief.

For more information about the Injured Spouse and Innocent Spouse Relief, visit www.IRS.gov.

Links:

• Publication 555, Community Property
• Form 8379, Injured Spouse Allocation
• Applying for Innocent Spouse Relief
• Publication 971, Innocent Spouse Relief 

Tax Refund Withholdings and Offsets

If you owe money because of certain delinquent debts, the IRS or the Department of Treasury's Financial Management Service (FMS), which issues IRS tax refunds, can offset or reduce your federal tax refund or withhold the entire amount to satisfy the debt.

Here are seven important facts the IRS wants you to know about tax refund offsets:

1. If you owe federal or state income taxes your refund will be offset to pay those taxes. If you had other debt such as child support or student loan debt that was submitted for offset, FMS will take as much of your refund as is needed to pay off the debt, and send it to the agency authorized to collect the debt. Any portion of your refund remaining after an offset will be refunded to you.
2. You will receive a notice if an offset occurs. The notice will reflect the original refund amount, your offset amount, the agency receiving the payment, and the address and telephone number of the agency.
3. You should contact the agency shown on the notice if you believe you do not owe the debt or you are disputing the amount taken from your refund.
4. If you filed a joint return and you're not responsible for the debt, but you are entitled to a portion of the refund, you may request your portion of the refund by filing IRS Form 8379, Injured Spouse Allocation. Attach Form 8379 to your original Form 1040, Form 1040A, or Form 1040EZ or file it by itself after you are notified of an offset.
5. If you file a Form 8379 with your return, write "INJURED SPOUSE" at the top left corner of the Form 1040, 1040A, or 1040EZ. IRS will process your allocation request before an offset occurs.
6. If you are filing Form 8379 by itself, it must show both spouses' social security numbers in the same order as they appeared on your income tax return. You, the "injured" spouse, must sign the form. Do not attach the previously filed Form 1040 to the Form 8379. Send Form 8379 to the Service Center where you filed your original return.
7. The IRS will compute the injured spouse's share of the joint return for you. Contact the IRS only if your original refund amount shown on the FMS offset notice differs from the refund amount shown on your tax return.

Follow the instructions on Form 8379 carefully and be sure to attach the required forms to avoid delays. If a notice is not received contact the Financial Management Service at 800–304–3107, Monday through Friday from 7:30AM to 5 PM (Central Time).

For assistance with completing Form 8379, call the IRS toll-free number 800-829-1040.

Link:

Form 8379, Injured Spouse Allocation

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Health Insurance Tax Breaks for the Self-Employed

Here is some information from the IRS about a special tax deduction for the self-employed. You may be able to deduct premiums paid for medical and dental insurance and qualified long-term care insurance for you, your spouse, and your dependents if you are one of the following:

The insurance plan must be established under your business.

For more information see IRS Publication 535, Business Expenses, available at http://www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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Six Facts about Choosing the Standard or Itemized Deductions

When filing your federal income tax return, taxpayers can choose to either take the standard deduction or to itemize their deductions. The IRS has put together the following six facts to help you choose the method that gives you the lowest tax.

Whether to itemize deductions on your tax return depends on how much you spent on certain expenses last year. Money paid for medical care, mortgage interest, taxes, charitable contributions, casualty losses and miscellaneous deductions can reduce your taxes. If the total amount spent on those categories is more than your standard deduction, you can usually benefit by itemizing.

1. Standard deduction amounts are based on your filing status and are subject to inflation adjustments each year. For 2010, they are:

• Single     $5,700
• Married Filing Jointly   $11,400
• Head of Household   $8,400
• Married Filing Separately  $5,700
• Qualifying Widow(er)  $11,400

2. Some taxpayers have different standard deductions The standard deduction amount depends on your filing status, whether you are 65 or older or blind and whether an exemption can be claimed for you by another taxpayer. If any of these apply, you must use the Standard Deduction Worksheet on the back of Form 1040EZ, or in the 1040A or 1040 instructions. The standard deduction amount also depends on whether you plan to claim the additional standard deduction for a loss from a disaster declared a federal disaster or state or local sales or excise tax you paid in 2010 on a new vehicle you bought before 2010. You must file Schedule L, Standard Deduction for Certain Filers to claim these additional amounts.

3. Limited itemized deductions Your itemized deductions are no longer limited because of your adjusted gross income.

4. Married Filing Separately When a married couple files separate returns and one spouse itemizes deductions, the other spouse cannot claim the standard deduction and therefore must itemize to claim their allowable deductions.

5. Some taxpayers are not eligible for the standard deduction They include nonresident aliens, dual-status aliens and individuals who file returns for periods of less than 12 months due to a change in accounting periods.

6. Forms to use The standard deduction can be taken on Forms 1040, 1040A or 1040EZ.  If you qualify for the higher standard deduction for new motor vehicle taxes or a net disaster loss, you must attach Schedule L. To itemize your deductions, use Form 1040, U.S. Individual Income Tax Return, and Schedule A, Itemized Deductions.

These forms and instructions may be downloaded from the IRS website at http://www.irs.gov800-829-3676). or ordered by calling 800-TAX-FORM (

 

Links:

• Publication 17, Your Federal Income Tax (PDF 2.3MB)
• Schedule A, Itemized Deductions (PDF) 

Small Business Bookkeeping Tips

Having a bookkeeper on your in-house team is ideal, but
not all small businesses can afford to have one. If this
is the case, you can do it yourself or utilize some of
the employees you may already have to do the bookkeeping
tasks.

It’s important to keep your personal and business finances
separate in order to keep things straight when it comes to
tax time. Don’t confuse yourself more by trying to mix the
two together.

You want to keep thorough records of business transactions
and accounts receivables. When tax time rolls around, you
can just use these to add up the figures instead of spending
time shuffling through scraps of paper in a shoebox.

Balance the books right away. Don’t wait for several
transactions to occur and then decide to balance them.
Some business owners put it off and then the task seems
insurmountable.

Be sure to check your financial statements often to determine
where you’re spending too much or too little. You may discover
if there are ways to cut costs in your small business or if
there are ways to budget some extra items into your business.

Always keep up to date on the new tax laws and regulations.
Don’t wait until tax time to check them out. There may be
something you can use now that would help you save money when
it’s time to file your taxes.

Always keep copies of all of your invoices in case the
originals get lost. If using computer software, make sure
you back up all of your files so that you have a copy in
case something unforeseen should happen.

Research all of the possible tax deductions you can use in
your business. Some items are deductible in full, while others
take depreciation into account.  Also, the tax strategy will
be different for small businesses operating out of the home
versus brick and mortar businesses that are independent from
the household.

A bookkeeper can take the headaches away for you to some degree, and you don’t have to hire one onto your staff.  If you can’t quite afford one yet, then take pleasure in knowing that all is
not lost with the vast amount of do-it-yourself resources
available to the small business owner.

IRS Has $1.1 Billion for People Who Have Not Filed a 2007 Income Tax Return.

Refunds totaling more than $1.1 billion may be waiting for nearly 1.1 million people who did not file a federal income tax return for 2007, the Internal Revenue Service announced. However, to collect the money, a return for 2007 must be filed with the IRS no later than Monday, April 18, 2011. 

Ten Important Facts 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 a capital asset is sold, the difference between the amount you paid for the asset and the amount you sold it for is a capital gain or capital loss.

Here are ten facts from the IRS about gains and losses and how they 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 deduct capital losses only on investment property, not on property held for personal use.
5. Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.
6. If you have long-term gains in excess of your long-term losses, you have a net capital gain to the extent your net long-term capital gain is more than your net short-term capital loss, if any.
7. The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2010, the maximum capital gains rate for most people is 15%. For lower-income individuals, the rate may be 0% on some or all of the net capital gain. Special types of net capital gain can be taxed at 25% or 28%.
8. If your capital losses exceed your capital gains, the excess can be deducted on your tax return and used 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. Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040.

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 http://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)

Itemizing Deductions

On Monday, February 14th, the IRS began accepting all tax returns for electronic processing. Itemizers, school teachers and some college students had to wait while the IRS re-programmed their computers and re-designed their forms to add back deductions that were resurrected as part of the Tax Relief Act. Judging from the your reactions, many of you were quite upset. Well now that wait is over.

When Does Itemizing Make Sense? In the cases I've seen, itemizing generally makes the most sense when a person already has deductible expenses on things like state tax withholding, mortgage interest, and property taxes. But there are other situations when itemizing makes sense too: if you've suffered uninsured damage to your house or car, or incurred significant medical bills, itemizing might provide you with some tax benefit for your out-of-pocket expenses. See More About:  schedule a  itemized tax deductions

Alternative Minimum Tax "Minimizes" Some Itemized Deductions The AMT adds back certain itemized deductions to income when calculating the alternative minimum tax. In many instances, the AMT provides an exact offset whereby the tax savings of taking a deduction is perfectly matching with an increase in AMT. In practical terms, the green refund meter on your tax software won't change no matter how high you increase your deductions. The most common deductions that are added back for AMT are state income taxes, property taxes, and all those miscellaneous deductions. See More About:  form 1040  alternative minimum tax

Deductions You Don't Need to Itemize Personally I much prefer to take deductions listed on page 1 of the 1040, as these deductions work directly to reduce income tax and aren't bundled up with other deductions. Teachers can avail themselves of the deduction for classroom expenses, people who are relocated can take the moving expense deduction, and former college students can deduct their student loan interest See More About:  tax deductions  adjustments to income

Eight Essential Facts about Claiming the First-Time Homebuyer Credit

If you purchased a home in 2010, you may be eligible to claim the First-Time Homebuyer Credit, whether you are a first-time homebuyer or a long-time resident purchasing a new home. The purchaser must have been at least 18 years old on the date of purchase; for a married couple, only one spouse must meet this age requirement. A dependent is not eligible to claim the credit.

Here are eight things the IRS wants you to know about claiming the credit:

1. You must have bought – or entered into a binding contract to buy – a principal residence located in the United States on or before April 30, 2010. If you entered into a binding contract by April 30, 2010, you must have closed on the home on or before September 30, 2010.
2. To be considered a first-time homebuyer, you and your spouse – if you are married – must not have jointly or separately owned another principal residence during the three years prior to the date of purchase.
3. To be considered a long-time resident homebuyer you and your spouse – if you are married – must have lived in the same principal residence for any consecutive five-year period during the eight-year period that ended on the date the new home is purchased.
4. The maximum credit for a first-time homebuyer is $8,000, half that amount for married individuals filing separately. The maximum credit for a long-time resident homebuyer is $6,500. Married individuals filing separately are limited to $3,250.
5. You must file a paper return and attach Form 5405, First-Time Homebuyer Credit and Repayment of the Credit with additional documents to verify the purchase. Therefore, if you claim the credit you will not be able to file electronically.
6. New homebuyers must attach a copy of a properly executed settlement statement used to complete such purchase. Buyers of a newly constructed home, where a settlement statement is not available, must attach a copy of the dated certificate of occupancy. Mobile home purchasers who are unable to get a settlement statement must attach a copy of the retail sales contract.
7. If you are a long-time resident claiming the credit, the IRS recommends that you also attach any documentation covering the five-consecutive-year period, including Form 1098, Mortgage Interest Statement or substitute mortgage interest statements, property tax records or homeowner’s insurance records.
8. Members of the military and certain other federal employees serving outside the U.S. have an extra year to buy a principal residence in the U.S. and qualify for the credit.

For more information about these rules including details about documentation and other eligibility requirements for the First-Time Homebuyer Tax Credit, visit http://www.irs.gov/recovery.

Avoid a Burnout (Advice for Small Business Owners)

If you are like most small business owners, you very likely work more than five days a week and you fulfill more than just one role in your business. If you own a small coffee shop, you probably also service customers, mentor your employees, order supplies and often do your own bookkeeping, and the list goes on and on.

Often, overloading ourselves with so many functions can lead to stress, exhaustion and eventually burnout.   If that happens, your business will suffer.

Performing all these different functions may have been a financial necessity when you first started this business, but as time goes on and your revenues improve, we should look at ways to ease this burden and enjoy the fruits of our labour.

We should work smart, not hard. Ask yourself, what am I good at? What tasks can I outsource? Can I afford to work on certain things myself? Or is my time better spent earning revenue?

If right now, you do your own bookkeeping or accounting, taking away from earning revenue or from enjoying your family, it’s time to call a professional, who has the expertise and knowledge to help you with your financial goals. You will be amazed at the difference this will make to you and your business!

Estimated Taxes: Calculating How Much Estimated Tax to Pay

Paying estimated taxes is one way for individuals to submit payments for their taxes to the federal government. Generally, people who run their own business, landlords, investors, and other people may need to pay in estimated taxes if their paycheck withholding won't cover all the taxes that are due. The other payment option is to pay in through withholding. Taxpayers might want to consider adjusting their withholding instead of paying estimated taxes.

The Estimated Tax Penalty

You need to pay in at least enough tax through a combination of withholding and estimated payments to avoid the estimated tax penalty. To avoid the penalty, you will need to pay in "at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller," according to the IRS. The penalty is basically the IRS's way of charging you interest for not paying your taxes throughout the year. The current interest rate for underpayments by individuals is 4%. (The IRS sets this rate each quarter.)

Figuring out how much to pay in estimated taxes

The easiest method for calculating your estimated payments is to divide last year's unfunded tax liability in four, and then make estimated payments using this figure. To do this, look on last year's tax return and find your total tax liability . Then subtract any withholding you expect to pay in for this year. If your withholding will be about the same as last year, you could subtract last year's withholding amount. The difference is the amount of tax that needs to be paid in through estimated taxes to avoid a penalty. This method, while quick and easy to calculate, does not take into account changes in your income for this year. You might have more income, or more losses, or qualify for different tax deductions. The alternate method that I use personally and with my clients is to run a tax calculation based on this year's income.

What I do is run a report showing income and deductions for the year using a financial software program such as Quicken, Microsoft Money, Quickbooks or Peachtree. These programs can generate a report showing your income and deductions for the year-to-date (or any other time period you want to measure). I then export the figures into a spreadsheet program for further number crunching. Be sure to multiply these year-to-date amounts to cover the entire year. To make the math easier, you may want to run the report based on, the first half of the year, for example, and then you could multiply by two to get a projected full year figures.

Using these annualized income and deduction figures, you will calculate your projected tax liability. You will need to know the current year's tax rates. And you would subtract any withholding or tax credits you will be eligible for in order to find out exactly how much needs to be paid in through estimated tax payments.

Estimated tax payments are due quarterly. Here's a list of the payment due dates:

Estimated Tax Deadlines

Estimated tax payments are due quarterly on the following days:

• April 15th,
• June 15th,
• September 15th, and
• January 15th.

Some taxpayers pay more frequently than this. Some people have set up the monthly payments by EFTPS so that a fixed amount of tax is paid as part of their monthly budget. And if you skip a payment, you may want to adjust your subsequent estimated payment to cover the shortfall.

The Tax Cuts of 2010 - Good News for Businesses

Do you own a business? Are you wondering how your company is affected by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 - aka the Obama Tax Cuts?

If so, read on. We explain how your business can benefit from the new tax cuts. We also tell you about your responsibility to enact the payroll tax cut for your employees.

Paying Less Tax Under the New Legislation

The Bonus Depreciation Doubled in Size

Under the Obama Tax Cuts, the bonus depreciation amount jumped from 50% to 100%. This means businesses can write off 100% of eligible purchases (e.g., equipment and off-the-shelf computer software) bought and put in service between September 9, 2010 and December 31, 2011.

Note: In 2012, business owners can still take a bonus depreciation, but it will be back at the 50% level.

Section 179 Deductions Also Got a Boost

Section 179 deductions allow businesses to deduct the full purchase price of property from their gross income.

Section 179 deductions differ from standard depreciations because they allow you to write off your expenses in the same year you bought property, rather than spreading it out over time.

Section 179 was bolstered under the Small Business Jobs Act of 2010 (signed September 27, 2010), with the allowable deduction set at $500,000 for 2010 and 2011. Now, under the Obama Tax Cuts, the maximum deduction will fall only to $125,000 in 2012, rather than to $25,000, as it would have without the recent tax cut package.

This should inject confidence in the business owner that she can continue to invest in her business for the next few years - which is beneficial not just for her, but for the U.S. economy as a whole.

Caution: Estates and trusts cannot take a section 179 deduction.

Section 179 Vs. Bonus Depreciations - Which Is Better?

Section 179 deductions are available on all new and used equipment, whereas the bonus depreciation (set now at 100%, with no limit) is for new equipment only.

Think of the bonus depreciation as an extra deduction you can take - but you must take it in the first year only.

To figure out which type of deduction is right for your business for tax year 2010, give us a call.

Complying with the New Payroll Tax Cut

The Obama Tax Cuts instituted a one-year reduction in the Social Security tax for employees, from 6.2% to 4.2%. This means the single taxpayer making $50,000 will save $1,000 on taxes in 2011.

Note: This reduction in Social Security tax will not impact the employee's future Social Security benefits.

But it's up to business owners to adjust their employees' withholdings. They must do so as soon as possible in January 2011, but no later than January 31, 2011. Notice 136 lists the new amounts you should withhold from employees' paychecks.

Caution: If you withhold too much Social Security tax during January, you will need to make an offsetting adjustment in your employees' pay as soon as possible and no later than March 31, 2011. Ask us for more details.

Self-Employed Folks See a Reduction, Too. Those who own businesses with no other employees should also be aware of their new Social Security withholding amount, which fell from 12.4% to 10.4%. This combined with the 2.9% Medicare rate brings the total of the 2011 self-employment tax rate to 13.3%.

Confused? We're Here to Help

The Obama Tax Cuts are designed to bolster the economy by putting more money back in the pockets of business owners, thus allowing them up to hire more workers.

But to take advantage of the new rules for deductions and depreciations, you have to understand the new law.

That's where we come in. To find out more about how to improve your business with certain investments now and in 2012, please contact us. 

colorsconsulting@gmail.com

Stop Doing Shoebox Bookkeeping and Start Taking Charge of Your Financial Records

Some small business owners have the mistaken belief that as long as they have all their paperwork together in one box that they’re doing a good job with their finances.  Nothing could be further from the truth.  In bookkeeping circles this is known as “shoebox bookkeeping” and many times it’s a bookkeepers worst nightmare at year end.

Bookkeepers generally charge by the hour so the additional time it takes them to sort and categorize your paperwork will end up costing you more than if you’d spent a little time organizing your paperwork.

Also when a bookkeeper only looks at your paperwork once a year it can be difficult to answer questions about specific expenses when so much time has passed by.  This may mean missing out on an important business expense because you can’t give an adequate explanation for it.

Not only that, but most businesses typically must submit remittances to the government either monthly or quarterly.  If your information is kept in a box, this makes getting reports in on time that much more difficult.

Furthermore, business owners who use shoebox bookkeeping have no idea how they’re doing financially throughout the fiscal year.  They can’t tell if they’re spending too much or bringing in enough revenue to make a profit.  They tend to judge their finances by the balance in their bank account, which doesn’t take into account monies owed by them or to them.

So if you are a small business owner who is using a shoebox bookkeeping system, you really need to consider whether this is saving you money or whether it’s time to find yourself a freelance bookkeeper.