Tax Tips Individuals

Errors made on tax returns may delay the processing of your tax return, which in turn, may cause your refund to arrive later. Here are nine common errors the IRS wants you to avoid to help guarantee your refund arrives on time.

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.
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.
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.
Math errors When preparing paper returns, review all math for accuracy. Remember, when you file electronically, the software takes care of the math for you!
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.
Incorrect bank account numbers for Direct Deposit If you are due a refund and requested direct deposit, be sure to review the routing and account numbers for your financial institution.
Forgetting to sign and date the return An unsigned tax return is like an unsigned check – it is invalid.
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 2008 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.
Claiming the Making Work Pay Tax Credit Taxpayers with earned income should claim the Making Work Pay Tax Credit by attaching a Schedule M, Making Work Pay and Government Retiree Credits to their 2009 Form 1040 or 1040 A. Taxpayers who file Form 1040-EZ will use the worksheet for Line 8 on the back of the 1040-EZ to figure their Making Work Pay Tax Credit. The credit is worth up to $400 for individuals and $800 for married couples filing jointly. Many people who worked during 2009 are slowing down the processing of their tax return by not properly claiming this credit.

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Six Things You Need to Know About Your Economic Recovery Payment

Did you receive a $250 Economic Recovery Payment in 2009? You'll need to know if you are claiming the Making Work Pay Tax Credit on your 2009 tax return.

Only individuals who received income from the Social Security Administration, Department of Veterans Affairs and Railroad Retirement Board received a $250 Economic Recovery Payment.

If you received benefits from one or more of these agencies, but you are unsure if you received the $250 Economic Recovery Payment, you can find out by using the "Did I Receive a 2009 Economic Recovery Payment?" feature online at IRS.gov or by calling 1-866-234-2942. These tools give you an easy way to verify if you received the one-time Economic Recovery Payment and which agency made the payment. These payments must be included when claiming the Making Work Pay Tax Credit on 2009 tax returns.

Here are six tips from the IRS that will help you determine if you received an Economic Recovery Payment:

If you had earned income in 2009 or are a government retiree and received an Economic Recovery Payment you need to report the payment and the amount when claiming the Making Work Pay and Government Retiree Credit on Schedule M, Making Work Pay Credit and Government Retiree Credits or as you complete your return using e-file software.
The Economic Recovery Payments are not taxable income; however, anyone who receives social security, veteran or railroad retirement benefits, as well as certain other government retirement benefits, must reduce the Making Work Pay Tax Credit they claim by the amount of any payment they received in 2009.
To verify whether you received the $250 payment, you can call 1-866-234-2942 and select Option 1 to access the "Did I Receive a 2009 Economic Recovery Payment?" telephone feature. The online version for verifying your Economic Recovery Payment will be available on IRS.gov in mid-March.
When using the "Did I Receive a 2009 Economic Recovery Payment?" feature to determine if you received an Economic Recovery Payment, you must provide your Social Security number, date of birth and zip code from your last filed tax return.
You must make a separate inquiry for each person on the tax return when using the "Did I Receive a 2009 Economic Recovery Payment?", even if you are filing a joint tax return.
Not claiming the Economic Recovery Payment on the Schedule M can delay the processing of your tax return. To avoid delays be sure to use the "Did I Receive a 2009 Economic Recovery Payment?" feature to find out if you received the payment.

More information about the Economic Recovery Payment and the Making Work Pay Tax Credit can be found at IRS.gov/recovery. Schedule M and the related instructions can be obtained at IRS.gov or can be ordered by calling 800-TAX-FORM (800-829-3676).

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Nine Things You Should Know about Penalties

The tax filing deadline is approaching. If you don’t file your return and pay your tax by the due date you may have to pay a penalty. Here are nine things the IRS wants you to know about the two different penalties you may face if you do not pay or file on time.

If you do not file by the deadline, you might face a failure-to-file penalty.
If you do not pay by the due date, you could face a failure-to-pay penalty.
The failure-to-file penalty is generally more than the failure-to-pay penalty. So if you cannot pay all the taxes you owe, you should still file your tax return and explore other payment options in the meantime.
The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes.
If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
You will have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes.
If you filed an extension and you paid at least 90 percent of your actual tax liability by the due date, you will not be faced with a failure-to-pay penalty if the remaining balance is paid by the extended due date.
If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty. However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax.
You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

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Five Tips to Avoid Tax Time Stress

Filing your tax return doesn’t have to be stressful. The IRS has put together five stress-relieving tips to help you.

1. Don’t Procrastinate Resist the temptation to put off your taxes until the very last minute. Rushing to meet the filing deadline may cause you to overlook potential sources of tax savings and will likely increase your risk of making an error.

2,. Visit the IRS Website In 2009, more than 296 million visits were made to IRS.gov. Make 1040 Central your first stop to learn the latest news and find answers to your questions.

3. File Your Return Electronically Last year, two out of three tax returns were filed electronically. More than 800 million tax returns have been processed safely and securely over the past 20 years. Use e-file and direct deposit to get your refund in as few as10 days. E-filed returns have a much lower error rate. Taxpayers receive a fast acknowledgement that the IRS received the return, a service not available to paper filers. You can e-file through your tax preparer or commercial software. Or, you can use Free File, a service offered by the IRS and private sector partners to prepare and e-file your federal return for free. Again, see IRS.gov for more information.

4. Don’t Panic if You Can’t Pay If you cannot pay the full amount of taxes you owe by the April 15th deadline, you should still file your return by the deadline and pay as much as you can to avoid penalties and interest. You should also contact the IRS to discuss your payment options at 1-800-829-1040. The agency may be able to provide some relief such as a short-term extension to pay, an installment agreement or an offer in compromise.

More than 75 percent of taxpayers eligible for an Installment Agreement can apply using the Web-based Online Payment Agreement application available on IRS.gov. To find out more about this simple and convenient process type “Online Payment Agreement” in the search box on the IRS.gov homepage.

5. Request an Extension of Time to File – But Pay on Time If the April 15 clock runs out, you can get an automatic six-month extension of time to file until October 15. However, this extension of time to file does not give you more time to pay any taxes due. If you have not paid at least 90 percent of the total tax due by the April deadline you may also be subject to an Estimated Tax Penalty. To obtain an extension, just file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. The easiest way to file a Form 4868 is through Free File at www.irs.gov/freefile. Form 4868 is also available at IRS.gov or you can call 800-TAX-FORM (800-829-3676) and have a paper form mailed to you.

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Five Facts You Need to Know about Suspicious E-mails

There are many e-mail scams circulating that fraudulently use the Internal Revenue Service name or logo as a lure. The goal of the scam – known as phishing – is to trick you into revealing personal and financial information. The scammers can then use your personal information – such as your Social Security number, bank account or credit card numbers – to commit identity theft and steal your money.

Here are five things the IRS wants you to know about phishing scams.

1. The IRS does not send unsolicited e-mails about a person’s tax account or ask for detailed personal and financial information via e-mail.

2. The IRS never asks taxpayers for their PIN numbers, passwords or similar secret access information for their credit card, bank or other financial accounts.

3. If you receive an e-mail from someone claiming to be the IRS or directing you to an IRS site,

Do not reply to the message.
Do not open any attachments. Attachments may contain malicious code that will infect your computer.
Do not click on any links. If you clicked on links in a suspicious e-mail or phishing Web site and entered confidential information, visit IRS.gov and enter the search term 'identity theft' for more information and resources to help.

4. You can help shut down these schemes and prevent others from being victimized. If you receive a suspicious e-mail that claims to come from the IRS, you can forward that e-mail to a special IRS mailbox, phishing@irs.gov. You can forward the message as received or provide the Internet header of the e-mail. The Internet header has additional information to help us locate the sender.

5. Remember, the official IRS Web site is http://www.irs.gov/. Do not be confused or misled by sites claiming to be the IRS but end in .com, .net, .org or other designations instead of .gov.

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IRS Outlines Additional Steps to Assist Unemployed Taxpayers and Others

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WASHINGTON — The Internal Revenue Service today announced several additional steps it is taking this tax season to help people having difficulties meeting their tax obligations because of unemployment or other financial problems.

The steps –– an expansion of efforts that began more than a year ago –– include additional flexibility on offers in compromise for struggling taxpayers, a series of Saturday “open houses” offering taxpayers extra opportunities to work out tax problems face to face with the IRS, special outreach with partner groups to unemployed taxpayers and the availability of more information on a special section of the IRS Web site.

“Times are tough for many people, and the IRS wants to do everything it can to help people who have lost their job or face financial strain,” IRS Commissioner Doug Shulman said. “We continue to make adjustments to key programs and expand ways for people to get help. We’re doing everything we can to help ease the burden on struggling taxpayers.”

New Flexibility for Offers in Compromise

For some taxpayers, an offer in compromise –– an agreement between a taxpayer and the IRS that settles the taxpayer’s debt for less than the full amount owed –– continues to be a viable option. IRS employees will now have additional flexibility when considering offers in compromise from taxpayers facing economic troubles, including the recently unemployed.

Specifically, IRS employees will be permitted to consider a taxpayer’s current income and potential for future income when negotiating an offer in compromise. Normally, the standard practice is to judge an offer amount on a taxpayer’s earnings in prior years. This new step provides greater flexibility when considering offers in compromise from the unemployed. The IRS may also require that a taxpayer entering into such an offer in compromise agree to pay more if the taxpayer’s financial situation improves significantly.

These immediate steps are part of an on-going effort by the IRS to ensure the availability of the Offer in Compromise program for taxpayers.

Hundreds of Saturday Open Houses to Resolve Taxpayer Issues

In addition, IRS will hold hundreds of special Saturday open houses to give struggling taxpayers more opportunity to work directly with IRS employees to resolve issues. The offices will be open on March 27 and three additional Saturdays in the spring and early summer. Dates, times and locations will be announced shortly.

During the expanded Saturday hours, taxpayers will be able to address economic hardship issues they may be facing or get help claiming any of the special tax breaks in last year’s American Recovery and Reinvestment Act, including the:

Homebuyer tax credit
American Opportunity Credit
Making Work Pay credit
Expanded Earned Income Tax Credit

In addition to these special Saturdays, taxpayers can take advantage of toll-free telephone assistance and regularly scheduled hours at local Taxpayer Assistance Centers. Taxpayers can find the location, telephone number and business hours of the nearest assistance center by visiting the Contact My Local Office page on IRS.gov.

Special Outreach Efforts to Unemployed

The IRS is working and coordinating with state departments of revenue and state workforce agencies to help taxpayers who are having problems meeting their tax liabilities because of unemployment or other financial problems.

These coordinated efforts may include opportunities for taxpayers to make payment arrangements and resolve both federal and state tax issues in one place.

Special Section of IRS.gov Created

Taxpayers who are unemployed or struggling financially can find information on a new page on the IRS Web site, IRS.gov. This online tax center has numerous resources including links to information on tax assistance and relief to help struggling taxpayers

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Other Options Available for Taxpayers

The IRS will continue to offer other help to taxpayers, including:

Assistance of the Taxpayer Advocate Service for those taxpayers experiencing particular hardship navigating the IRS.
Postponement of collection actions in certain hardship cases.
Added flexibility for missed payments on installment agreements and offers in compromise for previously compliant individuals having difficulty paying.
Additional review of home values for offers in compromise in cases where real-estate valuations may not be accurate.
Accelerated levy releases for taxpayers facing economic hardship.

In addition, the IRS will accelerate lien relief for homeowners if a taxpayer cannot refinance or sell a home because of a tax lien. As previously announced, a taxpayer seeking to refinance or sell a home may request the IRS make a tax lien secondary to the lien by the lending institution that is refinancing or restructuring a loan. The taxpayer may also request the IRS discharge its claim if the home is being sold for less than the amount of the mortgage lien under certain circumstances.

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Additional Standard Deduction for Real Estate Taxes

The IRS wants taxpayers who pay state or local real estate taxes but don’t qualify to itemize their tax deductions, to know that they may qualify for an increased standard deduction. This is the last year that the higher standard deduction for real estate taxes is available.

Here are six things you need to know about the higher standard deduction for real estate taxes:

The additional deduction amount is equal to the amount of real estate taxes paid, or $500 for single filers or $1,000 for joint filers, whichever is less.
The taxes must be imposed on you.
You must have paid the taxes during your tax year.
The taxes must be levied for general public welfare on the assessed value of the real property and charged uniformly on all property under the jurisdiction of the taxing authority. Many states and counties also impose local benefit taxes for improvements to property, such as assessments for streets, sidewalks and sewer lines. These taxes usually cannot be deducted.
Real estate taxes paid on foreign or business property do not qualify for the increased standard deduction.
You must file a Form 1040 or 1040A and attach Schedule L, Standard Deduction for Certain Filers, to claim the increased deduction. When claiming the higher standard deduction for real estate taxes, be sure to check the box on line 40b of Form 1040 or line 24b of Form 1040A.

For more information, see Form 1040 or 1040A Instructions and Schedule L instructions. The forms and instructions can be downloaded at IRS.gov or ordered by calling 800-TAX-FORM (800-829-3676).

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Top Ten Facts About the Child and Dependent Care Credit

Did you pay someone to care for a child, spouse, or dependent last year? If so, you may be able to claim the Child and Dependent Care Credit on your federal income tax return. Below are the top 10 things the IRS wants you to know about claiming a credit for child and dependent care expenses.

The care must have been provided for one or more qualifying persons. A qualifying person is your dependent child age 12 or younger when the care was provided. Additionally, your spouse and certain other individuals who are physically or mentally incapable of self-care may also be qualifying persons. You must identify each qualifying person on your tax return.
The care must have been provided so you – and your spouse if you are married filing jointly – could work or look for work.
You – and your spouse if you are married filing jointly – must have earned income from wages, salaries, tips, other taxable employee compensation or net earnings from self-employment. One spouse may be considered as having earned income if they were a full-time student or they were physically or mentally unable to care for themselves.
The payments for care cannot be paid to your spouse, to someone you can claim as your dependent on your return, or to your child who will not be age 19 or older by the end of the year even if he or she is not your dependent. You must identify the care provider(s) on your tax return.
Your filing status must be single, married filing jointly, head of household or qualifying widow(er) with a dependent child.
The qualifying person must have lived with you for more than half of 2009. However, see Publication 503, Child and Dependent Care Expenses, regarding exceptions for the birth or death of a qualifying person, or a child of divorced or separated parents.
The credit can be up to 35 percent of your qualifying expenses, depending upon your adjusted gross income.
For 2009, you may use up to $3,000 of expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.
The qualifying expenses must be reduced by the amount of any dependent care benefits provided by your employer that you deduct or exclude from your income.
If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer. If you are a household employer, you may have to withhold and pay social security and Medicare tax and pay federal unemployment tax. For information, see Publication 926, Household Employer's Tax Guide.

Beginning with 2009 tax returns, Schedule 2, Child and Dependent Care Expenses for Form 1040A Filers, has been eliminated. Form 1040A filers will now use Form 2441, Child and Dependent Care Expenses. For more information on the Child and Dependent Care Credit, see Publication 503, Child and Dependent Care Expenses. You may download these free forms and publications from IRS.gov or order them by calling 800-TAX-FORM (800-829-3676).

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Did I Receive a 2009 Economic Recovery Payment?

The IRS developed the “Did I Receive an Economic Recovery Payment?” look up tool which gives taxpayers an easy way to determine if they received the one-time ERP payment and which agency made the payment.

Beginning March 8, 2010, taxpayers can call 866-234-2942 to access the phone application. The Web application will be available in late March on IRS.gov.

Taxpayers who had earned income in 2009 or are government retirees and received an Economic Recovery Payment need to report whether or not they received an ERP and the amount when they prepare their Schedule M, Making Work Pay and Government Retiree Credits.

The one time $250 ERP was paid to individuals in the following categories:

Retirees, disabled individuals and Supplemental Security Income (SSI) recipients receiving benefits from the Social Security Administration,
Disabled veterans receiving benefits from the U.S. Department of Veterans Affairs, and
Railroad Retirement beneficiaries.

Using the IRS look up tool taxpayers will have to enter three pieces of information to determine if they received an ERP:

SSN
Date of birth
Zip code from the last filed return

A separate telephone call or Web inquiry must be made for each taxpayer, even if filing a joint tax return.

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Ten Facts about Claiming the Child Tax Credit

The Child Tax Credit is a valuable credit that can significantly reduce your tax liability. Here are 10 important facts from the IRS about this credit and how it may benefit your family.

Amount - With the Child Tax Credit, you may be able to reduce your federal income tax by up to $1,000 for each qualifying child under the age of 17.
Qualification - A qualifying child for this credit is someone who meets the qualifying criteria of six tests: age, relationship, support, dependent, citizenship, and residence.
Age Test - To qualify, a child must have been under age 17 – age 16 or younger – at the end of 2009.
Relationship Test - To claim a child for purposes of the Child Tax Credit, they must either be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption.
Support Test - In order to claim a child for this credit, the child must not have provided more than half of their own support.
Dependent Test - You must claim the child as a dependent on your federal tax return.
Citizenship Test - To meet the citizenship test, the child must be a U.S. citizen, U.S. national, or U.S. resident alien.
Residence Test - The child must have lived with you for more than half of 2009. There are some exceptions to the residence test, which can be found in IRS Publication 972, Child Tax Credit.
Limitations - The credit is limited if your modified adjusted gross income is above a certain amount. The amount at which this phase-out begins varies depending on your filing status. For married taxpayers filing a joint return, the phase-out begins at $110,000. For married taxpayers filing a separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000. In addition, the Child Tax Credit is generally limited by the amount of the income tax you owe as well as any alternative minimum tax you owe.
Additional Child tax Credit - If the amount of your Child Tax Credit is greater than the amount of income tax you owe, you may be able to claim the Additional Child Tax Credit.

For more information, see IRS Publication 972, Child Tax Credit, available at the IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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Ten Facts about Mortgage Debt Forgiveness

If your mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you may be able to claim special tax relief and exclude the debt forgiven from your income. Here are 10 facts the IRS wants you to know about Mortgage Debt Forgiveness.

Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.
The limit is $1 million for a married person filing a separate return.
You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.
If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
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, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.
If your debt is reduced or eliminated you normally will receive a year-end statement, 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 foreclosed.
Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.

For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit IRS.gov. A good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. Taxpayers may obtain a copy of this publication and Form 982 either by downloading them from IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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Five Important Tax Credits

You might be eligible for a valuable tax credit. A tax credit is a dollar-for-dollar reduction of taxes owed. Some credits are even refundable, which means you might receive a refund rather than owe any taxes at all. Here are five popular tax credits you should consider before filing your 2009 Federal Income Tax Return:

The Earned Income Tax Credit is a refundable credit for certain people who work and have earned income from wages, self-employment or farming. Income, age and the number of qualifying children determine the amount of the credit. EITC reduces the amount of tax you owe and may also give you a refund. For more information see IRS Publication 596, Earned Income Credit.
The Child and Dependent Care Credit is for expenses paid for the care of your qualifying children under age 13, or for a disabled spouse or dependent, to enable you to work or look for work. For more information, see IRS Publication 503, Child and Dependent Care Expenses.
The Child Tax Credit is for people who have a qualifying child. The maximum amount of the credit is $1,000 for each qualifying child. This credit can be claimed in addition to the credit for child and dependent care expenses. For more information on the Child Tax Credit, see IRS Publication 972, Child Tax Credit.
The Retirement Savings Contributions Credit, also known as the Saver’s Credit, is designed to help low-to-moderate income workers save for retirement. You may qualify if your income is below a certain limit and you contribute to an IRA or workplace retirement plan, such as a 401(k) plan. The Saver’s Credit is available in addition to any other tax savings that apply. For more information, see IRS Publication 590, Individual Retirement Arrangements (IRAs).
The Health Coverage Tax Credit pays up to 80% of the health insurance premiums for eligible Trade Adjustment Assistance recipients and Pension Benefit Guaranty Corporation payees. You can complete IRS Form 8885, Health Coverage Tax Credit to claim the credit on your tax return. To determine if you’re qualified, or to find out how to receive the HCTC each month, visit IRS.gov and search for “HCTC.”

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IRS Has $1.3 Billion for People Who Have Not Filed a 2006 Tax Return

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Washington — Unclaimed refunds totaling more than $1.3 billion are awaiting nearly 1.4 million people who did not file a federal income tax return for 2006, the Internal Revenue Service announced today. However, to collect the money, a return for 2006 must be filed with the IRS no later than Thursday, April 15, 2010.

The IRS estimates that the median unclaimed refund for tax-year 2006 is $604.

Some people may not have filed because they had too little income to require filing a tax return even though they had taxes withheld from their wages or made quarterly estimated payments. In cases where a return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund. If no return is filed to claim the refund within three years, the money becomes property of the U.S. Treasury.

For 2006 returns, the window closes on April 15, 2010. The law requires that the return be properly addressed, mailed and postmarked by that date. There is no penalty for filing a late return qualifying for a refund. Though back-year tax returns cannot be filed electronically, taxpayers can still speed up their refunds by choosing to have them deposited directly into a checking or savings account.

The IRS reminds taxpayers seeking a 2006 refund that their checks will be held if they have not filed tax returns for 2007 or 2008. In addition, the refund will be applied to any amounts still owed to the IRS and may be used to satisfy unpaid child support or past due federal debts such as student loans.

By failing to file a return, people stand to lose more than refunds of taxes withheld or paid during 2006. For example, most telephone customers, including most cell-phone users, qualify for the one-time telephone excise tax refund. Available only on the 2006 return, this special payment applies to long-distance excise taxes paid on phone service billed from March 2003 through July 2006. The government offers a standard refund amount of $30 to $60, or taxpayers can base their refund request on the actual amount of tax paid. For details, see the Telephone Excise Tax Refund page on IRS.gov.

In addition, many low-and-moderate income workers may not have claimed the Earned Income Tax Credit (EITC). The EITC helps individuals and families whose incomes are below certain thresholds, which in 2006 were $38,348 for those with two or more children, $34,001 for people with one child and $14,120 for those with no children. For more information, visit the EITC Home Page.

Current and prior year tax forms and instructions are available on the Forms and Publications page of IRS.gov or by calling toll-free 1-800-TAX-FORM (1-800-829-3676). Taxpayers who are missing Forms W-2, 1098, 1099 or 5498 for 2006, 2007 or 2008 should request copies from their employer, bank or other payer. If these efforts are unsuccessful, taxpayers can get a free transcript showing information from these year-end documents by calling 1-800-829-1040, or by filing Form 4506-T, Request for Transcript of Tax Return, with the IRS.

Individuals Who Did Not File a 2006 Return with an Estimated Refund

	Individuals	Median Estimated Refund	Total Estimated Refunds ($000)*
Alabama	21,800	$608	$18,839
Alaska	6,300	$693	$6,997
Arizona	39,900	$507	$33,921
Arkansas	11,800	$579	$10,543
California	159,700	$554	$150,640
Colorado	25,200	$531	$23,119
Connecticut	15,500	$686	$18,676
Delaware	5,200	$622	$5,297
District of Columbia	5,100	$601	$5,448
Florida	101,700	$641	$110,709
Georgia	45,700	$560	$42,642
Hawaii	9,500	$668	$10,658
Idaho	5,800	$482	$4,723
Illinois	51,400	$655	$54,740
Indiana	26,600	$641	$24,146
Iowa	12,200	$596	$9,990
Kansas	13,400	$586	$11,771
Kentucky	14,500	$610	$12,976
Louisiana	23,800	$641	$24,615
Maine	4,900	$561	$4,203
Maryland	30,800	$616	$29,938
Massachusetts	29,000	$669	$31,939
Michigan	42,800	$618	$40,790
Minnesota	18,900	$552	$16,227
Mississippi	11,800	$567	$10,120
Missouri	25,800	$561	$21,090
Montana	4,000	$530	$3,425
Nebraska	6,100	$590	$5,390
Nevada	19,400	$575	$19,163
New Hampshire	5,400	$706	$5,943
New Jersey	39,900	$666	$43,030
New Mexico	9,800	$560	$8,612
New York	76,700	$666	$87,563
North Carolina	39,100	$539	$32,919
North Dakota	2,100	$589	$1,875
Ohio	44,600	$593	$38,467
Oklahoma	18,200	$576	$15,779
Oregon	21,900	$490	$18,340
Pennsylvania	47,100	$652	$45,050
Rhode Island	4,300	$652	$4,231
South Carolina	16,400	$534	$13,810
South Dakota	2,500	$604	$2,193
Tennessee	22,200	$598	$19,756
Texas	109,600	$653	$114,720
Utah	9,200	$528	$9,592
Vermont	2,200	$565	$1,782
Virginia	40,600	$594	$39,460
Washington	37,100	$641	$39,713
West Virginia	4,800	$660	$4,775
Wisconsin	17,000	$564	$14,903
Wyoming	2,900	$691	$3,229
US Armed Forces	4,800	$821	$4,367
US Possessions & Territories	200	$887	$444
Totals	1,367,200	$604	$1,333,288

*Excluding the Earned Income Tax Credit and other credits.

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Signature Requirements for Claiming the First-time Homebuyer Credit

While the Form 5405 instructions indicate that a properly executed settlement statement should show the signatures of all parties, the IRS recognizes that the elements of the settlement document, often a Form HUD-1, may vary from jurisdiction to jurisdiction and may not reflect the signatures of the buyer and seller. The settlement statement that must be attached to the return is considered to be properly executed if it is complete and valid according to local law. In locations where signatures are not required, the IRS encourages the buyer to sign the settlement statement prior to attaching it to the tax return even in cases where the settlement form does not include a signature line.

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2009 Charitable Contributions for Haiti Relief

The IRS has issued a reminder that February 28, 2010, is the last day for individuals who itemize their deductions and corporations to make cash charitable contributions that are deductible on their 2009 tax returns to charities providing earthquake relief in Haiti. Contributions made after that date and before the end of 2010 can only be claimed on a 2010 tax return.

This special tax relief provision, enacted on January 22, 2010, applies to cash donations, including donations made by text, e-mail, check and credit or debit cards, but not to contributions of property. Donations charged to a credit card before the end of February can be used for 2009, even if the credit card bill is not paid until after February 28. Also, checks can be used for 2009, as long as they are mailed by the end of February and clear the donor's financial institution shortly thereafter.

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How to Handle Missing Form W-2s

Employees who have not received a Form W-2 from an employer may contact the IRS directly if an employer is not being cooperative. The IRS will then send a letter to the employer, which includes a request that the employer provide a Form W-2 to the employee within 10 days. The letter also advises the employer of the penalties for failing to do so.

Employers need to write "REISSUED STATEMENT" on the new copy of the W-2 unless they provide the copy to employees electronically. Employers are not required to send Copy A of the reissued W-2 to the Social Security Administration.

Employees must still file their personal income tax returns, or request an extension to file, by April 15, 2010, even if they do not receive all their W-2s by the filing deadline. Employees who have contacted their employer and the IRS regarding missing W-2s may use Form 4852, Substitute for Form W-2, Wage and Tax Statement, to estimate their wage income and withholding taxes on their personal income tax return. If employees receive their W-2 after filing the return, and the information reported is different from what was reported on their income tax return, they must amend the return by filing Form 1040-X.

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Seven Things You Should Know About Checking the Status of Your Refund

Are you expecting a tax refund from the Internal Revenue Service this year? If so, here are seven things you should know about checking the status of your refund once you have filed your federal tax return.

1. Online Access to Refund Information Where’s My Refund? or ¿Dónde está mi reembolso? are interactive tools on IRS.gov and the fastest, easiest way to get information about your federal income tax refund. Whether you split your refund among several accounts, opted for direct deposit into one account, used part of your refund to buy U.S. savings bonds or asked the IRS to mail you a check, Where’s My Refund? and ¿Dónde está mi reembolso? give you online access to your refund information nearly 24 hours a day, 7 days a week. It’s quick, easy and secure.

2. When to Check Refund Status If you e-file, you can get refund information 72 hours after the IRS acknowledges receipt of your return. If you file a paper return, refund information will generally be available three to four weeks after mailing your return.

3. What You Need to Check Refund Status When checking the status of your refund, have your federal tax return handy. To get your personalized refund information you must enter:

Your Social Security Number or Individual Taxpayer Identification Number
Your filing status which will be Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er)
Exact whole dollar refund amount shown on your tax return

4. What the Online Tool Will Tell You Once you enter your personal information, you could get several responses, including:

Acknowledgement that your return was received and is in processing.
The mailing date or direct deposit date of your refund.
Notice that the IRS could not deliver your refund due to an incorrect address. In this instance, you may be able to change or correct your address online using Where’s My Refund?.

5. Customized Information Where’s My Refund? also includes links to customized information based on your specific situation. The links guide you through the steps to resolve any issues affecting your refund. For example, if you do not get the refund within 28 days from the original IRS mailing date shown on Where’s My Refund?, you may be able to start a refund trace.

6. Visually Impaired Taxpayers Where’s My Refund? is also accessible to visually impaired taxpayers who use the Job Access with Speech screen reader used with a Braille display and is compatible with different JAWS modes.

7. Toll-free Number If you do not have internet access, you can check the status of your refund in English or Spanish by calling the IRS Refund Hotline at 800-829-1954 or the IRS TeleTax System at 800-829-4477. When calling, you must provide your or your spouse’s Social Security number, filing status and the exact whole dollar refund amount shown on your return.

Refund checks are normally sent out weekly on Fridays. If you check the status of your refund and are not given the date it will be issued, please wait until the next week before checking back.

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Four Facts Every Parent Should Know about Their Child’s Investment Income

The IRS wants parents to be aware of the tax rules that affect their children’s investment income. The following four facts will help parents determine whether their child’s investment income will be taxed at the parents’ rate or the child’s rate.

1. Investment Income Children with investment income may have part or all of this income taxed at their parents’ tax rate rather than at the child’s rate. Investment income includes interest, dividends, capital gains and other unearned income.

2. Age Requirement The child’s tax must be figured using the parents’ rates if the child has investment income of more than $1,900 and meet one of three age requirements for 2009:

The child was born after January 1, 1992.
The child was born after January 1, 1991, and before January 2, 1992, and has earned income that does not exceed one-half of their own support for the year.
The child was born after January 1, 1986, and before January 2, 1991, and a full-time student with earned income that does not exceed one-half of the child’s support for the year.

3. Form 8615 To figure the child's tax using the parents’ rate for the child’s return, fill out Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900, and attach it to the child's federal income tax return.

4. Form 8814 When certain conditions are met, a parent may be able to avoid having to file a tax return for the child by including the child’s income on the parent’s tax return. In this situation, the parent would file Form 8814, Parents' Election To Report Child's Interest and Dividends.

More information can be found in IRS Publication 929, Tax Rules for Children and Dependents. This publication and Forms 8615 and 8814 are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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Five Tips About the First-Time Homebuyer Credit Documentation Requirements

Claiming the First-Time Homebuyer Tax Credit on your 2009 tax return might mean a larger refund but it can seem complex. Are you confused about the documentation requirements? The IRS recognizes that the settlement documents can vary from location to location, so here are five tips to clarify the documentation requirements.

Settlement Statement: Purchasers of conventional homes must attach a copy of Form HUD-1 or other properly executed Settlement Statement.
Properly Executed Settle Statement: Generally, a properly executed settlement statement shows all parties' names and signatures, property address, sales price and date of purchase. However, settlement documents, including the Form HUD-1, can vary from one location to another and may not include the signatures of both the buyer and seller. In areas where signatures are not required on the settlement document, the IRS encourages buyers to sign the settlement statement when they file their tax return -- even in cases where the settlement form does not include a signature line.
Retail Sales Contract: Purchasers of mobile homes who are unable to get a settlement statement must attach a copy of the executed retail sales contract showing all parties' names and signatures, property address, purchase price and date of purchase.
Certificate of Occupancy: For a newly constructed home, where a settlement statement is not available, attach a copy of the certificate of occupancy showing the owner’s name, property address and date of the certificate.
Long-Time Residents: If you are a long-time resident claiming the credit, the IRS recommends that you also attach documentation covering the five-consecutive-year period such as Form 1098, Mortgage Interest Statement or substitute mortgage interest statements, property tax records or homeowner’s insurance records.

For more information about the First-Time Homebuyer Tax Credit and the documentation requirements, visit IRS.gov/recovery.

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Five Tips for Taxpayers Making a Move

The IRS offers five tips for taxpayers who have moved or are about to move. If you’ve changed your home or business address, make sure you update that information with the IRS to ensure you receive any refunds or correspondence from the IRS.

1. How to Change Your Address You can change your address on file with the IRS in several ways:

Correct the address legibly on the mailing label that comes with your tax package;
Write the new address in the appropriate boxes on your tax return;
Use Form 8822, Change of Address, to submit an address or name change any time during the year;
Give the IRS written notification of your new address by writing to the IRS center where you file your return. Include your full name, old and new addresses, Social Security Number or Employer Identification Number and signature. If you filed a joint return, be sure to include the information for both taxpayers. If you filed a joint return and have since established separate residences, both taxpayers should notify the IRS of your new addresses; and
Should an IRS employee contact you about your account, you may be able to verbally provide a change of address.

2. Notify Your Employer Be sure to also notify your employer of your new address so you get your W-2 forms on time.

3. Notify the Post Office If you change your address after you’ve filed your return, don’t forget to notify the post office at your old address so your mail can be forwarded.

4. Estimated Tax Payments If you make estimated tax payments throughout the year, you should mail a completed Form 8822, Change of Address, or write the IRS campus where you file your return. You may continue to use your old pre-printed payment vouchers until the IRS sends you new ones with your new address. However, do not correct the address on the old voucher.

5. Postal Service The IRS does use the Postal Service’s change of address files to update taxpayer addresses, but it’s still a good idea to notify the IRS directly.

Visit IRS.gov for more information about changing your address. At IRS.gov, you can also find the address of the IRS center where you file your tax return or download Form 8822, Change of Address. The form is also available by calling 800-TAX-FORM (800-829-3676).

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Six Facts on How to Get Credit for Retirement Savings Contributions

If you make eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement, you may be eligible for a tax credit. Here are six things you need to know about the Retirement Savings Contributions Credit:

1. Income Limits The Savers Credit, formally known as the Retirement Savings Contributions Credit, applies to individuals with a filing status and income of:

Single, married filing separately, or qualifying widow(er), with income up to $27,750
Head of Household, with income up to $41,625
Married Filing Jointly, with income up to $55,500

2. Eligibility requirements To be eligible for the credit you must have been born before January 2, 1992, you cannot have been a full-time student during the calendar year and cannot be claimed as a dependent on another person’s return.

3. Credit amount If you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans, you may be able to take a credit of up to $1,000 or up to $2,000 if filing jointly. The credit is a percentage of the qualifying contribution amount, with the highest rate for taxpayers with the least income.

4. Distributions When figuring this credit, you generally must subtract the amount of distributions you have received from your retirement plans from the contributions you have made. This rule applies to distributions received in the two years before the year the credit is claimed, the year the credit is claimed, and the period after the end of the credit year but before the due date - including extensions - for filing the return for the credit year.

5. Other tax benefits The Retirement Savings Contributions Credit is in addition to other tax benefits which may result from the retirement contributions. For example, most workers at these income levels may deduct all or part of their contributions to a traditional IRA. Contributions to a regular 401(k) plan are not subject to income tax until withdrawn from the plan.

6. Forms to use To claim the credit use Form 8880, Credit for Qualified Retirement Savings Contributions.

For more information, review IRS Publication 590, Individual Retirement Arrangements (IRAs), Publication 4703, Retirement Savings Contributions Credit, and Form 8880. Publications and forms can be downloaded at IRS.gov or ordered by calling 800-TAX-FORM (800-829-3676).

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10 Facts About Capital Gains and Losses

Have you heard of capital gains and losses? If not, you may want to read up on them because they might have an impact on your tax return. The IRS wants you to know these ten facts about gains and losses and how they could affect your tax situation.

Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.
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.
You must report all capital gains.
You may deduct capital losses only on investment property, not on property held for personal use.
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.
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.
The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2009, the maximum capital gains rate for most people is15%. 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%.
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.
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.
Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13of 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 IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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Gambling Winnings Are Always Taxable Income

Gambling winnings are fully taxable and must be reported on your tax return. Here are the top seven facts the Internal Revenue Service wants you to know about gambling winnings.

Gambling income includes – but is not limited to – winnings from lotteries, raffles, horse and dog races and casinos, as well as the fair market value of prizes such as cars, houses, trips or other noncash prizes.
Depending on the type and amount of your winnings, the payer might provide you with a Form W-2G and may have withheld federal income taxes from the payment.
The full amount of your gambling winnings for the year must be reported on line 21 of IRS Form 1040. You may not use Form 1040A or 1040EZ. This rule applies regardless of the amount and regardless of whether you receive a Form W-2G or any other reporting form.
If you itemize deductions, you can deduct your gambling losses for the year on line 28 of Schedule A, Form 1040.
You cannot deduct gambling losses that are more than your winnings.
It is important to keep an accurate diary or similar record of your gambling winnings and losses.
To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses.

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Seven Facts to Help You Understand the Alternative Minimum Tax

The Alternative Minimum Tax attempts to ensure that anyone who benefits from certain tax advantages pays at least a minimum amount of tax.

Here are seven facts the Internal Revenue Service wants you to know about the AMT and changes to this special tax for 2009.

1. Tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain expenses. These benefits can drastically reduce some taxpayers’ tax obligations. Congress created the AMT in 1969, targeting taxpayers who could claim so many deductions they owed little or no income tax.

2. Because the AMT is not indexed for inflation, a growing number of middle-income taxpayers are discovering they are subject to the AMT.

3. You may have to pay the AMT if your taxable income for regular tax purposes plus any adjustments and preference items that apply to you are more than the AMT exemption amount.

4. The AMT exemption amounts are set by law for each filing status.

5. For tax year 2009, Congress raised the AMT exemption amounts to the following levels:

$70,950 for a married couple filing a joint return and qualifying widows and widowers;
$46,700 for singles and heads of household;
$35,475 for a married person filing separately.

6. The minimum AMT exemption amount for a child whose unearned income is taxed at the parents' tax rate has increased to $6,700 for 2009.

7. If you claim a regular tax deduction on your 2009 tax return for any state or local sales or excise tax on the purchase of a new motor vehicle, that tax is also allowed as a deduction for the AMT.

Taxpayers can find more information about the Alternative Minimum Tax and how it impacts them by accessing IRS Form 6251, Alternative Minimum Tax —Individuals, and its instructions at IRS.gov or by calling 800-TAX-FORM (800-829-3676

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Seven Facts About Social Security Benefits

If you received Social Security benefits in 2009, you need to know whether or not these benefits are taxable. Here are seven facts the Internal Revenue Service wants you to know about Social Security benefits so you can determine whether or not they are taxable to you.

1. How much – if any – of your Social Security benefits are taxable depends on your total income and marital status.

2. Generally, if Social Security benefits were your only income for 2009, your benefits are not taxable and you probably do not need to file a federal income tax return.

3. If you received income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status.

4. Your taxable benefits and modified adjusted gross income are figured on a worksheet in the Form 1040A or Form 1040 Instruction booklet.

5. You can do the following quick computation to determine whether some of your benefits may be taxable:

First, add one-half of the total Social Security benefits you received to all your other income, including any tax exempt interest and other exclusions from income.
Then, compare this total to the base amount for your filing status. If the total is more than your base amount, some of your benefits may be taxable.

6. The 2009 base amounts are:

$32,000 for married couples filing jointly.
$25,000 for single, head of household, qualifying widow/widower with a dependent child, or married individuals filing separately who did not live with their spouses at any time during the year.
$0 for married persons filing separately who lived together during the year.

7. For additional information on the taxability of Social Security benefits, see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits. Publication 915 is available at IRS.gov or by calling 800-TAX-FORM (800-829-3676

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Top Ten Facts about Taking Early Distributions from Retirement Plans

Some taxpayers may have needed to take an early distribution from their retirement plan last year. The IRS wants individuals who took an early distribution to know that there can be a tax impact to tapping your retirement fund. Here are ten facts about early distributions.

Payments you receive from your Individual Retirement Arrangement before you reach age 59 ½ are generally considered early or premature distributions.
Early distributions are usually subject to an additional 10 percent tax.
Early distributions must also be reported to the IRS.
Distributions you rollover to another IRA or qualified retirement plan are not subject to the additional 10 percent tax. You must complete the rollover within 60 days after the day you received the distribution.
The amount you roll over is generally taxed when the new plan makes a distribution to you or your beneficiary.
If you made nondeductible contributions to an IRA and later take early distributions from your IRA, the portion of the distribution attributable to those nondeductible contributions is not taxed.
If you received an early distribution from a Roth IRA, the distribution attributable to your prior contributions is not taxed.
If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.
There are several exceptions to the additional 10 percent early distribution tax, such as when the distributions are used for the purchase of a first home, for certain medical or educational expenses, or if you are disabled.
For more information about early distributions from retirement plans, the additional 10 percent tax and all the exceptions see IRS Publication 575, Pension and Annuity Income and Publication 590, Individual Retirement Arrangements (IRAs). Both publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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Five Tax Changes for 2009

As you get ready to prepare your 2009 tax return, the Internal Revenue Service wants to make sure you have all the details about tax law changes that may impact your tax return.

Here are the top five changes that may show up on your 2009 return.

1. The American Recovery and Reinvestment Act

ARRA provides several tax provisions that affect tax year 2009 individual tax returns due April 15, 2010. The recovery law provides tax incentives for first-time homebuyers, people who purchased new cars, those that made their homes more energy efficient, parents and students paying for college, and people who received unemployment compensation.

2. IRA Deduction Expanded

You may be able to take an IRA deduction if you were covered by a retirement plan and your 2009 modified adjusted gross income is less than $65,000 or $109,000 if you are married filing a joint return.

3. Standard Deduction Increased for Most Taxpayers

The 2009 basic standard deductions all increased. They are:

$11,400 for married couples filing a joint return and qualifying widows and widowers
$5,700 for singles and married individuals filing separate returns
$8,350 for heads of household

Taxpayers can now claim an additional standard deduction based on the state or local sales or excise taxes paid on the purchase of most new motor vehicles purchased after February 16, 2009. You can also increase your standard deduction by the state or local real estate taxes paid during the year or net disaster losses suffered from a federally declared disaster.

4. 2009 Standard Mileage Rates

The standard mileage rates changed for 2009. The standard mileage rates for business use of a vehicle:

55 cents per mile

The standard mileage rates for the cost of operating a vehicle for medical reasons or a deductible move:

24 cents per mile

The standard mileage rate for using a car to provide services to charitable organizations remains at 14 cents per mile.

5. Kiddie Tax Change

The amount of taxable investment income a child can have without it being subject to tax at the parent's rate has increased to $1,900 for 2009.

For more information about these and other changes for tax year 2009, visit IRS.gov.

Links:

FS-2010-4, 2009 Tax Law Changes Provide Saving Opportunities for Nearly Everyone
The American Recovery and Reinvestment Act of 2009: Information center
1040 Central
Form 1040 instructions (PDF 941K)

IRS YouTube Videos:

Tax Filing Season 2010 English | Spanish | ASL
Earned Income Tax Credit English | Spanish | ASL
Education Credits - Parents English| ASL
Education Tax Credit-Claim it-Students English | Spanish | ASL
Energy Tax Credits Claim It English | Spanish | ASL
Haiti Earthquake Donations English | Spanish | ASL
Making Work Pay - Claim It English | ASL
New Homebuyer Credit-Claim It English | Spanish
New Homebuyer Credit-Military English
Split Refunds-Savings Bonds English | Spanish
Unemployment Compensation English | Spanish
Vehicle Tax Deduction - Claim It English | Spanish | ASL

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6 Facts about the American Opportunity Tax Credit.pdf

Be Sure to Know Whether You Qualify for the Earned Income Tax Credit

The Earned Income Tax Credit, commonly referred to as EITC, can be a financial boost for working people adversely impacted by hard economic times. However, one in four eligible taxpayers could miss out on the credit because they don’t check it out. Here are the top 10 things the Internal Revenue Service wants you to know about this valuable credit, which has been making the lives of working people a little easier for 35 years.

Just because you didn’t qualify last year, doesn’t mean you won’t this year. As your financial, marital or parental situations change from year-to-year, you should review the EITC eligibility rules to determine whether you qualify.
If you qualify, it could be worth up to $5,657 this year. EITC not only reduces the federal tax you owe, but could result in a refund. The amount of your EITC is based on the amount of your earned income and whether or not there are qualifying children in your household. New EITC provisions mean more money for larger families.
If you qualify, you must file a federal income tax return and specifically claim the credit in order to get it – even if you are not otherwise required to file.
Your filing status cannot be Married Filing Separately.
You must have a valid Social Security Number. You, your spouse – if filing a joint return – and any qualifying child listed on Schedule EIC must have a valid SSN issued by the Social Security Administration.
You must have earned income. You have earned income if you work for someone who pays you wages, you are self-employed, you have income from farming, or – in some cases – you receive disability income.
Married couples and single people without kids may qualify. If you do not have qualifying children, you must also meet the age and residency requirements as well as dependency rules.
Special rules apply to members of the U.S. Armed Forces in combat zones. Members of the military can elect to include their nontaxable combat pay in earned income for the EITC. If you make this election, the combat pay remains nontaxable.
It’s easy to determine whether you qualify. The EITC Assistant, an interactive tool available on IRS.gov, removes the guesswork from eligibility rules. Just answer a few simple questions to find out if you qualify and estimate the amount of your EITC.
Free help is available at volunteer assistance sites and IRS Taxpayer Assistance Centers to help you prepare and claim your EITC. If you are preparing your taxes electronically, the software program you use will figure the credit for you. If you qualify for the credit you may also be eligible for Free File. You can access Free File at IRS.gov.

For more information about the EITC, see IRS Publication 596, Earned Income Credit. This publication – available in both English and Spanish – can be downloaded from IRS.gov or ordered by calling 800-TAX-FORM (800-829-3676).

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Expanded EITC Tax Credit

"As part of the economic recovery efforts, there have been important changes to expand EITC to benefit taxpayers,” said IRS Commissioner Doug Shulman. “Today, more than ever, hard-working individuals and families can use a little extra help. EITC can make the lives of working people a little easier.”

Eligibility for EITC depends on earned income and family size, among other tests. However, single people and childless workers also are eligible, although for smaller amounts. For tax years 2009 and 2010, the American Recovery and Reinvestment Act created a new category for families with three or more children and expanded the maximum benefit for this category.

To qualify for the EITC, earned income and adjusted gross income (AGI) for individuals must each be less than:

$43,279 ($48,279 married filing jointly) with three or more qualifying children
$40,295 ($45,295 married filing jointly) with two qualifying children
$35,463 ($40,463 married filing jointly) with one qualifying child
$13,440 ($18,440 married filing jointly) with no qualifying children

The maximum credit for tax year 2009 is:

$5,657 with three or more qualifying children
$5,028 with two qualifying children
$3,043 with one qualifying child
$457 with no qualifying children

The maximum amount of investment income is $3,100 for tax year 2009. For families, there are also certain requirements for child residency and relationship that must be met. Additional eligibility information is available in FS-2010-11 and on the Web at IRS.gov/EITC.

Another new provision adds to the definition of a “qualifying child:” The child must be younger than the person claiming the child unless the child is totally and permanently disabled any time during the year. The child cannot have filed a joint return other than to claim a refund. Also new for 2009, if a qualifying child can be claimed by either a parent or another person, the other person must have an AGI higher than the parent in order to claim the child for EITC purposes.

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Tax Tips for Taxpayers Itemizing

1) Insurance premiums on policies that cover medical costs are deductible. Premiums on disability and loss of income insurance are not deductible.
2) Qualified long-term care insurance premiums are deductible subject to age and dollar limits: Age 40 or less, $320; ages 41 to 50, $600; ages 51 to 60, $1,190; ages 61 to 70, $3,180 and ages 71 and up, $3,980.
3) Special assessments paid on your property are normally not allowed as a deduction. But, the interest portion of the special assessments can be deducted as a tax.
4) Loan origination fees (points) are deductible as interest by a buyer of a new principal residence. Homebuyers are also allowed to deduct seller-paid points. Points paid on refinancing an existing residence must be deducted over the life of the mortgage.
5) Charitable contributions of $250 or more in any one day to any one organization must have written substantiation from the organization. A bank record, such as a cancelled check is not sufficient.
6) When making contributions of used furniture, appliances and clothing to nonprofit organizations, request a receipt from the organization. Attach a record of the items donated to the receipt for proof of this deductible contribution. Contributions must be in good or better condition to be deductible.

7) Taxpayers who own appreciated stocks or bonds can take advantage of certain tax-saving methods by donating the securities to churches or other nonprofit organizations.
8) If you experienced a casualty loss (flood, fire, theft, etc.) that exceeds 10% of AGI, your tax preparer will explain what information is required to determine your deductible loss, if any. Net casualty losses from a federally declared disaster are not subject to this limitation.
9) Expenses incurred for education for improving your skills for your present job or maintaining your job may be deducted. Seminars, tuition, books and some travel expenses can be deducted. Travel as a “form of education” is not deductible. Example: French teacher travels to France to maintain general familiarity with the French language and culture—not deductible. However, see Tax Tip 2 for education costs that qualify for a credit even when not job-related.
10) Job-seeking costs in the same field of employment are deductible. Successful job placement is not necessary.
11) Part of a legal fee incurred in a divorce or an estate plan may be deductible if it is for advice on the tax consequences. Have yourattorney clearly indicate how much of the fee is for tax advice.
13) Expenses incurred for attending conventions, seminars or othermeetings that give investment advice to taxpayers are not deductible.
14) Investment interest (land, margin account, etc.) is deductible only to the extent of net investment income for the year. Net investment incomeincludes dividends, interest, royalties and short-term capital gains.

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Tax Tips for All Taxpayers

1) A person who files a joint return (other than a return filed solely to claim a refund) cannot be claimed as a dependent.
2) An American Opportunity tax credit ($2,500 maximum) is available on a per-student, per-year basis for the first four years of post-secondary tuition, fees, books, supplies and equipment.
A lifetime learning credit (maximum $2,000 per return) is available for post-secondary educational expenses (tuition and fees, plus books, supplies and equipment that must be paid to the institution as a condition of enrollment or attendance). It is available for an unlimited number of years for undergraduate, graduate, professional degree and other students acquiring or improving job skills enrolled in one or more courses.
The education credits phase out at higher levels of adjusted gross income (AGI). Also, special rules apply to students in schools in the Midwestern Disaster Area. Ask your tax advisor.

3) You can also deduct up to $2,500 of interest on qualified education loans for college or vocational school expenses, or up to $4,000 of post-secondary tuition and fees, even if you do not itemize deduc-tions. Deductions are phased out based on AGI.
4) Nondeductible contributions up to $5,000 ($6,000 if 50 or older) can be made to a Roth IRA. Distributions, including earnings, are tax-free when certain requirements are met. The contribution limit is subject to an AGI-based phase-out.
5) An IRA deduction up to $5,000 ($6,000 if 50 or older) is available to all taxpayers who are not covered by an employer-sponsored retirement plan. Taxpayers covered by an employer plan may be eligible for a full or partial deduction, depending on their AGI.
6) If only one spouse has compensation, a spousal IRA can be set up for the nonworking spouse. Each spouse (working and nonworking) may contribute up to $5,000 or $6,000 (if age 50 or older).
7) Exceptions apply to the 10% penalty for early withdrawals from an IRA if the funds are used for: (1) medical expenses in excess of 7.5% of AGI, (2) certain qualified educational expenses, (3) a first-time home purchase for distributions of up to $10,000 or (4) medical insurance for those who are unemployed for at least 12 weeks. Note: IRA withdrawals are still subject to regular income tax.
8) A gain exclusion up to $250,000 ($500,000 if married and filing jointly or certain surviving spouses) is available for a sale of a principal residence if the taxpayer(s) owned and occupied the residence for two years of the five-year period ending on date of sale. The five-year period is extended for certain military, foreign service and intelligence personnel. If the home was used other than as your principal resi-dence any time after 2008, some of the gain may be taxable.
9) Interest on certain Series EE savings bonds issued after 1989 is tax-exempt if proceeds are used for qualified educational expenses of a taxpayer, spouse or dependent, subject to AGI-based phase-out.

10) Keep receipts supporting tax deductions at least four years.
11) Improvement costs may reduce taxable profit upon sale of property. Keep records of improvement costs made to all real property at least four years after the property is sold.
12) If stock or mutual fund dividends are automatically reinvested in-stead of received in cash, maintain good records of all reinvested dividends each year. These reinvestments increase cost basis, and reduce gain or increase loss upon sale.
13) If “allocated tips” are listed on year-end Form W-2, the amount will be subject to both Social Security and income tax unless records (tip log) verify that a lesser amount was actually received.
14) Child care expense credit allows up to a 35% tax credit on up to $3,000 of child care costs paid for one dependent or $6,000 for two or more dependents.
15) Taxpayers born before 1936 who receive a lump-sum distribution from a pension plan or profit-sharing plan may utilize a tax-saving method with 10-year averaging. Ask your tax advisor.

16) Taxpayers investing in certain types of passive activities (such as limited partnerships) are limited in the amount of loss they can claim to offset other types of income. However, a taxpayer who actively participates in a rental real estate activity can apply up to $25,000 in rental losses against other sources of income—subject to phase-out based on AGI.
17) Purchasers of qualifying alternative fueled vehicles (such as hybrids) and plug-in electric vehicles are eligible for a tax credit. Ask your tax advisor.
18) Taxpayers can exclude $2 million ($1 million if MFS) of certain mortgages cancelled because of their financial condition or decline in the home’s value. To qualify, the loan must have been to buy or improve the principal residence (or a loan refinancing such loans).
19) Taxpayers who purchase a new vehicle (car, light truck, motorcycle or motor home) after 2/16/09 and before 2010 can deduct the state and local taxes paid on the purchase whether they claim the standard deduction or itemize deductions.

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Issue Number: IRS TAX TIP 2010-04

Five Important Facts about Dependents and Exemptions

When you prepare to file your tax return, there are two things that will factor into your tax situation: dependents and exemptions. Here are five important facts the IRS wants you to know about dependents and exemptions before you file your 2009 tax return.

If someone else claims you as a dependent, you may still be required to file your own tax return. Whether or not you must file a return depends on several factors, including the amount of your unearned, earned or gross income, your marital status, any special taxes you owe and, any advance Earned Income Tax Credit payments you received.
Exemptions reduce your taxable income. There are two types of exemptions: personal exemptions and exemptions for dependents. For each exemption you can deduct $3,650 on your 2009 tax return. Exemption amounts are reduced for taxpayers whose adjusted gross income is above certain levels, depending on your filing status.
If you are a dependent, you may not claim an exemption. If someone else – such as your parent – claims you as a dependent, you may not claim your personal exemption on your own tax return.
Your spouse is never considered your dependent. On a joint return, you may claim one exemption for yourself and one for your spouse. If you’re filing a separate return, you may claim the exemption for your spouse only if they had no gross income, are not filing a joint return, and were not the dependent of another taxpayer.
Some people cannot be claimed as your dependent. Generally, you may not claim a married person as a dependent if they file a joint return with their spouse. Also, to claim someone as a dependent, that person must be a U.S. citizen, U.S. resident alien, U.S. national or resident of Canada or Mexico for some part of the year. There is an exception to this rule for certain adopted children. See IRS Publication 501, Exemptions, Standard Deduction, and Filing Information for additional tests to determine who can be claimed as a dependent.

For more information on exemptions, dependents and whether or not you or your dependent needs to file a tax return, see IRS Publication 501. The publication is available on IRS.gov or can be ordered by calling 800-TAX-FORM (800-829-3676).

Links:

IRS Publication 501, Exemptions, Standard Deduction, and Filing Information

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Issue Number: IRS TAX TIP 2010-03

Eight Facts About Filing Status

Everyone who files a federal tax return must determine which filing status applies to them. It’s important you choose your correct filing status as it determines your standard deduction, the amount of tax you owe and ultimately, any refund owed to you.

Here are eight facts about the five filing status options the IRS wants you to know in order to choose the correct filing status for your situation.

Your marital status on the last day of the year determines your marital status for the entire year.
If more than one filing status applies to you, choose the one that gives you the lowest tax obligation.
Single filing status generally applies to anyone who is unmarried, divorced or legally separated according to state law.
A married couple may file a joint return together. The couple’s filing status would be Married Filing Jointly.
If your spouse died during the year and you did not remarry during 2009, you may still file a joint return with that spouse for the year of death, provided the joint return election is not revoked by a personal representative for the deceased spouse.
A married couple may elect to file their returns separately. Each person’s filing status would generally be Married Filing Separately.
Head of Household generally applies to taxpayers who are unmarried. You must also have paid more than half the cost of maintaining a home for you and a qualifying person to qualify for this filing status.
You may be able to choose Qualifying Widow(er) with Dependent Child as your filing status if your spouse died during 2007 or 2008, you have a dependent child and you meet certain other conditions.

There’s much more information about determining your filing status in Publication 501, Exemptions, Standard Deduction, and Filing Information. Publication 501 is available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Link:

Publication 501, Exemptions, Standard Deduction, and Filing Information (PDF 196K)

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Issue Number: IRS TAX TIP 2010-02

Five Filing Facts for Recently Married or Divorced Taxpayers

If you were married or divorced recently, there are a couple of things you’ll want to do to ensure the name on your tax return matches the name registered with the Social Security Administration.

Here are five facts from the IRS for recently married or divorced taxpayers. Following these steps will help avoid problems when you file your tax return.

If you took your spouse’s last name or if both spouses hyphenate their last names, you may run into complications if you don’t notify the SSA. When newlyweds file a tax return using their new last names, IRS computers can’t match the new name with their Social Security Number.
If you were recently divorced and changed back to your previous last name, you’ll also need to notify the SSA of this name change.
Informing the SSA of a name change is a snap; you’ll just need to file a Form SS-5, Application for a Social Security Card at your local SSA office.
Form SS-5 is available on SSA’s Web site at www.socialsecurity.gov, by calling 800-772-1213 or at local offices. It usually takes about two weeks to have the change verified.
If you adopted your spouse’s children after getting married, you’ll want to make sure the children have an SSN. Taxpayers must provide an SSN for each dependent claimed on a tax return. For adopted children without SSNs, the parents can apply for an Adoption Taxpayer Identification Number – or ATIN – by filing Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions with the IRS. The ATIN is a temporary number used in place of an SSN on the tax return. The W-7A is available on IRS.gov, or by calling 800-TAX-FORM (800-829-3676).

Links:

Social Security Administration
Form SS-5, Application for a Social Security Card (PDF)
Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions (PDF 42K)

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Relief for Military Spouses

The Military Spouses Residency Relief Act, signed into law on November 11, 2009, provides relief to military spouses by allowing them to file in their domicile state rather than the state of military assignment provided presence (or absence) in that state is due to the service member’s compliance with military orders. Under the Act any income earned by the spouse in a state of domicile is not treated as income earned in that state if that spouse is not treated as a resident of that state. The new rules are effective for any state or local income tax return filed for any tax year beginning in 2009.

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Choose the Tax Form that Best Fits Your Needs

To file your 2009 individual tax return, you’ll have to decide which form to use…unless you e-file. If you file electronically, the software automatically selects the simplest and best form for you. Whether you use e-file or prepare on paper, using the simplest form will help avoid costly errors or processing delays. And remember, if you file electronically, it speeds up the processing of your tax return and the delivery of your refund.

Here are things to consider when deciding which IRS form to file.

Use the 1040EZ if:

Your taxable income is below $100,000
Your filing status is Single or Married Filing Jointly
You and your spouse – if married -- are under age 65 and not blind
You are not claiming any dependents
Your interest income is$1,500 or less
You are not claiming the additional standard deduction for real estate taxes, taxes on the purchase of a new motor vehicle, or disaster losses

Use the 1040A if:

Your taxable income is below $100,000
You have capital gain distributions
You claim certain tax credits
You claim deductions for IRA contributions, student loan interest, educator expenses or higher education tuition and fees

If you cannot use the 1040EZ or the 1040A, you’ll probably need to file using the 1040. You must use the 1040 if:

Your taxable income is $100,000 or more
You claim itemized deductions
You are reporting self-employment income
You are reporting income from sale of property

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January 26, 2010

Issue Number: IRS Tax Tip 2010-17

Do I have to File a Tax Return?

You must file a tax return if your income is above a certain level. The amount varies depending on filing status, age and the type of income you receive.

Check the Individuals section of IRS.gov or consult the instructions for Form 1040, 1040A, or 1040EZ for specific details that may affect your need to file a tax return with the IRS this year.

Even if you don’t have to file, here are eight reasons why you may want to file:

Federal Income Tax Withheld If you are not required to file, you should file to get money back if Federal Income Tax was withheld from your pay, you made estimated tax payments, or had a prior year overpayment applied to this year's tax.

Making Work Pay Credit You may be able to take this credit if you have earned income from work. The maximum credit for a married couple filing a joint return is $800 and $400 for other taxpayers.

Government Retiree Credit You may be eligible for this credit if you received a government pension or annuity payment in 2009. However, the amount of this credit reduces any making work pay credit you receive.

Earned Income Tax Credit You may qualify for EITC if you worked, but did not earn a lot of money. EITC is a refundable tax credit; which means you could qualify for a tax refund.

Additional Child Tax Credit This credit may be available to you if you have at least one qualifying child and you did not get the full amount of the Child Tax Credit.

Refundable American Opportunity Credit This education tax credit is available for 2009 and 2010. The maximum credit per student is $2,500 and the first four years of postsecondary education qualify.

First-Time Homebuyer Credit The credit is a maximum of $8,000 or $4,000 if your filing status is married filing separately. The credit applies to homes bought anytime in 2009 and on or before April 30, 2010. However, you have until on or before June 30, 2010, if you entered into a written binding contract before May 1, 2010. If you bought a home after November 6, 2009, you may be able to qualify and claim the credit even if you already owned a home. In this case, the maximum credit for long-time residents is $6,500, or $3,250 if your filing status is married filing separately.

Health Coverage Tax Credit Certain individuals, who are receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, or pension benefit payments from the Pension Benefit Guaranty Corporation, may be eligible for a Health Coverage Tax Credit worth 80 percent of monthly health insurance premiums when you file your 2009 tax return.

For more information about filing requirements and your eligibility to receive tax credits, visit IRS.gov.

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Plug-in Electric Vehicle Credits

Go green and save!

You may be able to claim one of three credits for plug-in electric vehicles manufactured primarily for use on public streets, roads, and highways. Vehicles manufactured for use on a golf course do not qualify.

(1) The plug-in electric drive motor vehicle credit is available for newly purchased qualified vehicles placed in service for business or personal use after 2008.

For 2009, the amount of the credit varies depending on the battery capacity and the weight of the vehicle and ranges from $2,500 to $15,000.
After 2009, the credit tops out at $7,500, depending on the battery capacity. To qualify, vehicles must be newly purchased, have four or more wheels, have a gross vehicle weight rating (GVWR) of less than 14,000 pounds, and draw propulsion using a rechargeable battery with at least four kilowatt hours.

(2) The plug-in electric vehicle credit is available for certain vehicles purchased after February 17, 2009, and before January 1, 2012. The credit equals 10 percent of the cost of a new vehicle, up to a maximum credit of $2,500. You can either purchase:

Certain low-speed vehicles (i.e., four-wheeled vehicles with a GVWR of less than 3,000 pounds) that are propelled to a significant extent by a rechargeable battery with a capacity of at least 4 kilowatt hours; or
A two- or three-wheeled vehicle (i.e., motor scooter, motorcycle, etc.) with a GVWR of less than 14,000 pounds that is propelled to a significant extent by a rechargeable battery with a capacity of at least 2.5 kilowatt hours.

For 2009, you cannot claim this credit for a vehicle that qualifies for the plug-in electric drive motor vehicle credit. You cannot claim both credits for the same vehicle.

(3) The plug-in conversion credit applies to property placed in service after February 17, 2009, and before January 1, 2012. The credit equals 10 percent of the cost of converting any motor vehicle (new or used) to a qualified plug-in electric drive motor vehicle, up to a maximum credit of $4,000. You may claim this credit even if you already claimed a hybrid vehicle credit for the same vehicle in an earlier year.

Check out www.pluginamerica.org and www.eaaev org for more information on plug-in electric vehicles.

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Making Work Pay Credit and Pensions

Should you adjust withholding?

In February 2009, the government reduced the withholding tables for the Making Work Pay Credit. If you are receiving a pension and have no earned income, you do not qualify for the Making Work Pay Credit. However, if you have withholding from your pension payments, you may not have enough, and may end up owing more taxes when you file your tax return.

Pension payors were provided an optional procedure for additional withholding on pension payments to offset the withholding reductions for the Making Work Pay Credit. However, they are not required to use this procedure, so you should check with your pension plan administrator.

If your pension payor does not use the optional adjustment procedure, you can increase your withholding by filing Form W-4P, Withholding Certificate for Pension or Annuity Payments. If you submitted a Form W-4P to request additional withholding after the 2009 February withholding tables were issued, and your pension payor is using the optional adjustment procedure, you may want to submit a new Form W-4P to get rid of the additional withholding.

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Earned Income Credit (EIC)

Should you request an advance payment?

In 2009 and 2010, there is an increased EIC for taxpayers with three or more qualifying children. The EIC reduces the tax you owe, and gives you a refund even if you do not owe any tax. In 2009, you may be able to claim the credit if:

You have three or more qualifying children and your earned income and adjusted gross income (AGI) are less than $43,279 ($48,279 if married filing jointly). The most you can get is $5,657.
You have two qualifying children and your earned income and AGI are less than $40,295 ($45,295 if married filing jointly). The most you can get is $5,028.
You have one qualifying child and your earned income and AGI are less than $35,463 ($40,463 if married filing jointly). The most you can get is $3,043.
You have no qualifying children and your earned income and AGI are less than $13,440 ($18,440 if married filing jointly). The most you can get is $457.

If you think you will be eligible for the EIC and you have at least one qualifying child, you may choose to get advance EIC payments (up to $1,826) with your pay by completing Form W-5, Earned Income Credit Advance Payment Certificate, and giving it to your employer. If you are entitled to an EIC greater than the amount advanced, you may claim the additional amount on your 2009 tax return.

Be careful requesting advance EIC payments! If you get advance payments and you are not eligible for the EIC, you must pay back these payments when you file your 2009 tax return. First, consult your tax professional to make sure you qualify for the EIC.

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Qualifying Child

Do you need to adjust your withholding?

If you want to claim someone as a dependent, the individual must be a qualifying child or a qualifying relative. In 2009, the definition of a qualifying child was revised. Now:

Your qualifying child must be younger than you;
A child cannot be your qualifying child if he or she files a joint return, unless the return was only filed to claim a refund; and
If the parents can claim the child as a qualifying child but no parent so claims the child, no one else can claim the child as

a qualifying child unless that person’s AGI is higher than the highest AGI of any parent of the child.

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Quik Tips

In general, if an inherited IRA has several nonspouse designated beneficiaries, each beneficiary must take required minimum distributions (RMDs) over the oldest beneficiary’s (the shortest) life expectancy. However, if you set up separate accounts with separate beneficiaries by the end of the year following the year of death, you can take RMDs from your separate account over your life expectancy. This allows you to stretch out your payments if you are younger. In addition, there are no RMDs for 2009 because they were waived

If you are at least 70½ years old, you can still make tax-free charitable distributions of up to $100,000 from your IRA through December 31, 2009. The distribution must be made directly by the trustee of your IRA to the charitable organization.

You can deduct employment agency fees and amounts paid for preparing your resume while looking for a new job in your present occupation. You can also deduct the cost of traveling to and from an area if the trip is primarily to look for a new job. However, you cannot deduct job search expenses if you are looking for a job for the first time, or in a new occupation.

You can rent out your principal residence for a couple years before selling it and still exclude up to $250,000 of gain ($500,000 if married filing jointly) if you owned and used it as your principal residence for at least two out of five years ending on the date of sale. However, any gain due to depreciation and periods of nonqualified use must be recognized.

If you have an office in your home that is your principal place of business, you may deduct transportation expenses incurred in going between your home office and any other work location in the same trade or business.

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0-Percent Capital Gains Rate

Tax-free step-up in basis?

If you have owned stock with a low basis for more than a year and think the stock will continue to go up in value, now may be the time to sell it if all of the gain on the sale falls within the 10- or 15-percent income tax brackets. In this case, the gain on the sale is taxed at the 0-percent capital gains rate. In addition, if you buy the stock right back, you effectively receive a tax-free step-up in basis.

You may be thinking that the gain on the sale is disallowed under the wash sale rules when you buy identical stock within 30 days of selling it. However, the wash sale rules only disallow losses on such sales.

The 0-percent capital gains rate is available through 2010. To qualify for the 0-percent capital gains rate in 2009, your income (including long-term capital gains) must be under $33,951 (single and married filing separately), $67,901 (married filing jointly), and $45,501 (head of household). Ordinary income uses up the 10- and 15-percent income tax brackets before long-term capital gains, so if you have a lot of W-2 income, you will not qualify for the 0-percent capital gains rate.

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Section 1202 Gain Exclusion

Thinking of selling qualified small business stock?

It may be wise to hold off selling your qualified small business stock if it is issued in 2009 or 2010. In general, you can exclude 50 percent of the gain on the sale of qualified small business stock that was held for more than five years. However, the remaining 50 percent of the gain is taxed at the 28-percent capital gains rate, so the entire gain on the sale is effectively taxed at a rate of 14 percent.

For qualified small business stock issued after February 17, 2009, and before January 1, 2011, the 50-percent exclusion is increased to 75 percent. Thus, only 25 percent of the gain is taxed at the 28-percent rate, which effectively taxes the entire gain at a rate of 7 percent. You still need to hold the stock for five years, so you’ll have to project your tax situation five years from now to determine if it’s worth the wait.

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Exercising an Incentive Stock Option?

How to avoid the alternative minimum tax (AMT)

In general, when you buy stock by exercising an incentive stock option (ISO) and don’t sell that stock in the same year, you could be subject to AMT. For regular tax purposes, no income is recognized when an ISO is exercised. However, additional income is recognized for AMT purposes equal to the excess of the stock’s FMV on the date of exercise over the exercise price. Therefore, you may be taxed on income you haven’t even received (phantom income).

Don’t be caught off guard and end up with an unexpected tax liability when you go to file your tax return. If you exercised an ISO early in the year and the stock has been rapidly declining ever since, consider selling the stock before the end of the year. There is no AMT adjustment when stock that was acquired by exercising an ISO is sold in the same year, so you can avoid paying tax on phantom income. Otherwise, if you want to hold onto the stock and don’t want a big tax liability at year-end, you can make estimated tax payments. Also, the additional tax triggered by the AMT adjustment for ISOs generates a minimum tax credit (MTC) that may reduce your regular tax in future years.

Note: If you owed AMT attributable to the exercise of ISOs for 2007 or any prior year, the amount still owed as of October 3, 2008, was abated. However, your MTC must be reduced accordingly. In addition, any unpaid interest and penalties with respect to such unpaid AMT as of October 3, 2008, were abated. If you already paid such interest and penalties, you can increase your MTC. You should have received a Letter 2719C from the IRS detailing the amount of tax, interest, and penalties that were abated.

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Roth IRAs

Is this a good place to put your money?

Roth IRAs can be more beneficial than other retirement accounts because qualified distributions are not taxable, and you don’t have to take required minimum distributions when you reach the age of 70½. However, you cannot make a Roth IRA contribution when your income exceeds certain limits. For 2009, the Roth IRA contribution limit is phased out (reduced) when your modified adjusted gross income (AGI) is between $105,000 and $120,000 ($166,000 and $176,000 if married filing jointly).

If your income is too high to make a Roth IRA contribution for 2009, you can still make a contribution to a traditional IRA. In general, the contribution will be nondeductible if you or your spouse is covered by a retirement plan at work, but it will give you basis in the IRA. On the other hand, if you and your spouse are not covered by a retirement plan at work, the contribution will be fully deductible regardless of your AGI.

For 2010 and beyond, the $100,000 modified AGI limit on converting a traditional IRA to a Roth IRA has been eliminated, so you can convert that 2009 traditional IRA contribution to a Roth IRA in 2010 regardless of your AGI.

You must recognize the amount converted, except any basis, as income. However, any taxable income from a 2010 conversion will be included in gross income ratably over a two-year period beginning in 2011, unless you elect out of the two-year period and include all of it in 2010. This two-year rule only applies to 2010 conversions. Examine your tax situation to determine which year(s) to recognize any taxable income from a 2010 conversion.

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The information contained in this newsletter is not intended to provide specific tax advice or to take the place of either the written law or regulations.

AMERICAN TAX & BOOKKEEPING

"To Serve Our Clients With Honesty & Integrity"

Issue Number: IRS TAX TIP 2010-04

Issue Number: IRS TAX TIP 2010-03

Issue Number: IRS TAX TIP 2010-02

Five Filing Facts for Recently Married or Divorced Taxpayers