29

Feb

Happy Tax Season Series: Mortgage Debt Forgiveness – Is it Taxable?

When someone forgives a debt you owe, the amount of the canceled debt is normally taxable to you.  However, there are some exceptions.  One of those exceptions is found in the Mortgage Forgiveness Debt Relief Act of 2007 and is available to homeowners whose mortgage debt is partly or entirely forgiven during tax years 2007 through 2012.

The following are some important points:

1.  Amount of Debt Forgiven.  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.

2.  Method of Debt Forgiveness/Reduction.  You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.

3.  Type of Debt.  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.

4.  Claiming 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.

5.  Debt that Does Not Qualify.  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 the exception for insolvency – may be applicable.  IRS Form 982 provides more details about these provisions.

6.  Form 1099-C.   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 see IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments.   Please contact us if you need assistance.

Muiños & Morales

446 days ago Short URL Comments

Tax Compliance

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15

Feb

Happy Tax Season Series: The Child Tax Credit

The Child Tax Credit is available to eligible taxpayers with “qualifying children” under age 17.   This Child Tax Credit is in addition to the credit for child and dependent care expenses and the Earned Income Tax Credit.  The following are some important facts and rules relating to the Child Tax Credit:

  • 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 age 17.
  • Qualification.   A “qualifying child” for this credit is someone who meets the qualifying criteria of the following seven tests: age, relationship, support, dependent, joint return, citizenship and residence.
  1. Age test.   To qualify, a child must have been under age 17 – age 16 or younger – at the end of 2011.
  2. Relationship test.   To claim a child for purposes of the Child Tax Credit, the child must 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.
  3. Support test.   In order to claim a child for this credit, the child must not have provided more than half of his/her own support.
  4. Dependent test.   You must claim the child as a dependent on your federal tax return.
  5. Joint return test.   The qualifying child can not file a joint return for the year (or files it only as a claim for refund).
  6. Citizenship test.   To meet the citizenship test, the child must be a U.S. citizen, U.S. national or U.S. resident alien.  There is an exception to this rule for adopted children.  If you are a U.S. citizen or U.S. national and your adopted child lived with you all year as a member of your household in 2011, that child meets the citizenship test.
  7. Residence test.   The child must have lived with you for more than half of 2011.  There are some exceptions to this residence test which are too detailed to discuss here.
  • 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 by 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 and 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.  This Additional Child Tax Credit may give you a refund even if you do not owe any tax.

For more information contact us or see IRS Publication 972, Child Tax Credit.   You can also use the Interactive Tax Assistant to determine if you’re eligible for the Child Tax Credit.   The Interactive Tax Assistant will ask you a series of questions and provide you with responses.

Muiños & Morales

460 days ago Short URL Comments

Tax Compliance/Tax Credits

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14

Feb

Happy Tax Season Series: Love ‘em or Leave ‘em – Tips for Newlyweds and Divorced Taxpayers

If you recently married or divorced, you are probably not thinking about taxes.  However, you need to sooner rather than later to ensure tax compliance as a newly married couple or as a newly single individual.

1.  Inform the Social Security Administration of your name change.  If you changed your name after a recent marriage or divorce (or if you hyphenated your last names), you to take the necessary steps to ensure the name on your tax return matches the name registered with the Social Security Administration.  A mismatch between the name shown on your tax return and the SSA records can cause problems in the processing of your return and may even delay your refund.

To update your Social Security details, fill in Form SS-5, Application for a Social Security Card, at your local SSA office or by mail and provide a recently issued document as proof of your legal name change.  The form is available on Social Security Administration’s Web site at http://www.ssa.gov or by calling 800-772-1213 or at local offices.  Your new card will have the same number as your previous card, but will show your new name.

If you adopted your spouse’s children after getting married and their names changed, you’ll need to update their names with SSA too.  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.

2.  Inform the IRS and U.S. Postal Service of a change of address.  Avoid missing any IRS correspondence.  To update your address with the IRS, fill in Form 8822, Change of Address.

3.  Inform your employer of your change in marital status, name change and change of address.  This will ensure you receive your Form W-2 Wage early next year.

4.  Determine your tax filing status.  Depending on when you were married or divorced, your filing status may be single, married filing jointly or married filing separately.  In some circumstances, you can choose the most beneficial filing status, based on your individual earnings and tax obligations, that will allow you to pay the least amount of taxes.  Additionally, there may be other reasons why one filing status maybe be better under your individual circumstances.

5.  Determine your withholding amount.  If you choose to file jointly as a newly married couple, your combined salaries may put you in a higher tax bracket.  If you are newly single, your tax bracket may also change.  Thus, your withholding amount may need to change.   You can calculate the amount you should be having withheld by using the IRS Withholding calculator.   Once you have determined the correct amount, fill out a new Form W-4, Employee’s Withholding Allowance Certificate, and provide it to your employer so the correct amount is withheld from your pay.

If you need assistance with any of these issues, please contact us.

Muiños & Morales

461 days ago Short URL Comments

Tax Compliance

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10

Feb

Happy Tax Season Series: Don’t Forget to Report Unemployment Compensation

With the current United States unemployment rate, many Americans are collecting unemployment, some for the first time ever.  Now that tax season is here, many people are asking whether unemployment payments are taxable.   The short answer is yes, unemployment compensation is taxable.

Unemployment compensation generally includes any amounts received under the unemployment compensation laws of the United States or of a state.  It includes state unemployment insurance benefits and benefits paid to you by a state or the District of Columbia from the Federal Unemployment Trust Fund.  It also includes railroad unemployment compensation benefits.  However, it does not include worker’s compensation payments.

If you received unemployment compensation during the year, you should receive Form 1099-G, showing the amount you were paid.  Any unemployment compensation received must be included in your income and is reported on line 19 of Form 1040, line 13 of Form 1040A, or line 3 of Form 1040EZ.

If you received unemployment compensation, you may be required to make quarterly estimated tax payments.  However, you can avoid this burden by asking the payor to withhold federal income tax by filing a Form W-4V, Voluntary Withholding Request.  If you have done neither of these things, and had no other income tax withheld previously during the year 2011, you may have difficulty paying the taxes you owe this year.

However, we remind you that you should always timely file your income tax return, regardless of whether you can pay the amount owed or not, in order to avoid unnecessary failure to file penalties.  See our previous blog post here explaining additional reasons why you generally should always file.  There are IRS payment plans and other tax debt relief solutions available to you to pay off this debt.

If you have questions or would like our assistance please contact us. 

For more information, see Unemployment Benefits in Publication 525.

Muiños & Morales

465 days ago Short URL Comments

Late or Unfiled Tax Returns/Tax Compliance

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03

Feb

Happy Tax Season Series: Are You Eligible for the Earned Income Tax Credit?

Are you aware of the Earned Income Tax Credit?  The Earned Income Tax Credit (“EITC”) is a financial boost for workers earning $49,078 or less in 2011.  Four out of five eligible taxpayers filed for and received their EITC last year.  Find out if you are eligible!  It only takes a few minutes.

Here are ten things the IRS wants you to know about this valuable credit, which has been making the lives of working people a little easier since 1975.

1.  As your financial, marital or parental situations change from year to year, you should review the EITC eligibility rules to determine whether you qualify.  Just because you didn’t qualify last year doesn’t mean you won’t this year.

2.  If you qualify, the credit could be worth up to $5,751.  EITC not only reduces the federal tax you owe, but could result in a refund.  The amount of your EITC is based on your earned income and whether or not there are qualifying children in your household.  The average credit was around $2,240 last year.

3.  If you are eligible for EITC, you must file a federal income tax return and specifically claim the credit – even if you are not otherwise required to file.  Remember to include Schedule EIC, Earned Income Credit when you file your Form 1040 or, if you file Form 1040A, use and retain the EIC worksheet.

4.  You do not qualify for EITC if your filing status is Married Filing Separately.

5.  You must have a valid Social Security number for yourself (and your spouse if filing a joint return) and any qualifying child listed on Schedule EIC.

6.  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.

7.  Married couples and single people without children may qualify. If you do not have qualifying children, you must also meet the age and residency requirements, as well as dependency rules.

8.  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.

9.  It’s easy to determine whether you qualify.  The IRS has developed an interactive tool called the EITC Assistant, which is available on the IRS.gov website.   Just answer a few simple questions to find out if you qualify and estimate the amount of your EITC.

10.  Free help is available at Volunteer Income Tax Assistance (“VITA”)  sites to help you prepare and claim your EITC.  If you are preparing your taxes electronically, the software will figure the credit for you.  To find a VITA site near you, click here.

For more information about the EITC, see IRS Publication 596, Earned Income Credit.

Muiños & Morales

472 days ago Short URL Comments

Tax Compliance/Tax Credits

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02

Feb

Happy Tax Season Series: How to Choose a Tax Return Preparer

Many people look for help from professionals when it’s time to file their tax return.  However, even if a return is prepared by someone else, the taxpayer is legally responsible for what is reported.   So, it’s very important to choose your tax preparer carefully.

Here are ten tips from the IRS to keep in mind when choosing a tax return preparer:

1. Check the preparer’s qualifications.   New regulations require all paid tax return preparers to have a Preparer Tax Identification Number (“PTIN”).  In addition to making sure they have a PTIN, ask if the preparer is affiliated with a professional organization and attends continuing education classes.  The IRS is also phasing in a new test requirement to make sure those who are not an enrolled agent, CPA, or attorney have met minimal competency requirements.  Those subject to the test will become a Registered Tax Return Preparer once they pass it.

2. Check on the preparer’s history.  Check to see if the preparer has a questionable history with the Better Business Bureau and check for any disciplinary actions and licensure status through the state boards of accountancy for certified public accountants; the state bar associations for attorneys; and the IRS Office of Enrollment for enrolled agents.

3. Ask about their service fees.  Avoid preparers who base their fee on a percentage of your refund or those who claim they can obtain larger refunds than other preparers.  Also, always make sure any refund due is sent to you or deposited into an account in your name.  Under no circumstances should all or part of your refund be directly deposited into a preparer’s bank account.

4. Ask if they offer electronic filing.  Any paid preparer who prepares and files more than 10 returns for clients must file the returns electronically, unless the client opts to file a paper return.  More than 1 billion individual tax returns have been safely and securely processed since the debut of electronic filing in 1990.  Make sure your preparer offers IRS e-file.

5. Make sure the tax preparer is accessible.  Make sure you will be able to contact the tax preparer after the return has been filed, even after the April due date, in case questions arise.

6. Provide all records and receipts needed to prepare your return.  Reputable preparers will request to see your records and receipts and will ask you multiple questions to determine your total income and your qualifications for expenses, deductions and other items.  Do not use a preparer who is willing to electronically file your return before you receive your Form W-2 using your last pay stub.  This is against IRS e-file rules.

7. Never sign a blank return.  Avoid tax preparers that ask you to sign a blank tax form.

8. Review the entire return before signing it.   Before you sign your tax return, review it and ask questions.  Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.

9. Make sure the preparer signs the form and includes their PTIN.   A paid preparer must sign the return and include their PTIN as required by law. Although the preparer signs the return, you are responsible for the accuracy of every item on your return.  The preparer must also give you a copy of the return.

10. Report abusive tax preparers to the IRS.  You can report abusive tax preparers and suspected tax fraud to the IRS on Form 14157, Complaint: Tax Return Preparer. Download Form 14157 from http://www.irs.gov or order by mail at 800-TAX-FORM (800-829-3676).

Muiños & Morales

473 days ago Short URL Comments

Tax Compliance

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01

Feb

Happy Tax Season Series: Where’s my W-2?

It’s February 1st and the deadline for filing your individual income tax return will arrive in the blink of an eye.   Make sure you have obtained all the necessary documents before filing your 2011 tax return.

You should receive an IRS Form W-2, Wage and Tax Statement, from each of your employers for the year 2011.  Employers had until yesterday, January 31st, to issue your 2011 W-2 earnings statement.  However, if you do not receive your W-2 within a week, you should do the following:

1.  Contact your employer.   Contact your employer to inquire if and when the W-2 was mailed.  If it was mailed, it may have been returned to the employer because of an incorrect or incomplete address.  Verify the address the W-2 was mailed to and make any necessary corrections.  After contacting the employer, allow a reasonable amount of time for them to resend or issue the W-2.

2. Contact the IRS.    If you do not receive your W-2 by February 14, contact the IRS for more information and assistance at 1 (800) 829-1040.  The IRS will require you to provide your name, address, Social Security number, phone number.  Additionally, the IRS will ask you for the following:

•  Employer’s name, address and phone number
•  Dates of employment in 2011
•  An estimate of the wages you earned and  the federal income tax withheld.  The estimate should be based on year-to-date information from your final pay stub for 2011, if possible.

3.  File your return.   Regardless of whether or not you receive your Form W-2, you still must file your tax return or request an extension to file by April 17, 2012.  Failure to do so may result in assessments of penalties and interest.  If you have not received your Form W-2 in time to file your return by the due date, and have completed steps 1 and 2, you may use IRS Form 4852, Substitute for Form W-2, Wage and Tax Statement.  Attach Form 4852 to the return, estimating income and withholding taxes as accurately as possible.  Note that this may cause a delay in issuing your refund while the IRS verifies this information.

4. File a Form 1040X.  On occasion, you may receive your missing W-2 after you file your return using Form 4852, and the information on the W-2 may be different from what you reported on your tax return.  If this is the case, you must amend your return by filing a Form 1040X, Amended U.S. Individual Income Tax Return.

Muiños & Morales

474 days ago Short URL Comments

Tax Compliance

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