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Monthly Archives: January 2013

Who Should File a 2012 Tax Return?

If you received income during 2012, you may need to file a tax return in 2013. The amount of your income, your filing status, your age and the type of income you received will determine whether you’re required to file. Even if you are not required to file a tax return, you may still want to file. You may get a refund if you’ve had too much federal income tax withheld from your pay or qualify for certain tax credits.

You can find income tax filing requirements on IRS.gov. The instructions for Forms 1040, 1040A or 1040EZ also list filing requirements. The Interactive Tax Assistant tool, also available on the IRS website, is another helpful resource. The ITA tool answers many of your tax law questions including whether you need to file a return.

Even if you’ve determined that you don’t need to file a tax return this year, you may still want to file. Here are five reasons why:

1. Federal Income Tax Withheld. If your employer withheld federal income tax from your pay, if you made estimated tax payments, or if you had a prior year overpayment applied to this year’s tax, you could be due a refund. File a return to claim any excess tax you paid during the year.

2. Earned Income Tax Credit. If you worked but earned less than $50,270 last year, you may qualify for EITC. EITC is a refundable tax credit; which means if you qualify you could receive EITC as a tax refund. Families with qualifying children may qualify to get up to $5,891 dollars. You can’t get the credit unless you file a return and claim it. Use the EITC Assistant to find out if you qualify.

3. Additional Child Tax Credit. If you have at least one qualifying child and you don’t get the full amount of the Child Tax Credit, you may qualify for this additional refundable credit. You must file and use new Schedule 8812, Child Tax Credit, to claim the credit.

4. American Opportunity Credit. If you or someone you support is a student, you might be eligible for this credit. Students in their first four years of postsecondary education may qualify for as much as $2,500 through this partially refundable credit. Even those who owe no tax can get up to $1,000 of the credit as cash back for each eligible student. You must file Form 8863, Education Credits, and submit it with your tax return to claim the credit.

5. Health Coverage Tax Credit. If you’re receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation, you may be eligible for a 2012 Health Coverage Tax Credit. Spouses and dependents may also be eligible. If you’re eligible, you can receive a 72.5 percent tax credit on payments you made for qualified health insurance premiums.

Want more information about filing requirements and tax credits? Visit IRS.gov.

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Check Your Eligibility for the Earned Income Tax Credit

The Earned Income Tax Credit has made the lives of working people a little easier since 1975. EITC can be a boost for workers who earned $50,270 or less in 2012. Yet the IRS estimates that one out of five eligible taxpayers fails to claim their EITC each year. The IRS wants everyone who is eligible for the credit to get the credit that they’ve earned.

Here are the top five things the IRS wants you to know about this credit.

1. EITC is valuable. The EITC not only reduces the federal tax you owe, but could result in a refund. You base the amount of EITC on your earned income and the number of qualifying children in your household. The average credit was around $2,200 last year. If you qualify, the credit could be worth up to $5,891.

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

3. File your return. If you are eligible for the EITC, you must file a federal income tax return to 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. If you file Form 1040A, use the EIC worksheet and keep it for your records. If you use IRS e-file to prepare and file your tax return, the software will guide you and not let you forget this important step. E-file does the work and figures your EITC for you!

4. Know the qualifications. You should understand the qualifications for EITC before claiming it, including:

# You do not qualify for EITC if your tax filing status is Married Filing Separately.
# You must have a valid Social Security number for yourself, your spouse – if filing a joint tax return – and any qualifying child listed on Schedule EIC.
# You must have earned income. You have earned income if you are paid wages, you are self-employed, you have income from farming or you receive disability income.
# Married couples and single people without children may qualify. If you do not have qualifying children, you must also meet 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 as earned income for the purpose of computing the EITC. Even if you make this choice, your combat pay will remain nontaxable.

5. Use the EITC Assistant. It’s easy to determine if you qualify. The EITC Assistant, a helpful tool available on IRS.gov, removes the guesswork from eligibility rules. Just answer a few simple questions to find out if you qualify and to estimate the amount of your EITC.

With IRS Free File, you can claim EITC by using brand name tax preparation software to prepare and e-file your tax return for free. It’s available exclusively at IRS.gov/freefile. Free help preparing your return to claim your EITC is also available at one of thousands of Volunteer Income Tax Assistance sites around the country. To find the volunteer site nearest to you, use the VITA locator tool on IRS.gov.

For more information about the EITC, see IRS Publication 596, Earned Income Credit. It’s available in English and Spanish on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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A Look at 6 Common 1099 Forms

When you earn wages, tips, or a salary, your employer will send you a W-2 form detailing your income over the past year. The Form 1099
is used by the IRS to report all other forms of income you’ve received.

1099-MISC – The 1099-MISC, arguably the most common 1099, was created to cover all sorts of miscellaneous income such as freelancer income and work as an independent contractor. If you’ve received any sort of income over $600 form any source, be looking for a 1099-MISC in the mail leading up to April.

1099-INT – For those of you who’ve earned income from interest, such as investment or savings accounts, you will be using the 1099-INT to report this income to the IRS. This form details exactly how much interest income you’ve earned.

1099-S – Another 1099 that seems to be gaining in popularity as of late is the 1099-S form, which details real estate transactions. This form is pretty straight forward, and you should receive the 1099-S from your broker explaining your income from your real estate deals.

1099-C – The 1099-C reports any of your debts that were cancelled in the past year. As an example, if your credit card company settled the debt that you owed by forgiving $3000, then you would be required to report that amount as income on your tax return.

1099-R – For those of you who have been planning for the future, the 1099-R will find it’s way into your mailbox if you have taken money out of your retirement account or pension plan. Yes, those withdrawals are likely considered income.

1099-DIV – One of the last more “common” 1099 Forms is the 1099-DIV, which will be important to you if you have earned income based on dividends and distributions from your stock portfolio.

A Wise Approach

The overall purpose of the 1099 is to make sure that you, your source of income, and the IRS are all in agreement about your earnings. For a complete, comprehensive, and expert look at all 20+ 1099s, you can talk to a Tax-Xpert professional about which forms you should be expecting.

Remember that all your sources of income will not arrive on one 1099 form.

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Congress passes Fiscal Cliff Act

Pulling back from the “fiscal cliff” at the 13th hour, Congress on Tuesday preserved most of the George W. Bush-era tax cuts and extended many other lapsed tax provisions.

Here are the Act’s main tax features:

Individual tax rates
All the individual marginal tax rates under EGTRRA and JGTRRA are retained (10%, 15%, 25%, 28%, 33%, and 35%). A new top rate of 39.6% is imposed on taxable income over $400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).

Phaseout of itemized deductions and personal exemptions
The personal exemptions and itemized deductions phaseout is reinstated at a higher threshold of $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly.

Capital gains and dividends
A 20% rate applies to capital gains and dividends for individuals above the top income tax bracket threshold; the 15% rate is retained for taxpayers in the middle brackets. The zero rate is retained for taxpayers in the 10% and 15% brackets.

Alternative minimum tax
The exemption amount for the AMT on individuals is permanently indexed for inflation. For 2012, the exemption amounts are $78,750 for married taxpayers filing jointly and $50,600 for single filers. Relief from AMT for nonrefundable credits is retained.

Estate and gift tax
The estate and gift tax exclusion amount is retained at $5 million indexed for inflation ($5.12 million in 2012), but the top tax rate increases from 35% to 40% effective Jan. 1, 2013. The estate tax “portability” election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount, was made permanent by the act.

Permanent extensions
Various temporary tax provisions enacted as part of EGTRRA were made permanent. These include:

#Marriage penalty relief (i.e., the increased size of the 15% rate bracket (Sec. 1(f)(8)) and increased standard deduction for married taxpayers filing jointly (Sec. 63(c)(2));
#The liberalized child and dependent care credit rules (allowing the credit to be calculated based on up to $3,000 of expenses for one dependent or up to $6,000 for more than one) (Sec. 21);
#The exclusion for National Health Services Corps and Armed Forces Health Professions Scholarships (Sec. 117(c)(2));
#The exclusion for employer-provided educational assistance (Sec. 127);
#The enhanced rules for student loan deductions introduced by EGTRRA (Sec. 221);
#The higher contribution amount and other EGTRRA changes to Coverdell education savings accounts (Sec. 530);
#The employer-provided child care credit (Sec. 45F);
#Special treatment of tax-exempt bonds for education facilities (Sec 142(a)(13));
#Repeal of the collapsible corporation rules (Sec. 341);
#Special rates for accumulated earnings tax and personal holding company tax (Secs. 531 and 541); and
#Modified tax treatment for electing Alaska Native Settlement Trusts (Sec. 646).

Individual credits expired at the end of 2012
The American opportunity tax credit for qualified tuition and other expenses of higher education was extended through 2018. Other credits and items from the American Recovery and Reinvestment Act of 2009, P.L. 111-5, that were extended for the same five-year period include enhanced provisions of the child tax credit under Sec. 24(d) and the earned income tax credit under Sec. 32(b). In addition, the bill permanently extends a rule excluding from taxable income refunds from certain federal and federally assisted programs (Sec. 6409).

Individual provisions expired at the end of 2011
The act also extended through 2013 a number of temporary individual tax provisions, most of which expired at the end of 2011:

#Deduction for certain expenses of elementary and secondary school teachers (Sec. 62);
#Exclusion from gross income of discharge of qualified principal residence indebtedness (Sec. 108);
#Parity for exclusion from income for employer-provided mass transit and parking benefits (Sec. 132(f));
#Mortgage insurance premiums treated as qualified residence interest (Sec. 163(h));
#Deduction of state and local general sales taxes (Sec. 164(b));
#Special rule for contributions of capital gain real property made for conservation purposes (Sec. 170(b));
#Above-the-line deduction for qualified tuition and related expenses (Sec. 222); and
#Tax-free distributions from individual retirement plans for charitable purposes (Sec. 408(d)).

Business tax extenders
The act also extended many business tax credits and other provisions. Notably, it extended through 2013 and modified the Sec. 41 credit for increasing research and development activities, which expired at the end of 2011. The credit is modified to allow partial inclusion in qualified research expenses and gross receipts those of an acquired trade or business or major portion of one. The increased expending amounts under Sec. 179 are extended through 2013. The availability of an additional 50% first-year bonus depreciation (Sec. 168(k)) was also extended for one year by the act. It now generally applies to property placed in service before Jan. 1, 2014 (Jan. 1, 2015, for certain property with longer production periods).

Other business provisions extended through 2013, and in some cases modified, are:

#Temporary minimum low-income tax credit rate for non-federally subsidized new buildings (Sec. 42);
#Housing allowance exclusion for determining area median gross income for qualified residential rental project exempt facility bonds (Section 3005 of the Housing Assistance Tax Act of 2008);
#Indian employment tax credit (Sec. 45A);
#New markets tax credit (Sec. 45D);
#Railroad track maintenance credit (Sec. 45G);
#Mine rescue team training credit (Sec. 45N);
#Employer wage credit for employees who are active duty members of the uniformed services (Sec. 45P);
#Work opportunity tax credit (Sec. 51);
#Qualified zone academy bonds (Sec. 54E);
#Fifteen-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements (Sec. 168(e));
#Accelerated depreciation for business property on an Indian reservation (Sec. 168(j));
#Enhanced charitable deduction for contributions of food inventory (Sec. 170(e));
#Election to expense mine safety equipment (Sec. 179E);
#Special expensing rules for certain film and television productions (Sec. 181);
#Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico (Sec. 199(d));
#Modification of tax treatment of certain payments to controlling exempt organizations (Sec. 512(b));
#Treatment of certain dividends of regulated investment companies (Sec. 871(k));
#Regulated investment company qualified investment entity treatment under the Foreign Investment in Real Property Act (Sec. 897(h));
#Extension of subpart F exception for active financing income (Sec. 953(e));
#Lookthrough treatment of payments between related controlled foreign corporations under foreign personal holding company rules (Sec. 954);
#Temporary exclusion of 100% of gain on certain small business stock (Sec. 1202);
#Basis adjustment to stock of S corporations making charitable contributions of property (Sec. 1367);
#Reduction in S corporation recognition period for built-in gains tax (Sec. 1374(d));
#Empowerment Zone tax incentives (Sec. 1391);
#Tax-exempt financing for New York Liberty Zone (Sec. 1400L);
#Temporary increase in limit on cover-over of rum excise taxes to Puerto Rico and the Virgin Islands (Sec. 7652(f)); and
#American Samoa economic development credit (Section 119 of the Tax Relief and Health Care Act of 2006, P.L. 109-432, as modified).

Energy tax extenders
The act also extends through 2013, and in some cases modifies, a number of energy credits and provisions that expired at the end of 2011:

#Credit for energy-efficient existing homes (Sec. 25C);
#Credit for alternative fuel vehicle refueling property (Sec. 30C);
#Credit for two- or three-wheeled plug-in electric vehicles (Sec. 30D);
#Cellulosic biofuel producer credit (Sec. 40(b), as modified);
#Incentives for biodiesel and renewable diesel (Sec. 40A);
#Production credit for Indian coal facilities placed in service before 2009 (Sec. 45(e)) (extended to an eight-year period);
#Credits with respect to facilities producing energy from certain renewable resources (Sec. 45(d), as modified);
#Credit for energy-efficient new homes (Sec. 45L);
#Credit for energy-efficient appliances (Sec. 45M);
#Special allowance for cellulosic biofuel plant property (Sec. 168(l), as modified);
#Special rule for sales or dispositions to implement Federal Energy
#Regulatory Commission or state electric restructuring policy for qualified electric utilities (Sec. 451); and
#Alternative fuels excise tax credits (Sec. 6426).

Foreign provisions
The IRS’s authority under Sec. 1445(e)(1) to apply a withholding tax to gains on the disposition of U.S. real property interests by partnerships, trusts, or estates that are passed through to partners or beneficiaries that are foreign persons is made permanent, and the amount is increased to 20%.

New taxes
In addition to the various provisions discussed above, some new taxes also took effect Jan. 1 as a result of 2010’s health care reform legislation.

Additional hospital insurance tax on high-income taxpayers. The employee portion of the hospital insurance tax part of FICA, normally 1.45% of covered wages, is increased by 0.9% on wages that exceed a threshold amount. The additional tax is imposed on the combined wages of both the taxpayer and the taxpayer’s spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.

For self-employed taxpayers, the same additional hospital insurance tax applies to the hospital insurance portion of SECA tax on self-employment income in excess of the threshold amount.

Medicare tax on investment income. Starting Jan. 1, Sec. 1411 imposes a tax on individuals equal to 3.8% of the lesser of the individual’s net investment income for the year or the amount the individual’s modified adjusted gross income (AGI) exceeds a threshold amount. For estates and trusts, the tax equals 3.8% of the lesser of undistributed net investment income or AGI over the dollar amount at which the highest trust and estate tax bracket begins.

For married individuals filing a joint return and surviving spouses, the threshold amount is $250,000; for married taxpayers filing separately, it is $125,000; and for other individuals it is $200,000.

Net investment income means investment income reduced by deductions properly allocable to that income. Investment income includes income from interest, dividends, annuities, royalties, and rents, and net gain from disposition of property, other than such income derived in the ordinary course of a trade or business. However, income from a trade or business that is a passive activity and from a trade or business of trading in financial instruments or commodities is included in investment income.

Medical care itemized deduction threshold. The threshold for the itemized deduction for unreimbursed medical expenses has increased from 7.5% of AGI to 10% of AGI for regular income tax purposes. This is effective for all individuals, except, in the years 2013–2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the end of the tax year, the increased threshold does not apply and the threshold remains at 7.5% of AGI.

Flexible spending arrangement. Effective for cafeteria plan years beginning after Dec. 31, 2012, the maximum amount of salary reduction contributions that an employee may elect to have made to a flexible spending arrangement for any plan year is $2,500.

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5 End of the Year Tax Tips for Newly Married Couples

I just attended a wedding this past weekend and I’m always happily amazed at the outpouring of emotion at one of the most joyous occasions in your life. As a personal finance writer, we’re always focused on the dollars and cents of life so it’s nice to be reminded of what we’re working towards. Sadly, once the cake and champagne has been consumed and the DJ shuts off the music, we have to be transported back from this magical place and back to reality. 🙂

With reality comes taxes and the challenges that a newly married couple must face. Once the honeymoon is over, it’s time to start getting serious about your finances as a couple. And that includes getting your tax situation in order. Remember that your marital status is determined by your status on December 31. So if you marry on December 31, you are considered married for the whole tax year.

As the year draws to a close, and as you consider your new married filing jointly status, here are five tips to keep in mind:

1. Change Your Name with the Social Security Administration

Changing your name on your Social Security Card is step one. You want the name the Social Security Administration has to match the name on your tax return. If you have changed your name as a result of the marriage, you need to make sure that is reflected with all of the proper agencies. You need to fill out and file a Form SS-5 with your local Social Security Administration office. You’ll receive a new card, but your Social Security number will remain the same.

If you didn’t change your name as a result of the marriage, there is no need to file with the Social Security Administration.

You’ll want to change your name at the SSA before you try to change it on your driver’s license or any other documents. It can save you a lot of time because the SSA document can be used as proof for the license, which is then used as proof for everything else (utility bills, banks, credit cards).

2. Double Check Your Tax Withholding

Now that you have a new tax status, it’s important to review your tax withholding. Does your combined income with your spouse put you in a higher tax bracket? If so, you might not be withholding enough. Tax-Xpert has a great calculator that can help you figure out if one or both of you need to make changes to your tax withholding amount. You want to make sure that you begin withholding more from your paycheck, or you could be surprised by your higher tax bill come April.

3. Consider the Possibility of Filing Separately

In most cases, it makes sense to file jointly. However, depending on your individual tax situations this year, it might make sense to file as married filing separately – at least at first. Take the time to figure your taxes with both scenarios to see what your tax bill ends up being. You can re-evaluate your tax filing status next year to see if the best option has changed. You can use Tax-Xpert TaxCaster for free to check both scenarios.

4. Look at ALL Your Possible Tax Breaks

If you file jointly, your spouse’s tax breaks are yours as well. Make sure that you review ALL of your tax breaks from the past year. If you just got married, you might be able to take advantage of your spouse’s generous charitable donations to help lower your bill. Consider investment losses, dependent care credits, education credits, mortgage interest, and other tax breaks. Go back through the finances for both of you and identify your joint tax breaks – and see if you have time to rack up a couple more tax breaks before the end of the year.

I’ve always found that the simplest way to do this is with software. Tax preparation packages make this dead simple because they walk you through everything – trying to figure it out by reading IRS publications is usually a time consuming and difficult process.

5. Understand that Same-Sex Couples Can’t File Federal Taxes Jointly

Same-sex newlyweds need to be aware that they can’t file their federal tax return jointly. The Defense of Marriage Act, passed in 1996, prohibits federal recognition of same-sex couples. So, even if same-sex marriage or civil unions are legal in your state of residence, as far as the federal government is concerned, they are not recognized. Same-sex couples have to file as single when filling out a federal tax return.

These are just a few of the tax tips We’d give our newly married friends.

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