| Let’s Talk Taxes Education Credits from Uncle Sam Oct. 10th,2008 A good education is the best thing you can give yourself and your children. Uncle Sam recognizes the value of education and has given us credits and deductions to help. Hope Scholarship Credit—this credit is allowed for tuition and related expenses for the first two years of post secondary education. Students must be attending classes at least half time pursuing a degree or recognized credential at an eligible educational institution. The credit may be claimed for more than one family member. A maximum credit of $1650 is allowed for tax year 2006. Lifetime Learning Credit—this credit is allowed for up to 20 percent of the amount of the qualified tuition and related expenses, not to exceed $10,000. The maximum credit is $2000 and is allowed for undergraduate and graduate level courses as well as any course of instruction at an eligible institution to acquire or improve job skills. There is no requirement to be a half-time student, but the credit is calculated on a per family basis rather than per student. Credits may be taken for the taxpayer, spouse, or a dependent. Dependents are not allowed to take the credit. The credits are not available for married filing separate returns or for nonresident aliens. Both credits have an income phase-out which is $45,000 to $55,000 for single and $90,000 to $110,000 for married joint returns. Eligible expenses for both credits are tuition and fees, including tuition paid by loans in the year the tuition is paid, not when the loan is repaid. There is a prepayment rule that allows a credit for expenses paid in one tax year for an academic period that begins in the first 3 months of the following year. For a deeper understanding of education tax credits, you may wish to contact a licensed tax practitioner, such as an enrolled agent. The author is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics. Independent Contractor vs. Employee September 02,2008 Are your workers independent contractors or employees? The answer can have a profound impact on how much tax you pay as a small business owner. Knowing whether your workers are or are not employees will affect the amount of taxes you must withhold from their pay. It will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give to them. Employers who misclassify workers as independent contractors can end up with substantial tax bills as well as penalties for failing to pay employment taxes and failing to file required tax forms. Workers can avoid higher tax bills and lost benefits if they know their proper status. Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS. Generally, whether a worker is an employee or an independent contractor depends upon how much control you have as a business owner. If you have the right to control or direct not only what is to be done but also how it is to be done then your workers are most likely employees. If you can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are probably independent contractors. Three broad characteristics are used by the IRS to determine the relationship between businesses and workers - Behavioral Control, Financial Control, and the Type of Relationship. Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training, or other means. Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job. The Type of Relationship factor relates to how the workers and the business owner perceive their relationship. Knowing the proper worker classification can be critical to your business. Don’t guess. Act now to make certain you know for sure. You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer's Supplemental Tax Guide, and Publication 1779, Independent Contractor or Employee. Both of these publications and Form SS-8 are available on the IRS Web site or by calling the IRS at 800- 829-3676 (800-TAX-FORM). The address of the official IRS governmental Web site is www.irs.gov. Tax Scams - The Last Thing You Need Aug. 19, 2008 Life is complex enough without con artists trying to separate you from your hard earned dollars. It can be very costly if you become a victim of a scam that trades on the image or the mission of the IRS. Everyone should be vigilant in protecting personal, financial and tax information. The IRS has these tips to avoid falling prey to con artists. Watch your personal and financial information very closely, particularly during electronic transactions. The IRS is among a growing group of government agencies and corporations whose names and Web sites are being copied by imposters posing as employees conducting official business and seeking your personal information. Be aware that the IRS does not use e-mail to initiate contact with taxpayers about their accounts. Do not open links in unsolicited messages claiming to come from the IRS. Not all scams come by way of the Internet or email. The telephone is a low-tech source of scams. Do not give away personal information to callers claiming to be from the IRS unless you have verified the caller’s identity. You can confirm an IRS contact by calling 800-829-1040. Thieves can use stolen personal data to access your financial accounts, run up charges on credit cards or apply for new loans. With a stolen identity a con-artist might try to use your Social Security Number to intercept your refund or falsify employment records, leaving the IRS with the impression that you did not report all of your income. Some con artists earn their living by preparing false, and illegal, tax returns. Make certain that all of the information on your tax return is accurate since you are responsible for its content regardless of who prepares your return. Dishonest return preparers, promising unreasonably large refunds, can cause many headaches for you. Such preparers attract new clients by promising large refunds while skimming a portion of the inflated refunds and charging high fees for preparation services. Choose carefully when you hire a tax preparer. As the saying goes, if it sounds too good to be true, it probably is. In contrast to shady tax preparers, some con artists openly tell you that you do not have to pay taxes. Be wary of anyone who encourages you to side-step your responsibility to file an income tax return or to pay the proper amount of tax due. Some promoters make outlandish claims that taxes are not legal, that wages are not income, that a voluntary tax system means you can choose not to file or pay and that income tax returns violate your protection against self-incrimination or the right to privacy. Often these promoters will use techniques that are strikingly similar to any other con-artist to charge a high fee to share their “secrets” with you. Such arguments are false and have been repeatedly rejected by the courts. You may end up paying for this mistake twice, first when you pay for the bad advice and second when you are faced with a higher tax bill plus penalties and interest. For more information about these and other tax scams visit the IRS Web site at IRS.gov. Remember that for the genuine IRS Web site be sure to use .gov. Don't be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is www.irs.gov. Selling Your Home July 17,2008 During summer months, many people sell their home and move to a new location. Many of those individuals will make a profit on the sale and still will not have to pay a single dime of additional income tax to the IRS. Generally, you have made a profit if the selling price of your home is greater than the price you paid to purchase the home. That profit, considered a capital gain, is usually subject to income tax. However, under certain circumstances the law allows you to exclude all or part of that gain from your income – that is, you may not have to pay tax on the profit. Individuals may be able to exclude up to $250,000 of capital gain on the sale of their home, and married taxpayers filing joint returns may be able to exclude up to $500,000. The exclusion may be claimed each time that you sell your main home, but generally no more often than once every two years. To qualify, you must meet both the ownership and use tests. Ownership Test: During the 5-year period ending on the date of the sale, you must have owned the home for at least 2 years. Use Test: During the 5-year period ending on the date of the sale, you must have lived in the home as your main home at least 2 years. If you and your spouse file a joint return and both meet the use test, you normally will be able to claim the exclusion for married couples even if only one of you meets the ownership test. If you do not meet these tests, you may still be allowed to exclude a reduced amount of the gain realized on the sale of your home. But you must have sold the home for other specific reasons such as serious health issues, a change in your place of employment, or certain unforeseen circumstances such as a divorce or legal separation, natural or man-made disasters resulting in a casualty to your home, or an involuntary conversion of your home. For sales after 2007, the maximum exclusion on the sale of a main home by an unmarried surviving spouse is $500,000 if the sale occurs no later than 2 years after the date of the other spouse's death. However, this rule applies only if the requirements for joint filers relating to ownership and use were met immediately before the date of death, and during the 2-year period ending on the date of death, there was no sale or exchange of a main home by either spouse which qualified for the exclusion. If you were on qualified official extended duty in the U.S. Armed Services, the Foreign Service, or the intelligence community, you may suspend the five-year test period for up to 10 years. You are on qualified extended duty when, for more than 90 days or for an indefinite period, you are: At a duty station that is at least 50 miles from your main home, or Residing under government orders in government housing. Intelligence community members must serve on extended duty at a duty station that is located outside the United States. If you are entitled to exclude the entire gain from the sale of your home, you do not need to report the gain on your federal tax return. However, if you are not entitled to exclude the entire amount of the gain, use Schedule D, Capital Gains and Losses, and Form 1040 to report the total gain, the portion that can be excluded, and the portion that is subject to capital gains tax. For more information see IRS Publication 523, Selling Your Home, available at IRS.gov or by calling 800-TAX-FORM (800-829-3676). I |
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