Catch Up On Some Tax Planning
July 23, 2010 by Taxcut Editor
Filed under Personal and Business Taxes
Anytime is a good time to improve tax fitness with a few simple exercises.
Consider Roth IRA assets. By keeping assets inside a Roth IRA, they can grow tax free for retirement. Also, this year people can convert traditional IRAs to Roth IRAs. Account holders are no longer subject to the $100,000 modified adjusted gross income limit. With conversions that occur in 2010, they can also split their conversion amounts equally and report them as income for tax years 2011 and 2012.
Take advantage of tax-deferred retirement accounts. If you have a 401(k) or other employer-sponsored retirement plan available, contribute as much as you can afford to contribute. By increasing contributions every time you get a raise, you can increase your savings. The plans are basically funded with pretax dollars, which will reduce taxable income. Also, that money will grow tax free until it is withdrawn. If the contribution is to a Roth IRA, it is made with post-tax money, so the funds can be withdrawn tax free after the age of 59½.
Consider a 529 college savings plan. The annual $13,000 gift would go a long way toward the amount needed to save for education expenses. Contributors may also be eligible for a state tax deduction or credit. They can also take advantage of a special five-year accelerated gifting provision, which is $65,000 in one year per contributor. That covers the current year and the next four years.
Hold assets more than a year. Any capital gain made within a year is considered taxable income, like a salary. But gains taken after a year are considered capital gains, which in 2010 is taxed at the maximum rate of 15 percent. The capital gains rate is almost always lower than the income tax rate. Also, the capital gains rate is expected to go up to 20 percent next year, so some people are taking advantage by taking their gains this year.
Give to charity. Contributing to charities is always a good idea. But if you are planning a gift, it might be best to do it soon, because some in Washington have been looking at cutting back on charitable deductions as a revenue-saving measure.
Thomas P. Marshall is President of Virginia Estate and Retirement Planning Advisors, Inc., a Fee-Based Richmond Financial Planner with offices throughout Virginia.
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First Time Home Buyer Tax Credit
June 21, 2010 by Taxcut Editor
Filed under Personal and Business Taxes
First Time Home Buyer Tax Credit. – If you are buying a home for the very first time be advised that there are different first time homebuyer programs that are available to you. These programs will help you get your very first home at the best deal possible.
First time home buyer tax credit.
This is an ideal year to buy a home for first time buyers. The Obama’s mortgage program includes an $8,000 tax credit or 10% of the home’s price, whichever is lower, for Americans who are buying a home for the first time.
However, not everyone is eligible for this tax credit. A single homebuyer who makes more than $95000 a year or a married couple who jointly has a yearly income of $150000 will not be able to get the full amount of the tax credit. And a single buyer who makes more than $95K a year and a married couple who makes more than $170K are not eligible for the tax credit at all. However, if your income does not belong to any of the brackets mentioned above, then you are indeed qualified for the full amount of the tax credit.
If you are eligible, the $8,000 tax credit (or 10 percent of the amount of the home) is fully refundable. You can claim this amount on your next tax return if you buy a home this year. Even if the amount of your federal tax liability is less, the total amount of the tax credit should be refunded.
Federal Housing Administration Loans.
With this kind of loan the only required down payment would be 3.5% of the purchase price of the house. Unlike a conventional loan which would require at least 20% down payment. This kind makes purchasing a home for the first time significantly more affordable. This is just yet another mortgage program of the government to make it more affordable for everyone to own a home. Again, not everyone qualifies for this program. In order to be eligible for this loan, your monthly mortgage payments after you have purchased the home should not be more than 29% of your monthly gross income. And for one to get approval, he/she should have a good credit standing.
Special Loans for first time home buyers.
Many lending institutes offer special packages for people who are buying a house for the first time. Included in the package is a considerably lower down payment. At least less than the conventional 20% down payment required by most lenders. Other creditors who will not give you a lower down payment offer a program where you can get a piggyback loan for you to be able to reach the required traditional 20% down payment.
Usually, if you apply for a loan that has a down payment which is less than the traditional 20% of the purchase price of the house, you would be required to get a Private Mortgage Insurance. This is required by creditors for them to use as security in the event that their borrowers suddenly default on their payments. The cost of this insurance is normally 0,5% of the mortgage amount per annum. And usually by the time the borrower has paid 20% of the loan, creditors will allow the borrow to cancel the insurance.
When you are considering purchasing a home for the first time, it would be advisable for you to research on all your options. If you take advantage of the programs mentioned above, you would have saved a couple of thousands of dollars, which can increase your savings significantly. Also, check out your state’s federal program. Some states in the US offer additional grants that can help in making your first time home even more affordable.
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Reporting Your Child’s Income on Your Return
November 18, 2009 by taxman
Filed under IRS News Items
You may be able to avoid filing a return for your child by reporting the child’s income on your return.
For any year the kiddie tax applies to your child, you may be able to report the child’s investment income on your tax return. (The kiddie tax applies to certain children with investment income above a threshold amount, as explained here.) This may cause the total amount paid to be higher or lower, but most people think about doing this mainly because of the convenience: it means preparing and filing one less tax return. You’re never required to do this, so you shouldn’t make this election if it will cost you more than the benefit you get from avoiding paperwork.
The amount of paperwork you avoid by doing this isn’t much. If you make the election you have to fill out a special form and attach it to your own tax return. That’s likely to be about the same amount of work as preparing a separate return for the child.
Who can do this
Not everyone can make this election. You can do this only if all of the following are true:
- The kiddie tax applied to your child for the year. The kiddie tax can now apply to students up to age 24.
- The child’s only income was from interest and dividends, including capital gain distributions and Alaska Permanent Fund dividends. If your child has any other income, such as a capital gain or loss from selling shares of stock, the election is not available.
- The child’s gross income for the year was less than $9,500. (This is the number for 2009; it is adjusted from time to time for inflation.)
- The child is required to file a tax return for the year. If the child’s income is too low to require a tax return, you probably don’t want to report the income on your tax return, but even if for some strange reason you want to do so, the IRS says it isn’t allowed.
Probably the key point here is that the election isn’t available if your child has capital gains or losses, other than capital gain distributions. Many people wonder if they can use this rule to move a child’s capital losses to the parents’ return, but this isn’t possible. (Click here for more on capital losses of minors.)
How it’s done
You don’t simply add the child’s income to your own income on your tax return. Instead, you report the child’s income on a special form and attach it to your return. Click here to download the form and instructions.
Effect of the election
If you make this election, you still get the benefit of the child’s $950 standard deduction. You also get to apply the child’s tax rate to the next $950 of income. (The tax rate at this level is 10%.) It’s only when the child’s investment income exceeds $1,900 that the parents’ tax rate applies.
Example: In 2009 your child has $2,900 of interest income and no other income. The first $950 of investment income escapes taxation: your child’s standard deduction takes care of that. The next $950 is taxed at the child’s rate of 10%. That leaves $1,000 to be taxed at whatever rate would apply if this income were added to the income reported on your tax return. Suppose you’re in the 28% tax bracket. The tax on your child’s income would be 10% of $950 plus 28% of $1,000, for a total of $375.
This is the same example we used in explaining the kiddie tax, because you end up with the same result either way. As explained below, however, there are some ways you can end up paying more tax (or possibly less tax) as a result of reporting this income on your return instead of a separate return for the child.
Certain benefits not available
Some benefits that might be claimed on a child’s separate income tax return are not available if you report the child’s income on your tax return. Here are some examples:
- If your child forfeits interest for withdrawing money from making an early withdrawal from a savings account, a deduction is allowed on a separate tax return but not if you report the child’s income on your tax return.
- If your child has itemized deductions such as investment expenses and charitable contributions that add up to more than $950, tax savings from those itemized deductions would potentially be available, but only on a separate tax return for the child.
- If your child is blind, a larger standard deduction is available, but only on a separate tax return for the child.
In addition, the tax on the child’s income may be somewhat higher if the child received capital gain distributions. You get the benefit of the capital gains rate on any portion of the child’s income that is taxed at your rate, but lose the benefit on any portion that is taxed at the child’s rate. The maximum amount that is taxed at the child’s rate is $950, and at this income level the difference in rates is 10% (the regular tax rate is 10% and the capital gains rate at this level is 0%), so the difference can be as much as $95.
Investment interest expense
There’s one place where you can come out ahead by including the child’s income on your tax return. When you determine how much investment interest expense you’re allowed to deduct, the IRS says you can add the child’s investment income to your own. Having a larger amount of investment income sometimes allows you to claim a larger deduction for investment interest expense. If you have investment interest expense that isn’t deductible because you don’t have enough net investment income, you may benefit by making the election to include your child’s investment income on your tax return.
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Commercial Property Math You Should Know
October 1, 2009 by Taxcut Editor
Filed under Personal and Business Taxes
commercial property is an extremely interesting subject. This is likely a result of the huge potential profits from just one deal. It is true that the converse can also happen. Without proper diligence you could lose that much.
You do need some basic math to invest in commercial property. Just part of it will be basic addition and subtraction. (They will be part of it though!) You have to be able to interpret what different numbers mean.
Many investors have lost it all thanks to misreading the numbers. Avoid this by knowing the issues at stake.
* • Value depends on net operating income - The net is the commercial property value. You need to subtract the operations costs from the gross income to get the net. What about a building that generates 5 million dollars each year? However, if it costs 4,999,990 dollars a year to operate the building, you have a net value of ten dollars. Now it sounds pretty lousy.
* • Keep a close eye on income versus expense - You need hard numbers here. You need every number or you do not have enough information. You should not accept these numbers as projections. You cannot make assumptions either. The wrong projection or assumption could lead to major losses. Being certain about values enables you to solidly back a deal.
* Assumptions increase your risk - Every time you make an assumption you increase your risk in the deal. You cannot guarantee that an assumption is true. If a deal looks good based only on assumption, then walk away. Of course, some assumptions may be necessary. You could determine that the assumption that you will keep a building’s tenants is allowable. However this assumption still contributes to the risk issue.
Commercial property investing is exciting. Many think of it as a millionaire maker. Just be realistic about commercial properties. Being meticulous and careful will increase your odds of success with commercial property.
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Whistleblower – Informant Award
June 10, 2009 by Taxcut Editor
Filed under IRS News Items
The IRS Whistleblower Office pays money to people who blow the whistle on persons who fail to pay the tax that they owe. If the IRS uses information provided by the whistleblower, it can award the whistleblower up to 30 percent of the additional tax, penalty and other amounts it collects.
Who can get an award?
The IRS may pay awards to people who provide specific and credible information to the IRS if the information results in the collection of taxes, penalties, interest or other amounts from the noncompliant taxpayer.
The IRS is looking for solid information, not an educated guess or unsupported speculation. We are also looking for a significant Federal tax issue – this is not a program for resolving personal problems or disputes about a business relationship.
What are the rules for getting an award?
The law provides for two types of awards. If the taxes, penalties, interest and other amounts in dispute exceed $2 million, and a few other qualifications are met, the IRS will pay 15 percentto 30 percent of the amount collected. If the case deals with an individual, his or her annual gross income must be more than $200,000. If the whistleblower disagrees with the outcome of the claim, he or she can appeal to the Tax Court. These rules are found at Internal Revenue Code IRC Section 7623(b) – Whistleblower Rules.
The IRS also has an award program for other whistleblowers – generally those who do not meet the dollar thresholds of $2 million in dispute or cases involving individual taxpayers with gross income of less that $200,000. The awards through this program are less, with a maximum award of 15 percent up to $10 million. In addition, the awards are discretionary and the informant cannot dispute the outcome of the claim in Tax Court. The rules for these cases are found at Internal Revenue Code IRC Section 7623(a) – Informant Claims Program, and some of the rules are different from those that apply to cases involving more than $2 million.
If you decide to submit information and seek an award for doing so, use IRS Form 211. The same form is used for both award programs.
More Information:
What Happens to a Claim for an Informant Award (Whistleblower)
Procedures used and the criteria followed to identify and process informant cases
History of the Whistleblower/Informant Program
Historical information on the evolution of the concept of paying for leads from its inception up to the current law followed today
Whistleblower Law
A brief synopsis of what the new whistleblower law entails. This is the most significant change to the Services approach to informant awards in 140 years
How Do You File a Whistleblower Award Claim
Step by step procedures to follow to file an informant claim for award
Confidentiality and Disclosure for Whistleblowers
The rules governing confidentiality of informant information
IRC Section 7623(b) – Whistleblower Rules
The requirements of the new rules enacted in IRC Section 7623(b), the Whistleblower Program
IRC Section 7623(a) – Informant Claims Program
The requirement of the rules governing claims that do not meet the requirements of the provisions in the whistleblower program under IRC Section 7623(b). These claims are part of the Informant Claims Program
IRS Form 211
Application for Award for Original Information
News Release IR-2007-201
Procedure Unveiled for Reporting Violations of the Tax Law, Making Reward Claims
Notice 2008-4Guidance to the public on how to file claims
Claims Submitted to the IRS Whistleblower Office under Section 7623
Whistleblower Office At-a-Glance
2008 Report to Congress on the Whistleblower Program
Reporting other information to the IRS
If you have information about tax noncompliance but are not interested in an award, or you have other information you believe may be of interest to the IRS:
* For information on how to Report Suspected Tax Fraud Activity, if you have information about an individual or company you suspect is not complying with the tax law, and you do not want to seek an award . You can remain anonymous
* The IRS sets professional standards for attorneys, certified public accountants and enrolled agents who represent taxpayers before the IRS. To learn more about those professional standards, or how to report a violation, see Office of Professional ResponsibilityAt-a-Glance – Report Circular 230Violations – email OPR@irs.gov
* Report Fraud, Waste and Abuseto Treasury Inspector General for Tax Administration (TIGTA), if you want to report, confidentially, misconduct, waste, fraud, or abuse by an IRS employee or a Tax Professional, you can call 1-800-366-4484 (1-800-877-8339 for TTY/TDD users). You can remain anonymous.
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