Tag Archives: Income Tax

Combating Tax Return Fraud – What You Need to Know

WASHINGTON, DC (January 12, 2016) How do you know if someone has filed a tax return using your Social Security number? And what do you do then?

This is happening more and more—the latest General Accounting Office (GAO) report says that IRS paid out over $5.8 billion in fraudulent returns in 2013. IRS does have security measures in place to verify the accuracy of tax returns and the validity of Social Security numbers submitted, but that hasn’t stopped the bad guys from filing returns using other people’s identities—early and often!

“Filing your return early is actually a great way to thwart these fraudsters,” said Kerry Freeman, EA, of Freeman Income Tax Services in Anthem, AZ. “By filing later, you give the bad guys more time to file a false return in your name.”

If you receive a notice from the IRS that leads you to believe someone may have used your Social Security number fraudulently, or if your electronic filing is rejected, Freeman advises that you notify the IRS immediately by calling the IRS’ Identity Protection Specialized Unit (IPSU) at 800.908.4490. For the IRS to mark your account to identify any questionable activity, you must complete Form 14039, Identify Theft Affidavit. Mail or fax the form (one or the other, doing both will result in a delay) to the address or fax number listed on the form

The IRS is well aware of the uptick in fraudulent filings and is making efforts to prevent it, such as monitoring Internet “IP” addresses where multiple returns are filed and keeping track of the time it takes to fill out each return online. Scammers prepare returns in rapid succession, unlike most taxpayers, who typically put in time to make sure the information on their return is correct.

Freeman also noted that the IRS is providing increased protection with a personal pin number for taxpayers, known as an “IP PIN”—an identity protection pin.

“An IP PIN is a six-digit number the IRS will assign you if you think you’ve been the victim of identity theft that helps prevent the misuse of your Social Security number on fraudulent federal income tax returns. IRS is not giving out IP Pins to everyone, but if you think you’ve been a victim of identity theft you’ll need one.”

Many people feel safer having a licensed professional, such as an enrolled agent, prepare their returns. Enrolled agents (also known as “EAs”) receive their licenses from the IRS and are required to undergo a background check. They abide by a code of ethics and earn annual continuing education. You can find an enrolled agent in good standing on the directory of the National Association of Enrolled Agents (NAEA): eatax.org.

The “Protecting Americans from Tax Hikes Act of 2015”

Overview of the Provisions

PERMANENT PROVISIONS

The bill makes over 20 tax relief provisions permanent, including provisions from 11 different bills marked up by the Ways and Means Committee in 2015.

  • Research and Development Credit (base credit, 14% ASC, AMT and Payroll provisions)
  • Section 179 expensing ($500,000 and $2 million limits, no limitation on real estate)
  • State and local sales tax deduction
  • 15-year depreciation for leaseholds and improvements
  • International tax relief: Active finance exception
  • Deduction for teacher classroom expenses
  • 100% exclusion on gains from sale of small business stock
  • Low-Income Housing Tax Credit extenders: the 9% floor and military housing allowance
  • Employer wage credit for employees on active duty (expanded for all employers)
  • All three charitable extenders: food inventory, conservation easements, and IRA charitable rollover, and exemption for certain payments to a controlling exempt organization
  • Both S corporation provisions: 5-year built in gains tax and charitable contributions
  • Mass transit parity
  • Deduction for teacher classroom expenses (indexed for inflation)
  • Enhancements since 2001: Earned Income Tax Credit, Additional Child Tax Credit, and American Opportunity Tax Credit
  • Two provisions for mutual funds: treatment of RIC dividends for foreign investors and subjecting RICs to FIRPTA

FIVE-YEAR PROVISIONS

  • Bonus depreciation (50% for 2015-17, 40% in 2018, 30% in 2019)
  • International tax relief: Controlled foreign corporation look-through rule
  • The New Markets Tax Credit
  • The Work Opportunity Tax Credit

TWO-YEAR PROVISIONS

  • Exclusion of discharged mortgage debt relief from gross income (modified)
  • Mortgage insurance premiums treated as qualified residence interest
  • Above the line deduction for qualified tuition and related expenses
  • Indian Employment Tax Credit
  • Railroad Track Maintenance Credit (modified)
  • Mine Rescue Team Training Credit
  • Qualified Zone Academy Bonds
  • Race horses: 3-year recovery period
  • Motorsports complexes; 7-year recovery period
  • Accelerated depreciation for business property on Indian reservations (modified)
  • Election to expense mine safety equipment
  • Film and television expensing (modified to include live theater)
  • Section 199 deduction for activities in Puerto Rico
  • Empowerment Zone tax incentives (modified)
  • Temporary increase in rum cover over
  • American Samoa economic development credit
  • Nonbusiness energy property credit
  • Alternative fuel vehicle refueling property credit
  • 2-wheeled plug-in electric motor credit
  • Second generation biofuel producer credit
  • Biodiesel and renewable diesel incentives credit
  • Indian Coal Production Tax Credit (modified)
  • Credit for facilities producing energy from certain renewable resources
  • Credit for energy-efficient new homes
  • Special allowance for second generation biofuel plant property
  • Energy efficient commercial buildings deduction
  • Special rule for sales or dispositions to implement FERC or State electric restructuring policy for qualified electric utilities
  • Credits relating to alternative fuels
  • Credit for new qualified fuel cell motor vehicles
  • Medical device tax moratorium

EXCISE TAXES

  • Medical device tax moratorium
  • Craft Beverage Modernization and Tax Reform Act

PROGRAM INTEGRITY

  • Modification of filing dates of returns and statements relating to employee wage information and nonemployee compensation to improve compliance
  • Safe harbor for de minimis errors on information returns and payee statements
  • Requirements for the issuance of ITINs.
  • Prevention of retroactive claims of earned income credit after issuance of social security number.
  • Prevention of retroactive claims of child tax credit. Sec. 206. Prevention of retroactive claims of American opportunity tax credit
  • Procedures to reduce improper claims. Sec. 208. Restrictions on taxpayers who improperly claimed credits in prior year
  • Treatment of credits for purposes of certain penalties.
  • Increase the penalty applicable to paid tax preparers who engage in willful or reckless conduct.
  • Employer identification number required for American opportunity tax credit.
  • Higher education information reporting only to include qualified tuition and related expenses actually paid.

MISCELLANEOUS PROVISIONS

Family Tax Relief

  • Exclusion for amounts received under the Work Colleges Program
  • Improvements to section 529 accounts
  • Elimination of residency requirement for qualified ABLE programs
  • Exclusion for wrongfully incarcerated individuals.
  • Clarification of special rule for certain governmental plans
  • Rollovers permitted from other retirement plans into simple retirement accounts
  • Technical amendment relating to rollover of certain airline payment amounts
  • Treatment of early retirement distributions for nuclear materials couriers, United States Capitol Police, Supreme Court Police, and diplomatic security special agents
  • Prevention of extension of tax collection period for members of the Armed Forces who are hospitalized as a result of combat zone injuries

Real Estate Investment Trusts

  • Restriction on tax-free spinoffs involving REITs
  • Reduction in percentage limitation on assets of REIT which may be taxable REIT subsidiaries
  • Prohibited transaction safe harbors
  • Repeal of preferential dividend rule for publicly offered REITs
  • Authority for alternative remedies to address certain REIT distribution failures Limitations on designation of dividends by REITs
  • Debt instruments of publicly offered REITs and mortgages treated as real estate assets
  • Asset and income test clarification regarding ancillary personal property
  • Hedging provisions.
  • Modification of REIT earnings and profits calculation to avoid duplicate taxation
  • Treatment of certain services provided by taxable REIT subsidiaries
  • Exception from FIRPTA for certain stock of REITs
  • Exception for interests held by foreign retirement or pension funds
  • Increase in rate of withholding of tax on dispositions of United States real property interests
  • Interests in RICs and REITs not excluded from definition of United States real property interests
  • Dividends derived from RICs and REITs ineligible for deduction for United States source portion of dividends from certain foreign corporations

Additional Provisions

  • Deductibility of charitable contributions to agricultural research organizations
  • Removal of bond requirements and extending filing periods for certain taxpayers with limited excise tax liability
  • Modifications to alternative tax for certain small insurance companies
  • Treatment of timber gains
  • Modification of definition of hard cider
  • Church plan clarification

Revenue Provisions

  • Updated ASHRAE standards for energy efficient commercial buildings deduction
  • Excise tax credit equivalency for liquified petroleum gas and liquified natural gas
  • Exclusion from gross income of certain clean coal power grants to non-corporate taxpayers
  • Clarification of valuation rule for early termination of certain charitable remainder unitrusts
  • Prevention of transfer of certain losses from tax indifferent parties
  • Treatment of certain persons as employers with respect to motion picture projects

TAX ADMINISTRATION

Internal Revenue Service Reforms

  • Duty to ensure that IRS employees are familiar with and act in ac- cord with certain taxpayer rights
  • IRS employees prohibited from using personal email accounts for official business
  • Release of information regarding the status of certain investigations
  • Administrative appeal relating to adverse determinations of tax-exempt status of certain organizations
  • Organizations required to notify Secretary of intent to operate under 501(c)(4)
  • Declaratory judgments for 501(c)(4) and other exempt organizations
  • Termination of employment of Internal Revenue Service employees for taking official actions for political purposes
  • Gift tax not to apply to contributions to certain exempt organizations
  • Extend Internal Revenue Service authority to require truncated Social Security numbers on Form W-2
  • Clarification of enrolled agent credentials
  • Partnership audit rules

United States Tax Court

  • Filing period for interest abatement cases
  • Small tax case election for interest abatement cases
  • Venue for appeal of spousal relief and collection cases
  • Suspension of running of period for filing petition of spousal relief and collection cases
  • Application of Federal rules of evidence
  • Judicial conduct and disability procedures
  • Administration, judicial conference, and fees
  • Clarification relating to United States Tax Court

Tax Penalties and How to Avoid Them

The only thing worse than owing a tax bill: owing even more when the IRS tacks on penalty charges.

The IRS has many ways to collect extra money. There are tax penalties for:

  • Not having health insurance.
  • Filing what the IRS considers a frivolous tax return.
  • A variety of retirement account actions or inactions.

Most taxpayers, however, tend to encounter basic tax penalties for these 3 offenses:

  • Not paying what is owed.
  • Not filing a tax return at all.
  • Not paying enough tax throughout the year.

Nonfiling penalty

If you don’t file a Form 1040 or an extension to file using Form 4868 by April 15, the penalty for not filing starts accruing the very next day.

The assessment is 5% per month of any tax balance due. The full monthly charge for failing to file applies for any part of a month you’re late in sending in your tax return. So if you file on May 1, you still are assessed the monthly 5% penalty for that month.

Many taxpayers, says enrolled agent Alan Pinck, fall into the ostrich routine, especially if they owe and can’t afford to pay the due tax. They just ignore filing.

That’s not a good idea for many reasons.

First, says Pinck, “you’re just prolonging the inevitable.” Even if you get an extension until Oct. 15 to submit your Form 1040, you’ll have to make that October deadline or the nonfiling penalty will begin.

Plus, the IRS considers not filing at all the more serious offense. “It’s way worse than if you didn’t pay,” says Stephen DeFilippis, an enrolled agent in Wheaton, Illinois.

There is one bit of good news about the nonfiling penalty: It maxes out at 25% of your unpaid taxes.

Still, 25% is a hefty fee to pay just because you didn’t fill out the form on time.

 

Nonpayment penalty

As for those unpaid taxes, they have their own penalty.

Even if you file a return or an extension by April 15 but don’t pay what you owe in April, you’ll face the nonpayment penalty. The penalty is 0.5% of your due tax.

Again, this penalty is assessed for every month, or any part of a month, that your tax bill is outstanding. And like the nonfiling penalty, the nonpayment penalty can grow until it reaches 25% of your unpaid tax bill.

What if you don’t owe any or very much tax? Tax law still requires you to file.

If you are due a refund, filing is the only way to get that money.

And if you owe only a small amount but wait more than 60 days to file a tax return, the minimum failure-to-file penalty is the smaller of $135 or 100% of the unpaid tax.

Percentage break for both penalties

If you did not file on time and did not pay any tax you owed, you are subject to both penalties. However, the IRS actually gives you a bit of a break in these cases.

The combined penalty for failure to file and failure to pay is 5%, the total of the 4.5% late filing charge and 0.5% for the late payment for each month or part of a month that your return is late, up to 25%.

But don’t push it. If, after 5 months, you still have not filed or paid, the failure-to-file penalty will max out, but the 0.5% failure-to-pay penalty continues until the tax is paid — up to 25%.

That means your total penalty for failure to file and pay can be as much as 47.5% — a 22.5% late filing tax penalty and another 25% in late payment charges.

Underpayment penalty

U.S. taxes are collected on a pay-as-you-earn system. If you don’t meet that requirement, you’ll be hit with a tax underpayment penalty.

Most of us comply, thanks to income tax withholding from our paychecks. But if you’re an independent contractor, either full time or as a side job to your salaried employment, you are responsible for covering the tax due on those earnings through estimated tax payments.

The same timely tax-paying applies to other income, such as prize winnings, investment earnings and even stock options, an income source Pinck sees often at his San Jose, California-based firm A. Pinck and Associates.

Sometimes, people who receive these various types of untaxed income pay what they owe the IRS in 1 lump sum when they file their taxes. That won’t cut it.

The IRS wants its portion of your earnings when you get the money. Fail to do that and you could owe an underpayment penalty, even if you ultimately paid the full tax due.

Avoiding the underpayment penalty

There are a few ways to get around the tax underpayment penalty.

First, you can meet 1 of 2 estimated tax-filing safe harbors. Pay estimated taxes that are the lesser of 100% of your prior year’s tax liability or 90% of your current year’s tax liability. Most taxpayers, says DeFilippis, opt for the prior year safe harbor. “100% is a fixed target; 90% is a moving target,” he says.

Just make sure when you look at your previous year’s taxes, you note the correct amount to use as your safe harbor. For example, let’s say your tax liability was $20,000 and you paid $18,000 during the tax year through withholding, tax credits and estimated taxes; then your tax due was $2,000. Your estimated tax safe harbor amount this year is the 20 grand, not the $2,000.

If you have a salaried job, you also can make up for a coming estimated tax shortfall by increasing your withholding there, says DeFilippis. Married couples get an extra option here. If they file jointly, a spouse’s withholding will cover any shortage of estimated taxes due on the husband’s or wife’s untaxed income.

Or you can annualize your income. Here you file Form 2210, breaking down income and deductions by estimated tax period, showing that you paid as you should have for each. “If you got a big chunk at the end of the year, it only counts for the 4th quarter,” says DeFilippis. “Annualizing shows you had the correct amount in the first 3 (quarters) and only needed to pay the higher estimated amount in the last quarter.”

Other penalty options plus interest

If you face a tax penalty for the 1st time, the IRS might be lenient.

“A first-time abatement request can be made, and a lot of time the taxpayer will prevail,” says Pinck. Basically, you show the IRS that you’ve been good for your taxes in the past and promise to be compliant in the future.

Remember, though, even if the IRS grants some penalty relief, you’ll still face interest charges on unpaid taxes.

“Interest is statutory, so it’s usually not abated,” says Pinck. For general nonpayment, nonfiling situations, the current interest rate is 3%. It is adjusted quarterly, and the rate is posted on the IRS website.

A 3% rate doesn’t sound like much, but Pinck points out that it is compounded quarterly, not annually. “It can add up pretty quick,” he says.

So can the tax penalties for not filing, not paying or paying too little throughout the year. To stay out of those costly situations, file your 1040 on time, pay any taxes due with that form and keep track of and pay enough estimated taxes on your other earnings. That will ensure that Uncle Sam doesn’t get any more of your money than he should.

By Kay Bell

 

 

If You Get an IRS Notice, Here’s What to Do

 

 

Each year the IRS mails millions of notices and letters to taxpayers. If you receive a notice from the IRS, here is what you should do:

  • Don’t Ignore It.  You can respond to most IRS notices quickly and easily. It is important that you reply right away.
  • Focus on the Issue.  IRS notices usually deal with a specific issue about your tax return or tax account. Understanding the reason for your notice is important before you can comply.
  • Follow Instructions.  Read the notice carefully. It will tell you if you need to take any action to resolve the matter. You should follow the instructions.
  • Correction Notice.  If it says that the IRS corrected your tax return, you should review the information provided and compare it to your tax return.

    If you agree, you don’t need to reply unless a payment is due.

    If you don’t agree, it’s important that you respond to the IRS. Write a letter that explains why you don’t agree. Make sure to include information and any documents you want the IRS to consider. Include the bottom tear-off portion of the notice with your letter. Mail your reply to the IRS at the address shown in the lower left part of the notice. Allow at least 30 days for a response from the IRS.

  • Premium Tax Credit.  The IRS may send you a letter asking you to clarify or verify your premium tax credit information. The letter may ask for a copy of your Form 1095-A, Health Insurance Marketplace Statement.  You should follow the instructions on the letter that you receive. This will help the IRS verify information and issue the appropriate refund.
  • No Need to Visit IRS.  You can handle most notices without calling or visiting the IRS. If you do have questions, call the phone number in the upper right corner of the notice. You should have a copy of your tax return and the notice with you when you call.
  • Keep the Notice.  Keep a copy of the notice you get from the IRS with your tax records.
  • Watch Out for Scams.  Don’t fall for phone and phishing email scams that use the IRS as a lure. The IRS first contacts people about unpaid taxes by mail – not by phone. The IRS does not initiate contact with taxpayers by email, text or social media.
  • The Right to Retain Representation.   The Taxpayer Bill of Rights, or TBOR, takes many of your rights in our tax laws and groups them into 10 broad categories. For instance, you have the right to retain an authorized representative to represent you in your dealings with the IRS. You also have the right to seek assistance from a Low Income Taxpayer Clinic if you can’t afford representation. For more, visit IRS.gov and type TBOR in the search box.

IRS Summertime Tax Tip 2015-05, July 13, 2015

Five Tax Tips about Hobbies that Earn Income

 

Millions of people enjoy hobbies. They can also be a source of income. Some of these types of hobbies include stamp or coin collecting, craft making and horse breeding. You must report any income you get from a hobby on your tax return. How you report the income is different than how you report income from a business. There are special rules and limits for deductions you can claim for a hobby. Here are five basic tax tips you should know if you get income from your hobby:

  1. Business versus Hobby.  A key feature of a business is that you do the activity to make a profit. This differs from a hobby that you may do for sport or recreation. There are nine factors to consider when you determine if you do the activity to make a profit. Make sure you base your decision on all the facts and circumstances of your situation. Refer to Publication 535, Business Expenses to learn more. You can also visit IRS.gov and type “not-for-profit” in the search box.
  2. Allowable Hobby Deductions.  You may be able to deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is helpful or appropriate. See Publication 535 for more on these rules.
  3. Limits on Expenses.  As a general rule, you can only deduct your hobby expenses up to the amount of your hobby income. If your expenses are more than your income, you have a loss from the activity. You can’t deduct that loss from your other income.
  4. How to Deduct Expenses.  You must itemize deductions on your tax return in order to deduct hobby expenses. Your costs may fall into three types of expenses. Special rules apply to each type. See Publication 535 for how you should report them on Schedule A, Itemized Deductions.
  5. Use IRS Free File.  Hobby rules can be complex. IRS Free File can make filing your tax return easier. IRS Free File is available until Oct. 15. If you make $60,000 or less, you can use brand-name tax software. If you earn more, you can use Free File Fillable Forms, an electronic version of IRS paper forms. You can only access Free File through IRS.gov.

IRS Summertime Tax Tip 2015-08, July 20, 2015

Keep Track of Miscellaneous Deductions

Miscellaneous deductions can cut taxes. These may include certain expenses you paid for in your work if you are an employee. You must itemize deductions when you file to claim these costs. So if you usually claim the standard deduction, think about itemizing instead. You might pay less tax if you itemize.  Here are some IRS tax tips you should know that may help you reduce your taxes:

Deductions Subject to the Limit.  You can deduct most miscellaneous costs only if their sum is more than two percent of your adjusted gross income. These include expenses such as

  • Unreimbursed employee expenses.
  • Job search costs for a new job in the same line of work.
  • Some work clothes and uniforms.
  • Tools for your job.
  • Union dues.
  • Work-related travel and transportation.
  • The cost you paid to prepare your tax return. These fees include the cost you paid for tax preparation software. They also include any fee you paid for e-filing of your return.

Deductions Not Subject to the Limit.  Some deductions are not subject to the two percent limit. They include:

  • Certain casualty and theft losses. In most cases, this rule applies to damaged or stolen property you held for investment.  This may include property such as stocks, bonds and works of art.
  • Gambling losses up to the total of your gambling winnings.
  • Losses from Ponzi-type investment schemes.

There are many expenses that you can’t deduct. For example, you can’t deduct personal living or family expenses. You claim allowable miscellaneous deductions on Schedule A, Itemized Deductions. For more about this topic see Publication 529, Miscellaneous Deductions. You can get it on IRS.gov/forms at any time.

IRS Summertime Tax Tip 2015-09, July 22, 2015

Top 10 Tax Facts about Exemptions and Dependents

IRS Tax Tip 2015-05, January 26, 2015

Nearly everyone can claim an exemption on their tax return. It usually lowers your taxable income. In most cases, that reduces the amount of tax you owe for the year. Here are the top 10 tax facts about exemptions to help you file your tax return.

  1. E-file your tax return.  Filing electronically is the easiest way to file a complete and accurate tax return. The software that you use to e-file will help you determine the number of exemptions that you can claim. E-file options include free Volunteer Assistance, IRS Free File, commercial software and professional assistance.
  2. Exemptions cut income.  There are two types of exemptions. The first type is a personal exemption. The second type is an exemption for a dependent. You can usually deduct $3,950 for each exemption you claim on your 2014 tax return.
  3. Personal exemptions.  You can usually claim an exemption for yourself. If you’re married and file a joint return, you can claim one for your spouse, too. If you file a separate return, you can claim an exemption for your spouse only if your spouse:
    • Had no gross income,
    • Is not filing a tax return, and
    • Was not the dependent of another taxpayer.
  4. Exemptions for dependents.  You can usually claim an exemption for each of your dependents. A dependent is either your child or a relative who meets a set of tests. You can’t claim your spouse as a dependent. You must list the Social Security number of each dependent you claim on your tax return. For more on these rules, see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information. You can get Publication 501 on IRS.gov. Just click on the “Forms & Pubs” tab on the home page.
  5. Report health care coverage. The health care law requires you to report certain health insurance information for you and your family. The individual shared responsibility provision requires you and each member of your family to either:
    • Have qualifying health insurance, called minimum essential coverage, or
    • Have an exemption from this coverage requirement, or
    • Make a shared responsibility payment when you file your 2014 tax return.
  6. Some people don’t qualify.  You normally may not claim married persons as dependents if they file a joint return with their spouse. There are some exceptions to this rule.
  7. Dependents may have to file.  A person who you can claim as your dependent may have to file their own tax return. This depends on certain factors, like the amount of their income, whether they are married and if they owe certain taxes.
  8. No exemption on dependent’s return.  If you can claim a person as a dependent, that person can’t claim a personal exemption on his or her own tax return. This is true even if you don’t actually claim that person on your tax return. This rule applies because you can claim that person is your dependent.
  9. Exemption phase-out.  The $3,950 per exemption is subject to income limits. This rule may reduce or eliminate the amount you can claim based on the amount of your income. See Publication 501 for details.
  10. Try the IRS online tool.  Use the Interactive Tax Assistant tool on IRS.gov to see if a person qualifies as your dependent.

Six Tips on Who Should File a 2014 Tax Return

IRS Tax Tip 2015-03, January 22, 2015

Most people file their tax return because they have to, but even if you don’t, there are times when you should. You may be eligible for a tax refund and not know it. This year, there are a few new rules for some who must file. Here are six tax tips to help you find out if you should file a tax return:

  1. General Filing Rules.  Whether you need to file a tax return depends on a few factors. In most cases, the amount of your income, your filing status and your age determine if you must file a tax return. For example, if you’re single and 28 years old you must file if your income was at least $10,150. Other rules may apply if you’re self-employed or if you’re a dependent of another person. There are also other cases when you must file. Go to IRS.gov/filing to find out if you need to file.
  2. New for 2014: Premium Tax Credit.  If you bought health insurance through the Health Insurance Marketplace in 2014, you may be eligible for the new Premium Tax Credit. You will need to file a return to claim the credit. If you purchased coverage from the Marketplace in 2014 and chose to have advance payments of the premium tax credit sent directly to your insurer during the year you must file a federal tax return. You will reconcile any advance payments with the allowable Premium Tax Credit. You should receive Form 1095-A, Health Insurance Marketplace Statement, by early February. The new form will have information that will help you file your tax return.
  3. Tax Withheld or Paid.  Did your employer withhold federal income tax from your pay? Did you make estimated tax payments? Did you overpay last year and have it applied to this year’s tax? If you answered “yes” to any of these questions, you could be due a refund. But you have to file a tax return to get it.
  4. Earned Income Tax Credit.  Did you work and earn less than $52,427 last year? You could receive EITC as a tax refund if you qualify with or without a qualifying child. You may be eligible for up to $6,143. Use the 2014 EITC Assistant tool on IRS.gov to find out if you qualify. If you do, file a tax return to claim it.
  5. Additional Child Tax Credit.  Do you have at least one child that qualifies for the Child Tax Credit? If you don’t get the full credit amount, you may qualify for the Additional Child Tax Credit.
  6. American Opportunity Credit.  The AOTC is available for four years of post secondary education and can be up to $2,500 per eligible student.  You or your dependent must have been a student enrolled at least half time for at least one academic period. Even if you don’t owe any taxes, you still may qualify. However, you must complete Form 8863, Education Credits, and file a return to claim the credit. Use the Interactive Tax Assistant tool on IRS.gov to see if you can claim the credit. Learn more by visiting the IRS’ Education Credits Web page.

Six Common Myths Regarding Income Tax

By:  Isaac M O’Bannon, Managing Editor CPA Practice Advisor

While millions of American taxpayers wait for their W-2, 1099 and other important tax documents to arrive in the mail, their thoughts turn to the often-dreaded prospect of filing their 2014 tax returns.

With all the annual changes to the tax rules and its complexity, it’s not surprising that millions of Americans hire a paid preparer. After all, asking questions or searching the Web for answers often leads to more confusion and misconceptions, because when it comes to taxes, one standard answer usually does not fit all.

The National Association of Enrolled Agents, an organization of federally licensed tax professionals, has pointed out six frequently-encountered tax myths.

Myth 1: “I’m filing an extension this year, so I don’t need to pay anything yet.”

Fact: Tax extensions only extend the time you have left to file, and do not change the date on which you have to pay taxes owed. If you owe taxes and file an extension, you still have to pay the taxes owed by April 15, regardless of the extended deadline date. Otherwise, interest and penalties begin to stack up.

Myth 2: “I had a really big loss in the stock market this year, so I won’t owe any income taxes.”

Fact: Deduction of capital losses against ordinary income is limited to $3,000 per year. Also, whether you reinvest or receive dividends, they are income and are taxed as such.

Myth 3: “They paid me in cash, so I don’t have to report it.”

Fact: If it’s income, you must report it. You must always report income, regardless of whether it’s cash, tips, bonuses or dividends.

Myth 4: “I’m too young to have to pay taxes.”

Fact: Even dependents working part-time while in high school must file a tax return if they earned more than $6,200 in 2014, if they want to receive their refund or if their unearned income is more than $1,000.  There are numerous other situations that may lead to a dependent having to file a tax return. To be safe, consider consulting a licensed tax professional.

Myth 5: “Income earned outside the U.S. is not taxable.”

Fact: The operative word is “income,” which means it’s taxable. The IRS requires taxpayers to report all earned income, even if it’s earned abroad.

Myth 6: “Tax preparers only fill out forms that you can do yourself.”

Fact: Licensed preparers know the intricate (and constantly changing) tax laws, regulations and codes, and how they can be applied for your benefit to save you money. Enrolled agents receive IRS-approved annual continuing education, ensuring that they have the most up-to-date strategies to make sure you pay only what you owe and get any refunds you are due. Enrolled agents, CPAs and tax attorneys are also the only tax professionals who can represent taxpayers before the IRS.

Expired Tax Breaks Renewed

At long last, Congress granted a reprieve for most of the expired tax provisions that had remained in limbo this year, but the late-breaking tax relief is only temporary.

The new legislation – the Tax Increase Prevention Act of 2014 – restores these tax breaks retroactive to January 1, 2014. However the provisions expire again on December 31, 2014, so Congress will likely take up these measures again after the holidays. The president is expected to sign the approved bill into law.

The tax extenders cover a wide range of tax breaks both large and small for individuals and businesses. Here are ten of the most popular items for your clients.

1.State and local tax deductions: In lieu of deducting state and local income taxes, a taxpayer may elect to deduct states sales taxes. Deductions are based on actual receipts or a state-by-state table (plus sales tax paid for certain big-ticket items).

2.Section 179 deductions: A business can currently deduct, or “expense,” up to $500,000 of qualified assets placed in service in 2014, subject to a phaseout threshold of $2 million. Prior to the latest extension, the maximum allowance was just $25,000 with a $200,000 phaseout threshold.

3.Bonus depreciation: A separate provision allows a business to claim 50% “bonus depreciation” for qualified assets placed in service in 2014. Note that bonus depreciation may be combined with the Section 179 deduction in some cases.

4.Charitable IRA rollover: If you’re over age 70½, you can roll over up to $100,000 of IRA proceeds to a charity without paying tax on the distribution. This technique is often used to satisfy the rules for required minimum distributions (RMDs).

5.Research credits: This popular tax credit, which has been extended numerous times in the past, provides a tax credit equal to 20% of qualified expenses exceeding a base amount. Alternatively, a business can elect to use a simplified 14% credit.

6.Tuition-and-fees deduction: Taxpayers may deduct tuition and fees paid to a college in lieu of claiming one of the higher education tax credits. However, the maximum deduction of $4,000 is phased out based on modified adjusted gross income (MAGI).

7.Hiring credits: The Work Opportunity Tax Credit (WOTC) is available to employers hiring workers from one of several disadvantaged groups. Generally, the maximum credit is $2,400 per worker, although it can be high as $9,600 for certain veterans.

8.Mortgage loan forgiveness: This provision authorizes a tax exclusion for mortgage loan forgiveness on debts up to $2 million. The exclusion is available only on debt forgiveness for a principal residence.

9.Home energy credits: The residential energy credit has existed in various forms for years. For 2014, a maximum $500 credit may be claimed for 10% of qualified energy-saving expenditures like new heating and air conditioning systems.

10.Teacher classroom expenses: Teachers and certain other educators are able to deduct up to $250 of their out-of-pocket classroom expenses. This deduction is claimed above-the-line.