Tax Update Blog: 2009 Filing Season Tip Archives
A few last-minute things
April 15, 2009
It's too late to do much more for April 15, but a few last-minute reminders can't hurt.
- File or extend today.
- If you aren't ready to file, extend.
- Extending is better than amending; if you know there's an error - say, a K-1 that arrived after you prepared the return but before you mailed it - extend and file one right return.
- Don't count on the post office being open until midnight. That tradition is dying, and few still will have somebody out front waiting to get your return for postmarking until midnight.
- If you need to send a return or extension and the post office is closed, go to FedEx-Kinkos or some other place that is open late and is an authorized private delivery provider. It costs more than postage, but less than late-filing penalties, and the shipping receipt works the same way as a certified mail postmark. Make sure the receipt is dated today, and use the proper street address for private delivery services.
- The headaches above go away if you e-file, so maybe you should do that.
- If you are deducting an IRA payment, make sure you make it by today.
- If you are deducting a SEP payment, make sure you either make it today or you extend your return.
This is our last 2009 Filing Season Tip. Happy April 15!
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E-file, use certified mail, or roll the dice
April 14, 2009
As a green 25 year-old staff accountant, I was assigned to deliver a 1040 with a six-figure balance due to a local captain of industry who happened to be the biggest client in the local office of one of the national accounting firms. It was April 15. I was to collect his signature and his check and get the return to the post office.
One of the first things you learn at a national public accounting firm is the importance of covering your backside. After collecting the return and check I went down to the Capitol Square post office and got the returns postmarked "certified mail, return receipt requested." After getting a burger and malt at the late, lamented Stella's, I went back to the office and carefully put the postmarked receipt in the client file.
Two weeks later the partner in charge calls me into his office to show me a penalty notice from the IRS saying the Captain of Industry's return had been filed late. The postmarked receipt kept me from being fired that day, and I got to keep my job when the IRS reversed the penalties after we sent them a copy of the receipt.
Which is a long way of making a short point: document your return filing.
If you paper file at the post office, use Certified Mail, Return Receipt Requested. Get the postmarked paper receipt, because the postal service purges its computer records after two years. Certified mail adds $2.70 to the postage; the paper return receipt costs another $2.20. $4.90 isn't usually too much to spend to save your job.
If you use a private carrier, use one of the IRS authorized private delivery services, and hold on to your shipping receipt. Be sure to send it to the proper street delivery address.
If you really want security, e-file. You get delivery confirmation quickly, and you don't have to worry about the mail going astray.
This is our penultimate 2009 filing season tax tip. One more!
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Extensions: when procrastination is wise
April 13, 2009
It's serious now. Your return is due the day after tomorrow, and you just haven't had the time to get all your 1099s together. Or that pesky K-1 from that oil well investment still hasn't come in. Or you just realized you need to go back to 1988 to figure out your basis in that mutual fund you sold last year.
It's time to file your extension.
But that means I'll be audited! Nonsense. The IRS does not just ignore the millions of returns that come in by April 15 and then grab the stragglers that come in later. It's what's on your return that determines whether you'll be audited, not whether it's extended.
But I want the statute of limitations to run!. If there's something so bad on your return that you need to sneak it by rather than wait a few weeks to get it right, you may have a bigger problem than your extension. In any case, I've yet to see somebody pay extra tax on an exam because their statute was still open because of an extension, and I've been doing this since 1984. I'm sure it happens, but it's rare.
If you make a mistake because you hurry a return through, you increase your risk of exam far more than any extension could.
Extensions also give you more time to deal with other important tax issues, including:
- Electing the five-year NOL carryback for 2008 for small business losses.
- Funding a 2008 qualified pension or profit-sharing plan contribution, including a Keogh plan.
- Establishing and funding a SEP, or Simplified Employee Pension.
- Recharacterizing a 2008 Roth IRA contribution as a regular IRA contribution.
- Withdrawing excess IRA contributions for 2008.
How to extend.
You can extend a 1040 with Form 4868, postmarked no later than April 15. Extensions can also be electronically filed.
You should make sure you have at least 90 percent of your expected tax paid in with your extension to avoid penalties. If you are an estimated tax filer, bump up your extension payment by enough to cover your first quarter estimate. That way you have a little cushion in case you owe more on the extended return than you anticipate, and you can apply the overpayment to your first quarter 2009 taxes.
Link: IRS Topic 304, Extensions of Time to File Your Tax Return.
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Today's tax tip: Happy Easter!
April 12, 2009
Today's tax tip: stay away from taxes if you possibly can and enjoy the day. If tax tips brighten your day, then you can enjoy all of our 2009 filing season tax tips so far. More tomorrow!
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In a hole for April 15? Stop digging
April 11, 2009
So your return is done. You've gathered all the information, the numbers are crunched, and you're satisfied that your 1040's correct. There's just one little problem.
You owe the IRS money that you don't have.
Remember the first rule of holes: stop digging. The best way to get in deeper trouble is to ignore it and fail to file, so don't do that. If you just ignore the problem and neither file nor extend your return, you face a 5% monthly penalty, up to 25%, plus the current 4% monthly IRS underpayment rate. If you never get around to filing, remember that you can go to jail for willful failure to file (ask Wesley Snipes about that).
Some alternatives to help you out of the hole:
Try to scrape up the money. If you have a friendly banker, pay a visit first thing Monday. If that won't work, see if you have some room on a credit card; if you know you have money coming in soon, that might be all you need to tide you over. But if your cash flow problem will go further than the next credit card payment, that might not be a great idea, considering what they charge.
File an extension. Extending the return on Form 4868 doesn't extend the due date for payment of the tax. Still, it can be a way to buy time. While you have to be 90% paid in on your extension to avoid penalties, the penalty for for having to pay up when you timely file the extended return is 1/2% per month, plus the IRS late payment rate of 4%, as long as you file the actual return and pay your balance due by the October 15 extended due date. This works out to about a 10% interest rate, which is cheaper than most credit cards, car title loan shops, and the like, and it beats the heck out of the 5% monthly failure to file penalty. If you know you will come up with the funds to cover your balance due by October, this can work. Just show what you expect to owe, pay what you can, and be darn sure you can come up with the rest soon. And remember, each part month counts as a whole month; if you pay on April 16, you pay the same 1/2% as someone who pays on May 14.
Request an installment agreement. If your cash flow problem is bigger than you can take care of by October, consider an installment agreement with the IRS. Thanks to the miracle of the internets, folks owing under $25,000 can file an Online Payment Agreement Application with the IRS and get instant approval (knock wood). Alternately, you can attach Form 9465 to your timely-filed 1040 to apply for an installment agreement. If you timely file (by April 15 or with a valid extension), installment agreements avoid the nasty 5% monthly penalty, in exchange for the 1/2% monthly charge plus the 4% IRS underpayment rate.
Make the payments. If you fail to pay the balance due when you do file an extended return, or if you fail to meet your installment agreement obligations, things can turn ugly.
Collect all of our 2009 filing season tips!
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Got losses? Be sure to elect the carryback with your original 2008 return
April 10, 2009
See Update: IRS eases up on electing 5-year NOL carryback
The new rules for electing a five-year carryback for small business losses has a nasty trap: you have to elect the credit not on the carryback claim, but on the return reporting the loss. If you fail to make the election on the return itself, you only get the standard NOL period of two years (three years if you are a Bernie Madoff client).
You can extend your deadline for making the five-year election by extending the return. If your loss comes from a pass-through entity on a K-1, you make the election on your 2008 1040. You actually claim the carryback on Form 1045.
If you aren't sure whether you want to make the election, extending your return extends your carryback election deadline. If you've already filed, you should look carefully at the rules Section 5 of Revenue Procedure 2009-19 to see what to do.
After today, you have five more days to check back here for filing season tax tips!
Related: IRS issues rules for 5-year NOL carryback.
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Tax season ends a week from today - plenty of time to fund an IRA!
April 08, 2009
The traditional IRA is an often-overlooked last-minute tax saving device. Yes, there are limits to IRA deductibility, but it can be a no-brainer in some circumstances. You should be thinking IRA if:
- You don't have a pension plan at work.
- You have a spouse at home who doesn't participate in a pension plan.
- You are a dependent with wage or self-employment income.
- You participate in a plan, but your 2008 income isn't above the limits in the table below.
Source: IRS
If you qualify, you have until April 15 to start an IRA and make a deductible contribution. The limits are the lesser of your "earned income" (wage or self-employment income) or $5000 ($6,000 if you are 50 or over by the end of 2008).
Keep stopping by for new filing season tips through April 15!
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Nine days, ten tips
April 07, 2009
With nine days left of tax season, including today, it's worth looking at ten last-minute filing tips from our friends at IRS:
1. File Electronically - Consider filing electronically instead of using paper tax forms. If you file electronically and choose direct deposit, you can receive your refund in as few as 10 days.
2. Check the Identification Numbers - When filing a paper return carefully check the identification numbers — usually Social Security numbers — for each person listed. This includes you, your spouse, dependents and persons listed in relation to claims for the Child and Dependent Care Credit or Earned Income Tax Credit. Missing, incorrect or illegible Social Security Numbers can delay or reduce a tax refund.3. Double-Check Your Figures - If you are filing a paper return, you should double-check that you have correctly figured the refund or balance due.
4. Check the Tax Tables - If you are filing using the Free File Fillable Forms or a paper return you should double-check that you have used the right figure from the tax table.
5. Sign your form - Taxpayers must sign and date their returns. Both spouses must sign a joint return, even if only one had income. Anyone paid to prepare a return must also sign it.
6. Mailing Your Return - Use the coded envelope included with your tax package to mail your return. If you did not receive an envelope, check the section called "Where Do You File?" in the tax instruction booklet.
7. Mailing a Payment - People sending a payment should make the check out to “United States Treasury” and should enclose it with, but not attach it to the tax return or the Form 1040-V, Payment Voucher, if used. The check should include the taxpayer’s Social Security number, daytime phone number, the tax year and the type of form filed.
8. Electronic Payments - Electronic payment options are convenient, safe and secure methods for paying taxes. You can authorize an electronic funds withdrawal, or use a credit card or a debit card. For more information on electronic payment options, visit IRS.gov.
9. Extension to File - By the April due date, taxpayers should either file a return or request an extension of time to file. Remember, the extension of time to file is not an extension of time to pay.
10 . IRS.gov - Forms and publications and helpful information on a variety of tax subjects are available around the clock on the IRS Web site at IRS.gov.
Check back daily for more filing season tips through April 15!
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Track your carryforwards!
April 06, 2009
When somebody who has prepared their own returns hires a tax preparer, one of the most common ways the preparer will impress the new client is to obtain refunds because the client didn't keep track of tax benefit carryforwards.
The tax law has lots of limits on losses, expenses, and credits. If these are limited, the disallowed part usually carries forward. Sometimes you can find the number to carry forward for this year on last year's forms:
- Capital losses (2007 Schedule D, line 16 less line 21)
- Passive losses (2007 Form 8852, line 4 less line 16)
- Minimum Tax Credit (2007 Form 8801, line 28)
Other carryforwards have to be tracked off the return -- S corporation basis limitations, for example.
Home preparation tax software can track these carryforwards, but you have to watch carefully to be sure. If you do your return with pencil and paper, it's very easy to lose track of your carryforwards.
These carryforwards are why your preparer likes to see your old returns. They can get refunds going back three years, but if you are seeing your new preparer for the first time, bring at least seven years of returns, as carryforwards can arise even from otherwise closed years.
Come back for more 2009 filing season tips through April 15!
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How much would you pay to get your refund 14 days sooner?
April 05, 2009
Storefront tax prep shops charge from $29 to over $100 for "rapid refund" loans or "instant refunds." The benefit of the loans is that they get you your money faster. But unless you face eviction or are bouncing your checks, the costs almost certainly aren't worth it.
Flickr photo by TheTruthAbout...
Why not? A peek at an excerpt from this year's IRS refund cycle chart tells you how long your refund wait will be when you electronically file your 1040:
This translates into a maximum wait of 15 days if you have your refund direct-deposited. If you have a $500 refund coming, and you get it two weeks sooner, the cheapest $29 rapid refund fee translates into an effective annual interest rate of about 151 percent. A cash advance on your credit card is a better deal. Even car title loans are probably a better deal. And that's with a relatively cheap loan fee.
So if you are in a hurry for a refund, e-file with direct deposit. Unless they're about to repossess your car, and you have no other source of cash, avoid the "rapid refund."
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Remember your College Savings Iowa deduction!
April 04, 2009
Iowa has a highly-rated state-sponsored Section 529 plan, College Savings Iowa. It uses low-fee Vanguard Funds and has a reasonable range of investment choices.
Iowa taxpayers also get a deduction for CSI deductions on your Iowa 1040. For an Iowa top-bracket taxpayer, this is like a 6% negative load on the investment. But it's a deduction that is easy to forget at tax return time, as you don't get a 1098 reporting your 2008 contributions.
If you made 2008 CSI contributions, you can find the deductible amount by looking at the year-end statement they send. It lists your total 2008 contributions.
For 2008 you may deduct up to $2,685 per donor, per donee, in contributions made during 2008 to CSI. That means a couple with two children could deduct up to $10,740 in CSI 2008 contributions. You can make additional non-deductible contributions, subject to the normal limits for contributions for Section 529 plans.
The 2009 contribution limit goes up to $2,800 per donor, per donee.
You take the College Savings Iowa deduction on Iowa 1040 line 24.
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Basis is nice, but only 'at-risk' basis gives you a deductible loss
April 03, 2009
You have to have basis in your partnership or S corporation to deduct losses on your K-1. That's just your first hurdle. Your basis also has to be "at risk."
The at-risk rules were originally enacted to deal with the first wave of marketed tax shelters in the 1970s. They are overshadowed by the "passive loss" rules of 1986, but they were never repealed. In fact, your losses don't even get to the "passive loss" rules unless they are "at-risk." Losses that aren't at-risk are disallowed until they can offset future income from the activity, or until the taxpayer gets other "at-risk" basis.
What "at-risk" means
The at-risk rules arise from Code Section 465. In very simplified terms, they only let you deduct losses attributable to borrowed funds if you are on the hook for them. For example, should you borrow money to buy some cattle, and the bank can come after you personally for the funds if the loan isn't paid, you are likely "at-risk." If the bank's only recourse if you skip out on the loans is to repossess the animals, you aren't at-risk. The rules are quite complex; the tax law can treat loans from a related party, a promoter or your business partner as not at-risk, even if they can take everything you own if you default. Loans for which you are at-risk are typically called "recourse" loans; if you aren't at risk, the debt is "non-recourse."
So what does this have to do with your K-1? If your K-1 comes from an S corporation, not a lot. If you borrow money on a non-recourse basis to buy S corporation stock, you may have an at-risk rule problem, but nothing on your K-1 will tell you that.
Partnerships are different. A partner's basis includes his share of borrowings by the partnership. In contrast, corporate shareholders get no basis for borrowings incurred by the corporation with third parties, even if shareholders guarantee the debt.
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Got taxes? Get on the stick!
April 02, 2009
Today is April 2. There are less than two weeks before taxes are due. If you haven't gotten your tax information together, don't put it off. If you owe your preparer information, get it in. If you can't get it together, get to work on your extension. If you don't have all of your information to your preparer by now, an extension may well be in the cards already.
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IRAs and Partnerships can be an unhappy mix
March 31, 2009
A reader asks:
i just received a k-1 1065 from an llc which is included in my ira brand new this year.because my investment is included in my ira porfolio do i have to report the income shown on the k-1
That's a great question. It would be an even better question to ask before buying an LLC in your IRA. That's because LLCs often generate income that is - surprise! - taxable to the IRA.
The tax law frowns on tax-exempt entities like IRAs holding business assets. While it's OK to hold investments that generate interest and dividends in an IRA, Congress thought it would be unfair for taxable businesses to have to compete against tax-exempts. That's why the tax law imposes the Unrelated Business Income Tax, or UBIT, on business income earned by tax exempt entities. The UBIT is, in general, the corporation tax system applied to business income earned by exempt entities.
When UBIT applies to an IRA, the IRA has to pay income tax itself on Form 990-T at rates up to 35%. State income taxes can also apply. Of course, the after-tax income of a traditional IRA may be taxed again when it is distributed to the IRA owner.
If you have income taxable to an IRA coming from an LLC, it should be on line 20 of the LLC's K-1, listed with code "V". In this case, "V" doesn't stand for "Victory."
The Moral: LLCs and IRAs are a poor mix unless the LLC only holds investments that generate interest and dividend income. If you own an LLC that generates business income in your IRA, you may need to file Form 990-T by April 15.
Stop by tomorrow for the next installment of our 2009 filing season tips series!
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Can you deduct your K-1 loss?
March 30, 2009
Taxpayers with 2008 net operating losses from "small" businesses are eligible for a five-year loss carryback under recent legislation. If you have such a loss, there's a good chance it will be reported to you on a K-1. Unfortunately, just because your K-1 shows a loss doesn't necessarily mean you can deduct it.
Three limits apply to the use of K-1 losses, in this order:
1. You can't deduct losses in excess of your basis.
2. Even if you have basis to deduct losses, the basis has to be "at-risk," and
3. Even if the basis is "at-risk," losses that are "passive" might be limited.
Unfortunately, K-1s aren't designed to track your basis in your partnerships or S corporations. It's up to taxpayers and their preparers.
Basis Basics:
- Your basis starts with your initial investment in your ownership interest.
-It is increased by taxable income and reduced by deductible expenses, as reported in lines 1-12 of the 1120-S K-1, or lines 1-13 of the 1065 K-1.
-It is increased by tax-exempt income (like municipal bond income) and reduced by permanently non-deductible expenses (like the 50% non-deductible portion of meals and entertainment expenses); these are reported on line 16 of the 1120S K-1 and line 18 of the 1065 K-1.
- It is increased by capital contributions, which appear nowhere on the 1120S K-1 and on Part I, line L of the 1065 K-1.
- It is reduced by distributions, which are on line 16 of the 1120-S K-1 and Line 18 of the 1065 K-1.
Partners also get basis for their share of partnership debt, as reported on line K of the K-1. In contrast, S corporation owners only get basis for loans they make themselves to the corporation; guarantees don't count. More on this tomorrow Friday.
Come back daily for more filing season tips.
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Confusing things on your K-1
March 29, 2009
The idea behind a K-1 is easy enough. Pass-through entities -- partnerships and S corporations -- don't pay the tax on their income; their owners pay it. The K-1 gives the owners the information they need to report their shares of entity tax on their personal returns.
It gets complicated in a hurry because different items of income and expense are treated differently. A dividend is not taxed the same as business income, for example, so the pass-through entity has to break out these items separately on your K-1.
The IRS tries to help you get these things in the right place. The taxpayer instructions for the K-1 are useful, and the list of codes for K-1 items (linked below) is indispensable. Even with this help, some items on the return confuse taxpayers every year.
A great example of a confusing item is "Unrecaptured Section 1250" gain (line 9c of the partnership K-1 and line 8c of the S corporation K-1). It throws off many taxpayers, and not a few preparers, every year. It typically arises when a business sells a building. The business will normally report a gain because it has been depreciating the building, which lowers its tax basis. All of the gain is Section 1231 gain. To the extent the gain is a recovery of depreciation deductions, it is also "Unrecaptured Section 1250 gain," taxed at a maximum rate of 25%. If the business sells the building for more than it paid for it in the first place, the extra gain is taxed at a maximum 15% rate.
Example: Partnership buys a building for $100,000. Ten years later, after it has taken depreciation deductions of $25,000, it sells the building for $110,000.The partnership has a basis in the building of $25,000 (100,000 - $25,000). It has a gain of $35,000. $25,000 is "Unrecaptured Section 1250" gain, but all of the gain is "Section 1231 gain." $25,000 of gain will be taxed at a top rate of 25%, and the rest at a top rate of 15%.*
Bottom line: "unrecaptured Section 1250" amount is part of the Section 1231 gain - not an addition to it. Don't double-report it when you report it on your tax return. Far too many taxpayers do.
Links:
1065 K-1 Instructions
1120-S K-1 Instructions
1065 K-1 codes
1120-S K-1 codes
Check in for new filing season tips through April 15!
*Unless the taxpayer has "unrecaptured Section 1231 losses," which is one step of complexity too far for this post.
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No, the partnership won't get in trouble because you don't yet have your K-1
March 28, 2009
So you don't have your K-1 yet. You have all of your 1099s. You have a mind to threaten to snitch to the IRS on them - don't they know that stuff is all supposed to be out by the end of January?
No, they don't know that, because it's not true. The deadline for issuing 1099s for S corporations is March 15, and it's April 15 for calendar-year partnerships and trusts. What's more, all of these deadlines can be extended to September 15.
Why is it so hard to get a K-1 out? It's because they often have to carry the whole income of a business to sometimes dozens, or even hundreds, of 1040s.
Pass-through entities -- partnerships and S corporations -- don't pay taxes on their own income; the owners pay the tax. If you have an operating business, this can get complicated and require some time to sort out before the K-1 can be issued.
Trusts and Estates also have K-1s; these entities can pay their own tax, but if they make distributions for the beneficiaries, the distributions carry the taxable income with them; the K-1s report how much income is carried out to the beneficiaries.
We'll be talking about how to use K-1s on your tax returns over the next few days. Don't miss any of these installments in our 2009 filing season tips series
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You've already filed and you've found a mistake: what to do?
March 26, 2009
Every year it happens. After the return is filed, the taxpayer remembers that they sold some stock, or they get a corrected 1099, or they find a 1099 they forgot to give to the accountant. What to do?
It depends on what the error is.
If you owe a lot of money - say, more than 10% of your total tax - you should file an amended return by the April 15 due date. Otherwise you may incur late payment penalties.
If the error is small, relax. Your preparer will be a lot more friendly about correcting a return after April 15. If you will have an additional refund coming when you correct the error, the IRS pays interest. Let the smoke clear and file an amended return if the refund is significant.
Costs and benefits come into play here. You don't want to pay your preparer to file for a $10 refund; let it go. If it's the preparer's fault, let him take it off the bill rather than generate IRS attention.
But if the refund is significant, by all means file away. Just let your preparer get past April 15 first.
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Iowa Democrats heat up push to end federal deductibility
March 25, 2009
The idea of repealing Iowa's deduction for federal taxes, first floated by Senate Majority Leader Gronstal, has crossed the Capitol to the House:
In an interview with The Associated Press, Speaker Pat Murphy said there's a good chance lawmakers will take up the proposal in the closing weeks of the legislative session. He said ending the deductions would bring in hundreds of millions of dollars that would enable the state to reduce tax rates for most Iowans."It's something that we need, to eliminate federal deductibility and throw it into the rates," said Murphy, D-Dubuque. "Seventy-five to 80 percent of all Iowans will see a tax cut."
While the proponents of the repeal will dress it up as taking from the rich to give to the "middle class," they wouldn't bother if it weren't really a tax increase. Facing a big budget shortfall on the heels of their recent spending spree, federal deductibility is an irresistible target.
It's not clear what proposal the Democrats will throw together at the end of the session. The Sioux City Journal reports one version:
Rep. Paul Shomshor, D-Council Bluffs, chairman of the House Ways and Means Committee, said Tuesday the proposed changes would lower the state's top personal income tax rate from 8.98 percent to 6.98 percent and adjust the other rates downward as well to ease middle-class tax burdens.Repealing the ability for individual taxpayers to deduct their federal tax liability on their state income tax returns would generate about $594 million in revenue, which would be used to lower the overall rates and make Iowa's tax system more competitive in state-by-state comparisons, he said.
The top effective rate now taking the federal deduction into account is about 6.1%, so this would represent over a 10% increase in Iowa's top marginal rate -- just the thing we need to attract entrepreneurs to Iowa.
It's not clear whether this is going to go through or not, or what the effective dates will be if it does. If you're an Iowan who owes federal taxes for 2008, though, you might not want to wait until April 15 to pay them; you'd feel bad if they repealed the deduction for taxes paid after, say, April 10. (That's today's filing season tip, by the way).
But then, somebody has to pay for the Tower of Invincibility.
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Charity: no proof, no deduction
March 24, 2009
Since the beginning of days -- or at least since the charitable contribution was invented -- taxpayers have seen it as a mulligan. "Oh, I know I dropped at least $10 a week in the collection plate, and all of my change in the Salvation Army bucket. That has to add up to $400!"
No more. The tax law now requires you to prove every contribution. For cash gifts up to $249.99, a cancelled check or a receipt will do. If the gift is $250 or more, the IRS requires a letter telling:
- the amount of cash and a description (but not the value) of any property other than cash contributed;- whether the donee provided any goods or services in consideration for the contribution;
- a description and good-faith estimate of the value of those goods or services; and
- if the goods or services consist entirely of intangible religious benefits (e.g., admission to a religious ceremony, but not religious school tuition or fees), a statement to that effect.
No documentation, no deduction. So before you do your return, or go to your preparer, make sure you have your receipts, cancelled checks or letters from the charity. "Same as last year" is not a valid charitable deduction.
Check back for a new filing season tip every day through April 15!
Link: IRS page on Substantiating Charitable Contributions
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The Prom-season tax break
March 23, 2009
Spring break is over here, so prom season is upon us. Strangely, that can give mom and dad a tax break to ease their worry over their kids staying out late.
Prom tickets are among the expenses that qualify for Iowa's Tuition and Textbook credit. In addition to private tuition and textbook costs, certain costs for extracurricular activities qualify:
Examples of extracurricular activities: sporting events, speech activities, musical or dramatic events, driver’s education (if paid to a school), awards banquets, homecoming, prom (clothing does not qualify), and other school related social events, etc.
So tickets qualify, but dinner and clothes, the largest costs, don't.
Flickr photo by Lukasz Dunikoski
The credit is 25 percent of the first $1,000 paid for each dependent.
Check back daily through April 15 for more 2009 filing season tips. Collect them all!
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Your return: it's nice to check it twice
March 22, 2009
If you really want that tax refund in a hurry, take a little time to check your return before you send it. Whether you roll your own or you hire a preparer, here are some things you should double check:
- Make sure - twice - that the bank routing number and account number on your return are correct. If you get that wrong, the best that can happen is a delay of many weeks when the IRS electronic payment goes through. The worst that can happen is that your refund goes to somebody else's account, where it might be lost to you forever. You can look at the bottom of one of your checks (not your deposit slips) to check your routing and account number:
- Consider e-filing. If there's a major screw-up on your return, you normally will find out within a day, so you can fix it and re-file.
The IRS also has a good list of questions to ask yourself before filing. A few of the biggies:
-- Did you enter the names and social security numbers for yourself, your spouse, your dependents, and qualifying children for earned income credit or child tax credit, exactly as they appear on the social security cards? If there have been any name changes be sure to go to www.ssa.gov or call at 800–772–1213.-- Did you check only one filing status?
-- Did you check the appropriate exemption boxes and enter the names and social security numbers exactly as they appear on the social security cards, for all of the dependents claimed? Is the total number of exemptions entered?
-- Did you sign and date the return? If it is a joint return, did your spouse also sign and date the return?
-- Do you have a Form W-2 (PDF) from each of your employers and did you attach Copy B of each to your return? File only one return, even if you have more than one job. Combine the wages and withholdings from all Form W-2's, on one return.
-- Did you attach each Form 1099-R (PDF) that shows federal tax was withheld?
Check back daily through April 15 for more filing season tips!
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Team up with your scholar for tax prep!
March 21, 2009
When the fledglings leave the nest for college, they often take their tax prep responsibilities with them. That can be a mistake. Parents often can save money at tax time by coordinating their tax returns with their students.
Parents make more money in the normal course of things, so they assume that they get more benefit from the Hope and Lifetime Learning credits for college tuition than the student would. That's not always true. These credits phase out for joint returns at an adjusted gross income range of $96,000 to $116,000 ($48,000 to $58,000 for single taxpayers). So for many college parents, the credits are useless.
This is where coordinating returns comes in. If your student has summer or part-time work, or investment income, she may well incur income tax. But if the parents relinquish their dependent exemption for the student, the student can claim the credit. At the end of the day, the family taxes could well be lower that way.
IRS Publication 970 has this handy chart on claiming the credits:
And remember: if your student goes to school in a Midwestern disaster area, the credit can double.
Check back daily through April 15 for more 2009 filing season tips.
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March Tax Madness? Don't miss Super Saturday tomorrow.
March 20, 2009
Need tax help? Afraid you will be caught short of cash on April 15? Tomorrow's your chance to get help from the IRS:
On Saturday, March 21, 2009, approximately 250 IRS Taxpayer Assistance Centers and hundreds of community free tax help sites nationwide will open their doors to assist people. People who earn $42,000 or less are eligible for free tax return preparation at either the IRS TACs or the community partner sites.Super Saturday also is an opportunity for people, regardless of income, who may have a tax issue or who may be unable to pay their tax bill to visit an IRS TAC. The IRS can work with people to set up payment option plans that will prevent even greater penalties and interest. The IRS is committed to doing what it can to help financially distressed taxpayers who have played by the rules.
If you go, here's what you should bring:
* Valid driver’s license or photo identification (self & spouse, if applicable) * Social Security cards for all persons listed on the return* Dates of birth for all persons listed on the return
* All income statements: Forms W-2, 1099, Social Security, Unemployment, or other benefits statements, self-employment records and any documents showing taxes withheld
* Dependent child care information: payee’s name, address and Social Security Number or Taxpayer Identification Number
* Proof of account at financial institution for direct debit or deposit (i.e. cancelled/voided check or bank statement)
* Prior year tax return (if available)
* Any other pertinent documents or papers
The IRS will offer help at 11 sites in Iowa, including six in the Des Moines area. You can find all of the Super Saturday sites here.
Stop by for a daily filing season tip through April 15.
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Want your Iowa refund? Pay your parking tickets
March 19, 2009
If your Iowa tax refund seems to be a long time in coming, maybe there's a dark secret in your past -- like a parking ticket. Iowa court officials can place holds on your Iowa income tax refunds if you have outstanding fines and fees.
You can check on the status of your Iowa refund here. You might find that you need to send a check to the courthouse before the state sends a check to you.
Check back daily for more 2009 filing season tips
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Got floods? Double your education credit!
March 18, 2009
Vasts swaths of the Midwest were declared disaster areas last summer as a result of floods and storms. Yet if your child goes to college in one of the disaster areas, you may be able to benefit from the disaster. Congress doubled the education credits for college expenses incurred for students attending college in the disaster areas. Students in the disaster areas can claim up to $3,600 in "HOPE" credits and $4,000 in "Lifetime Learning Credits."
To find out whether you qualify, to to Table 1 in Fact Sheet 2008-27.
Check back daily for a new 2009 filing season tip through April 15.
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Remember to claim your out-of-state credit!
March 17, 2009
Many taxpayers pay income taxes in more than one state. With the increased popularity of "pass-through" ownership of businesses through S corporations and limited liability companies, many taxpayers find themselves filing returns in two or more states. Others have taxes paid in other states by the businesses that they own through a "composite" return filed by their S corporation or partnership.
All states with an income tax have a system to keep their residents from paying full state taxes on the same income in more than one state. The credit for taxes paid in other states is computed on your resident state return; Iowans use Form 130. The credit is the lesser of the tax paid to the other state or the tax computed on the income in the home state.
If you are an Iowan who owns an S corporation, there is another alternative. You can compute an S corporation apportionment credit on Form 134. This credit can provide significant savings, especially for taxpayers whose S corporations retain a large part of their annual income.
And remember, in Iowa you can claim a credit for taxes paid in other states if you have foreign tax withheld. Many taxpayers have this through international mutual funds.
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Got a 401(k)? Maybe the IRS will match it
March 16, 2009
Employers aren't the only ones that might match your 401(k) contribution. The IRS may match it too.
The "Savers Credit" provides a tax credit for individual contributions to IRAs or 401(k) plans. The credit can be up to $2,000 for joint filers. Eligible taxpayers in 2008 include:
* Married couples filing jointly with incomes up to $53,000;
* Heads of Household with incomes up to $39,750; and
* Married individuals filing separately and singles with incomes up to $26,500.
The credit isn't refundable - it can't take your tax below zero - but going to zero isn't a bad thing.
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The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not neccesarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
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