Help with 2010 Federal Income Tax Issues

Tax rate brackets for 2010 remains unchanged or has changed slightly, depending on your perspective, the IRS recently announced.  Perhaps because of the low economy as well as the inflation, only marginal changes have been made from the 2009 tax bracket.  CPI or Consumer Price Index data that the Bureau of Labor Statistics released is used by the IRS to calculate these tax parameters.   These has also been reviewed by various tax experts and firms and they have come up with a consensus on how much these tax exceptions are, what the standard deductions are and of course the income brackets are also considered and these figures will barely change in the following year.  Although there are a few notable change that will take place next year.  This will help in your tax planning for this coming tax season and employer setting withholding for 2010. Here is some of what this coming tax season will generally look like.

Personal exemption remains unchanged at $3,650 USD as well as the $5,700/$11,400 USD standard deductions for general taxpayers, perhaps except for the $50 USD increase for payers with the head of household status.  Around 2 out 3 taxpayers choose standard deductions in filing their returns rather than itemized deductions. These itemized deductions include mortgage interest, state and local taxes and charitable contributions.

Because of only around 0.2% inflation level, most employees will not receive as high a take home pay in January as they experienced the previous years because of the automatic adjustments in inflation.

Tax bracket thresholds will all see very little change this coming tax season. Tax for married couples filing jointly is up from $67,900 USD to $68,000 USD, their income threshold bracket that separates 15% to the 25% bracket is up only by a very little margin.

The gift tax exclusion given annually won’t change as well.  It remains pegged at $13,000 USD. In essence anyone can give away as much as $13,000 without tax considerations.  Wealthy people take advantage of this benefit as part of their strategy in their estate planning.  This can be done by paying for one’s tuition fee, medical bills and the likes, although this must be sent directly to the provider involved.

Your tax bill is lowered by indexing brackets when inflation is high and by including your income in a lower bracket, a good example is the 15% instead of the 25% bracket.  This lack of change makes for a level playing field for many taxpayers although high income earners can benefit from this due to “stealth taxes” like limits on itemized tax deductions as well as personal exemptions.

Savings on tax can vary widely depending on inflation adjustments and the circumstances of the individual involved. There is generally very little change with the tax payments this year compared to the previous years, only around $12.50 for $100,000 joint married couple and $6.25 for single individual.

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Expanded Standard Deductions Puts More Money Back in Your Pockets

Saving on Taxes in the Long Run

President Obama is taking steps in helping the people he signed new laws on taxes and added new provisions so that people would pay less tax. One of the changes that he made is expanding the standard deduction. Started in 2009, people could save on expanded standard deduction as compared to itemized deduction. The expanded standard deduction covers property taxes, sales taxes and other discounts if the taxpayer is an elderly or blind.

There are instances when the itemized deduction appears to be higher than the expanded standard deduction. The taxpayer should compute using both the itemized deduction and the expanded standard deduction, see which among the two calculations work better for him and could save him some money. The difference might be small, but it’s still money worth saving.

To be able to see the difference between the amount that you are going to pay for the expanded standard deduction and the itemized deduction, you must compute the tax using two different calculations. The method for the computation is the same but the result would be different.

First, try comparing the total expanded standard deduction from the total itemized deduction then multiply the difference to your marginal bracket.

Second, compute your state income tax refund using the expanded standard deduction and make another computation using the itemized deduction. If you use the itemized deduction, the state refund this year would be the taxable income on next year’s federal tax. Multiply your state refund this year to your marginal federal bracket. The end result would be the additional tax that you are going to pay for the following year.

Lastly, net your federal tax savings by using itemized deductions and compare this from the state refund increase.

By comparing the different computations, you would be able to see which among the expanded standard deduction and the itemized deduction works best for you and enables you to pay lesser tax. You can also download Schedule L, which uses the expanded standard deduction and compare it to Schedule A, which uses the itemized deduction, you will see that Schedule A is longer than Schedule L but Schedule A might be better, depending on the situation, the sum of your deductions and your tax bracket.

You might have a bigger refund if you itemize all your deductions. But look at how much you are going to save if you do not include your state refund on the following year’s income tax return. Itemized deduction is a short term solution while the expanded standard deduction is a long term solution in paying lesser tax. If you use both the expanded standard deduction and the itemized deduction for the computation, and compute these taxes in a span of 5 years, you’ll see the difference between the two deductions. So take advantage of paying lesser tax and recognize the big savings that you are going to save. This is legal and you won’t get sued for it.

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Energy Efficiency Can Equal Tax Credits

New Credit for the Environment-Friendly Homeowners

The U.S. government is coming up with new credits to help the citizens improve their way of living one is the Energy Tax Credit. Actually, this credit is not totally new but was revised for the benefit of the homeowners and the environment.

This is meant for home improvements that aim to lessen the electricity bill. This way, homeowners are encouraged to be eco-friendly thus helping save the environment. The renovations and repairs should be done and completed before the due date and it should have an environment-friendly factor and this means that not all home improvements are qualified for the credit.

It also gives a 30% rebate from the amount spent on certain types of doors, windows and lighting fixtures that are included in the Energy star tax credit. This, however, is only valid for the year of purchase only.

Energy Tax Credit Scope

Being a homeowner is not limited to owning houses only. Those who own condos and co-ops are also considered as homeowners and they are also included in the credit, regardless of their income bracket. Some homeowners may even get federal tax benefits apart from the rebates.

Homeowners who bought certain types of doors and windows that meet the requirements of the Energy Star will be given rebates, provided their date of purchase is from January 4, 2010 onwards.

Utility companies could also give discounts to homeowners who have certain appliances that are included in the list of environment-friendly products

Energy Tax Credit Amendment

This is the combination of the Energy Policy Act of 2005, which was amended in 2008, and the American Recovery and Reinvestment Act of 2009. This was signed by President Obama and it has more coverage than when the law was implemented in 1995 because President Obama aims to lessen the harmful effects of appliances and vehicles to the environment. This new law is beneficial for the homeowners because they have more credits if they use environment-friendly products

Products and appliances that qualify for the credit and are bought from January 1, 2009 to December 31, 2010 have a 30% rebate. These products and appliances should have a certification from the manufacturer and it should contain the product’s code.

Energy Tax Credit Qualifications

To be able to qualify for the credit, the home should be a primary residence. The construction of the house is not qualified but renovations that are done from 2009 to 2010 are qualified for the 30% rebate.

The renovations and repairs could cost up to $1,500.00 and the rebate can only be claimed once. Such renovations, repairs and appliances include asphalt or metal roof, biomass stoves, insulation, sliding glass doors, water heaters, storm doors and storm windows.

The credit also cover repairs of vacation houses or secondary houses with no credit limit and the credit can be claimed every year, provided that it consist of solar panels, solar water heater, geothermal heat pumps or wind energy systems.

Fuel cells could have a tax rebate if it was installed during the construction of the primary residence and not a vacation home. The construction should be done from 2009 to 2010.

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Revisions and Adjustments

The Child Tax Credit is applicable to taxpayers who have a dependent or dependents that is or are living with the taxpayer. The said dependent should be below 17 years of age by the end of the tax year.

Child Tax Qualifications

There are qualifications and requirements that should be met and submitted before the taxpayer can claim it. There are separate requirements for the child, the taxpayer should meet the qualifications and the credit limit should also be taken into consideration. The rules in dependency exemption also apply in the CTC. The taxpayer who is qualified to claim the CTC should also follow the same rules. The only difference is that the child should be below 17 years old before December 31 of the current year and the child can be the taxpayer’s own child, adopted child, foster child, stepchild, brother or sister, stepbrother or stepsister or even the taxpayer’s own grandchild. The child must be living with the taxpayer for more than 6 months and the child should not be self-supporting. Most importantly, the child should also be a resident or a citizen of the United States.

As for the credit limit, the taxpayer could claim $1,000 per child as stated under the regulations of the new CTC. It also depends on the tax liability, filing status and the taxpayer’s modified adjusted gross income. If the taxpayer is single and has a modified adjusted gross income that reaches $75,000, the CTC is automatically void. If the taxpayer is married, the taxpayer and the spouse could file for either a joint or separate income tax. For joint filers, the CTC is cancelled if the modified adjusted gross income exceeds $110,000. As for separate filers, if their modified gross income reaches $55,000, the CTC is also cancelled.

In cases where the credit is greater than the liability, the taxpayer can get a refund and this is known as “additional” Child Tax Credit or ACTC.

The Recovery Act

This act revises the qualifications for the CTC. It broadens the scope of eligibility by decreasing the minimum income bracket of the taxpayer from $12,550 to $3,000 so that more taxpayers can claim their CTC.

Other Option for Those Who Are Not Qualified for CTC

If the taxpayer is not qualified to get the CTC, then the taxpayer can apply for ACTC. This enables the taxpayer to decrease his tax liability. When this happens, the taxpayer can even get a refund. To be able to qualify for the ACTC, the taxpayer should meet the requirements of the regular CTC, the tax liability should be less than the allowed CTC, and the taxpayer should have an income of more than $11,750.

For the computation and additional limitations under the ACTC, you can read the IRS publication 972.

CTC is a good way to lessen your tax and even get a refund. All you have to do is to qualify for the CTC and submit all the requirements. This way, you could save money and put it to better use.

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Tax deductions mean bigger tax refunds.

The Truth about Tax Deductions and Tax Credits

The start of a year brings forth the need to prepare one’s taxes and to plan for the expenditure of the coming year. Though it may be a time to relax and enjoy the first lazy moments of the year, it is important that a family or individual strategically plan for the annual income tax return.

Tax Credits and Tax Deductions

There are two things that affect an individual’s annual income tax return. These are tax deductions and tax credits. Though basically the same, these two terms have different purposes and meanings. In a nutshell, tax deductions lower the amount of an individual’s taxable income, while tax credits inversely lowers the amount of taxes to be paid as a whole. In order to qualify for both, it is necessary that a taxpayer is aware of his possible tax deductions and tax credits, which is only made possible by being familiar with the existing tax regulations. If one is well-versed with the regulations, then he can save up thousands of dollars from deductions and credits.

Tax Deductions

Tax deductions are billable services, purchases, or items which affects a taxpayer’s annual income. The total tax deductions are subtracted from the annual income, which then lowers the tax to be paid. There are several ways to get tax deductions.

Types of Tax Deductions

The most common types of tax deductions lie with charity donation. If a taxpayer, in the form of a family, individual, or corporation, donates a substantial amount to charities, non-profit organizations, non-government organizations, trust funds, and anything similar, the amount donated can be indicated in the tax forms. This amount will be reduced from the taxable income, therefore giving the taxpayer less tax to shoulder.

Home mortgages and allowances are also famous forms of tax deductions. Especially for self-employed individuals, home mortgages interest repayments are deducted from their annual taxable income. The same goes for allowances. These two function as a tax shield, so that individuals have more money at hand, but lesser tax to be paid.

Tax Credits

Similarly, tax credits reduce the amount of taxes to be paid. It is offered due to a partial payment to an amount owed to the IRS, or due to a state benefit. An individual gains tax credit if there are any refunds or sum to be deducted from what he needs to pay the state. It can be given in several forms of taxes, including VAT, property tax, and income tax. Tax credits may also be given as a subsidy, or to encourage potential investments from a starting business’ investors. Tax credit in the form of state benefits increases an individual’s net income.

It may not seem like a lot of money, but in the end, if an individual properly applies for the corresponding tax credit and tax deduction which he is eligible to, then it could amount to thousands of dollars in savings. These tax deductions and tax credits are in place with the welfare of Americans in mind of the rule-makers – to ensure that Americans are properly paying their taxes and getting benefits by doing something that is right.

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Personal exemptions must meet certain IRS rules.

Taking yourself or someone else as a personal exemption requires certain rules, namely dependency, residency, support and sometimes by court order.

General Personal Exemption Rules

In order to take yourself as a personal exemption, you must meet certain criteria, namely that you are a taxpayer who may not be legally claimed as a dependent by another taxpayer (If another taxpayer is entitled to claim you as a dependent, you may NOT take an exemption for yourself, even if the other taxpayer DOES NOT actually claim an exemption for you.) and meet other qualifications, residency, and support standards. You must generally be a U.S. citizen or resident alien to qualify; see IRS publication 519 Tax Information for Aliens for additional detail. Meeting these simple test requirements should enable you to claim yourself as a dependent of yourself eligible for a personal tax exemption. The amount of your exemption will be reduced if your AGI is higher than a certain amount for your filing status.

Claiming Spouse Personal Exemption

If you were married by December 31st of  the tax filing year, or your spouse died at anytime within that tax year, your spouse is a U.S. citizen or resident alien, you are filing a joint return (married filing a joint return), and your spouse cannot be claimed as a dependent by someone else, you may claim as a personal exemption.

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Maximize your home office deduction.

The Taxpayer Relief Act of 1997 included a modification of the IRS’s definition of “principal place of business” that will permit a larger number of taxpayers to qualify for the home-office deduction. For tax years beginning after 1998, the deduction will be available for home offices that are used for administrative or management activities related to the taxpayer’s business (for example, billing, maintaining records, ordering supplies, scheduling appointments, creating reports).
Business/Personal Boundaries Home-based businesses, by their very nature, often have less structure. While many consider this to be an advantage, working at home can be a double-edged sword. The lack of structure tends to result in home-based workers putting in more hours than when they did not work at home. Having set office hours and “closing up” at the end of the day will help you balance business and personal matters.

Under the amended rules, a taxpayer is allowed to deduct expenses of a home office that is used for business purposes only if the space is used “exclusively” on a “regular basis” as:

The principal place of business carried on by the taxpayer,

1. A place for meeting with clients or customers in the ordinary course of business, or
2. A place for the taxpayer to perform administrative or management activities associated with the business, provided there is no other fixed location from which the taxpayer conducts a substantial amount of such administrative or management activities.

The Taxpayer Relief Act of 1997 added this third provision to the definition of principal place of business.

The exclusive-use test will be satisfied if a specific portion of the taxpayer’s home is used solely for business purposes or inventory storage. The regular-basis test is satisfied if the space is used on a continuing basis for business purposes (that is, incidental business use will not qualify.)

In determining the principal place of business (first provision under the definition of principal place of business, above), the IRS considers two factors: Does the taxpayer spend more business-related time in the home office than anywhere else? Are the most significant revenue-generating activities performed in the home office? Both of these factors must be considered when determining the principal place of business.

Employees
To qualify for the home-office deduction, an employee must satisfy two additional criteria. First, the use of the home office must be for the convenience of the employer (for example, the employer does not provide a space for the employee to do his/her job). Second, the taxpayer does not rent all or part of the home to the employer. Employees who telecommute may be able to satisfy the requirements for the home-office deduction.

Expenses
Home office expenses are classified into three categories:

Direct Business Expenses relate only to the taxpayer’s business activity (for example, supplies, salaries). Expenditures for additional phone lines, long-distance calls, and optional phone services for the business may be deductible as direct business expenses. However, basic local telephone service charges (that is, monthly access charges) for the first phone line in the residence generally do not qualify for the deduction.

Permissible Expenses are expenditures that could be included as itemized deductions in the individual’s tax return (for example, mortgage interest, real estate taxes, and casualty losses).

Previously Non-deductible Expenses would not be deductible if not for the home office deduction (for example, insurance, utilities, and depreciation).

Limitation
Home office deductions are limited to the gross income from the business activity. Previously non-deductible expenses cannot create or increase a net loss from a business activity. However, a carryover to future years is available for unused, allowable home-office expenses.

Sale of Residence
Tax rules generally permit a $500,000 (married filing jointly) or $250,000 (single or married filing separately) exclusion on the gain from the sale of a primary residence. If part of the home is used for business purposes, the gain is divided into two parts — personal-use portion (the exclusion applies) and business-use portion (exclusion does not apply). For example, a taxpayer who qualifies for the exclusion, but has used 25 percent of the home for business purposes during the during past five years, will only be able to apply the exclusion against 75 percent of any gain recognized on the sale of the home.

As with many tax laws there are exceptions to this rule. If you’d like a clearer picture of the size of the exclusion you qualify for, please call us.

Taxes
The “office-in-home” tax deduction is valuable because it converts a portion of otherwise nondeductible expenses (for example, utilities and homeowners insurance) into a deduction. The treatment of home offices for income tax purposes is one of the more controversial provisions in the tax law.

An individual is not entitled to deduct any expenses of using his/her home for business purposes unless the space is used exclusively on a regular basis as the “principal place of business.” The IRS applies a 2-part test to determine if the home office is the principal place of business.

Do you spend more business-related time in your home office than anywhere else?

Are the most significant revenue-generating activities performed in your home office?

If the answer to either of these questions is no, the home office will not be considered the principal place of business, and the deduction will not be available.

Business use of the home by an employee must also be for the convenience of the employer. These rules make it very difficult for an employee to qualify for the deduction.

If these three tests are met, the deduction is limited to the gross income from the business activity. Furthermore, a deduction for home-office expenses cannot create or increase a net loss from the business. Any disallowed deduction may be carried over to future years.

Taxpayers taking a deduction for business use of their home must complete Form 8829. Some tax experts believe that taking a deduction for home-office expenses, whether clearly allowable or not, increases the likelihood of an IRS audit.

These are some thoughts to consider.

If you have a home office or are considering one, please call us. We’ll be happy help you take advantage of these deductions.

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