Credits for Education

Education Credits have existed for many years and have been helpful to many families while their adult-age children or other members of the family pursue post secondary educations.
The American Recovery and Reinvestment Act of 2009 introduced significant changes to education credits.
· American Opportunity Credit (AOC) – This credit modifies the existing Hope Credit for tax years 2009 and 2010, making the Hope Credit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. Taxpayers may be able to take a credit of up to $2,500 for qualified education expenses paid for each student who qualifies for the American opportunity credit. Additionally, up to 40% of this credit may be refundable.
· Hope Credit – The Hope Credit is for the payment of the first two years of tuition and related expenses for an eligible student. This credit may be more advantageous only if at least one student attended an educational institution located in the Midwestern disaster area. For qualifying education institutions located in a Midwestern disaster area there is an expanded definition of qualifying expense and a credit of up to $3,600. However, both the American Opportunity Credit and Hope Credit cannot be claimed on the same tax return. If claiming the Hope credit for one student that attended an educational institution in a Midwestern disaster area, the Hope Credit must be claimed for all students that qualify.
· Lifetime Learning Credit – For the tax year, taxpayers may be able to claim a lifetime learning credit of up to $2,000 ($4,000 for students in Midwestern disaster areas) for qualified education expenses paid for all students enrolled in eligible educational institutions. There is no limit on the number of years the lifetime learning credit can be claimed for each student. However, a taxpayer cannot claim the Hope, American Opportunity and the Lifetime Learning credit for the same student in one year.

If you have any questions concerning education or other credits, please contact our office at (615) 746-4632.

Changes to First Time Homebuyer and Standard Deduction

The Internal Revenue Service (IRS) has now published the new Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, with instructions on its Web site, and the IRS wants more information from home purchasers than was requested last year. Taxpayers must check a box to indicate that they did not purchase the home from a related person, they must enter the purchase price of the new home, and, in the case of first-time homebuyers, confirm that they have not owned a home for three years. Long-term homeowners now eligible for a reduced credit for the purchase of a new home through April 10, 2010 must provide documentation that they have lived in their previous residence for five consecutive years of the last eight years. All claimants for the credit must document their purchase. Paper returns will be required for claiming the credit because of the added documentation.

Documentation of Purchase and Home Ownership

Both the first-time homebuyer and the long-term homeowner must attach a copy of the properly executed settlement statement (or similar documentation) used to complete the purchase. In most cases, this will be a HUD-1 Settlement Statement, complete with dates, and signed by all parties. Long-term homeowners taking advantage of the credit must also provide documentation of ownership of their previous home in the form of mortgage interest statements, property tax records, or homeowner's insurance records.

The Form 5405 for 2008 asked only for the address of the home purchased and the date acquired, in addition to income information. No documentation of the purchase was required.

Repayment

Taxpayers who claimed the credit for a home purchased in 2008, owned and used as their main home during all of 2009 and 2010, will begin repayment of the credit over a 15-year period with their 2010 return. These people should not file a Form 5405 with their 2009 return.

Individuals who have sold or disposed of a property, including through foreclosure, for which they claimed the credit in 2008 or 2009 must file a Form 5405 and repay the credit. The amount of the previously received credit is entered as a tax on their individual returns.

Increases to Standard Deduction -- Schedule L

Claiming the standard deduction is still easier than itemizing for most people, and three potential increases have added to the tax benefits for taxpayers who do not itemize. But these added deductions require a little more work on the part of filers who will have to complete the new Schedule L to claim an increase in their deductions, because they paid real estate tax, paid sales or excise tax on the purchase of a new motor vehicle, or lived in federal disaster areas and had disaster losses.

Last year taxpayers who paid real estate taxes calculated their standard deduction on a worksheet and checked a box on their return to show the addition ($500 for a filing single and $1,000 for joint filers).

Schedule L asks questions about filing status and income and requires the taxpayer to enter the specific amount of state or local real estate taxes paid as part of the calculation. If taxpayers want to claim an increase in the standard deduction because they paid state or local sales or excise tax on the purchase of a new motor vehicle after February 16, 2009, they need to provide the sales price of the motor vehicle and the amount of the tax on Schedule L. The totals of the vehicle and real estate taxes after certain calculations and net disaster losses are added to the standard deduction.

To claim a net disaster loss from a federally declared disaster that occurred in 2009 taxpayers will have to complete Form 4684 and Schedule L.

Tips for Choosing a Tax Preparer

This is an article written from an interview with IRS Manager, Melany Partner.

Although I am biased and think that my firm offers the most personal and professional tax preparation service in the Middle Tennessee area, I would strongly suggest reading this article and consider its points when choosing a new or replacement tax preparer.

If you have any questions, please feel free to call our team at (615) 746-4632.

If you pay someone to prepare your tax return, choose that preparer wisely. Taxpayers are legally responsible for what’s on their own tax returns even if prepared by someone else. So, it is important to choose carefully when hiring an individual or firm to prepare personal returns. Most return preparers are professional, honest and provide excellent service to their clients. Here are a few points to keep in mind when someone else prepares your return:

• A Paid Preparer is required by law to sign the return and fill in the preparer areas of the form. The preparer should also include their appropriate identifying number on the return. Although the Preparer signs the return, you are responsible for the accuracy of every item on your return. In addition, the preparer must give you a copy of the return.
• Review the completed return to ensure all tax information, your name, address and Social Security number(s) are correct. Make sure that none of these spaces is left blank.
• Review and ensure you understand the entries and are comfortable with the accuracy of the return before you sign.
• Never sign a blank return, and never sign in pencil.
• If you have provided specific authorization in a power of attorney filed with the IRS, you may have copies of notices or refund checks mailed to your preparer or representative; but only you can sign and cash your refund check. For further information on Powers of Attorney, refer to Topic 311.
• A Third Party Authorization Check Box on Form 1040 allows you to designate your Paid Preparer to speak to the IRS concerning how your return was prepared, payment and refund issues and mathematical errors.

It’s important for taxpayers to find qualified tax professionals if they need help preparing and filing their tax returns. Unqualified tax preparers may overlook legitimate deductions or credits that could cause clients to pay more tax than they should. Unqualified preparers may also make costly mistakes causing their clients to incur assessed deficiencies, penalties, and interest. Here are some suggestions to consider when hiring a tax professional:

• A paid preparer must sign the return as required by law.
• Avoid preparers who claim they can obtain larger refunds than other preparers. If your returns are prepared correctly, every preparer should derive substantially similar numbers.
• Beware of a preparer who guarantees results or who bases fees on a percentage of the amount of the refund. A practitioner may not charge a contingent fee (percentage of your refund) for preparing an original tax return.
• Understand that the most reputable preparers will request to see your receipts and will ask you multiple questions to determine your qualifications for expenses, deductions and other items. By doing so they have your best interest in mind and are trying to help you avoid penalties, interest or additional taxes that could result from an IRS examination.
• Choose a preparer you will be able to contact and one who will be responsive to your needs. Ask who will actually prepare the return before engaging services. Avoid firms where your work may be delegated down to someone with less training or some unknown worker. You should know exactly who works with your tax matters at all times and how to contact him or her; after all, you are paying for it. Determine if the preparer is exporting your return to a foreign country for preparation. Foreign countries do not have the same security and privacy laws as the United States nor is there any recourse should your information be compromised as a result of lax or nonexistent privacy procedures.
• Investigate whether the preparer has any questionable history with the Better Business Bureau, the state’s board of accountancy for CPAs, the state’s bar association for attorneys or the IRS Office of Professional Responsibility (OPR) for enrolled agents or the oversight agency in states that license or register tax preparers.
• Determine if the preparer’s credentials meet your needs or if your state mandates licensing or registration requirements for paid preparers. As of 2008, California and Oregon are the only two states that regulate paid tax preparers. Is he or she an Enrolled Agent, Certified Public Accountant (CPA) or Tax Attorney? Only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all matters including audits, collection actions and appeals. Other return preparers may represent taxpayers only in audits regarding a return that they signed as a preparer.
• Find out if the preparer is affiliated with a professional organization that provides or requires its members to pursue continuing education and holds them accountable to a code of ethics.
• Check IRS.gov for information regarding abusive shelters and other tax schemes and scams. Remember, if it sounds too good to be true, chances are it is.

E-File Season Begins

The IRS has begun accepting electronically filed returns as of January 15th, 2010. The first refunds will be direct deposited to the taxpayers bank accounts on January 29, 2010.

If you are ready to file your return, please contact our office at (615) 746-4632 to set you convenient appointment.

Charitable Contributions

One area of deductions that is fairly common is that of charitable contributions. Our office quite often will assist our valued clients in properly deducting the contributions made to charitable organizations.

Below, I have outlined some of the highlights of the code involving charitable contributions.

Charitable contributions are deductible only if you itemize deductions on Form 1040, Schedule A. You cannot take the deduction if you use the standard deduction.

To be deductible, charitable contributions must be made to qualified organizations.

The following list gives some examples of qualified organizations.

• Churches, a convention or association of churches, temples, synagogues, mosques, and other religious organizations.

• Most nonprofit charitable organizations such as the Red Cross and the United Way.

• Most nonprofit educational organizations, including the Boy (and Girl) Scouts of America, colleges, museums, and daycare centers if substantially all the childcare provided is to enable individuals (the parents) to be gainfully employed and the services are available to the general public. However, if your contribution is a substitute for tuition or other enrollment fee, it is not deductible as a charitable contribution, as explained later under Contributions You Cannot Deduct.

• Nonprofit hospitals and medical research organizations.

• Utility company emergency energy programs, if the utility company is an agent for a charitable organization that assists individuals with emergency energy needs.

• Nonprofit volunteer fire companies.

• Public parks and recreation facilities.

• Civil defense organizations.

If your contribution entitles you to merchandise, goods, or services, including admission to a charity ball, banquet, theatrical performance, or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received. For a contribution of cash, check, or other monetary gift (regardless of amount), you must maintain as a record of the contribution either a bank record or a written communication from the qualified organization containing the date and amount of the contribution and the name of the organization. You generally can deduct the fair market value of any property you donate, as well as your cash contributions, to qualified organizations.

For any contribution of $250 or more (including contributions of cash or property), you must obtain and keep in your records a contemporaneous written acknowledgment from the qualified organization indicating the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document from the qualified organization may satisfy both the written communication requirement for monetary gifts and the contemporaneous written acknowledgment requirement for all contributions of $250 or more.

You must fill out Form 8283, and attach it to your return, if your total deduction for all noncash contributions is more than $500. If you claim a deduction for a contribution of noncash property worth $5,000 or less, you must fill out Form 8283, Section A. If you claim a deduction for a contribution of noncash property worth more than $5,000, you will need a qualified appraisal of the noncash property and must fill out Form 8283, Section B. If you claim a deduction for a contribution of noncash property worth more than $5,000,000, you will also need to attach the qualified appraisal to your return.

If you have any questions regarding charitable contributions, please do not hesitate to call our office at (615) 746-4632.

Exemptions/Deductions Continued

The last post regarded the qualifying child dependency tests and how a child is qualified as a dependent. This post will deal with the second type of dependent, the qualifying relative.

There are four test that must be met for a person to be your qualifying relative. The four tests are;
(1) Not a qualifying child test - obviously, if the relative is your qualifying child, or the qualifying child of any other taxpayer, you will not be able to claim that child as an additional dependent;
(2) Member of household or relationship test - The person must either live with you all year as a member of your household, or, be related to you,
(3) Gross Income Test - a person's gross income for the year must be less that $3,650.00,
(4) Support Test - you generally must provide more than half of a person's total support during the calendar year.

The Support Test for qualifying child and qualifying relative can be extensive and complex.

These rules generally apply, but certain exceptions may apply

Exemptions/Dependents

For each person or dependent in your household, you are allowed to deduct $3,650.00 in 2009 as a exemption. If you are married filing jointly, you can claim an additional exemption for your spouse. But, what is the definition of a dependent?

The term dependent means either a qualifying child, or a qualifying relative. To qualify as a child, there are six tests that must be met.
(1) Relationship test - the child must be your son, daughter, stepchild, foster child, or a descedant of any of those, or, your brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of those listed,
(2) Age test - the child must be under the age of 19 at the end of the year and younger than you, a fullt-time student under the age of 24 at the end of the year, or, permanently and totally disabled at any time during the year, regardless of age,
(3) Residency test - child must have lived with you for more than half of the year. There are certain exceptions to this rule,
(4) Support test - the child cannot have provided more than half of his or her own support for the year,
(5) Joint Return test - the child cannot file a joint return for the year, and
(6) Special Test for Qualifying Child of More than One Person - If your qualifying child is not a qualifying child of anyone else, this test does not apply. If the child can meets the other five listed tests for more than one person, there the tiebreaker rules apply.
To determine which person can treat the child as a qualifying child, the following tie-breaker rules apply:
(a) If only one of the persons is the child's parent, the child is treated as the qualifying child of the parent,
(b) If the parents do not file a joint return together but both parents claim the child as a qualifying child, the IRS will treat the child as the qualifying child of the parent with whom the child lived for the longer periof of time during the year,
(c) If no parent can claim the child as a qualifying child, the child is treated as the qualifying child of the person who had the highest adjusted gross income (AGI) for the year,
(d) If a parent can claim the child as a qualifying child but no parent does so, the child is treated as the qualifying child of the person who had the highest AGI for the year, but only if that person's AGI is higher than the highest AGI of any of the child's parents who can claim the child.

These rules will generally apply, but there could be exceptions in your particular case.

to be continued...

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Deduction for Driving?

Did you know the IRS allows for deductions for driving your personal vehicle?

If you are self-employed, drive for the benefit of your employer and are not reimbursed, drive for medical or moving purposes, or drive for charitable activities, you may be allowed to received a deduction for the use of your vehicle.

In 2009, the mileage rates were as follows: 55 cents for business, 24 cents for medical or moving purposes, and 14 cents for charitable purposes. The rates effective January 1, 2010 are 50 cents for business, 16.5 cents for medical or moving purposes and 14 cents for charitable activities.

These rates are used in lieu of tracking actual expenses related to the operation of a vehicle, such as fuel, repairs and maintenance, and depreciation. In addition to using the mileage rates, you may also claim parking and toll fees in addition to these expenses as separate items for deductions.

In order to claim the deductions, you must be able to substantiate the number of miles driven as well as the purpose of the trip, such as banking, post office, meetings with clients or potential clients. Our firm recommends the use of mileage logs available at many office supply stores at a very reasonable price.

These rules will generally apply in most situations. There are certain exceptions that we will be more than happy to discuss with you.

Please give our office a call at (615) 746-4632, if you have any questions regarding this or other tax-related issues.

Do I Have to File?

Do I have to file? This is a common question that is answered by answering 3 question...(1) What is your filing status, (2) Are you older than 65, and (3) what is your gross income? If you can answer these 3 questions, by using the table below, you can determine if you have to file a return for 2009.
If your filing status is Single and you are under 65, you do not have to file until your gross income exceeds $9,350.00. If you're over 65, you do not have to file until your gross income exceed $10,750.00

If your filing status is Married filing jointly, and both spouses are under 65, you do not have to file until your gross income exceeds $18,700.00. If one spouse is over 65, the gross income goes up to $19,800.00, and if both spouses are over 65, then you do not have to file untile your gross income exceeds $20,900.00

If you plan to file married filing separately, regardless of age, you do not have to file as long as your income is less than $3,650.00.

If you qualify as Head of Household are are under 65, you do not have to file until your income exceeds $12,000.00, and if 65 or older, you do not have to file until your income exceeds $13,400.00.

These rules generally apply, but there are exceptions. For instance, if you are a W-2 wage earner and had taxes withheld from your earnings, even though you may not have exceed the gross income amounts, you would still want to file in order to receive a refund for all or part of your withheld taxes.

If you have any questions about your filing requirements, please do not hesitate to call our office at (615) 746-4632.