New Market Credits

Posted on May 23 2013 by admin

With the passage of the American Taxpayer Relief Act of 2012, the government extended the new markets tax credit which is available for investments made in entities involved in development in low- and moderate-income areas throughout the United States, Puerto Rico and certain United States possessions.

The credit applies to the acquisition of a qualified equity investment in a community development entity (CDE) through 2013, but credits not allocated to CDEs by the end of 2013 can be carried forward for allocation through 2018. A CDE is a domestic corporation or partnership whose primary mission is serving, or providing investment capital for, low-income communities or low-income persons. A qualified equity investment must be acquired directly from a CDE (or through an underwriter) on the original issue date for cash. The investment must be designated as a qualified equity investment by the CDE. Substantially all of the cash paid for the investment must be used by the CDE to make equity investments in, or loans to, qualified active businesses located in low-income communities or provide certain financial services to businesses and residents in low-income communities.

Over a 7-year period, you can get a total credit equal to 39% of the amount you invest. You claim the credit this way:

(1) 5% for the year in which you buy the equity interest from the CDE and each of the next two years (for a total credit of 15%), plus
(2) 6% for each of the next four years (for a total of 24%).

Any credits claimed must be paid back if, within the seven-year period, the entity stops being a CDE (or fails to meet the use-of-proceeds requirement) or you redeem your interest. However, IRS regulations provide a 6-month “cure period” to correct certain failures, thus avoiding recapture.

Nationally, the maximum annual amount of qualifying equity investments is capped at $3.5 billion for 2013.

The new markets tax credit for any tax year is subject to the general business credit rules. Thus, the credit is nonrefundable. Any unused credit can be carried back one year and carried forward for 20 years.

For businesses looking to make new investments the new markets credit can provide a substantial incentive to evaluate investing in low- and moderate-income areas.

 Michael Anderson

Claiming the Child and Dependent Care Tax Credit

Posted on May 22 2013 by admin

The Child and Dependent Care Credit can help offset some of the costs you pay for the care of your child, a dependent or a spouse. Here are 10 facts the IRS wants you to know about the tax credit for child and dependent care expenses.

1. If you paid someone to care for your child, dependent or spouse last year, you may qualify for the child and dependent care credit. You claim the credit when you file your federal income tax return.

2. You can claim the Child and Dependent Care Credit for “qualifying individuals.” A qualifying individual includes your child under age 13. It also includes your spouse or dependent who lived with you for more than half the year who was physically or mentally incapable of self-care.

3. The care must have been provided so you – and your spouse if you are married filing jointly – could work or look for work.

4. You, and your spouse if you file jointly, must have earned income, such as income from a job. A special rule applies for a spouse who is a student or not able to care for himself or herself.

5. Payments for care cannot go to your spouse, the parent of your qualifying person or to someone you can claim as a dependent on your return. Payments can also not go to your child who is under age 19, even if the child is not your dependent.

6. This credit can be worth up to 35 percent of your qualifying costs for care, depending upon your income. When figuring the amount of your credit, you can claim up to $3,000 of your total costs if you have one qualifying individual. If you have two or more qualifying individuals you can claim up to $6,000 of your costs.

7. If your employer provides dependent care benefits, special rules apply. See Form 2441, Child and Dependent Care Expenses for how the rules apply to you.

8. You must include the Social Security number on your tax return for each qualifying individual.

9. You must also include on your tax return the name, address and Social Security number (individuals) or Employer Identification Number (businesses) of your care provider.

10. To claim the credit, attach Form 2441 to your tax return.

Donna H. Laubscher, CPA

Tax Rules on Early Withdrawals from Retirement Plans

Posted on May 21 2013 by admin

Taking money out early from your retirement plan can cost you an extra 10 percent in taxes. Here are five things you should know about early withdrawals from retirement plans.

1. An early withdrawal normally means taking money from your plan, such as a 401(k), before you reach age 59½.

2. You must report the amount you withdrew from your retirement plan to the IRS. You may have to pay an additional 10 percent tax on your withdrawal.

3. The additional 10 percent tax normally does not apply to nontaxable withdrawals. Nontaxable withdrawals include withdrawals of your cost in participating in the plan. Your cost includes contributions that you paid tax on before you put them into the plan.

4. If you transfer a withdrawal from one qualified retirement plan to another within 60 days, the transfer is a rollover. Rollovers are not subject to income tax. The added 10 percent tax also does not apply to a rollover.

5. There are several other exceptions to the additional 10 percent tax. These include withdrawals if you have certain medical expenses or if you are disabled. Some of the exceptions for retirement plans are different from the rules for IRAs.

These rules can be tricky to navigate – if you are the least bit unsure, please seek the assistance of a professional – your plan custodian or a tax professional.

Donna H. Laubscher, CPA

How You Can Get Prior Year Tax Information from the IRS

Posted on May 16 2013 by admin

Have you filed your 2012 tax return?  But you cannot find a copy of it for whatever reason?  Maybe the dog ate it.  Maybe you have moved. 

The IRS offers several different ways to get tax return information or a copy of your own tax return for prior years. Here are options to help you get the information you need.

• Tax Return Transcript.  This shows most line items from your tax return as originally filed, along with any forms and schedules from your return.  This transcript does not reflect any changes made to the return after you filed it. Tax return transcripts are free. After the IRS has processed a return, transcripts are available for the current tax year and the past three tax years.

• Tax Account Transcript.  This shows any adjustments made by you or the IRS after filing your return. This transcript shows basic data, like marital status, type of return filed, adjusted gross income and taxable income. Tax account transcripts are free, and are available after the IRS has processed the return for the current tax year and the past three tax years.

• Order a Transcript.  You can request both transcript types online, by phone or by mail. To place your order online, go to IRS.gov and use the “Order a Transcript” tool. Order a transcript by phone at 800-908-9946. A recorded message will guide you through the process. You can also request your tax return transcript by mail by completing Form 4506T-EZ. Use Form 4506T to mail a request for your tax account transcript. You can get both forms online at IRS.gov.

• Tax Return Copies.  Actual copies of your tax returns are generally available for the current tax year and as far back as six years. The fee for each copy you order is $57. To request a copy of your tax return, complete Form 4506, available on IRS.gov. Mail your request to the IRS office listed on the form for your area.

• Delivery Times.  The turnaround time for online and phone orders is typically 5 to 10 days from the time the IRS receives the request. Allow 30 calendar days for delivery of a tax account transcript if you order by mail using Form 4506T-EZ or Form 4506T, and allow 60 days when ordering actual copies of your tax return by mail.

Donna H. Laubscher, CPA

Parents and Students: Check Out College Tax Benefits

Posted on May 15 2013 by admin

In general, the American opportunity tax credit, lifetime learning credit and tuition and fees deduction are available to taxpayers who pay qualifying expenses for an eligible student. Eligible students include the primary taxpayer, the taxpayer’s spouse or a dependent of the taxpayer.

Though a taxpayer often qualifies for more than one of these benefits, he or she can only claim one of them for a particular student in a particular year.  (Otherwise, this would be double dipping which is most generally disallowed in the tax law.) The benefits are available to all taxpayers – both those who itemize their deductions on Schedule A and those who claim a standard deduction. The credits are claimed on Form 8863 and the tuition and fees deduction is claimed on Form 8917.

The American Taxpayer Relief Act, enacted Jan. 2, 2013, extended the American opportunity tax credit for another five years until the end of 2017. The new law also retroactively extended the tuition and fees deduction, which had expired at the end of 2011, through 2013. The lifetime learning credit did not need to be extended because it was already a permanent part of the tax code.

For those eligible, including most undergraduate students, the American opportunity tax credit will yield the greatest tax savings.  Alternatively, the lifetime learning credit should be considered by part-time students and those attending graduate school. For others, especially those who don’t qualify for either credit, the tuition and fees deduction may be the right choice.

All three benefits are available for students enrolled in an eligible college, university or vocational school, including both nonprofit and for-profit institutions. None of them can be claimed by a nonresident alien or married person filing a separate return. In most cases, dependents cannot claim these education benefits.

Normally, a student will receive a Form 1098-T from their institution by the end of January of the following year. This form will show information about tuition paid or billed along with other information. However, amounts shown on this form may differ from amounts taxpayers are eligible to claim for these tax benefits.

Many of those eligible for the American opportunity tax credit qualify for the maximum annual credit of $2,500 per student. Here are some key features of the credit:

• The credit targets the first four years of post-secondary education, and a student must be enrolled at least half time. This means that expenses paid for a student who, as of the beginning of the tax year, has already completed the first four years of college do not qualify. Any student with a felony drug conviction also does not qualify.
• Tuition, required enrollment fees, books and other required course materials generally qualify. Other expenses, such as room and board, do not.
• The credit equals 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
• The full credit can only be claimed by taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less. For married couples filing a joint return, the limit is $160,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $180,000 or more and singles, heads of household and some widows and widowers whose MAGI is $90,000 or more.
• Forty percent of the American opportunity tax credit is refundable. This means that even people who owe no tax can get an annual payment of up to $1,000 for each eligible student. Other education-related credits and deductions do not provide a benefit to people who owe no tax.

The lifetime learning credit of up to $2,000 per tax return is available for both graduate and undergraduate students. Unlike the American opportunity tax credit, the limit on the lifetime learning credit applies to each tax return, rather than to each student. Though the half-time student requirement does not apply, the course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills. Other features of the credit include:

• Tuition and fees required for enrollment or attendance qualify as do other fees required for the course. Additional expenses do not.
• The credit equals 20 percent of the amount spent on eligible expenses across all students on the return. That means the full $2,000 credit is only available to a taxpayer who pays $10,000 or more in qualifying tuition and fees and has sufficient tax liability.
• Income limits are lower than under the American opportunity tax credit. For 2012, the full credit can be claimed by taxpayers whose MAGI is $52,000 or less. For married couples filing a joint return, the limit is $104,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $124,000 or more and singles, heads of household and some widows and widowers whose MAGI is $62,000 or more.

Like the lifetime learning credit, the tuition and fees deduction is available for all levels of post-secondary education, and the cost of one or more courses can qualify. The annual deduction limit is $4,000 for joint filers whose MAGI is $130,000 or less and other taxpayers whose MAGI is $65,000 or less. The deduction limit drops to $2,000 for couples whose MAGI exceeds $130,000 but is no more than $160,000, and other taxpayers whose MAGI exceeds $65,000 but is no more than $80,000.

There are a variety of other education-related tax benefits that can help many taxpayers. They include:

• Scholarship and fellowship grants—generally tax-free if used to pay for tuition, required enrollment fees, books and other course materials, but taxable if used for room, board, research, travel or other expenses.
• Student loan interest deduction of up to $2,500 per year.
• Savings bonds used to pay for college—though income limits apply, interest is usually tax-free if bonds were purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 years old.
• Qualified tuition programs, also called 529 plans, used by many families to prepay or save for a child’s college education.

Taxpayers with qualifying children who are students up to age 24 may be able to claim a dependent exemption and the earned income tax credit.

There are some opportunities for planning when preparing the returns for both parents and students.  See Six Important Facts about Dependents and Exemptions.

Donna H. Laubscher, CPA

Tax Guidelines for Children Who Have Investment Income

Posted on May 14 2013 by admin

Did you know that if a child receives investment income they are required to file a federal tax return for 2012? If a child cannot file his or her own tax return for any reason, such as age, the child’s parent or guardian is responsible for filing a return on the child’s behalf.

Per the IRS, there are special tax rules that affect how parents report a child’s investment income. Some parents can include their child’s investment income on their tax return on Form 8814 (Parents’ Election to Report Child’s Interest and Dividends). Other children may have to file their own tax return.

Here are four facts from the IRS about the taxability of your child’s investment income.

1. Investment income normally includes interest, dividends, capital gains and other unearned income, such as from a trust.

2. Special rules apply if your child’s total investment income is more than $1,900. The parent’s tax rate may apply to part of that income instead of the child’s tax rate.

3. If your child’s total interest and dividend income is less than $9,500, you may be able to include the income on your tax return.

4. Your child must file their own tax return if they received investment income of $9,500 or more. File Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900, with the child’s federal tax return.

If you have any questions, please contact our office.

Danette Hefty, EA

IRS Warns Donors about Charity Scams Following Recent Tragedies in Boston and Texas

Posted on May 9 2013 by admin

It’s sad but true. Following major disasters and tragedies, scam artists impersonate charities to steal money or get private information from well-intentioned taxpayers. Fraudulent schemes involve solicitations by phone, social media, email or in-person.

Scam artists use a variety of tactics. Some operate bogus charities that contact people by telephone to solicit money or financial information. Others use emails to steer people to bogus websites to solicit funds, allegedly for the benefit of tragedy victims. The fraudulent websites often mimic the sites of legitimate charities or use names similar to legitimate charities. They may claim affiliation with legitimate charities to persuade members of the public to send money or provide personal financial information. Scammers then use that information to steal the identities or money of their victims.

The IRS offers the following tips to help taxpayers who wish to donate to victims of the recent tragedies at the Boston Marathon and a Texas fertilizer plant:

• Donate to qualified charities.  Use the Exempt Organizations Select Check tool at IRS.gov to find qualified charities. Only donations to qualified charitable organizations are tax-deductible. You can also find legitimate charities on the Federal Emergency Management Agency (FEMA) Web site at fema.gov.
• Be wary of charities with similar names.  Some phony charities use names that are similar to familiar or nationally known organizations. They may use names or websites that sound or look like those of legitimate organizations.
• Don’t give out personal financial information.  Do not give your Social Security number, credit card and bank account numbers and passwords to anyone who solicits a contribution from you. Scam artists use this information to steal your identity and money.
• Don’t give or send cash.  For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the donation.
• Report suspected fraud.  Taxpayers suspecting tax or charity-related fraud should visit IRS.gov and perform a search using the keywords “Report Phishing.”

More information about tax scams and schemes is available at IRS.gov using the keywords “scams and schemes.”

Donna H. Laubscher, CPA

California Waives the Mandatory E-Pay Penalty for 4.15.2013 Payments

Posted on May 8 2013 by admin

The 2012 tax filing season had its share of challenges for the various governmental agencies. One of the last minute items was the failure of the California E-Pay system for a period of time on April 15, 2013. Some taxpayers who tried to make the mandatory e-pay tax payments on April 15th were unable to get into the system.

Acknowledging the problem faced on April 15, 2013, California has announced that they will waive the mandatory e-pay penalty for taxpayers that paid their tax, extension, or estimated tax payment by check.

Taxpayers may request a waiver of the mandatory e-pay penalty for the 04.15.2013 payment by:

Phone (Preferred Method):
• Tax Practitioner Hotline – 916.845.7057
• Taxpayers – 800.852.5711

Fax:
Complete FTB 4107, Mandatory e-Pay Election to Discontinue or Waiver Request. In Part 1, check the second box and enter 04.15.2013 Website Problem.
• Fax your request to 916.843.0468

Mail:
Complete FTB 4107, Mandatory e-Pay Election to Discontinue or Waiver Request. In Part 1, check the second box and enter 04.15.2013 Website Problem. In red, write 04.15.2013 Website Problem. Mail your request to:
 
STATE OF CALIFORNIA
FRANCHSIE TAX BOARD
PO BOX 942840
SACRAMENTO, CA 94240-0040
 
Important: California is stressing that this is a one-time waiver of the mandatory e-pay penalty; Taxpayers are still required to make future payments electronically unless they are granted a waiver. See FTB 4107 for more information or go to the FTB website and search for mandatory e-pay.

Melinda Nelson, CPA

Eight Facts on Late Filing and Late Payment Penalties

Posted on May 7 2013 by admin

April 15 is the annual deadline for most people to file their federal income tax return and pay any taxes they owe. By law, the IRS may assess penalties to taxpayers for both failing to file a tax return and for failing to pay taxes they owe by the deadline.

Here are eight important points about penalties for filing or paying late.

1. A failure-to-file penalty may apply if you did not file by the tax filing deadline. A failure-to-pay penalty may apply if you did not pay all of the taxes you owe by the tax filing deadline.

2. The failure-to-file penalty is generally more than the failure-to-pay penalty. You should file your tax return on time each year, even if you’re not able to pay all the taxes you owe by the due date. You can reduce additional interest and penalties by paying as much as you can with your tax return. You should explore other payment options such as getting a loan or making an installment agreement to make payments. The IRS will work with you.

3. The penalty for filing late is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. That penalty starts accruing the day after the tax filing due date and will not exceed 25 percent of your unpaid taxes.

4. If you do not pay your taxes by the tax deadline, you normally will face a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes. That penalty applies for each month or part of a month after the due date and starts accruing the day after the tax-filing due date.

5. If you timely requested an extension of time to file your individual income tax return and paid at least 90 percent of the taxes you owe with your request, you may not face a failure-to-pay penalty. However, you must pay any remaining balance by the extended due date.

6. If both the 5 percent failure-to-file penalty and the ½ percent failure-to-pay penalties apply in any month, the maximum penalty that you’ll pay for both is 5 percent.

7. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

8. You will not have to pay a late-filing or late-payment penalty if you can show reasonable cause for not filing or paying on time.

Note: The IRS recently announced special penalty relief to many taxpayers who requested an extension of time to file their 2012 federal income tax returns (click here) and some victims of the recent severe storms in parts of the South and Midwest. For details about these relief provisions, see IRS news releases IR-2013-31 and IR-2013-42. The IRS has also provided individual tax filing and payment extensions to those affected by the Boston explosions tragedy. See IR-2013-43 for more information.

Donna H. Laubscher, CPA

Arizona TPT Tax Rate is Going Down Effective June 1, 2013

Posted on May 2 2013 by admin

In May of 2010 Arizona voters approved a 1% Temporary Transaction Privilege Tax increase by passing Proposition 100. Last November, however, Arizona voters rejected a measure that would have made this temporary increase permanent. By voting no to Proposition 204 Arizona voters have ensured that the 1% temporary TPT increase will expire after May 31, 2013.

What does this mean to you?

This means you will be paying 1% less sales tax starting on June 1, 2013.

What do you need to do?

If you are a consumer, you should verify that the rates are correct.

If you are a business that collects the Arizona TPT tax, you need to update the way you calculate sales tax when invoicing a client or processing a sale beginning on June 1, 2013. Whether you create invoices in QuickBooks, use a POS system, or hand-calculate your sales tax, you need to update your sales tax rates.

For prime contractors and owner builders, you may be able to reduce the TPT rate on preexisting contracts.  However, this is on a per-contract basis and you should consult with a tax advisor before reducing your sales tax rate by 1% on preexisting contracts.

Sales tax rates can, and do, change frequently with little or no warning; because of this, it is best practice to check sales tax rates regularly. You can do so by going to azdor.gov website and navigating to their TPT Rates page.  Here are the rates as of June 1, 2013.

Sales tax is complicated enough having to navigate the sheer number of deductions available while also having to figure out what is and isn’t subject to the tax. If you compound that complexity with the ever-changing tax rates and the little-to-no forewarning that tax rates are changing, you can quickly find yourself with a notice from a city or the state.

But – it is not often that we get to let you know of a rate reduction!

Joshua Lemman