Is Your FEMA Assistance Taxable?

An individual whose principal residence is damaged or destroyed by Hurricane Katrina receives a FEMA IHP Repair Assistance or Replacement Assistance payment and/or insurance proceeds that exceed his or her adjusted tax basis in the damage or destroyed principal residence.

How is this treated for federal income tax purposes?

If the FEMA IHP repair assistance or replacement assistance payment and/or insurance proceeds (and any other form of compensation for the damaged or destroyed residence) exceed the recipient’s adjusted tax basis in the damaged or destroyed residence, the recipient has realized gain for federal income tax purposes. However, because the damage or destruction is considered an “involuntary conversion” of the residence for federal income tax purposes, the recipient may ordinarily defer reporting any gain if the cost of the repairs or the replacement residence is at least as much as the compensation received for the damage (including any FEMA IHP repair assistance or replacement assistance payment and/or insurance proceeds), and if certain other conditions are met. For more information, see Publication 547, Casualties, Disasters, and Thefts; Publication 4492, Tax Information Related to Hurricane Katrina; and Form 4684, Casualties and Thefts, and Instructions.

If the principal residence is destroyed, the destruction may be treated as a sale for purposes of the tax provisions governing the exclusion of gain from the sale of a principal residence, and gain may be excluded up to $250,000 ($500,000 for certain situations involving joint returns), if certain conditions are met. Additionally, because the destruction is considered an involuntary conversion of the residence, any gain in excess of the $250,000/$500,000 limitation may also be deferred by buying similar or related replacement property, if certain conditions are met. For more information, see Publication 547 and 4492 , and Form 4684 and Instructions.

The recipient of a FEMA IHP repair assistance payment or replacement assistance payment (and any other compensation for the damaged or destroyed residence) must reduce his or her “cost” basis in any replacement residence by the amount of any deferred gain from the damaged or destroyed residence

References/Related Topics

FAQs for Hurricane Victims
Rate the Small Business and Self-Employed Web Site

Tax Help - Moonlighting with Two Businesses

What do you do when your an independent consultant for two companies and also have an Ebay business on the side.

Should you have a separate business account for each business? Or can you have one account; and make sure to keep good records?”

When it comes to your tax return, you will need two separate Schedule Cs – one for each business.

You can set up your bookkeeping to accomplish this fairly easily. Either set up separate company files in your accounting system. Or, if you use QuickBooks, you can get the same result by setting up a CLASS for each of the businesses.

When you code the entries properly, you can get a full report by each CLASS for your tax return.
But do you need separate bank accounts?

Not in the early stages of the Ebay business. Once you see that your sales are about to be high enough to support you – set it up as a full-blown business, with bank account, appropriate licenses – and all.

OR if you already have a solid long-term plan in place to generate volume sales, set the business up properly right from the start.

Additional Resource Material:

Schedule C - The IRS Way

Tax Help - Low Income Taxpayer Clinics Now Open

It has been announced that the 2009 Low Income Taxpayer Clinic (LITC) grant application process is now open.

The LITC grant program is a federal program administered by the Taxpayer Advocate Service.

The Taxpayer Advocate Service is an independent organization within the IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels or who believe that an IRS system or procedure is not working as it should.

Under the LITC grant program, the IRS awards matching grants of up to $100,000 per year to develop, expand or maintain low income taxpayer clinics. The program is in its tenth year and continues to expand. To date in 2008, the LITC Program Office has awarded LITC grants to 154 organizations in 50 states, the District of Columbia, Puerto Rico and Guam.

LITCs are independent organizations that provide low income taxpayers with representation in federal tax controversies with the IRS for free or for a nominal charge. The clinics also provide taxpayer education and outreach for taxpayers who speak English as a second language. Publication 4134, Low Income Taxpayer Clinic List, provides information on clinics. It is available at http://www.irs.gov/ or local IRS offices.

Examples of qualifying organizations include:

Clinical programs at accredited law, business or accounting schools, whose students represent low income taxpayers in tax disputes with the IRS, and

Organizations exempt from tax under Code Section 501(a) that represent low income taxpayers in tax disputes with the IRS or refer those taxpayers to qualified representatives.

The application period for this grant will run from May 27, 2008, through July 7, 2008. The grant will cover the 2009 grant cycle, from Jan. 1, 2009, through Dec. 31, 2009. Applications must be postmarked or filed electronically by July 7, 2008.

Copies of the 2009 Grant Application Package and Guidelines, IRS Publication 3319 (Rev. 5-2008), are available at www.irs.gov/advocate. Applicants may also order application packages from the IRS Distribution Center by calling 1-800-829-3676. Applicants can also file electronically at http://www.grants.gov/. Those applying electronically should use the Funding Number TREAS-GRANTS-052009-001.

Questions about the LITC Program or grant application process can be addressed to the LITC Program Office at (202) 622-4711, not a toll-free call, or by e-mail at LITCProgramOffice@irs.gov.

Think About These Facts

Think about these facts:

• * The IRS has three years to give you a refund.


• * Three years to audit your tax return.


• * And ten years to collect any tax due.

Collectively, these laws are called the statute of limitations. They put time limits on various tax-related actions that you and the IRS can take.


Taxpayer's responsibility:


* You have 3 years to claim a tax refund (measured from the original deadline of the tax return, plus three years.)


Here's an example, your 2004 tax return was due on April 15th, 2005. 2005 plus 3 is 2008. You have until April 15th, 2008, to file your 2004 tax return and still get a tax refund. File your 2004 return after April 15th, 2008, and your refund "expires." It goes away forever. This is called the statute of limitations for claiming a refund.


Please file your 2004 tax returns on or before April 15th, 2008, so that your refunds are not lost forever.


IRS rights:


* The IRS has 3 years to audit your tax return or to assess any additional tax liabilities (measured from the day you actually filed your tax return).


If you filed your taxes before the deadline, the time is measured from the April 15th deadline.


For example, you filed your 2006 tax return on February 15th, 2007. The 3-year time period for an audit begins ticking from April 16th, 2007, (the filing deadline) and will stop ticking on April 16th, 2010. On April 17th, 2010, the IRS cannot audit your 2006 tax return unless there is a suspicion of tax fraud.


* IRS has 10 years to collect outstanding tax liabilities (measured from the day a tax liability has been finalized).


A tax liability can be finalized in a number of ways. It could be a balance due on a tax return, an assessment from an audit, or a proposed assessment that has become final. From that day, the IRS has ten years to collect the full amount, plus any penalties and interest. If the IRS doesn't collect the full amount in the 10-year period, then the remaining balance on the account disappears forever. The statute of limitations on collecting the tax has expired.


Example of the Statute of Limitations


Mr. Rogers wants to file 6 years of tax returns: 2001 through 2006. All years he has refunds. If he files by April 15th, 2007, Mr. Smith will receive refunds for his 2003, 2004, 2005, and 2006 tax returns. His refunds for 2001 and 2002, however, have expired.


Change the example slightly. Mr. Rogers wants to file 6 years of tax returns: 2001 through 2006. In 2001 and 2002, he could have received a refund. In 2003, 2004, and 2005, he owes. Mr. Rogers cannot apply his 2001 or 2002 refunds as an estimated tax payment towards his 2003 taxes. His refunds have expired. For the 2003 to 2006 tax returns, the IRS has ten years to collect the full tax, plus penalties and interest, from the date Mr. Rogers actually files the returns. If Mr. Rogers has a refund for 2006, that refund will be used to pay off his tax debts.


Plan of Attack:


It's really quiet simple and less stressful......file your tax returns. Why?


Remember......"It's always better to be proactive rather than reactive!"
* you can claim refunds

* it starts the clock ticking on the 3-year statute for audits and the 10-year collections statue.


Tax Law References





Internal Revenue Code, Section 6501 (3-year audit statute),
Section 6502 (10-year debt collection statute), and
Section 6511 (3-year refund statute). For more information on how the IRS manages these statute of limitations, see Internal Revenue Manual, 25.6.1, Statute of Limitations.





Back Taxes Resources
Back Taxes Essentials

IRS Assessments

IRS Penalties


Tax Debt Resources
Installment Agreements

Offer in Compromise

Partial Payment Agreements


Internal Revenue Code References
IRC 6501 (3 Years to Audit)

IRC 6502 (10 Years to Collect Debt)

IRC 6511 (3 Years to Claim Refund)

Tax Help - Do You Have Foreign Wages To Report?

US citizens living and working abroad have tax breaks available to them to ease the burden of filing in two countries.

The following are the breaks available for those residing and working outside of the U.S.:

In the US they may be able to exempt some or all of their foreign wages from US income taxes, up to $87,600 for 2008. This tax break is called the foreign earned income exclusion, and it applies only to foreign wages or self-employment income.

Another benefit available is the foreign tax credit. This is a credit against US income taxes for taxes paid to foreign governments. The credit applies to any type of foreign income, such as wages, interest or dividends. The foreign tax credit is a handy tax break for investors too, who might have paid foreign taxes on stocks or mutual funds with foreign holdings.

In addition to these two basic tax breaks for taxpayers with foreign income, the US also has tax treaties with various countries around to world. These treaties specify how certain types of income are going to be taxed.

People working, living, or doing business abroad have one final consideration, and that's reporting any bank accounts they have outside the United States. This is an annual report submitted to the Treasury Department. The Treasury uses these reports as part of its ongoing efforts to combat money laundering. US citizens must file this report if their total balance in all foreign bank accounts is $10,000 or greater at any time during the year.

Social Security & Retirement Income

If taxpayers receive a lump-sum distribution from a qualified retirement plan or a qualified retirement annuity and the plan participant was born before January 2, 1936, they may be able to elect optional methods of figuring the tax on the distribution. These optional methods can be elected only once after 1986 for any eligible plan participant.

A lump-sum distribution or payment, within a single tax year, of a plan participant's entire balance from all of the employer's qualified pension, profit-sharing, or stock bonus plans. All the participant's accounts under the employer's qualified pension, profit-sharing, or stock bonus plans must be distrubuted in order to be a lump-sum distribution.

If the lump-sum distribution qualifies, taxpayers can elect to treat the portion of the payment attributable to their active participation in the plan before 1974 as long-term capital gain taxed at a 20% rate. They can also elect to figure the tax on the rest of the distribution using the 10-year tax option.

It is important to enter all retirement income regardless of source on a tax return. Many times social security benefits may not be taxable for an individual, but not always. No one pays federal income tax on more than 85% of his or her social security benefits based on IRS rules.

If taxpayers:

File a federal tax return as an "individual" and their combined income is:

Between $25,000 and $34,000, they may have to pay income tax on 50% of their benefits

More than $34,000 up to 85% of their benefits may be taxable.

File a joint return, and they and their spouse have a combined income that is:


Between $32,000 and $44,000, they may have to pay income tax on 50% of their benefits

More than $44,000, up to 85% of their benefits may be taxable

Are married and file a separate tax return, they probably will pay taxes on their benefits.

Social security benefits are presented on Form 1099-SSA. Taxpayers of retirement age should always that this form with them when preparing tax returns. The information on this form should be entered on a return whether it is taxable or not.

Receiving Long-Term Disability?

Is it considered taxable? Several of my client's have found themselves in this situation and I wanted to clear the air on exactly what the IRS says about the taxability of these payments. Let's see what the IRS says:

"Generally, you must report as income any amount you receive for your disability through an accident or health insurance plan paid for by your employer.

If both you and your employer have paid the premiums for the plan, only the amount you receive for your disability that is due to your employers payments is reported as income. If you pay the entire cost of a health or accident insurance plan, do not include any amounts you receive for your disability as income on your tax return. If you pay the premiums of a health or accident insurance plan through a cafeteria plan, and the amount of the premium was not included as taxable income to you; the premiums are considered paid by your employer, and the disability benefits are fully taxable.

Refer to Publication 525, Taxable and Nontaxable Income, for more details. If the amounts are taxable, you can submit a Form W-4S (PDF), Request for Federal Income Tax Withholding, to the insurance company, or make estimated tax payments by filing Form 1040-ES (PDF), Estimated Tax for Individuals.

Amounts you receive from your employer while you are sick or injured are part of your salary or wages. Report the amount you receive on the line for Wages, salaries, tips, etc., on Form 1040 (PDF); Form 1040A (PDF); Form 1040EZ (PDF). You must include in your income sick pay from any of the following:

A welfare fund.

A state sickness or disability fund.

An association of employers or employees.

An insurance company, if your employer paid for the plan.

Payments you receive from qualified long-term care insurance contracts will generally be excluded from income as reimbursement of medical expenses received for personal injury or sickness under an accident and health insurance contract. Also, certain payments received under a life insurance contract on the life of a terminally or chronically ill individual (accelerated death benefits) can be excluded from income. Refer to Publication 907, Tax Highlights for Persons with Disabilities.

You may be able to deduct your out of pocket expenses for medical care above any reimbursements, if you are eligible to itemize your deductions. You will need to review Publication 502, Medical and Dental Expenses.

For more information, refer to Publication 907, Tax Highlights for Persons with Disabilities

New IRA Rules

Beginning in 2007, the Pension Protection Act of 2006 allows for a nonspouse beneficiary of a retirement plan to rollover plan funds into an Individual Retirement Account (IRA).

If a participant in a retirement plan dies leaving his or her accrued benefit under the plan to a nonspouse beneficiary, the nonspouse beneficiary may be able to rollover the inherited funds into an IRA set up to receive such funds.

The rollover must be a trustee-to-trustee direct transfer and the retirment plan must provide for this type of rollover. The distribution rules depend on whether the participant died before or after his or her required beginning date.

How Do You Use Your Car?

To take a business deduction for the use of a car, the taxpayer must determine whether the use was business or personal. If the answer is personal, no deduction is allowed on your tax return. Personal use includes commuting - driving from your home to your regular place of work.

A deduction may be allowed if a taxpayer has multiple jobs or businesses. Driving from home to "business one" is commuting, but driving from "business one" directly to "business two" is deductible. Also, taxpayers are usually allowed to deduct transportation costs for going from their home to a temporary workplace regardless of the distance.

Deductible car expense can include the cost of:

• Traveling from one workplace to another.


• Making business trips to visit customers or attend business meetings away from your regular workplace.


• Going to temporary workplaces.

To claim the deduction, taxpayers must keep adequate records such as a written travel log with complete and accurate mileage records for each business use of their car. If they are unable to produce a clear and accurate business mileage record, the IRS may disallow the deduction.

And finally, remember that if you are reimbursed for your mileage from the employer, you cannot claim the mileage deduction.

Tax Debt Help - Five Strategies for Getting Out of Debt

There's five and only five strategies for getting out of debt.

Installment agreement: a monthly payment plan for paying off the IRS.

Partial payment installment agreement: a fairly new debt management program where you have a long term payment plan to pay off the IRS at a reduced dollar amount.

Offer in Compromise: a program where you can settle your tax debts for less than what you owe. Requires making a lump sum or short term payment plan to pay off the IRS at a reduced dollar amount.

Not currently collectible: a program where the IRS voluntarily agrees not to collect on the tax debt for a year or so.

Filing bankruptcy: discharge your tax debts under the strict rules of a Chapter 7 or 13 bankruptcy petition. There's no "secret sauce" in paying off tax debts. These are the only five ways of getting out from under the IRS' aggressive debt collection tactics. If a tax pro promises you that you can save "pennies on the dollar" through an offer in compromise, that person is probably more interested in selling you something you don't need instead of focusing on your unique financial situation and determining what the best course of action is for you.


What You Need to Know About Tax Debts

Statute of Limitations on Collections

IRS Assessments

Substitute Tax Returns

IRS Penalties and Interest

Tax Help - Don't Throw That Social Security Statement Away!

I was looking over my annual Social Security statement this weekend, the one that lists yearly earnings that are credited for Social Security eligibility.

This form is more important than you realize, especially to those who are self-employed.

Most folks don't need to worry about their social security being reported, since wages from employment are reported each year using Form W-2. Employers send the W-2s directly to the Social Security Administration, and employees get credit for their Social Security wages. Self-employed people, however, need to report their income on a Form 1040 using Schedule C; and self-employed farmers report their income on a Schedule F. Now this is where the time limits come into play. To get credit for their self-employment earnings, they will need to file their tax returns within three years, three months, and fifteen days after the end of the year in which they earned their income.

In some cases, taxpayers will file their returns after this time period. So even though the tax is calculated in a return, and self-employment tax, and taxes are paid in full, no credit will be given for the tax returns that were filed after this time limit elapsed.

So if you need to file your back taxes, you will need to keep two separate time limits in mind.

There's the time limit for getting credit for Social Security purposes, a separate 3 year time period for claiming refunds from the IRS.

The difference is that the Social Security time limit expires on March 15th three years after the end of the calendar year, whereas the tax refund time limit expires on April 15th three years after the end of the calendar year.

This 3-year, 3-month, 15-day limit also applies to correcting your Social Security earnings. So one tip that applies to everyone is to check your annual Social Security statement and inform the agency of any earnings that seem to be missing before the time period has elapsed.

Tax Help - Form 1099-B on Consolidated Statements

Taxpayers who do a significant amount of investing in the stock and bond markets might have an account with a brokerage company for the purpose of executing transactions and managing his or her investment portfolio.

In addition to providing clients with the required tax reporting statements each year (Form 1099-DIV, 1099-INT, 1099-OID, 1099-B, etc.) brokers usually provide each client with a detailed consolidated report of all aspects of his or her account.

The year-end statements provided by financial brokers are a valuable source of information for tax professionals to accurately prepare your yearly returns.

Companies design their reports differently, but in general, most provide the client with the following additional information:

• A listing of dividends and other corporate distributions by security, and the dates distributions were made;


• A listing of taxable and nontaxable interest income by security, and the dates the income was paid;


• A statement of accrued interest on debt instruments sold or purchased during the year;


• A detailed record of trading activity for the year, identifying sales, redemptions, principal payments, and other transactions;


• A detailed record of purchases during the year;


• A detailed list of cost basis of assets sold during the year.

Review these types of documents carefully. It is very easy to overlook a single item when you are going through a consolidated form that is several pages long.

Highlight all items that require entry on your tax return and check off items as you enter them.

Missing an item may cause the IRS to review the entire return.

Tax Debt Help - Take Notice of the Notice!

Do you need to see what an IRS notice says, but don't have it in front of you? If you know the notice number, you can look up its purpose, basic message, possible enclosures, and other useful details. And if you have the tear-off stub from the last page, you can use the information printed on it to see some of the variable content included in that notice.

How To Identify Your NoticeThe notice number prints on the top of the first page of all our notices and on the lower left-hand side of the tear-off stub included with most of them. That number identifies the message we deliver in every notice. While the contents may vary somewhat, every notice with the same number has the same basic purpose.

CP Number Notice Title

CP 12 Math Error - Overpayment of $1 or more
CP 14 Balance Due, No Math Error
CP 49 Overpaid Tax Applied to Other Taxes You Owe
CP 90 Final Notice - Notice of Intent to Levy and Notice of Your Right to a Hearing
CP 91 - CP 298 Final Notice Before Levy on Social Security Benefits
CP 161 No Math Error, Balance Due
CP 501 Reminder Notice - Balance Due
CP 504 Urgent Notice - Balance Due
CP 523 Notice of Default on Installment Agreement
CP 2000 Notice of Proposed Adjustment for Underpayment/Overpayment

If My Notice Isn't Listed:

You'll find useful information here about many of the notices we send, including the purpose of the notice, the reason we send it, and a list of enclosures we might include with it. There's also sample content for each. Since parts of our notices vary depending on account conditions, the samples may not exactly match the notices we mail. The basic message, though, will be the same.
Individual Filer Notices

Notices we send about Form 1040, 1040A, or 1040EZ, or any schedules, forms, or attachments included with it are Individual Filer Notice.

Business Filer Notices

Notices we send about business-related tax forms such as Forms 941, 1065, and 1120, are Business Filer Notices.

What To Do When You Disagree

If your notice is listed above, follow the link for advice on handling disagreements with the notice. In general though, you need to contact IRS at the contact number provided on the notice to explain why you disagree. If that doesn't result in your satisfaction, the Taxpayer Advocate may be able to assist.

Tax Debt Help - Time Is of The Essence!

The IRS has three years to give you a refund, three years to audit your tax return, and ten years to collect any tax due. Together, these laws are called the statute of limitations. They put time limits on various tax-related actions that you and the IRS can take.

You have 3 years to claim a tax refund.This is measured from the original deadline of the tax return, plus three years. For example, your 2004 tax return was due on April 15th, 2005. 2005 plus 3 is 2008. You have until April 15th, 2008, to file your 2004 tax return and still get a tax refund. File your 2004 return after April 15th, 2008, and your refund "expires." It goes away forever. This is called the statute of limitations for claiming a refund.

The tax code says that you have three years from the original filing deadline to claim a refund.
zSB(3,3)

Please file your 2004 tax returns on or before April 15th, 2008, so that your refunds are not lost forever.

The IRS has 3 years to audit your tax return or to assess any additional tax liabilities.This is measured from the day you actually filed your tax return. If you filed your taxes before the deadline, the time is measured from the April 15th deadline. For example, you filed your 2006 tax return on February 15th, 2007. The 3-year time period for an audit begins ticking from April 16th, 2007, (the filing deadline) and will stop ticking on April 16th, 2010. On April 17th, 2010, the IRS cannot audit your 2006 tax return unless there is a suspicion of tax fraud.

The IRS has 10 years to collect outstanding tax liabilities.

This is measured from the day a tax liability has been finalized. A tax liability can be finalized in a number of ways. It could be a balance due on a tax return, an assessment from an audit, or a proposed assessment that has become final. From that day, the IRS has ten years to collect the full amount, plus any penalties and interest. If the IRS doesn't collect the full amount in the 10-year period, then the remaining balance on the account disappears forever. The statute of limitations on collecting the tax has expired.

Example of the Statute of Limitations

Let's provide an example based on a real-life scenario. Mr. Smith wants to file 6 years of tax returns: 2001 through 2006. All years he has refunds. If he files by April 15th, 2007, Mr. Smith will receive refunds for his 2003, 2004, 2005, and 2006 tax returns. His refunds for 2001 and 2002, however, have expired.

Let's change the example slightly. Mr. Smith wants to file 6 years of tax returns: 2001 through 2006. In 2001 and 2002, he could have received a refund. In 2003, 2004, and 2005, he owes. Mr. Smith cannot apply his 2001 or 2002 refunds as an estimated tax payment towards his 2003 taxes. His refunds have expired. For the 2003 to 2006 tax returns, the IRS has ten years to collect the full tax, plus penalties and interest, from the date Mr. Smith actually files the returns. If Mr. Smith has a refund for 2006, that refund will be used to pay off his tax debts.
Action Plan ItemIt is in your best interest to file your tax returns at your earliest possible convenience. First, you can claim refunds. Second, it starts the clock ticking on the 3-year statute for audits and the 10-year statue for collections.

Tax Law References

Internal Revenue Code, Section 6501 (3-year audit statute),
Section 6502 (10-year debt collection statute), and
Section 6511 (3-year refund statute). For more information on how the IRS manages these statute of limitations, see Internal Revenue Manual, 25.6.1, Statute of Limitations.

Back Taxes Resources

Back Taxes EssentialsIRS AssessmentsIRS Penalties

Tax Debt Resources

Installment Agreements

Offer in Compromise

Partial Payment Agreements

Tax Help - How Private Is Your Tax Situation?

I certainly think privacy is very important. And tax information in particular ought to remain completely confidential. If for no other reason than it's one less piece of information that marketers and identity thieves can get a hold of. But some state governments in the US have been releasing sensitive tax information in an attempt to shame high profile individuals into paying their taxes.

Making the news rounds is a story of how the Italian government released tax return information not just for people who are past due in paying, but "posted the returns for all 40 million Italians who paid taxes in 2005," according to this report from the New York Times.

Here in the United States, tax return information is confidential under federal law. There are stiff penalties for tax professionals or IRS agents who disclose tax information without your explicit authorization. Some states, however, post the names and addresses of people or businesses who are in arrears in paying their taxes. And even federal tax debts can become a matter of public record if the IRS files a tax lien against you.

So what can you do to ensure that your tax privacy is protected? It helps to begin by identifying who has access to your tax and financial records. Make sure your accountant and family members understand this information is confidential and ought not to be disclosed. Accountants are required to maintain the confidentiality of your records, and so you might want to review any privacy policies they have.

Second, make sure your tax records and any electronic files are password-protected, or stored to a secure media. For example, you might want to place PDF documents and tax software files into a ZIP file that's protected by a strong password.

And, finally, if you are in a situation where you owe taxes, make sure you set up a payment arrangement as soon as you can. This will help prevent the government from releasing your contact information on their Web site and may prevent them from filing a lien against you.

Tax Help - Questions on the Stimulus Rebates

Does the Stimulus Package puzzle you and do you have questions that you just can't seem to get answers too, well here are some of the most frequently asked questions about the economic stimulus rebate which have been released by the Internal Revenue.

Some of the questions concern when the rebate will be received, how much a person qualifies for, and some direct deposit issues that have arisen.

It's surprising how many different direct deposit issues the IRS discusses in a separate FAQ dealing just with direct deposit issues. In fact this page helped answer a perplexing questions. She paid her tax using the electronic withdrawal feature available in tax software programs.

If the IRS has your bank account information, you naturally expect to receive the rebate by direct deposit to the same account. It turns out, however, that the IRS will be mailing checks to people who used this electronic payment feature. (No reason is given for why the IRS couldn't just use the bank information to issue a direct deposit, but I suspect there might be some sort of technical explanation involved.)

Similar issues have arisen around various loan products issued by retail tax franchises and software companies. Taxpayers who used direct deposit in conjunction with a refund anticipation loan or a refund anticipation check will receive their rebate by check as well.

If you have questions about your rebate, you can use the Where's My Stimulus Payment? application on the IRS Web site, or call the IRS at 1-800-829-1040.

Additional resources:

Overview of the economic stimulus rebate plan
Tax Rebate Schedule
Economic Stimulus Payments Information Center

Tax Help - Tracking Your Refund and Stimulus Rebate

If you are wondering what has happened to your tax refund or to the stimulus rebate, you can check their status on the IRS Web site. The IRS has two Web services to track these funds:

Where's My Tax Refund? and
Where's My Stimulus Payment?

You'll need some information from your 2007 tax return so the IRS can verify your identify. So have a copy of your 1040 handy when using these Web services.

Additional resources:

Economic Stimulus Payments Information Center

Payments in Progress

Tax Help - Do You Have a Profit Motive?

Schedules C, E and F

Do you file either of these forms on your yearly return?

A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit.

The facts and circumstances of each case determine whether an activity is a trade or business.

The regularity of activities and transactions and the production of income are important elements. Taxpayers do not need to actually make a profit to be in a trade or business as long as they have a profit motive. Taxpayers do need, however, to make ongoing efforts to further the interests of their business.

The IRS is wary of taxpayers who have years of consecutive losses in their business. While there are businesses where long-term down turns occur, it is possible for the IRS to question their profit motive if they have losses year after year. It is important that you be able to substantiate your expenses and efforts to turn a profit in your business endeavors.

No Income Reported or Large Amounts of Deductions

Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit. To be deductible, a business expense must be both ordinary and necessary.

An ordinary expense is one that is common and accepted in a taxpayer's trade or business. A necessary expense is one that is helpful and appropriate for a taxpayer's trade or business. And expense does not have to be indispensable to be considered necessary.

Taxpayers with large deductions and expenses that tend to "zero out" their profits year after year may come under increased scrutiny from the IRS. While many businesses have large expenses in their first year of operations and in years of transition, few have expenses that equal their incomes year after year.

Make sure that you understand the differences between business expenses and personal expenses. If questioned by the IRS, you will need to be able to substantiate all of your expenses. Expenses that are not ordinary and necessary or that are personal will not be allowed.

Tax Help - Employee FICA Tip Credit

Under IRS regulations, employers in the food and beverage industry may be eligible for a credit for social security and Medicare taxes paid on their employees' tip income.

To qualify for the credit, an employer must meet both of the following requirements:

• The employer must have employees who receive tips from customers for providing, delivering, or serving food or beverages for consumption if tipping os such employees is customary.
• The employer must have paid or incurred employment taxes (i.e. employer social security and Medicare taxes) on those tips.

The credit is equal to social security and Medicare taxes paid on qualifying employee tips. However, the credit may not be claimed on the portion of tips used to meet the federal minimum wage rate.

Sound confusing or complicated, well let me give you some examples:

• In 2006, an employer pays $3.75 an hour to an employee and applies $1.40 per hour in tips to meet the federal minimum wage rate of $5.15. In that case, employment taxes paid on the $1.40 per hour in tips cannot be used toward the credit.
• In 2006, an employer payd $4.90 per hour to an employee and applies $2.00 per hour in tips. Because only $0.25 ($5.15-$4.90) of the tips are applied to meet the federal minimum wage standard, employment taxes paid on the remaining $1.75 of tips are eligible for the credit.

The business deduction for employer social security and Medicare taxes paid must be reduced by the amount of any credit claimed. The credit is a general business credit and is claimed on Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips.

Under the recently enacted Small Business and Work Opportunity Tax Act, the credit is determined based on the federal minimum wage in effect on January 1, 2007 (i.e. $5.15). So, although the federal hourly minimum wage increased to $5.85 later in 2007, the credit is not reduced. Instead, the credit is computed as if the rate were still $5.15 per hour.

• In 2007, an employer pays $3.75 per hour to an employee and applies $2.10 per hour in tips to meet the new federal minimum wage rate of $5.85. In this situation, the employment taxes paid on $0.70 per hour in tips will be eligible for the credit ($5.85-$5.15). Thus, the credit limitation has been frozen at the previous federal minimum wage rate of $5.15 per hour.

Another provision of the new law allows the credit to offset the alternative minimum tax. Before the change, the credit could not reduce federal income tax liability below tentative AMT.

Additional resources:

Frequently Asked Questions - Allocated Tips

Restaurant Tax Tips

Tip Income

Tax Help - Health Savings Accounts

The Tax Relief and Health Care Act of 2006 made significant changes to Health Savings Accounts (HSAs).

The maximum contribution a taxpayer may contribute to an HSA is no longer limited to the annual deductible. A taxpayer may contribute up to $2,850 (individual) or $5,650 (family).

For taxpayers over the age off 55, the catch-up contribution amount has been raised to $800 for 2007.

Taxpayers may also now make the maximum contribution even if their high deductible health plan (HDHP) coverage begins after January. There are some racapture provisions that apply if the taxpayer ceases to be enrolled in an HDHP or otherwise becomes ineligible to participate in an HSA.

The Tax Relief and Health Care Act of 2006 allows for a one-time funding of an HSA from an IRA made in a direct trustee-to-trustee transfer. Also, a one-time transfer to an HSA of unused flexible spending account or health reimbursement account funds is now allowed.

Additional reading:

Publication 969 (2007): Health Savings Accounts and Other Tax-Favored Health Plans

Tax Help - Husband & Wife Small Businesses

The Small Business and Work Opportunity Tax Act of 2007 changes the treatment of qualified joint ventures of married couples. They are no longer required to be treated as partnerships.

The provision generally permits a qualified joint venture whose only members are a husband and wife filing a joint return not to be treated as a partnership for Federal tax purposes.

A qualified joint venture is a joint venture involving the conduct of a trade or business, if all the following apply:

• The only members of the joint venture are a husband and wife.
• Both spouses materially participat in the trade or business.
• Both spouses elect to have the provision apply.

Under the provision, a qualified joint venture conducted by a husband and wife who file a joint return is not treated as a partnership for Federal tax purposes. All items of income, gain, loss, deduction and credit are divided between the spouses in accordance with their respective interests in the venture.

Each spouse takes into account his or her respective share of these items as a sole proprietor. Thus, it is anticipated that each spouse would account for his or her respective share on the appropriate form, such as Schedule C.

For purposes of determining net earnings from self-employment, each spouse's share of income or loss from a qualified joint venture is taken into account just as it is for Federal income tax purposes under the provision (i.e., in accordance with their respective interests in the venture).

This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based. However, this may not be true if either spouse exceeds the social security tax limitation.

Tax Help - Deductible PMI Premiums

What is PMI?

Private Mortage Insurance (PMI) is usually required when an individual buys a house with less than a 20% down payment.

PMI protects the lender against the costs of foreclosure. This insurance protection is provided by private mortage-insurance companies. Lenders ar able to accept lower down payments from the homebuyer by requiring PMI.

PMI provides what the equity of a higher down payment would pdrovided to cover a lender's losses in the event of foreclosure. Without PMI, a buyer might not be able to buy a home without a 20% down payment.

PMI Deduction for 2007

In 2007, PMI is deductible as an itemized deduction on Schedule A.

• PMI must meet the following requirements to be deductible:


• Premiums must be paid on new or refinanced mortgages issued after 2006;


• Premiums must be paid and incurred in 2007;


• Premiums must be paid on acquisition indebtedness.

Deductible PMI premiums will be phased out for AGI over $100,000 ($50,000 for MFS). Qualified PMI premiums will be deducted the same as mortgage interest.

If you paid PMI on your mortgage in 2007 and failed to take this deduction, you can always amended your return....that is your right!

Additional resources for understanding PMI:

Private MI: Today's Smart Choice

Publication 785

Frequently Asked Questions: PMI

Tax Help - Private vs. Public Schools: What's The Difference?

Remember back when we all went public school or the priviledged went to private boarding schools. The days when there were no knives, guns or drugs...well, I do. And incredibly, I miss those days.

In those days we got an education and it didn't cost a small fortune.

Today, parents find themselves wanting to keep their kids safe and out of the "drama" of public schools. Their goal is to find a school that will meet your child's needs. But how do you choose between a public school and a private school? And are you sure that you can afford the luxury of a private school.

Public schools cannot charge tuition. They are funded through federal, state and local taxes. When you pay your taxes, you are paying for your child's education and the education of other children in your community.

Private schools cost money. Private schools do not receive tax revenues, but instead are funded through tuition, fundraising, donations and private grants. According to the National Association of Independent Schools (NAIS), the median tuition for their member private day schools in 2005-2006 in the United States was close to $14,000 for grades 1 to 3, $15,000 for grades 6 to 8 and $16,600 for grades 9 to 12. The median tuition for their member boarding schools was close to $29,000 for grades 1 to 3, $32,000 for grades 6 to 12. Note that of the 28,384 private schools in the United States, about 1,058 are affiliated with NAIS. The Digest of Education Statistics 2005 from the National Center for Education Statistics (NCES) reports that for the 1999-2000 school year, the average private school tuition was about $4,700.

Parochial schools generally charge less. According to the National Catholic Educational Association, in their annual statistical report in 2005-2006, the average elementary school tuition for Catholic schools (in 2005) was $2,607; the average freshman tuition (for 2002-2003) was $5,870. Catholic Schools enroll more students (49%) than any other segment of private schools.

Public schools admit all children. By law, public schools must educate all children, including students with special needs. To enroll in a public school you simply register your child by filling out the necessary paperwork.

Private schools are selective. They are not obligated to accept every child, and in many private schools admission is very competitive.

With the increasing trend for parents to send their children to private schools, tax professionals are hearing the all important question, "Can I take off the cost of tuition for my child to attend private school under the education credit?".

Unfortunately the answer is no. The education credit is for "higher education" as in college, whether it be a community or four-year college. Tuition for private schools is considered a "priviledge".

Related reading sources:

Tax Benefits for Education

Understanding Education Credits

Higher Education Credits

Tax Help - All God's Creatures Need A Home

For the thousands of couples who have found that they cannot have children of their own, there is always the option of adoption.

The adoption is both time consuming and can be costly, but the IRS is willing help those who help the children.

The adoption credit generally is allowed for the year following the year in which the expenses are paid, a taxpayer who paid qualifying expenses in the current year for an adoption which became final in the current year, may be eligible to claim the credit on the current year return. The adoption credit is not available for any reimbursed expense.

In addition to the credit, certain amounts reimbursed by your employer for qualifying adoption expenses may be excludable from your gross income.

For both the credit or the exclusion, qualifying expenses include

• reasonable and necessary adoption fees,
• court costs,
• attorney fees,
• traveling expenses (including amounts spent for meals and lodging while away from home),
• and other expenses directly related to and for which the principal purpose is the legal adoption of an eligible child.

An eligible child must be under 18 years old, or be physically or mentally incapable of caring for himself or herself.

The adoption credit or exclusion cannot be taken for a child who is not a United States citizen or resident unless the adoption becomes final.

An eligible child is also a child with special needs if he or she is a United States citizen or resident and a state determines that the child cannot or should not be returned to his or her parent's home and probably will not be adopted unless assistance is provided.

Under certain circumstances, the amount of your qualified adoption expenses may be increased if you adopted an eligible child with special needs.

The credit and exclusion for qualifying adoption expenses are each subject to a dollar limit and an income limit.

Under the dollar limit the amount of your adoption credit or exclusion is limited to the dollar limit for that year for each effort to adopt an eligible child. If you can take both a credit and an exclusion, this dollar amount applies separately to each.

For example, if we assume the dollar limit for the year is $10,000 and you paid $9,000 in qualifying adoption expenses for a final adoption, while your employer paid $4,000 of additional qualifying adoption expenses, you may be able to claim a credit of up to $9,000 and also exclude up to $4,000.

The dollar limit for a particular year must be reduced by the amount of qualifying expenses taken into account in previous years for the same adoption effort.

The income limit on the adoption credit or exclusion is based on your modified adjusted gross income (modified AGI). If your modified AGI is below the beginning phase out amount for the year, the income limit will not affect your credit or exclusion. If your modified AGI is more than the beginning phase out amount for the year, your credit or exclusion will be reduced. If your modified AGI is above the maximum phase out amount for the year, your credit or exclusion will be eliminated.

Generally, if you are married, you must file a joint return to take the adoption credit or exclusion. If your filing status is married filing separately, you can take the credit or exclusion only if you meet special requirements.

To take the credit or exclusion, complete Form 8839 (PDF), Qualified Adoption Expenses, and attach the form to your Form 1040 (PDF) or Form 1040A (PDF).

Tax Help - My Home and Capital Gains

Now that the real estate market is in such turmoil, there are lots of folks who have found themselves either having to sell their homes or facing foreclosure. One of the most asked questions is in regard to capital gains tax on the sell of a primary residence.

One of my clients called me last week asking about her situation and here is a snipit of my reply.


“I owned a home for 5 years. I lived in it for the first 2.5 years, then rented it out for the last two and a half. This was also my first sale. I am told many things. Some say I will pay capital gains on the years I rented it (they consider that a business); Some say you don’t have to pay capital gains because you lived in it for 3 years as your primary residence.

And my response to her was to remember two things: 2.5 years out of 5; and $250,000. You must have lived in the home for 2.5 years of the last five (at any interval); and, you are allowed to make $250,000 (single, $500,000 married) before you have to pay capital gains tax.

Now, if you had made $275,000 on the sale, then you have to pay capital gains on the $25,000 difference ($275,000 less $250,000).

Since you’ve lived in the property for 3 years out of the last five, before the sale – the house is treated as your personal residence. There is no capital gain on the sale of the house – as long as the profits are under $250,000 (or $500,000 per couple).

However, since you rented it out, you could have taken deductions for depreciation. When you sell it, you have to pay tax on the depreciation – but only up to 25%, regardless of your tax bracket.

You can read more about it, and use the timeline worksheet in IRS Publication 701.

I strongly urge anyone to have a tax professional prepare this tax return, to make sure you get this one right. It will save you a fortune in the long run.

Related articles:

Frequently Asked Questions - Keyword: Primary Residence
Sale of Residence - Real Estate Tax Tips
Sale of Your Home
Rental Income and Expenses

Tax Help - Tired of Those High Gas Prices?

If you are like myself, every time you go to the gas pumps I see my grocery and utility money go into my gas tank. Both my daughter and myself have to drive 25 miles one way every day to work. Over the weekend we were discussing ways to try and cut back on gas consumption. One of the things that I mentioned to her was the option of purchasing a hybrid vehicle since most of them get 50 miles per gallon and provide a great tax credit at filing time.

Consider these facts and see if going "hybrid" would benefit you.

If you bought a hybrid vehicle in 2007, you may be entitled to a tax credit on your 2007 return.

The credit is worth as much as $3,000 for the most fuel-efficient models. The precise amount depends on the make and model of the vehicle and when the vehicle was purchased. The tax credit for hybrid vehicles, called the Alternative Motor Vehicle Credit, applies to vehicles purchased or placed in service on or after January 1, 2006. Hybrid vehicles have drive trains powered by both an internal combustion engine and a rechargeable battery.

Many currently available hybrid vehicles may qualify for the credit. Taxpayers may claim the credit on their 2007 tax returns only if they placed a qualified hybrid vehicle in service in 2007.

As of March 2007, more than 40 different models of hybrids were/are eligible for the credit.The credit is available only to the original purchaser of a new qualifying vehicle. If the qualifying vehicle is leased the credit is available only to the leasing company.

If 60,000 hybrid or advance lean burn technology vehicles of a particular manufacturer are sold, the tax credit is reduced and eventually eliminated. The full credit can be claimed up to the end of the third month after the quarter in which the manufacturer sells its 60,000th hybrid vehicle.

The credit for qualified Toyota and Lexus vehicles was eliminated for purchases on or after Oct. 1, 2007. The full credit for qualified Honda vehicles was available for all purchases in 2007, but has been reduced for purchases on or after Jan. 1, 2008.

To find out whether your car qualifies for the hybrid tax credit and the maximum amount of that credit, you can go to the IRS.gov website and search for “qualified hybrid vehicles.”

Hybrid Cars and Alternative Motor Vehicles
Summary of the Credit for Qualified Hybrid Vehicles
Form 8910, Alternative Motor Vehicle Credit

Qualifed Cars and Credit Amounts:
Model Year 2008
Model Year 2007
Model Year 2006
Model Year 2005

Tax Help - What's Your Limit? or Do You Even Have One?

Regardless of the type of IRA you choose, the Federal government imposes annual contribution limits. The chart below shows the maximum dollar amount individuals are allowed to deposit into their IRA each year. After 2008, the contribution limit will raise in increments of $500 depending upon the level of inflation.



Deposits into your IRA do not have to be made at the same time. (For example: In the year 2008, a 35 year old woman could deposit $416.67 into her IRA each month. At the end of the year, it would add up to the maximum $5,000.)

Due to the tax advantages of investing through an IRA, it is normally best to try and make the maximum annual contribution. The use-it-or-lose-it nature of contributions makes this all the more important (e.g., If you deposit $3,000 in 2008, you can't deposit $7,000 in 2009 [the $5,000 + the $2,000 you didn't deposit the year before].

You cannot contribute more than the total allowable amount during any fiscal year.)

IRA Contribution Limits

YEAR AGE 49 & BELOW AGE 50 & ABOVE
2002-2004 $3,000 $3,500
2005 $4,000 $4,500
2006-2007 $4,000 $5,000
2008 $5,000 $6,000

Additional Reading 101:



Maximum Contributions





Nondeductible Contributions





Eight Ways to Avoid IRA Early Withdrawal Penalties





Traditional IRA vs. Roth IRA

Tax Help - How Much Tax Do Large Corp CEOs Pay?

Time Running Out on CEO Compensation Excesses?

With the stock market in the can, the economy in sad shape, and people losing homes and jobs at an alarming rate, it is disturbing to read another report about CEO over-compensation.

The New York Times reported on the growing problem of what many call excessive compensation for CEOs of the top companies.

The argument has been that it is very competitive and companies must pay top dollar to hire and retain talented leaders.

However, as the Times pointed out, the CEOs of 10 financial services companies pocketed $320 million in compensation last year while their banks reported mortgage-related losses of $55 billion.

When will stockholders realize that the lap-dog board of directors and their CEO buddies are taking them for an expensive ride?

Tax Help - "On The Road Again, Just Can't Wait......"

Most long haul truckers are aware of the per diem deduction for meals and entertainment. But for those who are not and have not been taking full advantage of this deduction, take a look at the rates and do the math. This is a stellar way of reducing your tax liability.

First, you need to remember that any per diem amount can be highly scrutinized by the IRS. Therefore, keep those log book records.....this is the best proof of a per diem deduction. Also remember that you have to be a "long haul trucker" (on the road for over 12 hours per day).

Publication 1542 is your bible for this deduction and the Tables referred to below are located in this publication (it's too large to print here).

The Two Substantiation Methods

The tables in this publication reflect the high-low substantiation method and the regular federal per diem rate method.

High-low method. The first two tables in this publication list the localities that are treated under the high-low substantiation method as high-cost localities for all or part of the year.

Table 1 lists the localities that are eligible for $246 ($58 meals and incidental expenses (M&IE)) per diem, effective October 1, 2006. For travel on or after October 1, 2006, all other localities within CONUS are eligible for $148 ($45 M&IE) per diem under the high-low method.

Table 2 lists the localities that are eligible for $237 ($58 M&IE) per diem, effective October 1, 2007. For travel on or after October 1, 2007, the per diem for all other localities increases to $152 ($45 M&IE).

Regular federal per diem rate method.

Tables 3 and 4 give the regular federal per diem rates published by the General Services Administration (GSA). Both tables include the separate rate for meals and incidental expenses (M&IE) for each locality. The rates listed in Table 3 are effective October 1, 2006; those in Table 4 are effective October 1, 2007. The standard rate for all locations within CONUS not specifically listed in Table 3 is $99 ($60 for lodging and $39 for M&IE). For Table 4, this rate is $109 ($70 for lodging and $39 for M&IE).

Now let me give you an example of how great a deduction this can be.

250 days on the road driving coast to coast and hitting all the major cities (New York, Chicago, St. Louis, Dallas, Los Angeles) qualifies for the $58.00 per day rate:

250 day X $58.00 = $14,500 x 75% = $10,875 deduction amount
(receive 75% since you are covered under DOT regulations)

And the best part of it all is that you don't need to keep meal receipts.........those log books are your golden ticket!

If you haven't used this deduction in the past and are eligible, pull out those returns and starting amending. You might just be seeing Uncle Sam giving you more of those hard earned dollars back. Can't beat that with a stick................

More facts and figures for your deducting pleasure:

Publication 1542: Per Diem Rates
Standard Meal Allowances
Trucking Industry Overview: History of Trucking
Trucking Industry: Government Regulatory Requirements

Tax Help - What is the Difference Between a Limited Liability Company and a Corporation?

There are two common types of businesses:

"Pass-through" Businesses

Pass-through businesses are those in which the profits and losses of the business pass through to the owners. In other words, the business income is considered as the owner's income, and the owner pays the tax on his or her personal tax return.

Separate Business Entities

Corporations are separate businesses entities. The profts and losses of the corporation are taxable to the corporation, not the owners {shareholders). Corporations are set up as separate business entities.

How are LLCs and Corporations Formed?

Limited Liability Company (LLC)Set-upAn LLC is formed when one or more business people wants to go into business together.

The owners, called "Members," file Articles of Organization and set out an Operating Agreement. An LLC is a pass-through type of business, because the profits and losses are passed on to the Members depending on their share of membership.

Corporation Set Up

A Corporation is a separate legal entity. It is formed by filing corporate organization forms in the state where the corporation is located, and by designating shareholders, each with a specific number of shares. The corporation also creates a Board of Directors to oversee the corporate business.

How are Corporations and Limited Liability Companies Alike?

Both corporations and LLCs limit the liability of the owners/shareholders from the debts of the business and against lawsuits against the business.

How are Corporations and Limited Liability Companies Different?

Corporations and LLCs are different in how they are taxed. Because corporations are separate entities, they are taxed at the corporate rate, while LLCs are taxed based on Adjusted Gross Income of the owners. Here is an example:

A corporation has a profit of $350,000 for 2007. That profit is taxed at the corporate tax rate of 35 percent.

An LLC has the same amount of profit of $350,000. Its two Members each have a 50 percent share in the LLC, so each one is taxed on $175,000 of income on his or her personal tax return. The income from the LLC is included in the 1040 on line 12, and is considered along with other income for that person or couple for that year.

Further research reading:

Tax Information for Corporations

Tax Guide for Small Business

Partnerships

S Corporations