Automotive Manufacturer's Incentive Program to Vehicle Salesmen

Did you know that incentive payments paid by an automotive manufacturer whether directly to individual salespersons or through a dealer are taxable income?

The good news is that these payments, reported on Form 1099-MISC, Miscellaneous Income, are not treated as wages. Therefore these incentive payments from the manufacturer ar not subject to Federal income tax withholding, social security, Medicare, or Federal unemployment tax. Also, these payments are not considered to be self-employment income and therefore are not subject to self-employment tax.

If you are the recipient of a manufacturers' incentive payment, you need to report the income on a Form 1040, U. S. Individual Income Tax Return, Page 1, under Income (line titled "Other Income"), when you file your income tax return. The expenses that you incur to get the incentive payment may be deductible on Schedule A, Itemized Deductions (Form 1040), under Job Expenses and Most Other Miscellaneous Deductions (line titled "Other Expenses") and are subject to the 2% adjusted gross income limitation.

Please note: this income may not be reported on Schedule C (Form 1040), Profit and Loss from Business, because recipients of these payments are not engaged in an individual trade or business and are therefore not self-employed. Similarly, no expenses may be taken on Schedule C to offset incentive payment income.

If your tax return is prepared by someone other than yourself, make sure that the preparer is aware of the filing guidelines described previously for incentive payments.

For information on taxable income to include bonuses and awards, see Publication 525, Taxable and Nontaxable Income.

Hobby or for Profit?

The IRS has developed Fact Sheet 2008-23 that helps explain when an activity is a hobby or a for profit business. Section 183 limits deductions that can be claimed when an activity is not engaged in for profit. Taxpayers may need a clearer understanding of what constitutes an activity engaged in for profit and the tax implications of incorrectly treating hobby activities as activities engaged in for profit. This educational fact sheet provides information for determining if an activity qualifies as an activity engaged in for profit and what limitations apply if the activity was not engaged in for profit.

New PIN Requirement for 2009 Filing Season

Beginning with the 2009 filing season, all 1040-series taxpayers who file their returns electronically (including those using Free File) must sign their returns using an electronic personal identification number (PIN). A taxpayer's electronic signature will include a five-digit PIN that they create and either their prior year adjusted gross income (AGI) or prior year PIN.

The Form 8453-OL, U.S. Individual Income Tax Declaration for an IRS Online e-file Return, historically used as a signature document, will be obsolete.

Additionally, the Form 8453, U.S. Individual Income Tax Transmittal for an IRS e-file Return, will be used to submit required attachments for both self and practitioner-prepared electronic returns.

The IRS e-mail box has been established to receive your comments and questions related to this initiative.

Additional Military Families to Get Stimulus Payments This Fall

Married members of the military may receive economic stimulus payments this fall, even if their spouses or children don’t have social security numbers, following the newly-enacted HEART Act (Heroes Earnings Assistance and Relief Tax Act of 2008). Prior to this new legislation, some members of the military did not receive stimulus payments, or received a reduced amount, due to the absence of an SSN for a spouse or child.

In November, the Treasury will send checks and direct deposits to military families who qualify for these stimulus payments. The IRS estimates that there are more than 10,000 military families who will receive the additional stimulus payments. A specific time frame for the payments will be announced later this year.

"The IRS wants to make it as easy as possible for military families to get the stimulus payments authorized by the new law. People who already have filed don’t need to do anything else to get their money. We’ll do the rest,” said IRS Commissioner Doug Shulman. “We will work as quickly as possible to put these new provisions in place while making sure the rest of the stimulus payment program continues smoothly through the summer and fall."

To get a stimulus payment, eligible taxpayers must file a 2007 tax return. For married couples who have already filed a joint return, no further action is necessary. Generally, married couples qualify for an economic stimulus payment of up to $1,200, plus an additional $300 for each qualifying child younger than 17.

Because of the special challenges involved in making these newly-authorized payments, the IRS is taking the additional step of working with the Department of Defense to ensure that eligible filers get their money.

Originally, the Economic Stimulus Act of 2008, enacted in February, barred economic-stimulus payments to anyone filing a return who did not have a social security number. Returns using any number issued by the IRS, such as an individual taxpayer identification number (ITIN) were not eligible. For joint filers, this meant that both spouses must use valid social security numbers.
Those barred by the original law from receiving a stimulus payment included military members filing jointly with spouses who were ineligible to get an SSN. In addition, because they were not eligible for stimulus payments, they could not receive an additional $300 payment for each eligible child.

Married couples filing joint returns who are now eligible for stimulus payments under the new law will receive a notice from the IRS telling them the amount of their payment and the date it will be issued. Payments will be made by check or direct deposit. Those who chose direct deposit for their regular tax refund will typically get their stimulus payment by direct deposit. However, anyone who chose a refund-anticipation loan, had tax-preparation fees deducted from their refund or entered into other refund-related transactions, will get a check, instead.

The payments are based on 2007 income tax returns, including basic returns filed by eligible low-income people, solely to claim a stimulus payment. Those who have not yet filed, including members of the military who received nontaxable combat pay, should do so as soon as possible.

Related Items:

Economic Stimulus Payments Information Center
Economic Stimulus Payments: Especially for Military Combat Personnel
Tax Information for Members of the U.S. Armed Forces

Exercising Stock Options

Many employees rush to cash in their stock options as soon as they can. According to CNN's Money 101, that's not always so smart. Here's an overview of their reasoning:

There are three basic ways to exercise options: pay cash, swap company stock you already own, or engage in a "cashless exercise."

Cash exercise

This is the most straightforward route. You give your employer the necessary money and get stock certificates in return. What if, when it comes time to exercise, you don't have enough cash on hand to buy the option shares and pay any resulting tax?

Stock swaps

Some employers let you trade company stock you already own to acquire option stock. Say your company stock sells for $50 a share, and you have an ISO to buy 5,000 additional shares for $25 each.

Instead of paying $125,000 in cash to exercise the option, you could exchange 2,500 shares (with a total market value of $125,000) you already own for the 5,000 new shares. This strategy has the additional benefit of limiting your concentration in company stock (see below). Note: You must have held the swapped ISO shares for the required one- and two-year holding periods to avoid having the exchange treated as a sale and thus incurring tax.

Cashless exercises

This is a case in which you borrow from a stockbroker the money needed to exercise your option and, simultaneously, sell at least enough shares to cover your costs, including taxes and broker's commissions. Any balance is paid to you in cash or stock.

When to exercise

Although conventional wisdom holds that you should sit on your options until they are about to expire to allow the stock to appreciate and therefore maximize your gain, many employees can't stand to wait that long. One pre-bear-market study found that the typical employee cashed out of options within six months of becoming eligible to do so, thereby sacrificing an estimated $1 in future value for every $2 realized.

There are many legitimate reasons to exercise early. Among them:

1. You have lost faith in your employer's prospects and therefore in its stock.
2. You are overdosing on company shares. (It is generally imprudent to keep more than 10 percent of your portfolio in employer stock.)
3. You want to avoid getting pushed into a higher tax bracket. Waiting to exercise all your options at once could do just that. Exercising a portion at a time can alleviate the problem.

During the tech stock bubble, for example, at least a few conservative employees took profits in their high-flying companies' shares. Turning paper gains in options into real cash - despite exercising "early" according to conventional wisdom - seems to have been extraordinarily prudent in retrospect.

A quick way to estimate the value of your options is to calculate how much you would pocket after exercising them and immediately selling the shares. (Remember also that income tax will be due on that gain.)

You may be tempted to lock in a low-cost basis for your nonqualified options. Since the spread at exercise is taxed as ordinary income, it might make sense to exercise early so you can take most of your earnings in stock appreciation, taxed at lower, capital gains rates. This assumes, however, that you expect the price of the stock to continue rising in the future.

It's vital to remember that when you hold onto shares that have been converted from exercised options, it is the same as making an investment in the stock. Any time you hold stock - regardless of the method by which you acquire that equity - it carries the same potential risk. If you're not comfortable with the possibility of a decline, don't hold onto the shares.

Employee Stock Options and Ten Things You Should Know

1. Employee stock options are no longer reserved for the executive suite.

From cash-poor startups to old-line manufacturing and service firms competing for top talent, more and more companies are offering stock options to the rank and file as well.

2. Stock options are still popular, even after the dot-com crash.

According to the National Center for Employee Ownership as many as 9 million employees participate in some 4,000 plans. A decade ago, only 1 million U.S. employees had them.

3. Stock options can be expensive to exercise.

The lesson of the dot-com crash: Improperly exercising stock options can cause real financial headaches, particularly when it comes to paying taxes on your profits. Even if you keep the stock you purchased, you'll still have to pay taxes. But if you're careful not to overreach, options can be a lucrative benefit.

4. You'll see these common terms:

An employee stock option gives you the right to buy ("exercise") a certain number of shares of your employer's stock at a stated price (the "award," "strike," or "exercise" price) over a certain period of time (the "exercise" period).

5. There are two common types of plans:

Employee stock options come in two basic flavors: nonqualified stock options and qualified, or "incentive," stock options (ISOs). ISOs qualify for special tax treatment. For example, gains may be taxed at capital gains rates instead of higher, ordinary income rates. Incentive options go primarily to upper management, and employees usually get the nonqualified variety.

6. Nonqualified plans are special.

Unlike ISOs, nonqualified stock options can be granted at a discount to the stock's market value. They also are transferable to children and charity, provided your employer permits it.

7. There are three main ways to exercise options:

You can pay cash, swap employer stock you already own or borrow money from a stockbroker while simultaneously selling enough shares to cover your costs.

8. It's usually smart to hold options as long as you can.

Conventional wisdom holds that you should sit on your options until they are about to expire to allow the stock to appreciate and, therefore, maximize your gain. In the aftermath of the tech stock swoon, that logic may need some revision. In any event, you should not exercise options unless you have something better to do with the realized gain.

9. There may be compelling reasons to exercise early.

Among them: You have lost faith in your employer's prospects; you are overweighted on company stock and want to diversify for safety; you want to lock in a low-cost basis for nonqualified options; you want to avoid catapulting into a higher tax bracket by waiting.

10. Tax consequences can be tricky.

Unlike the case with nonqualified options, an ISO spread at exercise is considered a preference item for purposes of calculating the dreaded alternative minimum tax (AMT), increasing taxable income for AMT purposes.

What is FICA Tax?

If you're a wage or salaried employee, your employer picks up half of this tax burden.

That limit rises to $97,500 for the 2007 tax year from $94,200 for the 2006 tax year.

There are no earned income limits on Medicare taxes - so even if your salary is well above the cap for Social Security tax, you will still owe Medicare tax on your total earned income.

If you're a wage or salaried employee, you pay only half the FICA bill (6.2 percent for Social Security plus 1.45 percent for Medicare), and the tax is automatically withheld.

Your employer contributes the other half.

For most people that means 7.65 percent of their paycheck is withheld and their company pays another 7.65 percent on their behalf.

If you're self-employed, however, you're expected to cough up both the employee and the employer share of FICA. You are, however, permitted to deduct half of this self-employment tax as a business expense.

If you're self-employed, anticipate having a lot of investment income, are selling property in a given tax year, or don't have enough taxes withheld from your paycheck to cover an influx of non-wage related income (e.g., alimony or rental income), there's a good chance you will need to pay estimated taxes.

They're due four times a year (April 15, June 15, Sept. 15 and Jan. 15) and are filed using IRS Form 1040-ES.

If you're a retiree, you might also consider paying estimated taxes if you make unexpected lump-sum withdrawals from your nest egg during the year or if your IRA custodian does not withhold tax on your regular withdrawals.

On April 15, you have to file an annual return (Form 1040) for the previous year, and make your first estimated payment for the current year.

Figuring estimated payments can be tricky, so keep IRS Publication 505, "Tax Withholding and Estimated Tax," handy, and consult with a tax professional.

If, after taking all your deductions, exemptions, and credits, you don't think you will owe any more than $1,000 on April 15 on top of what you've already paid in taxes for the year, then you're not required to pay estimated taxes.

As such, if you're expecting a substantial income boost from the sale of stock or property, you may be able to avoid the complication of estimated taxes by increasing the withholdings on your W-4.

That should allow you to offset the remaining tax you'll owe at the end of the year. Likewise, if you're a shareholder in an S Corporation from which you receive a salary and distributions, then you can boost your withholding to counterbalance any taxes you'll owe on the distributions.

Even if you swear and yell at how much you pay the federal government, at least try to minimize your aggravation by doing all you can to avoid paying penalty and interest charges.

Does The IRS Really Have a Sense of Humor?

When it comes to taxes, everyone has an opinion. These quotes reflect the opinions of their authors; their inclusion here is not an official IRS endorsement of the sentiments expressed.

"Taxes are what we pay for civilized society.'' — Oliver Wendell Holmes, Jr., U.S. Supreme Court Justice

"The power of taxing people and their property is essential to the very existence of government.'' — James Madison, U.S. President

"To tax and to please, no more than to love and to be wise, is not given to men." — Edmund Burke, 18th Century Irish political philosopher and British statesman

“I am proud to be paying taxes in the United States. The only thing is – I could be just as proud for half the money.” — Arthur Godfrey, entertainer

“People who complain about taxes can be divided into two classes: men and women.” — Unknown

"No government can exist without taxation. This money must necessarily be levied on the people; and the grand art consists of levying so as not to oppress.'' — Frederick the Great, 18th Century Prussian king

"Like mothers, taxes are often misunderstood, but seldom forgotten.'' — Lord Bramwell, 19th Century English jurist

"The best measure of a man's honesty isn't his income tax return. It's the zero adjust on his bathroom scale.'' — Arthur C. Clarke, author

"Next to being shot at and missed, nothing is really quite as satisfying as an income tax refund.” — F. J. Raymond, humorist

A tax loophole is "something that benefits the other guy. If it benefits you, it is tax reform.'' — Russell B. Long, U.S. Senator

"Few of us ever test our powers of deduction, except when filling out an income tax form.'' — Laurence J. Peter, author

“The hardest thing in the world to understand is the income tax.” — Albert Einstein, physicist

“Taxation with representation ain’t so hot either.” — Gerald Barzan, humorist

“Where there is an income tax, the just man will pay more and the unjust less on the same amount of income.” — Plato

“Income tax has made more liars out of the American people than golf.” — Will Rogers, humorist

Tax Relief in Disaster Situations

The Federal Emergency Management Agency has issued an emergency declaration for the state of Florida because of damage resulting from Tropical Storm Fay. The IRS is monitoring the situation unfolding in Florida and will provide tax-related guidance as it becomes available.

Recent Tax Relief

Relief for Victims of Hurricane Dolly in Texas, see News Release

Special Relief for qualified recovery assistance property placed in the Kansas disaster area, see Notice 2008-67

Special Help for Greensburg, Kan., Tornado Victims, see News Release

Relief for Missouri Storms and Floods, see New Release

Relief for Illinois Storms and Floods, see News Release

Relief for Nebraska Storms, Floods and Tornadoes, see News Release

Relief for West Virginia Storms, Tornados, Flooding, Landslides and Mudslides, see News Release
Relief for Wisconsin Storms, Tornadoes and Flooding see News Release

Relief for Indiana Storms, Flooding and Tornadoes see News Release

Don't See What You're Looking For? Around the Nation contains links to previously issued disaster relief.

IRS Issues Instructions for New Form 990

The Internal Revenue Service released the revised instructions that tax-exempt organizations will need to fill out the redesigned Form 990, which must be filed starting with tax year 2008 (filed in 2009).

Most charities and other tax-exempt organizations must file an annual informational return with the IRS to maintain their tax-exempt status. Information reported on Form 990 is made available to the public.

“These instructions are the final step in a tremendous effort to bring the Form 990 up to date and to reflect the diversity and complexity of the tax-exempt community,” said IRS Commissioner Doug Shulman. "The revised form will give the IRS and the public a much better view of how exempt organizations operate. The improved transparency provided by these changes will also benefit the tax-exempt community.”

Form 990 had previously not seen major revisions since 1979. The revised instructions and redesigned Form 990 can be found on this Web site.

The revised instructions feature several new tools that make it easier to answer questions line-by-line and that facilitate uniform reporting. Input from the tax-exempt community played a major role in how the new instructions were designed.

“We were gratified by the amount of help the IRS received from the tax-exempt community through public comments to redesign the Form 990 and revise its instructions,” said Steven T. Miller, Commissioner of the Tax Exempt and Government Entities Division. “This input helped us achieve our goal of improving compliance while minimizing burden. We will now begin working with the tax-exempt sector to help organizations complete the form and prepare for the 2009 filing season."

The IRS expects to release instructions to the 2008 Form 990-EZ, Short Form Return of Organization Exempt from Income Tax, in the next few weeks.

As part of the phase in of the redesigned Form 990 over a three-year transition period, many organizations not eligible to file the Form 990-EZ for 2007 will be eligible to file Form 990-EZ or Form 990 for 2008. A summary of the transition period filing requirements for Form 990, 990-EZ, and 990-N is available at [link].

Tax-Free Mortgage Workouts for Taxpayers

There is now tax relief for struggling homeowners. If your mortgage debt is partly or entirely forgiven during 2007, 2008 or 2009 you may be able to claim special tax relief by filling out Form 982 and attaching it to your federal income tax return for that year.

Normally, debt forgiveness results in taxable income. But under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude from tax up to $2 million of debt forgiven on your principal residence. The limit is $1 million for a married person filing a separate return.

Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. The debt must have been used to buy, build or substantially improve your principal residence and must have been secured by that residence.

Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other kinds of tax relief, based on insolvency, for example, may be available. See Form 982 for details.

If your debt is reduced or eliminated you will receive a year-end statement (Form 1099-C) from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property given up through foreclosure.

The IRS urges borrowers to check the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven (Box 2) and the value listed for your home (Box 7).For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit the IRS Web site at IRS.gov.

A good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. This publication and Form 982 can be downloaded from IRS.gov or by calling 800-TAX-FORM (800-829-3676).Remember that for the genuine IRS Web site be sure to use .gov.

Don't be confused by internet sites that end in .com, .net, .org or other designations instead of .gov.

The address of the official IRS governmental Web site is www.irs.gov.Links:

IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments (PDF)
Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (PDF)

Document Protection For Hurricane Season

A few simple steps can help you keep your financial and tax records safe this hurricane season and potentially save you a big headache when it comes to filing your tax return next year.

Paperless Recordkeeping

Many people now receive bank statements and documents by e-mail or over the Web. Paper records such as W-2s, tax returns and other documents can be scanned and saved electronically.

With documents in electronic form, taxpayers can copy them onto a USB drive as a backup, which can be sent to a relative in another city for safe-keeping in case the taxpayer’s computer and paper files are destroyed.

Other options include copying files onto a CD or DVD. Many retail stores also sell computer software packages that can be used for recordkeeping.

Documenting Valuables

Another way you can prepare for disaster is to photograph or videotape the contents of your home, especially items of greater value. The IRS has a disaster loss workbook, Publication 584, which can help you compile a room-by-room list of belongings.

This can help you prove the market value of items for insurance and casualty loss claims. Photos should be stored with a friend or family member who lives outside the area.

Check on Fiduciary Bonds

Employers who use payroll service providers should ask the provider if they have a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider.

Update Emergency Plans

Review your emergency plan annually. Personal and business situations change over time as do preparedness needs. Individual taxpayers should make sure they are saving documents such as W-2s, home closing statements and insurance records. When employers hire new employees or when a company or organization changes functions, plans should be updated accordingly and employees should be informed of the changes.

IRS Is Ready to Help

When disaster strikes, the IRS stands ready to help with valuable information that you can request if your tax records are destroyed.

Immediately after a casualty, you can request a copy of your return and all attachments (including Form W-2) by using Form 4506, Request for Copy of Tax Return.

An information return or transcript can be ordered by calling 1-800-829-1040 or using Form 4506-T, Request for Transcript of Tax Return. There is no fee for a transcript. Transcripts are available for the current year and returns processed in the three prior years.

This Web site, IRS.gov, is also an indispensable source of information. The following pages and publications contain information that can help you be prepared when disaster strikes:

For Recent Grants of Relief, see Tax Relief in Disaster Situations
Reconstructing Your Records

Publication 552, Recordingkeeping for Individuals
Publication 583, Starting a Business and Keeping Records

IRS Increases Mileage Rates for 2008

The Internal Revenue Service today announced an increase in the optional standard mileage rates for the final six months of 2008. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

The rate will increase to 58.5 cents a mile for all business miles driven from July 1, 2008, through Dec. 31, 2008. This is an increase of eight (8) cents from the 50.5 cent rate in effect for the first six months of 2008, as set forth in Rev. Proc. 2007-70.

In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2008. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.

"Rising gas prices are having a major impact on individual Americans. Given the increase in prices, the IRS is adjusting the standard mileage rates to better reflect the real cost of operating an automobile," said IRS Commissioner Doug Shulman. "We want the reimbursement rate to be fair to taxpayers."

While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.

The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.

The new six-month rate for computing deductible medical or moving expenses will also increase by eight (8) cents to 27 cents a mile, up from 19 cents for the first six months of 2008. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.

The new rates are contained in Announcement 2008-63 on the optional standard mileage rates.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

Mileage Rate Changes:

Rates 1/1 through 6/30/08 Rates 7/1 through 12/31/08
Business $0.505
Medical/Moving $0.19
Charitable $0.14

Rates 7/1 through 12/31/08

Business $0.58.5

Medical/Moving $0.27

Charitable $0.14

Rental Income - Some Basic Tips

You generally must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of property.

Expenses of renting property can be deducted from your gross rental income. You generally deduct your rental expenses in the year you pay them. Publication 527, Residential Rental Property includes information on the expenses you can deduct if you rent a condominium or cooperative apartment, if you rent part of your property, or if you change your property to rental use.

Report rental income on your return for the year you actually or constructively receive it, if you are a cash basis taxpayer. You are a cash basis taxpayer if you report income in the year you receive it, regardless of when it was earned. You constructively receive income when it is made available to you, for example, by being credited to your bank account.

For more information about when you constructively receive income, see Publication 538,

Accounting Periods and Methods.

Advance rent is any amount you receive before the period that it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use.

Example:

You sign a 10-year lease to rent your property. In the first year, you receive $5,000 for the first year's rent and $5,000 as rent for the last year of the lease. You must include $10,000 in your income in the first year.

Security Deposits

Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in your income when you receive it.

Expenses Paid by Tenant

If your tenant pays any of your expenses, the payments are rental income. You must include them in your income. You can deduct the expenses if they are deductible rental expenses. See Rental Expenses in Publication 527, for more information.

Example One:
Your tenant pays the water and sewage bill for your rental property and deducts it from the normal rent payment. Under the terms of the lease, your tenant does not have to pay this bill.

Example Two:
While you are out of town, the furnace in your rental property stops working. Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. Based on the facts in each example, include in your rental income both the net amount of the rent payment and the amount the tenant paid for the utility bills and the repairs. You can deduct the cost of the utility bills and repairs as a rental expense.

Property or Services in Lieu of Rent

If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income.
If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary.

Example:
Your tenant is a painter. He offers to paint your rental property instead of paying 2 months' rent. You accept his offer. Include in your rental income the amount the tenant would have paid for 2 months' rent. You can include that same amount as a rental expense for painting your property.

Personal Use of Vacation Home or Dwelling Unit

If you have any personal use of a vacation home or other dwelling unit that you rent out, you must divide your expenses between rental use and personal use. See Figuring Days of Personal Use and How To Divide Expenses in Publication 527. If your expenses for rental use are more than your rental income, you may not be able to deduct all of the rental expenses. See How To Figure Rental Income and Deductions in Publication 527.

Additional Resources:

Publication 527, Residential Rental Property
Tax Tips - Real Estate

Student Loan Interest

What are the limits for deducting interest paid on a student loan?

The maximum deductible interest on a qualified student loan is $2,500 per return.

There is no deduction if you file as married filing separately, if you are claimed as a dependent, or if the loan is from a related party or a qualified employer plan. There are limits based on your filing status and adjusted gross income. For more information, refer to Publication 970, Tax Benefits for Education, and Tax Topic 513, Educational Expenses .

Here's a very important common question that should be considered before applying for student loans.

Last year, my parents took out a student loan for me in their name and I also took out a student loan. My parents received Form 1098-E for their loan and I also received Form 1098-E for my loan. Can we both claim the interest from the loans on our tax returns? Last year, I was not their dependent.

In order for a taxpayer to claim a deduction for student loan interest, the loan must be incurred for the taxpayer, the taxpayer's spouse, or a person who was the taxpayer's dependent when the taxpayer took out the loan. Since you were not your parents' dependent when they took out the student loan, the interest they paid on the loan does not qualify for deduction.

However, the student loan interest payments you made on the student loan you took out on your behalf are eligible for deduction, provided all the other requirements are met. For more information, refer to Publication 970, Tax Benefits for Education, Chapter 4; Tax Topic 505, Interest Expense; and Tax Topic 513, Educational Expenses.

Parents and Head of Household Status

If you moved out of your house on July 10, but was not divorced at the end of the year, you cannot file as head of household and take the earned income credit if I have a minor child. You will also not be eligible to claim the child care expenses.

And you ask why?

Well it's simple, you do not qualify for the head of household filing status because you and your spouse have not lived apart for the last 6 months of the taxable year and are not considered unmarried. Your filing status for the year will either be married filing separately, or married filing jointly.

If it is married filing separately, you will not qualify for the Earned Income Credit and cannot claim a credit based on child care expenses.

If you file a joint return with your spouse, you may be eligible to claim these credits. See Publication 503, Child and Dependent Care Expenses and Publication 596, Earned Income Credit.

Additional Resources:

Tax Topic 353, What is Your Filing Status?
Publication 501, Exemptions, Standard Deduction, and Filing Information
Publication 503, Child and Dependent Care Expenses
Publication 596, Earned Income Credit

Foreign & International Income - How to Report

Employees working for a foreign government or an international organization in the U.S. are subject to some special tax rules. The tax treatment of their compensation can vary according to whether the employee is a U.S. citizen, a dual citizen, a green cardholder (lawful permanent resident), or a foreign citizen without a green card.

U.S. citizens and green card holders pay U.S. taxes on their compensation while working in the U.S. They report their compensation as income from wages on line 7 of their Form 1040, U.S. Individual Income Tax Return.

U.S. citizens working in the U.S. must report self-employment income under the Self-Employment Contributions Act (SECA). SECA makes the contributions to the U.S. Social Security and Medicare systems for self-employed individuals. Self-employment tax is computed on Schedule SE, Self-Employment Tax, and reported on line 58 of the Form 1040. U.S. citizens working for foreign governments and organizations outside of the U.S. are not subject to self-employment tax. Green card holders and foreign citizens are not subject to self-employment taxes and may not voluntarily participate.

U.S. employees pay self-employment tax because the foreign government or organization is not liable for the employer’s portion of the contribution to the U.S. system. However, these employees are not “self-employed” for any other federal tax purposes. They may not claim deductions for expenses on Schedule C. They are not qualified to establish a Simplified Employee Pension (SEP) Plan and there is no allowable deduction on line 28 of Form 1040 for contributions to any such plan. Rules of contributing to SEP/IRA plans are explained in IRS Publication 560 and Revenue Ruling 73-384.

U.S. citizens and green card holders may claim deductions for unreimbursed employee business expenses arising from their employment on Form 2106, Employee Business Expenses. The deduction is claimed on line 20 of Schedule A, Itemized Deductions, on the Form 1040. These expenses are miscellaneous itemized deductions subject to the 2 percent of adjusted gross income limitation.

U.S. citizens and green card holders who expect to have tax due at the end of the year must file estimated tax payments because their compensation is not subject to withholding. The estimated payments ensure that employees have paid their proper amount of tax throughout the year. Estimated payments are made using Form 1040ES, Estimated Tax for Individuals. Forms are filed quarterly: April 15th, June 15th, September 15th, and January 15th.. There is a penalty for failure to make estimated tax payments.

Foreign citizens working in the U.S. for foreign governments and international organizations are generally exempt from U.S. income tax and self-employment tax on compensation. For example, exemptions can be found in section 893 of the Code, tax treaties, consular agreements, or international agreements. Individuals should check with their embassies and/or their tax preparers to find out if any exemptions apply.

Foreign citizens receiving U.S. source income (other than compensation) are generally subject to U.S. income tax. This income is reported on Form 1040-NR, U.S. Individual Income Tax Return Non-resident. Estimated payments may be required depending upon the amount received.

Additional Reading Materials:

Employee of Foreign Government or International Organization
Publication 560, Retirement Plans for Small Business
Topic 306, Penalty for Underpayment of Estimated Tax
Form 1040ES (PDF) and Instructions

The term “international organization” means a public international organization entitled to enjoy privileges, exemptions, and immunities as an international organization under the International Organizations Immunities Act (22 U.S.C. 288-288f).

Why You Might Need A Tax Accountant

One of my favorite tax bloggers is William Perez, writer for About.com. He has a very detailed and comprehensive blog with links to some great information. Being in the tax resolution business, I found the following information from one of his blogs that I wanted to share with you. There are also some links to his blog that could provide with additional information. Enjoy!

You should take some time to focus on exactly what you need your tax accountant to do. Here are some common situations:

Preparing your own taxes is time-consuming, stressful, or confusing.
You want to make sure your tax returns are accurate.
Your tax situation is pretty complex, and you need specialized advice and tips.
You would like to pay as little taxes as possible, and need detailed planning and advice.
You are facing a tax problem, such as filing back taxes, paying off a tax debt, or fighting an IRS audit.
You run a business, invest in the stock market, own rental property, or live outside the United States.

You should find an experienced tax accountant who specializes in the areas you need help with.

Here are my tips for finding the right professional who has the specialized tax expertise you need:

Referrals are your best bet. Ask everyone you can think of: family, friends, business owners, financial advisors and attorneys. It will help to ask someone who has a similar tax situation to yours.

Be wary of an accountant who promises you big refunds or that says you can deduct everything.

You, not the accountant, are ultimately responsible for the information on your tax return.

Do not be afraid to shop around or to change accountants if you are not comfortable.

Retail tax franchises such as H&R Block, Jackson Hewitt, and Liberty Tax Service offer competent tax service for individuals who need to file relatively straight-forward tax returns. Some tax preparers will be more experienced than others, and you can sometimes find CPAs and Enrolled Agents working in these offices. Prices are often determined by how many tax forms need to be filled out. Here's a tip: ask if you can meet with a CPA, enrolled agent, or senior tax preparer. You'll pay the same, but you'll get to speak with a seasoned professional.

Local, independent tax firms often specialize in the tax needs of individuals and small businesses in their neighborhood. Again, some independent tax accountants will be more experienced than others. Ask if the firm has the expertise to handle your taxes.

Enrolled Agents (EAs) are tax professionals who have passed a rigorous test and background check administered by the IRS. Enrolled agents often specialize and are best for complex tax situations.

Certified Public Accountants (CPAs) are accountants who have passed the rigorous CPA Exam and are licensed by the state they work in. CPAs will specialize in a specific area, such as audits, tax, or business consulting. CPAs are best at complex accounting work, and not all CPAs handle tax issues.

Tax attorneys are lawyers who have chosen to specialize in tax law. Often, tax attorneys will have a master of laws degree in taxation (LL.M.) in addition to the required juris doctor (J.D.) degree. Attorneys are best at complex legal matters, such as preparing estate tax returns or taking your case before the US Tax Court. For more information, see When Do You Need a Tax Attorney?

The tax industry is constantly changing and tax professionals are subject to various federal and state regulations.

Here are some questions you can ask to help ensure you find an experienced, trustworthy tax accountant:

What licenses or designations do you have?
How long have you been in the tax business?
What tax issues do you specialize in?
Do you have the knowledge and experience to handle my tax situation?
What are your fees?
Do you outsource any of your work? Do you perform the work personally? If not, what is the review process? Who signs the returns?
How long, approximately, will it take to finish my taxes?
What's your privacy policy? Will you share my tax information with any third-parties?
Do you believe I'm paying too much, too little, or just the right amount of tax? Tax accountants come from a wide variety of backgrounds, and have different attitudes about the US tax system.

Your goal is that you should find an experienced, competent tax account who specializes in the areas you need help with, and someone who believes in helping you to minimize your taxes.
After your interview, you'll want to perform a quick background check. Contact your state's board of accountacy to check the status of a CPA's license, or to find out if any disciplinary action taken against the CPA. For enrolled agents, you can ask the IRS Office of Professional Responsibility if an EA has been censured, disbarred or subjected to other disciplinary action.

Past Due Return Filers - How the IRS Looks At You

Why Should I File My Tax Return as Soon as Possible?

There are two advantages to filing as soon as possible:

Generally, if a taxpayer is due a refund for withholding or estimated taxes paid, it must be claimed within 3 years of the return due date or risk losing the right to it. The same rule applies to a right to claim a tax credit such as the Earned Income Credit (EIC).

Self-employed persons who do not file a return will not receive credits toward Social Security retirement or disability benefits. Failure to file results in not reporting any self-employment income to the Social Security Administration.

What If I Owe More Than I Can Pay?

Even if a taxpayer doesn't have enough money to pay, returns should be filed to avoid further penalties for failure to file. The IRS will assist in finding a solution to the problem.

The IRS has streamlined its policies to offer alternative account resolutions if a taxpayer cannot pay in full with the return:

The IRS will help to set up an installment agreement when the situation warrants. Installment payments allow taxpayers to pay the tax debt over time.

The IRS will consider whether an offer in compromise is an appropriate solution.

What If I Don't File Voluntarily?

The IRS is taking enforcement steps for those who repeatedly choose not to comply with the law. IRS employees will prepare returns when taxpayers do not file. The returns prepared by the IRS might not give credit for deductions and exemptions a taxpayer may be entitled to receive. Bills will be sent to those taxpayers for the tax due, plus penalties and interest.

People who repeatedly don't comply with the law are subject to additional enforcement measures.

How Can I Avoid Owing Money on Next Year's Return?

Many people don't file tax returns because they don't have enough money to pay the tax they owe. They find out after completing their return that their withholding or Estimated Tax payments do not equal their tax liability.

To help avoid this situation, the IRS can advise taxpayers how to ask an employer to withhold enough tax from their pay. For any income that is not subject to withholding, the IRS can provide information necessary to make quarterly payments to cover any amount to be owed. To make payments electronically, see Payment Options - Ways To Make a Payment or go to the EFTPS Web site.

Changes in financial circumstances could have an impact on taxes. For example, an increase in income, divorce, or selling an asset, may require adjustments to withholding or estimated payments.By taking these steps, taxpayers will be better able to meet their tax obligations and avoid tax day surprises.

Will I Go to Jail?

A long-standing practice of the IRS has been not to recommend criminal prosecution of individuals for failure to file tax returns, provided they voluntarily file, or make arrangements to file, before being notified they are under criminal investigation. The taxpayer must make an honest effort to file a correct return and have income from legal sources. A letter from the IRS concerning taxes is not a notice that a taxpayer is under criminal investigation.

The IRS helps to get people back into the system as part of its long-term plan to improve voluntary tax compliance. The IRS wants to get people back into the system, not prosecute ordinary people who made a mistake. However, flagrant cases involving criminal violations of tax laws will continue to be investigated.

Additional Reading Material:

Filing Late and/or Paying Late
Information Required to Prepare a Return
Examples Showing How Filing A Tax Return Can Benefit You
Getting Free Help
Items That Can Help Reduce the Amount of Tax You Owe
Payment Options
Forms for Filing Your Past Due Returns
Why an Installment Agreement Will Cost You More

Is an Offer in Compromise Right for You?

Should the IRS determine that a taxpayer is unable to pay the liability in a lump sum or through an installment agreement and has exhausted the search for other payment arrangements the last option would be to file an Offer in Compromise (OIC).

An OIC allows taxpayers to settle their tax liabilities for less than the full amount. Taxpayers should use the checklist in the Form 656, Offer in Compromise, package to determine if they are eligible for an offer in compromise. The objective of the OIC program is to accept a compromise when it is in the best interests of both the taxpayer and the government and promotes voluntary compliance with all future payment and filing requirements. See IRS Policy Statement P-5-100 for the complete OIC policy statement.

Major Changes to the OIC Program

The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), created major changes to the IRS OIC program as it relates to lump sum offers, periodic payment offers, and a determination as to when an offer is accepted. These changes affect all offers received by the IRS on or after July 16, 2006.

TIPRA, section 509, amends Internal Revenue Code section 7122 by adding a new subsection (c) “Rules for Submission of Offers in Compromise" which establishes the following:

A taxpayer filing a lump sum offer must pay 20 percent of the offer amount with the application (IRC 7122(c)(1)(A)). A lump sum offer means any offer of payments made in five or fewer installments.

A taxpayer filing a periodic payment offer must pay the first proposed installment payment with the application and pay additional installments while the IRS is evaluating the offer (IRC section 7122(c)(1)(B)). A periodic payment offer means any offer of payments made in six or more installments.

TIPRA Payments are Non-refundable

The IRS considers the 20 percent payment for a lump sum offer, and the installment payment on a periodic payment offer, as "payments on tax" and are not refundable regardless of whether the offer is declared not processable or is later returned, withdrawn, rejected or terminated by the IRS.

Taxpayers May Designate TIPRA Payments

Taxpayers may designate the application of the required TIPRA payments. The designation must be made in writing when the offer is submitted and must clearly specify how the partial payments are to be applied to a particular tax period(s) and to specific liabilities (e.g. income taxes, employment taxes, trust fund portions of employment, excise tax, etc.) Taxpayers may not designate how the $150 application fee is applied. The application fee reduces the assessed tax or other amounts due.

TIPRA and Application Fee Payment Exceptions

A taxpayer who qualifies for a low-income exception waiver or is filing a doubt as to liability offer is not required to pay the application fee, the 20 percent payment on a lump sum offer, or the initial payments required on a short term or deferred periodic payment offer. To determine low-income eligibility, refer to the section titled Application Fee Required for OIC.

Is Your Offer In Compromise "Processable"?

As a result of TIPRA, beginning July 17, 2006 in order to be considered for an OIC, a taxpayer must have met all of the following requirements:

The taxpayer is not a debtor in an open bankruptcy proceeding.
The $150 application fee, or a signed Form 656-A, "Income Certification for Offer in Compromise Application Fee and Payment" must be submitted.
The 20 percent payment with the lump sum offer, or a signed Form 656-A, "Income Certification for Offer in Compromise Application Fee and Payment" must be submitted.
The first installment payment on a periodic payment offer, or a signed Form 656-A, "Income Certification for Offer in Compromise Application Fee and Payment" must be submitted.

An offer that is received with a payment that is less than 20 percent payment on a lump sum offer will be deemed processable but the taxpayer will be asked to pay the remaining balance in order to avoid having the offer returned. Failure to submit the remaining balance will cause the IRS to return the offer and retain the $150 application fee.

Taxpayers filing a periodic payment offer (e.g. short term periodic, or deferred periodic offer) are required to submit the full amount of their first installment payment in order to meet the processability criteria. If the full amount of the first installment payment is not provided, the IRS will deem the offer not processable and will return the $150 application fee to the taxpayer.
If during the OIC investigation the initial offer amount is determined to be insufficient and not reflective of the taxpayer's ability to pay, the taxpayer will in most instances, be contacted and asked to increase the offer and submit the corresponding 20 percent payment if the offer was filed as a lump sum cash offer, or the periodic payment if the offer is a short term or deferred payment offer. The IRS may reject the offer if a taxpayer fails to increase the offer and provide the additional payment(s). The IRS will credit the taxpayer's account(s) with any payment(s) submitted with the original offer.

The IRS will deem an OIC "accepted" that is not withdrawn, returned, or rejected within 24 months after IRS receipt. If a liability included in the offer amounts is disputed in any judicial proceeding that time period is omitted from calculating the 24-month timeframe.
Application Fee Required for OIC - All taxpayers who submit a Form 656, "Offer in Compromise" must pay a $150 application fee except in two instances:

The OIC is submitted based solely on "doubt as to liability;" or>
The taxpayer's total monthly income falls at or below 250% of the Department of Health and Human Services (DHSS) poverty income levels.

The Form 656 Offer in Compromise (Revision 2/2007) package contains a worksheet titled “IRS OIC Monthly Low Income Guidelines Worksheet” designed to assist taxpayers in determining whether they qualify for the income exception. The worksheet also clarifies Item 2 to reflect Total Household Monthly Income, and now requires Self Employed individuals to adjust their total monthly income in Item 2. If income exception is met, a taxpayer is not required to pay the $150 application fee, the 20 percent payment on a lump sum offer, or the periodic payments required under TIPRA. Once eligibility for the income exception is determined, a taxpayer must complete Form 656-A (PDF) "Offer Certification for Offer in Compromise Application Fee and Payment." The worksheet, along with Form 656-A must be attached to the Form 656 application and mailed to the IRS for consideration.

The $150 application fee and the TIPRA payments must be paid using a check or money order made payable to the United States Treasury. Cash payments are not accepted. A taxpayer should submit two payments: one for the application fee and the other for the TIPRA payment.
Individuals Must File All Federal Tax Returns and Pay Required Estimated Tax Payments
The IRS expects a taxpayer requesting an OIC to file all delinquent tax returns and pay any required estimated tax payment. IRS will notify taxpayers and provide 30 days to file delinquent returns or make the required estimated tax payments. Failure to comply will cause the IRS to return the offer back to the taxpayer. The $150 application fee along with all TIPRA payments previously paid will be retained by the IRS and applied to the taxpayer’s liability.
Businesses Must File All Federal Tax Returns and Timely Pay all Required Federal Tax Deposits
The IRS is cautious to avoid providing financial advantages to operating businesses through the forgiveness of tax debt. This may create the appearance that the delinquent business has been able to profit from its failure to pay, giving it an advantage over other, fully compliant businesses.
Businesses that have employees are expected to have paid all required federal tax deposits for the current quarter in order for their offer to be evaluated. If the IRS determines that the required deposits have not been paid, the taxpayer will be provided with a reasonable amount of time to pay the deposits before the IRS proceeds with the investigation. In addition, the business will be expected to remain current on all filing and deposit requirements while the offer is being investigated.

Failure to either pay the deposits as requested, remain current with filing or pay all deposits that become due while the offer is under investigation will cause the IRS to return the offer back to the taxpayer. The $150 application fee along with all TIPRA payments previously paid will be retained by the IRS and applied to the taxpayer’s liability.

Statute of Limitations for Assessment and Collection is Suspended - The statute of limitations for assessment and collection of a tax debt is suspended while an OIC is "pending," or being reviewed.

The OIC is pending starting with the date an authorized IRS employee determines the Form 656 Offer in Compromise is ready for processing. The OIC remains pending until the IRS accepts, rejects, returns or acknowledges withdrawal of the offer in writing. If a taxpayer requests an Appeals hearing for a rejected OIC, the IRS will continue to treat the OIC as pending. Once the Appeals office issues a determination in writing to accept or reject the OIC then the pending status is removed.

Taxpayers Must File and Pay Taxes - In order to avoid defaulting an OIC once accepted by the IRS, taxpayers must remain in compliance in the filing and payment of all required taxes for a period of five years or until the offered amount is paid in full, whichever is longer. Failure to comply with these conditions will result in the default of the OIC and the reinstatement of the tax liability.

Federal Tax Liens are Not Released - If there is a Notice of Federal Tax Lien on record prior to filing Form 656, the lien is not released until the OIC terms are satisfied, or until the liability is paid, whichever comes first. A Notice of Federal Tax Lien may be filed during the course of an OIC investigation regardless of the type of offer being considered.

How Borrowing Money to Pay Your Taxes Could Cost You Less Than An Installment Agreement

If you owe $10,000 in taxes and you are considering entering into an installment agreement for 36 months, your payments could be as high as $339 per month including interest at the rate of 5 percent and failure to pay penalty of up to 1 percent each month. Keep in mind that these interest rates are subject to change quarterly. Since these rates change periodically and may increase, the taxpayer could end up paying even more. In this situation, you could save $2,247 by paying all of the taxes now rather than entering into an installment agreement. An installment agreement would cost a total of $12,204 in payments.

In addition, effective January 1, 2007, the new installment agreement user fee is $105 and $52 for agreements where payments are deducted directly from your bank account. Taxpayers with income at or below established levels, based on the Department of Health and Human Services poverty guidelines, can apply and be qualified to pay a reduced user fee of $43 for establishing new agreements, including agreements where payments are deducted directly from your bank account.

A Notice of Federal Tax Lien may also be filed against your property to secure the government’s interest against other creditors while the installment agreement is in effect. A more favorable solution to resolve the debt would be to obtain a loan from a bank or other financial institution, or pay taxes using a charge card. As demonstrated in the chart below, borrowing $10,000 over 36 months at various interest rates would result in less costly payment amounts as compared to an installment agreement:

InterestRate MonthlyPayment Months Total Paid to Lender Savings toTaxpayer
7% $308.77 36 $11,115.72 $1,131.28
9% $318.00 36 $11,448.00 $799.00
11% $327.39 36 $11,786.04 $460.96
13% $336.94 36 $12,129.84 $117.16

References/Related Topics
Filing Late and/or Paying Late
Why an Installment Agreement Will Cost You More

Why An Installment Agreement Can Cost You More

Are you aware that interest and penalties do not stop with an installment agreement/payment plan? You can save money by paying the full amount you owe, as quickly as possible; to minimize the interest and penalties you will be charged. Penalties and interest will continue to be charged on the unpaid portion of the debt throughout the duration of the installment agreement/payment plan.

Remember, the interest rate on a loan or credit card may be lower than the combination of penalties and interest imposed by the Internal Revenue Code. It is best that you pay as much as possible before entering into an agreement. See the example showing how borrowing money to pay your taxes could cost you less than an installment agreement.

A Notice of Federal Tax Lien would also be avoided, thereby maintaining your credit standing. Additionally, the installment agreement fee would not apply.

Paying your taxes in full, or partially paying your tax liabilities through liquidating or borrowing against real estate or personal property (bank accounts, stocks, bonds, 401(k) plans, or life insurance), would cost less than an installment agreement.

References/Related Topics

Filing Late and/or Paying Late
Frequently Asked Questions For Past Due Return Filers
How Full Payment of Taxes Saves You Money
Items That Can Help Reduce the Amount of Tax You Owe
Other Ways to Resolve Tax Debt
Payment Options
What Will Happen If You Don't File Your Past Due Return or Contact the IRS
When Do Penalties and Interest Apply

Not To Late for the Stimulus Rebate

Taxpayer who qualify for the economic stimulus rebate need to file a 2007 tax return to get their rebate this year. Some people who don't usually need to file a tax return, such as retirees, may want to file a return just to get their stimulus check.

Individuals receiving Social Security benefits or veteran's disability pensions will qualify for the rebate, even if they don't have any taxable income and aren't required to file a return. The IRS estimates that some 5.2 million people in this category have yet to file a return and claim their rebate. Social Security recipients and disabled veterans would qualify for a rebate check worth $300, or $600 if married and they file jointly. That means the IRS is holding about $1.5 billion in unclaimed stimulus payments.

The IRS has developed a simplified set of instructions for retirees and pensioners to request their rebate. You can download Package 1040A-3 (pdf), which contains instructions on which lines need to be filled out before mailing it off to the IRS.

If the rebate isn't claimed this year, you will still be able to claim the rebate on next year's tax return. A recent draft of next year's Form 1040 shows a new line item for the unclaimed stimulus payment.

More stimulus rebate links from the IRS:
Stimulus Payment Calculator
Stimulus Payment FAQs
Track Your Stimulus Payment

Fleet Trucking to File Excise Tax Forms Electronically

Individuals and organizations with 25 or more trucks, tractors or other heavy vehicles used on highways now are required to make their excise tax filings with the Internal Revenue Service electronically, rather than by paper.

Form 2290, Heavy Highway Vehicle Use Tax Return, is used to report and pay highway-use excise taxes. Last year truckers and others filed over 700,000 Forms 2290 and paid over $1 billion in federal highway use taxes. E-filing of Form 2290 began in August 2007.

Electronic filing streamlines the processing of the Form 2290, is more safe and reliable than paper filing and reduces preparation and processing errors. Although electronically-filing Form 2290 is not required for taxpayers reporting fewer than 25 vehicles, all taxpayers are encouraged to file their forms electronically. Most Forms 2290 are due by August 31.

Another advantage of e-filing Form 2290 is that taxpayers don’t have to wait for a stamped version of the Schedule 1, Schedule of Heavy Highway Vehicles, to be returned by mail because they will almost instantly receive the equivalent of a stamped version electronically. This means truckers won't have to wait to register their vehicles with the appropriate state authority when obtaining the proper license tags.

To file electronically, taxpayers need to select an approved transmitter/software provider for Form 2290. More Form 2290 information is available on the IRS Web site. In addition to Form 2290, Form 720, Quarterly Federal Excise Tax Return, and Form 8849, Claim for Refund of Excise Tax, may also be e-filed electronically.

Proposed Regulations Issued on S Corporation Debt Cancellation

The IRS has issued proposed regulations that provide guidance on the manner in which an S corporation reduces its tax attributes under Sec. 108(b) for tax years in which it has cancellation of debt (COD) income that is excluded from gross income under Sec. 108(a). In particular, they address situations in which the aggregate amount of the shareholders' disallowed losses and deductions that are treated as a net operating loss (NOL) tax attribute of the S corporation exceeds the amount of the S corporation's excluded COD income.

The full text of the proposed regulations is available on NATP’s website at http://www.natptax.com/treasury_decisions.html

Texas Hurricane Victims Qualify for Relief

Following Hurricane Dolly on July 22, the federal government declared Cameron, Hildalgo, and Willacy counties Presidential disaster areas qualifying for individualassistance.

As a result, the IRS is postponing certain deadlines until September 22 for taxpayers who reside or have a business in the disaster area. The postponement applies to return filing, tax payment, and other certain time-sensitive acts otherwise due between July 22, 2008 and September 22, 2008.

In addition, the IRS will waive the failure to deposit penalties for employment and excise deposits due on or after July 22 and on or before August 6, as long as the deposits were made by August 6. Additional details are available on the IRS website at
http://www.irs.gov/newsroom/article/0,,id=185442,00.html

IRS Issues Consumer Alert

The IRS warns taxpayers to be on the alert for e-mails and phone calls they may receive which claim to come from the IRS or other federal agency and which mention their tax refund or economic stimulus payment. These are almost certainly a scam whose purpose is to obtain personal and financial information — such as name, Social Security number, bank account and credit card or even PIN numbers — from taxpayers which can be used by the scammers to commit identity theft. The e-mails and calls usually state that the IRS needs the information to process a refund or stimulus payment or deposit it into the taxpayer's bank account. The e-mails often contain links or attachments to what appears to be the IRS Web site or an IRS "refund application form." However genuine in appearance, these phonies are designed to elicit the information the scammers are looking for.

The IRS does not send taxpayers e-mails about their tax accounts. Additionally, the way to get a tax refund or stimulus payment, or to arrange for a direct deposit, is to file a tax return.
For more information on consumer scams, see Suspicious e-Mails and Identity Theft.

IRS and the Industry Issue Resolution Program for Businesses

Businesses and associations have until Aug. 31 to submit tax issues to the Internal Revenue Service to be included in the Fall 2008 review in the Industry Issue Resolution (IIR) Program.
IIR is an IRS program to resolve business tax issues common to significant numbers of taxpayers through new and improved guidance. In past years, issues submitted by associations and others representing both small and large business taxpayers, resulted in tax guidance that has affected thousands of taxpayers.

Recent submissions accepted into the IIR program include:

Integrated Public Utilities - regarding an optional method to be used by integrated utility companies in computing their qualified production activities income under IRC section 199(c).

Auto Last In First Out - for automobile wholesalers, manufacturers and dealers regarding the proper treatment of the dollar-value, LIFO inventory method for pooling purposes of crossover vehicles, which have characteristics of trucks and cars.

Recent guidance issued as a result of the IIR program includes:

A safe harbor pooling method, the Vehicle-Pool Method, is available for resellers of cars and light-duty trucks under the last-in, first out (LIFO) inventory method effective for tax years ending on or after December 31, 2007, (Revenue Procedure 2008-23)

Valuation of Parts Inventory by Heavy Equipment Distributors (Revenue Procedure 2006-14)
Clarification regarding circumstances when facsimile signatures may be used to sign employment tax forms. (Revenue Procedure 2005-39)

Explanation of the circumstances under which insurance companies that make incentive payments to health care providers will be permitted to include those payments in unpaid losses.

The revenue procedure also provides procedures under which taxpayers may obtain automatic consent of the Commissioner to change their accounting method for those payments. (Revenue Procedure 2004-41)

For each issue selected, an IIR team of IRS and Treasury personnel gather relevant facts from taxpayers or other interested parties affected by the issue. The goal is to recommend guidance to resolve the issue. This benefits both taxpayers and the IRS by saving time and expense that would otherwise be expended on resolving the issue through examinations. IIR project selections are based on the criteria set forth in Revenue Procedure 2003-36.

Requests for guidance on tax issues under the IIR program can be submitted at any time to IIR@irs.gov. Submissions received are reviewed semi-annually with selections next being made from issues submitted by August 31, 2008.

Aliens and U. S. Citizens Living Abroad: U.S. Citizens Overseas

I am a U.S. citizen working abroad. Are my foreign earnings taxable?

A U.S. citizen or resident alien is generally subject to U.S. tax on total worldwide income. However, if you are a United States citizen or a resident alien who lives and works abroad, you may qualify to exclude all or part of your foreign earned income.

For specific information, refer to Tax Topic 853, Foreign Earned Income Exclusion - General.
If you would like more information on who qualifies for the exclusion, refer to Tax Topic 854, Foreign Earned Income Exclusion - Who Qualifies. For more information on what type of income qualifies for the exclusion, refer to Tax Topic 855, Foreign Earned Income Exclusion - What Qualifies. You may also wish to refer to chapter 4 Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, for a detailed discussion.

I am a U.S. citizen working for a U.S. firm in a foreign country. Is any part of my wages or expenses tax deductible?

U.S. citizens are taxed on their worldwide income. Some taxpayers may qualify for the foreign earned income exclusion, foreign housing exclusion, or foreign housing deduction, if their tax home is in a foreign country and they are either a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year, or are physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. If the taxpayer is temporarily away from his or her tax home in the United States on business (less than a year), he or she may be able to claim a foreign tax credit (if required to pay qualifying foreign tax on income earned in a foreign country), but would not qualify for the foreign earned income exclusion. The taxpayer may also qualify to deduct away from home expenses (for travel, meals, and lodging), but not against excluded income.

References:

Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad
Publication 514, Foreign Tax Credit for Individuals
Publication 463, Travel, Entertainment, Gift and Car Expenses
Form 2555 (PDF), Foreign Earned Income
Form 2555EZ (PDF), Foreign Earned Income Exclusion
Form 1116 (PDF), Foreign Tax Credit
Tax Topic 514, Employee Business Expenses

I am a U.S. citizen living and working overseas. Can I have a tax credit on my U.S. taxes for the taxes I pay to the foreign country?

The foreign tax credit is intended to relieve U.S. taxpayers of the double tax burden when their foreign source income is taxed by both the United States and the foreign country from which the income is derived.

Generally, only income taxes paid or accrued to a foreign country or a U.S. possession qualify for the foreign tax credit. You can choose to take the amount of any qualified foreign taxes paid or accrued during the year as a foreign tax credit or as an itemized deduction.

To choose the foreign tax credit you must generally complete Form 1116 (PDF), Foreign Tax Credit, and attach it to your Form 1040 (PDF). You may claim credit without attaching Form 1116 if all of your foreign source income is passive income (such as interest and dividends) reported to you on qualified payee statements and the total amount of qualifying foreign taxes you paid or accrued is not more than $300 ($600 in the case of a joint return) and is also reported to you on these qualified payee statements. To choose the deduction, you must itemize deductions on Form 1040, Schedule A (PDF).

You may not take either a credit or a deduction for taxes paid or accrued on income you exclude under the foreign earned income exclusion or the foreign housing exclusion. There is no double taxation in this situation because the income is not subject to U.S. tax.

References:

Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad
Publication 514, Foreign Tax Credit for Individuals
Form 1116 (PDF), Foreign Tax Credit
Tax Topic 856, Foreign Tax Credit