Six Year-End Tips to Reduce 2011 Taxes

Six Year-End Tips to Reduce 2011 Taxes

With the New Year fast approaching, there is still time for you to take steps that can lower your 2011 taxes. However, you usually need to take action no later than Dec. 31 in order to claim certain tax benefits.

Here are six tax-saving tips for you to consider before the calendar turns to 2012:

1. Make Charitable Contributions – If you itemize deductions, your donations must be made to qualified charities no later than Dec. 31 to be deductible for 2011. You must have a canceled check, a bank statement, credit card statement or a written statement from the charity, showing the name of the charity and the date and amount of the contribution for all cash donations. Donations charged to a credit card by Dec. 31 are deductible for 2011, even if the bill isn't paid until 2012. If you donate clothing or household items, they must be in good used condition or better to be deductible.

2. Install Energy-Efficient Home Improvements – You still have time this year to make energy-saving and green-energy home improvements and qualify for either of two home energy credits. Installing energy efficient improvements such as insulation, new windows and water heaters to your main home can provide up to $500 in tax savings. Homeowners going green should also check out the Residential Energy Efficient Property Credit, designed to spur investment in alternative energy equipment. The credit equals 30 percent of the cost of qualifying solar, wind, geothermal, or heat pump property. For details see Special Edition Tax Tip 2011-08, Home Energy Credits Still Available for 2011 on the IRS.gov website.

3. Consider a Portfolio Adjustment – Check your investments for gains and losses and consider sales by Dec. 31. You may normally deduct capital losses up to the amount of capital gains, plus $3,000 from other income. If your net capital losses are more than $3,000, the excess can be carried forward and deducted in future years.

4. Contribute the Maximum to Retirement Accounts – Elective deferrals you make to employer-sponsored 401(k) plans or similar workplace retirement programs for 2011 must be made by Dec. 31. However, you have until April 17, 2012, to set up a new IRA or add money to an existing IRA and still have it count for 2011. You normally can contribute up to $5,000 to a traditional or Roth IRA, and up to $6,000 if age 50 or over. The Saver’s Credit, also known as the Retirement Savings Contribution Credit, is also available to low- and moderate-income workers who voluntarily contribute to an IRA or workplace retirement plan. The maximum Saver’s Credit is $1,000, and $2,000 for married couples, but the amount allowed could be reduced or eliminated for some taxpayers in part because of the impact of other deductions and credits.

5. Make a Qualified Charitable Distribution – If you are age 70½ or over, the qualified charitable distribution (QCD) allows you to make a distribution paid directly from your individual retirement account to a qualified charity, and exclude the amount from gross income. The maximum annual exclusion for QCDs is $100,000. The excluded amount can be used to satisfy any required minimum distributions that the individual must otherwise receive from their IRAs in 2011. This benefit is available even if you do not itemize deductions.

6. Don't Overlook the Small Business Health Care Tax Credit – If you are a small employer who pays at least half of your employee health insurance premiums, you may qualify for a tax credit of up to 35 percent of the premiums paid. An employer with fewer than 25 full-time employees who pays an average wage of less than $50,000 a year may qualify. For more information see the Small Business Health Care Tax Credit page on IRS.gov.

And here is one final tip to remember: you should always save receipts and records related to your taxes. Good recordkeeping is a must because you need records to prepare your tax return, and it will help you to file quickly and accurately next year.

Special Edition Tax Tip 2011-09

Three Tips for Employers Outsourcing Their Payroll

Outsourcing payroll duties to third-party service providers can streamline business operations, but employers are ultimately responsible for paying federal tax liabilities.

Recent prosecutions of individuals and companies who - acting under the guise of a payroll service provider - have stolen funds intended for payment of employment taxes makes it important that employers who outsource payroll are aware of the following three tips:

1. Employer Responsibility The employer is ultimately responsible for the deposit and payment of federal tax liabilities. Even though you forward the tax payments to the third party to make the tax deposits, you - the employer - are the responsible party.

If the third party fails to make the federal tax payments, the IRS may assess penalties and interest. The employer is liable for all taxes, penalties and interest due. The IRS can also hold you personally liable for certain unpaid federal taxes.

2. Correspondence If there are any issues with an account, the IRS will send correspondence to the address of record. The IRS strongly suggests you do not change the address of record to that of the payroll service provider. That could limit your ability to stay informed of tax matters involving your business.

3. EFTPS Choose a payroll service provider that uses the Electronic Federal Tax Payment System. You can register on the EFTPS system to get your own PIN to verify the payments.

IRS Tax Tip 2011-05



Eight Tips for Taxpayers Who Receive an IRS Notice

Every year the Internal Revenue Service sends millions of letters and notices to taxpayers, but that doesn’t mean you need to worry. Here are eight things everyone should know about IRS notices – just in case one shows up in your mailbox.

1. Don’t panic. Many of these letters can be dealt with simply and painlessly.
2. There are number of reasons the IRS sends notices to taxpayers. The notice may request payment of taxes, notify you of a change to your account or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.
3. Each letter and notice offers specific instructions on what you need to do to satisfy the inquiry.
4. If you receive a correction notice, you should review the correspondence and compare it with the information on your return.
5. If you agree with the correction to your account, usually no reply is necessary unless a payment is due.
6. If you do not agree with the correction the IRS made, it is important that you respond as requested. Write to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the lower left part of the notice. Allow at least 30 days for a response.
7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right corner of the notice. Have a copy of your tax return and the correspondence available when you call.
8. It’s important that you keep copies of any correspondence with your records.

IRS Summertime Tax Tip 2011-22

Seven Tax Tips for Recently Married Taxpayers

With the summer wedding season in full swing, the soon-to-be married and the just married should review their changing tax status. If you recently got married or are planning a wedding, the last thing on your mind is taxes. However, there are some important steps you need to take to avoid stress at tax time. Here are seven tips for newlyweds.

1. Notify the Social Security Administration Report any name change to the Social Security Administration so your name and Social Security number will match when you file your next tax return. File a Form SS-5, Application for a Social Security Card, at your local SSA office. The form is available on SSA’s website at http://www.ssa.gov/, by calling 800-772-1213 or at local offices.
2. Notify the IRS if you move If you have a new address you should notify the IRS by sending Form 8822, Change of Address. You may download Form 8822 from www.IRS.gov or order it by calling 800–TAX–FORM (800–829–3676).
3. Notify the U.S. Postal Service You should also notify the U.S. Postal Service when you move so it can forward any IRS correspondence or refunds.
4. Notify your employer Report any name and address changes to your employer(s) to make sure you receive your Form W-2, Wage and Tax Statement, after the end of the year.
5. Check your withholding If both you and your spouse work, your combined income may place you in a higher tax bracket. You can use the IRS Withholding Calculator available on www.irs.gov to assist you in determining the correct amount of withholding needed for your new filing status. The IRS Withholding Calculator will give you the information you need to complete a new Form W-4, Employee's Withholding Allowance Certificate. You can fill it out and print it online and then give the form to your employer(s) so they withhold the correct amount from your pay.
6. Select the right tax form Choosing the right individual income tax form can help save money. Newly married taxpayers may find that they now have enough deductions to itemize on their tax returns. Itemized deductions must be claimed on a Form 1040, not a 1040A or 1040EZ.
7. Choose the best filing status A person’s marital status on Dec. 31 determines whether the person is considered married for that year. Generally, the tax law allows married couples to choose to file their federal income tax return either jointly or separately in any given year. Figuring the tax both ways can determine which filing status will result in the lowest tax, but usually filing jointly is more beneficial.

IRS Summertime Tax Tip 2011-20

Back-to-School Tips for Students and Parents Paying College Expenses

Whether you’re a recent graduate going to college for the first time or a returning student, it will soon be time to get to campus – and payment deadlines for tuition and other fees are not far behind.

Typically, these benefits apply to you, your spouse or a dependent for whom you claim an exemption on your tax return.

1. American Opportunity Credit  This credit, originally created under the American Recovery and Reinvestment Act, has been extended for an additional two years – 2011 and 2012. The credit can be up to $2,500 per eligible student and is available for the first four years of post secondary education. Forty percent of this credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes. Qualified expenses include tuition and fees, course related books, supplies and equipment. The full credit is generally available to eligible taxpayers whose modified adjusted gross income is below $80,000 ($160,000 for married couples filing a joint return).
2. Lifetime Learning Credit  In 2011, you may be able to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses paid for a student enrolled in eligible educational institutions. There is no limit on the number of years you can claim the Lifetime Learning Credit for an eligible student, but to claim the credit, your modified adjusted gross income must be below $60,000 ($120,000 if married filing jointly).
3. Tuition and Fees Deduction  This deduction can reduce the amount of your income subject to tax by up to $4,000 for 2011 even if you do not itemize your deductions. Generally, you can claim the tuition and fees deduction for qualified higher education expenses for an eligible student if your modified adjusted gross income is below $80,000 ($160,000 if married filing jointly).
4. Student loan interest deduction  Generally, personal interest you pay, other than certain mortgage interest, is not deductible. However, if your modified adjusted gross income is less than $75,000 ($150,000 if filing a joint return), you may be able to deduct interest paid on a student loan used for higher education during the year. It can reduce the amount of your income subject to tax by up to $2,500, even if you don’t itemize deductions.

For each student, you can choose to claim only one of the credits in a single tax year. However, if you pay college expenses for two or more students in the same year, you can choose to take credits on a per-student, per-year basis. You can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your senior son.

You cannot claim the tuition and fees deduction for the same student in the same year that you claim the American Opportunity Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction and should consider which is more beneficial for you.

IRS Summertime Tax Tip 2011-18

Tax Collection—Procedures and Rights

The tax function entrusted to the Internal Revenue Service (IRS) can be viewed as a two-step process: the determination of an individual ’s or entity’s tax liability, and the collection of taxes after the liability is determined. The IRS’s organization reflects these two steps: the guidance, returns processing and examination functions (revenue agents) are involved in determining tax liability; and the collection function (revenue officers) collects the taxes.

For some taxpayers, these steps are routine: the taxpayer files a return to determine liability and writes a check to pay the IRS (or files for a refund). But for other taxpayers, even if the IRS and the taxpayer agree on tax liability, the payment of taxes can be difficult. This article looks at some of the IRS’s basic collection procedures and taxpayers’ rights during this process.

Tools

Primary IRS collection tools include liens and levies, property seizures, installment agreements and offers-in-compromise (OICs). As part of the lien and levy process, the taxpayer is entitled to a collection due process (CDP) hearing with the IRS Office of Appeals.

Taxpayers may appeal an IRS action under the collection appeals program (CAP). CAP is available for seizures and installment agreements, as well as for liens and levies. Taxpayers may also appeal the IRS’s rejection of an OIC.

Recognizing that these are difficult economic times for some taxpayers, the IRS has indicated that it may exercise its discretion to ease the collection process. However, at the same time, the National Taxpayer Advocate indicates that some IRS collection procedures are making it more difficult for taxpayers to pay their taxes.

Liens

A tax lien is an encumbrance or interest in a taxpayer’s property to secure payment of federal taxes. All of a taxpayer’s property and rights to property are subject to the federal tax lien, including property acquired after a Notice of Federal Tax Lien (NTFL) is filed. The lien does not attach if the taxpayer has no interest in property or has properly transferred his or her interest before the lien arose (except in fraud cases).

Comment

The filing of a federal tax lien may affect a taxpayer’s credit rating.

A general tax lien arises automatically when the taxpayer fails to pay an assessed tax within 10 days after the IRS sends a notice and demand for payment. The lien continues until the liability is either satisfied or released, or if it becomes unenforceable. The IRS will usually file an NFTL with an appropriate state or local office to establish its rights versus other creditors of the taxpayer, although filing the notice is discretionary. The IRS also has discretion to withdraw the notice if it would facilitate the collection of taxes or under other circumstances.

Comment

A taxpayer must be given notice of the filing of the NFTL and the right to a CDP hearing within five business days after the first filing of the NFTL for each tax liability. The taxpayer may request a hearing by the date shown on the notice, generally 30 days after the filing of the NFTL.

Lien Relief

In IRS News Release IR-2011-20, the IRS announced it was providing collection relief applicable to liens, installment agreements, and OICs. First, the IRS raised the threshold for filing an NFTL. Commissioner Douglas Shulman said that the old threshold for generally filing an NFTL was $5,000 and that the IRS was going to double that to $10,000, to reflect inflation since the number was last revised.

Comment

Shulman said the change meant that tens of thousands of people with smaller tax debts will not be burdened by tax liens.

Second, the IRS will also make it easier for taxpayers to obtain lien withdrawals. Liens will be withdrawn immediately once the taxpayer fully pays his or her taxes. The IRS will also allow lien withdrawals for taxpayers entering into a direct-debit installment agreement, after the taxpayer demonstrates that the direct debit payments will be honored.

Comment

This is significant because a lien that is released continues to be on the taxpayer’s credit report, but a lien that is withdrawn is removed from the report.

Levies

A levy is a seizure of a taxpayer’s property and rights to property. Levies also seize obligations due the taxpayer. A lien is a claim used as security for a debt, while a levy actually takes property to satisfy the debt. The IRS may levy on property 10 days after assessing the tax and making notice and demand for payment, if the taxpayer does not pay the tax.

Normally, the IRS then has to wait an additional 30 days to actually levy on property. No levy is permitted before the IRS sends a final notice of intent to levy and notifies the taxpayer in writing of the taxpayer’s right to a fair hearing (a CDP hearing), unless the IRS determines that collection of the tax is in jeopardy. When collection is in jeopardy, the right to a hearing applies after the levy. The IRS cannot levy on property if the tax liability is subject to a pending OIC or installment agreement request.

Comment

The IRS can levy a state tax refund and then, after the levy, send notice of the right to a hearing.

Some property cannot be levied. This includes, for example, unemployment benefits, workers compensation, a weekly exemption amount for salary and other income, and household furniture and personal effects, up to a stated maximum.

The IRS can levy on property held by a third party, such as a bank account or the cash value of life insurance. If the IRS levies on a bank account, the levy attaches to deposits that have cleared and funds available for withdrawal when the levy is received. The bank must wait 21 days after the levy is received before sending the money, to allow the taxpayer to resolve any dispute about account ownership. If the IRS makes a wrongful levy claim, the taxpayer can file an administrative claim under Code Sec. 6343(b), as described in Publication 4528.

CDP Hearing

A taxpayer that receives notice of the filing of an NFTL, or of the IRS’s intent to levy on property, has 30 days to request a CDP hearing. If the taxpayer requests a hearing within 30 days of the levy notice, the levy actions are suspended. The hearing is held by the IRS Office of Appeals and must be conducted by an employee who had no prior involvement regarding the unpaid taxes. Taxpayers can go to court if they want to appeal the decision made at a CDP hearing.

Taxpayers request a CDP hearing by filing Form 12153, Request for a Collection Due Process or Equivalent Hearing. A taxpayer that misses the deadline for a CDP hearing may request an equivalent hearing, generally within one year from the date of the NFTL or the levy notice. The instructions to Form 12153 indicate that, unlike a CDP hearing, a taxpayer cannot go to court to appeal the decision made at an equivalent hearing.

The form requires that the taxpayer provide a reason for requesting a CDP hearing. These include a request for a collection alternative, such as an installment agreement or OIC, a request to subordinate or discharge a lien, a claim for innocent spouse relief, inability to pay taxes because of hardship, or disagreement with the tax liability or the amount of unpaid taxes.

Comment

Even if the IRS accepts a reason for non-payment, penalties and interest continue to accrue.

According to the Form 12153 instructions, hardship includes: terminal illness or excess medical bills; taxpayer’s only income is from Social Security, welfare or unemployment benefits; taxpayer is unemployed with little or no income; taxpayer’s reasonable expenses exceeding income; or other conditions.

Comment

The National Taxpayer Advocate has accused the IRS of failing to provide timely and adequate CDP hearings and depriving taxpayers of an opportunity to have their cases fully considered. The IRS has issued CDP notices without verifying tax liabilities or analyzing the taxpayer’s ability to pay. Another problem is that collection employees routinely ask taxpayers to withdraw CDP hearing requests if the case is resolved, potentially causing the loss of judicial review rights if resolution is not complete.

Collection Appeals Program

Taxpayers have the right to appeal most IRS collections. CAP may be available even though a CDP hearing is not. Unlike CDP, taxpayers cannot challenge the existence or amount of the tax liability (although this right is limited under CDP), and cannot appeal the IRS decision in court (although the IRS puts this in a favorable light, indicating that the decision is binding on the IRS).

Under CAP, taxpayers can appeal:

·         the proposed or actual filing of an NFTL, denied requests to withdraw an NFTL, and denied discharges, subordinations or non-attachments of a lien;

·         a levy, before or after the IRS actually levies on the property, and an IRS refusal to return levied property;

·         the seizure of property; or

·         rejection or termination (actual or proposed) of an installment agreement.

Taxpayers should first appeal a collection employee’s decision to a collection manager. For a seizure, appeal must be made to the collection manager within 10 days after the seizure notice. If not satisfied with the manager’s decision, taxpayers can file a Collection Appeal Request, Form 9423, under CAP. Again, there may be a short time frame—appeal of a lien, levy or seizure must be postmarked within two days of the conference with the manager, or the IRS will resume collection action.

Form 9423 requires that taxpayers explain their disagreement with the collection action and how they would resolve their tax problem. Taxpayers can be represented by a tax professional.

IRS Discretion

Other IRS actions to ease collection practices include making streamlined installment agreements available to more small businesses and increasing the income and tax liability limits for taxpayers to participate in streamlined OICs. The National Taxpayer Advocate points out, however, that IRS’s streamlined policies can channel taxpayers into unaffordable installment agreements that set them up for later defaults and adverse collection actions.

Conclusion

The IRS collection function has a number of weapons and options at its disposal. Taxpayers must be diligent to exercise their rights to contest IRS actions, but the IRS is showing more flexibility in taking collection actions and providing relief to taxpayers.

CCH Pratical Tax Bulletin, 12, Tax-Bulletin

Read This if you Need More Time to Pay Your Taxes

Taxpayers who owe taxes may be relieved to know that there are some options for those who owe and can’t afford to pay the full amount right away.

Here are the top 10 things to know if you need more time to pay your taxes.

1.     Taxpayers who are unable to pay all taxes due are encouraged to pay as much as possible. By paying as much as possible now, the amount of interest and penalties owed will be less.

2.     Based on the circumstances, a taxpayer could qualify for an extension of time to pay, an installment agreement, temporary delay or an Offer in Compromise.

3.     If you cannot pay the full amount, taxpayers should immediately call the number or write to the address on the bill they receive.

4.     You may want to consider financing the full payment of your tax liability through a loan. The interest rate and fees charged by a bank or credit card company are usually lower than interest and penalties imposed by the Internal Revenue Code.

5.     If you cannot pay in full immediately, you may qualify for a short amount of additional time, up to 120 days, to pay in full. No fee is charged for this type of payment arrangement and this option may minimize the amount of penalties and interest you incur.

6.     You may also want to consider an installment agreement. This arrangement allows you to make monthly payments after a one-time fee of $105 is paid. If you choose to pay through a Direct Debit from your bank account, the fee is reduced to $52. Lower-income taxpayers may qualify for a reduced fee of $43.

7.     To apply for an installment agreement you can use the Online Payment Agreement application available on the IRS website; file a Form 9465, Installment Agreement Request; or call the IRS at the telephone number shown on your bill.

8.     In some cases, a taxpayer may qualify for an offer in compromise, an agreement between the taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement.

9.     Even if you set up an installment agreement, the IRS may still file a Notice of Federal Tax Lien to secure the government’s interest until you make the final payment.

10.   It is important to respond to an IRS notice. If you do not pay your tax liability in full or make an alternative payment arrangement, the IRS is entitled to take collection action.

IRS Tax Tip 2011-64

Eight Tips to Help you Determine if your Gift is Taxable

If you give someone money or property during your life, you may be subject to the federal gift tax. Most gifts are not subject to the gift tax, but the following eight tips to help you determine if your gift is taxable.

1. Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or to a charity. If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual exclusion for the year. For 2011, the annual exclusion is $13,000.

2. Gift tax returns do not need to be filed unless you give someone, other than your spouse, money or property worth more than the annual exclusion for that year.

3. Generally, the person who receives your gift will not have to pay any federal gift tax because of it. Also, that person will not have to pay income tax on the value of the gift received.

4. Making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions).

5. The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. The following gifts are not taxable gifts:

• Gifts that are not more than the annual exclusion for the calendar year,
• Tuition or medical expenses you pay directly to a medical or educational institution for someone,
• Gifts to your spouse,
• Gifts to a political organization for its use, and
• Gifts to charities.

6. Gift Splitting – you and your spouse can make a gift up to $26,000 to a third party without making a taxable gift. The gift can be considered as made one-half by you and one-half by your spouse. If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, even if half of the split gift is less than the annual exclusion.

7. Gift Tax Returns – you must file a gift tax return on Form 709, if any of the following apply:

• You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year.
• You and your spouse are splitting a gift.
• You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until some time in the future.
• You gave your spouse an interest in property that will terminate due to a future event.

8. You do not have to file a gift tax return to report gifts to political organizations and gifts made by paying someone’s tuition or medical expenses.

IRS Tax Tip 2011-62

Seven Facts about Injured Spouse Relief

If you file a joint return and all or part of your refund is applied against your spouses’ past-due federal tax, state income tax, child or spousal support or federal nontax debt, such as a student loan, you may be entitled to injured spouse relief.

Here are seven facts to know about claiming injured spouse relief:

1.     To be considered an injured spouse, you must have made and reported tax payments, such as federal income tax withheld from wages or estimated tax payments, or claimed a refundable tax credit, such as the earned income credit or additional child tax credit on the joint return, and not be legally obligated to pay the past-due amount.

2.     If you live in a community property state, special rules apply. For more information about the factors used to determine whether you are subject to community property laws, see IRS Publication 555, Community Property.

3.     If you filed a joint return and you're not responsible for the debt, but you are entitled to a portion of the refund you may request your portion of the refund by filing Form 8379, Injured Spouse Allocation.

4.     You may file form 8379 along with your original tax return or your may file it by itself after you are notified of an offset.

5.     You can file the Form 8379 electronically. If you file a paper tax return you can include Form 8379 with your return, write "INJURED SPOUSE" at the top left corner of the Form 1040, 1040A, or 1040EZ. IRS will process your allocation request before an offset occurs.

6.     If you are filing Form 8379 by itself, it must show both spouses' social security numbers in the same order as they appeared on your income tax return. You, the "injured" spouse, must sign the form.

7.     Do not use Form 8379 if you are claiming innocent spouse relief. Instead, file Form 8857, Request for Innocent Spouse Relief.  This relief from a joint liability applies only in certain limited circumstances. IRS Publication 971, Innocent Spouse Relief, explains who may qualify, and how to request this relief.

IRS Tax Tip 2011-60

Tax Refund Withholdings and Offsets

If you owe money because of certain delinquent debts, the IRS or the Department of Treasury's Financial Management Service (FMS), which issues IRS tax refunds, can offset or reduce your federal tax refund or withhold the entire amount to satisfy the debt.

Here are seven important facts to know about tax refund offsets:

1.     If you owe federal or state income taxes your refund will be offset to pay those taxes. If you had other debt such as child support or student loan debt that was submitted for offset, FMS will take as much of your refund as is needed to pay off the debt, and send it to the agency authorized to collect the debt. Any portion of your refund remaining after an offset will be refunded to you.

2.     You will receive a notice if an offset occurs. The notice will reflect the original refund amount, your offset amount, the agency receiving the payment, and the address and telephone number of the agency.

3.     You should contact the agency shown on the notice if you believe you do not owe the debt or you are disputing the amount taken from your refund.

4.     If you filed a joint return and you're not responsible for the debt, but you are entitled to a portion of the refund, you may request your portion of the refund by filing IRS Form 8379, Injured Spouse Allocation. Attach Form 8379 to your original Form 1040, Form 1040A, or Form 1040EZ or file it by itself after you are notified of an offset.

5.     If you file a Form 8379 with your return, write "INJURED SPOUSE" at the top left corner of the Form 1040, 1040A, or 1040EZ. IRS will process your allocation request before an offset occurs.

6.     If you are filing Form 8379 by itself, it must show both spouses' social security numbers in the same order as they appeared on your income tax return. You, the "injured" spouse, must sign the form. Do not attach the previously filed Form 1040 to the Form 8379. Send Form 8379 to the Service Center where you filed your original return.

7.     The IRS will compute the injured spouse's share of the joint return for you. Contact the IRS only if your original refund amount shown on the FMS offset notice differs from the refund amount shown on your tax return.

IRS Tax Tip 2011-59

Work From Home? Consider the Home Office Deduction

Whether you are self-employed or an employee, if you use a portion of your home for business, you may be able to take a home office deduction.  Here are six things to know about the Home Office deduction

1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:

• as your principal place of business, or
• as a place to meet or deal with patients, clients or customers in the normal course of your business, or
• in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.

2. For certain storage use, rental use, or daycare-facility use, you are required to use the property regularly but not exclusively.

3. Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

4. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on line 30 of Form 1040 Schedule C, Profit or Loss From Business.

6. If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.

IRS Tax Tip 2011-53

What Parents Should Know about Their Child’s Investment Income

Parents need to be aware of the tax rules that affect their children’s investment income. Here are four facts that will help parents determine whether their child’s investment income will be taxed at the parents’ rate or the child’s rate:

1. Investment Income Children with investment income may have part or all of this income taxed at their parents’ tax rate rather than at the child’s rate. Investment income includes interest, dividends, capital gains and other unearned income.

2. Age Requirement The child’s tax must be figured using the parents’ rates if the child has investment income of more than $1,900 and meets one of three age requirements for 2010:

• Was under age 18 at the end of the year,
• Was age 18 at the end of the year and did not have earned income that was more than half of his or her support, or
• Was a full-time student over age 18 and under age 24 at the end of the year and did not have earned income that was more than half of his or her support.

3. Form 8615 To figure the child's tax using the parents’ rate for the child’s return, fill out Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900, and attach it to the child's federal income tax return.

4. Form 8814 When certain conditions are met, a parent may be able to avoid having to file a tax return for the child by including the child’s income on the parent’s tax return. In this situation, the parent would file Form 8814, Parents' Election To Report Child's Interest and Dividends.

IRS Tax Tip 2011-52

Health Insurance Tax Breaks for the Self-Employed

Here is some information about special tax deduction for the self-employed. You may be able to deduct premiums paid for medical and dental insurance and qualified long-term care insurance for you, your spouse, and your dependents if you are one of the following:

• A self-employed individual with a net profit reported on Schedule C (Form 1040), Profit or Loss From Business, Schedule C-EZ (Form 1040), Net Profit From Business, or Schedule F (Form 1040), Profit or Loss From Farming.
• A partner with net earnings from self-employment reported on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., box 14, code A.
• A shareholder owning more than 2% of the outstanding stock of an S corporation with wages from the corporation reported on Form W-2, Wage and Tax Statement.

The insurance plan must be established under your business.

• For self-employed individuals filing a Schedule C, C-EZ, or F, the policy can be either in the name of the business or in the name of the individual.
• For partners, the policy can be either in the name of the partnership or in the name of the partner. You can either pay the premiums yourself or your partnership can pay them and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. However, if the policy is in your name and you pay the premiums yourself, the partnership must reimburse you and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. Otherwise, the insurance plan will not be considered to be established under your business.
• For more-than-2% shareholders, the policy can be either in the name of the S corporation or in the name of the shareholder. You can either pay the premiums yourself or your S corporation can pay them and report the premium amounts on Form W-2 as wages to be included in your gross income. However, if the policy is in your name and you pay the premiums yourself, the S corporation must reimburse you and report the premium amounts on Form W-2 as wages to be included in your gross income. Otherwise, the insurance plan will not be considered to be established under your business.

IRS Tax Tip 2011-51

Six Facts About Alternative Minimum Tax

The Alternative Minimum Tax attempts to ensure that anyone who benefits from certain tax advantages pays at least a minimum amount of tax. The AMT provides an alternative set of rules for calculating your income tax. In general, these rules should determine the minimum amount of tax that someone with your income should be required to pay. If your regular tax falls below this minimum, you have to make up the difference by paying alternative minimum tax.

Here are six facts about the AMT and changes for 2010.

1. Tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain expenses. These benefits can drastically reduce some taxpayers’ tax obligations. Congress created the AMT in 1969, targeting higher-income taxpayers who could claim so many deductions they owed little or no income tax.

2. Because the AMT is not indexed for inflation, a growing number of middle-income taxpayers are discovering they are subject to the AMT.

3. You may have to pay the AMT if your taxable income for regular tax purposes plus any adjustments and preference items that apply to you are more than the AMT exemption amount.

4. The AMT exemption amounts are set by law for each filing status.

5. For tax year 2010, Congress raised the AMT exemption amounts to the following levels: 

• $72,450 for a married couple filing a joint return and qualifying widows and  widowers;
• $47,450 for singles and heads of household;
• $36,225 for a married person filing separately.

6.  The minimum AMT exemption amount for a child whose unearned income is taxed at the parents'  tax rate has increased to $6,700 for 2010.

IRS Tax Tips 2011-47

Ten Things to Know About the Child and Dependent Care Credit

If you paid someone to care for your child, spouse, or dependent last year, you may be able to claim the Child and Dependent Care Credit on your federal income tax return. Below are 10 things you should know about claiming a credit for child and dependent care expenses.

1.     The care must have been provided for one or more qualifying persons. A qualifying person is your dependent child age 12 or younger when the care was provided. Additionally, your spouse and certain other individuals who are physically or mentally incapable of self-care may also be qualifying persons. You must identify each qualifying person on your tax return.

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

3.     You – and your spouse if you file jointly – must have earned income from wages, salaries, tips, other taxable employee compensation or net earnings from self-employment. One spouse may be considered as having earned income if they were a full-time student or were physically or mentally unable to care for themselves.

4.     The payments for care cannot be paid to your spouse, to the parent of your qualifying person, to someone you can claim as your dependent on your return, or to your child who will not be age 19 or older by the end of the year even if he or she is not your dependent. You must identify the care provider(s) on your tax return.

5.     Your filing status must be single, married filing jointly, head of household or qualifying widow(er) with a dependent child.

6.     The qualifying person must have lived with you for more than half of 2010. There are exceptions for the birth or death of a qualifying person, or a child of divorced or separated parents. See Publication 503, Child and Dependent Care Expenses.

7.     The credit can be up to 35 percent of your qualifying expenses, depending upon your adjusted gross income.

8.     For 2010, you may use up to $3,000 of expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.

9.     The qualifying expenses must be reduced by the amount of any dependent care benefits provided by your employer that you deduct or exclude from your income.

10.   If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer and may have to withhold and pay social security and Medicare tax and pay federal unemployment tax. See Publication 926, Household Employer's Tax Guide.

IRS Tax Tip 2011-46

Seven Tips About Rental Income and Expenses

Do you rent property to others? If so, you’ll want to read the following seven tips about rental income and expenses.

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

1.     When to report income. You generally must report rental income on your tax return in the year that you actually receive it.

2.     Advance rent. 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.

3.     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.

4.     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.

5.     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.

6.     Rental expenses.  Generally, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income.

7.     Personal use of vacation home. 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.  If your expenses for rental use are more than your rental income, you may not be able to deduct all of the rental expenses.

For more information on rental income and expenses see Publication 527.

IRS Tax Tip 2011-45