Your kids can be helpful at tax time. That doesn't mean they'll sort your tax receipts or refill your coffee, but those charming children may help you qualify for some valuable tax benefits. Here are 10 things the IRS wants parents to consider when filing their taxes this year.

     1. Dependents In most cases, a child can be claimed as a dependent in the year they were born. For more information see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.

     2. Child Tax Credit You may be able to take this credit for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. For more information see IRS Publication 972, Child Tax Credit.

     3. Child and Dependent Care Credit You may be able to claim this credit if you pay someone to care for your child or children under age 13 so that you can work or look for work. See IRS Publication 503, Child and Dependent Care Expenses.

     4. Earned Income Tax Credit The EITC is a tax benefit for certain people who work and have earned income from wages, self-employment or farming. EITC reduces the amount of tax you owe and may also give you a refund. IRS Publication 596, Earned Income Credit, has more details.

     5. Adoption Credit You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child. If you claim the adoption credit, you must file a paper tax return with required adoption-related documents.  For details, see the instructions for IRS Form 8839, Qualified Adoption Expenses.

     6. Children with earned income If your child has income earned from working, they may be required to file a tax return. For more information, see IRS Publication 501.

     7. Children with investment income Under certain circumstances a child’s investment income may be taxed at their parent’s tax rate. For more information, see IRS Publication 929, Tax Rules for Children and Dependents.

     8. Higher education credits Education tax credits can help offset the costs of higher education. The American Opportunity and the Lifetime Learning Credits are education credits that can reduce your federal income tax dollar-for-dollar. See IRS Publication 970, Tax Benefits for Education, for details.

     9. Student loan interest You may be able to deduct interest paid on a qualified student loan, even if you do not itemize your deductions. For more information, see IRS Publication 970.

     10. Self-employed health insurance deduction If you were self-employed and paid for health insurance, you may be able to deduct any premiums you paid for coverage for any child of yours who was under age 27 at the end of the year, even if the child was not your dependent.

IRS Tax Tip 2012-15 January 24, 2012

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Yes, it’s tax time again, but there is some good news:  Taxes are still the lowest ever!  In the very last moments of 2010, Congress compromised on a tax bill that saved all US taxpayers from what would have been a substantial tax hike for 2011.

Even though tax rates are low, money is still tight.  I’ve attached a convenient check list to make sure you have all the information you need to claim every deduction you are entitled to.  Here are just a few FREE tax saving ideas, to help you save tax dollars and keep more of your hard-earned money in your pocket.   I'll be adding more as the season progresses, so be sure to come back often for new updates!

Tax Year 2011 may have brought no “major” tax changes, but there were many smaller tax changes that could significantly impact the preparation of your federal 1040 return this year.

Please take a moment to review these changes prior to your tax appointment on to insure we can prepare your return accurately:

New W-2 reporting of employer-sponsored health care coverage. Although it is only optional for Form W-2s issued in 2012 (becoming mandatory in 2013 under the health care reform legislation), some employees may receive W-2s for 2011 that include a new code (DD) in Box 12 along with the amount for employer-sponsored health care coverage. This provides the IRS with information to determine if the employer and employee have complied with the health insurance mandates of health care reform. However, as those mandates are not yet in effect, this added information on the W-2 does not impact 2011 federal tax return filing requirements.

Employee retention credit. This credit related to 2010 hiring, however, it required retaining the employee for at least 52 weeks to qualify for the credit, thereby moving eligibility for the credit to 2011 tax returns. To qualify for the credit, the employer must have paid wages in the last 26 weeks equal at least to 80 percent of the wages for the first 26 weeks. The credit is claimed on Form 5884-B and is the lesser of $1,000 or 6.2 percent of the retained worker’s wages during the period.

Limited Non-Business Energy Property Credit for 2011. This credit generally equals 10 percent (down from 30 percent the past two years) of what a homeowner spends on eligible energy-saving improvements, up to a maximum tax credit of $500 (down from the $1,500 combined limit that applied for 2009 and 2010). In addition, the energy standards are increased for most property (windows, exterior doors and skylights, for example, must meet Energy Star Program requirements). The cost of certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass all qualify, along with labor costs for installing these items. In addition, the cost of energy-efficient windows and skylights, energy-efficient doors, qualifying insulation and certain roofs also qualify for the credit, though the cost of installing these items do not. Be sure to let us know if you think you may qualify for this credit, and bring receipts with you to our tax appointment.

Standard mileage rates up in 2011. The standard mileage rate for business use of a car, van, pick-up or panel truck is 51 cents a mile for miles driven during the first  six months of 2011 (January through June) and 55.5 cents a mile for the rest of the year, up from 50 cents for 2010. The rate for the cost of operating a vehicle for medical reasons or as part of a deductible move is 19 cents a mile from January through June and 23.5 cents a mile after that, up from 16.5 cents per mile in 2010. The rate for using a car to provide services to charitable organizations is set by law and remains at 14 cents a mile.

Health insurance deduction for self-employed people. In 2011, eligible self-employed individuals and S corporation shareholders can use the self-employed health insurance deduction to reduce their income tax liability. Premiums paid for health insurance covering the taxpayer, spouse and dependents generally qualify for this deduction. In addition, premiums paid to cover an adult child under age 27 at the end of the year, also qualify, even if the child is not the taxpayer’s dependent. However, the deduction from self-employment income for determining self-employment tax, which was available only in tax-year 2010, no longer applies. As before, the insurance plan must be set up under the taxpayer’s business, and the taxpayer cannot be eligible to participate in an employer-sponsored health plan.

Do you have young children? You can still benefit from the Child Tax Credit, the Earned Income Credit and the Dependent Care Credit at the same levels as in the past.

Do you have children in college? The American Opportunity Tax Credit is still a part of your tax picture if you meet the qualifications. The credit of up to $2500 is available for 2011 educational expenses.

Are you an investor? You are still in luck. Tax on capital gains and qualified dividends are still at the lowest tax rates ever.

Are you paying on student loans?  The interest on old loans of up to $2500 is still deductible.

Did you do a 2010 Roth conversion?  If you deferred the tax to 2011 and 2012, the first installment is due.  If it was a bad idea to defer, you can always amend your 2010 to pay all of the tax in one year. 

Did you make energy saving home improvements in 2011?  You may be eligible for a credit of up to $500.

The following expenses now qualify as medical deductions:   

o   Lactation expenses

o   The cost of a caregiver for a dementia patient (even if caregiver is non-licensed.)

2011 is your last chance to take advantage of the following tax breaks:

o   Mortgage insurance premiums on your personal residence.

o   Teachers special deduction for up to $250 in classroom supplies. If you itemize, this one has a workaround!  Schools qualify as charitable organizations. You can donate the items to the school and take it as a charitable deduction on your schedule A. (Be sure to get a receipt for donations!)

o   Sales tax instead of state income tax as an itemized deduction.

o   Direct charitable contributions of IRA proceeds.

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2011 - It's time to get organized!

The following checklist will help you collect the documents you'll need to file your tax return.  When all of the boxes are checked, you're ready!

_____Your last years tax return (new clients)

_____Social Security numbers and dates of birth are needed for all taxpayers, spouses and dependents.

_____W-2 Forms

_____Your last paycheck stub of the year is full of information.

_____1099 forms for interest, dividends, retirement, Social Security, debt cancellation and unemployment income.

_____Property tax statements

_____Form 1098 for mortgage interest.

_____Year end statements from mutual funds, showing the transaction detail for the year.

_____Purchase and sale information, including dates, relating to anything sold during 2011.

_____Child care provider information (name, address, ss# and amount paid)

_____Names, addresses, and Social Security numbers from those you received interest from or paid interest to.

_____Bankruptcy or divorce papers.

_____If you paid an individual person $600 or more for services rendered in connection with your business, please provide their name, address and Social Security number.

_____Records showing income and expense for any small business or rental property you own.

_____K-1's from all invenstments in Partnerships, S Corporations, Estates or Tursts.

_____IRA year end statements.

_____Bring all other statements of income, whether you think they are taxable or not.

_____Forms 1098T and amounts paid for post-secondary tuition.

_____Form 1098C for donations of automobiles or boats.

_____Details on all noncash donations greater than $500.  Include date, place, fair market value and original cost.

_____Bring your records of estimated taxes paid.

_____Student loan interest 1098-E

_____Adoption costs if applicable.  Bring the legal documents to attach to return.

_____If you purchased a new fuel cell or electric vehicle in 2011, bring the year, make and purchase date.

_____Bring direct deposit information for any refunds you expect to receive.

_____Noncustodial parents claiming children need a signed IRS form 832 to claim the child.

_____If your mortgage was forgiven due to foreclosure, bring form 1099-C or 1099-A.

_____If you bought a new home, bring the purchase papers.

_____If you purchased a vehicle, boat or aic2rplane, bring evidence of the sales tax paid.

_____Information on energy saving home improvements might get you a tax credit.

_____If you were an investor, caught in a Ponzi-type scheme, bring the details.

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2011 - Charitable Mileage Deduction?

Did you drive your vehicle for charity? If so, you can deduct $.14 for every mile you drove delivering food to soup kitchens or for any other 501c3 charity.

If your medical expenses exceed 7.5% of your income, you may want to calculate a medical mileage deduction. Medical miles for 2011 are calculated at $0.19 per mile from 1/1/11 and $0.235 thereafter.

If you drove for business purposes, the situation is a little more complicated. First decide which miles qualify. Use the following three scenarios to determine how many mile you can deduct. Keep in mind the following statement: In general, commuting is not deductible.

1. If you have an office or regular place of business outside your home, you may not deduct commuting miles on your first trip to work and on your last trip home from work, but you can deduct any miles driven for work during the day and any miles driven to a second or temporary place of work.

2. If you have an office in your home that qualifies for a home office deduction, all of your business-related mileage is deductible.

3. If you work out of your home, but do not qualify for the home office deduction, use rule #1.  Tip:  Carefully plan to have your first and last stops close to home to maximize the mileage deduction.  A trip to the bank, post office, or a nearby supplier are deductible miles, if for a business purpose.

Once you have determined which miles to count, you need to decide whether to use the Standard Mileage rate or Actual Expenses:  Which method is best?

  The standard mileage rate for qualified business use for 2011 is $0.51 per mile from 1/1/11 to 6/30/11 and $0.555 thereafter.  Don't forget to record the year end odometer reading if you are planning on a business mileage deduction.  The standard method generally works best if your business miles are high or your vehicle is economical to run.  The actual expense method generally works best if your vehicle weighs over 6000 pounds, is costly to run, or you do not have that many miles.

2011 - Do you work at Home?

If you are self employed and you use a portion of your home exclusively as your principal place of business, to store inventory, or to conduct substantial management or administrative activities, you may qualify for the home office deduction.

If you are an employee, your home office must be required by your employer to be eligible for the home office deduction.

      **The home office space must be used regularly and exclusively for business.  Exclusively means that you can not use the area for any other purpose, strictly business!  If your office qualifies, you will need additional information to  claim the deduction.  Measure the total business space and the total space of your home.  You will also need your mortgage interest, property tax & insurance, association fees, repairs, maintenance, utilities, garbage, security and rents paid.  To claim depreciation expense on the home office, provide an accounting of the total investment in your home.

First installment of taxes owed on 2010 Roth conversions.  Individuals who did a Roth conversion in 2010 and elected to spread the tax payment over 2011 and 2012 will have to pay one-half of the tax owed on their 2011 income tax return. However, if a taxpayer took a distribution in 2011 from their 2010 Roth conversion, they may be required to pay more to cover taxes on the distributed amount. In addition, tax on any additional conversions done in 2011 will have to be included on the 2011 tax return. If you elected to spread the payment or took a distribution in 2011, make sure you bring that documentation with you so we can discuss options and calculations.

Changes for investors in reporting basis.  If you’re an investor, the IRS will receive a revised Form 1099-B from your broker that now records the basis of transactions during the year. You should also receive a copy of that form. The IRS will check to see that this information matches the basis reported on your return. Additionally, these transactions will now be reported on the new Form 8949, rather than directly on Schedule D. Be sure you bring all 1099-Bs to our tax appointment.

Carryover basis on inherited assets.  If you inherited assets where the estate elected to use the 2010 estate tax repeal option, you will receive a Form 8939 in January or February from the estate executor providing the basis information for those assets. An heir of a 2010 estate using the 2010 estate tax repeal option (and who sold the asset before receiving Form 8939) may be surprised at the amount of capital gain owed on the sale. It can be a complicated calculation, so if you inherited assets and receive Form 8939, bring that with you to our tax appointment.

New requirements for reporting foreign assets. Account Tax Compliance Act (FATCA) reporting requires foreign assets to be reported if they have a total value of more than $50,000 ($100,000 if married filing jointly).  FATCA is broader than what is defined under the Report of Foreign Bank and Financial Accounts, or FBAR. In addition to the prior obligation to report FBAR accounts on Form TDF90-22.1, FATCA must now be reported on a new Form 8938, so if you have a foreign account with balances of $50,000/$100,000, bring that information with you to the tax appointment.

****************************************2010 - New Lower Limits for the Child Tax Credit******************************

Under the American Recovery and Reinvestment Act (ARRA), more families will be eligible for the additional child tax credit because of a change in the way the credit is figured.

The child tax credit is for people have one or more qualifying child(ren) but earn only a modest income. The credit is $1000 per dependent child (under 17) who lived with you for more than half of the year. The credit is first applied to tax due. The balance is refundable.

ARRA reduces the minimum earned income amount to $3,000. Before ARRA, the minimum earned income amount was set to rise to $12,550. By reducing the amount to $3,000 more taxpayers will qualify to use the additional child tax credit.

For this purpose earned income includes only taxable earned income, and nontaxable combat pay. The credit phases out when AGI reaches $75K for single & head of household, $110K for married filing joint.

This change applies to tax years beginning in 2009 and 2010, and you must file a 1040 or 1040A to claim the credit.

2010 - New Vehicle Tax Deduction

Taxpayers who buy a new car vehicle this year may be entitled to a special tax deduction when they file their 2009 federal tax returns next year. The tax break is part of the American Recovery and Reinvestment Act of 2009.

Here are a few things you should know about this new deduction:

1. State and local sales taxes paid on up to $49,500 of the purchase price of qualifying vehicles are deductible.
2. Qualified motor vehicles generally include new (not used) cars, light trucks, motor homes and motorcycles.
3. Purchases must occur after Feb. 16, 2009, and before Jan. 1, 2010.
4. This deduction can be taken regardless of whether or not you itemize other deductions on your tax return.
5. Taxpayers will claim this deduction when filing their 2009 federal income tax return next year.
6. The amount of the deduction is phased out for higher income taxpayer's ($125K++)
   

2010 - Educational Credits Enhanced
American Opportunity Tax Credit is a new name for existing educational tax credits.  The new law temporarily enhances the existing HOPE education credit–for 2009 and 2010 only– in amount (from a maximum $1,800 to $2,500 per year), in scope (extending it to all four years of college and adding course materials to qualifying expenses), and in phase-out level (to $80,000/$160,000 joint filers).  The new makes 40 percent of the credit refundable.  Under the new credit, the maximum $2,500 per year would be allowed on $4,000 in qualifying payments (100 percent of the first $2,000 and 25 percent of the next $2,000).  Although this credit would be made retroactive to January 1, 2009, it does not automatically apply to a college semester that begins in 2009. Tuition paid late in 2008 for an upcoming 2009 semester qualifies only for a 2008 credit under existing rules.  The new law instructs the Treasury Department to study how to better coordinate the education credits with the federal Pell Grant program and the feasibility of requiring students to perform community service for purposes of the education credits.

The Standard Disclaimer:  The foregoing  discussions of the American Recovery & Reinvestment Act and other Tax Tips are offered for informational use only and do not constitute tax advice.  Please call to schedule your personal tax consultation.

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