Everyone wants to get as much back in their tax refund as possible, but tax laws are constantly added, changed, or updated. The J.K. Lasser Daily Tax Tip, brought to you by TaxACT, provide some insight into complex tax situations and offers helpful advice and guidance. Now that's something everyone can use!<br><br> The Daily Tax Tip content is provided by America's all-time best selling tax guide, J.K. Lasser's&#153; Your Income Tax Guide 2006 by John Wiley & Sons, Inc. Tax advice provided by The Daily Tax Tip shall not be construed as a substitute for the advice obtained or given by a certified tax professional. http://www.taxact.com/tax-tips/index.asp http://blogs.law.harvard.edu/tech/rss Sat, 7 Nov 2009 06:00:00 GMT Sat, 7 Nov 2009 06:00:00 GMT http://www.taxact.com/images/jk-lasser-rss.gif http://www.taxact.com/tax-tips/index.asp 88 21 If deferred pay is currently taxable under the rules of Code Section 409A, you must also pay a 20% penalty and interest at a rate 1% higher than the regular underpayment rate. http://www.taxact.com/tax-tips/index.asp?tid=1562 Sat, 7 Nov 2009 00:00:00 GMT 1562 No deduction is allowed for a fine or penalty paid to a government for the violation of a law. http://www.taxact.com/tax-tips/index.asp?tid=1561 Fri, 6 Nov 2009 00:00:00 GMT 1561 You may not postpone tax on earned commissions credited to your account in 2009 by not drawing them until 2010 or a later year. However, where a portion of earned commissions is not withdrawn because your employer is holding it to cover future expenses, you are not taxed on the amount withheld. http://www.taxact.com/tax-tips/index.asp?tid=1560 Thu, 5 Nov 2009 00:00:00 GMT 1560 An attorney who took a medical malpractice case on a contingent fee basis agreed to split the net fee with his ex-wife pursuant to their divorce agreement. After a favorable settlement, the attorney take was approximately $40,000 after expenses, half of which went to his ex-wife. Each paid tax on his or her share. The attorney argued that his partial assignment of the fee could shift the tax liability because collection was contingent on the outcome of the lawsuit. However, the IRS and the Tax Court held that the attorney was liable for the tax on the entire contingent fee, and an appeals court agreed. The attorney transferred only the right to receive income. Although his fee was contingent upon the successful outcome of the case, once the fee materialized, it was indisputably compensation for his personal services. http://www.taxact.com/tax-tips/index.asp?tid=1559 Wed, 4 Nov 2009 00:00:00 GMT 1559 Tips you receive are taxable income. You must report tips to your employer so your employer can withhold FICA and income tax from your regular pay to cover the tips. http://www.taxact.com/tax-tips/index.asp?tid=1558 Tue, 3 Nov 2009 00:00:00 GMT 1558 You must pay tax on severance pay received upon losing a job. The severance pay is taxable even if you signed a waiver releasing your former employer from potential future damage claims. The waiver does not change the nature of the payments from taxable pay to tax-free personal injury damages. http://www.taxact.com/tax-tips/index.asp?tid=1557 Mon, 2 Nov 2009 00:00:00 GMT 1557 A U.S. citizen or resident may have to pay tax on a gift or bequest received on or after June 17, 2008 from an individual (or estate of an individual) who expatriates on or after June 17, 2008 and is subject to the rules of Section 877A. The tax does not apply to the extent that gifts or bequests during the year are within the annual gift tax exclusion ($13,000 for 2009). The tax also does not apply if the transfer is reported on a timely filed gift tax return or estate tax return, or to transfers qualifying for the gift/estate tax marital deduction or charitable deduction. The value of a transfer not covered by an exception is taxable to the recipient at the highest rate on taxable gifts or estates, which is 45% for 2009. A gift or bequest to a domestic trust is also subject to the tax, payable by the trust. If the gift or bequest is to a foreign trust, a U.S. citizen or resident pays the tax when distributions from the trust are received. http://www.taxact.com/tax-tips/index.asp?tid=1556 Sun, 1 Nov 2009 00:00:00 GMT 1556 An alien planning to leave the U.S. should obtain a copy of Form 1040-C from the IRS to review his or her tax reporting obligations. http://www.taxact.com/tax-tips/index.asp?tid=1555 Sat, 31 Oct 2009 00:00:00 GMT 1555 If you were not a resident during 2008 but in 2009 you satisfy both the lawful resident (green card) test and the 183-day presence test, your residence begins on the earlier of the first day you are in the U.S. while a lawful permanent resident and the first day of physical presence. http://www.taxact.com/tax-tips/index.asp?tid=1554 Fri, 30 Oct 2009 00:00:00 GMT 1554 Do not report on the decedent final return income that is received after his or her death, or accrues after or because of death if the decedent used the accrual method. This income is considered income in respect of a decedent, or IRD. IRD is taxed to the estate or beneficiary receiving the income in the year of the receipt. On the decedent final return, only deductible expenses paid up to and including the date of death may be claimed. If the decedent reported on the accrual basis, those deductions accruable up to and including the date of death are deductible. If a check for payment of a deductible item was delivered or mailed before the date of the decedent death, a deduction is allowable on the decedent last return, even though the check was not cashed or deposited until after the decedent death. If the check was not honored by the bank, the item is not deductible. http://www.taxact.com/tax-tips/index.asp?tid=1553 Thu, 29 Oct 2009 00:00:00 GMT 1553 To expedite the closing of the decedent estate, an executor or other personal representative of the decedent may file Form 4810 for a prompt assessment. Once filed, the IRS has 18 months to assess additional taxes. The request does not extend the assessment period beyond the regular limit, which is three years from the date the return was filed. Form 4810 must be filed separately from the final return. http://www.taxact.com/tax-tips/index.asp?tid=1552 Wed, 28 Oct 2009 00:00:00 GMT 1552 If your child has 2009 investment income exceeding $1,900, his or her tax liability generally must be figured on Form 8615, and under the kiddie tax rules, the excess over $1,900 will be taxed at your top tax rate rather than at your child rate. The kiddie tax applies to children under age 18, and also to children who at the end of the year are either age 18 or full-time students under age 24 if their earned income is no more than 50% of their total support for the year. http://www.taxact.com/tax-tips/index.asp?tid=1551 Tue, 27 Oct 2009 00:00:00 GMT 1551 If your dependent parent is the qualifying person, you may claim head of household status even if he or she does not live with you. You must pay over half of your parent household expenses, whether your parent lives alone, with someone else, or in a senior citizens residence. http://www.taxact.com/tax-tips/index.asp?tid=1550 Mon, 26 Oct 2009 00:00:00 GMT 1550 Tax rates are lower for a head of household than for those filing as single. The standard deduction is also higher. For a married person who lived apart from his or her spouse during the last half of the year, qualifying as a head of household allows use of tax rates that are more favorable than those for married persons filing separately. http://www.taxact.com/tax-tips/index.asp?tid=1549 Sun, 25 Oct 2009 00:00:00 GMT 1549 If you will be appointed executor or administrator and are concerned about estate insolvency, it may be advisable to hedge as follows: (1) File separate returns. If it is later seen that a joint return is preferable, you have three years to change to a joint return. (2) File jointly but postpone being appointed executor or administrator until after the due date of the joint return. In this way, the joint return may be disaffirmed if the estate cannot cover its share of the taxes. http://www.taxact.com/tax-tips/index.asp?tid=1548 Sat, 24 Oct 2009 00:00:00 GMT 1548 If your spouse died during the year and you are filing a joint return, include his or her income earned through the date of death. http://www.taxact.com/tax-tips/index.asp?tid=1547 Fri, 23 Oct 2009 00:00:00 GMT 1547 The separate liability election is not available where the proper amount of tax was reported on a joint return but your spouse did not pay the tax. However, equitable relief may be available in this type of tax underpayment situation. http://www.taxact.com/tax-tips/index.asp?tid=1546 Thu, 22 Oct 2009 00:00:00 GMT 1546 The separate liability election generally allows you to avoid liability for the portion of a tax deficiency that is allocable to the other spouse. Such relief is unavailable, however, to the extent that you had actual knowledge of the omitted income or deducted item that gave rise to the tax deficiency. http://www.taxact.com/tax-tips/index.asp?tid=1545 Wed, 21 Oct 2009 00:00:00 GMT 1545 You have until two years from the date that the IRS first attempts to collect tax from you on the joint return to make an innocent spouse election. http://www.taxact.com/tax-tips/index.asp?tid=1544 Tue, 20 Oct 2009 00:00:00 GMT 1544 After the filing of Form 8857, the IRS is required to notify the non-electing spouse (or former spouse) of an electing spouse request for relief and allow the non-electing spouse an opportunity to participate in the determination. If the IRS makes a preliminary determination granting full or partial relief to the electing spouse, the non-electing spouse may file a written protest and obtain an Appeals Office conference. http://www.taxact.com/tax-tips/index.asp?tid=1543 Mon, 19 Oct 2009 00:00:00 GMT 1543 The IRS may try to defeat your claim for innocent spouse relief on the grounds that you knew, or should have known, that tax was understated on the joint return. http://www.taxact.com/tax-tips/index.asp?tid=1542 Sun, 18 Oct 2009 00:00:00 GMT 1542 In a 2006 legal memorandum, the IRS concluded that the community property income-splitting rule allowed to California spouses does not apply to registered domestic partners, despite the California law (effective in 2005) that extended to registered domestic partners community property rights and virtually all other spousal rights and responsibilities. Thus, a California registered domestic partner must report all of his or her earned income from personal services. He or she cannot report on a separate federal return only one-half of the combined income of both partners, as he or she could if married. According to the IRS, domestic partners under the California law are not married and Supreme Court precedent allowing married couples in community property states to split income applies only to husbands and wives. http://www.taxact.com/tax-tips/index.asp?tid=1541 Sat, 17 Oct 2009 00:00:00 GMT 1541 Where one spouse is a U.S. citizen or resident and the other is a nonresident alien who becomes a resident during the tax year, the couple may make a special election to file a joint return for that year and be taxed on their worldwide income. Thereafter, neither spouse may make the election again even if married to a new spouse. See the tests for determining status as a resident or nonresident alien. http://www.taxact.com/tax-tips/index.asp?tid=1540 Fri, 16 Oct 2009 00:00:00 GMT 1540 Where a U.S. citizen or resident is married to a nonresident alien, the couple may file a joint return if both elect to be taxed on their worldwide income. The requirement that one spouse be a U.S. citizen or resident need be met only at the close of the year. Joint returns may be filed in the year of the election and all later years until the election is terminated. http://www.taxact.com/tax-tips/index.asp?tid=1539 Thu, 15 Oct 2009 00:00:00 GMT 1539 If your spouse is in a combat zone or a qualified hazardous duty area, you can sign a joint return for your spouse. Attach a signed explanation to the return. http://www.taxact.com/tax-tips/index.asp?tid=1538 Wed, 14 Oct 2009 00:00:00 GMT 1538 If you and your spouse file separate returns, you have three years from the due date (without extensions) to change to a joint return. If a joint return is filed, you may not change to separate returns once the due date has passed. The filing of separate or joint estimated tax installments does not commit you to a similar tax return. http://www.taxact.com/tax-tips/index.asp?tid=1537 Tue, 13 Oct 2009 00:00:00 GMT 1537 If you reported a property donation exceeding $5,000 on Form 8283 and the charity sells or otherwise disposes of the property within three years after your gift, it must notify the IRS on Form 8282 and send you a copy. The sale might trigger the recapture of a deduction claimed for a contribution made after September 1, 2006. Reporting on Form 8282 is not required by the charity for a particular item if in Part II, Section B of Form 8283 you indicated that the appraised value of that item was not more than $500. Similar items such as a collection of books by the same author, stereo components, or place settings of silverware may be treated as one item. Reporting is also not required on Form 8282 for donated property that the organization uses or distributes without consideration, if this use furthers the organization's tax-exempt function or purpose. http://www.taxact.com/tax-tips/index.asp?tid=1148 Mon, 12 Oct 2009 00:00:00 GMT 1148 No deduction is allowed for giving a charitable organization money with the understanding that it will be used to pay premiums on life insurance, annuities, or endowment contracts for your benefit or that of a beneficiary designated by you. http://www.taxact.com/tax-tips/index.asp?tid=1147 Sun, 11 Oct 2009 00:00:00 GMT 1147 To raise funds, a charitable organization may ask contributors who own vacation homes to donate use of the property, which the charity then auctions off to the public. Be warned that if you offer your home in this way you will not only be denied a charitable deduction for your generosity, but you may jeopardize your deduction for rental expenses. A deduction is not allowed for giving a charity the free use of your property. http://www.taxact.com/tax-tips/index.asp?tid=1146 Sat, 10 Oct 2009 00:00:00 GMT 1146 If a fractional interest in art or other tangible personal property is donated after August 17, 2006, and the charity does not receive complete ownership of the item within 10 years of the initial contribution, or, if earlier, the death of the donor, all prior charitable deductions for the property will have to be recaptured, and interest charges plus a 10% penalty will be imposed. http://www.taxact.com/tax-tips/index.asp?tid=1145 Fri, 9 Oct 2009 00:00:00 GMT 1145 If you claim a deduction for art of $20,000 or more, you must attach a copy of a signed qualifying appraisal to Form 8283 and file it with your return. http://www.taxact.com/tax-tips/index.asp?tid=1144 Thu, 8 Oct 2009 00:00:00 GMT 1144 If you are the artist, your deduction is limited to cost regardless of how long you held the art work or to what use the charity puts it. In the case of a painting, the deduction would be the lower of the cost for canvas and paints and the fair market value. http://www.taxact.com/tax-tips/index.asp?tid=1143 Wed, 7 Oct 2009 00:00:00 GMT 1143 If you donate appreciated tangible personal property held long term, for which you claim a deduction exceeding $5,000, and it is sold by the charity by the end of the year of the contribution, the deduction is limited to your cost basis (and not fair market value) unless the charity makes a qualifying written certification to the IRS and gives you a copy. If you deduct more than your basis for the property and the charity sells the property after the year of the contribution but within three years of the contribution, and the charity does not provide the required certification, you must recapture part of the previously claimed deduction. http://www.taxact.com/tax-tips/index.asp?tid=1142 Tue, 6 Oct 2009 00:00:00 GMT 1142 When you donate appreciated collectibles and artwork held long term, you get a full deduction for the fair market value of the property if the items are used in connection with the charity's main activity or tax-exempt purpose. However, a deduction for fair market value is not available for certain contributions of taxidermy property. If the charity sells your property, your deduction is limited to your basis in the property (what you paid for it, rather than its appreciated value). Protect a deduction for fair market value by obtaining a letter from the charity stating that it intends to use your gift in connection with its tax-exempt purposes. http://www.taxact.com/tax-tips/index.asp?tid=1141 Mon, 5 Oct 2009 00:00:00 GMT 1141 A fee paid for an appraisal of donated real estate or art is not deductible as a charitable contribution. It may be claimed only as a miscellaneous itemized deduction subject to the 2% floor. http://www.taxact.com/tax-tips/index.asp?tid=1140 Sun, 4 Oct 2009 00:00:00 GMT 1140 In this chapter, property held long term is property held more than one year by the donor. http://www.taxact.com/tax-tips/index.asp?tid=1139 Sat, 3 Oct 2009 00:00:00 GMT 1139 If you receive payments from a state agency to reimburse you for the costs of caring for a foster child in your home, and you can show that your costs of caring for the child exceed the reimbursements, the excess is deductible as a charitable contribution. Keep detailed records to substantiate your support payments. http://www.taxact.com/tax-tips/index.asp?tid=1138 Fri, 2 Oct 2009 00:00:00 GMT 1138 You may rely on a written estimate from the organization of the value of any benefits given to you unless it seems unreasonable. Although the value of benefits received generally reduces your deductible contribution, certain token items and membership benefits do not reduce the amount of your deduction. http://www.taxact.com/tax-tips/index.asp?tid=1137 Thu, 1 Oct 2009 00:00:00 GMT 1137 You may not deduct the cost of raffle tickets, bingo games, or tickets for other types of lotteries organized by charities. http://www.taxact.com/tax-tips/index.asp?tid=1136 Wed, 30 Sep 2009 00:00:00 GMT 1136 You may deduct donations to domestic organizations that distribute funds to charities in foreign countries, as long as the U.S. organization controls the distribution of the funds overseas. An outright contribution to a foreign charitable organization is not deductible. Some exceptions to this ban are provided by international treaties. For example, if you have income from Canadian, Mexican, or Israeli sources, contributions to certain organizations in those countries are deductible subject to limitations. http://www.taxact.com/tax-tips/index.asp?tid=1135 Tue, 29 Sep 2009 00:00:00 GMT 1135 No deduction can be claimed for a contribution to a donor-advised fund if the sponsoring organization is a war veterans organization, fraternal society, veterans organization, or a non-functionally integrated Type III supporting organization. http://www.taxact.com/tax-tips/index.asp?tid=1134 Mon, 28 Sep 2009 00:00:00 GMT 1134 You get a tax deduction for the full market value when you donate appreciated securities traded on an established securities market that you have held more than one year. In addition, you also avoid paying capital gains tax on the securities appreciation. http://www.taxact.com/tax-tips/index.asp?tid=1133 Sun, 27 Sep 2009 00:00:00 GMT 1133 The law that allowed IRA owners age 70 or older to make a tax-free direct transfer of up to $100,000 from an IRA to charity expired at the end of 2007 and Congress had not yet extended it to 2008 at the time this book went to press. http://www.taxact.com/tax-tips/index.asp?tid=1132 Sat, 26 Sep 2009 00:00:00 GMT 1132 The phase out of the reduction to overall itemized deductions began with 2006 returns and will continue through 2009. For 2008 and 2009, only one-third of the amount that would have been disallowed under the pre-2006 rules will in fact be disallowed. In 2010, the reduction rules will no longer apply, assuming the law is not changed. Some members of Congress oppose the elimination of the reduction as an unnecessary tax break for high-income taxpayers. http://www.taxact.com/tax-tips/index.asp?tid=1131 Fri, 25 Sep 2009 00:00:00 GMT 1131 As the end of the year approaches, check your records for payments of deductible itemized expenses. If these payments are slightly less than the allowable standard deduction for the year, making a year-end payment of a deductible expense that you would otherwise pay in the following year could allow you to itemize. http://www.taxact.com/tax-tips/index.asp?tid=1130 Thu, 24 Sep 2009 00:00:00 GMT 1130 For 2008, an individual who may be claimed as a dependent may add $300 to earned income in figuring the allowable standard deduction. http://www.taxact.com/tax-tips/index.asp?tid=1129 Wed, 23 Sep 2009 00:00:00 GMT 1129 The reduced standard deduction rules apply to you if you may be claimed as a dependent on another tax return, such as by your parents. If you can be claimed as a dependent, it does not matter if you are actually claimed as a dependent. http://www.taxact.com/tax-tips/index.asp?tid=1128 Tue, 22 Sep 2009 00:00:00 GMT 1128 An additional standard deduction for 2008 is allowed to a person who is completely blind as of December 31, 2008. You may claim an additional deduction if you are partially blind and attach a letter certified by your doctor stating that you cannot see better than 20/200 in your better eye with lenses or that your field of vision is 20 degrees or less. Keep a copy of this letter. If the certification states that your vision will never improve beyond these limits, you will not have to file a new certification in later years; you will only have to attach a statement referring to the earlier certification. http://www.taxact.com/tax-tips/index.asp?tid=1127 Mon, 21 Sep 2009 00:00:00 GMT 1127 If you filed your return using the standard deduction and want to change to itemized deductions, or you itemized and want to change to the standard deduction, you may do so within the three-year period allowed for amending your return. If you are married and filing separately, each of you must consent to and make the same change; you both must either itemize or claim the standard deduction. http://www.taxact.com/tax-tips/index.asp?tid=1126 Sun, 20 Sep 2009 00:00:00 GMT 1126 An additional standard deduction may be claimed for 2008 state and local real estate taxes, up to the lesser of the actual taxes paid or $500, $1,000 on a joint return. The deduction for real estate taxes is in addition to the basic standard deduction and the extra standard deduction for those age 65 or older or blind, and is allowed regardless of income. http://www.taxact.com/tax-tips/index.asp?tid=1125 Sat, 19 Sep 2009 00:00:00 GMT 1125 To encourage or facilitate an employee's move, an employer may reimburse the employee for a loss incurred on the sale of his or her home. The IRS taxes such reimbursements as pay. http://www.taxact.com/tax-tips/index.asp?tid=1124 Fri, 18 Sep 2009 00:00:00 GMT 1124 For purposes of the 39-week test, full-time status is determined by the customary practices of your occupation in the area. If work is seasonal, off-season weeks count as work weeks if the off-season period is less than six months and you have an employment agreement covering the off-season. http://www.taxact.com/tax-tips/index.asp?tid=1123 Thu, 17 Sep 2009 00:00:00 GMT 1123 If you lose your job for reasons other than your willful misconduct, the 39-week requirement is waived. Should you resign or lose your job for willful misconduct, a part-time job will not satisfy the 39-week test. The time test is not waived because you reach mandatory retirement age first where this retirement was anticipated. http://www.taxact.com/tax-tips/index.asp?tid=1122 Wed, 16 Sep 2009 00:00:00 GMT 1122 It is not necessary for you and members of your household to travel together, or at the same time, to claim a deduction for the expenses incurred by each family member. http://www.taxact.com/tax-tips/index.asp?tid=1121 Tue, 15 Sep 2009 00:00:00 GMT 1121 If the cash received on the surrender of a policy exceeds the premiums paid less dividends received, the excess is taxed as ordinary income (not capital gain). If you take, instead, a paid-up policy, you may avoid tax. You get no deduction if there is a loss on the surrender of a policy. Tax may be avoided by a terminally ill individual on the surrender of a policy under an accelerated death benefit clause or on a sale of the policy to a viatical settlement company (17.16). http://www.taxact.com/tax-tips/index.asp?tid=1120 Mon, 14 Sep 2009 00:00:00 GMT 1120 A person who is terminally ill may withdraw without tax life insurance proceeds to pay medical bills and other living expenses. For policies lacking an accelerated benefits clause, it is possible to sell a life insurance policy without incurring tax to a viatical settlement company. http://www.taxact.com/tax-tips/index.asp?tid=1119 Sun, 13 Sep 2009 00:00:00 GMT 1119 When a beneficiary receiving a lump-sum distribution because of an employee's death reports the distribution using the special averaging method, the taxable amount of the distribution must be reduced by the estate taxes attributable to the distribution. http://www.taxact.com/tax-tips/index.asp?tid=1118 Sat, 12 Sep 2009 00:00:00 GMT 1118 Beneficiaries of trusts and estates must report items consistently with the Schedule K-1 provided by the trust or estate. If an item is treated inconsistently and a statement identifying the inconsistency is not attached to the return, the IRS may make a summary assessment for additional tax without issuing a deficiency notice. http://www.taxact.com/tax-tips/index.asp?tid=1117 Fri, 11 Sep 2009 00:00:00 GMT 1117 Deductible losses may not exceed your basis in S corporation stock and loans to the corporation. If losses exceed basis, the excess loss is carried over and becomes deductible when you invest or lend an equivalent amount of money to the corporation. This rule may allow for timing a loss deduction. In a year in which you want to deduct the loss, you may contribute capital or make an additional loan to the corporation. If a carryover loss exists when an S election terminates, a limited loss deduction may be allowed. http://www.taxact.com/tax-tips/index.asp?tid=1116 Thu, 10 Sep 2009 00:00:00 GMT 1116 Neither the IRS nor the Department of Justice is required to offer consistent settlements to audited partners so long as they do not discriminate for arbitrary reasons. http://www.taxact.com/tax-tips/index.asp?tid=1115 Wed, 9 Sep 2009 00:00:00 GMT 1115 The partnership, not the individual partners, makes elections affecting the computation of partnership income such as the election to defer involuntary conversion gains, to amortize organization and start-up costs, and to choose depreciation methods, including first-year expensing. An election to claim a foreign tax credit is made by the partners. http://www.taxact.com/tax-tips/index.asp?tid=1114 Tue, 8 Sep 2009 00:00:00 GMT 1114 If you bought property on credit and the seller cancels or reduces your purchase-related debt, this is a price adjustment, not a taxable cancellation of debt. http://www.taxact.com/tax-tips/index.asp?tid=1113 Mon, 7 Sep 2009 00:00:00 GMT 1113 Insurance can be purchased to cover a portion of credit card debt in the event you become unemployed or disabled, or you die. The Tax Court held that insurance payments of an unemployed credit card holder's debt were a taxable cancellation of debt to the extent the payments exceeded the premiums paid. http://www.taxact.com/tax-tips/index.asp?tid=1112 Sun, 6 Sep 2009 00:00:00 GMT 1112 If debt on your principal residence is cancelled in a mortgage restructuring or foreclosure, you may avoid cancellation of debt income on a qualifying debt discharge that occurs in 2007, 2008, or 2009. The cancelled debt must have been secured by your principal residence and incurred in the acquisition, construction, or substantial improvements of the principal residence. The maximum amount of qualified principal residence indebtedness for all three years is $2 million. http://www.taxact.com/tax-tips/index.asp?tid=1111 Sat, 5 Sep 2009 00:00:00 GMT 1111 You may not deduct legal fees incurred in obtaining tax-free damages for physical injury or physical sickness. If you recover taxable damages, you may be able to deduct legal fees. http://www.taxact.com/tax-tips/index.asp?tid=1110 Fri, 4 Sep 2009 00:00:00 GMT 1110 If your taxable income was a negative amount in the year in which the recovered item was deducted, you reduce the recovery includible in income by the negative amount. For example, if the taxable recovery would be $1,700 but you had a negative taxable income of $500 for the year the deduction was claimed, only $1,200 is taxable. http://www.taxact.com/tax-tips/index.asp?tid=1109 Thu, 3 Sep 2009 00:00:00 GMT 1109 A state and local tax refund received in 2008 is taxable only if you claimed the tax as an itemized deduction, and only to the extent that your itemized deductions in that year exceeded the standard deduction you could have claimed. To help you figure the taxable portion of 2007 itemized deductions recovered in 2008, 2007 standard deduction amounts are shown in Table 11-1. http://www.taxact.com/tax-tips/index.asp?tid=1108 Wed, 2 Sep 2009 00:00:00 GMT 1108 You may have to file a gift tax return if your gifts to an individual within the year exceed the annual gift tax exclusion, which for 2008 was $12,000. http://www.taxact.com/tax-tips/index.asp?tid=1107 Tue, 1 Sep 2009 00:00:00 GMT 1107 The federal appeals court for the Third Circuit (New Jersey, Pennsylvania, and Delaware) held that the settlement by an Atlantic City casino of a gambler's $3.4 million debt for $500,000 was not taxable. The debt was not enforceable under New Jersey law because the casino did not comply with state regulations on issuance of credit. Furthermore, the gambling chips were not property securing the debt; they had no economic value outside the casino. http://www.taxact.com/tax-tips/index.asp?tid=1106 Mon, 31 Aug 2009 00:00:00 GMT 1106 Gambling losses are deductible as miscellaneous deductions up to the amount of your gambling winnings. Lottery winnings paid in installments qualify as such gambling winnings. If you receive lottery installments in 2008, for instance, you may deduct any gambling losses incurred in 2008 up to the amount of that installment. Lottery winnings paid in installments do not lose their characteristic as gambling winnings. http://www.taxact.com/tax-tips/index.asp?tid=1105 Sun, 30 Aug 2009 00:00:00 GMT 1105 Courts have agreed with the IRS that a lump sum received for assigning the rights to future state lottery payments is taxed as ordinary income, not capital gain. The right to receive annual lottery payments is not a capital asset. http://www.taxact.com/tax-tips/index.asp?tid=1104 Sat, 29 Aug 2009 00:00:00 GMT 1104 Losses disallowed by at-risk rules are carried over and may be deductible in a later year. http://www.taxact.com/tax-tips/index.asp?tid=1103 Fri, 28 Aug 2009 00:00:00 GMT 1103 Even if you are personally liable for a debt, you may not be considered at risk if the lender has an interest in the activity other than as a creditor. http://www.taxact.com/tax-tips/index.asp?tid=1102 Thu, 27 Aug 2009 00:00:00 GMT 1102 If you have invested an amount for which you are not at risk, such as a nonrecourse loan, you generally must file Form 6198 to figure a deductible loss. However, nonrecourse financing for real estate that secures the loan is treated as an at-risk investment in most cases. http://www.taxact.com/tax-tips/index.asp?tid=1101 Wed, 26 Aug 2009 00:00:00 GMT 1101 The purpose of at-risk rules is to keep you from deducting losses from investments in which you have little cash invested and no personal liability for debts. http://www.taxact.com/tax-tips/index.asp?tid=1100 Tue, 25 Aug 2009 00:00:00 GMT 1100 If you sell your passive activity interest at a profit and have suspended losses, you may deduct a percentage of the losses each year during the installment period. http://www.taxact.com/tax-tips/index.asp?tid=1099 Mon, 24 Aug 2009 00:00:00 GMT 1099 To deduct suspended passive losses on a disposition of part of an activity, the part disposed of must constitute substantially all of the activity. http://www.taxact.com/tax-tips/index.asp?tid=1098 Sun, 23 Aug 2009 00:00:00 GMT 1098 Capital losses incurred on a disposition of a passive interest are also subject to the general $3,000 loss limitation ($1,500 if married filing separately). http://www.taxact.com/tax-tips/index.asp?tid=1097 Sat, 22 Aug 2009 00:00:00 GMT 1097 A PTP is a partnership whose interests are traded on established securities exchanges or are readily tradable in secondary markets. PTPs that are not treated as corporations for tax purposes are subject to special rules that allow losses to be used only to offset income from the same PTP. http://www.taxact.com/tax-tips/index.asp?tid=1096 Fri, 21 Aug 2009 00:00:00 GMT 1096 A working interest in an oil or gas well is exempt from the passive activity restrictions if your liability is not limited. The following forms of loss protection are disregarded and, thus, are not treated as limiting your liability: protection against loss by an indemnification agreement; a stop-loss agreement; insurance; or any similar arrangement or combination of agreements. http://www.taxact.com/tax-tips/index.asp?tid=1095 Thu, 20 Aug 2009 00:00:00 GMT 1095 You may not generate passive income by renting property to a business in which you materially participate. http://www.taxact.com/tax-tips/index.asp?tid=1094 Wed, 19 Aug 2009 00:00:00 GMT 1094 Gain on the sale of property used in a passive activity may be recharacterized as non passive income if the property was formerly used in a non passive activity. http://www.taxact.com/tax-tips/index.asp?tid=1093 Tue, 18 Aug 2009 00:00:00 GMT 1093 You cannot deduct passive losses from portfolio income. The tax law broadly defines portfolio income to include non business types of income including interest, dividends, and profits on the sale of investment property. http://www.taxact.com/tax-tips/index.asp?tid=1092 Mon, 17 Aug 2009 00:00:00 GMT 1092 Retired or disabled farmers are treated as materially participating in a farming activity if they materially participated for five of the eight years preceding their retirement or disability. A surviving spouse is also treated as materially participating in a farming activity if the real property used in the activity meets the estate tax rules for special valuation of farm property passed from a qualified decedent and the surviving spouse actively manages the farm. http://www.taxact.com/tax-tips/index.asp?tid=1091 Sun, 16 Aug 2009 00:00:00 GMT 1091 Material participation must be determined on an annual basis. Show proof of your participation by keeping an appointment book, calendar, or log of the days and time spent in the operation. If you want to treat contacts by phone as material activity, keep a log of phone calls showing the time and purpose of the calls. http://www.taxact.com/tax-tips/index.asp?tid=1090 Sat, 15 Aug 2009 00:00:00 GMT 1090 The IRS will not recognize time spent as an investor as participation unless you can show you are involved in daily operations or management of the activity. According to the IRS, this requires you to be at the business site on a regular basis. Even if you do appear daily, the IRS may ignore such evidence if there is an on-site manager or you have full-time business obligations at another site. Activity of an investor includes the studying and reviewing of financial reports for your own use that are considered unrelated to management decisions. If you invest in a business that is out of state or a distance from your home, you may also find it difficult to prove material participation. http://www.taxact.com/tax-tips/index.asp?tid=1089 Fri, 14 Aug 2009 00:00:00 GMT 1089 Once you treat activities separately or group them together as a single activity, the IRS generally requires you to continue the same treatment in later taxable years. You can regroup activities only if the original treatment was clearly inappropriate or has become clearly inappropriate because of a material change in circumstances. http://www.taxact.com/tax-tips/index.asp?tid=1088 Thu, 13 Aug 2009 00:00:00 GMT 1088 Proving professional status and material participation allows you to avoid passive loss limitations. You may improve your ability to meet the material participation tests by aggregating your rental real estate activities. However, you may not want to aggregate activities if you have passive losses from non-real estate activities and have rental income from an operation that, if treated as passive income, could be offset by the losses. Also be aware that if you elect to group all of your rental real estate activities as one activity and later sell one of the rental properties, you will probably be unable to deduct suspended losses from that property because of the rule that requires substantially of your interest in an activity (here, the combined activity) to be disposed of in order to deduct suspended losses. http://www.taxact.com/tax-tips/index.asp?tid=1087 Wed, 12 Aug 2009 00:00:00 GMT 1087 To take advantage of the $25,000 loan allowance, make sure you have proof of active management, such as approving leases and repairs. http://www.taxact.com/tax-tips/index.asp?tid=1086 Tue, 11 Aug 2009 00:00:00 GMT 1086 Renting a personal residence is not treated as a passive rental activity if you personally use the home for more than the greater of (1) 14 days or (2) 10% of the days the home is rented for a fair market rental amount. On Schedule E, you may claim a full deduction for the rental portion of real estate taxes and mortgage interest, assuming the home is a principal residence or qualifying second home under the mortgage interest rules. http://www.taxact.com/tax-tips/index.asp?tid=1085 Mon, 10 Aug 2009 00:00:00 GMT 1085 If you rent out a vacation unit for an average rental period of seven days or less at a loss, the loss is treated as a business loss deductible from non passive income if you meet the material participation tests. If you do not materially participate, the loss is treated as a passive loss, deductible only from passive income. The loss does not qualify for the up-to-$25,000 rental loss allowance because the property is not treated as rental property. http://www.taxact.com/tax-tips/index.asp?tid=1084 Sun, 9 Aug 2009 00:00:00 GMT 1084 As an independent oil or gas producer, or royalty owner, you do not have to treat a portion of your depletion deduction as a preference item or adjustment for AMT purposes. http://www.taxact.com/tax-tips/index.asp?tid=1083 Sat, 8 Aug 2009 00:00:00 GMT 1083 Prepayments of drilling expenses are deductible by tax-shelter investors only if the well is padded within 90 days after the close of the taxable year in which the prepayment was made, and the deduction is limited to the original amount of the investment. http://www.taxact.com/tax-tips/index.asp?tid=1082 Fri, 7 Aug 2009 00:00:00 GMT 1082 Authors and artists with expenses exceeding income may be barred by the IRS from claiming loss deductions. http://www.taxact.com/tax-tips/index.asp?tid=1081 Thu, 6 Aug 2009 00:00:00 GMT 1081 Certain working oil and gas interests are exempt from the passive activity loss restrictions. http://www.taxact.com/tax-tips/index.asp?tid=1080 Wed, 5 Aug 2009 00:00:00 GMT 1080 A profit motive is presumed if you can show a profit for at least three of the last five years you engaged in rental activities. The IRS, however, may rebut this presumption, but there are ways to fight this rebuttal. http://www.taxact.com/tax-tips/index.asp?tid=1079 Tue, 4 Aug 2009 00:00:00 GMT 1079 The IRS position on allocating mortgage interest and real estate taxes to rental income is not as favorable as the position adopted by the Tax Court and several appeals courts. http://www.taxact.com/tax-tips/index.asp?tid=1078 Mon, 3 Aug 2009 00:00:00 GMT 1078 If your deductions for operating expenses and depreciation are limited by the personal-use rules, the disallowed amounts may be carried over to the following year. http://www.taxact.com/tax-tips/index.asp?tid=1077 Sun, 2 Aug 2009 00:00:00 GMT 1077 Pool arrangements have been devised to avoid the loss restriction by attempting to increase the days the home is held for a fair rental value. They have not been successful. Courts have ruled that only days on which a home is actually rented count as fair rental days, not days of availability through the rental pool. http://www.taxact.com/tax-tips/index.asp?tid=1076 Sat, 1 Aug 2009 00:00:00 GMT 1076 As an investor, you can help finance the purchase of a principal residence for a family member or other individual. The rental income you receive for your ownership share in the property may be offset by deductions for your share of the mortgage interest, taxes, and operating expenses you pay under the terms of the agreement, as well as depreciation deductions for your percentage share. Rental losses are subject to the passive loss restrictions. The other co-owner living in the house may claim itemized deductions for payment of his or her share of the mortgage interest and taxes. http://www.taxact.com/tax-tips/index.asp?tid=1075 Fri, 31 Jul 2009 00:00:00 GMT 1075 Have an appraiser estimate the fair market value of the house when it is rented. The appraisal will help support your basis for depreciation or a loss deduction on a sale if your return is examined. http://www.taxact.com/tax-tips/index.asp?tid=1074 Thu, 30 Jul 2009 00:00:00 GMT 1074 A rental loss was denied to an owner of a two-story, four-bedroom house when he rented out two bedrooms to separate tenants after he lost his job. Although individual locks were placed on the doors of the rented bedrooms, the tenants and the owner shared access to the kitchen, bathroom, and other parts of the house. The Tax Court held that the rented rooms were not separate and distinct from the rest of the house that the owner used. The house was a single dwelling unit shared by the owner and tenants and under the personal-use rules, the owner could not claim a rental loss. http://www.taxact.com/tax-tips/index.asp?tid=1073 Wed, 29 Jul 2009 00:00:00 GMT 1073 What if repairs and improvements are unconnected and not part of an overall improvement program? Assume you repair the floors of one story and improve another story by cutting new windows. You probably may deduct the cost of repairing the floors provided you have separate bills for the jobs. To safeguard the deduction, schedule the work at separate times so that the two jobs are not lumped together as an overall improvement program. http://www.taxact.com/tax-tips/index.asp?tid=1072 Tue, 28 Jul 2009 00:00:00 GMT 1072 The Tax Court may allow a co-tenant to deduct more than his or her proportionate share of real estate taxes. According to the court, the deduction test for real estate taxes is whether the payment satisfies a personal liability or protects a beneficial interest in the property. In the case of co-tenants, nonpayment of taxes by the other co-tenants could result in the property being lost or foreclosed. To prevent this, a co-tenant who pays the tax is protecting his or her beneficial interest and, therefore, is entitled to deduct the payment of the full tax, provided the payment is from his or her own funds. In several cases, the Tax Court limited the taxpayer's deduction to his or her proportionate share, despite payment of the entire amount of taxes, because the taxpayer could not prove that the payment came from his own separate funds. http://www.taxact.com/tax-tips/index.asp?tid=1071 Mon, 27 Jul 2009 00:00:00 GMT 1071 Distinguish advance rentals, which are income, from security deposits, which are not. Security deposits are amounts deposited with you solely as security for the tenant's performance of the terms of the lease, and as such are usually not taxed, particularly where local law treats security deposits as trust funds. If the tenant breaches the lease, you are entitled to apply the sum as rent, at which time you report it as income. If both you and your tenant agree that a security deposit is to be used as a final rent payment, it is advance rent. Include it in your income when you receive it. http://www.taxact.com/tax-tips/index.asp?tid=1070 Sun, 26 Jul 2009 00:00:00 GMT 1070 Victims of the tornadoes and storms that hit the Greensboro, Kansas area in May 2007 (the Kansas disaster area) have been given relief similar to that provided to the victims of Hurricanes Katrina, Wilma, and Rita in 2005. Individuals whose principal residence was in the Kansas disaster area on May 4, 2007 and who suffered an economic loss due to the storms may report the first $100,000 of eligible retirement plan distributions received before 2009 over a three-year period. The distributions are reported on Form 8915. Three-year reporting applies unless you elect on Form 8915 to report the entire distribution in the year of receipt. In addition, the 10% penalty for pre-age 59 distributions does not apply to the first $100,000 of eligible distributions. An eligible distribution may be repaid within three years to an IRA or eligible employer plan. http://www.taxact.com/tax-tips/index.asp?tid=1069 Sat, 25 Jul 2009 00:00:00 GMT 1069 Tax treatment of a distribution you receive as the beneficiary of a Roth IRA depends on whether it would have been a qualified distribution had the owner been alive to receive it on the distribution date. If you receive the distribution before the end of the owner's five-year holding period, and part of the distribution is allocable to earnings under the ordering rules, you must include that amount in your taxable income. However, even if you receive a taxable distribution and are under age 59, you are not subject to the 10% early distribution penalty. http://www.taxact.com/tax-tips/index.asp?tid=1068 Fri, 24 Jul 2009 00:00:00 GMT 1068 The 10% penalty for pre age 59 distributions may apply if within five years of making a conversion to a Roth IRA, a distribution from that Roth IRA is received. The penalty applies to the portion of the withdrawal allocable to the conversion amount that was taxable in the year of the conversion. This is so even if the withdrawal is tax free under the ordering rule for Roth IRA distributions. http://www.taxact.com/tax-tips/index.asp?tid=1067 Thu, 23 Jul 2009 00:00:00 GMT 1067 You may have a loss on your Roth IRA investment because of declines in the stock market. If you liquidate all of your Roth IRA accounts, and the total distribution is less than your contributions to all of the Roth IRAs, you may be able to claim the difference as a deductible loss. However, the deduction is allowed only as a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income floor on Schedule A. http://www.taxact.com/tax-tips/index.asp?tid=1066 Wed, 22 Jul 2009 00:00:00 GMT 1066 For a withdrawal of earnings from a Roth IRA to be tax free, the five-year holding period test must be met and the taxpayer must be at least age 59 or meet one of the other conditions for a qualified distribution. For example, a taxpayer whose first Roth IRA contribution was for 2004 satisfies the five-year test at the end of 2008 so a distribution received after age 59 in 2009 (or later) will be a tax-free qualified distribution. http://www.taxact.com/tax-tips/index.asp?tid=1065 Tue, 21 Jul 2009 00:00:00 GMT 1065 IRS Form 8606 must be filed to report Roth IRA distributions. It is also used to report a conversion to a Roth IRA. If you recharacterized part of the converted amount, you must report the non-recharacterized amount on Form 8606. The recharacterized portion is not reported on Form 8606, but an explanation must be attached to your return; follow the Form 8606 instructions. http://www.taxact.com/tax-tips/index.asp?tid=1064 Mon, 20 Jul 2009 00:00:00 GMT 1064 After converting a traditional IRA to a Roth IRA, you may undo the conversion by recharacterizing the account as a traditional IRA. If you want to reconvert to a Roth IRA, you must stay within the IRS guidelines. A reconversion may not be made until the year following the year of the original conversion. http://www.taxact.com/tax-tips/index.asp?tid=1063 Sun, 19 Jul 2009 00:00:00 GMT 1063 The recharacterization rule is not limited to reversing a failed conversion to a Roth IRA. A regular Roth IRA contribution (up to the annual limit) may be recharacterized as a contribution to a traditional IRA if, for example, doing so would allow you to claim an IRA deduction under the certain rules. Similarly, if you contribute to a traditional IRA and decide that you would like to switch to a Roth IRA, you may recharacterize the contribution by transferring the contribution plus allocable income to a Roth IRA. A recharacterization must be made by the filing due date, plus extensions. If you recharacterize a traditional IRA contribution to a Roth IRA, the transfer is treated as if it were made to the Roth IRA on January 1 of the year in which the original traditional IRA contribution was made, regardless of when the recharacterization occurred. This may be an advantage for purposes of establishing the beginning of the five-year holding period for tax-free distributions of Roth IRA earnings. http://www.taxact.com/tax-tips/index.asp?tid=1062 Sat, 18 Jul 2009 00:00:00 GMT 1062 The Tax Increase Prevention and Reconciliation Act of 2005 (which was actually enacted in 2006) provides a tax planning opportunity in the guise of a revenue raiser. The $100,000 MAGI ceiling for making a conversion will be eliminated for tax years after 2009. Furthermore, a favorable income inclusion applies to conversions made in 2010. Unless a converting taxpayer elects otherwise, none of the income for a conversion made in 2010 will be taxable for that year; half of the income will be taxable in 2011 and half in 2012. This reporting break applies only for 2010 conversions. By extending the right to convert a traditional IRA to a Roth IRA to previously barred high-income taxpayers, and making it easier to pay the tax due on the conversion, Congress expects to garner a short-term revenue windfall as newly eligible taxpayers rush to convert in 2010. However, there is a potential cloud that could dampen the expected tax break on a 2010 conversion. There is uncertainty concerning the tax rates that will apply in 2011 and 2012 when the ratable inclusions would be made. The tax rates that apply under current law, ranging from 10% to 35%, are scheduled to sunset after 2010, and then be replaced with the rate structure that applied before 2001 (with rates ranging from 15% to 39.6%). The results of the 2008 presidential election are likely to determine what happens to tax rates. http://www.taxact.com/tax-tips/index.asp?tid=1061 Fri, 17 Jul 2009 00:00:00 GMT 1061 That you are over 70 years of age is no bar to setting up and contributing to a Roth IRA. For an annual contribution, you must have taxable compensation and not be subject to the MAGI phase out. To convert a traditional IRA to a Roth IRA, your income must be below the $100,000 ceiling. http://www.taxact.com/tax-tips/index.asp?tid=1060 Thu, 16 Jul 2009 00:00:00 GMT 1060 After 2008, inflation indexing may increase the contribute limit above $5,000. The additional contribution limit for individuals age 50 or older is scheduled to remain at $1,000. Because of the phase out rules, high income individuals may be ineligible to contribute. The $101,000 and $159,000 phase out thresholds that apply in 2008 will be subject to an inflation adjustment for 2009 and later years. http://www.taxact.com/tax-tips/index.asp?tid=1059 Wed, 15 Jul 2009 00:00:00 GMT 1059 A distribution made after 2007 from a qualified employer plan, a 403(b) plan, or a governmental 457 plan may be rolled over directly to a Roth IRA provided your modified adjusted gross income for 2008 or 2009 does not exceed $100,000 and you are not married filing separately. A direct rollover is a taxable distribution except to the extent it is allocable to after-tax contributions. http://www.taxact.com/tax-tips/index.asp?tid=1058 Tue, 14 Jul 2009 00:00:00 GMT 1058 The deadline for making Roth IRA contributions for 2008 is April 15, 2009, the regular due date for your 2008 return. This is the contribution deadline even if you obtain a filing extension for your 2008 return. http://www.taxact.com/tax-tips/index.asp?tid=1057 Mon, 13 Jul 2009 00:00:00 GMT 1057 In the first two years of SIMPLE IRA participation, the penalty for distributions before age 59 is increased from 10% to 25%. Proposals to eliminate the higher 25% penalty have not been approved by Congress. http://www.taxact.com/tax-tips/index.asp?tid=1056 Sun, 12 Jul 2009 00:00:00 GMT 1056 The IRS model notification included with Form 5304-SIMPLE or 5305-SIMPLE requires the employer to tell employees how much the employer will be contributing for the upcoming year. http://www.taxact.com/tax-tips/index.asp?tid=1055 Sat, 11 Jul 2009 00:00:00 GMT 1055 An employer with a 401(k) plan that reports on the calendar year may avoid the regular 401(k) nondiscrimination tests by following the contribution rules for SIMPLE IRAs. http://www.taxact.com/tax-tips/index.asp?tid=1054 Fri, 10 Jul 2009 00:00:00 GMT 1054 An employee over age 70 may still participate in an employer SEP plan. Minimum distributions from the plan must begin no later than a specified date in order to avoid an IRS penalty. http://www.taxact.com/tax-tips/index.asp?tid=1053 Thu, 9 Jul 2009 00:00:00 GMT 1053 If you inherit your spouse's traditional IRA and you are under age 70, you may delay the start of required minimum distributions by treating the IRA as your own. http://www.taxact.com/tax-tips/index.asp?tid=1052 Wed, 8 Jul 2009 00:00:00 GMT 1052 If you name your estate as beneficiary of your IRA and you die before your required beginning date, the entire account must be withdrawn by the end of the fifth year following the year of your death. If you die on or after the required beginning date, the account can be distributed over the balance of your single life expectancy, determined by your age in the year of death. http://www.taxact.com/tax-tips/index.asp?tid=1051 Tue, 7 Jul 2009 00:00:00 GMT 1051 To figure your required minimum distribution for the year you become age 70 and later years, use the Uniform Lifetime Table unless the exception for younger spouses applies. http://www.taxact.com/tax-tips/index.asp?tid=1050 Mon, 6 Jul 2009 00:00:00 GMT 1050 Because of stock market declines, taxpayers who began a series of payments under the fixed amortization or annuitization factor method may have experienced a much more rapid decrease in their account balances than anticipated when the payments began. To avoid a premature depletion of the accounts, the IRS allows a one-time irrevocable switch without penalty to the required minimum distribution method. http://www.taxact.com/tax-tips/index.asp?tid=1049 Sun, 5 Jul 2009 00:00:00 GMT 1049 The IRS in private rulings has allowed a reduction in the scheduled payments from an IRA if part of the IRA is transferred to an ex-spouse as part of a divorce settlement. The reduction is not treated by the IRS as a modification that triggers the penalty. http://www.taxact.com/tax-tips/index.asp?tid=1048 Sat, 4 Jul 2009 00:00:00 GMT 1048 An exception to the early distribution penalty for reservists called to active duty for over 179 days has been made permanent. http://www.taxact.com/tax-tips/index.asp?tid=1047 Fri, 3 Jul 2009 00:00:00 GMT 1047 Qualified higher education expenses must be paid in the same year that the distribution is received for the penalty exception to apply. This timing rule turns the penalty exception into a tax trap when a tuition payment made at the end of the year is reimbursed by an IRA withdrawal at the beginning of the following year, or an IRA distribution is taken at the end of the year to cover a tuition payment due at the start of the next year. http://www.taxact.com/tax-tips/index.asp?tid=1046 Thu, 2 Jul 2009 00:00:00 GMT 1046 If you are planning a series of payments to avoid the 10% early-distribution penalty, keep in mind that payments under this exception must continue for at least five years, or until you reach age 59, whichever is the longer period. http://www.taxact.com/tax-tips/index.asp?tid=1045 Wed, 1 Jul 2009 00:00:00 GMT 1045 The medical expense exception to the 10% penalty applies only to the extent that in the year you receive the distribution, you pay deductible medical costs in excess of 7.5% of your adjusted gross income. If the deductible medical expenses are not paid in the year the distribution is received, the exception is not available. http://www.taxact.com/tax-tips/index.asp?tid=1044 Tue, 30 Jun 2009 00:00:00 GMT 1044 You can take advantage of the rollover rule to borrow funds from your IRA if you need a short-term loan to pay your taxes or other expenses. As long as you redeposit the amount in an IRA within 60 days you are not taxed on the withdrawal; the redeposit is considered a tax-free rollover. You may roll over the funds to a different IRA from the one from which the withdrawal was made. A second withdrawal from the same IRA within one year would be taxable. http://www.taxact.com/tax-tips/index.asp?tid=1043 Mon, 29 Jun 2009 00:00:00 GMT 1043 A loss on an IRA investment is deductible only if your basis in nondeductible contributions has not been received after the entire account has been distributed. http://www.taxact.com/tax-tips/index.asp?tid=1042 Sun, 28 Jun 2009 00:00:00 GMT 1042 The Tax Court held that an IRA owner received a taxable distribution when a bank enforced a court's garnishment award for past-due child support by transferring his IRA to his ex-wife. The Tax Court found that the distribution to the owner's former wife was a discharge of indebtedness to her and was constructively received by him. Whether the transfer of funds was voluntary or in settlement of a legal obligation was held to be of no consequence. The 10% tax penalty for distributions before age 59 also applied. http://www.taxact.com/tax-tips/index.asp?tid=1041 Sat, 27 Jun 2009 00:00:00 GMT 1041 Qualified hurricane distributions made before 2007 from a traditional IRA, SEP, SIMPLE IRA, or Roth IRA to residents in the Hurricane Katrina, Rita, or Wilma disaster areas may be reported as income over three years or repaid without tax within the three-year period. http://www.taxact.com/tax-tips/index.asp?tid=1040 Fri, 26 Jun 2009 00:00:00 GMT 1040 For 2006 and 2007, individuals age 70 and older could exclude from income distributions of up to $100,000 from a traditional IRA that were transferred directly to a charity. When this book went to press, Congress had not yet extended to 2008 the law allowing the exclusion, but an extension was expected. http://www.taxact.com/tax-tips/index.asp?tid=1039 Thu, 25 Jun 2009 00:00:00 GMT 1039 Keep a copy of each Form 8606 filed showing nondeductible contributions and keep a separate record of deductible contributions. When you make withdrawals from a traditional IRA, the portion of each withdrawal allocable to nondeductible contributions is not taxed. You may not completely avoid tax even if you withdraw an amount equal to your nondeductible contributions. The tax-free portion of the withdrawal is figured on Form 8606. http://www.taxact.com/tax-tips/index.asp?tid=1038 Wed, 24 Jun 2009 00:00:00 GMT 1038 A Roth IRA is a nondeductible IRA that offers significant tax and retirement planning advantages. Contributions up to the annual limit may be made if modified adjusted gross income is below the annual phase out threshold. In general, after the five-year period beginning with the first taxable year for which a Roth IRA contribution was made, tax-free withdrawals may be made if you are age 59 or older, you are disabled or you have qualifying first-time home-buyer expenses. Traditional IRAs may be rolled over to Roth IRAs if your modified adjusted gross income is $100,000 or less. http://www.taxact.com/tax-tips/index.asp?tid=1037 Tue, 23 Jun 2009 00:00:00 GMT 1037 You are treated as an active participant in a 401(k) plan, profit-sharing plan, stock bonus plan, or money-purchase pension plan if contributions are made or allocated to your account for the plan year that ends within your tax year. Under this rule, you may be considered an active participant for a year during which no contributions by you or your employer are made to your account. http://www.taxact.com/tax-tips/index.asp?tid=1036 Mon, 22 Jun 2009 00:00:00 GMT 1036 Even if you qualify for a full IRA deduction, you may want to consider making a nondeductible contribution to a Roth IRA. For example, you may be willing to give up the current tax deduction in order to create a Roth IRA from which distributions will be completely tax free after age 59 and a five-year waiting period has passed. If you choose to make a deductible contribution to a traditional IRA, distributions from the traditional IRA will be taxable. You may also prefer the Roth-IRA advantage of not having to take minimum distributions starting at age 70, as is required with traditional IRAs. http://www.taxact.com/tax-tips/index.asp?tid=1035 Sun, 21 Jun 2009 00:00:00 GMT 1035 If you are not covered by an employer retirement plan but your spouse is, and you file a joint return for 2008, your individual deduction limit is not subject to the phase out rule unless modified adjusted gross income (MAGI) on the joint return is between $159,000 and $169,000. Your spouse, who is covered by an employer plan, is subject to the deduction phase out for 2008 if modified adjusted gross income on the joint return is between $85,000 and $105,000. http://www.taxact.com/tax-tips/index.asp?tid=1034 Sat, 20 Jun 2009 00:00:00 GMT 1034 Contributions to a traditional IRA may not be made after age 70, but contributions to a Roth IRA may be made even if you are over age 70, provided you have compensation to support the contribution and your income is within the limit allowed under the Roth IRA contribution rules. http://www.taxact.com/tax-tips/index.asp?tid=1033 Fri, 19 Jun 2009 00:00:00 GMT 1033 For 2009, the IRA contribution limit for individuals under age 50 may be increased above $5,000 (the 2008 limit) by an inflation adjustment. The extra $1,000 contribution allowed to individuals age 50 or older will not increase; it is set by statute and not subject to inflation adjustments. For deduction purposes, the contribution limits may be subject to a phase out. http://www.taxact.com/tax-tips/index.asp?tid=1032 Thu, 18 Jun 2009 00:00:00 GMT 1032 If you have a self-directed traditional IRA and you invest in collectibles, such as art works, gems, stamps, antiques, rugs, metals, guns, or certain coins, you will have to pay a tax on your investment. The investment is treated as a taxable distribution to you in the year you make it. Coins are treated as collectibles, except for state-issued coins or certain U.S. minted gold, silver, and platinum coins. There is also an exception for gold, silver, platinum, or palladium bullion held by the IRA trustee, provided the fineness of the metal meets commodity market standards. If bullion is stored with a company other than the IRA trustee, the investment is subject to the deemed distribution rule for collectibles. http://www.taxact.com/tax-tips/index.asp?tid=1031 Wed, 17 Jun 2009 00:00:00 GMT 1031 Fees paid to set up or manage an IRA, and annual account maintenance fees, are not considered IRA contributions provided they are separately billed. They are investment expenses that may be deducted as a miscellaneous itemized deduction subject to the 2% of adjusted gross income floor. However, broker's commissions that are paid when you make investments for your IRA are not separately deductible, according to the IRS. They are considered IRA contributions subject to the $5,000 contribution limit ($6,000 if age 50 or older) for 2008. http://www.taxact.com/tax-tips/index.asp?tid=1030 Tue, 16 Jun 2009 00:00:00 GMT 1030 Both of the favorable cost recovery rules discussed under Exceptions in this section are complicated and you should consult your plan administrator to determine if the exceptions apply and how to make the required calculations. http://www.taxact.com/tax-tips/index.asp?tid=1029 Mon, 15 Jun 2009 00:00:00 GMT 1029 If your annuity starting date was in 2008, you must use the simplified method to figure the taxable part of your 2008 payments, unless on the annuity starting date you were age 75 or older and your payments are guaranteed for at least five years. http://www.taxact.com/tax-tips/index.asp?tid=1028 Sun, 14 Jun 2009 00:00:00 GMT 1028 If you pay tax on a pension distribution and in the next year the plan determines that there was an overpayment, which you repay, the repayment may be deductible. If the repayment is $3,000 or less, it is deductible as a miscellaneous itemized deduction subject to the 2% floor, which may limit or eliminate the deduction. If the repayment exceeds $3,000, you may claim either a miscellaneous deduction not subject to the 2% floor, or if it would provide a lower tax for the year of repayment, a tax credit based on a recomputation of the prior year's tax. http://www.taxact.com/tax-tips/index.asp?tid=1027 Sat, 13 Jun 2009 00:00:00 GMT 1027 If no exception to the early withdrawal penalty applies, you compute the 10% penalty in Part I of Form 5329. The penalty is 5% instead of 10% if as of March 1, 1986, you were receiving payments under a specific schedule pursuant to your written election. Attach an explanation to Form 5329 if you are applying the 5% rate. http://www.taxact.com/tax-tips/index.asp?tid=1026 Fri, 12 Jun 2009 00:00:00 GMT 1026 The life expectancy tables for figuring your expected return are in IRS Publication 939. http://www.taxact.com/tax-tips/index.asp?tid=1025 Thu, 11 Jun 2009 00:00:00 GMT 1025 Payments on a complete surrender of the annuity contract or at maturity are taxable only to the extent they exceed your investment. http://www.taxact.com/tax-tips/index.asp?tid=1024 Wed, 10 Jun 2009 00:00:00 GMT 1024 If you can show severe financial hardship arising from a sudden illness or accident, or loss of property due to events beyond your control, and you are unable to obtain funds elsewhere, you may make a withdrawal from your employer's Section 457 plan. However, the need to buy a home or pay college expenses does not qualify as an unforeseeable emergency. http://www.taxact.com/tax-tips/index.asp?tid=1023 Tue, 9 Jun 2009 00:00:00 GMT 1023 A hardship distribution from a 401(k) plan is not eligible for rollover to an IRA or an eligible employer plan. Your employer will not apply 20% withholding to the distribution, as mandatory withholding applies only to rollover-eligible distributions (7.7). http://www.taxact.com/tax-tips/index.asp?tid=1022 Mon, 8 Jun 2009 00:00:00 GMT 1022 The Pension Protection Act of 2006 encourages employers to automatically enroll employees in a 401(k) plan. Unless employees affirmatively opt out, a specified percentage of their pay is contributed to the plan. Even though the employees do not make affirmative elections to contribute, such plans are qualified provided that the employees are given advance notice of their right either to receive cash or have the designated amount contributed by the employer to the plan. Starting in 2008, employers are granted protection from nondiscrimination restrictions if they have automatic enrollment plans that include mandatory matching or non-elective employer contributions. http://www.taxact.com/tax-tips/index.asp?tid=1021 Sun, 7 Jun 2009 00:00:00 GMT 1021 The regular tax-free limit is increased for certain loans to the victims of the 2007 storms in the Kansas disaster area, and a suspension of certain loan repayments is allowed. http://www.taxact.com/tax-tips/index.asp?tid=1020 Sat, 6 Jun 2009 00:00:00 GMT 1020 If you received a distribution before age 59, do not qualify for a penalty exception, and Code 1 is shown in Box 7 of your Form 1099-R, multiply the taxable distribution by 10% and enter that amount as the penalty on Line 59 of Form 1040; write no next to Line 59 to indicate that Form 5329 does not have to be filed. If you are subject to the penalty and Code 1 is not entered in Box 7 of Form 1099-R, you must file Form 5329. You may also have to file Form 5329 to claim a penalty exception. However, filing the form is not required if you qualify for the rollover exception or you qualify for another exception that is correctly coded in Box 7 of Form 1099-R. http://www.taxact.com/tax-tips/index.asp?tid=1019 Fri, 5 Jun 2009 00:00:00 GMT 1019 The substantially equal payments exception to the 10% early distribution penalty is generally revoked if qualifying payments are not received for at least five years. For example, you separate from service when you are age 57 and you begin to receive a series of qualifying substantially equal payments. When you are age 61, you stop the payments or modify the payment schedule so that it no longer qualifies. Unless the IRS permits an exception, the 10% penalty applies to the payments received before age 59 because the five-year test was not met. http://www.taxact.com/tax-tips/index.asp?tid=1018 Thu, 4 Jun 2009 00:00:00 GMT 1018 The 10% penalty on early withdrawals does not apply to the first $100,000 of qualified Kansas disaster area distributions. http://www.taxact.com/tax-tips/index.asp?tid=1017 Wed, 3 Jun 2009 00:00:00 GMT 1017 Drafting a QDRO involves technical details that legal counsel must carefully review. To ease the drafting burdens and reduce litigation over the effect of QDRO provisions, Congress passed a law requiring the IRS to provide sample language for inclusion in a QDRO that meets tax law requirements. The IRS sample language and a discussion of QDRO requirements is in IRS Notice 97-11. http://www.taxact.com/tax-tips/index.asp?tid=1016 Tue, 2 Jun 2009 00:00:00 GMT 1016 Your spouse must consent in writing to your waiver of a required annuity and the selection of a different type of distribution. A spouse's consent must be witnessed by a plan representative or notary public. An election to waive the qualified joint and survivor annuity may be made during the 90-day period ending on the annuity starting date. An election to waive the qualified pre-retirement survivor annuity may be made any time after the first day of the plan year in which you reach age 35. A waiver is revocable during the time permitted to make the election. http://www.taxact.com/tax-tips/index.asp?tid=1015 Mon, 1 Jun 2009 00:00:00 GMT 1015 If you receive a lump-sum distribution that includes appreciated employer securities, you may defer the tax on the net unrealized appreciation (NUA) in the securities. http://www.taxact.com/tax-tips/index.asp?tid=1014 Sun, 31 May 2009 00:00:00 GMT 1014 A taxpayer withdrew cash from his Keogh accounts and used most of the net distribution (after withholdings) to buy stock, which was then transferred to an IRA within 60 days of the withdrawal. He treated the entire distribution as a tax-free rollover but the IRS and Tax Court held it was taxable. The transfer of stock to the IRA was not a tax-free rollover; only the cash distribution itself could be rolled over. A negligence penalty was also imposed. A direct rollover from the Keogh accounts to an IRA would have been tax free; the stock could then have been purchased through the new IRA. http://www.taxact.com/tax-tips/index.asp?tid=1013 Sat, 30 May 2009 00:00:00 GMT 1013 If allowed by the employer plan, a non-spouse beneficiary may direct the plan to make a trustee-to-trustee transfer of a distribution to an IRA, provided the IRA is treated as an inherited IRA. http://www.taxact.com/tax-tips/index.asp?tid=1012 Fri, 29 May 2009 00:00:00 GMT 1012 A rollover from an employer plan to a traditional IRA is irrevocable, according to the IRS. At the time of the rollover, you must elect in writing to irrevocably treat the contribution as a rollover. If a qualifying lump-sum distribution is made to you and you roll it over, you may not later change your mind in order to claim averaging even though you were born before January 2, 1936, and the other tests for averaging are met. Before making a rollover, figure what the current tax would be on the lump-sum distribution under the special averaging method. Compare it with an estimate of the regular tax that will be payable on a later distribution of the rolled-over account from the IRA. http://www.taxact.com/tax-tips/index.asp?tid=1011 Thu, 28 May 2009 00:00:00 GMT 1011 If you are under age 59 and do not roll over an eligible distribution, you will generally be subject to a 10% penalty in addition to regular income tax. However, penalty exceptions apply if you separate from service and are age 55 or older, you are disabled, or you pay substantial medical expenses. http://www.taxact.com/tax-tips/index.asp?tid=1010 Wed, 27 May 2009 00:00:00 GMT 1010 If you roll over a distribution from an employer plan to a traditional IRA, you may later roll over a distribution from the IRA to a new employer's plan. You can make the subsequent rollover from the IRA even if the funds from the first employer were mixed with regular IRA contributions and earnings. However, if you were born before January 2, 1936, expect to join another employer's qualified plan, and want to preserve the possibility of claiming averaging for a lump-sum distribution from the new employer's plan, a rollover from the first employer plan should be to a segregated conduit IRA. A conduit IRA contains only the assets distributed from the first qualified plan plus the earnings on those assets. If you then join a company with a plan that accepts rollovers and make the rollover from the conduit IRA into that plan, a subsequent lump-sum distribution from the new employer plan will qualify for 10-year averaging (and possibly 20% capital gain treatment for pre-1974 participation), assuming the distribution otherwise qualifies. http://www.taxact.com/tax-tips/index.asp?tid=1009 Tue, 26 May 2009 00:00:00 GMT 1009 Before 2008 you could not roll over an employer plan distribution to a Roth IRA. You could make a tax-free rollover to a traditional IRA and then make a taxable conversion to a Roth IRA. However, a distribution made after 2007 from a qualified employer plan, 403(b) plan, or governmental 457 plan can be directly rolled over to a Roth IRA, provided you qualify under the taxable conversion rules. Your modified adjusted gross income in 2008 or 2009 cannot exceed $100,000 and, if married, you must file jointly to be eligible for a direct rollover. A direct rollover is a taxable distribution except to the extent it is allocable to after-tax contributions. http://www.taxact.com/tax-tips/index.asp?tid=1008 Mon, 25 May 2009 00:00:00 GMT 1008 A lump-sum distribution to two or more beneficiaries may qualify for averaging and capital gain treatment, so long as the plan participant was born before January 2, 1936. Each beneficiary may separately elect the averaging method for the ordinary income portion, even though other beneficiaries do not so elect. Follow the Form 4972 instructions for multiple recipients. http://www.taxact.com/tax-tips/index.asp?tid=1007 Sun, 24 May 2009 00:00:00 GMT 1007 If you were born before January 2, 1936, and a portion of your lump-sum distribution is attributable to plan participation before 1974, you may treat it as ordinary income eligible for averaging, or you may elect to treat it as capital gain taxable at a flat 20% rate; choose the method on Form 4972 that gives the lower overall tax. http://www.taxact.com/tax-tips/index.asp?tid=1006 Sat, 23 May 2009 00:00:00 GMT 1006 If you were born after January 1, 1936, a lump-sum distribution from your plan is not eligible for averaging. http://www.taxact.com/tax-tips/index.asp?tid=1005 Fri, 22 May 2009 00:00:00 GMT 1005 You are allowed to elect averaging only once as a plan participant after 1986. If before 1987 you elected 10-year averaging and were under age 59 1/2, you may elect averaging for a current distribution. However, if you were over age 59 1/2 when you made the pre-1987 election, you are barred from electing averaging again. If you were born before January 2, 1936, have not previously elected averaging, and elect averaging for a distribution received in 2008, you will not be able to claim averaging again if you join another company and receive a lump-sum distribution from the new employer. Even if you are barred from electing averaging for a lump sum from your own plan, you can make the election as a beneficiary of a deceased plan participant born before January 2, 1936. http://www.taxact.com/tax-tips/index.asp?tid=1004 Thu, 21 May 2009 00:00:00 GMT 1004 You may not claim averaging for a lump-sum distribution if you previously received a distribution from the same plan that was rolled over tax free to an IRA or to another qualified employer plan. http://www.taxact.com/tax-tips/index.asp?tid=1003 Wed, 20 May 2009 00:00:00 GMT 1003 If you are paid a distribution that qualifies for lump-sum averaging, Code A will be entered in Box 7 of Form 1099-R. http://www.taxact.com/tax-tips/index.asp?tid=1002 Tue, 19 May 2009 00:00:00 GMT 1002 If in 2008 you converted a traditional IRA to a Roth IRA, the conversion amount is included in Box 1 and in Box 2a of Form 1099-R as a taxable distribution. The entire conversion amount is taxable on your 2008 return, except for any portion allocable to nondeductible contributions. http://www.taxact.com/tax-tips/index.asp?tid=1001 Mon, 18 May 2009 00:00:00 GMT 1001 If your annuity contract or insurance policy is with an insurance company that is in a rehabilitation, conservatorship, insolvency, or a similar state proceeding, you may surrender the policy and make a tax-free reinvestment of the proceeds in a new policy with a different insurance company. The transfer must be completed within 60 days. If a government agency does not allow you to withdraw your entire balance from the troubled insurance company, you must assign all rights to any future distributions to the issuer of the new contract or policy. http://www.taxact.com/tax-tips/index.asp?tid=1000 Sun, 17 May 2009 00:00:00 GMT 1000 Before making a property transfer to a closely held corporation, consult an accountant or an attorney on the tax consequences. There may be instances when you have potential losses or you desire the corporation to take a stepped-up basis that would make tax-free treatment undesirable. http://www.taxact.com/tax-tips/index.asp?tid=999 Sat, 16 May 2009 00:00:00 GMT 999 If you transfer property to a third party on behalf of your spouse or former spouse where the transfer is required by a divorce or separation instrument, or if you have your spouse's or former spouse's written request or consent for the transfer, the transfer is tax free to you under Section 1041. The transfer is treated as if made to your spouse or former spouse, who then retransfers the property to the third party. A written request or consent must specifically state that the tax-free exchange rules of Code Section 1041 are intended, and you must receive it before filing the tax return for the year of the transfer. As discussed in the Examples on this page, a divorce-related stock redemption may qualify for Section 1041 treatment as a transfer on behalf of the other spouse. http://www.taxact.com/tax-tips/index.asp?tid=998 Fri, 15 May 2009 00:00:00 GMT 998 Parties may agree to pay interest on property transfers relating to divorce settlements when payments are to be made over time. The actual property transfer is generally a tax-free exchange. According to the Tax Court, the interest is separate and apart from the property transferred. The deductibility of the interest paid depends on the nature of the property transferred. Interest allocated to residential property, for instance, is deductible as residential mortgage interest; interest allocated to investment property is deductible as investment interest subject to the net investment income limit. http://www.taxact.com/tax-tips/index.asp?tid=997 Thu, 14 May 2009 00:00:00 GMT 997 Under the tax-free exchange rules, there is no taxable gain or deductible loss on the transfer of property, even if cash is received for the property or the other spouse (or former spouse) assumes liabilities or gives up marital rights as part of a property settlement. The spouse who receives property may incur tax on a later sale because his or her basis in the property is the same as the transferor-spouse's basis. Because the transferee bears the tax consequences of a later sale, he or she should consider the potential tax on the appreciation in negotiating a marital settlement. In a marital settlement, the transferee spouse can lessen the tax burden by negotiating for assets that have little or no unrealized appreciation. http://www.taxact.com/tax-tips/index.asp?tid=996 Wed, 13 May 2009 00:00:00 GMT 996 The IRS requires related parties who exchange property to file Form 8824 for the year of the exchange and also for the two years following the exchange. If either party disposes of the property received in the original exchange in any of these years, the deferred gain must be reported in the year of disposition as if the property had been sold. The two-year period is suspended for a holder of exchanged property who has substantially diminished his or her risk of loss, such as by use of a put or short sale. http://www.taxact.com/tax-tips/index.asp?tid=995 Tue, 12 May 2009 00:00:00 GMT 995 Property transferred to an exchange accommodation titleholder by a taxpayer cannot be transferred back to the taxpayer as replacement property under the QEAA rules. http://www.taxact.com/tax-tips/index.asp?tid=994 Mon, 11 May 2009 00:00:00 GMT 994 No extensions of time are allowed if the 45-day or 180-day statutory deadline for a deferred exchange cannot be met. If extra time is needed for finding suitable replacement property, it is advisable to delay the date of your property transfer because the transfer date starts the 45-day identification period. http://www.taxact.com/tax-tips/index.asp?tid=993 Sun, 10 May 2009 00:00:00 GMT 993 You may deduct a loss incurred on an exchange if it is attributable to unlike property transferred in the exchange. The loss is recognized to the extent that the basis of the unlike property (other than cash) transferred exceeds its fair market value. However, a loss is not recognized if the unlike property is received together with the like-kind property in the exchange. Such a loss is not deductible. http://www.taxact.com/tax-tips/index.asp?tid=992 Sat, 9 May 2009 00:00:00 GMT 992 Gain on an exchange is not taxed if the exchanged properties are either like kind or like class. The like-class test is satisfied if the exchanged properties are both within the same General Asset Class or the same Product Class. The Asset Class or Product Class is determined at the time of transfer. http://www.taxact.com/tax-tips/index.asp?tid=991 Fri, 8 May 2009 00:00:00 GMT 991 Recapture provisions supersede tax-free exchange rules. Thus, if you exchange a depreciable building placed in service before 1987, depreciation recapture may apply, so check the consequences of any recapture element. For example, if you exchange the building for land, the recaptured amount is fully taxable as ordinary income. http://www.taxact.com/tax-tips/index.asp?tid=990 Thu, 7 May 2009 00:00:00 GMT 990 If you make a like-kind exchange of depreciable MACRS property for other MACRS property, your basis for the new property is the same as the basis of the traded property. You depreciate that basis over the remaining recovery period, and using the same rate and convention as for the traded property. If you also paid cash as part of the exchange, you have an additional basis attributable to that investment that is depreciable as new MACRS property subject to a new recovery period. http://www.taxact.com/tax-tips/index.asp?tid=989 Wed, 6 May 2009 00:00:00 GMT 989 To protect against a possible IRS claim that your loan was a gift and not a loan, put the loan in writing with repayment terms as if the debtor were a third party. http://www.taxact.com/tax-tips/index.asp?tid=988 Tue, 5 May 2009 00:00:00 GMT 988 You do not have to wait until the debt is due in order to deduct a bad debt. Claim the deduction for the year that you can prove worthlessness occurred. http://www.taxact.com/tax-tips/index.asp?tid=987 Mon, 4 May 2009 00:00:00 GMT 987 If a nonbusiness bad debt became totally worthless in 2008, claim it as a short-term capital loss in Part I of Schedule D. Attach a statement describing the loan, your relationship to the debtor, how you tried to collect it, and why you decided it was worthless. http://www.taxact.com/tax-tips/index.asp?tid=986 Sun, 3 May 2009 00:00:00 GMT 986 You may claim a bad debt deduction for accounts and notes receivable on unpaid goods or services only if you have included the amount due as gross income. Thus, if a client or customer fails to pay a bill for services rendered, you do not have a deductible bad debt where you have not reported the amount as income. http://www.taxact.com/tax-tips/index.asp?tid=985 Sat, 2 May 2009 00:00:00 GMT 985 To claim a deduction for worthless stock or bonds, you must be able to prove that the stock became completely worthless in the year for which you are claiming the deduction. Sometimes you can avoid the problem of proving worthlessness by selling while there is still a market for the security. For example, a company is on the verge of bankruptcy, but in 2009 there is some doubt about the complete worthlessness of its securities. You might sell the securities for whatever you can get for them and claim the loss on the sale. However, if the security became worthless in a prior year, say in 2008, a sale for a nominal sum in 2009 will not give you a deduction in 2009. http://www.taxact.com/tax-tips/index.asp?tid=984 Fri, 1 May 2009 00:00:00 GMT 984 You have seven years from the due date of your return to claim a refund based on a deduction of a bad debt or worthless security. For example, if you have held securities that you learn became worthless in 2001, you still have until April 15, 2009, to file for a refund of 2001 taxes by claiming a deduction for the worthless securities on an amended return (Form 1040X) for 2001. http://www.taxact.com/tax-tips/index.asp?tid=983 Thu, 30 Apr 2009 00:00:00 GMT 983 If you make an exchange of like-kind property and also receive cash or other property that is payable in one or more future years, you may report the gain using the installment method. http://www.taxact.com/tax-tips/index.asp?tid=982 Wed, 29 Apr 2009 00:00:00 GMT 982 A transfer of installment obligations to your spouse or a transfer to a former spouse that is incident to a divorce is treated as a tax-free exchange unless the transfer is in trust. http://www.taxact.com/tax-tips/index.asp?tid=981 Tue, 28 Apr 2009 00:00:00 GMT 981 If you do not charge a minimum interest rate, the IRS may do so. This would require you and the buyer to treat part of the purchase price as interest. http://www.taxact.com/tax-tips/index.asp?tid=980 Mon, 27 Apr 2009 00:00:00 GMT 980 If an escrow arrangement imposes a substantial restriction, the IRS may allow installment reporting. An example of a substantial restriction: Payment of the escrow is tied to the condition that the seller refrain from entering a competing business for a period of five years. If, at any time during the escrow period, he or she engages in a competing business, all rights to the amount then held in escrow would be forfeited. http://www.taxact.com/tax-tips/index.asp?tid=979 Sun, 26 Apr 2009 00:00:00 GMT 979 An example of a contingent sale in which the selling price cannot be determined by the end of the year of the sale is a sale of your business where the selling price includes a percentage of future profits. You and your tax advisor should consult the technical rules in IRS regulation 15A.453-1(c) for details on reporting such sales. http://www.taxact.com/tax-tips/index.asp?tid=978 Sat, 25 Apr 2009 00:00:00 GMT 978 Where you transfer property to a related party, the IRS has two years from the date you notify it that there has been a second disposition to assess a deficiency with respect to your transfer. http://www.taxact.com/tax-tips/index.asp?tid=977 Fri, 24 Apr 2009 00:00:00 GMT 977 If you sell property on the installment basis to a relative who later resells the property, you could lose the benefit of installment reporting. http://www.taxact.com/tax-tips/index.asp?tid=976 Thu, 23 Apr 2009 00:00:00 GMT 976 When you have losses to offset your gain in the year of sale, installment sale reporting may not be advantageous. In such a case, you may want to report the full gain in the year of sale so the gain may be offset by the losses. However, there is a risk. If the losses are later disallowed by an IRS audit, you may not be given a second chance to use the installment method to spread the gain over the payment period. The IRS may not allow you to revoke your election out on the grounds that to do so would result in tax avoidance. http://www.taxact.com/tax-tips/index.asp?tid=975 Wed, 22 Apr 2009 00:00:00 GMT 975 If a loan arrangement gives you the right to repay the debt by transferring an installment obligation, you are treated as if you had directly pledged the obligation as security for the debt. As a result, the loan proceeds are treated as a payment on the installment obligation, which will increase installment income for the year of the deemed pledge. http://www.taxact.com/tax-tips/index.asp?tid=974 Tue, 21 Apr 2009 00:00:00 GMT 974 The entire recaptured amount (44.1 - 44.3) is reported in the year of sale on Form 4797, even though you report the sale on the installment basis. An installment sale does not defer the reporting of the recaptured deduction. You also add the recaptured amount to the basis of the sold asset on Line 12 of Form 6252 to compute the amount of the remaining gain to be reported on each installment. http://www.taxact.com/tax-tips/index.asp?tid=973 Mon, 20 Apr 2009 00:00:00 GMT 973 If your property is foreclosed, the amount of the mortgage is treated as sales proceeds even if you do not receive anything on the sale. http://www.taxact.com/tax-tips/index.asp?tid=972 Sun, 19 Apr 2009 00:00:00 GMT 972 You cannot defer to 2009 reporting of gain on a 2008 year-end sale of publicly traded securities, even if you do not receive payment until early January 2009. http://www.taxact.com/tax-tips/index.asp?tid=971 Sat, 18 Apr 2009 00:00:00 GMT 971 If you reported a pre-2008 sale on the installment method, use Form 6252 to report any 2008 payments on the sale. http://www.taxact.com/tax-tips/index.asp?tid=970 Fri, 17 Apr 2009 00:00:00 GMT 970 In an unusual case, the owner of office condominiums financed substantial improvements to the units by giving promissory notes to a contracting company that he controlled. Before paying off the notes he sold the units. He included the cost of the improvements in basis to figure his gain on the sale, but the IRS, with the approval of a federal district court, held that this was improper. The court held that as a cash-basis taxpayer, he could not include the face amount of the notes in the basis of the condominiums until the notes were paid. http://www.taxact.com/tax-tips/index.asp?tid=969 Thu, 16 Apr 2009 00:00:00 GMT 969 If you own property with someone other than your spouse, then at the other owner's death your basis for the property equals your original contribution to the purchase plus the portion of the property's value that was includible in the gross estate of the deceased owner. http://www.taxact.com/tax-tips/index.asp?tid=968 Wed, 15 Apr 2009 00:00:00 GMT 968 If spouses jointly own property and one spouse dies, the surviving spouse generally receives a stepped-up basis of 50% of the date-of-death value. The IRS at one time took the position that the 50% stepped-up basis rule applied to pre-1997 spousal joint tenancies. However, after the Tax Court and two federal appeals courts allowed a surviving spouse a 100% stepped-up basis if the spousal joint tenancy was created before 1977, the IRS decided to follow the Tax Court decision and will no longer litigate the issue. http://www.taxact.com/tax-tips/index.asp?tid=967 Tue, 14 Apr 2009 00:00:00 GMT 967 Since your basis for inherited property is the value at the decedent's death or alternate valuation date, income tax is completely avoided on the appreciation in value that occurred while the decedent owned the property. http://www.taxact.com/tax-tips/index.asp?tid=966 Mon, 13 Apr 2009 00:00:00 GMT 966 When you sell property received as a gift, it is possible that you may realize neither gain nor loss. You have neither gain nor losses if you sell for more than the date-of-gift value but not more than the donor's adjusted basis. http://www.taxact.com/tax-tips/index.asp?tid=965 Sun, 12 Apr 2009 00:00:00 GMT 965 The basis of gift property you receive generally depends on the donor's basis. Make sure you get this information from the donor. http://www.taxact.com/tax-tips/index.asp?tid=964 Sat, 11 Apr 2009 00:00:00 GMT 964 If you receive a gift of property from your spouse or you receive property from a former spouse in a divorce settlement, your basis for the property is generally the same as the spouse's basis. http://www.taxact.com/tax-tips/index.asp?tid=963 Fri, 10 Apr 2009 00:00:00 GMT 963 To figure gain or loss on the sale of mutual-fund shares where purchases are made at various times, you may use an averaging method to determine the cost basis of the shares sold. http://www.taxact.com/tax-tips/index.asp?tid=962 Thu, 9 Apr 2009 00:00:00 GMT 962 When you sell mortgaged property, you must include the unpaid balance of the mortgage as part of the sales price received, in addition to any cash. http://www.taxact.com/tax-tips/index.asp?tid=961 Wed, 8 Apr 2009 00:00:00 GMT 961 Keep records of permanent improvements and legal fees for rental property. These increase your basis and lower any potential gain when you sell the property. http://www.taxact.com/tax-tips/index.asp?tid=960 Tue, 7 Apr 2009 00:00:00 GMT 960 When you sell property that you inherited, report the sale as long-term gain or loss on Schedule D even if you actually held the property for less than one year. The law automatically treats inherited property as if it were held for more than one year. http://www.taxact.com/tax-tips/index.asp?tid=959 Mon, 6 Apr 2009 00:00:00 GMT 959 Tax reporting for year-end sales of real estate is different from that for publicly traded securities. Gain on a sale of realty at the end of 2008 may be deferred under the installment sale rules if payments will be received in 2009 or later years. Gain on a sale of publicly traded securities at the end of 2008 must be reported on your 2008 return although you receive payment in 2009. http://www.taxact.com/tax-tips/index.asp?tid=958 Sun, 5 Apr 2009 00:00:00 GMT 958 To obtain the benefit of favorable long-term capital gains rates, you must hold an asset more than a year before selling it. http://www.taxact.com/tax-tips/index.asp?tid=957 Sat, 4 Apr 2009 00:00:00 GMT 957 If you sold stocks, bonds, or other investment property through a broker, the sale is reported to the IRS on Form 1099-B. You are sent Copy B of Form 1099-B or a substitute statement. On your statement, the broker must indicate whether gross proceeds or gross proceeds minus commissions and option premiums were reported to the IRS. If the gross proceeds were reported, enter that amount as the sales price in column (d) of Schedule D and add any commissions or option premiums to cost basis in column (e). If only the net proceeds were reported, enter that amount as the sales price in column (d) of Schedule D and do not include commissions or option premiums in column (e). http://www.taxact.com/tax-tips/index.asp?tid=956 Fri, 3 Apr 2009 00:00:00 GMT 956 You may be able to defer capital gain on the sale of qualified empowerment zone assets that you acquired after December 21, 2000, and held for more than one year. You must purchase replacement assets in the same empowerment zone during the 60-day period beginning on the date of the sale. http://www.taxact.com/tax-tips/index.asp?tid=955 Thu, 2 Apr 2009 00:00:00 GMT 955 You generally may claim a 50% exclusion on a profitable sale of qualifying small business stock, provided you held the stock for more than five years before the sale. A 60% exclusion is allowed on the sale of qualifying empowerment zone business stock. The balance of the gain is treated as a 28% rate gain. For purposes of the alternative minimum tax, 7% of the excluded gain must be added back to income as a preference item. http://www.taxact.com/tax-tips/index.asp?tid=954 Wed, 1 Apr 2009 00:00:00 GMT 954 If you or your spouse has a capital loss carryover from a year in which separate returns were filed, and you are now filing a joint return, the carryovers from the separate returns may be combined on the joint return. If you previously filed jointly and are now filing separately, any loss carryover from the joint return may be claimed only on the separate return of the spouse who originally incurred the loss. http://www.taxact.com/tax-tips/index.asp?tid=953 Tue, 31 Mar 2009 00:00:00 GMT 953 If you have capital losses for 2008 in excess of the deductible limit, keep a copy of your 2008 Form 1040 and Schedule D to figure your loss carryover when you file your 2009 Schedule D. The 2009 Schedule D instructions will have a worksheet you can use to figure your loss carryovers from 2008 to 2009. http://www.taxact.com/tax-tips/index.asp?tid=952 Mon, 30 Mar 2009 00:00:00 GMT 952 The time you own a capital asset determines short-term or long-term treatment. The short-term holding period is a year or less, the long-term period more than one year. http://www.taxact.com/tax-tips/index.asp?tid=951 Sun, 29 Mar 2009 00:00:00 GMT 951 You may not deduct a capital loss on the sale of property held for personal use, such as a car or vacation home. The loss is not deductible. Losses on the sale of property held for investment, such as stock or mutual-fund shares, are fully deductible against capital gains but any excess loss is subject to the $3,000 limit. http://www.taxact.com/tax-tips/index.asp?tid=950 Sat, 28 Mar 2009 00:00:00 GMT 950 If adequate interest is not charged on an installment sale of personal-use property, such as a residence to be used by the buyer, imputed interest rules do not apply to the buyer. Thus, the buyer may not deduct the imputed interest. The buyer's deduction is limited to the payment of interest stated in the contract if a deduction is allowed under the home mortgage interest rules. http://www.taxact.com/tax-tips/index.asp?tid=949 Fri, 27 Mar 2009 00:00:00 GMT 949 If you give a child or other individual an interest-free or below-market-interest loan, such as to buy a home or start a business, imputed interest is limited or completely avoided provided (1) the total outstanding loan balance owed to you by the borrower at all times during the year does not exceed $100,000, and (2) avoidance of federal tax is not a principal purpose of the interest arrangement. If the above tests are met, imputed interest is limited to the borrower's net investment income where that income exceeds $1,000. If the borrower's net investment income is $1,000 or less, it is treated as zero, so no interest is imputed. http://www.taxact.com/tax-tips/index.asp?tid=948 Thu, 26 Mar 2009 00:00:00 GMT 948 A lender reporting imputed interest income or a borrower claiming an interest deduction must attach statements to their income tax returns reporting the interest, how it was calculated, and the names of the parties and their tax identification numbers. http://www.taxact.com/tax-tips/index.asp?tid=947 Wed, 25 Mar 2009 00:00:00 GMT 947 Given the complexity of the imputed interest rules and exceptions, you and your tax advisor should carefully review regulations to the Internal Revenue Code Section 7872 when drafting a loan agreement. http://www.taxact.com/tax-tips/index.asp?tid=946 Tue, 24 Mar 2009 00:00:00 GMT 946 Where an estate tax has been paid on bond interest accrued during the owner's lifetime, the new bondholder may claim the estate tax as a miscellaneous itemized deduction in the year that he or she pays tax on the accumulated interest. The deduction is not subject to the 2% adjusted gross income floor. http://www.taxact.com/tax-tips/index.asp?tid=945 Mon, 23 Mar 2009 00:00:00 GMT 945 Most E bonds have reached final maturity and no longer earn interest. E bonds issued during 1978 ceased earning interest in 2008, 30 years from the date of issuance. E bonds issued after 1978 and through June 1980 (the last issue date for E bonds) will also cease earning interest 30 years from their issue date. All deferred interest becomes taxable in the year of final maturity. http://www.taxact.com/tax-tips/index.asp?tid=944 Sun, 22 Mar 2009 00:00:00 GMT 944 When you cash in an E, EE, or I bond, you receive Form 1099-INT that lists as interest the difference between the amount received and the amount paid for the bond. The form may show more taxable interest than you are required to report because you have regularly reported the interest or a prior owner reported the interest. Report the full amount shown on Form 1099-INT on Schedule B if you file Form 1040, or on Part I of Schedule 1 if you file Form 1040A, along with your other interest income. Enter a subtotal of the total interest and then, on a separate line, reduce the subtotal by the savings bond interest that was previously reported and identify the reduction as Previously Reported U.S. Savings Bond Interest. The interest is exempt from state and local taxes. http://www.taxact.com/tax-tips/index.asp?tid=943 Sat, 21 Mar 2009 00:00:00 GMT 943 If your child has net investment income under the annual threshold ($1,800 for 2008) for the kiddie tax, making the election to report the interest annually may be advisable. For example, a dependent child is not allowed to claim a personal exemption, but he or she may claim a standard deduction for 2008 of at least $900. If the election to report the savings bond interest currently was made for 2008, up to $900 of the interest would be offset by the standard deduction, assuming the child had no other income. http://www.taxact.com/tax-tips/index.asp?tid=942 Fri, 20 Mar 2009 00:00:00 GMT 942 If you are a cash-basis taxpayer, you may postpone the tax on Treasury bill interest by selecting a Treasury bill maturing next year. Income is not recognized until the date on which the Treasury bill is paid at maturity, unless it has been sold or otherwise disposed of earlier. http://www.taxact.com/tax-tips/index.asp?tid=941 Thu, 19 Mar 2009 00:00:00 GMT 941 These are state and local bonds issued after October 9, 1969, used to provide funds for reinvestment in higher yielding instruments except where the bond proceeds are part of a required reserve or replacement fund or are being invested temporarily before the purposes of a bond issue can be fulfilled. Interest on arbitrage bonds is taxable. http://www.taxact.com/tax-tips/index.asp?tid=940 Wed, 18 Mar 2009 00:00:00 GMT 940 Payers of tax-exempt interest must report payments to the IRS. The IRS can match your reporting of tax-exempt interest against the information returns filed by payers. Although the interest is not subject to regular income tax, tax-exempt interest from specified private activity bonds is a tax preference for AMT purposes and tax-exempt interest is included in the formula for determining whether (and how much) Social Security benefits are subject to tax. http://www.taxact.com/tax-tips/index.asp?tid=939 Tue, 17 Mar 2009 00:00:00 GMT 939 Zero coupon bonds also may be a means of financing a child's education. A parent buys the bond for the child. The child must report the income annually, and if the income is not subject to the parent's marginal tax bracket under the kiddie tax, the income subject to tax may be minimal. The value of zero coupon bonds fluctuates sharply with interest rate changes. This fact should be considered before investing in long-term zero coupon bonds. If you sell zero coupon bonds before the maturity term at a time when interest rates rise, you may lose part of your investment. http://www.taxact.com/tax-tips/index.asp?tid=938 Mon, 16 Mar 2009 00:00:00 GMT 938 Do not report the amount shown in Box 1 of Form 1099-OID for a stripped bond or coupon; that amount must be recomputed under complicated rules described in IRS Publication 1212. http://www.taxact.com/tax-tips/index.asp?tid=937 Sun, 15 Mar 2009 00:00:00 GMT 937 For short-term governmental obligations (other than tax-exempts), the acquisition discount is accrued in daily installments under the ratable method, unless an election is made to use the constant yield method. http://www.taxact.com/tax-tips/index.asp?tid=936 Sat, 14 Mar 2009 00:00:00 GMT 936 If you do not report the discount annually and hold a bond until maturity, the discount is reported as interest income in the year of redemption. However, you have the option of reporting the market discount annually instead of at sale. http://www.taxact.com/tax-tips/index.asp?tid=935 Fri, 13 Mar 2009 00:00:00 GMT 935 Tax-exempt bonds bought before May 1, 1993, are not subject to the market discount interest income rule; all the gain at disposition is capital gain. http://www.taxact.com/tax-tips/index.asp?tid=934 Thu, 12 Mar 2009 00:00:00 GMT 934 If you are reporting the full amount of OID from Box 1 of Form 1099-OID include the amount as interest on your Form 1040, 1040A, or 1040EZ. However, if you are reporting less OID than the amount shown in Box 1 of Form 1099-OID, you must file Form 1040 and fill out Schedule B. Include the full amount shown in Box 1 of Form 1099-OID on Line 1 of Schedule B, along with other interest income. Make a subtotal of the Line 1 amounts and subtract from it the OID you are not required to report. Write OID Adjustment on the line where you show the subtraction, or Nominee distribution, if that is the reason for the reduction. If you are reporting more OID than the amount shown in Box 1 of Form 1099-OID, add the additional amount to the subtotal of the interest on Line 1 of Schedule B, and label it OID Adjustment. Your basis for the obligation is increased by the taxable OID for purposes of figuring gain on a sale or redemption. http://www.taxact.com/tax-tips/index.asp?tid=933 Wed, 11 Mar 2009 00:00:00 GMT 933 You may disregard OID that is less than one-fourth of one percent (.0025) of the principal amount multiplied by the number of full years from the date of original issue to maturity. On most long-term bonds, the OID will exceed this amount and must be reported. http://www.taxact.com/tax-tips/index.asp?tid=932 Tue, 10 Mar 2009 00:00:00 GMT 932 If you paid a premium on a taxable bond during 2008, you offset interest income on the bond by the amortized premium. You must file Form 1040 and show the reduction on Schedule B. Report the full interest from the bond on Line 1 of Schedule B, along with the rest of your interest income. On a separate line, subtract the amortized premium from a subtotal of the other interest. Label the subtraction ABP Adjustment. This interest offset rule applies to all taxable bonds acquired at a premium after 1987. http://www.taxact.com/tax-tips/index.asp?tid=931 Mon, 9 Mar 2009 00:00:00 GMT 931 You reduce the cost basis of the bond by the amount of the premium taken as a deduction. If you hold the bond to maturity, the entire premium is amortized and you have neither gain nor loss on redemption of the bond. If before maturity you sell the bond at a gain (selling price exceeds your basis for the bond), you realize long-term capital gain if you held the bond long term. A sale of the bond for less than its adjusted basis gives a capital loss. http://www.taxact.com/tax-tips/index.asp?tid=930 Sun, 8 Mar 2009 00:00:00 GMT 930 If you are penalized for making an early withdrawal from a certificate of deposit, you may lose part of your interest or principal. You must report the full amount of interest credited to your account, but you may deduct the full amount of the penalty/forfeited principal as well as interest on Line 30 of Form 1040. http://www.taxact.com/tax-tips/index.asp?tid=929 Sat, 7 Mar 2009 00:00:00 GMT 929 When you buy bonds between interest payment dates and pay accrued interest to the seller, this interest is taxable to the seller. The accrued interest is included on the Form 1099-INT you receive, but you should subtract it from your taxable interest. http://www.taxact.com/tax-tips/index.asp?tid=928 Fri, 6 Mar 2009 00:00:00 GMT 928 If you lose funds because of a financial institution's bankruptcy or insolvency, and you can reasonably estimate such a loss, you may deduct the loss as a nonbusiness bad debt, as a casualty loss, or as a miscellaneous itemized deduction. http://www.taxact.com/tax-tips/index.asp?tid=927 Thu, 5 Mar 2009 00:00:00 GMT 927 Tax-exempt interest, such as from municipal bonds, must be reported on your return although it is not subject to regular income tax. Tax-exempt interest is shown in Box 8 of Form 1099-INT and any portion that is subject to AMT is shown in Box 9. Report the Box 8 amount on Line 8b of Form 1040 or Form 1040A. On Part I of Schedule B of Form 1040 or Schedule 1 of Form 1040A, report the tax-exempt interest on Line 1 but then subtract it from a subtotal of the total interest so that it is not included in the amount shown on Line 2 of the schedule. http://www.taxact.com/tax-tips/index.asp?tid=926 Wed, 4 Mar 2009 00:00:00 GMT 926 Dividends on insurance policies are actually returns of premiums you previously paid. They are not subject to tax until they exceed the net premiums paid for the contract. http://www.taxact.com/tax-tips/index.asp?tid=925 Tue, 3 Mar 2009 00:00:00 GMT 925 A dividend declared and made payable in October through December by a mutual fund or REIT is taxable in the year it is declared, even if it is not paid until January of the following year. http://www.taxact.com/tax-tips/index.asp?tid=924 Mon, 2 Mar 2009 00:00:00 GMT 924 The receipt of stock under a stock split is not taxable. Stock splits resemble the receipt of stock dividends, but they are not dividends. They do not represent a distribution of surplus as in the case of stock dividends. Although you own more shares, your ownership percentage has not changed. The purpose of a stock split is generally to reduce the price of individual shares in order to increase their marketability. The basis of the old holding is divided among all the shares in order to find the basis for the new shares. http://www.taxact.com/tax-tips/index.asp?tid=923 Sun, 1 Mar 2009 00:00:00 GMT 923 Your company may allow you either to take cash dividends or automatically reinvest the dividends in company stock. If you elect the stock plan, and pay fair market value for the stock, the full cash dividend is taxable. If the plan lets you buy the stock at a discount, the amount of the taxable dividend is the fair market value of the stock on the dividend payment date plus any service fee charged for the acquisition. The basis of the stock is also the fair market value at the dividend payment date. The service charge may be claimed as an itemized deduction subject to the 2% adjusted gross income floor. If at the same time you also have the option to buy additional stock at a discount and you exercise the option, you have additional dividend income for the difference between the fair market value of the optional shares and the discounted amount you paid for the shares. http://www.taxact.com/tax-tips/index.asp?tid=922 Sat, 28 Feb 2009 00:00:00 GMT 922 In Box 1b of Form 1099-DIV for 2008, payers of dividends will report the amount eligible for the zero rate (if the 10% or 15% bracket would otherwise apply) or 15% rate (if the rate would otherwise be 25% or higher). You must enter the qualified dividends on the Qualified Dividends and Capital Gain Tax Worksheet in the IRS instructions for Form 1040 or Form 1040A to obtain the benefit of the preferential rate, unless you need the Schedule D Tax Worksheet to report other transactions. http://www.taxact.com/tax-tips/index.asp?tid=921 Fri, 27 Feb 2009 00:00:00 GMT 921 The line of business limitation for no-additional-cost services also applies to qualified employee discounts. Thus, if a company operates an airline and a hotel, employees who work for the airline may generally not receive tax-free hotel room discounts. However, if a special election was made by the company, employees may receive tax-free benefits from any line of business in existence before 1984. http://www.taxact.com/tax-tips/index.asp?tid=920 Thu, 26 Feb 2009 00:00:00 GMT 920 Highly compensated employees can receive tax-free company services only if the same benefits are available to other employees on a nondiscriminatory basis. For 2008, highly compensated employees include employees owning more than a 5% interest in 2008 or 2007, and employees who in 2007 had compensation over $105,000. Employers have the option of including only the top-paid 20% in the over-$105,000 category. The $105,000 compensation threshold may be increased for 2009. http://www.taxact.com/tax-tips/index.asp?tid=919 Wed, 25 Feb 2009 00:00:00 GMT 919 Reimbursements received tax free from your dependent care FSA reduces the expense base for figuring the dependent care credit. http://www.taxact.com/tax-tips/index.asp?tid=918 Tue, 24 Feb 2009 00:00:00 GMT 918 Whether all or only part of your dependent care FSA reimbursements are tax free is figured on Part III of Form 2441 if you file Form 1040. If you file Form 1040A, the calculation is made on Part III of Schedule 2. http://www.taxact.com/tax-tips/index.asp?tid=917 Mon, 23 Feb 2009 00:00:00 GMT 917 The IRS has given employers an opportunity to relax the use-it-or-lose-it deadline for health-care and dependent care FSAs. Employers have the option of amending their plans to allow employees an additional 2½ months to use the money in their FSAs. If the grace period is adopted, FSA funds that are unused at the end of a plan year can be applied to expenses incurred within the first 2 1/2 months of the following year. http://www.taxact.com/tax-tips/index.asp?tid=916 Sun, 22 Feb 2009 00:00:00 GMT 916 Your employer can make a one-time direct transfer of the balance in your health FSA to your HSA. The direct transfer must be made before 2012 and it cannot exceed the health FSA balance as of September 21, 2006, where that is less than the date-of-transfer balance. Following the transfer, you must remain eligible for an HSA by being covered by a high-deductible health plan (HDHP) for at least 12 months. Otherwise, the transferred funds will become taxable and also subject to a 10% penalty. http://www.taxact.com/tax-tips/index.asp?tid=915 Sat, 21 Feb 2009 00:00:00 GMT 915 If you itemize deductions on Schedule A (Form 1040), deduct payments for qualifying home mortgage interest and real estate taxes on your home even if you use a tax-free housing allowance to finance the payments. http://www.taxact.com/tax-tips/index.asp?tid=914 Fri, 20 Feb 2009 00:00:00 GMT 914 The IRS does not consider partners or self-employed persons as employees and so does not allow them to exclude the value of partnership-provided meals and lodging. http://www.taxact.com/tax-tips/index.asp?tid=913 Thu, 19 Feb 2009 00:00:00 GMT 913 Two federal courts held that a school superintendent received tax-free lodging where the home was one block away from the school and separated by a row of other houses. This met the business premises test. The IRS announced that it would continue to litigate similar cases arising outside the Eighth Circuit in which the case arose. The Eighth Circuit includes the states of Arkansas, Iowa, Minnesota, Missouri, Nebraska, and North and South Dakota. http://www.taxact.com/tax-tips/index.asp?tid=912 Wed, 18 Feb 2009 00:00:00 GMT 912 If housing is provided to some employees with a certain job and not others, the IRS may hold that the lodging is not a condition of employment. For example, the IRS taxed medical residents on the value of hospital lodging where other residents lived in their own apartments. http://www.taxact.com/tax-tips/index.asp?tid=911 Tue, 17 Feb 2009 00:00:00 GMT 911 You may be able to avoid tax on meals that you receive on your employer's premises even if your meals do not satisfy the employer convenience test. If more than half of the employees to whom meals are furnished on the employer's business premises are furnished the meals for the employer's convenience, all of the on-premises meals are treated as being furnished for the employer's convenience. http://www.taxact.com/tax-tips/index.asp?tid=910 Mon, 16 Feb 2009 00:00:00 GMT 910 If the value of an achievement award item is disproportionately high compared to the employer's cost, the IRS may conclude that the award is disguised compensation, in which case the entire value would be taxable. http://www.taxact.com/tax-tips/index.asp?tid=909 Sun, 15 Feb 2009 00:00:00 GMT 909 If you work overtime and occasionally receive meal money or cab fare home, the amount is tax free. The IRS has not provided a numerical standard for determining when payments are occasional. http://www.taxact.com/tax-tips/index.asp?tid=908 Sat, 14 Feb 2009 00:00:00 GMT 908 If your employer offers you the choice of receiving parking, transit pass, or van pooling benefits instead of cash salary as part of a cafeteria plan and you elect the benefits rather than the cash, you are not taxed, provided the value does not exceed the monthly tax-free limit. http://www.taxact.com/tax-tips/index.asp?tid=907 Fri, 13 Feb 2009 00:00:00 GMT 907 Your employer may decide to treat fringe benefits provided during the last two months of the calendar year as if they were paid during the following year. For example, if your employer makes this election for a company car provided to you in November or December of 2008, only the value of personal use from January through October is taxable to you in 2008; personal use in November and December is taxable in 2009. If your employer elects this special year-end rule, you should be notified near the end of the year or when you receive Form W-2. http://www.taxact.com/tax-tips/index.asp?tid=906 Thu, 12 Feb 2009 00:00:00 GMT 906 Your employer's payment of graduate school expenses qualifies for the up-to-$5,250 exclusion. http://www.taxact.com/tax-tips/index.asp?tid=905 Wed, 11 Feb 2009 00:00:00 GMT 905 If you paid adoption expenses in 2008 that were not reimbursed by your employer, and the adoption was final in 2008, you may be able to claim the adoption credit. http://www.taxact.com/tax-tips/index.asp?tid=904 Tue, 10 Feb 2009 00:00:00 GMT 904 You cannot assume that your employer-provided dependent care benefit is completely tax free merely because your employer has not included any part of it in Box 1 of Form W-2 as taxable wages. Although up to $5,000 of benefits are generally tax free, the tax-free amount is reduced where you or your spouse earn less than $5,000 or where you file separately from your spouse. You must show the amount of your qualifying dependent care expenses and figure the tax-free exclusion on Form 2441 if you file Form 1040, or on Schedule 2 of Form 1040A. http://www.taxact.com/tax-tips/index.asp?tid=903 Mon, 9 Feb 2009 00:00:00 GMT 903 If you receive coverage as a former employee, you must pay with Form 1040 your share of Social Security and Medicare taxes on group-term life insurance over $50,000. The taxable amounts are shown in Box 12 of Form W-2, with Codes M and N. http://www.taxact.com/tax-tips/index.asp?tid=902 Sun, 8 Feb 2009 00:00:00 GMT 902 An employer's payment for permanent disfigurement or permanent loss of bodily function is tax free if the payment is based solely on the nature of the injury. Whether or not you qualify for this exclusion, you may deduct as an itemized deduction any unreimbursed medical expense you have in connection with these injuries subject to the 7.5% adjusted gross income floor. http://www.taxact.com/tax-tips/index.asp?tid=901 Sat, 7 Feb 2009 00:00:00 GMT 901 Your employer can make a one-time direct transfer of your HRA balance to your HSA. The direct transfer must be made before 2012 and it cannot exceed the HRA balance as of September 21, 2006, where that is less than the date-of-transfer balance. Following the transfer, you must remain eligible for an HSA by being covered by a high-deductible health plan (HDHP) for at least 12 months. Otherwise, the transferred funds will become taxable and also subject to a 10% penalty. http://www.taxact.com/tax-tips/index.asp?tid=900 Fri, 6 Feb 2009 00:00:00 GMT 900 An employer's reimbursement of expenses for cosmetic surgery is taxable unless the employee had surgery to correct disfigurement from an accident, disease, or congenital deformity. http://www.taxact.com/tax-tips/index.asp?tid=899 Thu, 5 Feb 2009 00:00:00 GMT 899 You can make a one-time tax-free transfer from your IRA or Roth IRA to your HSA. A qualifying transfer is not taxable or subject to the 10% penalty for distributions before age 59½. Generally, only one IRA/Roth IRA transfer to an HSA is allowed during your lifetime, but if a transfer is made to a self-only HDHP, and later in the same year you obtain family HDHP coverage, a second transfer from an IRA or Roth IRA may be made in that year. The transfer (or transfers) count towards the annual HSA contribution limit for that year, so if the transfer exceeds the annual HSA contribution limit, the excess is taxable (and possibly subject to the pre-59½ penalty). If you want to transfer amounts from more than one IRA or Roth IRA to an HSA, you have to first roll the funds into a single IRA/Roth IRA and then make the transfer from that account. To be tax free, the transfer must be directly to the HSA trustee or custodian. Furthermore, you must remain HSA-eligible (have qualifying HDHP coverage) for 12 months following the date of the distribution; otherwise, the distribution is taxable (and possibly subject to the pre-59½ penalty) in the year that you cease to be eligible. Changing from family-HDHP coverage to a self-only HDHP during the 12-month testing period is not considered a cessation of HSA eligibility. http://www.taxact.com/tax-tips/index.asp?tid=898 Wed, 4 Feb 2009 00:00:00 GMT 898 If you are an eligible employee, contributions you make to your HSA are reported on Form 8889 and deducted on Line 25 of Form 1040. The deduction is above the line, so it is allowed even if you claim the standard deduction. If you are self-employed, you may claim the above-the-line HSA deduction subject to the same limits. http://www.taxact.com/tax-tips/index.asp?tid=897 Tue, 3 Feb 2009 00:00:00 GMT 897 If you leave your job and elect continuing health coverage, you may be charged a premium of 102% of the regular cost of similar coverage under the plan. If the COBRA coverage period is extended because you are disabled, you may be charged 150% of the regular premium during the extended period. http://www.taxact.com/tax-tips/index.asp?tid=896 Mon, 2 Feb 2009 00:00:00 GMT 896 The Supreme Court has held that an employer may not deny continuing care coverage to a former employee who on the date of election has coverage under his or her spouse's group health plan. http://www.taxact.com/tax-tips/index.asp?tid=895 Sun, 1 Feb 2009 00:00:00 GMT 895 If you expect restricted stock to appreciate, consider making an election to be immediately taxed on the value of the restricted stock, minus your cost. If you make the election, any appreciation in value that has accrued since the election was made will not be taxable when the stock becomes substantially vested. Tax on appreciation will not be due until the stock is sold. http://www.taxact.com/tax-tips/index.asp?tid=894 Sat, 31 Jan 2009 00:00:00 GMT 894 Determine the amount of cash you will need to make the purchases and meet your tax liability before you exercise a nonqualified option and receive vested stock. If you receive vested stock when you exercise the option, you will realize wage income equal to the excess of the value of the stock over the option price. In addition to the cash to buy the stock, you will need cash to pay the tax on the wage income. The tax is due even if you plan to hold onto the stock before selling. http://www.taxact.com/tax-tips/index.asp?tid=893 Fri, 30 Jan 2009 00:00:00 GMT 893 If you exercise an incentive stock option and your rights in the acquired stock are transferrable and not subject to a substantial risk of forfeiture, you have to treat as an adjustment for alternative minimum tax purposes the bargain element, that is, the excess of the fair-market value of the stock when the option was exercised over the option price. Unless you sell the stock by the end of that year, you must report an AMT adjustment based on the value of the stock when the option was exercised, even if the value later declines substantially. You avoid the AMT adjustment if you sell the stock in the same year the option was exercised. If your rights in the stock are restricted in the year you exercise the option, the AMT adjustment applies for the year the restrictions are lifted. http://www.taxact.com/tax-tips/index.asp?tid=892 Thu, 29 Jan 2009 00:00:00 GMT 892 Tax-free treatment applies to disability payments resulting from terrorist attacks inside as well as outside the United States. http://www.taxact.com/tax-tips/index.asp?tid=891 Wed, 28 Jan 2009 00:00:00 GMT 891 If you pay tax on retirement benefits from the military and then receive a retroactive disability determination from the Department of Veterans Affairs, you may file a refund claim for the tax paid on the retroactively excluded benefits. The Heroes Earnings Assistance and Relief Tax Act of 2008 extends the deadline for filing the refund claim beyond the normal three-year period. For disability determinations after June 17, 2008, a refund claim for tax years beginning within five years prior to the determination date can be filed until one year after the date of the determination if that is later than the regular refund deadline. For determinations after December 31, 2000 and through June 17, 2008, the filing deadline is extended until June 17, 2009. http://www.taxact.com/tax-tips/index.asp?tid=890 Tue, 27 Jan 2009 00:00:00 GMT 890 Not all payments for job-related illness or injury qualify as tax-free workers compensation. Unless the statute or regulation authorizing your disability payment restricts awards to on-the-job injury or illness, your payment is taxable. Even if your payments are in fact based upon job-related injury or illness, they are taxed if other individuals can receive payments from the plan for disabilities that are not work related. http://www.taxact.com/tax-tips/index.asp?tid=889 Mon, 26 Jan 2009 00:00:00 GMT 889 According to the Tax Court, sick leave may qualify as tax-free workers compensation if it is paid under a specific workers compensation statute or similar government regulation that authorizes the sick leave payment for job-related injuries or illness. http://www.taxact.com/tax-tips/index.asp?tid=888 Sun, 25 Jan 2009 00:00:00 GMT 888 If all guidelines other than the percentage test are satisfied, the IRS will determine whether the primary purpose of the program is to educate the children. If it is, the grants will be considered scholarships or fellowships; if it is not, the grants are taxed to the parent-employees as extra compensation. http://www.taxact.com/tax-tips/index.asp?tid=887 Sat, 24 Jan 2009 00:00:00 GMT 887 In a charitable split-dollar insurance plan, you give money to a charity, which invests in a life insurance policy and splits the proceeds with your beneficiaries. Taxpayers have attempted to deduct the initial donations, but the tax law was changed to disallow the deduction. http://www.taxact.com/tax-tips/index.asp?tid=886 Fri, 23 Jan 2009 00:00:00 GMT 886 If a repayment of wages in 2008 exceeds $3,000, a special law gives this alternative: Instead of claiming an itemized deduction from 2008 income, you may recompute your tax for the prior year as if the wages had not been reported. The difference between the actual tax paid in the prior year and the recomputed tax may be claimed as a credit on your 2008 return. The credit is claimed on Line 70 of Form 1040; write next to the line IRC 1341. If you claim the repayment as a miscellaneous itemized deduction, enter it on Line 28 of Schedule A, where it is not subject to the 2% floor. Choose either the credit or the itemized deduction, whichever gives you the larger tax reduction. http://www.taxact.com/tax-tips/index.asp?tid=885 Thu, 22 Jan 2009 00:00:00 GMT 885 If deferred pay is currently taxable under the rules of Code Section 409A, you must also pay a 20% penalty and interest at a rate 1% higher than the regular underpayment rate. http://www.taxact.com/tax-tips/index.asp?tid=884 Wed, 21 Jan 2009 00:00:00 GMT 884 No deduction is allowed for a fine or penalty paid to a government for the violation of a law. http://www.taxact.com/tax-tips/index.asp?tid=883 Tue, 20 Jan 2009 00:00:00 GMT 883 You may not postpone tax on earned commissions credited to your account in 2008 by not drawing them until 2009 or a later year. However, where a portion of earned commissions is not withdrawn because your employer is holding it to cover future expenses, you are not taxed on the amount withheld. http://www.taxact.com/tax-tips/index.asp?tid=882 Mon, 19 Jan 2009 00:00:00 GMT 882 An attorney who took a medical malpractice case on a contingent fee basis agreed to split the net fee with his ex-wife pursuant to their divorce agreement. After a favorable settlement, the attorney's take was approximately $40,000 after expenses, half of which went to his ex-wife. Each paid tax on his or her share. The attorney argued that his partial assignment of the fee could shift the tax liability because collection was contingent on the outcome of the lawsuit. However, the IRS and the Tax Court held that the attorney was liable for the tax on the entire contingent fee, and an appeals court agreed. The attorney transferred only the right to receive income. Although his fee was contingent upon the successful outcome of the case, once the fee materialized, it was indisputably compensation for his personal services. http://www.taxact.com/tax-tips/index.asp?tid=881 Sun, 18 Jan 2009 00:00:00 GMT 881 Tips you receive are taxable income. You must report tips to your employer so your employer can withhold FICA and income tax from your regular pay to cover the tips. http://www.taxact.com/tax-tips/index.asp?tid=880 Sat, 17 Jan 2009 00:00:00 GMT 880 You must pay tax on severance pay received upon losing a job. The severance pay is taxable even if you signed a waiver releasing your former employer from potential future damage claims. The waiver does not change the nature of the payments from taxable pay to tax-free personal injury damages. http://www.taxact.com/tax-tips/index.asp?tid=879 Fri, 16 Jan 2009 00:00:00 GMT 879 To expedite the closing of the decedent estate, an executor or other personal representative of the decedent may file Form 4810 for a prompt assessment. Once filed, the IRS has 18 months to assess additional taxes. The request does not extend the assessment period beyond the regular limit, which is three years from the date the return was filed. Form 4810 must be filed separately from the final return. http://www.taxact.com/tax-tips/index.asp?tid=878 Thu, 15 Jan 2009 00:00:00 GMT 878 If your dependent parent is the qualifying person, you may claim head of household status even if he or she does not live with you. You must pay over half of your parent household expenses, whether your parent lives alone, with someone else, or in a senior citizens residence. http://www.taxact.com/tax-tips/index.asp?tid=877 Wed, 14 Jan 2009 00:00:00 GMT 877 A U.S. citizen or resident may have to pay tax on a gift or bequest received on or after June 17, 2008 from an individual (or estate of an individual) who expatriates on or after June 17, 2008 and is subject to the rules of Section 877A. The tax does not apply to the extent that gifts or bequests during the year are within the annual gift tax exclusion ($12,000 for 2008). The tax also does not apply if the transfer is reported on a timely filed gift tax return or estate tax return, or to transfers qualifying for the gift/estate tax marital deduction or charitable deduction. The value of a transfer not covered by an exception is taxable to the recipient at the highest rate on taxable gifts or estates, which is 45% for 2007009. A gift or bequest to a domestic trust is also subject to the tax, payable by the trust. If the gift or bequest is to a foreign trust, a U.S. citizen or resident pays the tax when distributions from the trust are received. http://www.taxact.com/tax-tips/index.asp?tid=876 Tue, 13 Jan 2009 00:00:00 GMT 876 An alien planning to leave the U.S. should obtain a copy of Form 1040-C from the IRS to review his or her tax reporting obligations. http://www.taxact.com/tax-tips/index.asp?tid=875 Mon, 12 Jan 2009 00:00:00 GMT 875 If you were not a resident during 2007 but in 2008 you satisfy both the lawful resident (green card) test and the 183-day presence test, your residence begins on the earlier of the first day you are in the U.S. while a lawful permanent resident and the first day of physical presence. http://www.taxact.com/tax-tips/index.asp?tid=874 Sun, 11 Jan 2009 00:00:00 GMT 874 An alien mere presence in the U.S. does not make him or her a resident. An alien is generally treated as a resident only if he or she is a lawful permanent resident who has a green card or meets a substantial presence test. http://www.taxact.com/tax-tips/index.asp?tid=873 Sat, 10 Jan 2009 00:00:00 GMT 873 Do not report on the decedent final return income that is received after his or her death, or accrues after or because of death if the decedent used the accrual method. This income is considered income in respect of a decedent or IRD. IRD is taxed to the estate or beneficiary receiving the income in the year of the receipt. On the decedent final return, only deductible expenses paid up to and including the date of death may be claimed. If the decedent reported on the accrual basis, those deductions accruable up to and including the date of death are deductible. If a check for payment of a deductible item was delivered or mailed before the date of the decedent death, a deduction is allowable on the decedent last return, even though the check was not cashed or deposited until after the decedent death. If the check was not honored by the bank, the item is not deductible. http://www.taxact.com/tax-tips/index.asp?tid=872 Fri, 9 Jan 2009 00:00:00 GMT 872 If your child has 2008 investment income exceeding $1,800, his or her tax liability generally must be figured on Form 8615, and under the kiddie tax rules, the excess over $1,800 will be taxed at your top tax rate rather than at your child rate. Starting in 2008, the kiddie tax applies not only to children under age 18, but also to children who at the end of the year are age 18 or full-time students under age 24 if their earned income is no more than 50% of their total support for the year (24.2). http://www.taxact.com/tax-tips/index.asp?tid=871 Thu, 8 Jan 2009 00:00:00 GMT 871 Tax rates are lower for a head of household than for those filing as single. The standard deduction is also higher. For a married person who lived apart from his or her spouse during the last half of the year, qualifying as a head of household allows use of tax rates that are more favorable than those for married persons filing separately. http://www.taxact.com/tax-tips/index.asp?tid=870 Wed, 7 Jan 2009 00:00:00 GMT 870 If you will be appointed executor or administrator and are concerned about estate insolvency, it may be advisable to hedge as follows: (1) File separate returns. If it is later seen that a joint return is preferable, you have three years to change to a joint return. (2) File jointly but postpone being appointed executor or administrator until after the due date of the joint return. In this way, the joint return may be disaffirmed if the estate cannot cover its share of the taxes. http://www.taxact.com/tax-tips/index.asp?tid=869 Tue, 6 Jan 2009 00:00:00 GMT 869 If your spouse died during the year and you are filing a joint return, include his or her income earned through the date of death. http://www.taxact.com/tax-tips/index.asp?tid=868 Mon, 5 Jan 2009 00:00:00 GMT 868 The separate liability election is not available where the proper amount of tax was reported on a joint return but your spouse did not pay the tax. However, equitable relief may be available in this type of tax underpayment situation. http://www.taxact.com/tax-tips/index.asp?tid=867 Sun, 4 Jan 2009 00:00:00 GMT 867 The separate liability election generally allows you to avoid liability for the portion of a tax deficiency that is allocable to the other spouse. Such relief is unavailable, however, to the extent that you had actual knowledge of the omitted income or deducted item that gave rise to the tax deficiency. http://www.taxact.com/tax-tips/index.asp?tid=866 Sat, 3 Jan 2009 00:00:00 GMT 866 You have until two years from the date that the IRS first attempts to collect tax from you on the joint return to make an innocent spouse election. http://www.taxact.com/tax-tips/index.asp?tid=865 Fri, 2 Jan 2009 00:00:00 GMT 865 After the filing of Form 8857, the IRS is required to notify the non-electing spouse (or former spouse) of an electing spouse request for relief and allow the non-electing spouse an opportunity to participate in the determination. If the IRS makes a preliminary determination granting full or partial relief to the electing spouse, the non-electing spouse may file a written protest and obtain an Appeals Office conference. http://www.taxact.com/tax-tips/index.asp?tid=864 Thu, 1 Jan 2009 00:00:00 GMT 864 The IRS may try to defeat your claim for innocent spouse relief on the grounds that you knew, or should have known, that tax was understated on the joint return. http://www.taxact.com/tax-tips/index.asp?tid=863 Wed, 31 Dec 2008 00:00:00 GMT 863 In a 2006 legal memorandum, the IRS concluded that the community property income-splitting rule allowed to California spouses does not apply to registered domestic partners, despite the California law (effective in 2005) that extended to registered domestic partners community property rights and virtually all other spousal rights and responsibilities. Thus, a California registered domestic partner must report all of his or her earned income from personal services. He or she cannot report on a separate federal return only one-half of the combined income of both partners, as he or she could if married. According to the IRS, domestic partners under the new California law are not married and Supreme Court precedent allowing married couples in community property states to split income applies only to husbands and wives. http://www.taxact.com/tax-tips/index.asp?tid=862 Tue, 30 Dec 2008 00:00:00 GMT 862 Where one spouse is a U.S. citizen or resident and the other is a nonresident alien who becomes a resident during the tax year, the couple may make a special election to file a joint return for that year and be taxed on their worldwide income. Thereafter, neither spouse may make the election again even if married to a new spouse. http://www.taxact.com/tax-tips/index.asp?tid=861 Mon, 29 Dec 2008 00:00:00 GMT 861 Where a U.S. citizen or resident is married to a nonresident alien, the couple may file a joint return if both elect to be taxed on their worldwide income. The requirement that one spouse be a U.S. citizen or resident need be met only at the close of the year. Joint returns may be filed in the year of the election and all later years until the election is terminated. http://www.taxact.com/tax-tips/index.asp?tid=860 Sun, 28 Dec 2008 00:00:00 GMT 860 If your spouse is in a combat zone or a qualified hazardous duty area, you can sign a joint return for your spouse. Attach a signed explanation to the return. http://www.taxact.com/tax-tips/index.asp?tid=859 Sat, 27 Dec 2008 00:00:00 GMT 859 Filing separately will sometimes allow either you or your spouse to avoid part of the personal exemption phaseout or the reduction to specified itemized deductions. If you file jointly and have total 2008 adjusted gross income (AGI) exceeding $239,950, the exemption phaseout applies. If you file separately, the phaseout does not apply to the spouse reporting separate AGI of $119,975 or less. On the other hand, where your joint AGI is $239,950 or less, a spouse reporting AGI over $119,975 on a separate return will be subject to the phaseout although no phaseout would apply on a joint return. If for 2008 you itemize deductions, the deductions for taxes, mortgage interest, charitable donations, and miscellaneous deductions are reduced if AGI exceeds $159,950 on a joint return, or exceeds $79,975 on a separate return. If you file separately, the reduction does not apply on a separate return showing AGI of $79,975 or less. Where joint AGI is $159,950 or less, a spouse filing separately with separate AGI over $79,975 is subject to the reduction although no reduction would apply on a joint return. http://www.taxact.com/tax-tips/index.asp?tid=858 Fri, 26 Dec 2008 00:00:00 GMT 858 If you and your spouse file separate returns, you have three years from the due date (without extensions) to change to a joint return. If a joint return is filed, you may not change to separate returns once the due date has passed. The filing of separate or joint estimated tax installments does not commit you to a similar tax return. http://www.taxact.com/tax-tips/index.asp?tid=857 Thu, 25 Dec 2008 00:00:00 GMT 857 The so-called marriage penalty is faced by couples whose joint return tax liability exceeds the combined tax they would pay if single. This is generally the case where each spouse earns a substantial share of the total income. On the other hand, if one spouse has little or no income, there generally is a marriage bonus or singles penalty, as the couple tax on a joint return is less than the sum of the tax liabilities that would be owed if they were single. Tax legislation has reduced the marriage penalty by increasing the standard deduction for married couples filing jointly to double the amount allowed to a single person, and also making the 15% bracket twice as wide. http://www.taxact.com/tax-tips/index.asp?tid=856 Wed, 24 Dec 2008 00:00:00 GMT 856 A suit for damages may also be brought in federal district court against the IRS if IRS employees improperly fail to release a lien on your property. Before you sue, you must file an administrative claim for damages. The lawsuit must be filed within two years after your claim arose. You may sue for actual economic damages plus costs of the action; the types of damages that may be recovered are similar to those discussed for suing the IRS for unauthorized collection actions. http://www.taxact.com/tax-tips/index.asp?tid=855 Thu, 20 Nov 2008 00:00:00 GMT 855 If you bring an action in federal district court for unauthorized collection activities that the court considers to be frivolous, it may impose a penalty of up to $10,000. http://www.taxact.com/tax-tips/index.asp?tid=854 Wed, 19 Nov 2008 00:00:00 GMT 854 Attorneys' fees include the fees paid by a taxpayer for the services of anyone who is authorized to practice before the Tax Court or IRS. http://www.taxact.com/tax-tips/index.asp?tid=853 Tue, 18 Nov 2008 00:00:00 GMT 853 A new law requires taxpayers to make an upfront payment when they submit an offer-in-compromise to the IRS on or after July 16, 2006. For a lump-sum offer, the taxpayer must include 20% of the offer with the application; the same requirement applies for offers to pay in five or fewer installments. For periodic payment offers, the first proposed installment must accompany the offer. The IRS can allow exceptions for low-income taxpayers or for offers based on doubt as to liability. Any upfront payment is in addition to the user fee that generally must accompany the submission, but the fee will be credited toward the outstanding tax liability. http://www.taxact.com/tax-tips/index.asp?tid=852 Mon, 17 Nov 2008 00:00:00 GMT 852 If you bring a frivolous case to the Tax Court or unreasonably fail to pursue IRS administrative remedies, the Tax Court may impose a penalty of up to $25,000. Furthermore, if you appeal a Tax Court decision and the federal appeals court finds that the appeal was frivolous, the court may impose a penalty. http://www.taxact.com/tax-tips/index.asp?tid=851 Sun, 16 Nov 2008 00:00:00 GMT 851 If you do not respond to the 30-day letter, or if you later do not reach an agreement with an appeals officer, the IRS will send you a 90-day letter, also called a notice of deficiency. The IRS is required to specify on the notice the 90th day by which you must file your petition with the Tax Court. http://www.taxact.com/tax-tips/index.asp?tid=850 Sat, 15 Nov 2008 00:00:00 GMT 850 If you claim a deduction, credit, or exclusion on your return that would seem to a reasonable person to be too good to be true under the circumstances, the IRS is likely to consider you negligent unless you show you made an attempt to verify the correctness of the position. http://www.taxact.com/tax-tips/index.asp?tid=849 Fri, 14 Nov 2008 00:00:00 GMT 849 Effective for returns and statements due after, and filed after, October 22, 2004, a $10,000 penalty may be imposed on individuals who fail to adequately disclose a reportable transaction on Form 8886; the penalty is $50,000 for taxpayers that are not natural persons. If the reportable transaction is also a listed transaction, the penalty amounts increase to $100,000 and $200,000, respectively. See the Form 8886 instructions for definitions of reportable and listed transactions. These penalties apply whether or not there is an understatement of tax liability due to the transaction. They apply in addition to the other penalties discussed in 48.6.Penalties are also imposed for understating tax liability attributable to reportable transactions with a significant tax avoidance purpose, effective for taxable years ending after October 22, 2004. The penalty is generally 20% of the understatement if the transaction was adequately disclosed on Form 8886. There is an exception for reasonable cause, but to qualify, stringent requirements must be met; see Code Section 6664(d). If the transaction was not adequately disclosed, the penalty increases to 30% of the understatement and there is no reasonable cause exception. http://www.taxact.com/tax-tips/index.asp?tid=848 Thu, 13 Nov 2008 00:00:00 GMT 848 Before deciding whether to sign the Form 870, consider that, by signing, you are giving up your right of appeal to both the IRS Office of Appeals and the Tax Court. However, you may still file a refund suit in a federal district court or in the Court of Federal Claims unless you have agreed not to do so on the Form 870. http://www.taxact.com/tax-tips/index.asp?tid=847 Wed, 12 Nov 2008 00:00:00 GMT 847 Make sure that the examination is scheduled far enough in advance for you to get ready. Do not let the IRS hurry you into an examination until you are prepared. In some localities, particularly rural areas, the IRS may give short notice in scheduling a field audit. An agent may even appear at your home or place of business and try to begin the audit immediately. Resist this pressure and reschedule the meeting at your convenience. http://www.taxact.com/tax-tips/index.asp?tid=846 Tue, 11 Nov 2008 00:00:00 GMT 846 Generally, a person authorized to practice before the IRS may discuss your tax return issues with the IRS only if you sign a power of attorney on Form 2848. However, just above the signature section of your 2006 Form 1040, 1040A, or 1040EZ, you may consent to contacts between the IRS and your designee to resolve return processing issues such as mathematical errors, missing return information, or questions about refunds or payments. The designee can be a friend or relative and need not be a tax professional. A power of attorney will still be needed to handle an audit, underreported income issues, appeals within the IRS, and collection notices. http://www.taxact.com/tax-tips/index.asp?tid=845 Mon, 10 Nov 2008 00:00:00 GMT 845 There is no limitation on when tax may be assessed where a false or fraudulent return is filed with intent to evade tax, or where no return is filed. http://www.taxact.com/tax-tips/index.asp?tid=844 Sun, 9 Nov 2008 00:00:00 GMT 844 For IRS publications outlining taxpayer rights, notices, examinations of tax returns, appeal rights, and collection procedures, go to the Individuals page of the IRS website, www.irs.gov, and click on the link for Taxpayer Rights. From there, you can link to the Taxpayer Advocate page. The Taxpayer Advocate Service may help you resolve a problem that could not be settled through normal IRS channels. http://www.taxact.com/tax-tips/index.asp?tid=843 Sat, 8 Nov 2008 00:00:00 GMT 843 The IRS has been ramping up the number of audits, with a focus on high-income taxpayers, Schedule C filers, S corporations, partnerships, abusive tax shelters, and corporations. http://www.taxact.com/tax-tips/index.asp?tid=842 Fri, 7 Nov 2008 00:00:00 GMT 842 If you owe state income taxes, the state can refer the debt to the Treasury Department's Financial Management Service (FMS). The FMS will offset your federal tax refund by the state tax if your address on the return is within the state seeking the offset. The state must give you written notice that the debt is being referred to the FMS and provide an opportunity for disputing the liability. http://www.taxact.com/tax-tips/index.asp?tid=841 Thu, 6 Nov 2008 00:00:00 GMT 841 In filing a refund claim during any period in which a person is unable to manage his or her financial affairs due to a physical or mental impairment that has lasted or is expected to last for at least one year or to result in death, the law suspends the limitation period. The suspension does not apply during a period in which a guardian is authorized to handle the individual's financial affairs. http://www.taxact.com/tax-tips/index.asp?tid=840 Wed, 5 Nov 2008 00:00:00 GMT 840 Failure to file a timely refund claim is fatal, regardless of its merits. Even if you expect that your claim will have to be pursued in court, you must still file a timely refund claim with the IRS. Mailing a refund claim so that it is postmarked by the due date (including extensions) qualifies as a timely filing if you use the U.S. Postal Service. The timely mailing rule also applies to refund claims that are timely deposited with private delivery services that have been designated by the IRS. http://www.taxact.com/tax-tips/index.asp?tid=839 Tue, 4 Nov 2008 00:00:00 GMT 839 So long as the IRS has not yet assessed an underpayment of income tax (or gift, estate, or generation-skipping tax), you can make a cash deposit in order to suspend the running of interest on a potential underpayment. If you are later found to owe tax and the IRS uses the deposit to pay it, you will not be charged interest. The running of interest is suspended on the date the IRS receives the deposit, not later when the liability is assessed or the deposit is actually applied to the liability. If the dispute is resolved in your favor, the deposit is returned to you and you are paid interest. You may also request the return of all or part of the deposit at any time before the IRS has used it to pay tax, unless the IRS determines that collection of tax is in jeopardy. You are paid interest on a returned deposit that was attributable to a disputable tax. Revenue Procedure 2005-18 has guidelines for making and recouping deposits. http://www.taxact.com/tax-tips/index.asp?tid=838 Mon, 3 Nov 2008 00:00:00 GMT 838 Go to www.irs.gov to find a description of the free tax preparation and electronic filing services offered by companies that have partnered with the IRS and determine whether you meet the eligibility criteria. http://www.taxact.com/tax-tips/index.asp?tid=837 Sun, 2 Nov 2008 00:00:00 GMT 837 If your 2006 return is filed on or before the April 16, 2007, filing deadline, the IRS does not have to pay interest if the refund is issued before June 1, 2007, which is 46 days after the April 16 filing due date. If the return is filed after April 16, 2007, with or without an extension, no interest is due on refunds issued within 45 days after the actual filing date. If the overpayment is not refunded within 45 days, interest is paid from the date the tax was overpaid up to a date determined by the IRS that can be as much as 30 days before the date of the refund check. http://www.taxact.com/tax-tips/index.asp?tid=836 Sat, 1 Nov 2008 00:00:00 GMT 836 You can get an automatic six-month extension to file your 2006 return by filing Form 4868 by April 16, 2007. The extension is for filing only and does not extend the time to pay your taxes for 2006. http://www.taxact.com/tax-tips/index.asp?tid=835 Fri, 31 Oct 2008 00:00:00 GMT 835 Last minute filers may use specified services from DHL, Federal Express, and UPS as well as the U.S. Postal Service. If using the U.S. Postal Service, send the return certified (or registered) mail and keep the postmark receipt. If you use a private delivery service, keep a copy of the mailing label or obtain a receipt to verify a timely postmark. If your return is postmarked before or at any time on the filing due date (April 16, 2007, for 2006 returns), it is considered timely filed under a timely-mailing-is-timely-filing rule, even if the IRS receives it after the due date.The timely mailing rule also applies if you obtain a filing extension and are mailing your return on or before the extended due date.A timely foreign postmark for a return filed from abroad will also be accepted by the IRS as proof of a timely filing. http://www.taxact.com/tax-tips/index.asp?tid=834 Thu, 30 Oct 2008 00:00:00 GMT 834 Photocopy your signed return and keep the copy along with copies of Form W-2 and other income statements, receipts, cancelled checks, and other items to substantiate your deductions. http://www.taxact.com/tax-tips/index.asp?tid=833 Wed, 29 Oct 2008 00:00:00 GMT 833 You can obtain a copy of a prior year tax return from the IRS by filing Form 4506 and paying a $39 fee per return. Copies of Forms 1040, 1040A, and 1040EZ are generally available for seven years from filing before they are destroyed.You can use Form 4506-T to order free of charge a transcript of tax return information that provides line entries from tax returns for the three prior years and data from Forms W-2 and 1099. http://www.taxact.com/tax-tips/index.asp?tid=832 Tue, 28 Oct 2008 00:00:00 GMT 832 Electing the optional method to increase the base for Social Security coverage may also increase earned income for dependent care and earned income credit purposes. http://www.taxact.com/tax-tips/index.asp?tid=831 Mon, 27 Oct 2008 00:00:00 GMT 831 After you figure your self-employment tax on Schedule SE, deduct one-half of it on Line 27 of Form 1040. http://www.taxact.com/tax-tips/index.asp?tid=830 Sun, 26 Oct 2008 00:00:00 GMT 830 If you are a trader in securities (30.16), gains or losses from your trading business are not subject to self-employment tax. http://www.taxact.com/tax-tips/index.asp?tid=829 Sat, 25 Oct 2008 00:00:00 GMT 829 Fees you earn for freelance work as an independent contractor are business earnings reportable on Schedule C, and if you have a net profit, they are subject to self-employment tax on Schedule SE. http://www.taxact.com/tax-tips/index.asp?tid=828 Fri, 24 Oct 2008 00:00:00 GMT 828 The owner of one office building who holds it for investment (rather than for sale in the ordinary course of business) is not a real estate dealer, but a real estate investor. If the only tenant services provided are heat, light, water, and trash collection, report the rental income and expenses on Schedule E. The activity is not a Schedule C business subject to self-employment tax. http://www.taxact.com/tax-tips/index.asp?tid=827 Thu, 23 Oct 2008 00:00:00 GMT 827 Net Section 1231 gain is not treated as capital gain but as ordinary income to the extent of net Section 1231 losses realized in the five most recent prior taxable years. Losses are recaptured in chronological order on Form 4797. Losses that have already been recaptured under this rule in prior years are not taken into account. http://www.taxact.com/tax-tips/index.asp?tid=826 Wed, 22 Oct 2008 00:00:00 GMT 826 Profitable sales and involuntary conversions of Section 1231 assets are generally treated as capital gain, except for profits on equipment (44.1) and real estate allocated to recaptured depreciation (44.2), and losses are deducted as ordinary loss. However, the exact tax result depends on the net profit and loss realized for all sales of such property made during the tax year. Under the netting rules explained at 44.8, the net result of these sales determines the tax treatment of each individual sale. In making the computation on Form 4797, you must also consider losses and gains from casualty, theft, and other involuntary conversions involving business and investment property held more than one year. Follow the Form 4797 instructions. http://www.taxact.com/tax-tips/index.asp?tid=825 Tue, 21 Oct 2008 00:00:00 GMT 825 Ordinary income generally is not realized on a tax-free exchange or trade-in of the same type of property (unless some gain is taxed because the exchange is accompanied by boot (6.3) such as money). The ordinary income potential is assumed in the basis of the new property. However, where depreciable realty acquired before 1987 is exchanged for land, the amount of any depreciation recapture is immediately taxable in the year of the exchange. http://www.taxact.com/tax-tips/index.asp?tid=824 Mon, 20 Oct 2008 00:00:00 GMT 824 If you sell property on the installment basis, the first-year expensing deduction claimed for the property in a prior year is recaptured in the year of sale on Form 4797. An installment sale does not defer recapture of the first-year deduction; see 44.6. http://www.taxact.com/tax-tips/index.asp?tid=823 Sun, 19 Oct 2008 00:00:00 GMT 823 See 44.4 for how recapture rules affect gifts, charitable donations, and inheritances of depreciable property, and 44.5 for like-kind exchanges and involuntary conversions. http://www.taxact.com/tax-tips/index.asp?tid=822 Sat, 18 Oct 2008 00:00:00 GMT 822 If in 2006 you leased a car, truck, or van for at least 30 days and you deduct the lease charges as a business expense (43.12), you generally must reduce the deduction by an income inclusion amount based on an IRS table. If you claim the standard mileage allowance (43.1), the income inclusion rule does not apply. See IRS Publication 463 for details. http://www.taxact.com/tax-tips/index.asp?tid=821 Fri, 17 Oct 2008 00:00:00 GMT 821 The trade-in adjustment is not used for determining gain or loss on the disposition of the new car when it is later sold. It is used solely for depreciation purposes. http://www.taxact.com/tax-tips/index.asp?tid=820 Thu, 16 Oct 2008 00:00:00 GMT 820 If you were eligible for the special first-year depreciation allowance for a vehicle placed in service after September 10, 2001, and before January 1, 2005, you must reduce depreciable basis by the amount of the available allowance even if you did not claim it, unless you specifically elected not to claim the allowance on a statement attached to your return. http://www.taxact.com/tax-tips/index.asp?tid=819 Wed, 15 Oct 2008 00:00:00 GMT 819 If you meet the more-than-50% test in the year the car or other vehicle is placed in service, which entitles you to claim first-year expensing or accelerated MACRS, but business use falls to 50% or less in a later year, the recapture rules discussed at 43.10 apply. http://www.taxact.com/tax-tips/index.asp?tid=818 Tue, 14 Oct 2008 00:00:00 GMT 818 In deciding whether to elect the allowance in the first year, consider not only whether you will get a bigger first-year deduction using the allowance, or deducting actual operating costs plus depreciation, but also project your mileage, operating expenses, and depreciation expenses over the years you expect to use the vehicle. If in the first year you elect to deduct actual costs, including MACRS or straight-line MACRS depreciation, you may not use the IRS auto allowance for that vehicle in a later year. On the other hand, claiming the IRS allowance in the first year you put a vehicle in service forfeits your privilege to use MACRS and first-year expensing. If you switch from the allowance to deducting actual expenses in later years, you may claim straight-line depreciation over the remaining estimated useful life of the vehicle if the vehicle is not considered fully depreciated. http://www.taxact.com/tax-tips/index.asp?tid=817 Mon, 13 Oct 2008 00:00:00 GMT 817 A capital improvement to a business vehicle is depreciable under MACRS in the year the improvement is made. The MACRS deductions for the improvement and the vehicle are considered as a unit for purposes of applying the limits on the annual MACRS depreciation deduction. http://www.taxact.com/tax-tips/index.asp?tid=816 Sun, 12 Oct 2008 00:00:00 GMT 816 First-year expensing or depreciation (under the 200% or 150% declining balance method, or the straight-line method) is claimed on Form 4562 and then entered on Schedule C of Form 1040 if you are self employed. If you are an employee, use Form 2106 to calculate your deduction, which along with your other unreimbursed job expenses is subject to the 2% AGI floor (19.3) for miscellaneous itemized deductions on Schedule A of Form 1040. http://www.taxact.com/tax-tips/index.asp?tid=815 Sat, 11 Oct 2008 00:00:00 GMT 815 Computer software is not a Section 197 intangible (42.18) if it: (1) is readily available to the general public; (2) is not subject to an exclusive license; and (3) has not been substantially changed. If these three tests are met, software purchased in 2003-2009 is eligible for first-year expensing (42.3), or it may be depreciated over 36 months; see 42.19. Computer software falling outside of this exception is considered a Section 197 intangible subject to 15-year amortization if it is acquired in the acquisition of a business. http://www.taxact.com/tax-tips/index.asp?tid=814 Fri, 10 Oct 2008 00:00:00 GMT 814 A covenant not to compete is a Section 197 intangible if paid for in connection with the acquisition of a business. Excessive compensation or rental paid to a former owner of a business for continuing to perform services or provide the use of property is considered an amount paid for a covenant not to compete if the services or property benefits the trade or business. But an amount paid under a covenant not to compete that actually represents additional consideration for corporate stock is not a Section 197 intangible and must be added to the basis of the acquired stock. http://www.taxact.com/tax-tips/index.asp?tid=813 Thu, 9 Oct 2008 00:00:00 GMT 813 Upon the termination of a lease, the adjusted basis of a lessee's leasehold improvements that are abandoned may be claimed as a loss. For dispositions after June 12, 1996, a lessor may follow the rule applied to lessees if the improvements are irrevocably disposed of or abandoned at the termination of the lease. The lessor may recognize loss for the remaining adjusted basis of the improvements. http://www.taxact.com/tax-tips/index.asp?tid=812 Wed, 8 Oct 2008 00:00:00 GMT 812 A deduction of up to 50% of demolition and site cleanup costs can be claimed for property in the Gulf Opportunity Zone incurred after August 28, 2005, and before January 1, 2008. http://www.taxact.com/tax-tips/index.asp?tid=811 Tue, 7 Oct 2008 00:00:00 GMT 811 The MACRS class for an addition or improvement is generally determined by the MACRS class of the property to which the addition or improvement is made. For example, if you put an addition on a rental home that you are depreciating over 27.5 years, the addition is depreciated as 27.5-year residential rental property. The period for figuring depreciation begins on the date that the addition or improvement is placed in service, or, if later, the date that the property to which the addition or improvement was made is placed in service.See the Law Alert below for the special 15-year recovery rule allowed for qualified leasehold or restaurant improvements. http://www.taxact.com/tax-tips/index.asp?tid=810 Mon, 6 Oct 2008 00:00:00 GMT 810 Software purchased off the shelf and used for business or investment purposes qualifies for first-year expensing in 2003-2009. If not expensed, it is depreciable over a three-year period provided it has a useful life exceeding one year. If the useful life does not exceed one year, the cost is immediately deductible. Also see 42.19. http://www.taxact.com/tax-tips/index.asp?tid=809 Sun, 5 Oct 2008 00:00:00 GMT 809 If you use a home computer for business but not in a qualified home office (40.12), it must be used more than 50% of the time for business to claim a first-year expensing deduction. If used 50% or less for business, straight-line depreciation over the ADS recovery period is required. http://www.taxact.com/tax-tips/index.asp?tid=808 Sat, 4 Oct 2008 00:00:00 GMT 808 Accelerated rates of MACRS merely give you an opportunity to advance the time of taking your deduction. This may be a decided advantage where the higher deductions in the first few years will provide you with cash for working capital or for investments in other income-producing sources. That is, by accelerating the deductions, you defer the payment of taxes that would be due if you claimed smaller depreciation deductions, using more conservative straight-line rates. The tax deferral lasts until the rapid method provides lower depreciation deductions than would the more conservative method. You are generally more likely to benefit from accelerated MACRS in an ongoing business.If you are starting a new business in which you expect losses or low income at the start, accelerated MACRS may waste depreciation deductions that could be used in later years when your income increases. Therefore, before deciding to use accelerated MACRS rates, consider your income prospects. http://www.taxact.com/tax-tips/index.asp?tid=807 Fri, 3 Oct 2008 00:00:00 GMT 807 The half-year convention applies unless the total cost basis of depreciable assets placed in service during the last three months of the year exceeds 40% of the total basis of all property placed in service during the year.Under the half-year convention, all assets placed in service during the year are treated as placed in service at the midpoint of the year. http://www.taxact.com/tax-tips/index.asp?tid=806 Thu, 2 Oct 2008 00:00:00 GMT 806 If you were eligible for 30% first-year bonus depreciation for property placed in service after September 10, 2001, and before May 6, 2003, or eligible for 50% bonus depreciation (30% if so elected) for property placed in service after May 5, 2003, and before 2005, or claimed 50% bonus depreciation on Gulf Opportunity Zone property placed in service after August 26, 2005, and before January 1, 2008 (January 1, 2009, for nonresidential real property and residential rental property), you must reduce basis for MACRS purposes by the applicable deduction (30% or 50% of adjusted basis) unless you elected on your tax return to opt out of bonus depreciation for that class of property. http://www.taxact.com/tax-tips/index.asp?tid=805 Wed, 1 Oct 2008 00:00:00 GMT 805 The depreciation recovery periods for different types of assets are generally fixed by law according to the rules on this page. http://www.taxact.com/tax-tips/index.asp?tid=804 Tue, 30 Sep 2008 00:00:00 GMT 804 Equipment placed in service on the last day of the 2006 taxable year may qualify for the entire $108,000 first-year expensing deduction. You do not have to prorate the $108,000 limit for the amount of time you held the property. http://www.taxact.com/tax-tips/index.asp?tid=803 Mon, 29 Sep 2008 00:00:00 GMT 803 For Gulf Opportunity Zone property, the $430,000 phaseout threshold is increased by $600,000, to $1,030,000 in 2006. http://www.taxact.com/tax-tips/index.asp?tid=802 Sun, 28 Sep 2008 00:00:00 GMT 802 The expensing deduction may not exceed the net taxable income from all businesses that you actively conduct. Net income from active businesses is figured without regard to expensing, the deduction for 50% of self-employment liability, or any net operating loss carryback or carryforward. You may include wage or salary income as active business income and if you are married filing jointly, also include your spouse's net taxable income.If you have an overall net loss from all actively conducted businesses, you may not claim an expensing deduction for 2006. If net income is less than the cost of qualifying assets, expensing is limited to the income. However, the cost over the income limit is carried forward to 2007 on Form 4562 provided you complete the expensing section of Form 4562 for 2006. You do not get a carryover unless the deduction is claimed on the return for the first year the property is placed in service. http://www.taxact.com/tax-tips/index.asp?tid=801 Sat, 27 Sep 2008 00:00:00 GMT 801 The expensing limit for 2006 of $108,000 will be adjusted for inflation in 2007 through 2009. The 2007 limit has not yet been announced. After 2009, the limit is scheduled to fall to $25,000. http://www.taxact.com/tax-tips/index.asp?tid=800 Fri, 26 Sep 2008 00:00:00 GMT 800 If you did not deduct the correct amount of depreciation for a prior year, you may be able to make a correction by filing an amended return. However, if you did not deduct the correct amount of depreciation for two or more consecutive years, you must request an accounting method change; see IRS Publication 946 for details. See also 5.20 for adjustments to basis for unclaimed depreciation taken in prior years. http://www.taxact.com/tax-tips/index.asp?tid=799 Thu, 25 Sep 2008 00:00:00 GMT 799 Qualifying improvements made after October 22, 2004, and before 2006 to the interior of a nonresidential building are depreciable over 15 years using the straight-line method if the improvement was placed in service more than three years after the building was first placed in service. A similar 15-year recovery period is allowed for improvements to restaurant property placed in service after October 22, 2004, and before 2006 if it was made more than three years after the building was placed in service. However, when this book went to press, Congress had not yet extended the 15-year writeoff to eligible improvements after 2005. See the e-Supplement and the Form 4562 instructions for an update. http://www.taxact.com/tax-tips/index.asp?tid=798 Wed, 24 Sep 2008 00:00:00 GMT 798 As an owner-employee (owning more than 10% of the business), your dealings with the Keogh trust are subject to restrictions. You are generally subject to penalties if you buy property from or sell property to the trust; or charge any fees for services you render to the trust. These restrictions also apply to any member of your immediate family and any corporation in which you own more than half the voting stock, either directly or indirectly. http://www.taxact.com/tax-tips/index.asp?tid=797 Tue, 23 Sep 2008 00:00:00 GMT 797 Employers with 100 or fewer employees that do not have a qualified retirement plan generally may claim a tax credit on Form 8881 for administrative costs of setting up a pension plan, profit-sharing plan, 401(k) plan, SEP, or SIMPLE plan. At least one non-highly-compensated employee must be covered. The maximum credit is $500, 50% of the first $1,000 of startup costs. The credit is allowed for costs incurred in the year in which the plan takes effect and in the next two years. http://www.taxact.com/tax-tips/index.asp?tid=796 Mon, 22 Sep 2008 00:00:00 GMT 796 You must formally set up a Keogh plan in writing on or before the end of the taxable year in which you want the plan to be effective. For example, if you want to make a contribution for 2006, your plan must be set up on or before December 31, 2006, if you report on a calendar year basis. If a profit-sharing Keogh plan is established by the end of 2006, you have up until the due date for filing your 2006 return, plus the extension, to make a deductible contribution within the limits discussed in this section.If you miss the deadline for setting up a Keogh plan, you may contribute to a simplified employee pension plan (SEP) set up by the filing deadline for Form 1040, including extensions. See 41.4. http://www.taxact.com/tax-tips/index.asp?tid=795 Sun, 21 Sep 2008 00:00:00 GMT 795 If you have no employees other than your spouse, you may want to consider a one-person 401(k) plan, which allows you to contribute more than a Keogh plan. For example, for 2006, elective deferrals of up to $15,000 could be made, or $20,000 if age 50 or older during the year. In addition to the deferrals, a contribution of up to 20% of net earnings (reduced by 50% of self-employment tax liability; see 41.4) can be made to your account, subject to the overall limit, which for 2006 was $44,000. Starting in 2006, you can add a Roth 401(k) option to your plan, allowing after-tax contributions to produce tax-free returns. The income limitation on eligibility to contribute to a Roth IRA does not apply to a Roth 401(k). See the e-Supplement for the 2007 overall limit. http://www.taxact.com/tax-tips/index.asp?tid=794 Sat, 20 Sep 2008 00:00:00 GMT 794 If you are an employee-member of a company retirement plan, you may set up a Keogh plan if you carry on a self-employed enterprise or profession on the side. For example, you are employed by a company that has a qualified 401(k) plan to which you make salary deferrals. At the same time, you have a sideline consulting business. You may set up a Keogh plan based on your consultant earnings. Each plan is independent of the other. As an alternative to a Keogh plan, you may contribute to a simplified employee pension plan (SEP), as discussed in 41.3, or a SIMPLE IRA, discussed in 41.9. http://www.taxact.com/tax-tips/index.asp?tid=793 Fri, 19 Sep 2008 00:00:00 GMT 793 For a qualified business use, a refundable credit may be claimed for gasoline or special fuels. For example, a credit applies for fuel used in non-highway vehicles (other than motorboats), including generators, compressors, fork-lift trucks, and bulldozers. A credit may also be claimed for aviation fuel used for farming or commercial aviation. Different credit rates apply depending on the type of fuel. You must claim the credit on a timely filed income tax return, including extensions. You compute the credit on Form 4136, which you attach to Form 1040. For further details, see IRS Publication 378; farmers should see IRS Publication 225. http://www.taxact.com/tax-tips/index.asp?tid=792 Thu, 18 Sep 2008 00:00:00 GMT 792 Employers with 100 or fewer employees that do not have a qualified retirement plan generally may claim a tax credit on Form 8881 for administrative costs of setting up a pension plan, profit-sharing plan, 401(k) plan, SEP, or SIMPLE plan. At least one non-highly-compensated employee must be covered. The maximum credit is $500, 50% of the first $1,000 of startup costs. The credit is allowed for costs incurred in the year in which the plan takes effect and in the next two years. http://www.taxact.com/tax-tips/index.asp?tid=791 Wed, 17 Sep 2008 00:00:00 GMT 791 For S corporations, only wages allocable to a shareholder (and not the shareholder's personal wages) are taken into account for the limitation on the domestic production activities deduction. For both partnerships and S corporations in tax years beginning after May 17, 2006, wages for the W-2 limit include only amounts paid to determine qualified production activity income. http://www.taxact.com/tax-tips/index.asp?tid=790 Tue, 16 Sep 2008 00:00:00 GMT 790 The domestic production activities deduction (40.23) cannot create or increase an NOL carryback or carryforward (with very limited exceptions). http://www.taxact.com/tax-tips/index.asp?tid=789 Mon, 15 Sep 2008 00:00:00 GMT 789 You will generally make the election to relinquish the carryback if you expect greater tax savings by carrying the loss forward. You might also make the election if you are concerned you might be audited for earlier years if you carry back a loss for a refund. You make the election by attaching a statement to this effect to your return for the year of the loss, which must be filed by the due date plus extensions. The IRS refuses to allow a late election and received court approval for its position. http://www.taxact.com/tax-tips/index.asp?tid=788 Sun, 14 Sep 2008 00:00:00 GMT 788 A net nonbusiness capital loss may not be included in a net operating loss. If nonbusiness capital losses exceed nonbusiness capital gains, the excess is an adjustment that reduces your loss on Schedule A of Form 1045. In figuring your loss, you may take into account business capital losses only up to the total of business capital gains plus any nonbusiness capital gains remaining after the adjustment for nonbusiness deductions. http://www.taxact.com/tax-tips/index.asp?tid=787 Sat, 13 Sep 2008 00:00:00 GMT 787 In claiming home office expenses of a sideline business, it is important to be ready to prove that you are actually in business; see 40.10. In the case cited in the Example in 40.16, the Tax Court held that the doctor's personal efforts in managing the six units for tenants were sufficiently systematic and continuous to put him in the rental real estate business. In some cases, the rental of even a single piece of real property may be a business if additional services are provided such as cleaning or maid service. http://www.taxact.com/tax-tips/index.asp?tid=786 Fri, 12 Sep 2008 00:00:00 GMT 786 Expenses disallowed because of the income limitation may be carried forward and treated as home office expenses in a later tax year (Part IV, Form 8829). The carryover as well as the expenses of the later year are subject to the income limitation of that year. For example, tentative profit for 2006 on Line 29 of Schedule C is $1,000. Expenses allocated to the home office are $2,000. Only $1,000 of the expenses are deductible; $1,000 is carried over to 2007. http://www.taxact.com/tax-tips/index.asp?tid=785 Thu, 11 Sep 2008 00:00:00 GMT 785 While depreciation of a home office usually is figured using a 39-year recovery period, a 27.5 year recovery period can be used by an on-site landlord of a building in which at least one dwelling unit is rented out and 80% or more of the gross rental income is rental income from dwelling units within the building. In applying the 80% test, the rental value of the entire landlord's unit is treated as gross rental income and the rental value of the landlord's residential space (but not the home office) is treated as rental income from a dwelling unit.For example, where a landlord lived in one unit of his eight-unit building and used a room in his unit for a home office, the IRS allowed the home office to be depreciated over 27.5 years as residential rental property. http://www.taxact.com/tax-tips/index.asp?tid=784 Wed, 10 Sep 2008 00:00:00 GMT 784 If you rent rather than own your home, and you meet the home office tests in 40.12, enter the rent you paid during the year on Column (b) of Line 20 (Other Expenses) of Form 8829. http://www.taxact.com/tax-tips/index.asp?tid=783 Tue, 9 Sep 2008 00:00:00 GMT 783 You must report deductible 2006 home office expenses on Form 8829. Part I is used for showing the space allocated to business use (40.14); Part II for reporting deductible expenses allocated to business use (40.14); Part III for figuring depreciation on the business area (40.13); and Part IV for carryover to 2007 of expenses not allowed in 2006 because of income limitations applied in Part II (40.15). A sample copy of Form 8829 is on page 638. http://www.taxact.com/tax-tips/index.asp?tid=782 Mon, 8 Sep 2008 00:00:00 GMT 782 The tests for deducting office expenses will generally not present problems where the home area is the principal place of business or professional activity. For example, you are a doctor and see most of your patients at an office set aside in your home. A tax dispute may arise where you have a principal place of business elsewhere and use a part of your home for occasional work or administrative paperwork. Occasional use is not sufficient. If your deduction is questioned, you must prove that the area is used regularly and exclusively to meet with customers, clients, or patients or that the home office is the only place where administrative/management activities for the business are conducted. Have evidence that you have actual office facilities. Furnish the room as an office-with a desk, files, and a phone used only for business calls. Also keep a record of work done and business visitors. http://www.taxact.com/tax-tips/index.asp?tid=781 Sun, 7 Sep 2008 00:00:00 GMT 781 A home office deduction may be claimed if you regularly and exclusively use part of your home as the only place for conducting the administrative or management activities of your business, or if only minimal administrative work is done outside your home. The home area qualifies as your principal place of business even if you spend most of your working time providing services at outside locations. http://www.taxact.com/tax-tips/index.asp?tid=780 Sat, 6 Sep 2008 00:00:00 GMT 780 You may not deduct or amortize the expenses incurred in acquiring or selling securities or partnership interests such as securities registration expenses or underwriters' commissions. http://www.taxact.com/tax-tips/index.asp?tid=779 Fri, 5 Sep 2008 00:00:00 GMT 779 The question of whether an activity, such as dog breeding or collecting and selling coins and stamps, is a hobby or sideline business arises when losses are incurred. As long as you show a profit, you may deduct the expenses of the activity. But when expenses exceed income and your return is examined, an agent may allow expenses only up to the amount of your income and disallow the remaining expenses that make up your loss. At this point, to claim the loss, you may be able to take advantage of a profit presumption discussed in 40.10, or you may have to prove that you are engaged in the activity to make a profit. http://www.taxact.com/tax-tips/index.asp?tid=778 Thu, 4 Sep 2008 00:00:00 GMT 778 Penalties or fines paid to a government agency because of a violation of any law are not deductible. You may deduct penalties imposed by a business contract for late performance or nonperformance. http://www.taxact.com/tax-tips/index.asp?tid=777 Wed, 3 Sep 2008 00:00:00 GMT 777 A self-employed doctor may deduct the premium costs of malpractice insurance. However, a doctor who is not self-employed but employed by someone else, say a hospital, may deduct the premium costs only as a miscellaneous itemized deduction subject to the 2% of adjusted gross income floor. Whether malpractice premiums paid to a physician-owned carrier are deductible depends on how the carrier is organized. If there is a sufficient number of policyholders who are not economically related and none of whom owns a controlling interest in the insuring company, a deduction is allowed provided the premiums are reasonable and are based on sound actuarial principles.In one case, physicians set up a physician-owned carrier that was required by state insurance authorities to set up a surplus fund. The physicians contributed to the fund and received nontransferable certificates that were redeemable only if they retired, moved out of the state, or died. The IRS and Tax Court held the contributions to the fund were nondeductible capital expenses.In another case, a professional corporation of anesthesiologists set up a trust to pay malpractice claims, up to specified limits. The IRS and Tax Court disallowed deductions for the trust contributions on the grounds that the PC remained potentially liable. Malpractice claims within the policy limits might exceed trust funds and the PC would be liable for the difference. Since risk of loss was not shifted to the trust, the trust was not a true insurance arrangement. http://www.taxact.com/tax-tips/index.asp?tid=776 Tue, 2 Sep 2008 00:00:00 GMT 776 Owners and leaseholders of commercial buildings that are certified to meet certain energy-efficiency standards can qualify for a deduction of up to $1.80 per square foot. http://www.taxact.com/tax-tips/index.asp?tid=775 Mon, 1 Sep 2008 00:00:00 GMT 775 If you have employees, you must comply with employment tax responsibilities, such as collecting and paying to the government income tax withholding from employee wages. For details, see IRS Publication 15, Circular E, Employer's Tax Guide. http://www.taxact.com/tax-tips/index.asp?tid=774 Sun, 31 Aug 2008 00:00:00 GMT 774 On Line 17 of Schedule C, you deduct the portion of tax preparation costs allocable to preparing Schedule C and related tax forms. Also deduct on Line 17 fees for tax advice related to the business. http://www.taxact.com/tax-tips/index.asp?tid=773 Sat, 30 Aug 2008 00:00:00 GMT 773 A security trader may deduct expenses of trading on Schedule C; for further details, see 30.16. http://www.taxact.com/tax-tips/index.asp?tid=772 Fri, 29 Aug 2008 00:00:00 GMT 772 Interest on a tax deficiency based on business income reporting is not a deductible business expense; interest on a tax deficiency is always nondeductible personal interest. http://www.taxact.com/tax-tips/index.asp?tid=771 Thu, 28 Aug 2008 00:00:00 GMT 771 As a sole proprietor, you do not deduct health insurance premiums on Schedule C. Instead, you deduct 100% of health insurance costs for yourself, your spouse, and your dependents on Line 29, Form 1040. See also 12.10 for the way to claim health savings account contributions on Line 25 of Form 1040. http://www.taxact.com/tax-tips/index.asp?tid=770 Wed, 27 Aug 2008 00:00:00 GMT 770 The cash reporting requirement may not be avoided by splitting up a single transaction into separate transactions. Thus, a sale of property for $36,000 may not be broken down into four separate sales of $9,000 to avoid reporting. Similarly, an attorney who represents a client in a case must aggregate all cash payments by the client, although payments may be spread over several months. If the total exceeds $10,000, it must be reported. http://www.taxact.com/tax-tips/index.asp?tid=769 Tue, 26 Aug 2008 00:00:00 GMT 769 Generally, you must obtain the consent of the Internal Revenue Service prior to any change in accounting method. Apply for consent by filing Form 3115 as early as possible during the tax year for which you wish to make the change. http://www.taxact.com/tax-tips/index.asp?tid=768 Mon, 25 Aug 2008 00:00:00 GMT 768 The accrual method has this advantage over the cash basis: It generally gives a more even and balanced financial report. http://www.taxact.com/tax-tips/index.asp?tid=767 Sun, 24 Aug 2008 00:00:00 GMT 767 The cash basis has this advantage over other accounting methods: You may defer reporting income by postponing the receipt of income. But make certain that you avoid the constructive receipt rule. For example, if 2006 is a high income year or you might drop to a lower tax bracket in 2007, you might delay mailing some of your customers' bills so they do not receive them until 2007. You may also postpone the payment of presently due expenses to a year in which the deduction gives you a greater tax savings. http://www.taxact.com/tax-tips/index.asp?tid=766 Sat, 23 Aug 2008 00:00:00 GMT 766 Businesses with average annual gross receipts of $10 million are eligible to use a cash method safe harbor. http://www.taxact.com/tax-tips/index.asp?tid=765 Fri, 22 Aug 2008 00:00:00 GMT 765 Business persons and professionals with a 2006 net operating loss may get a refund of taxes paid in two prior tax years (more in some cases). If the loss is not fully eliminated by the income of the two prior years, the balance of the loss may be used to reduce your business income for up to 20 of the following years. See 40.18 for details. http://www.taxact.com/tax-tips/index.asp?tid=764 Thu, 21 Aug 2008 00:00:00 GMT 764 Estate tax planning is not a do-it-yourself activity. You should contact experienced counsel for help in developing a plan for your future estate that will accomplish your tax and personal objectives. http://www.taxact.com/tax-tips/index.asp?tid=763 Wed, 20 Aug 2008 00:00:00 GMT 763 To qualify for the marital deduction, the property must generally be given to the spouse outright or by other arrangements that are the legal equivalent of outright ownership. There is an exception for income interests in charitable remainder annuity or unitrusts and certain other qualified terminable interest property (QTIP) for which the executor makes an election. http://www.taxact.com/tax-tips/index.asp?tid=762 Tue, 19 Aug 2008 00:00:00 GMT 762 When this book went to press, it was unclear if the House and Senate would be able in the near future to agree on a compromise plan to reform the estate tax. Republican-led efforts to make estate tax repeal permanent after 2009 passed the House but not the Senate in mid-2006. This was followed by attempts to enact a compromise reform plan. The House passed a bill that would reunify the estate and gift taxes starting in 2010 as part of a package that would also extend expiring tax provisions and increase the minimum wage. However, the plan did not gain Senate approval because of opposition by Senate Democrats to the estate tax provisions. The bill would increase the exemption for gift and estate tax purposes in stages to $5 million by 2015 (and then index it for inflation), and allow the unused portion of a deceased spouse's exemption to be used by the surviving spouse. The tax rate on taxable transfers up to $25 million would be the capital gains rate and transfers over $25 million would be taxed at a rate of 40% in 2010, with the rate decreasing by 2% a year until reaching 30% for 2015 and later years. After 2015, the $25 million threshold would be indexed for inflation.When this book went to press, new efforts were underway to gain approval of the bill in the Senate, or possibly modify it in an attempt to win passage. See the e-Supplement for an update. http://www.taxact.com/tax-tips/index.asp?tid=761 Mon, 18 Aug 2008 00:00:00 GMT 761 There are some assets that you might not ordinarily consider as part of your estate. Nevertheless, include in your inventory any trust arrangements created by you in which you have: (1) a life estate (the income or other use of property for life); (2) income that is to be used to pay your legal obligations (support of a child, for example); (3) the right to change the beneficiary or his or her interest (a power of appointment); (4) the right to revoke a trust transfer or gift; and (5) a reversionary interest (the possibility that the property can come back to you). http://www.taxact.com/tax-tips/index.asp?tid=760 Sun, 17 Aug 2008 00:00:00 GMT 760 If you are buying a new policy with yourself as the insured, and you want to keep the proceeds out of your gross estate, set up an irrevocable trust to buy the policy or have the individual beneficiary buy the policy. For example, a daughter applies for a $1 million policy on her father's life and is the policy owner under the terms of the policy. If the father pays the premiums, his payments are treated as gifts, but the proceeds paid at his death are not subject to estate tax because he never had ownership rights in the policy.If you have an existing policy, you may assign your ownership rights, such as the right to change beneficiaries, the right to surrender or cancel the policy, the right to assign it, and the right to borrow against it, but the assignment must occur more than three years before death to exclude the proceeds from your estate. http://www.taxact.com/tax-tips/index.asp?tid=759 Sat, 16 Aug 2008 00:00:00 GMT 759 In a revocable trust, you retain control over the property by reserving the right to revoke the trust. As such, it is considered an incomplete gift and offers no present income tax savings. Furthermore, the trust property will be included as part of your estate. But a revocable trust minimizes delay in passing property to beneficiaries if you die while the trust is in force. When you transfer property to a trust, the property is generally not subject to probate, administration expenses, delays attendant on distributions of estates, or claims of creditors. The interests of trust beneficiaries are generally more secure than those of heirs under a will because a will may be denied probate if found invalid. http://www.taxact.com/tax-tips/index.asp?tid=758 Fri, 15 Aug 2008 00:00:00 GMT 758 Purchase of securities through custodial accounts provides a practical method for making a gift of securities to a minor child, eliminating the need for a trust. The mechanics of opening a custodial account are simple. An adult opens a stock brokerage account for a minor child and registers the securities in the name of a custodian for the benefit of the child. The custodian may be a parent, a child's guardian, grandparent, brother, sister, uncle, or aunt. In some states, the custodian may be any adult or a bank or trust company. The custodian has the right to sell securities in the account and collect sales proceeds and investment income, and use them for the child's benefit or reinvestment. Tax treatment of custodial accounts is discussed in 39.5. http://www.taxact.com/tax-tips/index.asp?tid=757 Thu, 14 Aug 2008 00:00:00 GMT 757 To begin the running of the statute of limitations on gift valuation, the gift must be adequately disclosed on Form 709 filed for the year of the gift. Follow the disclosure instructions for Schedule A of Form 709. Given this statute of limitations consideration, even donors of property valued at under the $12,000 annual exclusion may want to report the gift on Form 709 in order to start the clock running on how long the IRS has to challenge valuation of the gift. http://www.taxact.com/tax-tips/index.asp?tid=756 Wed, 13 Aug 2008 00:00:00 GMT 756 Complicated gift tax and estate rules apply to transfers of property that skip one or more generations, as where a grandparent gives property to a grandchild or great-grandchild. The generation-skipping transfer tax may apply in addition to regular gift tax or estate tax. The annual gift tax exclusion applies and there is an aggregate exemption that applies for lifetime gifts and transfers at death. The exemption equals the estate tax applicable exclusion amount shown at 39.11. See the gift tax instructions for Schedule C of Form 709 and the estate tax instructions for Schedule R of Form 706. The assistance of an experienced tax practitioner is advised if you are planning skip transfers. http://www.taxact.com/tax-tips/index.asp?tid=755 Tue, 12 Aug 2008 00:00:00 GMT 755 For 2002 and later years, a $345,800 lifetime credit is allowed, providing a lifetime exemption for $1 million of taxable gifts. If taxable gifts are made in one year, the amount of the credit used to offset the gift tax for that year reduces the credit available for use against gift tax in later years. The $345,800 credit and the $1 million exemption it provides will not increase even though the estate tax credit and exemption will increase through 2009; see 39.4. The maximum gift tax rate will be reduced along with the maximum estate tax rate (39.11) through 2009. Starting in 2010, the top gift tax rate will be the top rate for individual income tax, scheduled to be 35%. However, the post-2009 rules could be altered if Congress passes reform legislation. For example, when this book went to press, Congress was considering a proposal to reunify the gift and estate tax after 2009; see the Law Alert at 39.11. http://www.taxact.com/tax-tips/index.asp?tid=754 Mon, 11 Aug 2008 00:00:00 GMT 754 The annual exclusion exempts from gift tax the first $12,000 of gifts of present interests to each donee during 2006. If your spouse consents on Form 709 to split your gifts, the exclusion for each donee doubles to $24,000. Any change to the exclusion amount for gifts made after 2006 will be reported in the e-Supplement.If you make gifts of present interests in trust for more than one beneficiary, each beneficiary is treated separately for purposes of the annual exclusion. Also, if you give a present interest in property to more than one person as joint tenants, the annual exclusion can be claimed for each donee. http://www.taxact.com/tax-tips/index.asp?tid=753 Sun, 10 Aug 2008 00:00:00 GMT 753 If you are in a state that owes money to the federal unemployment fund, your FUTA credit for state unemployment taxes is reduced on Schedule H. http://www.taxact.com/tax-tips/index.asp?tid=752 Sat, 9 Aug 2008 00:00:00 GMT 752 Even if you request an extension to file copies of Form W-2 with the Social Security Administration, you must still furnish Form W-2 to your employees by January 31, 2007. http://www.taxact.com/tax-tips/index.asp?tid=751 Fri, 8 Aug 2008 00:00:00 GMT 751 You may have to register and pay state unemployment tax for a household employee. Contact your state tax and labor departments for guidance. http://www.taxact.com/tax-tips/index.asp?tid=750 Thu, 7 Aug 2008 00:00:00 GMT 750 You may not deduct your payment of your spouse's legal fees as a miscellaneous itemized deduction, even if the fees are only for tax advice. Furthermore, as discussed at 37.4, a payment of your spouse's legal fees may not qualify as deductible alimony even if paid under court order because liability for the payment might survive the payee-spouse's death under state law. http://www.taxact.com/tax-tips/index.asp?tid=749 Wed, 6 Aug 2008 00:00:00 GMT 749 The payer-spouse reports the recaptured amount as income in the third year and the payee-spouse claims a deduction for the same amount. The payer reports the recaptured amount on Form 1040, Line 11 (alimony received); cross out received and write recapture along with the payee-spouse's Social Security number.The payee-spouse deducts the recaptured amount on Form 1040, Line 31a (alimony paid). He or she crosses out the word paid and writes recapture, and also enters on that line the payer-spouse's Social Security number. http://www.taxact.com/tax-tips/index.asp?tid=748 Tue, 5 Aug 2008 00:00:00 GMT 748 If a reduction in your payments is not specifically tied to your child's reaching majority age but the scheduled date for the reduction is within six months before or after your child reaches age 18 or 21 (or other age of majority under local law), the IRS holds that the reduction is tied to the child's age. The reduction amount will be treated as child support unless you can prove that the reduction is for some other purpose. The IRS makes the same presumption if you have more than one child and your alimony payments are to be reduced at least twice and each reduction is within one year of a different child's reaching a particular age between ages 18 and 24; see the Example in 37.5. http://www.taxact.com/tax-tips/index.asp?tid=747 Mon, 4 Aug 2008 00:00:00 GMT 747 Cash payments to a third party may be deducted as alimony if they are under the terms of a divorce decree or separation instrument. You may also deduct as alimony payments made to a third party at the written request of the payee spouse. For example, your former wife asks you to make a cash donation to a charitable organization instead of paying alimony installments to her. Her request must be in writing and state that both she and you intend the payment to be treated as alimony. You must receive the written request before you file your return for the taxable year in which the payment was made. Your former wife may deduct the payment as a charitable contribution if she claims itemized deductions. http://www.taxact.com/tax-tips/index.asp?tid=746 Sun, 3 Aug 2008 00:00:00 GMT 746 A property transfer to a former spouse that is incident to a divorce is generally treated as a tax-free exchange; see 6.7 for details. http://www.taxact.com/tax-tips/index.asp?tid=745 Sat, 2 Aug 2008 00:00:00 GMT 745 According to the IRS, an alimony payment to a foreign recipient is deductible by the payer even if the recipient is not subject to U.S. tax on the payment because of a treaty provision or statutory exemption. http://www.taxact.com/tax-tips/index.asp?tid=744 Fri, 1 Aug 2008 00:00:00 GMT 744 If you paid alimony in 2006 meeting the deductible tests, claim your deduction on Line 31a of Form 1040, and enter the recipient's Social Security number. If you receive qualifying alimony payments, report them on Line 11 of Form 1040. http://www.taxact.com/tax-tips/index.asp?tid=743 Thu, 31 Jul 2008 00:00:00 GMT 743 If you qualify for a credit or deduction, you will generally receive a larger tax reduction by claiming a tax credit rather than a deduction. A deduction is only a partial offset against your tax, whereas a credit is deducted in full from your tax. Also, taking a deduction may bar you from carrying back an excess credit from a later year. However, a deduction may give you a larger tax saving if the foreign tax is levied at a high rate and the proportion of foreign income to U.S. income is small. Compute your tax under both methods and choose the one providing the larger tax reduction. http://www.taxact.com/tax-tips/index.asp?tid=742 Wed, 30 Jul 2008 00:00:00 GMT 742 An individual with $300 or less of creditable foreign taxes, $600 for married persons filing jointly, may elect to be exempt from the overall limitation on the credit, provided that the only foreign source income is qualified passive income. If the election is made, a foreign tax credit may be claimed directly on Line 47 of Form 1040 without filing Form 1116. See the instructions to Form 1116 for rules on making this election. http://www.taxact.com/tax-tips/index.asp?tid=741 Tue, 29 Jul 2008 00:00:00 GMT 741 A special statute, Section 988, governs the treatment of gain or loss on currency transactions. An individual who disposes of foreign currency in a personal transaction is not subject to tax under Section 988 on gain resulting from fluctuating exchange rates if the gain on the transaction is $200 or less. http://www.taxact.com/tax-tips/index.asp?tid=740 Mon, 28 Jul 2008 00:00:00 GMT 740 Information on Puerto Rico tax returns may be obtained at www.hacienda.gobierno.pr. Written requests may be sent to the Departamento de Hacienda, Negociado de Asistencia, Contributiva y Legislacin, P.O. Box 9024140, San Juan, Puerto Rico, 00902-4140. http://www.taxact.com/tax-tips/index.asp?tid=739 Sun, 27 Jul 2008 00:00:00 GMT 739 You generally must file Form 8898 for a tax year in which you have worldwide income of over $75,000 and in which you become or cease to be a bona fide resident of a U.S. possession. A $1,000 penalty may be imposed for failure to file a required Form 8898. http://www.taxact.com/tax-tips/index.asp?tid=738 Sat, 26 Jul 2008 00:00:00 GMT 738 If you are living and working abroad on April 16, 2007, you have an automatic extension to June 15, 2007. For an additional four months, file Form 4868 by June 15, 2007, and pay the estimated tax to limit interest and late payment penalties. For a longer extension, in anticipation of owing no tax on your foreign income, you may file Form 2350 either with the Internal Revenue Service, Philadelphia, Pennsylvania 19255, or with a local IRS representative. File Form 2350 before the due date for filing your 2006 return, which is June 15, 2007, if you are abroad and are on a calendar year. Generally, you will be granted an extension for a period ending 30 days after the date you expect to qualify for the foreign earned income exclusion. http://www.taxact.com/tax-tips/index.asp?tid=737 Fri, 25 Jul 2008 00:00:00 GMT 737 These expenses are generally treated as related to your foreign earnings. Thus, if you move to a foreign country and exclude your income, you may not deduct your moving expenses. If your earned income exceeds the exclusion limit, you allocate moving expenses between your tax-free and taxable earned income. http://www.taxact.com/tax-tips/index.asp?tid=736 Thu, 24 Jul 2008 00:00:00 GMT 736 Residence does not have the same meaning as domicile. Your domicile is a permanent place of abode; it is the place to which you eventually plan to return wherever you go. You may have a residence in a place other than your domicile. Thus, you may go, say, to Amsterdam, and take up residence there and still intend to return to your domicile in the U.S. But your leaving your domicile does not, by itself, establish a bona fide residence in a new place. You must intend to make a new place your residence. http://www.taxact.com/tax-tips/index.asp?tid=735 Wed, 23 Jul 2008 00:00:00 GMT 735 Starting in 2006, the steps for computing the housing cost exclusion are changed. There is a new definition of the base housing amount and a limit is imposed on the amount of employer-financed housing costs that can be taken into account. http://www.taxact.com/tax-tips/index.asp?tid=734 Tue, 22 Jul 2008 00:00:00 GMT 734 On Form 2555, you figure the housing exclusion before the foreign income exclusion. The income exclusion is limited to the excess of foreign earned income over the housing exclusion. http://www.taxact.com/tax-tips/index.asp?tid=733 Mon, 21 Jul 2008 00:00:00 GMT 733 You may not claim the foreign earned income exclusion, or the housing exclusion or deduction, if you work in a country subject to U.S. government travel restrictions. You are not treated as a bona fide resident of, or as present in, a country subject to the travel ban. See Form 2555 for countries on the restricted list. http://www.taxact.com/tax-tips/index.asp?tid=732 Sun, 20 Jul 2008 00:00:00 GMT 732 Rental income is generally not earned income. However, if you perform personal services, for example as an owner-manager of a hotel or rooming house in a foreign country, then up to 30% of your net rents may be earned income. http://www.taxact.com/tax-tips/index.asp?tid=731 Sat, 19 Jul 2008 00:00:00 GMT 731 If you have been claiming the exclusion and decide that it would be advantageous this year to forego the exclusion and instead claim the foreign tax credit for foreign earned income, be aware that claiming the credit is treated by the IRS as a revocation of the prior exclusion election. You may not claim an exclusion for the next five years unless the IRS allows you to reelect the exclusion.Claiming a foreign tax credit also may revoke a prior election to claim the housing cost exclusion. Depending on the foreign earned income in the year the credit is claimed, the credit may be considered a revocation of a prior earned income exclusion election and also a prior housing cost exclusion election, or as a revocation of only one of the elections.A good faith error in calculating foreign earned income that leads to claiming a foreign credit will not be treated as a revocation of prior elections. http://www.taxact.com/tax-tips/index.asp?tid=730 Fri, 18 Jul 2008 00:00:00 GMT 730 The inflation adjustment that had been scheduled to take effect in 2008 was accelerated to 2006, increasing the foreign earned income exclusion for 2006 to $82,400. However, the new law generally reduces the amount of housing costs that can be excluded from income; see 36.4.The new law also increases the tax on any taxable income not covered by the foreign earned income and housing cost exclusions. Such other income is subject to tax at the higher rate (or rates) that would have applied had there been no exclusions, rather than at the lowest tax brackets, as under prior law. http://www.taxact.com/tax-tips/index.asp?tid=729 Thu, 17 Jul 2008 00:00:00 GMT 729 For taxable years beginning after 2006, there will be only two credit limitation income categories: the passive income category and the general limitation income category. http://www.taxact.com/tax-tips/index.asp?tid=728 Wed, 16 Jul 2008 00:00:00 GMT 728 A new law allows individuals who are called to active duty for over 179 days to withdraw IRA or qualified plan funds before age 591/2 without penalty; see 35.8. http://www.taxact.com/tax-tips/index.asp?tid=727 Tue, 15 Jul 2008 00:00:00 GMT 727 National Guard and Reserve members who travel over 100 miles and stay overnight to attend Guard or Reserve meetings may claim an above-the-line deduction from gross income for their meals, lodging, and incidental expenses, plus the standard mileage rate for driving costs and parking fees and tolls. The expenses are reported on Form 2106 and the amount attributable to the over-100-mile-away trips is entered on Line 24 of Form 1040 as an above-the-line deduction from gross income (12.2). Other travel costs from Form 2106 are allowed only as miscellaneous itemized deductions, subject to the 2% of AGI floor. http://www.taxact.com/tax-tips/index.asp?tid=726 Mon, 14 Jul 2008 00:00:00 GMT 726 The cost and upkeep of uniforms is deductible only if you are prohibited from wearing them when off duty; see 19.6. A deduction allowed under this test must be reduced by any uniform allowance you receive, and the unreimbursed cost is subject to the 2% adjusted gross income (AGI) floor for miscellaneous itemized deductions. http://www.taxact.com/tax-tips/index.asp?tid=725 Sun, 13 Jul 2008 00:00:00 GMT 725 Tax forgiveness does not apply to a U.S. civilian or military employee who dies as a result of an accident or a training exercise. Abatement also does not apply to terroristic action within the United States. However, abatement does apply if the individual dies in the U.S. from a wound or injury incurred in a terroristic or military action outside the United States. http://www.taxact.com/tax-tips/index.asp?tid=724 Sat, 12 Jul 2008 00:00:00 GMT 724 The IRS has established an e-mail address, combatzone@irs.gov, for military personnel to ask questions about filing returns, paying taxes, and combat zone status. Responses to general questions will be communicated via e-mail. However, answers to questions that reference an individual's account information will be mailed to the last address of record; such information cannot be provided over the Internet. http://www.taxact.com/tax-tips/index.asp?tid=723 Fri, 11 Jul 2008 00:00:00 GMT 723 If your spouse serves in a combat zone or hazardous duty area, you are generally entitled to the same deadline extension as he or she is. However, any extra extension for your spouse's hospitalization within the United States is not available to you. Further, a spouse's extension does not apply to any year beginning more than two years after the end of combat or hazardous duty activities. http://www.taxact.com/tax-tips/index.asp?tid=722 Thu, 10 Jul 2008 00:00:00 GMT 722 The Heroes Earned Retirement Opportunities Act allows members of the armed services serving in a combat zone to contribute to either a traditional IRA (8.2) or a Roth IRA (8.20) based on their tax-free combat pay. The new law applies retroactively for individuals who received tax-free combat pay in 2004 and 2005. They have until May 28, 2009, to make contributions to a traditional IRA or a Roth IRA for 2004 and 2005. http://www.taxact.com/tax-tips/index.asp?tid=721 Wed, 9 Jul 2008 00:00:00 GMT 721 Members of the U.S. Armed Forces qualifying for the exclusion include commissioned officers and enlisted personnel in all regular and reserve units under control of the Secretaries of Defense, Army, Navy, and Air Force, and the Coast Guard. Members of the U.S. Merchant Marines or the American Red Cross are not included. http://www.taxact.com/tax-tips/index.asp?tid=720 Tue, 8 Jul 2008 00:00:00 GMT 720 If your ship or squadron is away from your home port or base, you may be able to deduct travel expenses while away. However, you are not considered away from home if you are at your permanent duty station or you are a naval officer assigned to permanent duty aboard a ship; see also 20.6. http://www.taxact.com/tax-tips/index.asp?tid=719 Mon, 7 Jul 2008 00:00:00 GMT 719 If you are married and your domicile (permanent home to which you intend to return) is in one of the following states, your military pay is subject to community property laws of that state: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. See 1.6 for community property reporting rules. http://www.taxact.com/tax-tips/index.asp?tid=718 Sun, 6 Jul 2008 00:00:00 GMT 718 For 2006-2010, a loan made to a qualified continuing care facility is exempt from imputed interest rules. http://www.taxact.com/tax-tips/index.asp?tid=717 Sat, 5 Jul 2008 00:00:00 GMT 717 Payments made to a tax-exempt organization that operates a life-care community are generally not deductible charitable contributions because you are receiving services in exchange. If you donate amounts over and above your regular monthly fees and do not receive any extra benefit as a result, you may deduct the excess payment as a charitable contribution; see 14.3. http://www.taxact.com/tax-tips/index.asp?tid=716 Fri, 4 Jul 2008 00:00:00 GMT 716 The tax credit for the elderly or disabled is not available to an unmarried individual who receives $5,000 or more of nontaxable Social Security benefits or nontaxable federal pensions such as from the Veterans Administration. The $5,000 limit also applies if you are married filing jointly and only one spouse qualifies for the credit. The limit is $7,500 if you file a joint return and both spouses qualify for the credit. http://www.taxact.com/tax-tips/index.asp?tid=715 Thu, 3 Jul 2008 00:00:00 GMT 715 Since 1983, the base amounts (34.8) and AGI phase-out thresholds (34.9) for figuring the credit for the elderly or disabled have remained the same while inflation adjustments and tax law changes have reduced tax liability. Since the credit cannot exceed tax liability, the number of taxpayers able to claim the credit has dropped drastically. http://www.taxact.com/tax-tips/index.asp?tid=714 Wed, 2 Jul 2008 00:00:00 GMT 714 The retirement age for receiving full Social Security benefits is gradually increasing, as shown below.Birth year-Full Social Security retirementage-Before 193865193865 and 2 months193965 and 4 months194065 and 6 months194165 and 8 months194265 and 10 months1943-195466195566 and 2 months195666 and 4 months195766 and 6 months195866 and 8 months195966 and 10 months1960 and after67 http://www.taxact.com/tax-tips/index.asp?tid=713 Tue, 1 Jul 2008 00:00:00 GMT 713 Benefit forfeitures for working while receiving benefits apply only to retirees under the full Social Security retirement age; see 34.5 and the Law Alert on page 569. You receive full benefits starting in the month you reach full retirement age no matter how much you earn. http://www.taxact.com/tax-tips/index.asp?tid=712 Mon, 30 Jun 2008 00:00:00 GMT 712 If you are married filing separately and during 2006 you lived with your spouse at any time, you must include in your taxable income the lesser of (1) 85% of your net Social Security benefits shown on Line 1 of the worksheet or (2) 85% of the provisional income shown on Line 7 of the worksheet on this page. http://www.taxact.com/tax-tips/index.asp?tid=711 Sun, 29 Jun 2008 00:00:00 GMT 711 You can use your Social Security benefits to meet your estimated and final tax liability by electing on Form W-4V to have tax withheld from benefits at a 7%, 10%, 15%, or 25% rate. http://www.taxact.com/tax-tips/index.asp?tid=710 Sat, 28 Jun 2008 00:00:00 GMT 710 The cost of MBA courses is deductible if the courses enhance the skills required in your current position, are not a minimum job requirement, and do not qualify you for a new business. If an MBA degree is required to obtain a promotion to a new position, the MBA is a minimum job requirement and no deduction will be allowed. For a deduction, the courses must be related to your existing job responsibilities and not lead to qualification for a new business. The Tax Court has allowed deductions for MBA expenses where individuals with some managerial or administrative experience took the courses to improve skills needed for their existing jobs.In one case, a college graduate who took a summer job before starting MBA courses was not allowed a deduction because he had not yet established himself in a business or employment; the summer position was just a temporary stage between schooling.If your employer reimburses you for MBA courses that qualify for a deduction, the reimbursement is a tax-free working condition fringe benefit; see 3.6. http://www.taxact.com/tax-tips/index.asp?tid=709 Fri, 27 Jun 2008 00:00:00 GMT 709 Elementary and secondary school teachers may deduct the cost of courses taken to make any of the following job changes: (1) elementary to secondary school classroom teacher; (2) classroom teacher in one subject (such as mathematics) to classroom teacher in another subject (such as English or history); (3) classroom teacher to guidance counselor; or (4) classroom teacher to principal. These are not considered a change to a new business. http://www.taxact.com/tax-tips/index.asp?tid=708 Thu, 26 Jun 2008 00:00:00 GMT 708 Unreimbursed education costs, such as for travel, tuition, books, fees, and meals, are deductible only if you claim itemized deductions. You generally must report your expenses on Form 2106 or in some cases Form 2106-EZ (see 19.3) before entering the deductible amount on Line 20 of Schedule A, where they and other miscellaneous itemized deductions are subject to the 2% AGI floor. http://www.taxact.com/tax-tips/index.asp?tid=707 Wed, 25 Jun 2008 00:00:00 GMT 707 If you have qualifying work-related education costs, check 33.9 to determine whether you can claim the lifetime learning credit. Also check 33.13 to see if you are eligible for the above-the-line deduction for tuition and fees. These tax breaks may be more valuable to you than a business or job expense deduction. http://www.taxact.com/tax-tips/index.asp?tid=706 Tue, 24 Jun 2008 00:00:00 GMT 706 If your parent or someone else claims you as a dependent on his or her return, you may not deduct interest on your return for student loan interest you paid. Furthermore, the person who claims you as a dependent may not deduct the interest where you are the borrower legally obligated to repay the loan. http://www.taxact.com/tax-tips/index.asp?tid=705 Mon, 23 Jun 2008 00:00:00 GMT 705 When you have qualifying education expenses, check to determine whether or not you can claim either the Hope or Lifetime learning credit. A credit produces a dollar-for-dollar reduction of your tax liability, while a deduction only reduces your taxable income. Claim the credit if it provides you with a larger tax benefit. You may not claim a credit and tuition and fees deduction for the same student in the same year. http://www.taxact.com/tax-tips/index.asp?tid=704 Sun, 22 Jun 2008 00:00:00 GMT 704 Legislation to extend the deduction for tuition and fees beyond 2005 is expected, but had not yet been enacted when this book went to press. See the e-Supplement for an update. http://www.taxact.com/tax-tips/index.asp?tid=703 Sat, 21 Jun 2008 00:00:00 GMT 703 If a designated beneficiary is appointed to the U.S. Military Academy, Naval Academy, Air Force Academy, Coast Guard Academy, or Merchant Marine Academy, a distribution is not subject to the 10% additional tax to the extent of the costs of advanced education at such academy (as defined by Section 2005(e)(3) of Title 10, United States Code, in effect on November 11, 2003). http://www.taxact.com/tax-tips/index.asp?tid=702 Fri, 20 Jun 2008 00:00:00 GMT 702 A Hope credit or lifetime learning credit may be claimed in the same year that a Coverdell ESA distribution is excluded from income as long as the distribution does not cover the same expenses for which a credit is claimed. http://www.taxact.com/tax-tips/index.asp?tid=701 Thu, 19 Jun 2008 00:00:00 GMT 701 You cannot claim any higher education credits for 2006 if your modified adjusted gross income exceeds $55,000 ($110,000 on a joint return). For 2007, these phaseout limits may again be indexed for inflation. http://www.taxact.com/tax-tips/index.asp?tid=700 Wed, 18 Jun 2008 00:00:00 GMT 700 For students attending an eligible GO Zone institution in 2005 or 2006, the lifetime learning credit (prior to the phaseout in 33.10) is 40% of the first $10,000 of qualified expenses, double the normal limit. The higher limit will not apply after 2006. http://www.taxact.com/tax-tips/index.asp?tid=699 Tue, 17 Jun 2008 00:00:00 GMT 699 The maximum Hope credit is doubled for students attending an eligible GO Zone institution in 2005 or 2006. For 2006, the maximum credit per student, before application of the phaseout (33.10), is $3,300, 100% of the first $2,200 of qualified expenses and 50% of the next $2,200. For 2005, the maximum credit per GO Zone student was $3,000,100% of the first $2,000 of qualified expenses and 50% of the next $2,000.The higher credit limit will not apply after 2006. http://www.taxact.com/tax-tips/index.asp?tid=698 Mon, 16 Jun 2008 00:00:00 GMT 698 For 2006, nonrefundable personal credits, including the education credits, may offset both regular income tax and AMT liability. Liability is reduced by certain credits when figuring the limitation for the education credits on Form 8863. http://www.taxact.com/tax-tips/index.asp?tid=697 Sun, 15 Jun 2008 00:00:00 GMT 697 Compare the benefits and limitations for the Hope credit and the lifetime learning credit before choosing which one to use for an eligible student. You may not claim both credits for the same student for the same tax year. This choice is only an issue for the first two years of post-secondary education, as the Hope credit is allowed only for those first two years (see 33.8); for later years, only the lifetime learning credit may be claimed.For example, if in 2006 you paid more than $2,200 of qualified expenses for your daughter's first year of college, you may not claim a $1,650 Hope credit based on the first $2,200 of expenses (33.8) and also claim a 20% lifetime learning credit for the balance of her expenses up to $10,000 (see 33.9). For 2006, the lifetime learning credit is generally more advantageous if qualified expenses exceed $8,250. However, if you paid qualified expenses for more than one student, keep in mind that the maximum lifetime learning credit you may claim on your 2006 return is $2,000 (33.9), regardless of how many students you paid expenses for, while the up-to-$1,650 Hope credit for 2006 is allowed for each eligible student. You can claim the Hope credit for one student and the lifetime learning credit for another student in the same year. http://www.taxact.com/tax-tips/index.asp?tid=696 Sat, 14 Jun 2008 00:00:00 GMT 696 The Pension Protection Act of 2006 has permanently extended QTP provisions that were scheduled to expire at the end of 2010, most prominently the rule that allows tax-free treatment for QTP distributions used to pay college costs. By removing the uncertainty over the post-2010 rules, the new law is expected to spur greater interest in QTPs among parents who may have held back from investing. http://www.taxact.com/tax-tips/index.asp?tid=695 Fri, 13 Jun 2008 00:00:00 GMT 695 If you must teach, do research, or provide other services to obtain a tuition reduction for graduate studies, a tuition reduction from the school is tax free if it is in addition to regular pay for the services. If the tuition reduction is your compensation, it is taxable, unless it is paid under the National Health Services Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program. http://www.taxact.com/tax-tips/index.asp?tid=694 Thu, 12 Jun 2008 00:00:00 GMT 694 If you want to take advantage of the specific identification method, make sure the fund sends you a written confirmation of your selling instructions.The specific identification method allows you to designate specific shares as the shares sold, allowing you to minimize a gain on the sale or to select shares that, because of their basis, would give you a loss. http://www.taxact.com/tax-tips/index.asp?tid=693 Wed, 11 Jun 2008 00:00:00 GMT 693 To determine your original basis of mutual-fund shares you acquired by gift, you must know the donor's adjusted basis, the date of the gift, the fair market value of the shares at the time of the gift, and whether any gift tax was paid on the shares. See 5.17. http://www.taxact.com/tax-tips/index.asp?tid=692 Tue, 10 Jun 2008 00:00:00 GMT 692 When you redeem part of your shares, the specific identification method of identifying the shares sold provides you the most flexibility. However, note the paperwork requirements for this method in Examples 1 and 2 in 32.10. http://www.taxact.com/tax-tips/index.asp?tid=691 Mon, 9 Jun 2008 00:00:00 GMT 691 Keep confirmation statements for purchases of shares as well as a record of distributions that are automatically reinvested in your account. These will show the cost basis for your shares. Your basis is increased by amounts reported to you by the fund on Form 2439, representing the difference between your share of undistributed capital gains that you were required to report as income and your share of the tax paid by the fund on undistributed gains. Your basis is reduced by nontaxable dividends that are a return of your investment. Keep copies of Form 2439 and information returns showing nontaxable dividends. http://www.taxact.com/tax-tips/index.asp?tid=690 Sun, 8 Jun 2008 00:00:00 GMT 690 A loss on the redemption of fund shares is disallowed to the extent that within 30 days before or after the sale, you buy shares in the same fund. The wash-sale rule (30.6) is triggered even when the acquisition of new shares occurs automatically (within the 61-day period) under a dividend reinvestment plan. http://www.taxact.com/tax-tips/index.asp?tid=689 Sat, 7 Jun 2008 00:00:00 GMT 689 The reporting and credit rules discussed at 32.7 for mutual funds also apply if you own shares in a REIT that has retained its long-term capital gains. http://www.taxact.com/tax-tips/index.asp?tid=688 Fri, 6 Jun 2008 00:00:00 GMT 688 Box 1b of Form 1099-DIV shows your qualified dividends, the portion of the amount in Box 1a (total ordinary dividends) that is eligible for the 15% or 5% capital gain rate. http://www.taxact.com/tax-tips/index.asp?tid=687 Thu, 5 Jun 2008 00:00:00 GMT 687 Exchange-traded funds (ETFs) are an alternative to mutual-fund index funds. ETFs provide diversification by closely tracking a particular market index (stocks, bonds, real estate securities, etc.). Unlike traditional open-end mutual funds, but like stocks or closed-end funds, ETFs trade on public exchanges. ETFs generally charge lower management fees than comparable open-end mutual funds. They are also generally more tax efficient than open-end funds, as they rarely have to make taxable capital gains distributions to investors. However, ETF investors pay broker commissions on every transaction, so for individuals who make small, regular investments, an open-end fund may be less costly. http://www.taxact.com/tax-tips/index.asp?tid=686 Wed, 4 Jun 2008 00:00:00 GMT 686 Preserve evidence of the property's fair market value. At a later date, the IRS may claim that the property was worth more than your bid and may tax you for the difference. Furthermore, be prepared to prove the worthlessness of the debt in order to support the bad debt deduction. http://www.taxact.com/tax-tips/index.asp?tid=685 Tue, 3 Jun 2008 00:00:00 GMT 685 Instead of forcing you to foreclose, the mortgagor may voluntarily convey the property to you in consideration for your cancelling the mortgage debt. Your loss is the amount by which the mortgage debt plus accrued interest exceeds the fair market value of the property. If, however, the fair market value exceeds the mortgage debt plus accrued interest, the difference is taxable gain. The gain or loss is reportable in the year you receive the property. Your basis in the property is its fair market value when you receive it. http://www.taxact.com/tax-tips/index.asp?tid=684 Mon, 2 Jun 2008 00:00:00 GMT 684 The gain limitation rules discussed at 31.12 do not affect the character of the gain. Thus, if you repossess property as a dealer, the gain is subject to ordinary income rates. If you, as an investor, repossess a tract originally held long term whose gain was reported on the installment method, the gain is capital gain. http://www.taxact.com/tax-tips/index.asp?tid=683 Sun, 1 Jun 2008 00:00:00 GMT 683 If, after the year the abandoned loss is claimed, the partnership's mortgaged holdings are foreclosed upon or reconveyed to the lender, each partner's share of the cancelled debt may be treated as an amount realized on a sale, or as ordinary cancellation of debt income; see 31.9. http://www.taxact.com/tax-tips/index.asp?tid=682 Sat, 31 May 2008 00:00:00 GMT 682 You report a foreclosure sale or voluntary conveyance to a creditor on Schedule D if the property was held for personal or investment purposes.Foreclosures and reconveyances of business assets are reported on Form 4797.If income from cancellation of indebtness is realized and it is not excludable under the rules discussed at 11.8, you report the taxable amount on Line 21, Form 1040. http://www.taxact.com/tax-tips/index.asp?tid=681 Fri, 30 May 2008 00:00:00 GMT 681 If your mortgaged property is foreclosed or repossessed, and the bank or other lender reacquires it, or if the lender knows that you have abandoned the property, you should receive from the lender Form 1099-A, which indicates the foreclosure bid price, the amount of your debt, and whether you were personally liable. The IRS may compare its copy of Form 1099-A with your return to check whether you have reported income from the foreclosure or abandonment.If the lender also cancels your debt of $600 or more, you may instead receive Form 1099-C, on which the information about the foreclosure or repossession will be included. http://www.taxact.com/tax-tips/index.asp?tid=680 Thu, 29 May 2008 00:00:00 GMT 680 In one case, the IRS and Tax Court interpreted the 75% external wall test for pre-1936 buildings as requiring that at least 75% of the existing external walls be retained in the same place, thereby denying the credit for a pre-1936 building that was relocated and then renovated. However, a federal appeals court disagreed, holding that there is no relocation restriction; the credit is allowed provided at least 75% of the external walls are retained as such after the renovation. http://www.taxact.com/tax-tips/index.asp?tid=679 Wed, 28 May 2008 00:00:00 GMT 679 The charitable deduction for a historic building easement (14.10) donated after August 17, 2006, must be reduced if a rehabilitation credit was claimed for the building in the five years preceding the donation. http://www.taxact.com/tax-tips/index.asp?tid=678 Tue, 27 May 2008 00:00:00 GMT 678 In reviewing an easement, the IRS will generally try to find grounds for allocating part of aproperty owner's basis to easement proceeds, especially where the allocation will result in a taxable gain. In opposition, a property owner will generally argue that the easement affects the entire property or that it is impossible to make an allocation because of the nature of the easement or the particular nature of the property. If he or she can sustain an argument, the proceeds for granting the easement reduce the basis of the entire property; see the Examples in 31.7. http://www.taxact.com/tax-tips/index.asp?tid=677 Mon, 26 May 2008 00:00:00 GMT 677 A tax-free exchange is not desirable if the transaction will result in a loss, since you may not deduct a loss in a tax-free exchange. To ensure the loss deduction, first sell the property and then buy new property with the proceeds. http://www.taxact.com/tax-tips/index.asp?tid=676 Sun, 25 May 2008 00:00:00 GMT 676 A tax-free exchange may be advantageous in the case of land. Land is not depreciable, but it may be exchanged for a depreciable rental building. The exchange is tax free and depreciation may be claimed on the building. However, be aware of a possible tax trap if you exchange rental property for land and the building was subject to depreciation recapture: The recapture provisions override the tax-free exchange rules. The recapture element will be taxable as ordinary income. http://www.taxact.com/tax-tips/index.asp?tid=675 Sat, 24 May 2008 00:00:00 GMT 675 The distinction between an investor and dealer is significant if land is sold on the installment basis. Investor status is preferable if you want to elect the installment method. Dealers may not elect installment sale treatment; see 5.21. http://www.taxact.com/tax-tips/index.asp?tid=674 Fri, 23 May 2008 00:00:00 GMT 674 The promoter may be taking a real estate commission by having a commission paid to a company that he or she controls. A reliable promoter should disclose this fact and be willing to collect the commission only after the investors have recovered their capital. Also check the reasonableness of prepaid management fees and loan fees and whether or not the sale of property to the syndicate is from a corporation in which the syndicator has an interest. If there is such a sale, check its terms, price, interest rates, and whether there is any prepaid interest that may conceal a cash profit payout to the syndicator. http://www.taxact.com/tax-tips/index.asp?tid=673 Thu, 22 May 2008 00:00:00 GMT 673 Holders of Series E and EE bonds are no longer able to exchange their bonds for HH bonds. The Treasury discontinued HH offerings at the close of business on August 31, 2004. HH bonds issued on or before August 31, 2004, will continue to earn interest semiannually until they reach final maturity 20 years after issue. http://www.taxact.com/tax-tips/index.asp?tid=672 Wed, 21 May 2008 00:00:00 GMT 672 In the year you cash in a savings bond you could lose interest by cashing it in too soon. Interest accrues only twice a year on E bonds. Interest also accrues twice a year on EE bonds issued prior to May 1, 1997. The accrual months depend on the month of issue. If you cash your bonds before the accrual month that applies to your bond, you will lose interest. See 30.14. http://www.taxact.com/tax-tips/index.asp?tid=671 Tue, 20 May 2008 00:00:00 GMT 671 You must keep records that distinguish between Section 1244 stock and other stock interests. Your records must show that the corporation qualified as a small business corporation when the stock was issued, you are the original holder of the Section 1244 stock, and it was issued for money or property. Stock issued for services does not qualify. In addition, the records should also show the amount paid for the stock, information relating to any property transferred for the stock, any tax-free stock dividends issued on the stock, and the corporation's gross receipts data for the most recent five-year period.Failure to keep these records will be grounds for disallowing a loss that is claimed on Section 1244 stock. http://www.taxact.com/tax-tips/index.asp?tid=670 Mon, 19 May 2008 00:00:00 GMT 670 Interest on qualified private activity bonds issued after August 7, 1986, is tax free for regular tax purposes but is a tax preference item for alternative minimum tax (AMT) purposes; see Chapter 23. http://www.taxact.com/tax-tips/index.asp?tid=669 Sun, 18 May 2008 00:00:00 GMT 669 Instead of purchasing tax-exempts directly, you may consider investing in municipal bond funds. The funds invest in various municipal bonds and, thus, offer the safety of diversity. The value of fund shares will fluctuate with the bond markets. Also, an investment in the fund may be as small as $1,000 compared with the typical $5,000 municipal bond. Check on fees and other restrictions in municipal bond funds. http://www.taxact.com/tax-tips/index.asp?tid=668 Sat, 17 May 2008 00:00:00 GMT 668 Puts and calls allow you to speculate at the expense of a small investment-a call, for expected price rises, and a put, for expected price declines. They may also be used to protect paper profits or fix the amount of your losses on securities you own.You do not have to exercise a put or call to realize your profit. You may sell the option to realize your profit. If you exercise a call, the cost of the call is added to the cost of the stock purchased. If you exercise a put, you reduce the selling price of stock sold by the cost of the put. If you do not exercise a call or put, you realize a capital loss. http://www.taxact.com/tax-tips/index.asp?tid=667 Fri, 16 May 2008 00:00:00 GMT 667 You report conversion transactions on Form 6781. The ordinary income element is not reported as interest income, but as an ordinary gain on Form 4797. http://www.taxact.com/tax-tips/index.asp?tid=666 Thu, 15 May 2008 00:00:00 GMT 666 Non-equity options and dealer equity options, which include options based on regulated stock indexes and interest rate futures, are taxed like regulated futures contracts. This means that they are reported annually under the marked-to-market accounting system. You treat all such options held at the end of the year as if they were disposed of at year-end for a price equal to fair market value. Any gain or loss is arbitrarily taxed as if it were 60% long term and 40% short term. It is advisable to ask your broker whether the specific options you hold come within this special rule.You use Form 6781 to report 60/40% gains, which are then transferred to Schedule D. http://www.taxact.com/tax-tips/index.asp?tid=665 Wed, 14 May 2008 00:00:00 GMT 665 If for 2004 you have a net loss on Section 1256 contracts, the loss may be carried back for three years under special rules. To carry back the net loss, you must make the election on Form 6781, file Form 1045 or an amended return (Form 1040X), and attach an amended Form 6781 for the applicable year. Follow the instructions to Form 6781. http://www.taxact.com/tax-tips/index.asp?tid=664 Tue, 13 May 2008 00:00:00 GMT 664 You use Form 6781 for reporting gains and losses on straddle positions and on Section 1256 contracts that are open at the end of the year but treated as sold under the marked-to-market rules discussed in this section. http://www.taxact.com/tax-tips/index.asp?tid=663 Mon, 12 May 2008 00:00:00 GMT 663 If you are subject to the constructive sale rules, you will have to report income as if you had made a sale although you still hold the position. http://www.taxact.com/tax-tips/index.asp?tid=662 Sun, 11 May 2008 00:00:00 GMT 662 Sometimes the wash-sale rule can work to your advantage. Assume that during December you are negotiating a sale of real estate that will bring you a large capital gain. You want to offset a part of that gain by selling certain securities at a loss. You are unsure just when the gain transaction will go through. It may be on the last day of the year, at which point it may be too late to sell the loss securities before the end of the same year.You can do this: Sell the loss securities during the last week of December. If the profitable deal goes through before the end of the year, you need not do anything further. If it does not, buy back the loss securities early in January. The December sale will be a wash sale and the loss disallowed. When the profitable real estate sale occurs next year, you can sell the loss securities again. This time the loss will be allowed and will offset the gain. http://www.taxact.com/tax-tips/index.asp?tid=661 Sat, 10 May 2008 00:00:00 GMT 661 Although the loss deduction is barred if the wash-sale rule applies, the economic loss is not forfeited for tax purposes. The loss might be realized at a later date when the repurchased stock is sold, because after the disallowance of the loss, the cost basis of the new lot is fixed as the basis of the old lot and adjusted (up or down) for the difference between the selling price of the old stock and purchase price of the new stock; see the Examples in 30.6. http://www.taxact.com/tax-tips/index.asp?tid=660 Fri, 9 May 2008 00:00:00 GMT 660 The acquisition of a put (an option to sell) is treated as a short sale if you hold substantially identical securities short term at the time you buy the put. If you have held the underlying stock for one year or less at the time you buy the put, any gain on the exercise, sale, or expiration of the put is a short-term capital gain. The same is true if you buy the underlying stock after you buy the put but before its exercise, sale, or expiration. Your holding period for the underlying stock begins on the earliest of: (1) the date you dispose of the stock; (2) the date you exercise the put; (3) the date you sell the put; or (4) the date the put expires. However, the short-sale rules do not apply if on the same day you buy a put and stock that is identified as covered by the put. If you do not exercise the put that is identified with the stock, add its cost to the basis of the stock. http://www.taxact.com/tax-tips/index.asp?tid=659 Thu, 8 May 2008 00:00:00 GMT 659 You realize no taxable income on the exercise of stock rights. Capital gain or loss on the new stock is recognized when you later sell the stock. The holding period of the new stock begins on the date you exercised the rights. Your basis for the new stock is the subscription price you paid plus your basis for the rights exercised. http://www.taxact.com/tax-tips/index.asp?tid=658 Wed, 7 May 2008 00:00:00 GMT 658 For several years before 1986, an exclusion was allowed for stock dividends received from public utility companies if the dividends were reinvested in stock. If you claimed the exclusion, the stock takes a zero basis. If you sell the stock, the entire sales proceeds of the stock are reported as long-term capital gain. http://www.taxact.com/tax-tips/index.asp?tid=657 Tue, 6 May 2008 00:00:00 GMT 657 If you want to realize gains on publicly traded securities, you have until December 29, 2006, to transact the sale. Gain is reported in 2006, although cash is not received until the settlement date in 2007. If you do not want to realize the gain in 2006, delay the trade date until 2007.Losses are also realized as of the trade date; a loss on a sale made by December 29, 2006, is reported on your 2006 return. http://www.taxact.com/tax-tips/index.asp?tid=656 Mon, 5 May 2008 00:00:00 GMT 656 If you inherit a residence in which you do not intend to live, it may be advisable to put it up for rent to allow for an ordinary loss deduction on a later sale. If you merely try to sell, and you finally do so at a loss, you are limited to a capital loss. http://www.taxact.com/tax-tips/index.asp?tid=655 Sun, 4 May 2008 00:00:00 GMT 655 A rental loss may be barred on a temporary rental before sale. The IRS and Tax Court held that where a principal residence was rented for several months while being offered for sale, the rental did not convert the home to rental property. Deductions for rental expenses were limited to rental income; no loss could be claimed. A federal appeals court disagreed and allowed a rental loss deduction; also see 9.7. http://www.taxact.com/tax-tips/index.asp?tid=654 Sat, 3 May 2008 00:00:00 GMT 654 If you sell a house that has been converted from personal to rental use, and the sales price is less than the conversion date basis, a loss on the sale is deductible; see 29.9. http://www.taxact.com/tax-tips/index.asp?tid=653 Fri, 2 May 2008 00:00:00 GMT 653 If you reported taxable gain allocable to a home office on the sale of a home before 2003 that qualifies for the exclusion, you can file a refund claim (on Form 1040X), provided the statute of limitations for filing an amended return has not expired for the year of sale; see 47.2. http://www.taxact.com/tax-tips/index.asp?tid=652 Thu, 1 May 2008 00:00:00 GMT 652 Gain on a previous home sale that you postponed under the prior law rollover rules reduces the basis of your current home if your current home was a qualifying replacement residence for the previous home. Postponed gains on several earlier sales may have to be taken into account under the basis reduction rule. The basis reduction will increase the gain on the sale of your current home. http://www.taxact.com/tax-tips/index.asp?tid=651 Wed, 30 Apr 2008 00:00:00 GMT 651 If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer. If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. Your ownership interest is determined by state law.If you and a joint owner other than your spouse sell your jointly owned home, each of you must figure your own gain or loss according to your ownership interest in the home. http://www.taxact.com/tax-tips/index.asp?tid=650 Tue, 29 Apr 2008 00:00:00 GMT 650 If you received Form 1099-S, Box 2 should show the gross proceeds from the sale of your home. However, Box 2 does not include the fair market value of any property other than cash or notes, or any services you received or will receive. For these, Box 4 will be checked. If you certify to the person responsible for closing the sale that your entire gain is excludable from your gross income, that person does not have to report the sale on Form 1099-S, but may choose to do so. http://www.taxact.com/tax-tips/index.asp?tid=649 Mon, 28 Apr 2008 00:00:00 GMT 649 The reduced maximum exclusion rules in 29.4 reflect IRS regulations that generally apply to sales after August 12, 2004, but an election can be made to apply the rules retroactively to earlier sales. If you reported gain on a sale that can be avoided under the reduced maximum exclusion rules for sales due to a change in place of employment, health, or unforeseen circumstances, a refund claim can be made on an amended return, provided the prior year is not closed by the statute of limitations; see 47.2. http://www.taxact.com/tax-tips/index.asp?tid=648 Sun, 27 Apr 2008 00:00:00 GMT 648 For a recently married couple, the exclusion limit on a joint return is $250,000, not $500,000, where only one of the spouses has satisfied the ownership and use tests before a sale. Gain in excess of the $250,000 exclusion is reported on Schedule D; see the Filing Instruction on page 494. http://www.taxact.com/tax-tips/index.asp?tid=647 Sat, 26 Apr 2008 00:00:00 GMT 647 Short temporary absences for vacations count as time you used the residence. This is true even if you rent out your residence during the vacation period. http://www.taxact.com/tax-tips/index.asp?tid=646 Fri, 25 Apr 2008 00:00:00 GMT 646 The settlement agent responsible for closing the sale of your principal residence must report the sale to the IRS on Form 1099-S if the sales price exceeded $250,000, or $500,000 if you are married filing jointly. If the price was $250,000/$500,000 or less and you provide a written, signed certification that the full amount of your gain qualifies for the exclusion, the settlement agent may rely on the certification and not file the Form 1099-S or may choose to file the form anyway. IRS Revenue Procedure 98-20 has a sample certification form. http://www.taxact.com/tax-tips/index.asp?tid=645 Thu, 24 Apr 2008 00:00:00 GMT 645 If the entire gain on the sale of your principal residence is excludable from income under the rules discussed in 29.1-29.7, you do not have to report the sale at all on your return. This is true even if you receive a Form 1099-S from the settlement agent showing a sales price exceeding the maximum $250,000/$500,000 exclusion. So long as your allowable exclusion equals or exceeds your gain, the sale does not have to be reported, regardless of the sales price.If you have any gain that cannot be excluded, or you decide not to claim the exclusion for excludable gain, you must report the entire gain on Schedule D. If some of the gain is excludable, the exclusion is entered as a loss, reducing the reported gain. For example, if you have a gain of $650,000 and qualify for the maximum $500,000 exclusion on a joint return, the details of the sale would be reported on Line 8 of Schedule D. Directly below the $650,000 gain shown in column (f) of Line 8, you would subtract the $500,000 exclusion as if it were a loss; label it Section 121 exclusion. http://www.taxact.com/tax-tips/index.asp?tid=644 Wed, 23 Apr 2008 00:00:00 GMT 644 These maintain your home in good condition but do not add to its value or prolong its life. You do not add their cost to the basis of your property. Examples of repairs include repainting your house inside or outside, fixing gutters or floors, repairing leaks or plastering, and replacing broken window panes. See 9.3 when repairs tied to an improvement project may be capital improvements. http://www.taxact.com/tax-tips/index.asp?tid=643 Tue, 22 Apr 2008 00:00:00 GMT 643 A residence acquired in a like-kind exchange must be owned for at least five years before gain on its sale can qualify for the exclusion. The five-year ownership requirement applies to sales after October 22, 2004. http://www.taxact.com/tax-tips/index.asp?tid=642 Mon, 21 Apr 2008 00:00:00 GMT 642 If you have realized capital gains during the year and have paper losses, realizing losses can offset the gains plus up to $3,000 of other income. If you previously realized losses and have paper gains, you can selectively realize gains that can be offset by the losses. See 30.1 and 30.2 for planning securities transactions. http://www.taxact.com/tax-tips/index.asp?tid=641 Sun, 20 Apr 2008 00:00:00 GMT 641 If you are self-employed and are on the cash basis, you can defer income by delaying your billing at the end of the year or extending the time of collection. If you own a closely held corporation, you can time the payment of dividends and bonuses. http://www.taxact.com/tax-tips/index.asp?tid=640 Sat, 19 Apr 2008 00:00:00 GMT 640 You have a choice in allocating withholdings from pay or other income that is subject to withholding: (1) You may treat your entire year's withholdings as having been withheld in equal amounts for each of the four payment periods or (2) you may allocate to each payment period the actual withholdings paid for that period. Also, if toward the end of the year you find that you have underestimated for an earlier period, ask your employer to withhold an extra amount that may be allocated equally over the four periods. This way, you may eliminate the underestimate for the earlier periods. http://www.taxact.com/tax-tips/index.asp?tid=639 Fri, 18 Apr 2008 00:00:00 GMT 639 If your income typically fluctuates throughout the year, or if your income unexpectedly changes during the year, you may base installment payments on the annualized income method. This method allows you to avoid a penalty for installment periods during which less income is earned by reducing the required estimated tax payment for such periods. To figure your installment payments, use the Annualized Estimated Tax Worksheet in IRS Publication 505. If you base installment payments on the annualized method, you must file Form 2210 with your return to determine if you are subject to an estimated tax penalty. http://www.taxact.com/tax-tips/index.asp?tid=638 Thu, 17 Apr 2008 00:00:00 GMT 638 You may charge estimated tax payments using a Visa, MasterCard, American Express, or Discover Card. See the Form 1040-ES instructions. If you charge estimated tax payments, you do not have to file Form 1040-ES vouchers. http://www.taxact.com/tax-tips/index.asp?tid=637 Wed, 16 Apr 2008 00:00:00 GMT 637 20% withholding does not apply to a distribution eligible for rollover (7.8) if you have the employer make a direct rollover to a qualified plan or IRA. http://www.taxact.com/tax-tips/index.asp?tid=636 Tue, 15 Apr 2008 00:00:00 GMT 636 Your employer must withhold 20% from a distribution paid to you if the distribution was eligible for tax-free rollover; see 7.8. http://www.taxact.com/tax-tips/index.asp?tid=635 Mon, 14 Apr 2008 00:00:00 GMT 635 See Chapter 38 for FICA withholding on wages paid to household employees. http://www.taxact.com/tax-tips/index.asp?tid=634 Sun, 13 Apr 2008 00:00:00 GMT 634 Winnings from bingo, keno, and slot machines are not subject to income tax withholding. However, if you do not provide a taxpayer identification number, the payer will withhold tax at the 28% backup withholding rate (26.12). http://www.taxact.com/tax-tips/index.asp?tid=633 Sat, 12 Apr 2008 00:00:00 GMT 633 If your employer is unable to collect enough money from your wages during the year to cover the Social Security or Medicare tax on the tips you reported, the uncollected amount is shown on your Form W-2 in Box 12 with Code A next to it for Social Security or Code B for Medicare. You must report the uncollected amount on Line 63 of Form 1040 (total tax) as an additional tax due; write UT and show the amount next to Line 63. http://www.taxact.com/tax-tips/index.asp?tid=632 Fri, 11 Apr 2008 00:00:00 GMT 632 If you have not reported tips of $20 or more in any month, or tips are allocated to you under the special tip allocation rules, you must compute Social Security and Medicare tax on that amount on Form 4137 and enter it as a tax due on Line 59 of Form 1040; attach Form 4137 to Form 1040. The unreported tips must be included as wages on Line 7 of Form 1040. http://www.taxact.com/tax-tips/index.asp?tid=631 Thu, 10 Apr 2008 00:00:00 GMT 631 Starting a new job in the middle of a year presents a withholding problem. The amount of tax withheld from your paycheck is figured by taking your weekly pay and multiplying this by a 52-week pay period. For example, if as a recent graduate you start a job on July 1 and your weekly pay is $1,000 for 26 weeks (July 1-December 31), your withholding will be based on an annual income of $52,000 ($1,000 52 weeks) and not the $26,000 you will actually earn that year. This will result in overwithholding. To alleviate this problem, you may ask your employer to calculate withholdings on what is known as the part year method if your work days during the year are expected to be 245 or fewer. This formula calculates withholding based on actual earnings rather than expected earnings over a full year of employment. As an alternative, you may elect to claim extra exemptions on Form W-4, which has the same effect of reducing the amount withheld each week from your paycheck. http://www.taxact.com/tax-tips/index.asp?tid=630 Wed, 9 Apr 2008 00:00:00 GMT 630 Adjust withholding if there will be a significant change in the tax you owe for 2007. Credits such as the child tax credit, Hope scholarship credit, and lifetime learning credit may reduce your 2007 tax. By decreasing your withholding now, you can get the benefit of the lower taxes throughout the year. On the other hand, a withholding increase may be advisable if previously claimed deductions or credits will not be available to you, or if you expect an increase in nonwage income such as capital gains. Check the instructions to Forms W-4 and 1040-ES for 2007 to help you adjust your withholdings. http://www.taxact.com/tax-tips/index.asp?tid=629 Tue, 8 Apr 2008 00:00:00 GMT 629 If you do not expect withholdings to meet your final tax liability, ask your employer to withhold a greater amount of tax; see 26.1. On the other hand, if the withholding rate applied to your wages results in overwithholding, you may claim extra withholding allowances to reduce withholding during the year; see 26.4 and 26.5. http://www.taxact.com/tax-tips/index.asp?tid=628 Mon, 7 Apr 2008 00:00:00 GMT 628 A complete and updated list of qualifying hybrid vehicles can be found at www.irs.gov/newsroom/topic/index.html. Click on Hybrid Cars and Alternative Motor Vehicles. http://www.taxact.com/tax-tips/index.asp?tid=627 Sun, 6 Apr 2008 00:00:00 GMT 627 The alternative motor vehicle tax credit cannot be used to reduce your alternative minimum tax (23.5). Even if you are not liable for AMT, you must figure your tentative AMT on Form 6251 to figure your credit for personal use of a qualifying vehicle on Form 8910. The tentative AMT reduces the regular tax liability against which the vehicle credit can be claimed. As a result, the benefit of the hybrid vehicle tax credit may be substantially reduced or eliminated because of the tentative AMT. http://www.taxact.com/tax-tips/index.asp?tid=626 Sat, 5 Apr 2008 00:00:00 GMT 626 The IRS announced that siding does not qualify for the credit. However, because some consumers had purchased siding based on a manufacturer's certification that a credit was available, the IRS said that homeowners who installed siding before December 1, 2006, could rely on such a certification and claim the credit. http://www.taxact.com/tax-tips/index.asp?tid=625 Fri, 4 Apr 2008 00:00:00 GMT 625 If within nine years of receiving a mortgage credit certificate you sell or dispose of your home at a gain, the mortgage subsidy you received generally must be recaptured as income. See Form 8828 for details. http://www.taxact.com/tax-tips/index.asp?tid=624 Thu, 3 Apr 2008 00:00:00 GMT 624 The credit for qualified retirement savings contributions had been scheduled to expire at the end of 2006, but it was made permanent by the Pension Protection Act of 2006.The income ranges for the three credit rates may be raised by an inflation adjustment starting in 2007. http://www.taxact.com/tax-tips/index.asp?tid=623 Wed, 2 Apr 2008 00:00:00 GMT 623 The amount of your allowable adoption credit for a year cannot be more than your tax liability for that year; follow the Form 8839 instructions. If your credit is more than this limit, you can carry forward any unused credit for the next five years, or until used, whichever comes first. http://www.taxact.com/tax-tips/index.asp?tid=622 Tue, 1 Apr 2008 00:00:00 GMT 622 If the IRS denies an EIC by issuing a deficiency notice, the credit may not be claimed in a future tax year unless you show on Form 8862 that you are eligible to take the credit. If the IRS recertifies eligibility, Form 8862 does not have to be filed again in subsequent tax years unless the IRS again denies the EIC in a deficiency proceeding. http://www.taxact.com/tax-tips/index.asp?tid=621 Mon, 31 Mar 2008 00:00:00 GMT 621 Earned income does not include nontaxable employee compensation such as salary deferrals and reductions, excludable dependent care benefits, and excludable education assistance. http://www.taxact.com/tax-tips/index.asp?tid=620 Sun, 30 Mar 2008 00:00:00 GMT 620 A taxpayer who negligently or fraudulently claims the EIC is prohibited from claiming future credits over a period of several years. The credit is disallowed for two years from the tax year for which it is determined that the EIC claim was claimed recklessly or in disregard of the rules. The period increases to 10 years from the most recent tax year for which it is found that the EIC was claimed fraudulently. http://www.taxact.com/tax-tips/index.asp?tid=619 Sat, 29 Mar 2008 00:00:00 GMT 619 Care costs, such as a nurse's wages, may also qualify as medical expenses, but you may not claim both the dependent care credit and the medical expense deduction. If you use the expenses to figure the credit and your care costs exceed the amount allowed as dependent care costs, the excess, to the extent it qualifies as a medical expense, may be added to other deductible medical costs. http://www.taxact.com/tax-tips/index.asp?tid=618 Fri, 28 Mar 2008 00:00:00 GMT 618 The amount you pay to a day-care center or nursery school for a dependent child under age 13 is eligible for the credit, even if it covers such incidental benefits as lunch. However, tuition for a child in first grade or higher is not taken into account. If the dependent is not your child, costs for care outside the home qualify only if the dependent regularly spends at least eight hours per day in your home. Up to $3,000 a year of outside-the-home care expenses may be taken into account in figuring the credit for one dependent, and up to $6,000 for two or more. http://www.taxact.com/tax-tips/index.asp?tid=617 Thu, 27 Mar 2008 00:00:00 GMT 617 If both husband and wife are full-time students and neither works, they may not claim the credit for dependent care costs. While one student-spouse is considered to have earned income of $250 ($500 if more than one qualified person is cared for) each month, the other spouse's earned income is zero. Care costs eligible for the credit are limited to the lesser amount of earned income, which in this case is zero. http://www.taxact.com/tax-tips/index.asp?tid=616 Wed, 26 Mar 2008 00:00:00 GMT 616 Expenses qualifying for the dependent care credit are reduced by any tax-free reimbursements under a qualified employer dependent care program. That is, the reimbursements reduce the $3,000 expense limit for one dependent, or the $6,000 expense limit for two or more qualifying dependents; see 25.8. Your employer will report reimbursements in Box 10 of your Form W-2. You figure the tax-free portion of the reimbursement, and any reduction to the credit expense base, on Form 2441 if you file Form 1040 or on Schedule 2 if you file Form 1040A. http://www.taxact.com/tax-tips/index.asp?tid=615 Tue, 25 Mar 2008 00:00:00 GMT 615 The dependent care credit is limited to your tax liability. In other words, if the credit amount exceeds the tax that you owe, you will not be given a refund of the difference. http://www.taxact.com/tax-tips/index.asp?tid=614 Mon, 24 Mar 2008 00:00:00 GMT 614 The refundable portion of the child tax credit for 2006 is 15% of taxable earned income in excess of $11,300. Combat pay that is otherwise excluded from income (see 35.4) is treated as taxable earned income for purposes of figuring the refundable amount. http://www.taxact.com/tax-tips/index.asp?tid=613 Sun, 23 Mar 2008 00:00:00 GMT 613 You can claim the child tax credit for a child who is a qualifying child (25.2) even though he or she cannot be claimed as your dependent because (1) you, or your spouse if filing jointly, can be claimed as a dependent by another taxpayer, or (2) the child is married and files a joint return, and the exception at 21.9 does not apply.To claim the child tax credit for such a non-dependent child, you must complete Form 8901 and attach it to your Form 1040 or Form 1040A. http://www.taxact.com/tax-tips/index.asp?tid=612 Sat, 22 Mar 2008 00:00:00 GMT 612 The $1,000 maximum child tax credit per qualifying child applies through 2010. http://www.taxact.com/tax-tips/index.asp?tid=611 Fri, 21 Mar 2008 00:00:00 GMT 611 The law allowing all nonrefundable personal credits to offset regular income tax and AMT liability was extended through 2006. http://www.taxact.com/tax-tips/index.asp?tid=610 Thu, 20 Mar 2008 00:00:00 GMT 610 Including the child's income on your return could be disadvantageous not only by subjecting the income to a higher tax rate (than on the child's own return), but also by making it more difficult for you to claim certain deductions and raising your state and local taxes. http://www.taxact.com/tax-tips/index.asp?tid=609 Wed, 19 Mar 2008 00:00:00 GMT 609 If you are unable to file your 2006 return by April 16, 2007, but your child's return is filed by the April 16 deadline, the child's Form 8615 may be based on an estimate of your tax liability. When you have the completed income information, file an amended return. http://www.taxact.com/tax-tips/index.asp?tid=608 Tue, 18 Mar 2008 00:00:00 GMT 608 Before your child can complete Form 8615, or you prepare it for the child, your own taxable income must be determined. http://www.taxact.com/tax-tips/index.asp?tid=607 Mon, 17 Mar 2008 00:00:00 GMT 607 The reach of the kiddie tax can be reduced or eliminated if investments held in the name of children under age 18 earn little or no current taxable income, as in the case of growth stocks or tax-exempt municipal bonds. Interest on U.S. savings bonds can be deferred until after a child reaches age 18 and the kiddie tax no longer applies. http://www.taxact.com/tax-tips/index.asp?tid=606 Sun, 16 Mar 2008 00:00:00 GMT 606 The Tax Increase Prevention and Reconciliation Act applies the kiddie tax to investment income of children age under age 18 as of the end of the year, effective for 2006 and later tax years. Previously, only children under age 14 were subject to the kiddie tax. http://www.taxact.com/tax-tips/index.asp?tid=605 Sat, 15 Mar 2008 00:00:00 GMT 605 The kiddie tax does not apply to a child who was 18 years old or older on January 1, 2007, or to a child under age 18 who is married and files a joint return; see 23.2. http://www.taxact.com/tax-tips/index.asp?tid=604 Fri, 14 Mar 2008 00:00:00 GMT 604 Your AMT basis in stock acquired through the exercise of an ISO is increased by the amount of the required AMT adjustment. Keep basis records for both AMT and regular tax purposes, since in the year the stock is sold, the higher AMT basis will reduce (or even eliminate in some cases) the gain reportable for AMT purposes. http://www.taxact.com/tax-tips/index.asp?tid=603 Thu, 13 Mar 2008 00:00:00 GMT 603 If you exercise an incentive stock option and your rights in the acquired stock are transferable and not subject to a substantial risk of forfeiture, you have to treat as an AMT adjustment the excess of the fair-market value of the stock when the option was exercised over the option price. Unless you sell the stock by the end of that same year, you must report an AMT adjustment based on the value of the stock when the option was exercised, even if the value later declines substantially. You avoid the AMT adjustment if you sell the stock in the same year the option was exercised. http://www.taxact.com/tax-tips/index.asp?tid=602 Wed, 12 Mar 2008 00:00:00 GMT 602 A married couple found themselves paying AMT tax when their regular tax deduction of 12 personal exemptions for themselves and their 10 children was disregarded for AMT purposes. In the Tax Court, they argued that AMT was not intended to apply to taxpayers merely because they had large families. The Tax Court disagreed. Congress specifically wrote the law considering the effect of personal exemptions on AMT tax liability. The Tenth Circuit appeals court, although more sympathetic to the couple, agreed with the Tax Court that their situation fit within the AMT rules. http://www.taxact.com/tax-tips/index.asp?tid=601 Tue, 11 Mar 2008 00:00:00 GMT 601 If you claimed the standard deduction instead of itemizing deductions on Form 1040, you may not claim the standard deduction as an AMT deduction. Exemptions for yourself and your dependents are also not allowed for AMT purposes. The standard deduction and personal exemptions are not added back to income. They are indirectly disallowed by using adjusted gross income as the starting point for figuring AMT on Form 6251. http://www.taxact.com/tax-tips/index.asp?tid=600 Mon, 10 Mar 2008 00:00:00 GMT 600 http://www.taxact.com/tax-tips/index.asp?tid=599 Sun, 9 Mar 2008 00:00:00 GMT 599 The word fish means finfish, mollusks, crustaceans, and all other forms of marine animal and plant life other than marine mammals and birds. http://www.taxact.com/tax-tips/index.asp?tid=598 Sat, 8 Mar 2008 00:00:00 GMT 598 When figuring your tax under the averaging method on Schedule J, you may use negative taxable income for a base year (any of the three preceding years) for which deductions exceeded gross income. See the Schedule J instructions for details. http://www.taxact.com/tax-tips/index.asp?tid=597 Fri, 7 Mar 2008 00:00:00 GMT 597 If you do not have net capital gains on Schedule D (see 22.4), and are not using Form 8615 to compute the kiddie tax for a child under age 14 (24.4), the IRS requires you to use the Tax Table to determine the regular tax on your taxable income if it is less than $100,000. http://www.taxact.com/tax-tips/index.asp?tid=596 Thu, 6 Mar 2008 00:00:00 GMT 596 The phaseout of exemptions is being gradually eliminated between 2006 and 2010. For 2006 and 2007, the amount of the phaseout is two-thirds of the full phaseout that was required on 2005 returns. For 2008 and 2009, only one-third of the phaseout will apply, and after 2009, there will not be any phaseout of exemptions. http://www.taxact.com/tax-tips/index.asp?tid=595 Wed, 5 Mar 2008 00:00:00 GMT 595 On a 2006 return, you are not allowed to claim any deduction for personal exemptions if your adjusted gross income exceeds $273,000 if you are single, $348,250 if you are married filing jointly, 310,650 if you file as head of household, and $174,125 if you are married filing separately. http://www.taxact.com/tax-tips/index.asp?tid=594 Tue, 4 Mar 2008 00:00:00 GMT 594 If you are planning to claim an exemption for a dependent who as of the end of 2006 does not have the required Social Security number or individual taxpayer identification number, either you or that person should file Form SS-5 with the Social Security Administration or Form W-7 with the IRS (for an ITIN) as soon as possible so the number may be obtained before the April 16, 2007, filing deadline for your 2006 return. If you do not have the SSN by the filing due date, you should file Form 4868 for an automatic extension to file; see 46.3. http://www.taxact.com/tax-tips/index.asp?tid=593 Mon, 3 Mar 2008 00:00:00 GMT 593 When a married dependent files a joint return, the parent cannot claim an exemption. The loss of the exemption may cost a parent more than the joint return saves the couple. In such a case, it may be advisable for the couple to file separate returns so that the parent may benefit from the larger tax saving.If the couple decides to revoke their election to file jointly and then file separately in order to preserve the exemption for a parent, they must do so before the filing date for the return. Once a joint return is filed, the couple may not, after the filing deadline, file separate returns for the same year. http://www.taxact.com/tax-tips/index.asp?tid=592 Sun, 2 Mar 2008 00:00:00 GMT 592 If a custodial parent releases the right to claim a dependency exemption for his or her child on Form 8332 (or substitute statement), the release also gives the noncustodial parent the right to claim the child tax credit and the additional child tax credit, assuming the credits are not phased out; see 25.2. http://www.taxact.com/tax-tips/index.asp?tid=591 Sat, 1 Mar 2008 00:00:00 GMT 591 If you contribute more than 10% of a person's support and all other more-than-10% contributors agree to let you claim the exemption, each of them should sign a consent on separate Forms 2120 that you attach to your return. http://www.taxact.com/tax-tips/index.asp?tid=590 Fri, 29 Feb 2008 00:00:00 GMT 590 If your contribution does not exceed 50% of total household support, earmark contributions to at least one of the dependents. This will allow you to claim at least one exemption. Without proper records, however, the IRS treats your contributions as divided among the members of the household. http://www.taxact.com/tax-tips/index.asp?tid=589 Thu, 28 Feb 2008 00:00:00 GMT 589 A lump-sum contribution covering a relative's stay in a long-term care facility is prorated over the relative's life expectancy to determine your current support contribution. http://www.taxact.com/tax-tips/index.asp?tid=588 Wed, 27 Feb 2008 00:00:00 GMT 588 If your dependent joins the military, the value of food, lodging, clothing, and educational assistance provided by the government constitutes government support. http://www.taxact.com/tax-tips/index.asp?tid=587 Tue, 26 Feb 2008 00:00:00 GMT 587 Income that is invested is not treated as support. However, personal savings are treated as support if they are used for food, clothing, lodging, or other support items. http://www.taxact.com/tax-tips/index.asp?tid=586 Mon, 25 Feb 2008 00:00:00 GMT 586 The gross income test does not apply to qualifying children (21.3), including full-time students who are under age 24 as of the end of the year. If your child was age 24 or older at the end of 2006 and had gross income of $3,300 or more, you may not claim him or her as a dependent. http://www.taxact.com/tax-tips/index.asp?tid=585 Sun, 24 Feb 2008 00:00:00 GMT 585 Nephews, nieces, uncles, and aunts must be your blood relatives to qualify under the relationship test. For example, the brother or sister of your father or mother qualifies as your relative; their spouses do not. You may not claim your spouse's nephews, nieces, uncles, or aunts as your qualifying relatives unless you file a joint return. http://www.taxact.com/tax-tips/index.asp?tid=584 Sat, 23 Feb 2008 00:00:00 GMT 584 You must obtain and report on your return the Social Security number of each dependent claimed. Nonresident and resident aliens not eligible for Social Security numbers must have an individual taxpayer identification number; see 21.11. http://www.taxact.com/tax-tips/index.asp?tid=583 Fri, 22 Feb 2008 00:00:00 GMT 583 Make sure that the names used when you and your spouse file your joint return match the names you have provided to the Social Security Administration. If there is a mismatch between a name and Social Security number, the IRS will disallow the exemption and then send you a notice that allows you to explain the discrepancy and restore the deduction; see 21.10. http://www.taxact.com/tax-tips/index.asp?tid=582 Thu, 21 Feb 2008 00:00:00 GMT 582 If a child or sibling (or his or her descendant) is your qualifying child under 21.3, his or her gross income does not matter. You also do not have to provide over half of the child's support. You may claim the exemption if the other tests for an exemption are met as explained at 21.3. http://www.taxact.com/tax-tips/index.asp?tid=581 Wed, 20 Feb 2008 00:00:00 GMT 581 On Form 8914 you can claim an additional exemption of $500 for each person displaced by Hurricane Katrina, other than your spouse or dependent, for whom you provide free housing in your principal residence for at least 60 days. The additional $500 exemption is allowed for up to four displaced persons, for a maximum of $2,000 (but no more than $1,000 if married filing separately). The $2,000 limit applies to both 2005 and 2006, so any additional exemptions claimed on your 2005 return reduce the $2,000 maximum for 2006. http://www.taxact.com/tax-tips/index.asp?tid=580 Tue, 19 Feb 2008 00:00:00 GMT 580 If you were given mileage allowance for 2006 in excess of 44.5 cents per mile, the excess will be included as wages on your Form W-2; see Example 2 in 20.33. If your allowance was less than 44.5 cents per mile, you may deduct the difference as a miscellaneous itemized deduction subject to the 2% AGI floor; see Example 3 in 20.33. http://www.taxact.com/tax-tips/index.asp?tid=579 Mon, 18 Feb 2008 00:00:00 GMT 579 If a per diem allowance exceeds the federal travel rate or the IRS high-low rate, the excess will be reported as income on your Form W-2, unless you return the excess; see Example 3 on the left. The excess reportable on Form W-2 is also subject to income tax and FICA tax withholding. http://www.taxact.com/tax-tips/index.asp?tid=578 Sun, 17 Feb 2008 00:00:00 GMT 578 As changes to per diem rates are announced by the General Services Administration (GSA), a What's Hot article on the IRS website will announce the new rates. Go to www.irs.gov/formspubs; then go to the What's Hot in Tax Forms, Publications and Other Tax Products page for updates to Publication 1542. http://www.taxact.com/tax-tips/index.asp?tid=577 Sat, 16 Feb 2008 00:00:00 GMT 577 An employer that uses the high-low method to reimburse an employee for the first nine months of the year must continue to do so for the rest of the year. Although the rates and high-cost localities list may change on October 1, the pre-October rates and high-cost localities may be used for the rest of the year as long as this is done consistently for all employees. http://www.taxact.com/tax-tips/index.asp?tid=576 Fri, 15 Feb 2008 00:00:00 GMT 576 If you adequately report expenses to your employer and return excess reimbursements, you are treated as being reimbursed under an accountable plan and generally do not have to report any reimbursement on your return; see 20.31. http://www.taxact.com/tax-tips/index.asp?tid=575 Thu, 14 Feb 2008 00:00:00 GMT 575 If you fail to return excess payments within a reasonable time but you meet all of the other tests applied to an accountable plan, such as providing proof of the expenses, only the retained excess is taxed to you as if paid outside of an accountable plan. http://www.taxact.com/tax-tips/index.asp?tid=574 Wed, 13 Feb 2008 00:00:00 GMT 574 If you are entitled to reimbursement from your employer, make sure you ask for reimbursement. Failure to be reimbursed may prevent you from deducting your out-of-pocket expenses. A supervisor whose responsibility was to maintain good relations with his district and store managers entertained them and their families and also distributed gifts among them. His cost was $2,500, for which he could have been reimbursed by his company, but he made no claim. Consequently, the Tax Court disallowed the cost as a deduction on his return. The expense was the company's; any goodwill he created benefitted it. But because he failed to seek reimbursement, he was not allowed to convert company expenses into his own. http://www.taxact.com/tax-tips/index.asp?tid=573 Tue, 12 Feb 2008 00:00:00 GMT 573 If an adequate record of expenses is kept for part of a tax year, and that period is representative of the whole year, the IRS will accept those records as proof of expenses for the entire year. For example, if you keep records for the first week of each month that show that 75% of the use of your car is for business purposes, and your invoices and bills show the same business pattern for the rest of each month, the IRS will treat your partial record as proof of 75% business use for the whole year. http://www.taxact.com/tax-tips/index.asp?tid=572 Mon, 11 Feb 2008 00:00:00 GMT 572 Credit card charge statements for traveling and entertainment expenses meet the IRS tests, provided the business purpose of the expense is also shown. Credit card statements provide space for inserting the names of people entertained, their business relationship, the business purpose of the expense, and the portion of the expense to be allocated to business and personal purposes. These statements generally meet the IRS requirements of accounting to your employer for reimbursed expenses (20.31), provided a responsible company official reviews them. The IRS will not accept a credit card statement as substantiation of a lodging expense. http://www.taxact.com/tax-tips/index.asp?tid=571 Sun, 10 Feb 2008 00:00:00 GMT 571 Employee bonuses should not be labeled as gifts. An IRS agent examining your records may, with this description, limit the deduction to $25 unless you can prove the excess over $25 was compensation. By describing the payment as a gift, you are inviting an IRS disallowance of the excess over $25. This was the experience of an attorney who gave his secretary $200 at Christmas. The IRS disallowed $175 of his deduction. The Tax Court refused to reverse the IRS. The attorney could not prove that the payment was for services. http://www.taxact.com/tax-tips/index.asp?tid=570 Sat, 9 Feb 2008 00:00:00 GMT 570 An employer who provides meals to employees on employer premises is allowed a full deduction for all the meals provided that more than half of the employees who are provided meals are furnished them for substantial noncompensatory business reasons. http://www.taxact.com/tax-tips/index.asp?tid=569 Fri, 8 Feb 2008 00:00:00 GMT 569 Individuals subject to Department of Transportation limitations on hours of service, such as interstate truck and bus drivers, pilots and other air transportation workers, and train crews, may claim a higher deductible percentage of food and beverage costs when working away from home. The deductible amount is 75% in 2006 and 2007, and 80% for 2008 and later years. http://www.taxact.com/tax-tips/index.asp?tid=568 Thu, 7 Feb 2008 00:00:00 GMT 568 A hotel may include meals in a room charge. In such cases, the room charge must be allocated between the meals/entertainment and lodging. The amount allocated to meals and entertainment is subject to the 50% cost limitation. If you receive a per diem allowance from your employer covering both lodging and meals under an accountable reimbursement plan, you may have to allocate part of the reimbursement to meals in order to deduct expenses in excess of the reimbursement; see 20.31. http://www.taxact.com/tax-tips/index.asp?tid=567 Wed, 6 Feb 2008 00:00:00 GMT 567 The IRS presumes that entertainment during a hunting or fishing trip or on a yacht is not conducive to business discussion or activity. You must prove otherwise.In one case, a printing-press-parts manufacturer convinced a federal appeals court (Eighth Circuit) that there was a business purpose for the annual fishing trips it held for factory workers and sales personnel following its sales conference. Specific company business was discussed during the trips. Salespersons gave feedback to factory employees concerning manufacturing problems that increased the need for repairs, parts distribution issues were discussed, and plans made to counter competitors. http://www.taxact.com/tax-tips/index.asp?tid=566 Tue, 5 Feb 2008 00:00:00 GMT 566 A business discussion generally must take place the same day as the dining or entertainment. If not, and your deduction is questioned, you must give an acceptable reason for the interval between the discussion and the dining or entertainment. IRS regulations recognize that a day may separate a business meeting and the entertainment of an out-of-town customer. He or she may come to your office to discuss business one day and you provide entertainment the next day, or you provide the entertainment on the first day and discuss business the day after.The IRS does not estimate how long a business discussion should last. But it does warn that a meeting must involve a discussion or negotiation to obtain income or business benefits. It does not require that more time be devoted to the meeting than to the entertainment. http://www.taxact.com/tax-tips/index.asp?tid=565 Mon, 4 Feb 2008 00:00:00 GMT 565 If your spouse accompanied you on a business trip, your bills will probably show costs for both of you. These usually are less than twice the cost for a single person. To find what you may deduct where your spouse's presence is for personal and not qualifying business reasons, do not divide the bill in half. Figure what accommodations and transportation would have cost you alone and deduct that. The excess over the single person's costs is not deductible. http://www.taxact.com/tax-tips/index.asp?tid=564 Sun, 3 Feb 2008 00:00:00 GMT 564 Keep a copy of the convention program and a record of the business sessions you attend. If the convention provides a sign-in book, sign it. In addition, keep a record of all of your business expenses as explained in 20.26. http://www.taxact.com/tax-tips/index.asp?tid=563 Sat, 2 Feb 2008 00:00:00 GMT 563 If your business trip is extended over a weekend to take advantage of reduced airfares, the additional cost of meals, lodging, and other incidental expenses is deductible. http://www.taxact.com/tax-tips/index.asp?tid=562 Fri, 1 Feb 2008 00:00:00 GMT 562 If the IRS determines that you were primarily on vacation, it will disallow all travel costs except for costs directly related to your business in the area such as registration fees at a foreign business convention; see 20.14. http://www.taxact.com/tax-tips/index.asp?tid=561 Thu, 31 Jan 2008 00:00:00 GMT 561 If your return is examined, proving the business purpose of your trip depends on presenting evidence to convince an examining agent that the trip, despite your vacationing, was planned primarily to transact business. Keep a log or diary to substantiate business activities. http://www.taxact.com/tax-tips/index.asp?tid=560 Wed, 30 Jan 2008 00:00:00 GMT 560 If you take your family with you to a temporary job site, an IRS agent may argue that this is evidence that you considered the assignment to be indefinite. In the Michaels Example on this page, however, such a move was not considered detrimental to a deduction of living expenses at the job location. http://www.taxact.com/tax-tips/index.asp?tid=559 Tue, 29 Jan 2008 00:00:00 GMT 559 Federal employees such as FBI agents and prosecutors who are certified by the Attorney General as traveling on behalf of the federal government in a temporary duty status to investigate, prosecute, or provide support services for the investigation or prosecution of a federal crime are not subject to the one-year limitation on deductibility of expenses while away from home on temporary assignments. http://www.taxact.com/tax-tips/index.asp?tid=558 Mon, 28 Jan 2008 00:00:00 GMT 558 If you have more than one regular place of business, your tax home is your principal place of business. Your principal place of business or employment is determined by comparing: (1) the time ordinarily spent working in each area; (2) the degree of your business activity in each area; (3) the amount of your income from each area; (4) the taxpayer's permanent residence; and (5) whether employment at one location is temporary or indefinite.No single factor is determinative. The relative importance of each factor will vary depending on the facts of a particular case. For example, where there are no substantial differences between incomes earned in two places of employment, your tax home is probably the area in which you spend more of your time. Where there are substantial income differences, your tax home is probably the area in which you earn more of your income. http://www.taxact.com/tax-tips/index.asp?tid=557 Sun, 27 Jan 2008 00:00:00 GMT 557 For travel expense purposes, your home is your place of business, employment, or post of duty, regardless of where you maintain your family residence. This tax home includes the entire city or general area of your business premises or place of employment. The area of your residence may be your tax home if your job requires you to work at widely scattered locations, you have no fixed place of work, and your residence is in a location economically suited to your work. http://www.taxact.com/tax-tips/index.asp?tid=556 Sat, 26 Jan 2008 00:00:00 GMT 556 The IRS standard meal allowance (MIE rate) does not include laundry, cleaning, and pressing of clothing. If you have receipts to substantiate laundry and cleaning costs, you may deduct them separately from the MIE allowance, which includes as incidental expenses fees and tips for porters, baggage carriers, hotel maids, and room stewards.If you do not pay or incur any meal expenses for a particular day on a trip away from home but you do have qualifying incidental expenses on that day, you have the option of deducting the actual costs or an allowance of $3 per day for the incidental expenses. The $3-per-day allowance must be prorated for the first and last days of the trip, as discussed at the end of 20.4 (Claiming the allowance). http://www.taxact.com/tax-tips/index.asp?tid=555 Fri, 25 Jan 2008 00:00:00 GMT 555 The IRS considers a work location temporary if the period of employment is realistically expected to last, and actually does last, one year or less. If you take an assignment expected to last more than a year but it actually lasts less than a year, your assignment is not considered temporary and commuting costs are not deductible. http://www.taxact.com/tax-tips/index.asp?tid=554 Thu, 24 Jan 2008 00:00:00 GMT 554 If you are self-employed and your regular office is outside your home, you may not deduct the cost of commuting to the office or from that office to your home even if you work at home at a second job. However, in several cases, the Tax Court allowed self-employed persons whose home office was their principal place of business (40.12) to deduct travel costs beginning with the first business call of the day. The IRS now agrees with this approach. http://www.taxact.com/tax-tips/index.asp?tid=553 Wed, 23 Jan 2008 00:00:00 GMT 553 An employer that uses the high-low method to reimburse an employee for the first nine months of the year must continue to do so for the rest of the year. Although the rates and high-cost localities list may change on October 1, the pre-October rates and high-cost localities may be used for the rest of the year as long as this is done consistently for all employees. http://www.taxact.com/tax-tips/index.asp?tid=552 Tue, 22 Jan 2008 00:00:00 GMT 552 Your lawyer should bill you separately or itemize fees for services connected with deductible items (collection of taxable alimony or separate maintenance payments; or preparation of tax returns, tax audits, and tax litigation) and nondeductible capital items (expenses incurred in purchase of property or dispute over title). http://www.taxact.com/tax-tips/index.asp?tid=551 Mon, 21 Jan 2008 00:00:00 GMT 551 There have been disputes over the deductibility of fees charged for general tax advice unconnected to the preparation of a return or a tax controversy. A deduction for fees charged for general tax advice not within these areas may be disallowed, unless the fee can be related to the production of business or investment income or the management of income-producing property. See the Examples in 19.16. http://www.taxact.com/tax-tips/index.asp?tid=550 Sun, 20 Jan 2008 00:00:00 GMT 550 The purchase of Your Income Tax in 2006 may be claimed as a miscellaneous expense deduction on your 2006 return. The cost, when included with other miscellaneous expenses, is subject to the 2% AGI floor. If you purchase the book in 2007, include the cost with your other miscellaneous expenses on your 2007 return. http://www.taxact.com/tax-tips/index.asp?tid=549 Sat, 19 Jan 2008 00:00:00 GMT 549 Companies authorized by the IRS to process credit card payments of taxes charge a convenience fee. The fee is not deductible as a tax preparation expense. Expenses for figuring tax liability are deductible but this is a fee to enable the payment of one's liability after it has been determined. http://www.taxact.com/tax-tips/index.asp?tid=548 Fri, 18 Jan 2008 00:00:00 GMT 548 You may deduct legal fees paid in 2006 for preparing your tax return or refund claim, or for representing you in a trial, examination, or hearing involving any tax; see 19.16. Legal fees incurred in defending against a tax imposed by a foreign country are also deductible. However, legal fees incurred in reducing an assessment on property to pay for local benefits are not deductible; the fees are capital expenses which are added to basis. http://www.taxact.com/tax-tips/index.asp?tid=547 Thu, 17 Jan 2008 00:00:00 GMT 547 You may not deduct the cost of an investment or financial planning seminar or similar meeting. http://www.taxact.com/tax-tips/index.asp?tid=546 Wed, 16 Jan 2008 00:00:00 GMT 546 Travel costs of a trip away from home (20.6) to look after investments, or to confer with your attorney, accountant, trustee, or investment counsel about the production of income, may be deducted as miscellaneous itemized deductions subject to the 2% of adjusted gross income floor. If you have investment property in a resort area, keep proof that the trip was taken primarily to check your investment property, not to vacation. http://www.taxact.com/tax-tips/index.asp?tid=545 Tue, 15 Jan 2008 00:00:00 GMT 545 To support your deduction, keep a record of business calls made at home or anywhere outside your employer's office. http://www.taxact.com/tax-tips/index.asp?tid=544 Mon, 14 Jan 2008 00:00:00 GMT 544 If you are an employee and also have a sideline business for which you use a home office, the office expenses are deductible if the office is used regularly and exclusively as your principal place of business or a meeting place with clients, customers, or patients. If the tests are met, you claim your home office expenses as a self-employed person on Form 8829, which you attach to Schedule C. The deduction may not exceed your income from the sideline business. See Chapter 40 for a sample Form 8829 and other deduction details. http://www.taxact.com/tax-tips/index.asp?tid=543 Sun, 13 Jan 2008 00:00:00 GMT 543 Cellular phone equipment must be used for the convenience of the employer and be a condition of your employment for you to be able to claim first-year expensing or a depreciation deduction for the cost. http://www.taxact.com/tax-tips/index.asp?tid=542 Sat, 12 Jan 2008 00:00:00 GMT 542 The Tax Court allowed a first-year expensing deduction to a working couple who used the same home computer given these facts: The husband, a professor, used it to store historical data; the wife, a state transportation planner, used it to do extensive number crunching. What apparently won the decision for the couple was evidence that (1) the husband did not have access to a computer at the university, and (2) the state office in which the wife worked did not have funds to buy a computer. The court held that the use of the computer was necessary for them to properly do their jobs, and as the purchase of a computer spared their employers from having to provide them with computers, the purchase was for the employers' convenience.In a later case, a telemarketing sales manager was allowed a first-year expensing deduction for a home computer and printer used to prepare reports. The key to winning the deduction was her supervisor's testimony that as a mid-level manager, she could not enter the office after regular hours to use a company computer, and that she was able to keep up with the volume of sales reports she was required to submit by using her home computer and accessing information via modem. http://www.taxact.com/tax-tips/index.asp?tid=541 Fri, 11 Jan 2008 00:00:00 GMT 541 If your new employer pays the fee under an agreement with an agency, you may disregard the payment for tax purposes. However, if you pay the fee and deduct it as a job search expense and in a later year you are reimbursed by your employer, you must report the reimbursement as taxable income to the extent you received a tax benefit from the earlier deduction; see 11.6.A company interested in your services may invite you to a job interview and agree to pay all of the trip expenses to its office, even if you are not hired. The company payment is tax free up to your actual expenses. http://www.taxact.com/tax-tips/index.asp?tid=540 Thu, 10 Jan 2008 00:00:00 GMT 540 You may not deduct the expenses of seeking your first job. http://www.taxact.com/tax-tips/index.asp?tid=539 Wed, 9 Jan 2008 00:00:00 GMT 539 If you are allowed to deduct the cost of work clothes and uniforms, you also may deduct the cost of cleaning and laundering them. Also, courts have allowed the cost of cleaning and laundering to be deducted in situations where:The clothes could only be worn one day at a time because they became too dirty.Dirty clothes were a hazard; they became baggy and might have gotten caught in machinery.Clothes were worn only at work and a place for changing clothes was provided by the employer.A meat cutter had to wear clean work clothes at all times. http://www.taxact.com/tax-tips/index.asp?tid=538 Tue, 8 Jan 2008 00:00:00 GMT 538 Your claim of a work clothes deduction is helped if your employer requires you to wear a uniform. Uniform costs of reservists and service persons, in excess of any uniform allowance, are deductible if you are prohibited from wearing the uniform off duty. http://www.taxact.com/tax-tips/index.asp?tid=537 Mon, 7 Jan 2008 00:00:00 GMT 537 Statutory employees, such as full-time life insurance salespersons, may deduct expenses on Schedule C and so avoid the 2% AGI floor; see 40.6 for further details. http://www.taxact.com/tax-tips/index.asp?tid=536 Sun, 6 Jan 2008 00:00:00 GMT 536 You generally must report your job-related expenses, and any employer reimbursements, on Form 2106. Form 2106-EZ is a shorter form that you may use if none of your job expenses are reimbursed and you deduct car expenses, if any, using the IRS flat mileage allowance. http://www.taxact.com/tax-tips/index.asp?tid=535 Sat, 5 Jan 2008 00:00:00 GMT 535 Most miscellaneous deductions are subject to a floor of 2% of your adjusted gross income (AGI), which may limit or bar a deduction. Your AGI is the amount on Line 37 of Form 1040; it is shown again on Line 38. http://www.taxact.com/tax-tips/index.asp?tid=534 Fri, 4 Jan 2008 00:00:00 GMT 534 Even if you are able to deduct for regular tax purposes a portion of miscellaneous expenses because they exceed the 2% AGI floor, you will lose the benefit of that deduction if you are subject to alternative minimum tax (AMT). The deduction from Schedule A for miscellaneous expenses (after the 2% floor) must be added back to income in determining whether you are liable for AMT; see 23.2. http://www.taxact.com/tax-tips/index.asp?tid=533 Thu, 3 Jan 2008 00:00:00 GMT 533 Follow the instructions to Form 4684 for reporting gains or losses from casualties and thefts of property used in a business or held for the production of income. http://www.taxact.com/tax-tips/index.asp?tid=532 Wed, 2 Jan 2008 00:00:00 GMT 532 Buying a replacement from a relative or related business organization will not defer gain unless total gains from involuntary conversions for the year are $100,000 or less. http://www.taxact.com/tax-tips/index.asp?tid=531 Tue, 1 Jan 2008 00:00:00 GMT 531 If you elect to defer tax on a gain, intending to buy replacement property, but you fail to make a replacement within the time limit, you must file an amended return for the year of the gain and pay the tax that you had elected to defer. You also must file an amended return and report the gain not eligible for deferral if you invest in property that does not qualify as a replacement, or which costs less than the amount realized from the involuntary conversion.However, if you elect to defer and make a timely qualifying replacement, you may not change your mind and pay tax on the gain in order to obtain a higher basis (18.20) for the replacement property. The Tax Court has agreed with the IRS that the election to defer is irrevocable once a qualified replacement is made within the time limits. Similarly, once you report to the IRS (18.22) that a qualified replacement has been made, you may not substitute other replacement property, even if the replacement period has not yet expired. http://www.taxact.com/tax-tips/index.asp?tid=530 Mon, 31 Dec 2007 00:00:00 GMT 530 Within the time limits, you must buy replacement property rather than merely contracting to do so. If you cannot replace property within the time required, ask your local IRS area director for additional time. Apply for an extension before the end of the period. If you apply for an extension within a reasonable time after the statutory period has run out, you must have a reasonable cause for the delay in asking for the extension. http://www.taxact.com/tax-tips/index.asp?tid=529 Sun, 30 Dec 2007 00:00:00 GMT 529 Consider whether postponement of gain at the expense of a reduced basis for property is advisable, compared to the tax consequences of reporting the gain in the year it is realized. http://www.taxact.com/tax-tips/index.asp?tid=528 Sat, 29 Dec 2007 00:00:00 GMT 528 Gain on the conversion may escape tax under the rules discussed in Chapter 29. If not, tax may be deferred under the involuntary conversion replacement rules. http://www.taxact.com/tax-tips/index.asp?tid=527 Fri, 28 Dec 2007 00:00:00 GMT 527 If you are insured for your full loss and do not file a claim because you do not want to risk cancellation of liability coverage, you may not claim a deduction. If you do not file an insurance claim but your loss exceeds the coverage, the noncovered loss may be deductible. For example, if you have a $2,500 deductible on your personal automobile insurance policy, a loss of up to $2,500 would be reduced by the $100 floor and the balance would be deductible only to the extent the 10% of adjusted gross income floor was exceeded (see Step 5 in 18.13). http://www.taxact.com/tax-tips/index.asp?tid=526 Thu, 27 Dec 2007 00:00:00 GMT 526 If your property is damaged, you must reduce the basis of the damaged property by the casualty loss deduction and compensation received for the loss; see 5.20. When you later sell the property, gain or loss is the difference between the selling price and the reduced basis. http://www.taxact.com/tax-tips/index.asp?tid=525 Wed, 26 Dec 2007 00:00:00 GMT 525 The IRS may accept an appraisal that is used to obtain federal loans or loan guarantees following a Presidentially declared disaster as proof of the amount of a casualty loss. http://www.taxact.com/tax-tips/index.asp?tid=524 Tue, 25 Dec 2007 00:00:00 GMT 524 Expenses that are incidental to a casualty or theft, such as medical treatment for personal injury, temporary housing, fuel, moving, or rentals for temporary living quarters, are not deductible as casualty losses. http://www.taxact.com/tax-tips/index.asp?tid=523 Mon, 24 Dec 2007 00:00:00 GMT 523 If you are claiming a loss for property used in your business or income-producing activity, use Section B on page 2 of Form 4684 (not shown here). Losses from income-producing property are entered on Line 27 of Schedule A as other miscellaneous deductions and are not subject to the 2% adjusted gross income floor. http://www.taxact.com/tax-tips/index.asp?tid=522 Sun, 23 Dec 2007 00:00:00 GMT 522 If you are claiming a loss for personal-use property, use Section A on page 1 of Form 4684. If you suffered more than one casualty or theft during the year, use a separate Form 4684 for each one. The total deductible casualty or theft loss from Section A of Form 4684 is then entered on Line 19, Schedule A of Form 1040. http://www.taxact.com/tax-tips/index.asp?tid=521 Sat, 22 Dec 2007 00:00:00 GMT 521 Personal casualty or theft losses that were caused by 2005 Hurricane Katrina, Rita, or Wilma are not subject to the $100 per casualty/theft reduction and also are not subject to the 10% of adjusted gross income floor. Line 11 of Form 4684 specifically exempts these hurricane losses from the $100 reduction, and on Line 17 they are excluded from the 10% of adjusted gross income floor that otherwise applies on Line 19. http://www.taxact.com/tax-tips/index.asp?tid=520 Fri, 21 Dec 2007 00:00:00 GMT 520 Where a husband and wife file a joint return, only one $100 floor applies to a casualty loss suffered by either spouse, whether the property is owned jointly or separately. If separate returns are filed, each spouse must reduce his or her half of the loss on jointly owned property by $100. If the property is owned by one spouse, only that spouse can claim a casualty loss on a separate return. http://www.taxact.com/tax-tips/index.asp?tid=519 Thu, 20 Dec 2007 00:00:00 GMT 519 The IRS has warned shareholders who suffer a loss in the value of their stock due to the fraud, misappropriation, or other misconduct of corporate officers or directors that their loss is not a deductible theft loss. A decline in stock value is not a theft if the stock was purchased on the open market rather than directly from the corporate officials accused of misconduct. The loss is deductible only as a capital loss when the stock is sold or becomes worthless; see 5.4 for the limits on capital losses.The Tax Court took the same approach in holding that a taxpayer who bought stock on the open market could not support a theft loss under California law because there was no privity relationship between the taxpayer and the corporate officers accused of wrongdoing, and so it could not be shown that there was intent to obtain the taxpayer's property. http://www.taxact.com/tax-tips/index.asp?tid=518 Wed, 19 Dec 2007 00:00:00 GMT 518 If you claim a theft loss and in a later year the property is returned to you, you must refigure your loss deduction. If the refigured deduction is lower than the amount you claimed, the difference must be reported as income in the year of the recovery. To recalculate the loss, follow the steps in 18.13 for figuring deductible losses, but in Step 1, compute the loss in fair market value from the time the property was stolen until you recovered it. The lower of this loss in value, if any, or your adjusted basis for the property is then reduced by insurance reimbursements and the personal-use floors (18.12) to get the recalculated loss. http://www.taxact.com/tax-tips/index.asp?tid=517 Tue, 18 Dec 2007 00:00:00 GMT 517 Unreimbursed accident damage may be a deductible casualty loss. http://www.taxact.com/tax-tips/index.asp?tid=516 Mon, 17 Dec 2007 00:00:00 GMT 516 The Tax Court held that the loss of an engine because of a failure to use antifreeze is not deductible as a casualty loss since the damage is not the result of a destructive force or accident but of personal neglect. http://www.taxact.com/tax-tips/index.asp?tid=515 Sun, 16 Dec 2007 00:00:00 GMT 515 If you have other miscellaneous deductions that exceed 2% of adjusted gross income, claiming investment loss treatment may be preferable to treating the loss as a casualty subject to the 10% floor or a bad debt subject to the $3,000 limit. http://www.taxact.com/tax-tips/index.asp?tid=514 Sat, 15 Dec 2007 00:00:00 GMT 514 The casualty must have caused damage to your property. Damage to a nearby area that lowered the value of your property does not give you a loss deduction. http://www.taxact.com/tax-tips/index.asp?tid=513 Fri, 14 Dec 2007 00:00:00 GMT 513 If the IRS extends the due date to file tax returns and pay taxes for a person in an area declared to be a disaster area by the President, the IRS will abate interest on past-due taxes for the period covered by the extension. http://www.taxact.com/tax-tips/index.asp?tid=512 Thu, 13 Dec 2007 00:00:00 GMT 512 Under a 2005 law, property owners are not taxed on qualified disaster mitigation payments from FEMA (Federal Emergency Management Agency) to elevate or relocate flood-prone homes and businesses or build hurricane shelters. If you included such payments in income on a prior year's return, and the time limit for filing an amended return (47.2) has not expired, you can file for a refund on Form 1040X. http://www.taxact.com/tax-tips/index.asp?tid=511 Wed, 12 Dec 2007 00:00:00 GMT 511 You are not taxed on disaster relief payments from any source that reimburses or pays you for unreimbursed costs of repairing or rehabilitating your personal residence, or replacing its contents, as a result of a Presidentially declared disaster.You are not taxed on payments, regardless of the source, that cover reasonable and necessary personal, family, living, or funeral expenses as a result of a Presidentially declared disaster, so long as they are not otherwise paid by insurance or other reimbursement. The exclusion also applies to payments made by the federal, state, or local government to individuals affected by a Presidentially declared disaster in order to promote the general welfare. http://www.taxact.com/tax-tips/index.asp?tid=510 Tue, 11 Dec 2007 00:00:00 GMT 510 Disaster loss rules give you a chance to deduct a loss earlier than under general rules. This may result in a tax refund for the prior year. You may make an election to claim the loss for the prior year in a signed statement attached to an amended return for that year if the original return has already been filed. List the date of the disaster and where the property was located (city, town, county, and state). To amend a filed return for the prior year, use Form 1040X. Consider making the election if the deduction on the return of the prior year gives a greater tax reduction than if claimed on the return for the year in which the loss occurred, or if you need the refund for the prior year tax and do not want to wait until you file your return for the year of the disaster to claim the loss. http://www.taxact.com/tax-tips/index.asp?tid=509 Mon, 10 Dec 2007 00:00:00 GMT 509 Read the rules on this page to insure that you deduct your casualty loss in the correct year. http://www.taxact.com/tax-tips/index.asp?tid=508 Sun, 9 Dec 2007 00:00:00 GMT 508 Termite damage is generally nondeductible since it often results from long periods of termite infestation. Proving a sudden action in the sense of fixing the approximate moment of the termite invasion is difficult. Some courts have allowed a deduction, but the IRS will bar deductions for termite damage under any conditions based on a study that found that serious termite damage results only after an infestation of three to eight years. Examples of other nondeductible casualty losses are at 18.11. http://www.taxact.com/tax-tips/index.asp?tid=507 Sat, 8 Dec 2007 00:00:00 GMT 507 The cost of preventive measures, such as burglar alarms or smoke detectors, or the cost of boarding up property against a storm, is not deductible. http://www.taxact.com/tax-tips/index.asp?tid=506 Fri, 7 Dec 2007 00:00:00 GMT 506 A sale or other transfer of vulnerable property to federal, state, or local authorities (or Indian tribal governments) under a hazard mitigation program is treated as an involuntary conversion, thereby allowing a gain to be deferred if a qualifying replacement (see 18.19) is made. http://www.taxact.com/tax-tips/index.asp?tid=505 Thu, 6 Dec 2007 00:00:00 GMT 505 Within the time limits, you must buy replacement property rather than merely contracting to do so. If you cannot replace property within the time required, ask your local IRS area director for additional time. Apply for an extension before the end of the period. If you apply for an extension within a reasonable time after the statutory period has run out, you must have a reasonable cause for the delay in asking for the extension. http://www.taxact.com/tax-tips/index.asp?tid=504 Wed, 5 Dec 2007 00:00:00 GMT 504 If you received payments in 2006 from a qualified long-term care policy, you must figure the amount of taxable payments, if any, on Form 8853. http://www.taxact.com/tax-tips/index.asp?tid=503 Tue, 4 Dec 2007 00:00:00 GMT 503 Unreimbursed expenses for long-term care services to care for a chronically ill patient are deductible medical expenses subject to the 7.5% AGI floor. Depending on your age, all or part of premiums paid for a qualifying policy are includible in your medical expenses. http://www.taxact.com/tax-tips/index.asp?tid=502 Mon, 3 Dec 2007 00:00:00 GMT 502 If you are disabled and incur costs to enable you to work, the payments may be treated as a deductible business expense rather than as a medical expense. http://www.taxact.com/tax-tips/index.asp?tid=501 Sun, 2 Dec 2007 00:00:00 GMT 501 When special equipment is installed in your home to alleviate a disease or ailment, you must determine if it increases the value of your home. You generally may claim a medical deduction only to the extent that the cost of the equipment exceeds the increase in value. However, if you install a ramp or railing, widen doorways or hallways, or add similar improvements to cope with a disability, these are usually treated by the IRS as not adding to the value of the home. http://www.taxact.com/tax-tips/index.asp?tid=500 Sat, 1 Dec 2007 00:00:00 GMT 500 The cost of a nurse's services is a deductible medical expense, even if the nurse is not licensed or registered, so long as he or she provides the patient with medical services. If household services are also provided, only the portion of the nurse's pay attributable to the provision of medical services qualifies. http://www.taxact.com/tax-tips/index.asp?tid=499 Fri, 30 Nov 2007 00:00:00 GMT 499 If the patient entered a nursing home to receive medical care, a deduction may be taken for meals and lodging while there, in addition to medical care costs. http://www.taxact.com/tax-tips/index.asp?tid=498 Thu, 29 Nov 2007 00:00:00 GMT 498 The parent of a child with psychological problems may deduct only that part of a private school fee directly related to psychological aid given to the child. http://www.taxact.com/tax-tips/index.asp?tid=497 Wed, 28 Nov 2007 00:00:00 GMT 497 While transportation to receive medical care is a deductible medical expense subject to the 7.5% AGI floor, meals while on a trip for medical treatment are not deductible. They simply replace the meals you normally would eat. However, if you are hospitalized, the cost of meals while an inpatient is a deductible expense. http://www.taxact.com/tax-tips/index.asp?tid=496 Tue, 27 Nov 2007 00:00:00 GMT 496 The costs of trips to receive medical treatment are deductible as medical expenses subject to the 7.5% AGI floor. The costs of a trip to a conference to learn about medical treatment may be deductible if recommended by a doctor. http://www.taxact.com/tax-tips/index.asp?tid=495 Mon, 26 Nov 2007 00:00:00 GMT 495 If you may claim a person as your dependent under a multiple support agreement, include with your medical expenses only the amount you actually pay for the dependent's medical expenses. If you are reimbursed by others who signed the multiple support agreement, you must reduce your deduction by the amount of reimbursement. http://www.taxact.com/tax-tips/index.asp?tid=494 Sun, 25 Nov 2007 00:00:00 GMT 494 If you are married and both you and your spouse have separate incomes, and one of you has substantial medical expenses, consider filing separate returns. This way the 7.5% floor will apply separately to your individual incomes, not to the higher joint income. To make sure which option to take-filing jointly or separately-you compute your tax on both types of returns and choose the one giving the lower overall tax; see 1.3. http://www.taxact.com/tax-tips/index.asp?tid=493 Sat, 24 Nov 2007 00:00:00 GMT 493 The amount of deductible premiums for a qualifying long-term care policy depends on your age; see 17.15. http://www.taxact.com/tax-tips/index.asp?tid=492 Fri, 23 Nov 2007 00:00:00 GMT 492 If you have more than one policy and receive reimbursements that exceed your total medical expenses for the year, you must pay tax on all or part of the reimbursement where your employer paid premiums on the policies; see Examples 1-4 on this page. http://www.taxact.com/tax-tips/index.asp?tid=491 Thu, 22 Nov 2007 00:00:00 GMT 491 In a 2006 legal memorandum, IRS Chief Counsel determined that gender reassignment surgery (GRS) is nondeductible. It does not fit the narrow definition of allowable cosmetic procedures intended to correct a disfigurement arising from a disease, accident, or congenital abnormality. It could be argued that GRS is treatment for an illness or disease and, as such, is a deductible medical expense. However, Chief Counsel refused to go that far given the controversy surrounding this issue and the lack of favorable IRS guidance. http://www.taxact.com/tax-tips/index.asp?tid=490 Wed, 21 Nov 2007 00:00:00 GMT 490 Exercise and weight-reduction programs are deductible as treatments for specific conditions, but not as ways to improve your general health, even if your doctor has recommended them; see 17.2. http://www.taxact.com/tax-tips/index.asp?tid=489 Tue, 20 Nov 2007 00:00:00 GMT 489 A mother-to-be may deduct the cost of classes instructing her in Lamaze breathing and relaxation techniques, stages of labor, and delivery procedures. If her husband or other childbirth coach also attends the classes, the portion of the fee allocable to the coach is not deductible. Costs of classes on early pregnancy, fetal development, or caring for newborns also are not deductible. http://www.taxact.com/tax-tips/index.asp?tid=488 Mon, 19 Nov 2007 00:00:00 GMT 488 The IRS allows a deduction for the costs of joining a weight-loss program and fees for follow-up meetings if a physician has made a diagnosis of obesity. http://www.taxact.com/tax-tips/index.asp?tid=487 Sun, 18 Nov 2007 00:00:00 GMT 487 OTC drugs, even if prescribed by a doctor, are not deductible, with the exception of insulin. http://www.taxact.com/tax-tips/index.asp?tid=486 Sat, 17 Nov 2007 00:00:00 GMT 486 You may not deduct medical expenses for which you have been reimbursed by insurance or other awards (17.4). Furthermore, reimbursement of medical expenses deducted in prior tax years may be taxable income (11.6). http://www.taxact.com/tax-tips/index.asp?tid=485 Fri, 16 Nov 2007 00:00:00 GMT 485 If an automobile license fee is based partly on value and partly on weight or other tests, the tax attributed to the value is deductible. For example, assume a registration fee based on 1% of value, plus 40 per hundred-weight. The part of the tax equal to 1% of value qualifies as an ad valorem tax and is deductible as a personal property tax on Schedule A. http://www.taxact.com/tax-tips/index.asp?tid=484 Thu, 15 Nov 2007 00:00:00 GMT 484 If you sold a house in 2006 and received Form 1099-S, check Box 5 for the amount of real estate tax that you paid in advance and that is allocable to the buyer. The buyer may deduct this amount. You subtract it from the amount you paid when claiming your 2006 itemized deduction for real estate taxes. http://www.taxact.com/tax-tips/index.asp?tid=483 Wed, 14 Nov 2007 00:00:00 GMT 483 A sale of a principal residence generally does not have to be reported on Form 1099-S if the seller gives the real estate agent responsible for the closing written assurance that the home was the seller's principal residence and that the full gain on the sale is excludable from income (see Chapter 29). http://www.taxact.com/tax-tips/index.asp?tid=482 Tue, 13 Nov 2007 00:00:00 GMT 482 Tenant-stockholders of a cooperative housing corporation may deduct their share of the real estate taxes paid by the corporation. However, no deduction is allowed if the corporation does not own the land and building but merely leases them and pays taxes under the lease agreement. See also 15.9. http://www.taxact.com/tax-tips/index.asp?tid=481 Mon, 12 Nov 2007 00:00:00 GMT 481 If you were entitled to a refund on your 2005 state tax return and you credited the overpayment towards your 2006 estimated state tax, do not forget to include the credited amount with other 2006 payments of state and local income tax on your 2006 Schedule A. http://www.taxact.com/tax-tips/index.asp?tid=480 Sun, 11 Nov 2007 00:00:00 GMT 480 When this book went to press, Congress had not yet extended to 2006 the law authorizing the option to deduct state and local general sales taxes in lieu of state and local income taxes. Without an extension, state and local sales taxes will not be deductible on 2006 returns. However, an extension is quite likely; see the e-Supplement for an update. http://www.taxact.com/tax-tips/index.asp?tid=479 Sat, 10 Nov 2007 00:00:00 GMT 479 In figuring your 2006 itemized deduction for state and local income taxes paid, remember to include tax that you paid in 2006 when you filed your 2005 state and local tax returns. http://www.taxact.com/tax-tips/index.asp?tid=478 Fri, 9 Nov 2007 00:00:00 GMT 478 If you prepay business or investment loan interest, you must spread the interest deduction over the period of the loan. In the year of payment, you may deduct only the interest allocable to that year. http://www.taxact.com/tax-tips/index.asp?tid=477 Thu, 8 Nov 2007 00:00:00 GMT 477 To get an interest deduction you must pay the interest; you may not claim a deduction by having the creditor add the interest to the debt. If you do not have funds to pay the interest, you may borrow money to pay the interest. The borrowed funds must be from a different creditor. The IRS disallows deductions where a debtor borrows from the same creditor to make interest payments on an earlier loan. The second loan is considered a device for getting an interest expense deduction without actually making payments. The Tax Court and several federal appeals courts have sided with the IRS. http://www.taxact.com/tax-tips/index.asp?tid=476 Wed, 7 Nov 2007 00:00:00 GMT 476 To safeguard your investment and business interest deductions, you must earmark and keep a record of your loans. You should avoid using loan proceeds to fund different types of expenditures. http://www.taxact.com/tax-tips/index.asp?tid=475 Tue, 6 Nov 2007 00:00:00 GMT 475 You may not deduct interest on loans used to buy or carry tax-exempt securities. If you receive exempt-interest dividends from a mutual fund during the year, you may deduct interest on a loan used to buy or carry the mutual-fund shares only to the extent that the proceeds can be allocated to taxable dividends you also receive. http://www.taxact.com/tax-tips/index.asp?tid=474 Mon, 5 Nov 2007 00:00:00 GMT 474 If you elect on Form 4952 to treat net capital gains or qualified dividends as investment income in order to increase your 2006 investment interest deduction, that amount is not eligible to be taxed at favorable capital gain rates (5.3). http://www.taxact.com/tax-tips/index.asp?tid=473 Sun, 4 Nov 2007 00:00:00 GMT 473 Limits apply to the deduction for interest on loans used to buy or carry market discount bonds (4.20) and Treasury bills (4.27). http://www.taxact.com/tax-tips/index.asp?tid=472 Sat, 3 Nov 2007 00:00:00 GMT 472 Points you paid in 2006 on the purchase of your principal residence will be reported to the IRS by the lender on Form 1098 if they meet the five tests for a deduction listed in 15.8. Seller-paid points are also included on Form 1098. Form 1098 is used by the IRS to check on the deduction you claim for points on Line 10 of Schedule A. Points paid on an improvement loan for your principal residence are deductible on Line 12 of Schedule A if they meet the tests; they are not shown on Form 1098. http://www.taxact.com/tax-tips/index.asp?tid=471 Fri, 2 Nov 2007 00:00:00 GMT 471 A married couple purchased a principal residence and paid points late in the year. For the year of the purchase, their standard deduction exceeded their itemized deductions. The IRS ruled that claiming the standard deduction for the year the points are paid would not entirely forfeit the deduction for points. The points may be amortized starting in the second year. Assuming that they itemize deductions starting in the second year, the allocable portion of the points may be deducted each year over the remaining loan term. http://www.taxact.com/tax-tips/index.asp?tid=470 Thu, 1 Nov 2007 00:00:00 GMT 470 You may not deduct as points amounts that are for specific lender services. To be deductible, points on the purchase of a principal residence must be prepaid interest for the use of the loan money. http://www.taxact.com/tax-tips/index.asp?tid=469 Wed, 31 Oct 2007 00:00:00 GMT 469 Huntsman replaced a three-year loan used to purchase his principal residence with a 30-year mortgage. He deducted $4,400 of points paid on the new mortgage. The IRS and the Tax Court held that the points had to be deducted over the 30-year loan term.The Federal Appeals Court for the Eighth Circuit disagreed and allowed a full deduction in the year the points were paid. The first loan was temporary and merely a step in obtaining permanent financing for the purchase of the principal residence.The IRS has announced that in areas outside of the Eighth Circuit, it will continue to disallow full deductions in the year of payment for points paid on refinancings. The Eighth Circuit includes only these states: Minnesota, Iowa, North and South Dakota, Nebraska, Missouri, and Arkansas. In these states, the IRS will not challenge deductions for points on refinancing agreements similar to Huntsman's that replace short-term financing with long-term permanent financing.In a later case, the Tax Court held that the Huntsman exception does not apply where a borrower refinances a long-term mortgage to take advantage of lower interest rates; the points must be deducted over the term of the new mortgage. http://www.taxact.com/tax-tips/index.asp?tid=468 Tue, 30 Oct 2007 00:00:00 GMT 468 If you do not personally receive a Form 1098 but a person (other than your spouse with whom you file a joint return) who is also liable for and paid interest on the mortgage received a Form 1098, you deduct your share of the interest and attach a statement to your Schedule A showing the name and address of the person who received the form. If you are the payer of record on a mortgage on which there are other borrowers entitled to a deduction for the interest shown on the Form 1098 you received, provide them with information on their share of the deductible amount.The Tax Court has allowed a joint obligor to deduct his or her payment of another obligor's share of the mortgage interest if the payment is made to avoid the loss of the property, and payment is made with his or her separate funds. http://www.taxact.com/tax-tips/index.asp?tid=467 Mon, 29 Oct 2007 00:00:00 GMT 467 Banks and other lending institutions report mortgage interest payments of $600 or more to the IRS on Form 1098. You should receive a copy of Form 1098 or a similar statement by January 31, 2007, showing your mortgage payments in 2006. Deductible points (15.8) paid on the purchase of a principal home are included on Form 1098. http://www.taxact.com/tax-tips/index.asp?tid=466 Sun, 28 Oct 2007 00:00:00 GMT 466 You may not deduct expenses incurred in obtaining a mortgage loan, such as loan assumption fees or costs of an appraisal or credit report. http://www.taxact.com/tax-tips/index.asp?tid=465 Sat, 27 Oct 2007 00:00:00 GMT 465 Interest on consumer loans is not deductible, but you can use a home equity line-of-credit mortgage to pay off existing consumer debts and finance future consumer expenses. However, although interest on a home equity loan is fully deductible for regular tax purposes if within the $100,000 limit, the interest is not deductible for purposes of alternative minimum tax, unless the loan proceeds were used to improve your first or second home; see 23.2. http://www.taxact.com/tax-tips/index.asp?tid=464 Fri, 26 Oct 2007 00:00:00 GMT 464 The Tax Court allowed a taxpayer to deduct mortgage interest payments on a loan that his brother obtained when the taxpayer's poor credit rating prevented him from obtaining a mortgage loan. The taxpayer's brother bought the house but allowed the taxpayer and his wife to live there on the condition that they make the mortgage payments directly to the bank.The IRS disallowed the taxpayer's deduction for the mortgage interest on the grounds that he was not liable for the mortgage debt; his brother was. However, the Tax Court allowed the deduction, holding that the taxpayer was the equitable owner of the home and that he was legally obligated to his brother to pay off the mortgage. http://www.taxact.com/tax-tips/index.asp?tid=463 Thu, 25 Oct 2007 00:00:00 GMT 463 Interest on debt secured by a residence other than your principal or second home may still be deductible, if you use the proceeds for investment or business purposes; see 15.12. http://www.taxact.com/tax-tips/index.asp?tid=462 Wed, 24 Oct 2007 00:00:00 GMT 462 Interest is deductible on up to $1 million of home acquisition loans taken out after October 13, 1987 ($500,000 limit if married filing separately). Mortgage loans taken out before October 14, 1987, are not subject to the $1,000,000 (or $500,000) limit. However, outstanding loans from before October 14, 1987, reduce the $1 million (or $500,000) ceiling for post-October 13, 1987, loans. http://www.taxact.com/tax-tips/index.asp?tid=461 Tue, 23 Oct 2007 00:00:00 GMT 461 When planning substantial donations that may exceed the annual ceiling, make a projection of your income for at least five years. Although the carryover period of five years will probably absorb most excess donations, it is possible that the excess may be so large that it will not be completely absorbed during the year of the contribution and the five-year carryover period. It is also possible that your income may drop in the future so that you cannot adequately take advantage of the excess. http://www.taxact.com/tax-tips/index.asp?tid=460 Mon, 22 Oct 2007 00:00:00 GMT 460 If you made charitable contributions subject to several deduction ceilings, the deductions are applied against adjusted gross income in the specific order shown under Applying the Deduction Ceilings in 14.17. http://www.taxact.com/tax-tips/index.asp?tid=459 Sun, 21 Oct 2007 00:00:00 GMT 459 Instead of the generally applicable ceiling for capital gain property of 30% of adjusted gross income, a higher deduction ceiling for qualified conservation contributions (14.10) made in 2006 and in 2007 may be available. The fair market value of a qualified conservation contribution to a 50% limit organization in 2006 and 2007 may be deducted to the extent that 50% of adjusted gross income exceeds the deduction allowed for all other charitable contributions. If the donor is a qualified farmer or rancher, a qualified conservation contribution is allowable to the extent that 100% of adjusted gross income exceeds the deduction allowed for all other charitable contributions. If the donated property had been used in agriculture or livestock production, the 100% limit applies only if there is a requirement that the property remain generally available for such production. Qualified contributions in excess of the 50% or 100% limit can be carried forward for up to 15 years. http://www.taxact.com/tax-tips/index.asp?tid=458 Sat, 20 Oct 2007 00:00:00 GMT 458 If you contribute cash and property in the same year, your deductions may be subject to different limits, such as 50% of adjusted gross income for the cash and 30% for the property. Follow the steps and Examples at the end of this section for applying the ceilings.If your donation exceeds the limits, you may carry over the excess for five years. http://www.taxact.com/tax-tips/index.asp?tid=457 Fri, 19 Oct 2007 00:00:00 GMT 457 When you contribute appreciated securities or real estate that you have held for more than a year to a church, college, or other organization treated as a 50% limit organization, your deduction for the property donation is limited to 30% of your adjusted gross income unless you elect the 50% ceiling as discussed at 14.19. http://www.taxact.com/tax-tips/index.asp?tid=456 Thu, 18 Oct 2007 00:00:00 GMT 456 Taxpayers age 70 or older may exclude from gross income in 2006 and 2007 direct transfers from an IRA to a 50% limit charitable organization (other than a supporting organization or donor advised fund), up to a limit of $100,000 each year; see 8.8. No charitable deduction is allowed for a direct transfer that is excludable from income. An excludable transfer is not taken into account in applying the deduction ceilings of 14.17 to other charitable contributions. http://www.taxact.com/tax-tips/index.asp?tid=455 Wed, 17 Oct 2007 00:00:00 GMT 455 A donation of cash to a church, college, or publicly supported charity is deductible up to 50% of your adjusted gross income; see the list of 50% limit organization in 14.17. http://www.taxact.com/tax-tips/index.asp?tid=454 Tue, 16 Oct 2007 00:00:00 GMT 454 To protect against the possibility of a valuation dispute that could lead to a penalty where you are claiming a deduction of at least $50,000 for a work of art, you may request a valuation from the IRS prior to the time you file. See 14.9 for obtaining the IRS valuation. http://www.taxact.com/tax-tips/index.asp?tid=453 Mon, 15 Oct 2007 00:00:00 GMT 453 The IRS considers 20% of the amount paid for the right to buy college or university athletic seating to be the fair market value of the right. You may deduct 80% (see 14.3). When your payment is $312.50 or more, you are considered to have made a contribution of at least $250 ($250 = 80% of $312.50), requiring a written acknowledgment from the charity. http://www.taxact.com/tax-tips/index.asp?tid=452 Sun, 14 Oct 2007 00:00:00 GMT 452 All charitable contributions of money after 2006, regardless of the amount, must be substantiated by a cancelled check, bank record, or acknowledgment from the charity showing the name of the organization and the date and amount of the contribution. Other written records do not qualify. http://www.taxact.com/tax-tips/index.asp?tid=451 Sat, 13 Oct 2007 00:00:00 GMT 451 A philanthropy may offer a life income plan (pooled income fund) to which you transfer property or money in return for a guaranteed income for life. After your death, the philanthropy has full control over the property. If you enter such a plan, ask the philanthropy for the amount of the deduction that you may claim for the value of your gift. http://www.taxact.com/tax-tips/index.asp?tid=450 Fri, 12 Oct 2007 00:00:00 GMT 450 If the charity sells or otherwise disposes of appraised property within three years after your gift, it must notify the IRS on Form 8282 and send you a copy. The sale might trigger the recapture of a deduction claimed for a contribution made after September 1, 2006; see the Law Alert in 14.6. Reporting on Form 8282 is not required by the charity if in Part II, Section B of Form 8283 you indicated that the appraised value of the item was not more than $500. Similar items such as a collection of books by the same author, stereo components, or place settings of silverware may be treated as one item. Reporting is also not required for donated property that the organization uses or distributes without consideration, if this use furthers the organization's tax-exempt function or purpose. http://www.taxact.com/tax-tips/index.asp?tid=449 Thu, 11 Oct 2007 00:00:00 GMT 449 No deduction is allowed for giving a charitable organization money with the understanding that it will be used to pay premiums on life insurance, annuities, or endowment contracts for your benefit or that of a beneficiary designated by you. http://www.taxact.com/tax-tips/index.asp?tid=448 Wed, 10 Oct 2007 00:00:00 GMT 448 Historic building faade easements. A donation after July 25, 2006, of a faade easement with respect to a building in a registered historic district, other than one listed in the National Register, is allowed only if the easement preserves the entire exterior, including the space above as well as the front, rear, and sides of the building. The easement must bar exterior changes inconsistent with the historical character of the building. A written agreement between the donor and the donee must certify that the donee is a qualifying historic preservation organization with the resources and commitment to enforce the easement.For contributions after 2006, the donor must attach to his or her tax return a qualified appraisal of the easement, photographs of the building exterior, and a description of all zoning laws and similar restrictions on development.If a deduction of over $10,000 is claimed for a faade easement donated on or after February 13, 2007, a $500 fee must be included with the donor's return or no deduction will be allowed.Reduction for prior rehabilitation credit. The deduction for a historic building easement donated after August 17, 2006, must be reduced if a rehabilitation tax credit (31.8) was claimed for the building in the five years preceding the donation. http://www.taxact.com/tax-tips/index.asp?tid=447 Tue, 9 Oct 2007 00:00:00 GMT 447 To raise funds, a charitable organization may ask contributors who own vacation homes to donate use of the property, which the charity then auctions off to the public. Be warned that if you offer your home in this way you will not only be denied a charitable deduction for your generosity, but you may jeopardize your deduction for rental expenses. A deduction is not allowed for giving a charity the free use of your property. See the Example at the end of 14.10. http://www.taxact.com/tax-tips/index.asp?tid=446 Mon, 8 Oct 2007 00:00:00 GMT 446 If a fractional interest in art or other tangible personal property (14.6) is donated after August 17, 2006, and the charity does not receive complete ownership of the item within 10 years of the initial contribution, or, if earlier, the death of the donor, all prior charitable deductions for the property will have to be recaptured, and interest charges plus a 10% penalty will be imposed. http://www.taxact.com/tax-tips/index.asp?tid=445 Sun, 7 Oct 2007 00:00:00 GMT 445 If you claim a deduction for art of $20,000 or more, you must attach a copy of a signed qualifying appraisal to Form 8283 and file it with your return; see 14.12 for further details. http://www.taxact.com/tax-tips/index.asp?tid=444 Sat, 6 Oct 2007 00:00:00 GMT 444 If you are the artist, your deduction is limited to cost regardless of how long you held the art work or to what use the charity puts it. In the case of a painting, the deduction would be the lower of the cost for canvas and paints and the fair market value. http://www.taxact.com/tax-tips/index.asp?tid=443 Fri, 5 Oct 2007 00:00:00 GMT 443 If you donate used clothing, furniture, or household appliances, deduct their fair market value, which is usually much less than your original cost. Prices paid in thrift shops for similar items are an indication of fair market value.For contributions made after August 17, 2006, of used clothing or household items (furniture or furnishings, linens, appliances, or electronics, but not antiques, art, or jewelry), a deduction is barred unless the item is in good used condition or better. In addition, Congress wants the IRS to write regulations denying a deduction for clothing or household items that have minimal value. If an item is valued at over $500 in a qualified appraisal that is attached to the donor's return, a deduction is allowed even if the item is not in good used condition or better. http://www.taxact.com/tax-tips/index.asp?tid=442 Thu, 4 Oct 2007 00:00:00 GMT 442 If you donate appreciated tangible personal property held long term after September 1, 2006, for which you claim a deduction exceeding $5,000, and it is sold by the charity by the end of the year of the contribution, the deduction is limited to your cost basis (and not fair market value) unless the charity makes a written certification to the IRS and gives you a copy. The certification, signed by an officer of the charity under penalty of perjury, must either explain how the charity's use of the property furthered its tax-exempt purpose or function, or state that a related use of the property was intended at the time of the donation but it became impossible or unfeasible to implement such intent.If you deduct fair market value for the property and the charity sells the property after the year of the contribution but within three years of the contribution, and the charity does not provide the above certification, you must recapture the benefit of the previously claimed deduction. In the year of the sale, you must report as ordinary income the excess of the deduction over your cost basis for the property at the time of the donation. http://www.taxact.com/tax-tips/index.asp?tid=441 Wed, 3 Oct 2007 00:00:00 GMT 441 When you donate appreciated collectibles and artwork held long term, you get a full deduction for the fair market value of the property if the items are used in connection with the charity's main activity or tax-exempt purpose. However, a deduction for fair market value is not available for certain contributions of taxidermy property; see the Law Alert below.If the charity sells your property, your deduction is limited to your basis in the property (what you paid for it, rather than its appreciated value). Protect a deduction for fair market value by obtaining a letter from the charity stating that it intends to use your gift in connection with its tax-exempt purposes. http://www.taxact.com/tax-tips/index.asp?tid=440 Tue, 2 Oct 2007 00:00:00 GMT 440 A fee paid for an appraisal of donated real estate or art is not deductible as a charitable contribution. It may be claimed only as a miscellaneous itemized deduction subject to the 2% floor (see 19.1). http://www.taxact.com/tax-tips/index.asp?tid=439 Mon, 1 Oct 2007 00:00:00 GMT 439 In this chapter, property held long term is property held more than one year by the donor. http://www.taxact.com/tax-tips/index.asp?tid=438 Sun, 30 Sep 2007 00:00:00 GMT 438 If you receive payments from a state agency to reimburse you for the costs of caring for a foster child in your home, and you can show that your costs of caring for the child exceed the reimbursements, the excess is deductible as a charitable contribution. Keep detailed records to substantiate your support payments. http://www.taxact.com/tax-tips/index.asp?tid=437 Sat, 29 Sep 2007 00:00:00 GMT 437 You may rely on a written estimate from the organization of the value of any benefits given to you unless it seems unreasonable. Although the value of benefits received generally reduces your deductible contribution, certain token items and membership benefits do not reduce the amount of your deduction. http://www.taxact.com/tax-tips/index.asp?tid=436 Fri, 28 Sep 2007 00:00:00 GMT 436 You may not deduct the cost of raffle tickets, bingo games, or tickets for other types of lotteries organized by charities. http://www.taxact.com/tax-tips/index.asp?tid=435 Thu, 27 Sep 2007 00:00:00 GMT 435 Except for certain token benefits and memberships that are disregarded for tax purposes, you may not deduct a contribution to a qualified charity to the extent that you receive goods, services, or financial benefits in exchange; see 14.3.The Tax Court and Ninth Circuit Court of Appeals agree with the IRS that you may not deduct tuition payments to a religious school for the education of your children if secular courses that lead to a recognized degree are provided, unless the payments exceed the usual tuition charged for a secular education in your area.Fees paid to a tax-exempt rest home in which you live, or to a hospital for the care of a particular patient, are not deductible if any benefit is received from the contribution. A gift to a retirement home, over and above monthly fees, is not deductible if your accommodations are dependent on the size of your gift. http://www.taxact.com/tax-tips/index.asp?tid=434 Wed, 26 Sep 2007 00:00:00 GMT 434 You may deduct donations to domestic organizations that distribute funds to charities in foreign countries, as long as the U.S. organization controls the distribution of the funds overseas. An outright contribution to a foreign charitable organization is not deductible. Some exceptions to this ban are provided by international treaties. For example, if you have income from Canadian, Mexican, or Israeli sources, contributions to certain organizations in those countries are deductible subject to limitations. For details, see IRS Publication 526. http://www.taxact.com/tax-tips/index.asp?tid=433 Tue, 25 Sep 2007 00:00:00 GMT 433 You get a tax deduction for the full market value when you donate appreciated securities traded on an established securities market that you have held more than one year. In addition, you also avoid paying capital gains tax on the securities' appreciation. http://www.taxact.com/tax-tips/index.asp?tid=432 Mon, 24 Sep 2007 00:00:00 GMT 432 Taxpayers age 70 or older may exclude from gross income in 2006 and 2007 direct transfers from an IRA to a 50% limit charitable organization (other than a supporting organization or donor advised fund), up to a limit of $100,000 each year; see 8.8. No charitable deduction is allowed for a direct transfer that is excludable from income. An excludable transfer is not taken into account in applying the deduction ceilings of 14.17 to other charitable contributions. http://www.taxact.com/tax-tips/index.asp?tid=431 Sun, 23 Sep 2007 00:00:00 GMT 431 Starting in 2006, the required reduction to overall itemized deductions is being phased out. For 2006 and 2007, the reduction is only two-thirds of the reduction that was required for 2005. For 2008 and 2009, the reduction will be only one-third of the otherwise required reduction. Starting in 2010, the reduction rules will no longer apply. http://www.taxact.com/tax-tips/index.asp?tid=430 Sat, 22 Sep 2007 00:00:00 GMT 430 As the end of the year approaches, check your records for payments of deductible itemized expenses. If these payments are slightly less than the allowable standard deduction for the year, making a year-end payment of a deductible expense that you would otherwise pay in the following year could allow you to itemize. http://www.taxact.com/tax-tips/index.asp?tid=429 Fri, 21 Sep 2007 00:00:00 GMT 429 For 2006, an individual who may be claimed as a dependent may add $300 to earned income in figuring the allowable standard deduction; see the worksheets in 13.5. http://www.taxact.com/tax-tips/index.asp?tid=428 Thu, 20 Sep 2007 00:00:00 GMT 428 The reduced standard deduction rules apply to you if you may be claimed as a dependent on another tax return, such as by your parents. If you can be claimed as a dependent under the rules at 21.1, it does not matter if you are actually claimed as a dependent. http://www.taxact.com/tax-tips/index.asp?tid=427 Wed, 19 Sep 2007 00:00:00 GMT 427 An additional standard deduction is allowed to a person who is completely blind as of December 31, 2006. You also qualify if you are partially blind and attach a letter certified by your doctor stating that you cannot see better than 20/200 in your better eye with lenses or that your field of vision is 20 degrees or less. Keep a copy of this letter. If the certification states that your vision will never improve beyond these limits, you will not have to file a new certification in later years; you will only have to attach a statement referring to the earlier certification. http://www.taxact.com/tax-tips/index.asp?tid=426 Tue, 18 Sep 2007 00:00:00 GMT 426 If you filed your return using the standard deduction and want to change to itemized deductions, or you itemized and want to change to the standard deduction, you may do so within the three-year period allowed for amending your return. If you are married and filing separately, each of you must consent to and make the same change; you both must either itemize or claim the standard deduction. http://www.taxact.com/tax-tips/index.asp?tid=425 Mon, 17 Sep 2007 00:00:00 GMT 425 Report your Archer MSA contribution on Form 8853 and follow the instructions to figure any limitations on the amount you may deduct and for the rules on handling excess contributions. Form 8853 must be attached to your Form 1040. http://www.taxact.com/tax-tips/index.asp?tid=424 Sun, 16 Sep 2007 00:00:00 GMT 424 You have until April 16, 2007, to make a deductible contribution to an Archer MSA for 2006. http://www.taxact.com/tax-tips/index.asp?tid=423 Sat, 15 Sep 2007 00:00:00 GMT 423 If you and your spouse are covered under a high-deductible health plan with family coverage, employer contributions to either of your Archer MSAs bar both of you from making Archer MSA contributions for that year. If you each have self-only coverage under a high-deductible health plan, employer contributions to one of your Archer MSAs do not prevent the other from making MSA contributions. http://www.taxact.com/tax-tips/index.asp?tid=422 Fri, 14 Sep 2007 00:00:00 GMT 422 A state could require health plans to provide benefits without regard to a deductible or with a deductible below the minimum annual deductible for an HDHP ($1,050 for a self-only plan and $2,100 for family coverage in 2006). The IRS provided relief to individuals in these states while giving the states until January 1, 2006, to modify their laws to conform to HDHP requirements. Health plans that failed to qualify as HDHPs solely because of state laws in effect at the beginning of 2004 were treated as HDHPs by the IRS for months before 2006.A further extension was provided to non-calendar-year health plans that complied with state deductible requirements as of their most recent plan renewal date before 2006. The IRS treated such non-calendar-year plans as HDHPs until their renewal date in 2006. http://www.taxact.com/tax-tips/index.asp?tid=421 Thu, 13 Sep 2007 00:00:00 GMT 421 Report your HSA contributions on Form 8889 and follow the instructions to figure any limitations on the amount you may deduct. Also use Form 8889 to report an HSA distribution and figure the amount, if any, that is taxable. Form 8889 must be attached to your Form 1040. http://www.taxact.com/tax-tips/index.asp?tid=420 Wed, 12 Sep 2007 00:00:00 GMT 420 To encourage or facilitate an employee's move, an employer may reimburse the employee for a loss incurred on the sale of his or her home. The IRS taxes such reimbursements as pay. http://www.taxact.com/tax-tips/index.asp?tid=419 Tue, 11 Sep 2007 00:00:00 GMT 419 For purposes of the 39-week test, full-time status is determined by the customary practices of your occupation in the area. If work is seasonal, off-season weeks count as work weeks if the off-season period is less than six months and you have an employment agreement covering the off-season. http://www.taxact.com/tax-tips/index.asp?tid=418 Mon, 10 Sep 2007 00:00:00 GMT 418 If you lose your job for reasons other than your willful misconduct, the 39-week requirement is waived. Should you resign or lose your job for willful misconduct, a part-time job will not satisfy the 39-week test. The time test is not waived because you reach mandatory retirement age first where this retirement was anticipated. http://www.taxact.com/tax-tips/index.asp?tid=417 Sun, 9 Sep 2007 00:00:00 GMT 417 Use the following worksheet to see if your move satisfies the 50-mile test. Find the shortest of the most commonly traveled routes in measuring the distances.Distance betweenIn miles1. Old residenceand new job location_______2. Old residence andold job location_______3. Difference (must beat least 50 miles)_______ http://www.taxact.com/tax-tips/index.asp?tid=416 Sat, 8 Sep 2007 00:00:00 GMT 416 It is not necessary for you and members of your household to travel together, or at the same time, to claim a deduction for the expenses incurred by each family member. http://www.taxact.com/tax-tips/index.asp?tid=415 Fri, 7 Sep 2007 00:00:00 GMT 415 The 100% health insurance deduction may not be claimed for any month during 2006 that you were eligible to participate in an employer's subsidized health plan, including a plan of your spouse's employer. If the deduction would be barred for any month because of such eligibility and you have long-term care coverage that is not employer subsidized, you may claim the 100% deduction for the portion of the long-term-care premiums that is deductible for your age, as shown at 17.15. http://www.taxact.com/tax-tips/index.asp?tid=414 Thu, 6 Sep 2007 00:00:00 GMT 414 If a government agency or financial institution canceled your debt after August 24, 2005, and before January 1, 2007, the debt discharge is excludable from your income provided your principal residence was within the core Hurricane Katrina disaster area on August 25, 2005. The exclusion also applies if you lived within the Hurricane Katrina disaster area but outside the core disaster area on August 25, 2005, if you suffered economic loss because of Hurricane Katrina. The exclusion does not apply to any indebtedness to the extent that real property constituting security for such indebtedness is located outside the Hurricane Katrina disaster area. See IRS Publication 4492 for futher details. http://www.taxact.com/tax-tips/index.asp?tid=413 Wed, 5 Sep 2007 00:00:00 GMT 413 If the cash received on the surrender of a policy exceeds the premiums paid less dividends received, the excess is taxed as ordinary income (not capital gain). If you take, instead, a paid-up policy, you may avoid tax; see 6.12. You get no deduction if there is a loss on the surrender of a policy.Tax may be avoided by a terminally ill individual on the surrender of a policy under an accelerated death benefit clause or on a sale of the policy to a viatical settlement company; see 17.16. http://www.taxact.com/tax-tips/index.asp?tid=412 Tue, 4 Sep 2007 00:00:00 GMT 412 A person who is terminally ill may withdraw without tax life insurance proceeds to pay medical bills and other living expenses. For policies lacking an accelerated benefits clause, it is possible to sell a life insurance policy without incurring tax to a viatical settlement company; see 17.16. http://www.taxact.com/tax-tips/index.asp?tid=411 Mon, 3 Sep 2007 00:00:00 GMT 411 Beneficiaries of trusts and estates must report items consistently with the Schedule K-1 provided by the trust or estate. If an item is treated inconsistently and a statement identifying the inconsistency is not attached to the return, the IRS may make a summary assessment for additional tax without issuing a deficiency notice. http://www.taxact.com/tax-tips/index.asp?tid=410 Sun, 2 Sep 2007 00:00:00 GMT 410 Deductible losses may not exceed your basis in S corporation stock and loans to the corporation. If losses exceed basis, the excess loss is carried over and becomes deductible when you invest or lend an equivalent amount of money to the corporation. This rule may allow for timing a loss deduction. In a year in which you want to deduct the loss, you may contribute capital to the corporation. If a carryover loss exists when an S election terminates, a limited loss deduction may be allowed. http://www.taxact.com/tax-tips/index.asp?tid=409 Sat, 1 Sep 2007 00:00:00 GMT 409 The American Jobs Creation Act of 2004 increased the maximum number of S corporation shareholders to 100 (from 75) and allowed family members to elect to treat all members of the family as one shareholder for purposes of the limit. The new rules apply to S corporation taxable years beginning after December 1, 2004, but the IRS has been slow in issuing guidance. When this book went to press, the IRS was in the process of preparing guidelines on the family election. In the interim, taxpayers may rely on the rules in Notice 2005-91. http://www.taxact.com/tax-tips/index.asp?tid=408 Fri, 31 Aug 2007 00:00:00 GMT 408 Neither the IRS nor the Department of Justice is required to offer consistent settlements to audited partners so long as they do not discriminate for arbitrary reasons. http://www.taxact.com/tax-tips/index.asp?tid=407 Thu, 30 Aug 2007 00:00:00 GMT 407 The rules subjecting partners to tax on pre-contribution gain when they contribute property and the partnership makes a later distribution are complicated and hedged with restrictions. Consult a tax advisor before making transfers of appreciated property to, or taking distributions from, a partnership. http://www.taxact.com/tax-tips/index.asp?tid=406 Wed, 29 Aug 2007 00:00:00 GMT 406 The partnership, not the individual partners, makes elections affecting the computation of partnership income such as the election to defer involuntary conversion gains, to amortize organization and start-up costs, and to choose depreciation methods, including first-year expensing. An election to claim a foreign tax credit is made by the partners. http://www.taxact.com/tax-tips/index.asp?tid=405 Tue, 28 Aug 2007 00:00:00 GMT 405 If you bought property on credit and the seller cancels or reduces your purchase-related debt, this is a price adjustment, not a taxable cancellation of debt. http://www.taxact.com/tax-tips/index.asp?tid=404 Mon, 27 Aug 2007 00:00:00 GMT 404 Special rules apply to debt cancellations under bankruptcy law. A debt cancelled in a bankruptcy case is not included in your income, but certain losses, credits, and basis of property must be reduced by the amount of excluded income. http://www.taxact.com/tax-tips/index.asp?tid=403 Sun, 26 Aug 2007 00:00:00 GMT 403 Insurance can be purchased to cover a portion of credit card debt in the event you become unemployed or disabled, or you die. The Tax Court held that insurance payments of an unemployed credit card holder's debt were a taxable cancellation of debt to the extent the payments exceeded the premiums paid. http://www.taxact.com/tax-tips/index.asp?tid=402 Sat, 25 Aug 2007 00:00:00 GMT 402 Student loans cancelled by educational organizations may be tax free if the loan was made under a program that encourages students to provide public service by working in occupations or areas with unmet needs. The services must be under the direction of a governmental unit or tax-exempt charity. Services to the lender organization do not qualify. http://www.taxact.com/tax-tips/index.asp?tid=401 Fri, 24 Aug 2007 00:00:00 GMT 401 If your damages are tax free, you may not deduct your litigation costs. If your damages are taxable, including the contingency fee portion of a taxable recovery (see 11.7), you may be able to deduct your legal fees. A business expense deduction may be claimed on Schedule C for legal fees to recover taxable business income. The American Jobs Creation Act of 2004 allows an above-the-line deduction (directly from gross income) for legal fees in employment discrimination suits, certain other unlawful discrimination cases and federal False Claims Act cases paid after October 22, 2004, with respect to settlements or judgments occurring after that date. The above-the-line deduction is claimed on Line 36 of Form 1040 (see 12.2).Legal fees not eligible for the above-the-line deduction or Schedule C deduction may be claimed only as miscellaneous itemized deductions on Schedule A subject to the 2% adjusted gross income floor and the limitation on itemized deductions for higher-income taxpayers. The miscellaneous itemized deduction is not allowed at all for alternative minimum tax (AMT) purposes. http://www.taxact.com/tax-tips/index.asp?tid=400 Thu, 23 Aug 2007 00:00:00 GMT 400 If your taxable income was a negative amount in the year in which the recovered item was deducted, you reduce the recovery includible in income by the negative amount. For example, if the taxable recovery would be $1,700 but you had a negative taxable income of $500 for the year the deduction was claimed, only $1,200 is taxable. http://www.taxact.com/tax-tips/index.asp?tid=399 Wed, 22 Aug 2007 00:00:00 GMT 399 A state and local tax refund received in 2005 is taxable only if you claimed the tax as an itemized deduction, and only to the extent that your itemized deductions in that year exceeded the standard deduction you could have claimed.To help you figure the taxable portion of 2005 itemized deductions recovered in 2006, 2005 standard deduction amounts are shown on the next page. http://www.taxact.com/tax-tips/index.asp?tid=398 Tue, 21 Aug 2007 00:00:00 GMT 398 You may have to file a gift tax return if your gifts to an individual within the year exceed the annual gift tax exclusion, which for 2006 was $12,000; see 39.2. http://www.taxact.com/tax-tips/index.asp?tid=397 Mon, 20 Aug 2007 00:00:00 GMT 397 The federal appeals court for the Third Circuit (New Jersey, Pennsylvania, and Delaware) held that the settlement by an Atlantic City casino of a gambler's $3.4 million debt for $500,000 was not taxable. The debt was not enforceable under New Jersey law because the casino did not comply with state regulations on issuance of credit. Furthermore, the gambling chips were not property securing the debt; they had no economic value outside the casino. http://www.taxact.com/tax-tips/index.asp?tid=396 Sun, 19 Aug 2007 00:00:00 GMT 396 Courts have agreed with the IRS that a lump sum received for assigning the rights to future state lottery payments is taxed as ordinary income, not capital gain. The right to receive annual lottery payments is not a capital asset. http://www.taxact.com/tax-tips/index.asp?tid=395 Sat, 18 Aug 2007 00:00:00 GMT 395 Gambling losses are deductible as miscellaneous deductions up to the amount of your gambling winnings. Lottery winnings paid in installments qualify as such gambling winnings. If you receive lottery winnings in 2006, for instance, you may deduct any gambling losses incurred in 2006 up to the amount of that installment. Lottery winnings paid in installments do not lose their characteristic as gambling winnings. http://www.taxact.com/tax-tips/index.asp?tid=394 Fri, 17 Aug 2007 00:00:00 GMT 394 When a beneficiary receiving a lump-sum distribution because of an employee's death reports the distribution using the special averaging method (Chapter 7), the taxable amount of the distribution must be reduced by the estate taxes attributable to the distribution. See the Form 4972 instructions when calculating the tax under averaging. http://www.taxact.com/tax-tips/index.asp?tid=393 Thu, 16 Aug 2007 00:00:00 GMT 393 Losses disallowed by at-risk rules are carried over and may be deductible in a later year. http://www.taxact.com/tax-tips/index.asp?tid=392 Wed, 15 Aug 2007 00:00:00 GMT 392 Even if you are personally liable for a debt, you may not be considered at risk if the lender has an interest in the activity other than as a creditor; see 10.18. http://www.taxact.com/tax-tips/index.asp?tid=391 Tue, 14 Aug 2007 00:00:00 GMT 391 If you have invested an amount for which you are not at risk, such as a nonrecourse loan, you generally must file Form 6198 to figure a deductible loss. However, nonrecourse financing for real estate that secures the loan is treated as an at-risk investment in most cases; see 10.18. http://www.taxact.com/tax-tips/index.asp?tid=390 Mon, 13 Aug 2007 00:00:00 GMT 390 The purpose of at-risk rules is to keep you from deducting losses from investments in which you have little cash invested and no personal liability for debts. http://www.taxact.com/tax-tips/index.asp?tid=389 Sun, 12 Aug 2007 00:00:00 GMT 389 A stockholder may be treated as materially participating in his company's business; see the tests in 10.15. http://www.taxact.com/tax-tips/index.asp?tid=388 Sat, 11 Aug 2007 00:00:00 GMT 388 If you sell your passive activity interest at a profit and have suspended losses, you may deduct a percentage of the losses each year during the installment period; see 10.13. http://www.taxact.com/tax-tips/index.asp?tid=387 Fri, 10 Aug 2007 00:00:00 GMT 387 Capital losses incurred on a disposition of a passive interest are also subject to the general $3,000 loss limitation ($1,500 if married filing separately) discussed at 5.4. http://www.taxact.com/tax-tips/index.asp?tid=386 Thu, 9 Aug 2007 00:00:00 GMT 386 To deduct suspended passive losses on a disposition of part of an activity, the part disposed of must constitute substantially all of the activity; see 10.13. http://www.taxact.com/tax-tips/index.asp?tid=385 Wed, 8 Aug 2007 00:00:00 GMT 385 A PTP is a partnership whose interests are traded on established securities exchanges or are readily tradable in secondary markets. PTPs that are not treated as corporations for tax purposes are subject to special rules that allow losses to be used only to offset income from the same PTP. See the instructions to Form 8582. http://www.taxact.com/tax-tips/index.asp?tid=384 Tue, 7 Aug 2007 00:00:00 GMT 384 A working interest in an oil or gas well is exempt from the passive activity restrictions if your liability is not limited. The following forms of loss protection are disregarded and, thus, are not treated as limiting your liability: protection against loss by an indemnification agreement; a stop-loss agreement; insurance; or any similar arrangement or combination of agreements. http://www.taxact.com/tax-tips/index.asp?tid=383 Mon, 6 Aug 2007 00:00:00 GMT 383 You may not generate passive income by renting property to a business in which you materially participate. See Self-rental rule: Renting to your business on this page. http://www.taxact.com/tax-tips/index.asp?tid=382 Sun, 5 Aug 2007 00:00:00 GMT 382 As discussed at 10.16, gain on the sale of property used in a passive activity may be recharacterized as nonpassive income if the property was formerly used in a nonpassive activity. http://www.taxact.com/tax-tips/index.asp?tid=381 Sat, 4 Aug 2007 00:00:00 GMT 381 You cannot deduct passive losses from portfolio income. The tax law broadly defines portfolio income to include nonbusiness types of income including interest, dividends, and profits on the sale of investment property. http://www.taxact.com/tax-tips/index.asp?tid=380 Fri, 3 Aug 2007 00:00:00 GMT 380 Retired or disabled farmers are treated as materially participating in a farming activity if they materially participated for five of the eight years preceding their retirement or disability. A surviving spouse is also treated as materially participating in a farming activity if the real property used in the activity meets the estate tax rules for special valuation of farm property passed from a qualified decedent and the surviving spouse actively manages the farm. http://www.taxact.com/tax-tips/index.asp?tid=379 Thu, 2 Aug 2007 00:00:00 GMT 379 The IRS will not recognize time spent as an investor as participation unless you can show you are involved in daily operations or management of the activity. According to the IRS, this requires you to be at the business site on a regular basis. Even if you do appear daily, the IRS may ignore such evidence if there is an on-site manager or you have full-time business obligations at another site. Activity of an investor includes the studying and reviewing of financial reports for your own use that are considered unrelated to management decisions. If you invest in a business that is out of state or a distance from your home, you may also find it difficult to prove material participation. http://www.taxact.com/tax-tips/index.asp?tid=378 Wed, 1 Aug 2007 00:00:00 GMT 378 Material participation must be determined on an annual basis. Show proof of your participation by keeping an appointment book, calendar, or log of the days and time spent in the operation. If you want to treat contacts by phone as material activity, keep a log of phone calls showing the time and purpose of the calls. http://www.taxact.com/tax-tips/index.asp?tid=377 Tue, 31 Jul 2007 00:00:00 GMT 377 Once you treat activities separately or group them together as a single activity, the IRS generally requires you to continue the same treatment in later taxable years. You can regroup activities only if the original treatment was clearly inappropriate or has become clearly inappropriate because of a material change in circumstances. http://www.taxact.com/tax-tips/index.asp?tid=376 Mon, 30 Jul 2007 00:00:00 GMT 376 Proving professional status and material participation allows you to avoid passive loss limitations. You may improve your ability to meet the material participation tests in 10.6 by aggregating your rental real estate activities. However, you may not want to aggregate activities if you have passive losses from non-real estate activities and have rental income from an operation that, if treated as passive income, could be offset by the losses.Also be aware that if you elect to group all of your rental real estate activities as one activity and later sell one of the rental properties, you will probably be unable to deduct suspended losses from that property because of the rule that requires substantially all of your interest in an activity (here, the combined activity) to be disposed of in order to deduct suspended losses; see 10.13. http://www.taxact.com/tax-tips/index.asp?tid=375 Sun, 29 Jul 2007 00:00:00 GMT 375 To take advantage of the $25,000 loan allowance, make sure you have proof of active management, such as approving leases and repairs. http://www.taxact.com/tax-tips/index.asp?tid=374 Sat, 28 Jul 2007 00:00:00 GMT 374 The rental loss allowance is phased out when your modified adjusted gross income is over $100,000. For every dollar of income over $100,000, the loss allowance is reduced by 50 cents. When your modified adjusted gross income reaches $150,000, the allowance is completely phased out. An explanation of modified adjusted gross income and an example of how the phaseout works is under the heading Phaseout of the allowance on this page.If modified AGI is-Loss allowance is-Up to $100,000$25,000110,000 20,000120,00015,000130,000 10,000140,0005,000150,000 or more0 http://www.taxact.com/tax-tips/index.asp?tid=373 Fri, 27 Jul 2007 00:00:00 GMT 373 Renting a personal residence is not treated as a passive rental activity if you personally use the home for more than the greater of (1) 14 days or (2) 10% of the days the home is rented for a fair market rental amount; see 9.7 On Schedule E, you may claim a full deduction for the rental portion of real estate taxes and mortgage interest, assuming the home is a principal residence or qualifying second home under the mortgage interest rules (15.1).See 9.9 for limitations on deductions of other rental expenses. http://www.taxact.com/tax-tips/index.asp?tid=372 Thu, 26 Jul 2007 00:00:00 GMT 372 If you rent out a vacation unit for an average rental period of seven days or less at a loss, the loss is treated as a business loss deductible from nonpassive income if you meet the material participation tests at 10.6. If you do not materially participate, the loss is treated as a passive loss, deductible only from passive income. The loss does not qualify for the up-to-$25,000 rental loss allowance discussed in 10.2 because the property is not treated as rental property. http://www.taxact.com/tax-tips/index.asp?tid=371 Wed, 25 Jul 2007 00:00:00 GMT 371 As an independent oil or gas producer, or royalty owner, you do not have to treat a portion of your depletion deduction as a preference item or adjustment for AMT purposes; see Chapter 23. http://www.taxact.com/tax-tips/index.asp?tid=370 Tue, 24 Jul 2007 00:00:00 GMT 370 Prepayments of drilling expenses are deductible by tax-shelter investors only if the well is spudded within 90 days after the close of the taxable year in which the prepayment was made, and the deduction is limited to the original amount of the investment. http://www.taxact.com/tax-tips/index.asp?tid=369 Mon, 23 Jul 2007 00:00:00 GMT 369 Authors and artists with expenses exceeding income may be barred by the IRS from claiming loss deductions; see 40.10. http://www.taxact.com/tax-tips/index.asp?tid=368 Sun, 22 Jul 2007 00:00:00 GMT 368 Certain working oil and gas interests are exempt from the passive activity loss restrictions; see 10.10. http://www.taxact.com/tax-tips/index.asp?tid=367 Sat, 21 Jul 2007 00:00:00 GMT 367 A profit motive is presumed if you can show a profit for at least three of the last five years you engaged in rental activities. The IRS, however, may rebut this presumption. For a way to fight this rebuttal, consult 40.10. http://www.taxact.com/tax-tips/index.asp?tid=366 Fri, 20 Jul 2007 00:00:00 GMT 366 The IRS position on allocating mortgage interest and real estate taxes to rental income is not as favorable as the position adopted by the Tax Court and several appeals courts; see Example 2 on the right. http://www.taxact.com/tax-tips/index.asp?tid=365 Thu, 19 Jul 2007 00:00:00 GMT 365 If your deductions for operating expenses and depreciation are limited by the personal-use rules, the disallowed amounts may be carried over to the following year. http://www.taxact.com/tax-tips/index.asp?tid=364 Wed, 18 Jul 2007 00:00:00 GMT 364 Pool arrangements have been devised to avoid the loss restriction by attempting to increase the days the home is held for a fair rental value. They have not been successful. Courts have ruled that only days on which a home is actually rented count as fair rental days, not days of availability through the rental pool. http://www.taxact.com/tax-tips/index.asp?tid=363 Tue, 17 Jul 2007 00:00:00 GMT 363 As an investor, you can help finance the purchase of a principal residence for a family member or other individual. The rental income you receive for your ownership share in the property may be offset by deductions for your share of the mortgage interest, taxes, and operating expenses you pay under the terms of the agreement, as well as depreciation deductions for your percentage share. Rental losses are subject to the passive loss restrictions in Chapter 10.The other co-owner living in the house may claim itemized deductions for payment of his or her share of the mortgage interest and taxes. http://www.taxact.com/tax-tips/index.asp?tid=362 Mon, 16 Jul 2007 00:00:00 GMT 362 Have an appraiser estimate the fair market value of the house when it is rented. The appraisal will help support your basis for depreciation or a loss deduction on a sale if your return is examined. http://www.taxact.com/tax-tips/index.asp?tid=361 Sun, 15 Jul 2007 00:00:00 GMT 361 A rental loss was denied to an owner of a two-story, four-bedroom house when he rented out two bedrooms to separate tenants after he lost his job. Although individual locks were placed on the doors of the rented bedrooms, the tenants and the owner shared access to the kitchen, bathroom, and other parts of the house. The Tax Court held that the rented rooms were not separate and distinct from the rest of the house that the owner used. The house was a single dwelling unit shared by the owner and tenants and under the personal-use rules at 9.7, the owner could not claim a rental loss. http://www.taxact.com/tax-tips/index.asp?tid=360 Sat, 14 Jul 2007 00:00:00 GMT 360 What if repairs and improvements are unconnected and not part of an overall improvement program? Assume you repair the floors of one story and improve another story by cutting new windows. You probably may deduct the cost of repairing the floors provided you have separate bills for the jobs. To safeguard the deduction, schedule the work at separate times so that the two jobs are not lumped together as an overall improvement program. http://www.taxact.com/tax-tips/index.asp?tid=359 Fri, 13 Jul 2007 00:00:00 GMT 359 The Tax Court allowed a co-tenant to deduct more than her proportionate share of real estate taxes. According to the court, the deduction test for real estate taxes is whether the payment satisfies a personal liability or protects a beneficial interest in the property. In the case of co-tenants, nonpayment of taxes by the other co-tenants could result in the property being lost or foreclosed. To prevent this, a co-tenant who pays the tax is protecting his or her beneficial interest and, therefore, is entitled to deduct the payment of the full tax, provided the payment is from his or her own funds. http://www.taxact.com/tax-tips/index.asp?tid=358 Thu, 12 Jul 2007 00:00:00 GMT 358 Distinguish advance rentals, which are income, from security deposits, which are not. Security deposits are amounts deposited with you solely as security for the tenant's performance of the terms of the lease, and as such are usually not taxed, particularly where local law treats security deposits as trust funds. If the tenant breaches the lease, you are entitled to apply the sum as rent, at which time you report it as income. If both you and your tenant agree that a security deposit is to be used as a final rent payment, it is advance rent. Include it in your income when you receive it. http://www.taxact.com/tax-tips/index.asp?tid=357 Wed, 11 Jul 2007 00:00:00 GMT 357 The Pension Protection Act of 2006 provides penalty exceptions for qualified reservists on active duty and certain public safety officers who separate from service at age 50 or older; see 7.15 for details. http://www.taxact.com/tax-tips/index.asp?tid=356 Tue, 10 Jul 2007 00:00:00 GMT 356 The 10% penalty on early withdrawals does not apply to qualified Hurricane Katrina, Rita, or Wilma distributions; see 7.30. http://www.taxact.com/tax-tips/index.asp?tid=355 Mon, 9 Jul 2007 00:00:00 GMT 355 Both of the favorable cost recovery rules discussed in 7.29 under Exceptions are complicated and you should consult your plan administrator to determine if the exceptions apply and how to make the required calculations. http://www.taxact.com/tax-tips/index.asp?tid=354 Sun, 8 Jul 2007 00:00:00 GMT 354 If your annuity starting date was in 2006, you must use the simplified method discussed in 7.27 to figure the taxable part of your 2006 payments, unless on the annuity starting date you were age 75 or older and your payments are guaranteed for at least five years. http://www.taxact.com/tax-tips/index.asp?tid=353 Sat, 7 Jul 2007 00:00:00 GMT 353 If you pay tax on a pension distribution and in the next year the plan determines that there was an overpayment, which you repay, the repayment may be deductible. If the repayment is $3,000 or less, it is deductible as a miscellaneous itemized deduction subject to the 2% floor (see 19.1), which may limit or eliminate the deduction. If the repayment exceeds $3,000, you may claim either a miscellaneous deduction not subject to the 2% floor, or if it would provide a lower tax for the year of repayment, a tax credit based on a recomputation of the prior year's tax; see 2.9. http://www.taxact.com/tax-tips/index.asp?tid=352 Fri, 6 Jul 2007 00:00:00 GMT 352 If no exception to the early withdrawal penalty applies, you compute the 10% penalty in Part I of Form 5329. The penalty is 5% instead of 10% if as of March 1, 1986, you were receiving payments under a specific schedule pursuant to your written election. Attach an explanation to Form 5329 if you are applying the 5% rate. http://www.taxact.com/tax-tips/index.asp?tid=351 Thu, 5 Jul 2007 00:00:00 GMT 351 The life expectancy tables for figuring your expected return are in IRS Publication 939. http://www.taxact.com/tax-tips/index.asp?tid=350 Wed, 4 Jul 2007 00:00:00 GMT 350 Payments on a complete surrender of the annuity contract or at maturity are taxable only to the extent they exceed your investment. http://www.taxact.com/tax-tips/index.asp?tid=349 Tue, 3 Jul 2007 00:00:00 GMT 349 If you can show severe financial hardship arising from a sudden illness or accident, or loss of property due to events beyond your control, and you are unable to obtain funds elsewhere, you may make a withdrawal from your employer's Section 457 plan. However, the need to buy a home or pay college expenses does not qualify as an unforeseeable emergency. http://www.taxact.com/tax-tips/index.asp?tid=348 Mon, 2 Jul 2007 00:00:00 GMT 348 The IRS has released proposed regulations that would eliminate the right of employees to make tax-free transfers of their accounts to vendors outside of the employer's 403(b) plan; see the e-Supplement for an update. http://www.taxact.com/tax-tips/index.asp?tid=347 Sun, 1 Jul 2007 00:00:00 GMT 347 A hardship distribution from a 401(k) plan is not eligible for rollover (7.7) to an IRA or an eligible employer plan. Your employer will not apply 20% withholding to the distribution, as mandatory withholding applies only to rollover-eligible distributions (7.7). http://www.taxact.com/tax-tips/index.asp?tid=346 Sat, 30 Jun 2007 00:00:00 GMT 346 To avoid discrimination problems an employer may set a lower limit for elective salary deferrals by highly compensated employees than the generally applicable ceiling.If, after contributions are made, the plan fails to meet the nondiscrimination tests, the excess contributions will either be returned to the highly compensated employees or kept in the plan but recharacterized as after-tax contributions. In either case, the excess contribution is taxable. Form 1099-R will indicate the excess contribution.Employers may avoid the nondiscrimination tests by meeting the SIMPLE plan contribution rules; see 7.17.Starting in 2008, employers who adopt qualifying automatic enrollment features for their 401(k) plans are treated as meeting the nondiscrimination tests. http://www.taxact.com/tax-tips/index.asp?tid=345 Fri, 29 Jun 2007 00:00:00 GMT 345 The Pension Protection Act of 2006 encourages employers to automatically enroll employees in a 401(k) plan. Unless employees affirmatively opt out, a specified percentage of their pay is contributed to the plan. Even though the employees do not make affirmative elections to contribute, such plans are qualified provided that the employees are given advance notice of their right either to receive cash or have the designated amount contributed by the employer to the plan.Starting in 2008, the new law grants employers protection from nondiscrimination restrictions if they adopt automatic enrollment plans that include mandatory matching or non-elective employer contributions. http://www.taxact.com/tax-tips/index.asp?tid=344 Thu, 28 Jun 2007 00:00:00 GMT 344 If you leave your company before your loan is paid off, the company will reduce your vested account balance by the outstanding debt and report the defaulted amount as a taxable distribution on Form 1099-R.For example, if your vested account balance is $100,000, and the outstanding loan is $20,000, your account balance is reduced to $80,000. If you elect to receive the balance, rather than choosing a direct rollover, $20,000 will be withheld (20% of the full $100,000) and you will receive only $60,000; see 7.8. However, the full $100,000 is treated as a taxable distribution. If you do not roll over (7.8) the entire $100,000 within 60 days, you will be taxed on the portion not rolled over, and possibly be subject to a 10% penalty if you were under age 591/2 at the time of the distribution (see 7.15).In other words, tax on the defaulted loan balance can be avoided by depositing that amount into a rollover IRA within 60 days of the date that the balance was treated as being in default. http://www.taxact.com/tax-tips/index.asp?tid=343 Wed, 27 Jun 2007 00:00:00 GMT 343 If you received a distribution before age 591/2, do not qualify for a penalty exception, and Code 1 is shown in Box 7 of your Form 1099-R, multiply the taxable distribution by 10% and enter that amount as the penalty on Line 60 of Form 1040; write no next to Line 60 to indicate that Form 5329 does not have to be filed. If you are subject to the penalty and Code 1 is not entered in Box 7 of Form 1099-R, you must file Form 5329.You may also have to file Form 5329 to claim a penalty exception. However, filing the form is not required if you qualify for the rollover exception or you qualify for another exception that is correctly coded in Box 7 of Form 1099-R. http://www.taxact.com/tax-tips/index.asp?tid=342 Tue, 26 Jun 2007 00:00:00 GMT 342 The substantially equal payments exception to the 10% early distribution penalty is generally revoked if qualifying payments are not received for at least five years. For example, you separate from service when you are age 57 and you begin to receive a series of qualifying substantially equal payments. When you are age 61, you stop the payments or modify the payment schedule so that it no longer qualifies. Unless the IRS permits an exception, the 10% penalty applies to the payments received before age 591/2 because the five-year test was not met. http://www.taxact.com/tax-tips/index.asp?tid=341 Mon, 25 Jun 2007 00:00:00 GMT 341 Drafting a QDRO involves technical details that legal counsel must carefully review. To ease the drafting burdens and reduce litigation over the effect of QDRO provisions, Congress passed a law requiring the IRS to provide sample language for inclusion in a QDRO that meets tax law requirements. The IRS sample language and a discussion of QDRO requirements is in IRS Notice 97-11. http://www.taxact.com/tax-tips/index.asp?tid=340 Sun, 24 Jun 2007 00:00:00 GMT 340 Your spouse must consent in writing to your waiver of a required annuity and the selection of a different type of distribution. A spouse's consent must be witnessed by a plan representative or notary public. An election to waive the qualified joint and survivor annuity may be made during the 90-day period ending on the annuity starting date. An election to waive the qualified pre-retirement survivor annuity may be made any time after the first day of the plan year in which you reach age 35. A waiver is revocable during the time permitted to make the election. http://www.taxact.com/tax-tips/index.asp?tid=339 Sat, 23 Jun 2007 00:00:00 GMT 339 If you receive a lump-sum distribution that includes appreciated employer securities, you may defer the tax on the net unrealized appreciation (NUA) in the securities. http://www.taxact.com/tax-tips/index.asp?tid=338 Fri, 22 Jun 2007 00:00:00 GMT 338 A taxpayer withdrew cash from his Keogh accounts and used most of the net distribution (after withholdings) to buy stock, which was then transferred to an IRA within 60 days of the withdrawal. He treated the entire distribution as a tax-free rollover but the IRS and Tax Court held it was taxable. The transfer of stock to the IRA was not a tax-free rollover; only the cash distribution itself could be rolled over. A negligence penalty was also imposed.A direct rollover from the Keogh accounts to an IRA would have been tax free; the stock could then have been purchased through the new IRA. http://www.taxact.com/tax-tips/index.asp?tid=337 Thu, 21 Jun 2007 00:00:00 GMT 337 The Pension Protection Act of 2006 allows a nonspouse beneficiary to make a trustee-to-trustee transfer of a distribution after 2006 to an IRA, provided the IRA is treated as an inherited IRA. Required minimum distributions from the inherited IRA must be received under the rules for nonspouse beneficiaries discussed in 8.14. http://www.taxact.com/tax-tips/index.asp?tid=336 Wed, 20 Jun 2007 00:00:00 GMT 336 A rollover from an employer plan to a traditional IRA is irrevocable, according to the IRS. At the time of the rollover, you must elect in writing to irrevocably treat the contribution as a rollover. If a qualifying lump-sum distribution is made to you and you roll it over, you may not later change your mind in order to claim averaging even though you were born before January 2, 1936, and the other tests for averaging are met (7.4). Before making a rollover, figure what the current tax would be on the lump-sum distribution under the special averaging method. Compare it with an estimate of the regular tax that will be payable on a later distribution of the rolled-over account from the IRA. http://www.taxact.com/tax-tips/index.asp?tid=335 Tue, 19 Jun 2007 00:00:00 GMT 335 If you are under age 591/2 and do not roll over an eligible distribution, you will generally be subject to a 10% penalty in addition to regular income tax. However, penalty exceptions apply if you separate from service and are age 55 or older, you are disabled, or you pay substantial medical expenses; see 7.15 for a full list of penalty exceptions. http://www.taxact.com/tax-tips/index.asp?tid=334 Mon, 18 Jun 2007 00:00:00 GMT 334 If you roll over a distribution from an employer plan to a traditional IRA, you may later roll over a distribution from the IRA to a new employer's plan. You can make the subsequent rollover from the IRA even if the funds from the first employer were mixed with regular IRA contributions and earnings.However, if you were born before January 2, 1936, expect to join another employer's qualified plan, and want to preserve the possibility of claiming averaging for a lump-sum distribution (7.2) from the new employer's plan, a rollover from the first employer plan should be to a segregated conduit IRA. A conduit IRA contains only the assets distributed from the first qualified plan plus the earnings on those assets. If you then join a company with a plan that accepts rollovers and make the rollover from the conduit IRA into that plan, a subsequent lump-sum distribution from the new employer plan will qualify for 10-year averaging (and possibly 20% capital gain treatment for pre-1974 participation), assuming the distribution otherwise qualifies under the rules at 7.2. http://www.taxact.com/tax-tips/index.asp?tid=333 Sun, 17 Jun 2007 00:00:00 GMT 333 Under current law, you may not roll over an employer plan distribution to a Roth IRA. You may make a tax-free rollover to a traditional IRA and then make a taxable conversion to a Roth IRA if you qualify under the rules at 8.21.However, a new law will allow a distribution made after 2007 from a qualified employer plan, 403(b) plan, or governmental 457 plan to be directly rolled over to a Roth IRA, provided you qualify under the taxable conversion rules at 8.21. http://www.taxact.com/tax-tips/index.asp?tid=332 Sat, 16 Jun 2007 00:00:00 GMT 332 A lump-sum distribution to two or more beneficiaries may qualify for averaging and capital gain treatment, so long as the plan participant was born before January 2, 1936. Each beneficiary may separately elect the averaging method for the ordinary income portion, even though other beneficiaries do not so elect. Follow the Form 4972 instructions for multiple recipients. http://www.taxact.com/tax-tips/index.asp?tid=331 Fri, 15 Jun 2007 00:00:00 GMT 331 If you were born before January 2, 1936, and a portion of your lump-sum distribution is attributable to plan participation before 1974 (7.5), you may treat it as ordinary income eligible for averaging, or you may elect to treat it as capital gain taxable at a flat 20% rate; choose the method on Form 4972 that gives the lower overall tax. http://www.taxact.com/tax-tips/index.asp?tid=330 Thu, 14 Jun 2007 00:00:00 GMT 330 If you were born after January 1, 1936, a lump-sum distribution from your plan is not eligible for averaging. http://www.taxact.com/tax-tips/index.asp?tid=329 Wed, 13 Jun 2007 00:00:00 GMT 329 You are allowed to elect averaging only once as a plan participant after 1986. If before 1987 you elected 10-year averaging and were under age 591/2, you may elect averaging for a current distribution. However, if you were over age 591/2 when you made the pre-1987 election, you are barred from electing averaging again.If you were born before January 2, 1936, have not previously elected averaging, and elect averaging for a distribution received in 2006, you will not be able to claim averaging again if you join another company and receive a lump-sum distribution from the new employer.Even if you are barred from electing averaging for a lump sum from your own plan, you can make the election as a beneficiary of a deceased plan participant born before January 2, 1936. http://www.taxact.com/tax-tips/index.asp?tid=328 Tue, 12 Jun 2007 00:00:00 GMT 328 You may not claim averaging for a lump-sum distribution if you previously received a distribution from the same plan that was rolled over tax free (7.7) to an IRA or to another qualified employer plan. http://www.taxact.com/tax-tips/index.asp?tid=327 Mon, 11 Jun 2007 00:00:00 GMT 327 If you are paid a distribution that qualifies for lump-sum averaging, Code A will be entered in Box 7 of Form 1099-R. See 7.4 for averaging rules. http://www.taxact.com/tax-tips/index.asp?tid=326 Sun, 10 Jun 2007 00:00:00 GMT 326 If in 2006 you converted a traditional IRA to a Roth IRA, the conversion amount is included in Box 1 and in Box 2a of Form 1099-R as a taxable distribution. The entire conversion amount is taxable on your 2006 return, except for any portion allocable to nondeductible contributions; see 8.21. http://www.taxact.com/tax-tips/index.asp?tid=325 Sat, 9 Jun 2007 00:00:00 GMT 325 Higher loan limits than otherwise allowable under the rules at 7.16 apply to loans to Hurricane Katrina, Rita, or Wilma victims, and a delay is provided for repaying outstanding loans; see 7.31. http://www.taxact.com/tax-tips/index.asp?tid=324 Fri, 8 Jun 2007 00:00:00 GMT 324 See 7.30 and 7.31 for the special rules applicable to qualifying retirement plan withdrawals, repayments, and loans attributable to Hurricane Katrina, Rita, or Wilma. http://www.taxact.com/tax-tips/index.asp?tid=323 Thu, 7 Jun 2007 00:00:00 GMT 323 If your annuity contract or insurance policy is with an insurance company that is in a rehabilitation, conservatorship, insolvency, or a similar state proceeding, you may surrender the policy and make a tax-free reinvestment of the proceeds in a new policy with a different insurance company. The transfer must be completed within 60 days. If a government agency does not allow you to withdraw your entire balance from the troubled insurance company, you must assign all rights to any future distributions to the issuer of the new contract or policy. See IRS Revenue Procedure 92-44. http://www.taxact.com/tax-tips/index.asp?tid=322 Wed, 6 Jun 2007 00:00:00 GMT 322 Before making a property transfer to a closely held corporation, consult an accountant or an attorney on the tax consequences. There may be instances when you have potential losses or you desire the corporation to take a stepped-up basis that would make tax-free treatment undesirable. http://www.taxact.com/tax-tips/index.asp?tid=321 Tue, 5 Jun 2007 00:00:00 GMT 321 If you transfer property to a third party on behalf of your spouse or former spouse where the transfer is required by a divorce or separation instrument, or if you have your spouse's or former spouse's written request or consent for the transfer, the transfer is tax free to you under Section 1041. The transfer is treated as if made to your spouse or former spouse, who then retransfers the property to the third party. A written request or consent must specifically state that the tax-free exchange rules of Code Section 1041 are intended, and you must receive it before filing the tax return for the year of the transfer. As discussed in the Examples on this page, a divorce-related stock redemption may qualify for Section 1041 treatment as a transfer on behalf of the other spouse. http://www.taxact.com/tax-tips/index.asp?tid=320 Mon, 4 Jun 2007 00:00:00 GMT 320 Parties may agree to pay interest on property transfers relating to divorce settlements when payments are to be made over time. The actual property transfer is generally a tax-free exchange. According to the Tax Court, the interest is separate and apart from the property transferred. The deductibility of the interest paid depends on the nature of the property transferred. Interest allocated to residential property, for instance, is deductible as residential mortgage interest; interest allocated to investment property is deductible as investment interest subject to the net investment income limit. See Chapter 15. http://www.taxact.com/tax-tips/index.asp?tid=319 Sun, 3 Jun 2007 00:00:00 GMT 319 Under the tax-free exchange rules, there is no taxable gain or deductible loss on the transfer of property, even if cash is received for the property or the other spouse (or former spouse) assumes liabilities or gives up marital rights as part of a property settlement. The spouse who receives property may incur tax on a later sale because his or her basis in the property is the same as the transferor-spouse's basis; see the Examples in 6.7. Because the transferee bears the tax consequences of a later sale, he or she should consider the potential tax on the appreciation in negotiating a marital settlement. In a marital settlement, the transferee spouse can lessen the tax burden by negotiating for assets that have little or no unrealized appreciation. http://www.taxact.com/tax-tips/index.asp?tid=318 Sat, 2 Jun 2007 00:00:00 GMT 318 The IRS requires related parties who exchange property to file Form 8824 for the year of the exchange and also for the two years following the exchange. If either party disposes of the property received in the original exchange in any of these years, the deferred gain must be reported in the year of disposition as if the property had been sold.The two-year period is suspended for a holder of exchanged property who has substantially diminished his or her risk of loss, such as by use of a put or short sale. http://www.taxact.com/tax-tips/index.asp?tid=317 Fri, 1 Jun 2007 00:00:00 GMT 317 Property transferred to an exchange accommodation titleholder by a taxpayer cannot be transferred back to the taxpayer as replacement property under the QEAA rules. See Revenue Procedure 2004-51 for details. http://www.taxact.com/tax-tips/index.asp?tid=316 Thu, 31 May 2007 00:00:00 GMT 316 Small qualified intermediary companies as well as members of Confress have asked the IRS to withdraw controversial proposed regulations that would require a taxpayer who has relinquished property to report as income all of the interest earned on an escrow account holding the proceeds from the sale of that property during the exchange period. Intermediary companies have typically retained some of the interest to supplement the flat fees they charge and they claim that the proposals would force them to raise their fees, putting them at a severe competitive disadvantage to banks that serve as intermediaries. Bank intermediaries can lend out the escrow funds at a higher interest rate than that paid to the taxpayers making exchanges and this internal spread would allow the banks to keep their fees lower than the fees non-bank intermediaries would have to charge were the proposals to take effect.See the e-Supplement for an update on the proposed regulations. http://www.taxact.com/tax-tips/index.asp?tid=315 Wed, 30 May 2007 00:00:00 GMT 315 No extensions of time are allowed if the 45-day or 180-day statutory deadline for a deferred exchange cannot be met. If extra time is needed for finding suitable replacement property, it is advisable to delay the date of your property transfer because the transfer date starts the 45-day identification period. http://www.taxact.com/tax-tips/index.asp?tid=314 Tue, 29 May 2007 00:00:00 GMT 314 You may deduct a loss incurred on an exchange if it is attributable to unlike property transferred in the exchange. The loss is recognized to the extent that the basis of the unlike property (other than cash) transferred exceeds its fair market value. However, a loss is not recognized if the unlike property is received together with the like-kind property in the exchange. Such a loss is not de