AUDITS – IRS INTERNAL GUIDELINES
There are circumstances that cause the IRS to examine your return more closely. For example, the IRS may examine your return and request more information if your itemized deductions exceed any IRS internal guidelines, or you claim tax shelter losses. Also, if your business expenses and/or cash charitable contributions are substantial in relation to your income, you may receive an audit notice.
AUDITS – NOTICES
If you receive an audit notice from the IRS, you need to acknowledge it and respond promptly. You should consult a tax professional before sending information or additional money to the IRS. There may be an error in the amount that IRS claims you owe. Some tax professionals may even represent you at an audit, without your actual attendance.
AUDITS – RED FLAGS
There are circumstances that may be red flags. If a closed corporation of which you are a shareholder has had its return examined, you may also receive an audit notice. Are your business expenses or charitable contributions high in relation to your income? These circumstances may also prompt an audit.
Cars, Trucks and Automobile
Using a car for business related activities you will need to account for it using one of two methods. Also if you are deducting you car against your income there are deduction limits which you must take into account. The page Tax Tips for Vehicles has more information bout this.
Business and Job Related Tax Tips
COMPUTER AND CELLULAR PHONE
If you purchased a computer or cellular phone and use it for business, you may be able to claim a depreciation deduction. Your employer must require you to have the phone or computer as a condition of employment, and you must use them for the convenience of your employer. You must keep a record of the personal and business use of the computer or phone to determine the percentage of business use.
If you incur entertaining costs for business reasons, you may be able to deduct 50% of the amount. The expense must be considered ordinary or necessary to your profession. Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation.
If you are looking for a job in your current profession and can itemize your deductions, certain expenses may qualify as miscellaneous deductions. Employment agency fees, résumé printing, phone calls, and mailing expenses are examples of deductible items.
Some of your job-related expenses that may be deducted include union dues, job-related magazines and books, and other related business expenses. Generally, you must depreciate the cost of tools used in your work. If your employer requires you to wear work clothes or uniforms that are not suitable for everyday wear, you may deduct the cost and upkeep.
NATIONAL GUARD AND RESERVE MEMBERS
If you are a member of the National Guard or Reserves and you must travel away from home to perform your service (such as for a drill or a meeting) in a location that is more than 100 miles away from your home, you can take a deduction for related travel expenses as an adjustment to income, even if you do not itemize your deductions. Allowable expenses include expenses for overnight transportation, meals, and lodging. The amount of the allowable expenses cannot exceed the amount the federal government pays its employees for travel expenses.
SECTION 179 EXPENSING – GENERAL
If you purchase certain qualifying equipment, you may deduct the cost by making a section 179 expense deduction. The maximum section 179 deduction is $105,000 for 2005.
SELF-EMPLOYED HEALTH INSURANCE
If you are self-employed, you may deduct up to 100% of your medical insurance costs that cover yourself, your spouse, and your dependents as an adjustment to income. To do this, you (and your spouse if filing jointly) must not be eligible for coverage by an employer-subsidized health plan.
START-UP AND ORGANIZATIONAL COSTS
You may be able to claim a deduction of up to $5,000 for start-up and organizational costs incurred after October 22, 2004. The deduction is reduced by the amount by which the start-up costs exceed $50,000. If you cannot deduct all your costs in the first year the business begins, amortize the remaining costs over 15 years.
You may be able to deduct business travel expenses if you must conduct business away from your tax home. The cost of transportation, lodging, laundry, dry cleaning, and telephone expenses are some of the deductible expenses. Generally, meals are only 50% deductible. If you are subject to the Department of Transportation hours of service limits, you may be able to deduct 70% of your meal expenses.
TIP INCOME – RECORD OF TIPS
Do you receive tips as part of your income? You must report all tips as wages on Form 1040. If you receive tips of $20 or more in one month, you must also keep a daily record of tips received and give your employer a written report of your tips for that month by the 10th day of the next month.
TIP INCOME – ALLOCATED TIPS
If you receive tip income, and work for a large food or beverage establishment, your employer may be required to allocate an amount of tips to you on your Form W-2. Your employer must allocate tips if the amount of tips you reported to him is below the IRS required minimum percentage of gross sales. The difference is called allocated tips and is in box 8 of your Form W- 2. You will have to include these allocated tips in your income and also pay Social Security and Medicare tax on them.
Have you received unemployment compensation during the year? You must report unemployment compensation as income. State and federal unemployment insurance benefits, and railroad unemployment compensation benefits, are all considered taxable income. You can choose to have income tax withheld from any unemployment compensation you receive.
Casualty and Theft Loss
CASUALTY AND THEFT LOSS – HOME
Unfortunately, theft and natural disasters such as floods, tornadoes, and hurricanes occur. The good news is that you may get a tax break. Damage to your home and possessions which occurs due to theft, fire, storm, or another natural disaster is deductible if you itemize your deductions. The loss must be reduced by any insurance or other type of reimbursement plus $100, and then by 10% of your adjusted gross income.
CASUALTY AND THEFT LOSS – AUTO
If you have been involved in an automobile accident, the damage to your car may be considered a casualty loss. This would apply if the loss were not due to your negligence or the negligence of someone driving your vehicle. The loss must first be reduced by any insurance or other reimbursement plus $100, and then by 10% of your adjusted gross income.
CASUALTY AND THEFT LOSS – PROOF OF CASUALTY OR LOSS
To deduct a casualty or theft loss, you must be able to prove that a casualty or theft loss occurred and provide proof of the amount that you deduct. Each casualty or theft loss is reduced by any reimbursement and by $100, and is further reduced by 10% of your adjusted gross income.
CASUALTY AND THEFT LOSS – FEDERAL DISASTER AREA
If the President of the United States declares your area a federal disaster area, you have a choice of which tax year to deduct a casualty loss. You may deduct the loss for the year in which it occurred, or you may choose to amend your previous year’s return and deduct the loss in that previous tax year for a faster refund.
SPECIAL BONUS DEPRECIATION – EXPIRED
Special bonus depreciation is not available for most property purchased after 2004.
Change of Address
CHANGE OF ADDRESS
Are you planning a move before the end of the year? The IRS has its own official change-of- address form, Form 8822, Change of Address. If you fill it out and mail it to the appropriate IRS service center, you should receive your tax booklet at your new address.
CHARITABLE CONTRIBUTIONS – REQUIRED DOCUMENTS
If you made contributions to a church or qualified non-profit organization, these contributions can be deducted as an itemized deduction on Schedule A. The IRS requires you to keep a written acknowledgement from the church or organization for any single contribution of $250 or more. You should keep records and receipts for all other contributions as well.
CHARITABLE CONTRIBUTIONS – DISASTERS
As you consider making charitable contributions to assist natural disaster victims, keep in mind that you can deduct your contributions only if you make them to a qualified organization.
You can ask any organization whether it is a qualified organization, or you can investigate by calling the IRS (toll-free) at 1-877-829-5500 or by checking the online version of Publication 78, Cumulative List of Organizations described in Section 170(c) of the Internal Revenue Code of 1986 on the IRS Web site at http://apps.irs.gov/app/pub78. Some organizations, such as churches and governments, may be qualified even though they are not listed. Learn more about the tax consequences of a disaster.
CHARITABLE CONTRIBUTIONS – VEHICLES
If you donate a vehicle that has a fair market value over $500, your deduction depends on what the charity does with the vehicle. For example, if the charity immediately sells the vehicle, your deduction may be limited to the gross proceeds from the sale. Also, substantiation requirements are stricter than with other charitable contributions. Charitable contributions are deducted on Schedule A.
CHARITABLE CONTRIBUTIONS – FAIR MARKET VALUE
Extra tax deductions may be as close as your closet. If you donated clothing, toys, furniture, or other household items to charity, you are allowed to deduct the fair market value of your donated items. However, the IRS does not provide a guide to determine the fair market value. The IRS suggests surveying thrift and consignment stores for similar items to provide an indication of the fair market value. An alternative to surveying thrift and consignment stores, or simply guessing the value of your items, is the ItsDeductible® program – available at your local Jackson Hewitt Tax Service®. Ask your Jackson Hewitt tax representative to use ItsDeductible* to accurately value your donations in compliance with IRS guidelines, helping you get the biggest possible deduction. Learn more about this service.
*Optional service. Fees may apply.
CHARITABLE CONTRIBUTIONS – TAX-DEDUCTIBLE DONATIONS
Carefully check out a charity before making a contribution. If there is any doubt whether the organization is listed with the IRS as a non-profit organization approved to receive tax- deductible donations, check with the organization or IRS.
CHARITABLE CONTRIBUTIONS – CHARITY BENEFIT OR EVENT
Have you attended a charity benefit or event lately? You may be able to deduct the dollar amount that is more than the fair market value of the event. For example, you attend a dinner fundraiser for a qualified non-profit organization and your ticket price is $65. If the regular price of the meal would have been $10, your contribution amount would be $55.
CHARITABLE CONTRIBUTIONS – EXCHANGE STUDENTS
If you have an American or foreign exchange student living in your home, you may be able to deduct up to $50 per month as a charitable deduction on Schedule A. You must have a written agreement from a qualified organization that provides the student program. The student must not be a relative and must be a full-time student at the high school level or below.
CHARITABLE CONTRIBUTIONS – NON-QUALIFIED ORGANIZATIONS
Not every donation you make to a worthy cause is deductible as a charitable contribution. If you gave money to an individual in need, or to an organization and specified that the contribution was for an individual, you are not allowed to deduct the amount given. When you donate to non-qualified organizations such as civic leagues or social clubs, you cannot take a tax deduction.
CHARITABLE CONTRIBUTIONS – DATE OF CONTRIBUTION
You may usually deduct charitable contributions only in the year that you actually make them. A check that you mail is considered delivered on the date you mail it. A contribution charged on a credit card is deductible in the year you make the charge. The amount of your deduction may be limited depending on the type of property given, and the type of organization to which it is given. Some contributions that you are not able to deduct in the current year because of adjusted gross income limits may be carried over to future years.
UNIFORM DEFINITION OF A CHILD
The Working Families Tax Relief Act of 2004 created a Uniform Definition of a Child effective starting with tax-year 2005. Tax benefits that are affected are dependency exemptions, the Head of Household filing status, the Child and Dependent Care Credit, the Child Tax Credit, and the Earned Income Tax Credit. The uniform definition of a child includes the following:
+ Child – A natural child, stepchild, adopted child, or eligible foster child
+ Adopted child – A child legally adopted, or a child lawfully placed by an authorized placement agency for legal adoption; this child is treated as a child by blood
+ Eligible foster child – A child placed by an authorized agency or by a judgment, decree, or other order of any court of competent jurisdiction
If you pay for adoption expenses, you may be able to take a credit for qualified adoption expenses of up to $10,630 per child. If your modified adjusted gross income is over $159,450, the credit begins to be phased out. If your modified adjusted gross income is $199,450 or more, you do not qualify for the credit.
CHILD AND DEPENDENT CARE – CHILD CARE EXPENSES
If you are a working parent, or you were working and are now looking for work, you may be able to claim a credit for your child care expenses. The credit may be as much as $1,050 for the expenses for one qualifying child or $2,100 for more than one child, depending on your adjusted gross income.
CHILD AND DEPENDENT CARE – PROVIDER IDENTIFICATION
Are you a working parent able to claim a credit for child care expenses? If so, you must provide the IRS with the care provider’s name, address, and taxpayer identification number (TIN) which can be a Social Security number or an employer identification number (EIN).
CHILD AND DEPENDENT CARE – TYPES OF PROVIDER IDENTIFICATION
If the care provider is a daycare center, the taxpayer identification number (TIN) is their employer identification number (EIN). If the provider is an individual, the TIN is the Social Security number. If the provider is a church or non-profit group and has no EIN, the words “tax exempt” can be substituted for the TIN.
CHILD AND DEPENDENT CARE – IN-HOME CHILD CARE
Do you pay someone to come into your home and provide child care while you work? If you do, you may actually be an employer who is required to pay employment taxes. If the person you pay provides care in their home, you would not be considered their employer.
CHILD AND DEPENDENT CARE CREDIT – COMBAT PAY
Earned income is calculated two different ways on Form 2441, Child and Dependent Care Expenses. The earned income calculation for Form 2441, Page 1 includes certain nontaxable earned income, including meals and lodging provided for the convenience of your employer and nontaxable combat pay. This calculation may affect your Child and Dependent Care Credit. To calculate the earned income amount for Form 2441, Page 2, you can elect whether or not to include combat pay as earned income. This calculation may affect how much of your dependent care benefit is excluded from your income. You should calculate your return both ways (including and not including combat pay as earned income on Form 2441, Page 2) to determine which gives you the more advantageous result.
CHILD AND DEPENDENT CARE CREDIT – AMENDING RETURNS
The 2002 and 2003 IRS instructions for Form 2441, Child and Dependent Care Expenses, contained an error that may have incorrectly reduced your Child and Dependent Care Credit for those years. This error was corrected in 2004. You may be entitled to additional refund if you filed Form 2441 for tax-years 2002 or 2003. Contact a local Jackson Hewitt office to discuss your situation and determine whether amending your return would result in additional tax savings.
Do you pay child support? If you do, can that child be claimed as a dependent on your tax return? Unless dependency is specified in your divorce decree, the custodial parent is generally entitled to claim the child as a dependent. The custodial parent may sign IRS Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents, allowing the noncustodial parent to claim the child as a dependent. Child support is neither income to the recipient, nor a deduction for the payer.
CHILD TAX CREDIT – QUALIFYING CHILD
You may qualify for a credit of up to $1,000 for each qualifying child under age 17 at the end of the year. A Qualifying Child is your dependent who is your child, stepchild, adopted child, eligible foster child or descendent of such, or your sibling, stepsibling or descendent of such. The individual must have lived with you for more than half of the year and must not have provided more than half of their own support. Generally, the child must be a U.S. citizen or a U.S. national or resident for some part of the year.
CHILD TAX CREDIT – REFUNDABLE CREDIT
If you receive less than the maximum $1,000 per qualifying child for the Child Tax Credit because it is limited to your tax liability, you may be entitled to receive all or part of your remaining Child Tax Credit as a refundable Additional Child Tax Credit.
CHILD TAX CREDIT – COMBAT PAY
Although combat pay is not included in income for purposes of calculating your federal income tax, combat pay is included as earned income when calculating the Additional Child Tax Credit. Because the amount of this credit is based in part on earned income, this could mean a higher credit for those with low taxable income.
CHILDREN’S INVESTMENT INCOME
Does your child under age 14 have investment income? If they do, and the total amount is more than $1,600, part of the amount may be taxed at the parent’s rate. The child may file a tax return, including Form 8615, Tax for Children Under Age 14 With Investment Income of More Than $1,600, or you may be able to file Form 8814, Parents’ Election To Report Child’s Interest and Dividends, and report your child’s income on your return.
The rules for dependents have changed. Some children who previously did not qualify as a dependent may now qualify. Additionally, some individuals who previously qualified as dependents may no longer qualify.
QUALIFYING CHILD FOR MORE THAN ONE PERSON
If you and another taxpayer(s) can claim the same child as a Qualifying Child, only one person can claim the following tax benefits (unless the rules for Children of Divorced or Separated Parents apply): the dependent exemption, the Head of Household filing status, the Child and Dependent Care Credit, the Child Tax Credit, or the Earned Income Credit. If more than one person claims tax benefits using the same Qualifying Child, the IRS will use the following tie-breaker rule to determine who can claim the tax benefits with that child:
+ If more than one taxpayer is a parent of the Qualifying Child, the parent with whom the child lived longer during the year will be allowed to claim the Qualifying Child for the benefit.
+ If the Qualifying Child lived with their parents an equal amount of time, the parent with the highest AGI will be allowed to claim the Qualifying Child for the benefit.
+ If only one of the taxpayers is a parent of the Qualifying Child, the parent will be allowed to claim the Qualifying Child for the benefit.
If neither of the taxpayers is a parent of the Qualifying Child, the taxpayer with the highest AGI will be allowed to claim the Qualifying Child for the benefit
Are you a designated foster parent or thinking about becoming one? Foster parents who receive payments from a state, political subdivision, or tax-exempt child placement agency may have charitable deductions. If you spend money to provide support for a foster child that is greater than the nontaxable payments you receive, you may be able to deduct that amount as an itemized deduction on Schedule A. You may do this if you are not making a profit or if you have no profit motive.
STANDARD DEDUCTION – DEPENDENT ON ANOTHER’S RETURN
The standard deduction for an individual for whom an exemption can be claimed on another person’s tax return is generally limited to the greater of (a) $800, or (b) the individual’s earned income for the year plus $250. In no case can the deduction exceed the regular standard deduction amount, generally $5,000 for 2005.
Earned Income Credit
EARNED INCOME CREDIT – TWO OR MORE QUALIFYING CHILDREN
The earned income credit is a refundable credit for low-income workers with earned income. The credit is available for taxpayers with or without children. For 2005, the maximum credit if you have two or more qualifying children is $4,400.
EARNED INCOME CREDIT – ONE QUALIFYING CHILD
The Earned Income Credit is a refundable credit for low-income workers with earned income. The credit is available for taxpayers with or without children. For 2005, the maximum credit if you have one qualifying child is $2,662.
EARNED INCOME CREDIT – NO QUALIFYING CHILDREN
The Earned Income Credit is a refundable credit for low-income workers with earned income. The credit is available for taxpayers with or without children. For 2005, the maximum credit if you have no qualifying children is $399.
EARNED INCOME CREDIT – FRAUDULENT OR RECKLESS CLAIM
You will not be eligible for the Earned Income Credit if the IRS has determined that you have previously claimed the credit fraudulently or recklessly. A fraudulent claim results in a 10-year loss of eligibility. A reckless claim results in a two-year loss of eligibility.
EARNED INCOME CREDIT – COMBAT PAY
Although combat pay is not included in income when calculating your federal income tax, you have the option of including combat pay as earned income when calculating the Earned Income Credit. You should calculate your return both ways (including and not including combat pay as earned income for Earned Income Credit purposes) to determine which way gives you the more advantageous result.
COVERDELL EDUCATION SAVINGS ACCOUNTS (EDUCATION IRAs)
An education savings account can be established for a child under the age of 18. Any individual (including the child) can make contributions to the account during the year if they meet certain income limitations. The total annual contributions per beneficiary are limited to $2,000. Withdrawals will be tax-free when used to pay education costs (elementary school, secondary school, or a post-secondary school such as a college) for the beneficiary.
HOPE AND LIFETIME LEARNING CREDITS
There are two nonrefundable tax credits for payments made for qualified tuition and related expenses for post-secondary education. You may be able to claim a Hope Credit of up to $1,500 for each eligible student. You may be able to claim a Lifetime Learning Credit of up to $2,000 for each family.
EDUCATOR EXPENSES – DEDUCTION
If you are an elementary or secondary school teacher, instructor, counselor, principal, or aide and you have worked at least 900 hours during a school year, you may deduct the cost of books, supplies, computer equipment (including software and services), and other materials used in the classroom. You may deduct up to $250 of these expenses directly against your income, without itemizing deductions. Remaining expenses can be deducted as a miscellaneous itemized deduction on Schedule A, subject to the 2% of adjusted gross income limit.
TUITION AND FEES DEDUCTION
Instead of claiming the Hope Credit or Lifetime Learning Credit, you can claim a tax deduction for qualified higher education expenses. You can take a deduction of up to $4,000 for qualified tuition and related expenses as an adjustment to income, even if you do not itemize your deductions. Certain restrictions apply.
QUALIFIED TUITION PROGRAM
A Qualified Tuition Program (QTP) allows you to prepay a student’s college tuition or contribute to a higher education savings account. Contributions are not tax deductible, but distributions will be tax-free if the distributions are used to pay for qualified higher education expenses.
EMPLOYER-PROVIDED EDUCATIONAL ASSISTANCE
You may be able to exclude up to $5,250 on your return for employer-provided educational assistance. The eligible education includes undergraduate and graduate courses.
STUDENT LOAN INTEREST
You may be able to claim a deduction of up to $2,500 for interest paid on a qualified student loan. Only the amount of interest actually paid during the year may be deducted. You cannot claim the deduction in any tax year in which another taxpayer claims you as a dependent. You do not need to itemize to claim this interest. This amount is subject to a phaseout, which begins at $50,000 of income for a single person, and at $105,000 for a married couple filing a joint return.
Estate and Gift Taxes
ESTATE AND GIFT TAXES
You can generally give money or property to another person without any tax consequences provided the amount does not exceed $11,000 per year. If this amount is exceeded, it must be reported on a gift tax return. The unified credit effectively exempts from tax the first $1,500,000 of such cumulative transfers of gifts.
Electronic filing, or e-file, reduces the time it takes to get your tax refund, but you must have a valid Social Security number for every person included on the return.
What happens if you filed a tax return and later realize that you omitted income or overlooked some deductions? You can amend your return by filing Form 1040X, Amended U.S. Individual Income Tax Return. Generally, you must file your amended return within three years after the date you filed your original return. You cannot change your filing status from Married Filing Jointly to Married Filing Separately after the due date of the original return.
EXTENSIONS – FILING
Do you need more time to file? By filing an extension, you can generally postpone filing your return until October 15. Filing an extension does not give you additional time to pay any tax you may owe. If you do not pay the tax due by April 17, 2006 you will accrue penalty and interest charges. Complete IRS Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, to file for an automatic six-month extension. If you file Form 4868, you will have until October 15, 2006 to file your tax return.
EXTENSIONS – ELECTRONIC FILING
The IRS offers electronic filing of extension applications. The IRS will process Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, through noon on April 16, 2006. Paper requests for extension must be postmarked by April 17, 2006. By filing an extension, you generally postpone the filing date of your return until October 16, 2006.
FILING STATUS – ANNULLED MARRIAGES
If you obtain an annulment that declares your marriage never existed, you are considered unmarried for this and any previous tax years. You must amend your tax returns for all the tax years not affected by the statue of limitations for filing a return (usually three years) to show this change in marital status.
FILING STATUS – END OF YEAR
Your filing status depends on whether you are married or unmarried on December 31 of a tax year. If you live apart from your spouse and meet certain tests you may be considered unmarried for the entire year. If you are divorced under a final decree by the last day of the year, you are considered unmarried for the entire year.
FILING STATUS – HEAD OF HOUSEHOLD
If you are single or separated, check to see if you qualify for the Head of Household filing status. This filing status allows you to take a higher standard deduction, possibly be eligible for a lower tax bracket, and perhaps qualify for the Earned Income Credit.
FILING STATUS – MARRIED FILING JOINTLY OR MARRIED FILING SEPARATELY
If you are married, you have a choice of filing statuses: Married Filing Jointly or Married Filing Separately. To be sure that you pay the lowest tax, calculate your return both ways. It is usually advantageous for a married couple to file jointly. However, if both of your incomes are about the same, you may pay more in taxes by filing jointly depending on the rest of your return.
FILING STATUS – MARRIED FILING JOINTLY
If you are married, you may choose to file Married Filing Jointly or Married Filing Separately return. On a joint return, you report your combined income and deduct your combined allowable deductions. You may file a joint return even if only you (or your spouse) had income.
FILING STATUS – MARRIED FILING SEPARATELY
If you are married, you may choose to file separate returns. This may be advantageous if this results in less tax liability or if either of you prefers to be responsible only for your own tax liability. If you were separated during the entire last half of the tax year, one of you may qualify as Head of Household if certain conditions are met.
Are you a household employer? You might be if you hired a housekeeper or a care provider for your dependent and the person provided services in your home. If you have a household employee, you may be required to withhold Social Security and Medicare taxes, federal unemployment tax, and federal income tax.
INDIVIDUAL RETIREMENT ARRANGEMENT (IRA) – CONTRIBUTIONS
You can contribute up to $4,000 to your IRA (or $4,000 to your spouse’s IRA if married filing jointly). If you or your spouse is age 50 or older, there is an additional “catch-up” contribution of up to $500 allowed.
INDIVIDUAL RETIREMENT ARRANGEMENT (IRA) – EARLY WITHDRAWAL
There is no additional 10% tax on early withdrawals up to $10,000 in your lifetime from an IRA if you are buying a first home for yourself, your children, or your grandchildren, or if you are paying higher education expenses for the IRA owner, spouse, child, or grandchild.
INDIVIDUAL RETIREMENT ARRANGEMENT (IRA) – ROLLOVER
The IRS may waive the 60-day requirement for rollovers from pensions or IRAs if you suffer a casualty, disaster, or other event beyond your reasonable control that prevents meeting the 60- day rule.
RETIREMENT SAVINGS CONTRIBUTIONS CREDIT
There is a credit for a percentage (50%, 20%, or 10%) of up to $2,000 of contributions you make to an employer elective deferral plan or IRAs. You must be age 18 or older to claim the credit. In addition, you cannot be a student as defined in the dependency tests or claimed as a dependent on another’s return. Any distribution from a retirement plan any time in the preceding two tax years, in the current tax year, or any day up until the due date of the current year’s return will reduce the amount available for the credit. This credit is in addition to any deduction or exclusion for the contribution.
You can elect to contribute up to $4,000 to a Roth IRA. If you are age 50 or older, there is an additional “catch-up” contribution allowable of $500. The Roth IRA differs from the traditional IRA because contributions are not deductible, but when withdrawn the earnings are not taxable.
Itemized Deductions (Limits)
ITEMIZED DEDUCTIONS (Limits)
Your income may limit the total amount of itemized deductions you can take. In 2005, if your adjusted gross income is over $145,950($72,975 if Married Filing Separately), your total itemized deductions may be reduced.
DEDUCTING COST OF TICKETS
If you were lucky enough to win money in a lottery, you can deduct the cost of your losing tickets for that calendar year as an itemized deduction up to the amount of your winnings. If a husband and wife file a joint return, their gambling winnings and losses are pooled so that the losses of one spouse are deductible against the winnings of the other up to the amount of winnings.
SHARING A WINNING LOTTERY TICKET
Who will pay the taxes when you win the lottery pool? Form 5754, Statement by Persons Receiving Gambling Winnings, has been provided by the IRS to alleviate the problem of reporting multiple ownership of lottery tickets. The form is prepared by the person who actually receives the winnings and it identifies all those entitled to a share of the winnings. The federal taxes should already have been withheld by the lottery.
Medical and Health
AMOUNTS SUBJECT TO SOCIAL SECURITY AND MEDICARE TAXES
For 2005, the total wage limit for amounts subject to Social Security tax is $90,000. There is no limit for wages subject to Medicare tax.
HEALTH SAVINGS ACCOUNT – DEDUCTION
If you made contributions to a health savings account (HSA), you may be able to take a deduction as an adjustment to income. You may establish and contribute to an HSA if you are covered by a high-deductible health plan. Amounts contributed to an HSA belong to you and are completely portable. Every year the money not spent stays in the account and gains interest tax- free, just like an IRA. Unused amounts remain available for later years (unlike amounts in Flexible Spending Arrangements that are forfeited if not used by the end of the year).
MEDICAL EXPENSES – ITEMIZED DEDUCTIONS
If you itemize your deductions, you may be able to deduct medical expenses. You can deduct the amount that is more than 7.5% of your adjusted gross income. Taxpayers are allowed to deduct unreimbursed medical and dental expenses for themselves and family members.
MEDICAL EXPENSES – LONG-TERM CARE
The costs of qualified long-term care services can generally be included as medical expenses. These costs include a part of the premiums for qualified long-term care insurance. Long-term care insurance premiums covering these qualified services are deductible as medical expenses (subject to the 7.5% of the adjusted gross income limit and certain age limitations).
MEDICAL EXPENSES – OVERLOOKED DEDUCTIONS
Do not overlook any medical deductions for which you may qualify. Hearing aids, eyeglasses, contact lenses, hospital fees for nursing, physical therapy, lab tests, and x-rays are all deductible. The mileage to and from a doctor or dentist’s office is deductible at 15 cents per mile from January 1 through August 31 and 22 cents per mile from September 1 through December 31 in 2005. Bus and taxi costs incurred for traveling to and from medical appointments are also deductible.
MEDICAL EXPENSES – MAXIMIZE YOUR DEDUCTIONS
If you file Form 1040 and itemize your deductions, you may deduct medical expenses that are over 7.5% of your adjusted gross income. Careful tax planning may allow you to plan ahead so that you could take more medical deductions during one tax year instead of spreading them over two. For example, in a year that you already have substantial medical expenses, schedule and pay for your routine doctor or dentist appointments by December 31 instead of early in the next year.
MEDICAL EXPENSES – WEIGHT CONTROL TREATMENT
The IRS has recognized obesity as a medical disease. If you participate in a weight loss program because your physician diagnoses obesity, you may be able to deduct it as a medical expense on Schedule A. General rules for deducting medical expenses apply.
MISCELLANEOUS EXPENSES #1
Various expenses fall in the category of miscellaneous deductions. Job-hunting, job travel, union dues, tax preparation, and safety deposit box fees are all examples of miscellaneous deductions. If you itemize, you can deduct the amount of miscellaneous expenses that is over 2% of your adjusted gross income.
MISCELLANEOUS EXPENSES #2
Various expenses fall in the category of miscellaneous deductions. Appraisal fees for casualties, theft losses or charitable contributions, depreciation on home computers used for investments, and fees to collect taxable income are all types of miscellaneous deductions. If you can itemize, you can deduct the amount of miscellaneous expenses that is over 2% of your adjusted gross income.
MISCELLANEOUS EXPENSES #3
Various expenses fall in the category of miscellaneous deductions. Hobby expenses, up to hobby income, can be taken as miscellaneous deductions. You may also deduct legal fees related to producing or collecting taxable income, doing or keeping your job, or to collect taxable alimony. If you can itemize, you can deduct the amount of miscellaneous expenses that is over 2% of your adjusted gross income.
If you moved at least 50 miles in the last year and your move was job-related, you may be able to deduct the cost of moving your household goods and your traveling expenses. The standard mileage rate for moving is 15 cents per mile from January 1 through August 31 and 22 cents per mile from September 1 through December 31 for 2005. Allowable expenses are deductible whether or not you use Schedule A and itemize your deductions.
There are certain types of income that are not taxed and do not have to be used to determine your taxable income. These include child support payments, military allowances, veterans’ benefits, welfare benefits, and workers’ compensation. A cash rebate that you received for a car purchase is not considered taxable income.
Presidential Election Campaign Contribution
PRESIDENTIAL ELECTION CAMPAIGN CONTRIBUTION
Do you usually mark either the ‘Yes’ or ‘No’ check box on your tax return that asks you if you would like to contribute $3 to the Presidential Election Campaign? If you do choose to contribute, it will not change the tax you pay or the refund you will receive. This fund was set up to help pay the expenses of presidential election campaigns.
BASIS OF PROPERTY – GAINS AND LOSSES
When you purchase property, the basis is usually its cost. Your cost also includes amounts you pay for sales tax paid on the purchase, commissions, and freight charges. Keep accurate records of all items that affect the basis of the property. This will help you to determine if you have a gain or loss when the item is sold.
HOME OFFICE – DEDUCTIONS
Home office deductions cannot be more than your earned income. If they are higher, you must carry over the nondeductible expenses to the following year. Form 8829, Expenses for Business Use of Your Home, is used to deduct home office expenses for a self-employed person.
HOME OFFICE – QUALIFICATIONS
A home office will qualify as the principal place of business if you use it exclusively and regularly to conduct administrative or management activities of your trade or business, and if there is no other fixed location of the business where you can conduct these activities.
LEGAL FEES FOR UNLAWFUL DISCRIMINATION CLAIMS
If you paid attorney fees and court costs after October 22, 2004 for actions settled after that date involving a claim of unlawful discrimination, a claim against the U.S. Government, or a claim made under section 1862(b)(3)(A) of the Social Security Act (Medicare fraud claim), you may be able to take a deduction as an adjustment to income up to the amount you include in gross income from such a claim. You do not have to itemize deductions to claim these expenses.
PAST TAX RETURNS – GETTING COPIES
If you are buying a home, your mortgage banker may ask for copies of several prior years’ tax returns. If you cannot locate them, contact your local Jackson Hewitt office to request copies for returns prepared by Jackson Hewitt. Otherwise, you can file Form 4506, Request for Copy of Tax Return, with the Internal Revenue Service. For a fee, the IRS will mail you copies of your past returns. This can take up to 60 calendar days.
REAL ESTATE – HOME PURCHASES
Your home purchase can be a wonderful tax advantage. You may be able to benefit from itemizing your deductions. If so, you can deduct payments such as mortgage interest, real estate taxes, and most points paid by you or the seller in the year of purchase. The earlier in the year you purchase your home, the more months of mortgage interest you will have by tax time.
REAL ESTATE – CLOSING PAPERS
Once you close on your new home, keep your closing papers, including the Form HUD-1, in a safe place. When it is time for tax preparation, the Form HUD-1 is the document you will need to determine the points and other closing costs you can deduct on your tax return.
REAL ESTATE – SELLING YOUR HOME
If you are getting ready to sell your home, it is time to calculate the basis of your property for tax purposes. If you have saved your Form HUD-1 from closing, you can add the attorney’s fees, surveys, agent’s commissions, title searches, recording fees, and the transfer and stamp taxes to the basis. You may also add improvements you have made to the property.
REAL ESTATE REFINANCING – LOAN POINTS
When interest rates drop, many people rush to refinance their home mortgages. Homeowners often assume that they may also deduct their points. If you use the proceeds of your new loan to make home improvements, you generally may deduct the loan points in the year you refinance. If only a portion of the loan is used to improve the home, only that portion of points is deductible in the year paid. The remainder must be deducted over the life of the loan.
REAL ESTATE REFINANCING – HOME IMPROVEMENTS
Are you thinking about refinancing your home mortgage? The portion of points paid to refinance a loan not used to substantially improve your main residence is generally deductible in equal amounts over the life of the loan. Any points not deducted by the year the loan is paid off are generally fully deducted in the payoff year.
REAL ESTATE – REPAIRS & IMPROVEMENTS
The terms repairs and improvements can be confusing as they apply to the value of your home. A repair or maintenance expense is not tax deductible and cannot be added to the basis of your home. An improvement adds to the value of your home and is added to the basis. Adding vinyl siding and installing a security system are examples of improvements.
RENTAL PROPERTY – MISCELLANEOUS DEDUCTIONS
If you are an owner of rental property, you can take deductions for advertising for tenants, the costs of signs, cleaning supplies, real estate taxes and mortgage interest. Some of the other deductions include landscaping, fees paid to property managers, and the cost of transportation to and from the rental property.
RENTAL PROPERTY – INCOME & EXPENSES
If you are a landlord, you will have income and expenses. Rental income includes payments made by an occupant for the use of property, payments to cancel a lease, advance rent, and any security deposit used as a final payment of rent. Some of your expenses, such as rent lost due to a vacancy, are not deductible. Improvements made to the property must be depreciated over a prescribed number of years and cannot be deducted all at once.
SALE OF A HOME – GENERAL
You can avoid paying taxes on the first $250,000 of profits on the sale of a home if you are single, or the first $500,000 if you are married. Generally, you must own and live in the home two of the last five years. If you did not own and live in the home two of the last five years, you still may be able to use a prorated exclusion amount in certain situations (for example, if you move because of your job).
SALE OF A HOME – LIKE-KIND EXCHANGE
If you acquired your home in a like-kind exchange, you can avoid paying taxes on the first $250,000 of profits on the sale of a home if you are single, or $500,000 if you are married. Generally, you must own and live in the home two of the last five years. If you sold your home after October 22, 2004, however, you must have lived in the home two of the last five years and owned the home for the last five years.
If you owe but cannot pay your full tax liability by April 17 2006, consider the IRS installment plan. To do this, complete Form 9465, Installment Agreement Request, and attach it to the front of your tax return. If the IRS approves the request, you will be charged a fee and interest on any unpaid balance. You should make the payments large enough so that the balance due will be paid off by the due date of your next return.
It is a good idea to keep your previous tax returns, as well as other important documents that have affected your income and deductions for at least three years. If you need a copy of a prior year return, contact your local Jackson Hewitt office to request a copy if that return was prepared by Jackson Hewitt. Otherwise, you can obtain a copy from the IRS for a fee by filing Form 4506, Request for Copy of Tax Return.
Sale of Personal Assets
SALE OF PERSONAL ASSETS
Did you take a loss on the sale of a capital asset such as a nonbusiness automobile or your home? These losses are not deductible. If you sold stocks, bonds, securities, land, or investment real estate, the loss is deductible. Losses on the sale of nonpersonal capital assets are first used to offset gains, after which up to $3,000 of the loss can be deducted on this year’s return unless you are married filing separately. Up to $1,500 of the loss is allowed if you are married filing separately. The remaining loss, if any, can be carried forward to next year and subsequent years until all the loss has been used.
SOCIAL SECURITY BENEFITS – EARNINGS LIMITS CHANGED
If you have reached full retirement age, you do not have to pay back Social Security benefits because of earning too much in your job or part-time job. (If you turned age 65 in 2005, your full retirement age is 65 years and 6 months.) You are allowed unlimited earnings at full retirement age. In the year you reach full retirement age, your earnings for the months prior to attaining full retirement age are limited to $31,800 for 2005 before losing benefits. Earnings in the year before you reach full retirement age, however, are limited to a $12,000 ceiling for 2005 before losing benefits. Under all circumstances, as income increases you may find more of your Social Security benefits are taxable.
SOCIAL SECURITY NUMBERS
If you are getting married and changing your name, be sure that you notify the Social Security Administration. If you have a baby, the hospital may provide Social Security application forms for your child. You must have a valid Social Security number for every person included on the tax return to electronically file with the IRS.
STATE & LOCAL TAXES – ITEMIZED DEDUCTIONS
You have the option of deducting state and local general sales taxes instead of state and local income taxes as an itemized deduction, but you cannot deduct both. If you choose to deduct state and local general sales taxes, you can use the actual taxes you paid during the year or the Optional State Sales Tax Tables to determine the amount of your deduction. You should keep your receipts to substantiate any actual sales taxes you claim.
If you expect to owe at least $1,000 in taxes after subtracting withholding and credits, you are usually required to pay estimated quarterly taxes. For estimated tax purposes, the year is divided into four payment periods. Generally, payments are due on April 15, June 15, September 15, and January 15 of the next year. The first payment for 2006 will be due on April 17, 2006.
ESTIMATED TAX – UNDERPAYMENT PENALTY
If you did not pay enough tax either through withholding or by making estimated tax payments, you will have an underpayment of estimated tax, and you may have to pay a penalty. Generally, there will be no penalty for underpayment unless the amount you owe is $1,000 or more.
If you are employed and receive large refunds, consider adjusting your withholding amounts with your employer. Instead of waiting until the end of the year to receive a big refund, you can complete a new Form W-4, give it to your employer, and have less withholding tax taken out of your paycheck. If income or employment circumstances change, it might also be to your advantage to revise your Form W-4 at that time.