A question that often arises is whether prepaid business expenses can be deducted in the year it is paid. Unfortunately, they cannot. Generally, where an expense relates to a period covering more than 12 months, the IRS and most courts agree that the deduction must be spread over the period to which the expense applies.
For example, you purchase a three-year maintenance plan for your office photocopy machines. The service company offers you a discount to prepay the contract, which you end up doing. In this case, the expense must be amortized (ratably deducted) over the three-year period and not all at once in the year paid. If you had only prepaid three months of the contract, that amount would have been deductible in the year paid. This rule precludes business owners from prepaying expenses as a means to reducing their profits for a particular year.
Thursday, February 25, 2010
Wednesday, February 24, 2010
2009 Tax Strategy XII – Charitable Contribution
In order for donations to be deductible, it must be given to a “qualified U.S. organization.” Not all nonprofit organizations qualify, but the IRS regularly publishes a list of the ones that do.
Limits on Charitable Deductions
In general, deductions for charitable gifts are limited to 50% of a taxpayer's adjusted gross income. However, depending on the kind of organization and the type of property being given, that limit can dip as low as 20%. In addition, if the individual's income is high enough, the partial benefit of his or her charitable deductions can be lost due to an overall limit the IRS imposes on itemized deductions.
Gifts That Return a Benefit to You
If a taxpayer is audited on his or her contributions, the IRS looks to see whether voluntary donations were made intentionally or whether it was just payment for services provided by a charitable organization. For example, payments to a parochial school for a child’s tuition or to a church for a family wedding give the taxpayer a benefit and do not qualify as contributions. Payments to charities for raffle tickets, lotteries, or bingo also fall in this category and aren’t deductible – with these one is really purchasing the chance to win that new TV, trip to Hawaii, etc. In certain situations, only a partial benefit may be received for what is given. In that case, one can generally deduct the amount of the gift that is over and above the value of what is received. Say you paid $50 to attend a fundraising dinner at your church. The church determines that the value of the dinner and program is $15.Your deductible charitable contribution is $35, i.e., the amount of your payment that exceeds $15.
Giving Your Time
Although you may volunteer many hours working for a charitable organization, the value of your time is not deductible. However, if you incur expenses (e.g., travel costs to and from the charity’s location) related to volunteer work, those costs are deductible. Other out-of-pocket costs incurred on behalf of the charity may be deductible as well.
Travel Away From Home for Charity
A charitable deduction can be taken for travel expenses (including meals and lodging) incurred while performing services for a charity in an out-of-town location. However, two important criteria need to be met in order to get this deduction:
(1) You must perform services for the organization in an official capacity while you are away from home.
(2) No “significant element of personal pleasure” must be connected with the travel.
Does this mean your trip cannot be enjoyable? No, but it does mean that the primary purpose of your travel must be related to your charitable duties and not be a personal vacation.
Non-Cash Donations
Donations do not always have to be in cash. One can also deduct the “fair market value” (FMV) of donated items like used clothing, furniture, and appliances (FMV is the price goods are likely to sell for on the open market).
Condition of Contributed Items:
The condition of the contributed item is important, because except as noted below, tax law does not permit a charitable contribution for clothing or household items unless the contributed items are in “good used condition” or “better.”
Tax law also does not allow a deduction for items with minimal monetary value, such as used socks or undergarments. There is a provision that permits a deduction for clothing and household goods that are not in good used condition or better. Under this provision, a deduction can be taken if (1) the amount claimed as a deduction is greater than $500, and (2) the taxpayer includes with the taxpayer’s return a qualified appraisal with respect to the property.
Household items include furniture, furnishings, electronics, appliances, linens, and other similar items. Food, paintings, antiques, and other objects of art, jewelry and gems, and collections are excluded from the definition of household items for this purpose.
Large Donations:
There are other rules that apply to certain types of non-cash contributions including limitations, appraisal requirements, deduction recapture, etc. Therefore, when contemplating an unusual or substantial non-cash contribution, it is appropriate to consult with this office.
Valuing Your Donation:
Perhaps the most difficult part of making non-cash donations is determining the value of the goods being given away. The decision about value is left to you and, unfortunately, there are not any cast-in-concrete formulas to give you the “right” answer. Here are a few general guidelines that may help:
• Consider the condition of each item being given away. Compare the style of your donation with current styles. Categorize each item being given by its condition (e.g., good, excellent, new, etc.)
• Do a little detective work to find out what the item you are donating would sell for in the current market. A visit to the local thrift shop, a quick glance through newspaper classified ads, or a stop at a neighborhood garage sale should provide you with a pretty good idea of the prices of goods like yours.
• If your donation includes equipment or machinery, consult with publications of commercial firms or trade organizations to find out your property’s value. Many of these organizations regularly publish information about going sales prices for cars, boats, airplanes, etc. Caution: When donating used vehicles to charity, special rules apply. See the paragraph on "Donating Used Vehicles to Charity.”
Your research will probably show that most used merchandise has a value that is considerably less than your property’s original cost! However, some items you give away may have actually gone up in value (e.g., antiques, jewelry, or artwork). To determine the value of these, hire a qualified appraiser. Regardless of whether the value of a donated item has gone up or down, if its current value is more than $5,000, a professional appraisal is mandatory (exception: most publicly-traded securities do not require an appraisal). Check with your tax advisor about the details that must be included in the appraisal and the IRS-required form.
Donating Used Vehicles to Charity:
Congress has imposed some tough new rules that substantially limit the deduction for a car donation. If the deduction exceeds $500, the deduction will generally be limited to the gross proceeds from the charity’s sale of the vehicle. In addition, a written acknowledgement from the charity is required and must contain the name of the donor, donor’s tax ID number and the vehicle identification number (or similar number) of the vehicle. The IRS provides form 1098-C for this purpose. There is an exception to these rules for donated vehicles that the charity retains for its own use “to substantially further the organization's regularly conducted activities.” Please call this office for more information.
Record of Non-Cash Donations:
Keep a list of the donated items and include a description of the property, its cost and FMV, how you determined the FMV, and when and how it was acquired. If the property has appreciated in value, be sure to get an appraiser’s report (since special rules apply to appreciated property, check with your tax advisor before you make your contribution). Request a receipt at the time of the donation and make sure it includes the date and the organization's name and address. If the value of donated items is $250 or more, in addition to the information noted above, a written acknowledgment from the organization must state whether the charity provided any goods or services in return for the gift, and if so, a good faith estimate of the value of the goods and services provided. You must have this written acknowledgment by the date you file your return or the extended due date of the return, whichever date is earlier.
Recordkeeping for Cash Donations
For monetary (cash, check) gifts, regardless of the amount, you should have a canceled check (bank record) or a written communication from the donee showing:
• The name of the donee organization,
• The date of the contribution, and
• The amount of the contribution.
The recordkeeping requirements may not be satisfied by maintaining other written records. This means that unless the charitable organization provides a written communication, cash donations put into a “Christmas kettle,” church collection plate, and pass-the-hat collections at youth sporting events will not be deductible. Bank records can substantiate donations by debit or credit card.
While many organizations may take the responsibility of providing a receipt, the tax law actually places this responsibility of getting acknowledgment on the gift donor. “This provision does not impose an information requirement upon charities; rather it places the responsibility upon taxpayers who claim an itemized deduction, without a bank record for substantiation, to request (and maintain in their records) substantiation from the charity.”
The charity’s acknowledgment must contain the following:
• The amount of money and a description of the value of other property, if any, contributed
• Whether the charity provided any goods or services in return for the gift
• A description and reasonable estimate of the value of the goods or services provided
Limits on Charitable Deductions
In general, deductions for charitable gifts are limited to 50% of a taxpayer's adjusted gross income. However, depending on the kind of organization and the type of property being given, that limit can dip as low as 20%. In addition, if the individual's income is high enough, the partial benefit of his or her charitable deductions can be lost due to an overall limit the IRS imposes on itemized deductions.
Gifts That Return a Benefit to You
If a taxpayer is audited on his or her contributions, the IRS looks to see whether voluntary donations were made intentionally or whether it was just payment for services provided by a charitable organization. For example, payments to a parochial school for a child’s tuition or to a church for a family wedding give the taxpayer a benefit and do not qualify as contributions. Payments to charities for raffle tickets, lotteries, or bingo also fall in this category and aren’t deductible – with these one is really purchasing the chance to win that new TV, trip to Hawaii, etc. In certain situations, only a partial benefit may be received for what is given. In that case, one can generally deduct the amount of the gift that is over and above the value of what is received. Say you paid $50 to attend a fundraising dinner at your church. The church determines that the value of the dinner and program is $15.Your deductible charitable contribution is $35, i.e., the amount of your payment that exceeds $15.
Giving Your Time
Although you may volunteer many hours working for a charitable organization, the value of your time is not deductible. However, if you incur expenses (e.g., travel costs to and from the charity’s location) related to volunteer work, those costs are deductible. Other out-of-pocket costs incurred on behalf of the charity may be deductible as well.
Travel Away From Home for Charity
A charitable deduction can be taken for travel expenses (including meals and lodging) incurred while performing services for a charity in an out-of-town location. However, two important criteria need to be met in order to get this deduction:
(1) You must perform services for the organization in an official capacity while you are away from home.
(2) No “significant element of personal pleasure” must be connected with the travel.
Does this mean your trip cannot be enjoyable? No, but it does mean that the primary purpose of your travel must be related to your charitable duties and not be a personal vacation.
Non-Cash Donations
Donations do not always have to be in cash. One can also deduct the “fair market value” (FMV) of donated items like used clothing, furniture, and appliances (FMV is the price goods are likely to sell for on the open market).
Condition of Contributed Items:
The condition of the contributed item is important, because except as noted below, tax law does not permit a charitable contribution for clothing or household items unless the contributed items are in “good used condition” or “better.”
Tax law also does not allow a deduction for items with minimal monetary value, such as used socks or undergarments. There is a provision that permits a deduction for clothing and household goods that are not in good used condition or better. Under this provision, a deduction can be taken if (1) the amount claimed as a deduction is greater than $500, and (2) the taxpayer includes with the taxpayer’s return a qualified appraisal with respect to the property.
Household items include furniture, furnishings, electronics, appliances, linens, and other similar items. Food, paintings, antiques, and other objects of art, jewelry and gems, and collections are excluded from the definition of household items for this purpose.
Large Donations:
There are other rules that apply to certain types of non-cash contributions including limitations, appraisal requirements, deduction recapture, etc. Therefore, when contemplating an unusual or substantial non-cash contribution, it is appropriate to consult with this office.
Valuing Your Donation:
Perhaps the most difficult part of making non-cash donations is determining the value of the goods being given away. The decision about value is left to you and, unfortunately, there are not any cast-in-concrete formulas to give you the “right” answer. Here are a few general guidelines that may help:
• Consider the condition of each item being given away. Compare the style of your donation with current styles. Categorize each item being given by its condition (e.g., good, excellent, new, etc.)
• Do a little detective work to find out what the item you are donating would sell for in the current market. A visit to the local thrift shop, a quick glance through newspaper classified ads, or a stop at a neighborhood garage sale should provide you with a pretty good idea of the prices of goods like yours.
• If your donation includes equipment or machinery, consult with publications of commercial firms or trade organizations to find out your property’s value. Many of these organizations regularly publish information about going sales prices for cars, boats, airplanes, etc. Caution: When donating used vehicles to charity, special rules apply. See the paragraph on "Donating Used Vehicles to Charity.”
Your research will probably show that most used merchandise has a value that is considerably less than your property’s original cost! However, some items you give away may have actually gone up in value (e.g., antiques, jewelry, or artwork). To determine the value of these, hire a qualified appraiser. Regardless of whether the value of a donated item has gone up or down, if its current value is more than $5,000, a professional appraisal is mandatory (exception: most publicly-traded securities do not require an appraisal). Check with your tax advisor about the details that must be included in the appraisal and the IRS-required form.
Donating Used Vehicles to Charity:
Congress has imposed some tough new rules that substantially limit the deduction for a car donation. If the deduction exceeds $500, the deduction will generally be limited to the gross proceeds from the charity’s sale of the vehicle. In addition, a written acknowledgement from the charity is required and must contain the name of the donor, donor’s tax ID number and the vehicle identification number (or similar number) of the vehicle. The IRS provides form 1098-C for this purpose. There is an exception to these rules for donated vehicles that the charity retains for its own use “to substantially further the organization's regularly conducted activities.” Please call this office for more information.
Record of Non-Cash Donations:
Keep a list of the donated items and include a description of the property, its cost and FMV, how you determined the FMV, and when and how it was acquired. If the property has appreciated in value, be sure to get an appraiser’s report (since special rules apply to appreciated property, check with your tax advisor before you make your contribution). Request a receipt at the time of the donation and make sure it includes the date and the organization's name and address. If the value of donated items is $250 or more, in addition to the information noted above, a written acknowledgment from the organization must state whether the charity provided any goods or services in return for the gift, and if so, a good faith estimate of the value of the goods and services provided. You must have this written acknowledgment by the date you file your return or the extended due date of the return, whichever date is earlier.
Recordkeeping for Cash Donations
For monetary (cash, check) gifts, regardless of the amount, you should have a canceled check (bank record) or a written communication from the donee showing:
• The name of the donee organization,
• The date of the contribution, and
• The amount of the contribution.
The recordkeeping requirements may not be satisfied by maintaining other written records. This means that unless the charitable organization provides a written communication, cash donations put into a “Christmas kettle,” church collection plate, and pass-the-hat collections at youth sporting events will not be deductible. Bank records can substantiate donations by debit or credit card.
While many organizations may take the responsibility of providing a receipt, the tax law actually places this responsibility of getting acknowledgment on the gift donor. “This provision does not impose an information requirement upon charities; rather it places the responsibility upon taxpayers who claim an itemized deduction, without a bank record for substantiation, to request (and maintain in their records) substantiation from the charity.”
The charity’s acknowledgment must contain the following:
• The amount of money and a description of the value of other property, if any, contributed
• Whether the charity provided any goods or services in return for the gift
• A description and reasonable estimate of the value of the goods or services provided
Monday, February 15, 2010
2009 Tax Strategy XI – Be prepared to receive your 1099
Form 1099s are the counter part to the W-2s, they are for payments made by all types of business and nonprofit organizations for non payroll payments like interest, dividends or self employment income. There are 16 different types of 1099s and are due to recipients by February 1, 2010 and copies to the IRS by March 1, 2010. Listings of these are at the bottom of this blog.
One of the more prevalent 1099s is the 1099-MISC, which is for Miscellaneous Income. 1099-MISC covers the following:
(1) Royalties or broker payments in lieu of dividends or tax-exempt interest
(2) Services - If you received less than $600 in the year a 1099 is not required
(3) Rents
(4) Prizes and awards
(5) Other income payments
Payments to Corporations are exempt except for the following:
(1) Medical and health care payments
(2) Fish purchases for cash. “Fish” means all fish and other forms of aquatic life
(3) Attorneys’ fees
(4) Substitute payments in lieu of dividends or tax-exempt interest
(5) Payments by a federal executive agency for services
There are detailed rules in preparing and filling a 1099. To get more detailed information, visit the IRS web site www.irs.gov/pub/irs-pdf/i1099gi_09.pdf
Listing of 1099s
Form 1099-A: Acquisition or Abandonment of Secured Property
Form 1099-B: Proceeds from Broker and Barter Exchange Transactions
Form 1099-C: Cancellation of Debt
Form 1099-CAP: Changes in Corporate Control and Capital Structure
Form 1099-DIV: Dividends and Distributions
Form 1099-G: Certain Government Payments
Form 1099-H: Health Coverage Tax Credit (HCTC) Advance Payments
Form 1099-INT: Interest Income
Form 1099-LTC: Long Term Care and Accelerated Death Benefits
Form 1099-MISC: Miscellaneous Income
Form 1099-OID: Original Issue Discount
Form 1099-PATR: Taxable Distributions Received From Cooperatives
Form 1099-Q: Payments from Qualified Education Programs (Under Sections 529 and 530)
Form 1099-R: Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
Form 1099-S: Proceeds from Real Estate Transactions
Form 1099-SA: Distributions From an HSA, Archer MSA, or Medicare Advantage MSA
One of the more prevalent 1099s is the 1099-MISC, which is for Miscellaneous Income. 1099-MISC covers the following:
(1) Royalties or broker payments in lieu of dividends or tax-exempt interest
(2) Services - If you received less than $600 in the year a 1099 is not required
(3) Rents
(4) Prizes and awards
(5) Other income payments
Payments to Corporations are exempt except for the following:
(1) Medical and health care payments
(2) Fish purchases for cash. “Fish” means all fish and other forms of aquatic life
(3) Attorneys’ fees
(4) Substitute payments in lieu of dividends or tax-exempt interest
(5) Payments by a federal executive agency for services
There are detailed rules in preparing and filling a 1099. To get more detailed information, visit the IRS web site www.irs.gov/pub/irs-pdf/i1099gi_09.pdf
Listing of 1099s
Form 1099-A: Acquisition or Abandonment of Secured Property
Form 1099-B: Proceeds from Broker and Barter Exchange Transactions
Form 1099-C: Cancellation of Debt
Form 1099-CAP: Changes in Corporate Control and Capital Structure
Form 1099-DIV: Dividends and Distributions
Form 1099-G: Certain Government Payments
Form 1099-H: Health Coverage Tax Credit (HCTC) Advance Payments
Form 1099-INT: Interest Income
Form 1099-LTC: Long Term Care and Accelerated Death Benefits
Form 1099-MISC: Miscellaneous Income
Form 1099-OID: Original Issue Discount
Form 1099-PATR: Taxable Distributions Received From Cooperatives
Form 1099-Q: Payments from Qualified Education Programs (Under Sections 529 and 530)
Form 1099-R: Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
Form 1099-S: Proceeds from Real Estate Transactions
Form 1099-SA: Distributions From an HSA, Archer MSA, or Medicare Advantage MSA
Sunday, February 14, 2010
2009 Tax Strategy X – Do you have your W-2 Yet?
You should receive a Form W-2, Wage and Tax Statement, from each of your employers for use in preparing your federal tax return. Employers must furnish this record of 2009 earnings and withheld taxes no later than February 1, 2010 (if mailed, allow a few days for delivery). If you do not receive your Form W-2, contact your employer to find out if and when the W-2 was mailed. If it was mailed, it may have been returned to your employer because of an incorrect address. After contacting your employer, allow a reasonable amount of time for your employer to resend or to issue the W-2.
If you still do not receive your W-2 by February 15th, contact the IRS for assistance at 1-800-829-1040. When you call, have the following information handy:
• The employer's name and complete address, including zip code, the employer's identification number (if known), and telephone number,
• Your name and address, including zip code, Social Security number, and telephone number; and
• An estimate of the wages you earned, the federal income tax withheld, and the dates you began and ended employment.
If you misplaced your W-2, contact your employer. Your employer can replace the lost form with a "reissued statement." Be aware that your employer is allowed to charge you a fee for providing you with a new W-2.
You still must file your tax return on time even if you do not receive your Form W-2. If you cannot get a W-2 by the tax-filing deadline, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement, but it will delay any refund due while the information is verified.
If you receive a corrected W-2 after your return is filed and the information it contains does not match the income or withheld tax that you reported on your return, you must file an amended return on Form 1040X, Amended U.S. Individual Income Tax Return.
If you still do not receive your W-2 by February 15th, contact the IRS for assistance at 1-800-829-1040. When you call, have the following information handy:
• The employer's name and complete address, including zip code, the employer's identification number (if known), and telephone number,
• Your name and address, including zip code, Social Security number, and telephone number; and
• An estimate of the wages you earned, the federal income tax withheld, and the dates you began and ended employment.
If you misplaced your W-2, contact your employer. Your employer can replace the lost form with a "reissued statement." Be aware that your employer is allowed to charge you a fee for providing you with a new W-2.
You still must file your tax return on time even if you do not receive your Form W-2. If you cannot get a W-2 by the tax-filing deadline, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement, but it will delay any refund due while the information is verified.
If you receive a corrected W-2 after your return is filed and the information it contains does not match the income or withheld tax that you reported on your return, you must file an amended return on Form 1040X, Amended U.S. Individual Income Tax Return.
Saturday, February 13, 2010
2009 Tax Strategy IX – Avoid Identity Theft During Tax Season
Consumers should protect themselves against online identity theft and other scams that increase during and linger after the filing season. Such scams may appropriate the name, logo or other appurtenances of the IRS or U.S. Department of the Treasury to mislead taxpayers into believing that the scam is legitimate. Scams involving the impersonation of the IRS usually take the form of e-mails, tweets or other online messages to consumers. Scammers may also use phones and faxes to reach intended victims. Some scammers set up phony Web sites.
The IRS and E-mail
Generally, the IRS does not send unsolicited e-mails to taxpayers. Further, the IRS does not discuss tax account information with taxpayers via e-mail or use e-mail to solicit sensitive financial and personal information from taxpayers. The IRS does not request financial account security information, such as PIN numbers, from taxpayers.
Object of Scams
Most scams impersonating the IRS are identity theft schemes. In this type of scam, the scammer poses as a legitimate institution to trick consumers into revealing personal and financial information - such as passwords and Social Security, PIN, bank account and credit card numbers - that can be used to gain access to and steal their bank, credit card or other financial accounts. Attempted identity theft scams that take place via e-mail are known as phishing. Other scams may try to persuade a victim to advance sums of money in the hope of realizing a larger gain. These are known as advance fee scams.
How an Identity Theft Scam Works
Most of the scams that impersonate the IRS are identity theft scams. Typically, a consumer will receive an e-mail that claims to come from the IRS or Treasury Department. The message will contain an enticing or intimidating subject line, such as tax refund, inherited funds or IRS notice. Usually, the message will state that the recipient needs to provide the IRS with information to obtain the refund or avoid some penalty. The message will instruct the consumer to open an attachment or click on a link in the e-mail. This may lead to an official-looking form to be filled out online or send the taxpayer to a seemingly genuine but bogus IRS Web site. The look-alike site will then contain a phony but genuine-looking online form or interactive application that requires the personal and financial information the scammer can use to commit identity theft.
Alternatively, the clicked link may secretly download malware to the consumer's computer. Malware is malicious code that can take over the computer's hard drive, giving the scammer remote access to the computer, or it could look for passwords and other information and send them to the scammer.
Phony Web or Commercial Sites
In many IRS-impersonation scams, the scammer sends the consumer to a phony Web site that mimics the appearance of the genuine IRS Web site, IRS.gov. This allows the scammer to steer victims to phony interactive forms or applications that appear genuine but require the targeted victim to enter personal and financial information that will be used to commit identity theft.
The official Web site for the Internal Revenue Service is IRS.gov, and all IRS.gov Web page addresses begin with http://www.irs.gov/.
In addition to Web sites established by scammers, there are commercial Internet sites that often resemble the authentic IRS site or contain some form of the IRS name in the address but end with a .com, .net, .org or other designation instead of .gov. These sites have no connection to the IRS. Consumers may unknowingly visit these sites when searching the Internet to retrieve tax forms, publications and other information from the IRS.
Frequent or Recent Scams
There are a number of scams that impersonate the IRS. Some of them appear with great frequency, particularly during and right after filing season, and recur annually. Others are new.
• Refund Scam: This is the most frequent IRS-impersonation scam seen by the IRS. In this phishing scam, a bogus e-mail claiming to come from the IRS tells the consumer that he or she is eligible to receive a tax refund for a specified amount. It may use the phrase "last annual calculations of your fiscal activity." To claim the tax refund, the consumer must open an attachment or click on a link contained in the e-mail to access and complete a claim form. The form requires the entry of personal and financial information. Several variations on the refund scam have claimed to come from the Exempt Organizations area of the IRS or the name and signature of a genuine or made-up IRS executive. In reality, taxpayers do not complete a special form to obtain their federal tax refund; refunds are triggered by the tax return they submitted to the IRS.
• Lottery winnings or cash consignment: These advance fee scam e-mails claim to come from the Treasury Department to notify recipients that they'll receive millions of dollars in recovered funds or lottery winnings or cash consignment if they provide certain personal information, including phone numbers, via return e-mail. The e-mail may be just the first step in a multi-step scheme, in which the victim is later contacted by telephone or further e-mail and instructed to deposit taxes on the funds or winnings before they can receive any of it. Alternatively, they may be sent a phony check of the funds or winnings and told to deposit it but pay 10 percent in taxes or fees. Thinking that the check must have cleared the bank and is genuine, some people comply. However, the scammers, not the Treasury Department, will get the taxes or fees. In reality, the Treasury Department does not become involved in notification of inheritances or lottery or other winnings.
• Beneficial Owner Form: This fax-based phishing scam, which generally targets foreign nationals, recurs periodically. It's based on a genuine IRS form, the W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. The scammer, though, invents his or her own number and name for the form. The scammer modifies the form to request passport numbers, information that is often used for account security purposes (such as mother's maiden name) and similar detailed personal and financial information, and states that the recipient may have to pay additional tax if he or she fails to immediately fax back the completed form. In reality, the real W-8BEN is completed by banks, not individuals.
Other Known Scams
The contents of other IRS-impersonation scams vary but may claim that the recipient will be paid for participating in an online survey or is under investigation or audit. Some scam e-mails have referenced Recovery-related tax provisions, such as Making Work Pay, or solicited for charitable donations to victims of natural disasters. Taxpayers should beware of an e-mail scam that references underreported income and the recipient's "tax statement", since clicking on a link or opening an attachment is known to download malware onto the recipient's computer.
How to Spot a Scam
Many e-mail scams are fairly sophisticated and hard to detect. However, there are signs to watch for, such as an e-mail that:
• Requests detailed or an unusual amount of personal and/or financial information, such as name, SSN, bank or credit card account numbers or security-related information, such as mother's maiden name, either in the e-mail itself or on anther site to which a link in the e-mail sends the recipient.
• Dangles bait to get the recipient to respond to the e-mail, such as mentioning a tax refund or offering to pay the recipient to participate in an IRS survey.
• Threatens a consequence for not responding to the e-mail, such as additional taxes or blocking access to the recipient's funds.
• Gets the Internal Revenue Service or other federal agency names wrong.
• Uses incorrect grammar or odd phrasing (many of the e-mail scams originate overseas and are written by non-native English speakers).
• Uses a really long address in any link contained in the e-mail message or one that does not start with the actual IRS Web site address (http://www.irs.gov). The actual link's address, or url, is revealed by moving the mouse over the link included in the text of the e-mail.
What to Do
Taxpayers who receive a suspicious e-mail claiming to come from the IRS should take the following steps:
• Avoid opening any attachments to the e-mail, in case they contain malicious code that will infect your computer.
• Avoid clicking on any links, for the same reason. Alternatively, the links may connect to a phony IRS Web site that appears authentic and then prompts for p ersonal identifiers, bank or credit card account numbers or PINs.
• Visit the IRS Web site, www.irs.gov, to use the "Where's My Refund?" interactive tool to determine if they are really getting a refund, rather than responding to the e-mail message.
• Forward the suspicious e-mail or url address to the IRS mailbox phishing@irs.gov, then delete the e-mail from their inbox.
• Consumers who believe they are or may be victims of identity theft or other scams may visit the U.S. Federal Trade Commission's Web site for identity theft, www.OnGuardOnline.gov, for guidance in what to do. The IRS is one of the sponsors of this site.
More information on IRS-impersonation scams, identity theft and suspicious e-mail is available on IRS.gov.
The IRS and E-mail
Generally, the IRS does not send unsolicited e-mails to taxpayers. Further, the IRS does not discuss tax account information with taxpayers via e-mail or use e-mail to solicit sensitive financial and personal information from taxpayers. The IRS does not request financial account security information, such as PIN numbers, from taxpayers.
Object of Scams
Most scams impersonating the IRS are identity theft schemes. In this type of scam, the scammer poses as a legitimate institution to trick consumers into revealing personal and financial information - such as passwords and Social Security, PIN, bank account and credit card numbers - that can be used to gain access to and steal their bank, credit card or other financial accounts. Attempted identity theft scams that take place via e-mail are known as phishing. Other scams may try to persuade a victim to advance sums of money in the hope of realizing a larger gain. These are known as advance fee scams.
How an Identity Theft Scam Works
Most of the scams that impersonate the IRS are identity theft scams. Typically, a consumer will receive an e-mail that claims to come from the IRS or Treasury Department. The message will contain an enticing or intimidating subject line, such as tax refund, inherited funds or IRS notice. Usually, the message will state that the recipient needs to provide the IRS with information to obtain the refund or avoid some penalty. The message will instruct the consumer to open an attachment or click on a link in the e-mail. This may lead to an official-looking form to be filled out online or send the taxpayer to a seemingly genuine but bogus IRS Web site. The look-alike site will then contain a phony but genuine-looking online form or interactive application that requires the personal and financial information the scammer can use to commit identity theft.
Alternatively, the clicked link may secretly download malware to the consumer's computer. Malware is malicious code that can take over the computer's hard drive, giving the scammer remote access to the computer, or it could look for passwords and other information and send them to the scammer.
Phony Web or Commercial Sites
In many IRS-impersonation scams, the scammer sends the consumer to a phony Web site that mimics the appearance of the genuine IRS Web site, IRS.gov. This allows the scammer to steer victims to phony interactive forms or applications that appear genuine but require the targeted victim to enter personal and financial information that will be used to commit identity theft.
The official Web site for the Internal Revenue Service is IRS.gov, and all IRS.gov Web page addresses begin with http://www.irs.gov/.
In addition to Web sites established by scammers, there are commercial Internet sites that often resemble the authentic IRS site or contain some form of the IRS name in the address but end with a .com, .net, .org or other designation instead of .gov. These sites have no connection to the IRS. Consumers may unknowingly visit these sites when searching the Internet to retrieve tax forms, publications and other information from the IRS.
Frequent or Recent Scams
There are a number of scams that impersonate the IRS. Some of them appear with great frequency, particularly during and right after filing season, and recur annually. Others are new.
• Refund Scam: This is the most frequent IRS-impersonation scam seen by the IRS. In this phishing scam, a bogus e-mail claiming to come from the IRS tells the consumer that he or she is eligible to receive a tax refund for a specified amount. It may use the phrase "last annual calculations of your fiscal activity." To claim the tax refund, the consumer must open an attachment or click on a link contained in the e-mail to access and complete a claim form. The form requires the entry of personal and financial information. Several variations on the refund scam have claimed to come from the Exempt Organizations area of the IRS or the name and signature of a genuine or made-up IRS executive. In reality, taxpayers do not complete a special form to obtain their federal tax refund; refunds are triggered by the tax return they submitted to the IRS.
• Lottery winnings or cash consignment: These advance fee scam e-mails claim to come from the Treasury Department to notify recipients that they'll receive millions of dollars in recovered funds or lottery winnings or cash consignment if they provide certain personal information, including phone numbers, via return e-mail. The e-mail may be just the first step in a multi-step scheme, in which the victim is later contacted by telephone or further e-mail and instructed to deposit taxes on the funds or winnings before they can receive any of it. Alternatively, they may be sent a phony check of the funds or winnings and told to deposit it but pay 10 percent in taxes or fees. Thinking that the check must have cleared the bank and is genuine, some people comply. However, the scammers, not the Treasury Department, will get the taxes or fees. In reality, the Treasury Department does not become involved in notification of inheritances or lottery or other winnings.
• Beneficial Owner Form: This fax-based phishing scam, which generally targets foreign nationals, recurs periodically. It's based on a genuine IRS form, the W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. The scammer, though, invents his or her own number and name for the form. The scammer modifies the form to request passport numbers, information that is often used for account security purposes (such as mother's maiden name) and similar detailed personal and financial information, and states that the recipient may have to pay additional tax if he or she fails to immediately fax back the completed form. In reality, the real W-8BEN is completed by banks, not individuals.
Other Known Scams
The contents of other IRS-impersonation scams vary but may claim that the recipient will be paid for participating in an online survey or is under investigation or audit. Some scam e-mails have referenced Recovery-related tax provisions, such as Making Work Pay, or solicited for charitable donations to victims of natural disasters. Taxpayers should beware of an e-mail scam that references underreported income and the recipient's "tax statement", since clicking on a link or opening an attachment is known to download malware onto the recipient's computer.
How to Spot a Scam
Many e-mail scams are fairly sophisticated and hard to detect. However, there are signs to watch for, such as an e-mail that:
• Requests detailed or an unusual amount of personal and/or financial information, such as name, SSN, bank or credit card account numbers or security-related information, such as mother's maiden name, either in the e-mail itself or on anther site to which a link in the e-mail sends the recipient.
• Dangles bait to get the recipient to respond to the e-mail, such as mentioning a tax refund or offering to pay the recipient to participate in an IRS survey.
• Threatens a consequence for not responding to the e-mail, such as additional taxes or blocking access to the recipient's funds.
• Gets the Internal Revenue Service or other federal agency names wrong.
• Uses incorrect grammar or odd phrasing (many of the e-mail scams originate overseas and are written by non-native English speakers).
• Uses a really long address in any link contained in the e-mail message or one that does not start with the actual IRS Web site address (http://www.irs.gov). The actual link's address, or url, is revealed by moving the mouse over the link included in the text of the e-mail.
What to Do
Taxpayers who receive a suspicious e-mail claiming to come from the IRS should take the following steps:
• Avoid opening any attachments to the e-mail, in case they contain malicious code that will infect your computer.
• Avoid clicking on any links, for the same reason. Alternatively, the links may connect to a phony IRS Web site that appears authentic and then prompts for p ersonal identifiers, bank or credit card account numbers or PINs.
• Visit the IRS Web site, www.irs.gov, to use the "Where's My Refund?" interactive tool to determine if they are really getting a refund, rather than responding to the e-mail message.
• Forward the suspicious e-mail or url address to the IRS mailbox phishing@irs.gov, then delete the e-mail from their inbox.
• Consumers who believe they are or may be victims of identity theft or other scams may visit the U.S. Federal Trade Commission's Web site for identity theft, www.OnGuardOnline.gov, for guidance in what to do. The IRS is one of the sponsors of this site.
More information on IRS-impersonation scams, identity theft and suspicious e-mail is available on IRS.gov.
Friday, February 12, 2010
2009 Tax Strategy VIII – Special Tax Treatment for Dividend Income
Does the dividend you receive qualify for special treatment? When you receive a 1099-DIV, the dividends reported could be Qualifying Dividends, Non-Qualifying Dividends, Ordinary Dividends or Capital Gain Dividends. Qualifying Dividends get special tax treatment.
Qualifying Dividends are taxed at different rates than the income tax rate, thus in 2009 the tax on Qualifying Dividend Income needs to be calculated separately at 15% for Taxpayers in the 25% income tax bracket or higher and are not taxable for Taxpayers below the 25% income tax bracket.
WHAT IS A DIVIDEND
A dividend defined by IRC Section 316 is a distribution by a corporation to its shareholders out of accumulated earnings and profits. Thus the distribution MUST be:
(1) From a corporation and not any other entity
(2) Received by shareholders in their capacity as shareholders and not as employees, vendors or creditors.
(3) The corporation MUST have earnings and profits
WHAT IS A QUALIFYING DIVIDEND
The following are the requirements for a dividend to be classified as a Qualifying Dividend
(1) Must be from a US domestic corporation or a qualified foreign corporation
(2) The corporation CANNOT be tax-exempt
(3) Must be received by non-corporate taxpayers. Dividends received by partnerships, “S” corporations or any other legal entity do not qualify.
(4) Must be held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date
(5) Dividends paid by an Employee Stock Ownership Plan [ESOP] do not qualify
(6) A Qualified Foreign Corporation is a corporation that is incorporated in the US or in a US possession and traded on a US exchange but has non-US citizens as majority stockholders. In addition, a corporation incorporated in a foreign country that is covered by a comprehensive tax treaty with the US is a Qualified Foreign Corporation.
EXAMPLES OF DISTRIBUTIONS THAT ARE QUALIFYING DIIVIDENDS
(1) Common Stock
(2) Preferred Stock [Special Rules Apply]
(3) Some Mutual Funds [Special Rules Apply]
(4) Real Estate Investment Trusts - REITs [Special Rules Apply]
EXAMPLES OF DISTRIBUTIONS THAT ARE NOT QUALIFYING DIVIDNEDS
(1) Money Market and Bonds Funds
(2) Credit Union Dividends
(3) “S” Corporations
(4) Payment in Lieu of Dividends
(5) Return of Capital
Qualifying Dividends are taxed at different rates than the income tax rate, thus in 2009 the tax on Qualifying Dividend Income needs to be calculated separately at 15% for Taxpayers in the 25% income tax bracket or higher and are not taxable for Taxpayers below the 25% income tax bracket.
WHAT IS A DIVIDEND
A dividend defined by IRC Section 316 is a distribution by a corporation to its shareholders out of accumulated earnings and profits. Thus the distribution MUST be:
(1) From a corporation and not any other entity
(2) Received by shareholders in their capacity as shareholders and not as employees, vendors or creditors.
(3) The corporation MUST have earnings and profits
WHAT IS A QUALIFYING DIVIDEND
The following are the requirements for a dividend to be classified as a Qualifying Dividend
(1) Must be from a US domestic corporation or a qualified foreign corporation
(2) The corporation CANNOT be tax-exempt
(3) Must be received by non-corporate taxpayers. Dividends received by partnerships, “S” corporations or any other legal entity do not qualify.
(4) Must be held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date
(5) Dividends paid by an Employee Stock Ownership Plan [ESOP] do not qualify
(6) A Qualified Foreign Corporation is a corporation that is incorporated in the US or in a US possession and traded on a US exchange but has non-US citizens as majority stockholders. In addition, a corporation incorporated in a foreign country that is covered by a comprehensive tax treaty with the US is a Qualified Foreign Corporation.
EXAMPLES OF DISTRIBUTIONS THAT ARE QUALIFYING DIIVIDENDS
(1) Common Stock
(2) Preferred Stock [Special Rules Apply]
(3) Some Mutual Funds [Special Rules Apply]
(4) Real Estate Investment Trusts - REITs [Special Rules Apply]
EXAMPLES OF DISTRIBUTIONS THAT ARE NOT QUALIFYING DIVIDNEDS
(1) Money Market and Bonds Funds
(2) Credit Union Dividends
(3) “S” Corporations
(4) Payment in Lieu of Dividends
(5) Return of Capital
Thursday, February 11, 2010
2009 Tax Strategy VII – Tax Credits
Each year, many taxpayers overlook tax credits, even though they often qualify for one or more of them. Though both tax deductions and credits save you money, they do it in different ways. A deduction lowers the income on which tax is figured. The tax credit is even better because it lowers the tax itself. Take time now to review your records and see if you qualify for one of these tax credits; many are new or expanded for the 2009 tax filing year.
First-time Homebuyer's Credit
A credit limit of $8,000 for qualified first-time homebuyers is available in 2009. Further, long-time residents who owned and used the same principal residence for any 5 consecutive years of the last 8 years prior to purchasing a subsequent new principal residence, may now qualify for a tax credit of up to $6,500. Contact us for further information regarding this credit.
Energy Improvements Qualify for Expanded Tax Credits
People who weatherize their homes or purchase alternative energy equipment may qualify for either of two expanded home energy tax credits: the Residential Energy Property Credit and the Residential Energy Efficient Property Credit.
• Residential Energy Property Credit: The new law increases the energy tax credit for homeowners who make energy efficient improvements to their existing homes. The new law increases the credit rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 for improvements placed in service in 2009 and 2010. The credit applies to improvements such as adding insulation, energy efficient exterior windows and energy-efficient heating and air conditioning systems.
• Residential Energy Efficient Property Credit: This nonrefundable energy tax credit will help individual taxpayers pay for qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbines. The new law removes some of the previously imposed maximum amounts and allows for a credit equal to 30 percent of the cost of qualified property.
American Opportunity Credit Helps Pay for First Four Years of College
More parents and students can use a federal education credit to offset part of the cost of college under the new American Opportunity Credit. This credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Income guidelines are expanded and required course materials are added to the list of qualified expenses. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.
New Vehicle Purchase Incentive
New car buyers can deduct the state or local sales or excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. There is no limit on the number of vehicles that may be purchased, and eligible taxpayers may claim the deduction for taxes paid on multiple purchases. However, the deduction is limited to the tax on up to $49,500 of the purchase price of each qualifying new vehicle. Qualifying new vehicles must be purchased, not leased, after Feb. 16, 2009, and before Jan. 1, 2010.
Earned Income Tax Credit (EITC)
The Earned Income Tax Credit (EITC) helps low- and moderate-income workers and working families. Working families with incomes below $48,279 (married filing jointly in 2009) and childless workers with incomes under $18,440 often qualify. Ordinarily, you must have earned income as an employee, independent contractor, farmer or business owner. Some disability retirees are also eligible. There is only a slight increase in these income levels for 2010; for example, working families with incomes below $48,362 (married filing jointly) and childless workers with incomes under $18,470, may quality in 2010.
Child Tax Credit
If you have a dependent child under age 17 at the end of 2009, you probably qualify for the child tax credit. This credit, which can be as much as $1,000 for each qualifying child, is in addition to the regular $3,650 personal exemption for 2009 you can claim for each dependent. A change in the way the credit is figured means that more low- and moderate-income families will qualify for the full credit on their 2009 returns. Don't confuse the child tax credit with the child care credit.
Note: In IRS Publication 972, there is a Child Tax Credit Worksheet to help you determine if you can claim the tax credit.
Credit for Child and Dependent Care Expenses
If you pay someone to care for your child so you can work or look for work, you probably qualify for this credit. Normally, your child must be your dependent and under age 13. Though often referred to as the child care credit, this credit is also available if you pay someone to care for a spouse or dependent, regardless of age, who is unable to care for himself or herself. In most cases, you need to obtain the care provider's social security number or taxpayer identification number and enter it on your return.
Note: Form 1040 filers claim the credit for child and dependent care expenses on Form 2441. Form 1040A filers claim it on Schedule 2.
Saver's Credit
The saver's credit helps low-and moderate-income workers save for retirement. You probably qualify if your income is below certain limits and you contribute to an IRA or workplace retirement plan, such as a 401(k). Income limits for 2009 are $27,750 for singles and married filing separately, $41,625 for heads of household and $55,500 for joint filers. These income limits are adjusted annually for inflation, however, will remain unchanged for 2010. The credit, up to $1,000, is based on a percentage (10-50%) of each dollar placed into a retirement plan, up to the first $2,000. The lower the adjusted gross income, the higher the credit percentage; resulting in the maximum credit of $1,000 (50% of $2,000).
Tip: Also known as the retirement savings contributions credit, the saver's credit is available in addition to any other tax savings that apply. You still have time to put money in an IRA and get the saver's credit on your 2009 return. 2009 IRA contributions can be made until April 15, 2010. Use Form 8880 to claim the saver's credit.
Caution: Like other tax credits, the saver's credit can increase a taxpayer's refund or reduce the tax owed. Though the maximum saver's credit is $1,000 ($2,000 for married couples), the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.
A taxpayer's credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver's credit, and its instructions have details on figuring the credit correctly.
Other Credits Available
IRS.gov has information on these additional credits:
• Foreign tax credit, claimed on Form 1040 Line 47
• Credit for the elderly or the disabled, claimed on Form 1040 Schedule R
• Adoption credit, claimed on Form 8839
• Alternative motor vehicle (including hybrids) credit, claimed on Form 8910
• Credit for prior year minimum tax, claimed on Form 8801
Tax Credits Can Save You Money
These credits can increase your refund or reduce the tax you owe. Usually, credits can only lower your tax to zero. But some credits, such as the EITC and the child tax credit, can actually exceed your tax. Though some credits are available to people at all income levels, others have income restrictions. These include the EITC, saver's credit, education credits and child tax credit.
Tip: If you qualify, you can claim any credit, regardless of whether you itemize your deductions. Any credit can be claimed on Form 1040.
Tax credits help you pay part of the cost of raising a family, going to college, savings for retirement, or getting daycare so you can work or go to school.
First-time Homebuyer's Credit
A credit limit of $8,000 for qualified first-time homebuyers is available in 2009. Further, long-time residents who owned and used the same principal residence for any 5 consecutive years of the last 8 years prior to purchasing a subsequent new principal residence, may now qualify for a tax credit of up to $6,500. Contact us for further information regarding this credit.
Energy Improvements Qualify for Expanded Tax Credits
People who weatherize their homes or purchase alternative energy equipment may qualify for either of two expanded home energy tax credits: the Residential Energy Property Credit and the Residential Energy Efficient Property Credit.
• Residential Energy Property Credit: The new law increases the energy tax credit for homeowners who make energy efficient improvements to their existing homes. The new law increases the credit rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 for improvements placed in service in 2009 and 2010. The credit applies to improvements such as adding insulation, energy efficient exterior windows and energy-efficient heating and air conditioning systems.
• Residential Energy Efficient Property Credit: This nonrefundable energy tax credit will help individual taxpayers pay for qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbines. The new law removes some of the previously imposed maximum amounts and allows for a credit equal to 30 percent of the cost of qualified property.
American Opportunity Credit Helps Pay for First Four Years of College
More parents and students can use a federal education credit to offset part of the cost of college under the new American Opportunity Credit. This credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Income guidelines are expanded and required course materials are added to the list of qualified expenses. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.
New Vehicle Purchase Incentive
New car buyers can deduct the state or local sales or excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. There is no limit on the number of vehicles that may be purchased, and eligible taxpayers may claim the deduction for taxes paid on multiple purchases. However, the deduction is limited to the tax on up to $49,500 of the purchase price of each qualifying new vehicle. Qualifying new vehicles must be purchased, not leased, after Feb. 16, 2009, and before Jan. 1, 2010.
Earned Income Tax Credit (EITC)
The Earned Income Tax Credit (EITC) helps low- and moderate-income workers and working families. Working families with incomes below $48,279 (married filing jointly in 2009) and childless workers with incomes under $18,440 often qualify. Ordinarily, you must have earned income as an employee, independent contractor, farmer or business owner. Some disability retirees are also eligible. There is only a slight increase in these income levels for 2010; for example, working families with incomes below $48,362 (married filing jointly) and childless workers with incomes under $18,470, may quality in 2010.
Child Tax Credit
If you have a dependent child under age 17 at the end of 2009, you probably qualify for the child tax credit. This credit, which can be as much as $1,000 for each qualifying child, is in addition to the regular $3,650 personal exemption for 2009 you can claim for each dependent. A change in the way the credit is figured means that more low- and moderate-income families will qualify for the full credit on their 2009 returns. Don't confuse the child tax credit with the child care credit.
Note: In IRS Publication 972, there is a Child Tax Credit Worksheet to help you determine if you can claim the tax credit.
Credit for Child and Dependent Care Expenses
If you pay someone to care for your child so you can work or look for work, you probably qualify for this credit. Normally, your child must be your dependent and under age 13. Though often referred to as the child care credit, this credit is also available if you pay someone to care for a spouse or dependent, regardless of age, who is unable to care for himself or herself. In most cases, you need to obtain the care provider's social security number or taxpayer identification number and enter it on your return.
Note: Form 1040 filers claim the credit for child and dependent care expenses on Form 2441. Form 1040A filers claim it on Schedule 2.
Saver's Credit
The saver's credit helps low-and moderate-income workers save for retirement. You probably qualify if your income is below certain limits and you contribute to an IRA or workplace retirement plan, such as a 401(k). Income limits for 2009 are $27,750 for singles and married filing separately, $41,625 for heads of household and $55,500 for joint filers. These income limits are adjusted annually for inflation, however, will remain unchanged for 2010. The credit, up to $1,000, is based on a percentage (10-50%) of each dollar placed into a retirement plan, up to the first $2,000. The lower the adjusted gross income, the higher the credit percentage; resulting in the maximum credit of $1,000 (50% of $2,000).
Tip: Also known as the retirement savings contributions credit, the saver's credit is available in addition to any other tax savings that apply. You still have time to put money in an IRA and get the saver's credit on your 2009 return. 2009 IRA contributions can be made until April 15, 2010. Use Form 8880 to claim the saver's credit.
Caution: Like other tax credits, the saver's credit can increase a taxpayer's refund or reduce the tax owed. Though the maximum saver's credit is $1,000 ($2,000 for married couples), the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.
A taxpayer's credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver's credit, and its instructions have details on figuring the credit correctly.
Other Credits Available
IRS.gov has information on these additional credits:
• Foreign tax credit, claimed on Form 1040 Line 47
• Credit for the elderly or the disabled, claimed on Form 1040 Schedule R
• Adoption credit, claimed on Form 8839
• Alternative motor vehicle (including hybrids) credit, claimed on Form 8910
• Credit for prior year minimum tax, claimed on Form 8801
Tax Credits Can Save You Money
These credits can increase your refund or reduce the tax you owe. Usually, credits can only lower your tax to zero. But some credits, such as the EITC and the child tax credit, can actually exceed your tax. Though some credits are available to people at all income levels, others have income restrictions. These include the EITC, saver's credit, education credits and child tax credit.
Tip: If you qualify, you can claim any credit, regardless of whether you itemize your deductions. Any credit can be claimed on Form 1040.
Tax credits help you pay part of the cost of raising a family, going to college, savings for retirement, or getting daycare so you can work or go to school.
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