Taxable or Non-Taxable Income?

There are situations when certain types of income are only partially taxed or not taxed at all. Some examples of non-taxable Income are:

1. Adoption expense reimbursements for qualifying expenses,

2. Child support payments,

3. Gifts, bequests and inheritances,

4. Non cash employer gifts (holiday turkey),

5. Workers’ compensation benefits,

6. Meals and lodging for the convenience of your employer,

7. Compensatory damages awarded for physical injury or physical sickness,

8. Welfare benefits,

9. Economic recovery payments, and

10. Cash rebates from a dealer or manufacturer

Some income may be taxable under certain circumstances, but not taxable in other situations. Examples of items that may or may not be included in your taxable income are:

1. Life Insurance If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds which were paid to you because of the insured person’s death are not taxable unless the policy was turned over to you for a price.

2. Scholarship or Fellowship Grant If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.

3. Non-cash Income Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.

Should I File a Return?

You do not have to file a tax return in all cases, but there are some instances in which you still should file, even if it is not expressly required. You should file if any of the following apply:

1. Did you have Federal Income Tax withheld from your pay? – You should file to get money back if Federal Income Tax was withheld from your pay, you made estimated tax payments, or had a prior year overpayment applied to this year’s tax.

2. Do you qualify for the Making Work Pay Credit? – You may be able to take this credit if you had earned income from work. The maximum credit for a married couple filing a joint return is $800 and $400 for other taxpayers.

3. Do you qualify for the Earned Income Tax Credit? – You may qualify for EITC if you worked, but did not earn a lot of money. EITC is a refundable tax credit; which means you could qualify for a tax refund.

4. Do you qualify for the Additional Child Tax Credit? – This refundable credit may be available to you if you have at least one qualifying child and you did not get the full amount of the Child Tax Credit.

5. Do you qualify for the American Opportunity Credit? – The maximum credit per student is $2,500 and the first four years of postsecondary education qualify.

6. Did you buy your first home? – If so, you could qualify for the First Time Home- Buyers Credit. The credit is a maximum of $8,000, or $4,000 if your filing status is married filing separately. To qualify for the credit, taxpayers must have bought, or entered into a binding contract to buy, a principal residence on or before April 30, 2010. If you entered into a binding contract by April 30, 2010, you must have closed on the home on or before September 30, 2010.

Delayed Filing for Some Taxpayers

Due to Congressional action at year-end, taxpayers will need to wait to file until middle to late February if any of the following three categories apply:

Taxpayers claiming itemized deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses, as well as, state and local taxes and the state and local general sales tax deduction. Because of late Congressional action to enact tax law changes, anyone who itemizes and files a Schedule A will need to wait to file.

Taxpayers claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students — covering up to $4,000 of tuition and fees paid to a post-secondary institution — is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit and Lifetime Learning Credit.

Taxpayers claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. The educator expense deduction is claimed on Form 1040, Line 23, and Form 1040A, Line 16.

Nondeductible Expenses

As a small business owner, you have the opportunity to deduct certain expenses from your taxes. Don’t let yourself get carried away though; there are some expenses that are not deductible, regardless of the situation. Just as a reminder, below are some common expenses that CANNOT be deducted as a business expense.

Clothing—Unless it is protective gear, or a uniform not to be worn during non-working hours, clothing cannot be deducted.

Commuting Expenses—The cost of transportation from your home to your main/regular place of work.

Life Insurance Premiums—If the business or the business owner is a direct or indirect beneficiary, the expense cannot be deducted.

Lunches with Co-workers—Meals with co-workers are nondeductible, unless traveling away from home on business.

Personal Legal Expenses—For example, legal fees relating to custody of children, divorce, preparation of a will, and personal injury claims are nondeductible.

Political Contributions—Political donations and lobbying expenses to influence voters are not deductible.

Residential Telephone Service—The first telephone line to your residence is nondeductible even if used in a trade or business.

Health Club, Social Club or Country Club Dues—In general, club fees and weight loss programs are nondeductible, even if your job requires to you stay in shape. (Note: If certain conditions are met, the expense may qualify as a medical expense.)

Fines and Penalties—Traffic tickets, tax penalty payments, and violations of law are not deductible expenses.

Payroll Tax Cut in the 2010 Tax Relief Act

The Social Security payroll tax on individual wages will be lowered to 4.2% in 2011, from the 6.2% rate. Self-employed workers will also get a two percent reduction from 12.4% to 10.4%. There is no phase-out of the payroll tax reduction for higher income workers; it applies to everyone who works, regardless of income. However, since Social Security taxes apply only to the first $106,800 (the 2011 wage base) of earnings, the benefit for high earners tops out at $2,136. The employer’s share of Social Security tax remains at 6.2%.

Property Damage from Corrosive Drywall

Did you suffer property damage due to corrosive drywall?  The Internal Revenue Service has issued guidance providing relief to homeowners who have suffered property losses due to the effects of certain imported drywall installed in homes between 2001 and 2009. Revenue Procedure 2010-36 enables you to treat damages from corrosive drywall as a casualty loss and provides a ”safe harbor” formula for determining the amount of the loss.

You can claim a loss for 75% of the unreimbursed amount paid during the tax year to repair damage to your residence and household appliances from corrosive drywall.

Get Copies of Your Tax Documents Faster

Do you need a copy of a previously filed tax return? You can order copies of your tax return or tax account transcript quicker and easier.  

You have two ordering methods phone or mail. To request your free transcripts call the new toll-free number (1-800-908-9946) and follow the message prompts, or complete IRS Form 4506T, Request for Transcript of Tax Return, and mail it to the address listed in the instructions. You should receive your transcript in fewer than two weeks. For mailed requests, allow up to 30 days.

If you need an exact copy of a previously filed and processed tax return with attachments (including Form W-2), you should complete Form 4506, Request for Copy of Tax Return, and mail it to the addressed listed in the instructions, along with a $57 fee for each tax year requested. Copies are generally available for returns filed in the current year and going back six years.

 Keep this valuable information in mind in case you, or someone you know, need a copy of a tax document.

Promised AMT Relief

 

What needs to be patched? Absent Congressional action, the 2010 AMT exemption amounts for individuals revert to the levels they were at for 2000. Under present law, more than 21 million taxpayers will be subject to higher taxes in 2010 unless legislation is enacted to limit the reach of the AMT. Taxwriters are assuring the IRS that 2010 AMT patch will be enacted. They are committed to AMT legislation in which, in the aggregate, not one additional taxpayer faces higher taxes in 2010 due to the onerous AMT. Such legislation will allow the personal credits against the AMT and set the AMT exemption amounts for 2010 at $47,450 for individuals and $72,450 for married taxpayers filing jointly.

IRS Auditors Begin Accepting QuickBooks and Peachtree Records

The Internal Revenue Service has begun accepting taxpayer records for audits and examinations in electronic format from small businesses using Intuit’s QuickBooks and Sage’s Peachtree accounting software.

Approximately 1,100 IRS revenue agents recently completed training on QuickBooks Premier Accountant Edition 2010 software and are now trained to accept taxpayers’ QuickBooks files, as appropriate.  In order to insure security of the electronic files they should not be emailed.  Electronic files should be provided on a CD, DVD or flash drive.  The IRS will also accept electronic records from Peachtree accounting software.

Obtaining the electronic files from the taxpayer provides the IRS significant advantages including:

• Taxpayers do not have to print records stored electronically
• A complete  set of accounting records
• Reduction in the number of document requests
• Increase the revenue agents analysis and testing of the books and records
• Speed and efficiency of field examinations
• Faster audit resolution

The legal authority for requesting a taxpayer’s QuickBooks backup files and accounting records in electronic format is based on IRC Section 6001, Regulation 1.6001-1(a) and -1(e), Revenue Ruling 71-20 and Revenue Procedure 98-25. Rev. Proc. 98-25 does not prevent or exempt a taxpayer from providing electronic records, if such records exist.

Adoption Credit for 2010 and 2011

The adoption credit was scheduled to sunset at the end of 2010. However, the massive health care reform legislation extended and revised the adoption tax credit. The health care legislation enhanced the adoption tax credit in three ways. First, it bumped the maximum adop-tion credit from $12,150 to $13,170. Second, it extended this increased tax credit amount to the year 2011. Third, it made the adoption credit refundable. Any adoption credit in the year 2009 or earlier that was in excess of your tax liability can be carried forward to the subsequent tax year. Excess adoption credit can be carried forward for five years and is used up on a first-in, first-out basis.