Tax Credits That You Should Not Forget

What is the purpose of tax credits. The purpose of tax credits is to reduce the amount of tax. Credits can reduce your tax liability to 0 while other credits are refundable which mean that they can produe a refund. One of the most popular refundale tax credits is the Eaned Income Credit (EITC). Each year many taxpayers often overlook various tax credits even if they qualify.

Here is a list of some of the new tax credits available in 2008.

First Time HomeBuyers Credit (NEW)

As was mentioned previosly, this credit applies to first time homeowners who purchased their home during the time period of April 8, 2008 to December 31, 2008. A first time homeowner is anyone who did not own their main home in the prior three years. This credit of $7,500 acts like a 15 year interest free loan. The credit must be claimed on Form 5405.

Recovery Rebate Credit (NEW)

The Recovery Rebate Credit is a onetime credit for people who didn't receive the full economic stimulus payment last year and whose circumstances may have changed, making them eligible now for some or all of the unpaid portion. The amount you receive for the recovery rebate credit will be included as part of your refund, as shown on your tax return. The IRS provides online assistance that helps you calculate the amount of your credit

Amazon loses New York tax case

As reported in AccountingWeb, last July, Amazon.com Inc. filed a complaint with the Supreme Court of the State of New York saying it is unconstitutional to require e-tailers based outside of New York to collect the state's sales and uses taxes. Well apparently the judge did not agree with this Amazon's complaint because the Judge dismissed the complaint.

New York State Supreme Court Justice Eileen Bransten said that New York law requires companies to collect state and local sales taxes if the company generates $10,000 or more in revenue as a result of commissions paid to persons in New York for sales referrals. Justice Bransten wrote in her decision that, "There is no basis upon which Amazon can prevail.

Since this decision has been announced, the state of Florida and California has introduced legislation that would impose the collection of taxes by e-tailers on internet purchases.

Read more

Florida Bill Would Tax Internet Purchases

California propses sales tax on online retailers

Car sales tax deduction

Consumers are expected to receive a tax break for the purchase of a new car this year but it may not have much impact on the steep decline in auto sales.
The $787 billion economic stimulus, which was signed into law, would give consumers a state sales tax and excise tax deduction on new cars purchased before the end of 2009. Many new car buyers could see savings of hundreds of dollars in next year's tax filing.
The incentives, worth $1.68 billion, were designed to boost auto sales and increase traffic in dealer showrooms during a dark period for the industry. General Motors Corp. and Chrysler LLC are living off of billions of dollars in government loans and must convince President Obama's administration that they can emerge as viable companies.
It doen't matter how much government aid we give to the Big Three automakers, they can't survive if consumers aren't buying cars, and banks aren't making loans so that consumers can purchase cars
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Economic Stimulus 101

Well the Senate and the House have finally comprised on a stimulus package that is expected to be signed into law by President Obama on Tuesday. Here are some of the tax changes that will affect you.

Workers can expect to see about $13 extra in their weekly paychecks, starting around June, from a new $400 tax credit to be doled out through the rest of the year. Couples would get up to $800. In 2010, the credit would be about $7.70 a week, if it is spread over the entire year.

The $1,000 child tax credit would be extended to more low-income families that don't make enough money to pay income taxes, and poor families with three or more children will get an expanded Earned Income Tax Credit.

Middle-income and wealthy taxpayers will be spared from paying the Alternative Minimum Tax, which was designed 40 years ago to make sure wealthy taxpayers pay at least some tax, but was never indexed for inflation. Congress fixes it each year, usually in the fall.

First-time homebuyers who purchase their homes before Dec. 1 would be eligible for an $8,000 tax credit, and people who buy new cars before the end of the year can write off the sales taxes.

Homeowners who add energy-efficient windows, furnaces and air conditioners can get a tax credit to cover 30 percent of the costs, up to a total of $1,500.

College students — or their parents — are eligible for tax credits of up to $2,500 to help pay tuition and related expenses in 2009 and 2010.

Those receiving unemployment benefits this year wouldn't pay any federal income taxes on the first $2,400 they receive.

AMT Exemption Increased For One Year

For tax-year 2008, Congress raised the alternative minimum tax exemption to the following levels:

• $69,950 for a married couple filing a joint return and qualifying widows and widowers, up from $66,250 in 2007
  
• $34,975 for a married person filing separately, up from $33,125 and
  
• $46,200 for singles and heads of household, up from $44,350

Under current law, these exemption amounts will drop to $45,000, $22,500 and $33,750, respectively, in 2009. Form 6251 and the AMT Calculator provide more information.

The AMT was enacted in 1969 to ensure that the richest Americans were not able to avoid paying taxes. However, because the AMT is not indexed for inflation many middle class taxpayers wind up paying this tax. According to the Tax Policy Center, 46% of households with incomes between $75,000 and $100,000 will be subject to the AMT tax by 2010.

Because the AMT disallows dependent exemptions and imposes significant marriage penalties, it hits some taxpayers harder than others. Families with children are more likely to be subject to the AMT than those without children: in 2010, 44 percent of those with two children will face the AMT compared with only 17 percent of those without children. Married couples will be more than 12 times as likely as singles to face the AMT in 2010. AMT participation for married families with two or more children and AGI between $75,000 and $100,000 will increase dramatically from less than 0.5 percent in 2007 to 87 percent in 2010

Since the AMT disallows the state and local tax deduction, residents in high-tax states are more likely to pay the tax. In 2007, families in high-tax states were almost three times more likely to face the AMT than those in low-tax states (5.0 vs. 1.8 percent). As more taxpayers are ensnared by the AMT, that differential will fall to about one-fourth in 2010 (28.8 vs. 21.5 percent).

Tax Software Choices

As April 15 approaches and our minds turn to filing our tax returns, I always have a tough time choosing which off the shelf tax software to purchase either TurboTax or TaxCut. Despite having used both products, my decision often boils down to the one that I find is easier to navigate through which is TaxCut. I have used TaxCut in 8 out of the past 13 years in which I have used tax software. If you haven't purchased your tax software yet, the New York Times has an excellent article on "Choosing the Tax Software that is right For You." If you need more information see Tax Preparation Software.

Many off the shelf tax software companies now offer on online version of their software. I have never used the online version but this is also a good option since in order to do business with the I.R.S., software companies have to demonstrate that they have certain firewalls and certain security measures in place. Here is some information on online tax filing options

Here is somehting you want to consider before purchasing your tax software, if your household income is less than $56,000, you can prepare and file your federal taxes online for free through the IRS website.

How To Avoid An IRS Audit, Part 2

Here are a couple more areas that you need to be concerned about in order to avoid having your tax return scrutinized by the IRS.

Home office deductions.

While not as big a red flag as in the past, because more people work at home, if your return is examined and you claim a home office deduction you should be able to document that your employer requires you to work from home. Self-employed people who use a portion of their home to run their businesses are generally able to deduct their office expenses. Freelancers or people who use their home office part of the time may be able to deduct a portion of their costs.



Self-employment

Because there are more opportunities for misstating income and deductions, self-employed individuals are more likely to be audited.

How To Avoid An IRS Audit Part 1

It is that time of year again when we must collect our W2's, K-1's, interest and dividend statements, mortgage statements, and any other doccuments that are neccessary to file our tax returns. Now if you are interested in avoiding an IRS audit, there are certain situations or deductions that are more likely to attract IRS attention.

1. Mathematical errors.

The IRS checks every return for math mistakes and if it finds a computation error that resulted in an underpayment of tax, will send a letter with the corrected figures and a bill for the balance due.

2. Differences between documents and returns.

If the IRS finds a mismatch between numbers you use on your return and what appears on your W-2s, 1099 statements or other documents, you'll likely get a letter asking you to explain the discrepancies.

3. Unusual, or unusually large, charitable deductions.

Making in-kind donations like a car that is valued at more than $500 requires attaching a specific acknowledgment form, 1098-C, from the charity. Canceled checks or receipts are typically all that is needed to back up other charitable deductions. But for anything over $250, you need written proof that shows any benefits or goods you received in exchange — for instance the value of a meal you had at a fundraising dinner. Larger donations, such as land, art or stocks, may require additional documentation.

What Form Do I Use To File My Taxes

The beginning of the new year always reminds me that is now time to start collecting all the doccuments that I need to file my taxes. If you do this on your own, one the issues that many people struggle with is which form do I use. The IRS has three forms for filing individual tax returns, the 1040, 1040A, and the 1040EZ.

Form 1040
The 1040 form is the standard income tax form. Any U.S. resident can use Form 1040, but it is also commonly referred to as the "long form" since it covers many additional schedules that may apply to a more complex tax return such as income from owning rental property or running your own small business. The 1040 should be used if:

• Taxable income is more than $100,000.


• You have itemized deductions.


• You have self employment income.


• You have sold your home.

Form 1040A
If your tax return does not quite require the full 1040, the next option is Form 1040A. There are some limitations as to who can use this form.

• Your taxable income is under $100,000.


• You use the standard deductions.


• You have above the line deductions.


• You have capital gain distributions, but no other capital gains or losses.
  
  

Form 1040EZ
The simplest income tax form is Form 1040EZ. This form is for only the most basic tax returns, and a number of limitations apply.

• Your income is under $100,000.


• Your filing status is either single or maried filing jointly.


• You do not have any dependents.


• You are not legally blind.


• You and your spouse are not over 65.