Knowledge is the key to maximizing your tax savings. Taking a little time to research some tax credits could save you thousands of dollars. I must admit taxes can sometimes be very boring and complex. I'm not suggesting you go to the library and do hours of research. However, I suggest checking out the IRS website and asking your tax accountant simply questions throughout the year not just during tax season.
I would like to open your eyes to the world of Education tax credits. Yes, now I know I have your undivided attention. Hey, we pay thousands of dollars to fund a college education so we deserve it! Individual taxpayers are allowed a nonrefundable tax credit to offset the costs of post-secondary, graduate or vocational education. These education tax credits are known as the Hope Credit and the Lifetime Learning Credit.
1. The Hope Credit is a nonrefundable tax credit with an annual maximum of $1,500 for each student.
§ The credit is based on qualified expenses paid by the taxpayer for qualifying individuals enrolled for the first two years of a post-secondary degree or certificate program at an eligible educational institution on at least a half-time basis.
§ Qualified expenses are defined as tuition and fees required for the enrollment or attendance of the following individuals at eligible educational institution: taxpayer, spouse, or any dependent of taxpayer with respect to whom taxpayer is allowed s dependency exemption deduction.
§ Qualified expenses do not include the costs of room and board, insurance or other personal, living of family expenses, even if paid to the school.
2. The Lifetime Learning Credit is also a nonrefundable income tax credit calculated as a percentage of qualified expenses paid during the taxable year by the taxpayer, including post-graduate course work and courses to acquire or improve job skills.
§ Unlike the Hope Credit, this credit is based on the annual expenses incurred by the taxpayer for all members of the family.
§ This credit is allowed for an unlimited number of taxable years. The Hope credit is per student but the Lifetime Learning credit is per return.
§ A Lifetime Learning credit is not allowed against the expenses incurred for an eligible student for whom a Hope credit is allowed for the taxable year.
The Tax Factor was created to educate individuals and small-business owners about taxes. Let’s face it, nothing in life is guaranteed except death and taxes. Okay, maybe that sounded pretty depressing but the goal of this blog is to help you find the information to learn how to make taxes work for you. Taxes can be extremely complicated but knowing about deductions and credits can save you thousands of dollars per year.
Dec 4, 2008
Tax Scams To Avoid
I know we all hate to pay taxes, however it’s here and not going nowhere. Throughout history taxpayers had found creative ways to avoid taxes. There are a lot of legal ways to reduce your taxes through careful tax planning. The wrong method of reducing taxes is through illegal tax avoidance scams. There will be some accountants that we promote illegal tax scams. Every year the IRS reports a “Dirty Dozen” list. This list contains the top 12 tax scams that the IRS is actively pursing. Trust me, you don’t want to receive a letter from the IRS regarding interest and penalties due from getting caught in a tax scam. There is a chance you could lose your property and access to your financial accounts. In the worst cases, some people lost their freedom and had to spend time in jail. Is it worth saving a few dollars on your tax return?
In 2008, The IRS urges taxpayers to avoid these common schemes:
1. Phishing
Phishing is a tactic used by Internet-based thieves to trick unsuspecting victims into revealing personal information they can then use to access the victims’ financial accounts. These criminals use the information obtained to empty the victims’ bank accounts, run up credit card charges and apply for loans or credit in the victims’ names. Phishing scams often take the form of an e-mail that appears to come from a legitimate source. Some scam e-mails falsely claim to come from the IRS. To date, taxpayers have forwarded more than 33,000 of these scam e-mails, reflecting more than 1,500 different schemes, to the IRS. The IRS never uses e-mail to contact taxpayers about their tax issues. Taxpayers who receive unsolicited e-mail that claims to be from the IRS can forward the message to a special electronic mailbox, phishing@irs.gov.
2. Scams Related to the Economic Stimulus Payment
Some scam artists are trying to trick individuals into revealing personal financial information that can be used to access their financial accounts by making promises relating to the economic stimulus payment, often called a “rebate.” To obtain the payment, eligible individuals in most cases will not have to do anything more than file a 2007 federal tax return. But some criminals posing as IRS representatives are trying to trick taxpayers into revealing their personal financial information by falsely telling them they must provide information to get a payment. For instance, a potential victim is told by phone or e-mail that he or she is eligible for a rebate but must provide a bank account number (or similar information) to get the payment. If the target is unwilling, the victim is then told that he cannot receive the rebate unless the information is provided. Individuals should remember that the only way to get a stimulus payment is to file a 2007 tax return. The IRS urges taxpayers to be extra-vigilant. The IRS will not contact taxpayers by phone or e-mail about their stimulus payment.
3. Frivolous Arguments
Promoters of frivolous schemes encourage people to make unreasonable and unfounded claims to avoid paying the taxes they owe. Most recently, the IRS expanded its list of frivolous legal positions that taxpayers should stay away from. Taxpayers who file a tax return or make a submission based on one of these positions on the list are subject to a $5,000 penalty. The most recent update of the list of frivolous positions includes: misinterpretation of the 9th Amendment to the U.S. Constitution regarding objections to military spending, erroneous claims that taxes are owed only by persons with a fiduciary relationship to the United States, a nonexistent “Mariner’s Tax Deduction” related to invalid deductions for meals and the misuse of the fuel tax credit (see below).
4. Fuel Tax Credit Scams
The IRS is receiving claims for the fuel tax credit that are unreasonable. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit was recently added to the list of frivolous tax claims, potentially subjecting those who improperly claim the credit to a $5,000 penalty.
5. Hiding Income Offshore
Individuals continue to try to avoid paying U.S. taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore debit cards, credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance plans. The IRS and the tax agencies of U.S. states and possessions continue to aggressively pursue taxpayers and promoters involved in such abusive transactions.
6. Abusive Retirement Plans
The IRS continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to Roth IRAs. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into Roth IRAs or companies owned by their Roth IRAs at less than fair market value. In one variation of the scheme, a promoter has the taxpayer move a highly appreciated asset into a Roth IRA at cost value, which is below annual contribution limits even though the fair market value far exceeds the amount allowed.
7. Zero Wages
Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS. Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme.
8. False Claims for Refund and Requests for Abatement
This scam involves a request for abatement of previously assessed tax using Form 843, “Claim for Refund and Request for Abatement.” Many individuals who try this have not previously filed tax returns. The tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses Form 843 to list reasons for the request. Often, one of the reasons given is "Failed to properly compute and/or calculate Section 83-Property Transferred in Connection with Performance of Service."
9. Return Preparer Fraud
Dishonest tax return preparers can cause many problems for taxpayers who fall victim to their schemes. These scam artists make their money by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Some preparers promote the filing of fraudulent claims for refunds on items such as fuel tax credits to recover taxes paid in prior years. Taxpayers should choose carefully when hiring a tax preparer, especially one who promises something that seems too good to be true.
10. Disguised Corporate Ownership
Some people are going as far as forming domestic shell corporations in certain states for the purpose of disguising the ownership of a business or financial activity. Once formed, these anonymous entities can be used to facilitate underreporting of income, non-filing of tax returns, engaging in listed transactions, money laundering, financial crimes and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance.
11. Misuse of Trusts
For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. They promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. However, some trusts do not deliver the promised tax benefits. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust.
12. Abuse of Charitable Organizations and Deductions
The IRS continues to observe the misuse of tax-exempt organizations. Misuse includes arrangements to improperly shield income or assets from taxation, attempts by donors to maintain control over donated assets or income from donated property and overvaluation of contributed property. In addition, IRS examiners are seeing an upturn in instances where taxpayers try to disguise private tuition payments as contributions to charitable or religious organizations.
Other Scams to recognize and avoid:
Slavery reparations
Promoters suggest that African-Americans can claim a deduction or credit for reparations. There is no such reparation and no such allowable deduction or credit.
Shared earned income credits
Promoters tell taxpayers that they can “share” dependents in order for multiple taxpayers to claim the earned income credit with respect to the same dependents. Only eligible taxpayers can claim the earned income credit and only one credit is allowed for each dependent.
Home-based businesses
While there is a deduction allowed for legitimate home-based businesses, promoters tell taxpayers to fictitiously create a business run from home so that a deduction will be allowed. Fake businesses do not support real deductions.
How to Report Suspected Tax Fraud Activity
Suspected tax fraud can be reported to the IRS using IRS Form 3949-A, Information Referral. Form 3949-A is available for download from the IRS Web site at IRS.gov. The completed form or a letter detailing the alleged fraudulent activity should be addressed to the Internal Revenue Service, Fresno, CA 93888. The mailing should include specific information about who is being reported, the activity being reported, how the activity became known, when the alleged violation took place, the amount of money involved and any other information that might be helpful in an investigation. The person filing the report is not required to self-identify, although it is helpful to do so. The identity of the person filing the report can be kept confidential.
Whistleblowers also could provide allegations of fraud to the IRS and may be eligible for a reward by filing Form 211, Application for Award for Original Information, and following the procedures outlined in Notice 2008-4, Claims Submitted to the IRS Whistleblower Office under Section 7623.
In 2008, The IRS urges taxpayers to avoid these common schemes:
1. Phishing
Phishing is a tactic used by Internet-based thieves to trick unsuspecting victims into revealing personal information they can then use to access the victims’ financial accounts. These criminals use the information obtained to empty the victims’ bank accounts, run up credit card charges and apply for loans or credit in the victims’ names. Phishing scams often take the form of an e-mail that appears to come from a legitimate source. Some scam e-mails falsely claim to come from the IRS. To date, taxpayers have forwarded more than 33,000 of these scam e-mails, reflecting more than 1,500 different schemes, to the IRS. The IRS never uses e-mail to contact taxpayers about their tax issues. Taxpayers who receive unsolicited e-mail that claims to be from the IRS can forward the message to a special electronic mailbox, phishing@irs.gov.
2. Scams Related to the Economic Stimulus Payment
Some scam artists are trying to trick individuals into revealing personal financial information that can be used to access their financial accounts by making promises relating to the economic stimulus payment, often called a “rebate.” To obtain the payment, eligible individuals in most cases will not have to do anything more than file a 2007 federal tax return. But some criminals posing as IRS representatives are trying to trick taxpayers into revealing their personal financial information by falsely telling them they must provide information to get a payment. For instance, a potential victim is told by phone or e-mail that he or she is eligible for a rebate but must provide a bank account number (or similar information) to get the payment. If the target is unwilling, the victim is then told that he cannot receive the rebate unless the information is provided. Individuals should remember that the only way to get a stimulus payment is to file a 2007 tax return. The IRS urges taxpayers to be extra-vigilant. The IRS will not contact taxpayers by phone or e-mail about their stimulus payment.
3. Frivolous Arguments
Promoters of frivolous schemes encourage people to make unreasonable and unfounded claims to avoid paying the taxes they owe. Most recently, the IRS expanded its list of frivolous legal positions that taxpayers should stay away from. Taxpayers who file a tax return or make a submission based on one of these positions on the list are subject to a $5,000 penalty. The most recent update of the list of frivolous positions includes: misinterpretation of the 9th Amendment to the U.S. Constitution regarding objections to military spending, erroneous claims that taxes are owed only by persons with a fiduciary relationship to the United States, a nonexistent “Mariner’s Tax Deduction” related to invalid deductions for meals and the misuse of the fuel tax credit (see below).
4. Fuel Tax Credit Scams
The IRS is receiving claims for the fuel tax credit that are unreasonable. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit was recently added to the list of frivolous tax claims, potentially subjecting those who improperly claim the credit to a $5,000 penalty.
5. Hiding Income Offshore
Individuals continue to try to avoid paying U.S. taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore debit cards, credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance plans. The IRS and the tax agencies of U.S. states and possessions continue to aggressively pursue taxpayers and promoters involved in such abusive transactions.
6. Abusive Retirement Plans
The IRS continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to Roth IRAs. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into Roth IRAs or companies owned by their Roth IRAs at less than fair market value. In one variation of the scheme, a promoter has the taxpayer move a highly appreciated asset into a Roth IRA at cost value, which is below annual contribution limits even though the fair market value far exceeds the amount allowed.
7. Zero Wages
Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS. Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme.
8. False Claims for Refund and Requests for Abatement
This scam involves a request for abatement of previously assessed tax using Form 843, “Claim for Refund and Request for Abatement.” Many individuals who try this have not previously filed tax returns. The tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses Form 843 to list reasons for the request. Often, one of the reasons given is "Failed to properly compute and/or calculate Section 83-Property Transferred in Connection with Performance of Service."
9. Return Preparer Fraud
Dishonest tax return preparers can cause many problems for taxpayers who fall victim to their schemes. These scam artists make their money by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Some preparers promote the filing of fraudulent claims for refunds on items such as fuel tax credits to recover taxes paid in prior years. Taxpayers should choose carefully when hiring a tax preparer, especially one who promises something that seems too good to be true.
10. Disguised Corporate Ownership
Some people are going as far as forming domestic shell corporations in certain states for the purpose of disguising the ownership of a business or financial activity. Once formed, these anonymous entities can be used to facilitate underreporting of income, non-filing of tax returns, engaging in listed transactions, money laundering, financial crimes and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance.
11. Misuse of Trusts
For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. They promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. However, some trusts do not deliver the promised tax benefits. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust.
12. Abuse of Charitable Organizations and Deductions
The IRS continues to observe the misuse of tax-exempt organizations. Misuse includes arrangements to improperly shield income or assets from taxation, attempts by donors to maintain control over donated assets or income from donated property and overvaluation of contributed property. In addition, IRS examiners are seeing an upturn in instances where taxpayers try to disguise private tuition payments as contributions to charitable or religious organizations.
Other Scams to recognize and avoid:
Slavery reparations
Promoters suggest that African-Americans can claim a deduction or credit for reparations. There is no such reparation and no such allowable deduction or credit.
Shared earned income credits
Promoters tell taxpayers that they can “share” dependents in order for multiple taxpayers to claim the earned income credit with respect to the same dependents. Only eligible taxpayers can claim the earned income credit and only one credit is allowed for each dependent.
Home-based businesses
While there is a deduction allowed for legitimate home-based businesses, promoters tell taxpayers to fictitiously create a business run from home so that a deduction will be allowed. Fake businesses do not support real deductions.
How to Report Suspected Tax Fraud Activity
Suspected tax fraud can be reported to the IRS using IRS Form 3949-A, Information Referral. Form 3949-A is available for download from the IRS Web site at IRS.gov. The completed form or a letter detailing the alleged fraudulent activity should be addressed to the Internal Revenue Service, Fresno, CA 93888. The mailing should include specific information about who is being reported, the activity being reported, how the activity became known, when the alleged violation took place, the amount of money involved and any other information that might be helpful in an investigation. The person filing the report is not required to self-identify, although it is helpful to do so. The identity of the person filing the report can be kept confidential.
Whistleblowers also could provide allegations of fraud to the IRS and may be eligible for a reward by filing Form 211, Application for Award for Original Information, and following the procedures outlined in Notice 2008-4, Claims Submitted to the IRS Whistleblower Office under Section 7623.
When to use Standard or Itemized Deductions
What is a party-goer’s favorite opening line when trying to get to know someone?
Answer: 'Hey, did you use itemized deductions on your tax return?'
Ok, maybe that line might not work but at least you tried! Seriously, learning the basics about standard and itemized deductions could have a major impact on your income tax return. After computing adjusted gross income (AGI), a taxpayer is entitled to subtract certain deductions used to figure taxable income. Most taxpayers have a choice between taking the standard deduction and using itemized deductions.
Use the Standard deduction if:
• Your standard deduction is more than the total itemized deductions.
• You are not filing a tax return with a short tax year
• You are not a nonresident or dual-status alien during the year
• You are filing as married filing separately, and your spouse did not itemize their deductions.
Use Itemized deductions if:
• You cannot take the standard deduction
• Your total itemized deductions are more than the standard deduction
• You had large uninsured medical and dental expenses
• You had various miscellaneous expenses
• You paid taxes and interest on personal residence
• You had large casualty or theft losses
• You made large charitable contributions
• When choosing to itemize your deductions, remember to have official documentation to prove your claims. You never know when the IRS will choose to audit your return.
Answer: 'Hey, did you use itemized deductions on your tax return?'
Ok, maybe that line might not work but at least you tried! Seriously, learning the basics about standard and itemized deductions could have a major impact on your income tax return. After computing adjusted gross income (AGI), a taxpayer is entitled to subtract certain deductions used to figure taxable income. Most taxpayers have a choice between taking the standard deduction and using itemized deductions.
Use the Standard deduction if:
• Your standard deduction is more than the total itemized deductions.
• You are not filing a tax return with a short tax year
• You are not a nonresident or dual-status alien during the year
• You are filing as married filing separately, and your spouse did not itemize their deductions.
Use Itemized deductions if:
• You cannot take the standard deduction
• Your total itemized deductions are more than the standard deduction
• You had large uninsured medical and dental expenses
• You had various miscellaneous expenses
• You paid taxes and interest on personal residence
• You had large casualty or theft losses
• You made large charitable contributions
• When choosing to itemize your deductions, remember to have official documentation to prove your claims. You never know when the IRS will choose to audit your return.
Dec 3, 2008
Junior, You're Hired!
Did you know there are tax advantages associated with hiring your children? Salaries paid to your children under 18 are not subject to the social security tax, or FUTA (up to age 21) when employed in a parent's sole proprietorship. Fringe benefits are also available to the child. It's very important to remember wages must be reasonable and you have to prove your child actually worked. For example, don't say your 3-year old lifted inventory in your factory!
Think twice about giving your children allowance and consider the advantages of giving them a paycheck:
1. It enables you to take advantage of the child's full standard deduction
2. It enables you to reduce adjusted gross income, thereby preserving personal exemptions and itemized deductions
3. It enables your child to make contributions to an IRA
4. It enables the child to receive money that is not subject to the kiddie tax
As employees, your children can participate in a qualified retirement plan and any of the company's other fringe benefits, such as:
• Group-term insurance
• Accident and health insurance
• Educational assistance
• Travel and entertainment
Think twice about giving your children allowance and consider the advantages of giving them a paycheck:
1. It enables you to take advantage of the child's full standard deduction
2. It enables you to reduce adjusted gross income, thereby preserving personal exemptions and itemized deductions
3. It enables your child to make contributions to an IRA
4. It enables the child to receive money that is not subject to the kiddie tax
As employees, your children can participate in a qualified retirement plan and any of the company's other fringe benefits, such as:
• Group-term insurance
• Accident and health insurance
• Educational assistance
• Travel and entertainment
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