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Archive for the ‘IRS/Tax Articles’ Category

Some Important Facts about IRS Appeal Rights

13 May 2010 | Hertsel Shadian

The IRS provides an appeals system for those who do not agree with the results of an IRS tax return examination, with other adjustments made by the IRS to their tax liability, or with collection (lien or levy) actions undertaken against them by the IRS. Here are some things to know when it comes to your appeal rights within the IRS:

  1. When the IRS makes an adjustment to your tax return, you will receive a report or letter explaining the proposed adjustments. By law, this letter also should explain how to request a conference with an Appeals office in case you do not agree with the IRS findings on your tax return.
  2. In addition to tax return examinations, many other tax obligations also can be appealed.  You also may appeal penalties, interest, trust fund recovery penalties, offers in compromise, liens and levies.
  3. You generally can request a face to face meeting with an Appeals Officer or Settlement Officer at an IRS office located nearest your home or place of business. However, conferences also can take place by telephone.
  4. Appeals conferences are informal meetings. You may represent yourself or have someone else represent you. Those allowed to represent taxpayers include attorneys, certified public accountants or individuals enrolled to practice before the IRS.
  5. If you request a conference with an IRS Appeals employee and choose to represent yourself without an attorney or other professional tax advisor, you are urged to be prepared with all appropriate documentation, records, and arguments to support your position. Appeals Officers generally will review and consider all reasonable arguments and records; however, be cautioned that Appeals Officers or Settlement Officers will not consider frivolous arguments or those based on specious Constitutional grounds that have been repeatedly rejected by courts.
  6. The IRS Appeals Office is separate from—and independent of—the IRS office taking the action you may disagree with. Thus, the Appeals Officer will review the disputed issues from a fresh and unbiased perspective and generally will seek to resolve the matter fairly. This includes flexibility to settle a matter on terms that are more favorable to the taxpayer than previously were proposed by the IRS, including taking into account the risks of litigation to the IRS if the matter is not resolved.
  7. The Appeals Office is the only level of administrative appeal within the agency. If you do not reach agreement with IRS Appeals, or if you do not wish to appeal within the IRS, you may appeal certain actions through the courts.
  8. For further information on the appeals process, consult your professional tax preparer or other professional tax advisor. You also can refer to IRS Publication 5, Your Appeal Rights and How To Prepare a Protest If You Don’t Agree, and Publication 556, Examination of Returns, Appeal Rights and Claims for Refund. For further information, see also Publication 1660, Collection Appeal Rights, which discusses how you can appeal collection actions and Publication 3605, Fast Track Mediation–A Process for Prompt Resolution of Tax Issues. These publications, along with more information on IRS Appeals, are available on the IRS website at www.IRS.gov.

What Happens After You File Your Tax Return

6 May 2010 | Hertsel Shadian

Most taxpayers already have filed their federal tax returns, but many may still have questions about their refund status, proper recordkeeping, how to correct mistakes on their return, and what to do if they move. Here is some information to help:

Refund Information

You can go online to check the status of your 2009 refund 72 hours after the IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after you mail a paper return. Make sure to have a copy of your 2009 tax return available because you will need to know your filing status, the first Social Security number shown on the return, and the exact whole-dollar amount of the refund. You have three options for checking on your refund:

  • Go to IRS.gov, and click on “Where’s My Refund” which will take you to a secure link to check the status of your tax refund
  • Call 1-800-829-4477, 24 hours a day, seven days a week for automated refund information
  • Call 1-800-829-1954 during the hours shown in your tax form instructions

What Records Should I Keep?

Normally, tax records should be kept for at least three years from the date the tax return is filed which relates to those records. However, some documents—such as records relating to a home purchase or sale, stock transactions, IRAs and business or rental property—should be kept longer. You should keep copies of tax returns you have filed and the tax forms package as part of your records. These may be helpful later in amending already filed returns or preparing future returns. There also are many records you have that may help document items on your tax return. You’ll need this documentation in case the IRS selects your return for examination. Here are some tips about keeping good records:

  1. Normally, tax records should be kept for at least three years from the date the return is filed which relates to the records, because the IRS generally must assess any additional tax within three years of the return filing date (although there are exceptions to this rule).
  2. Some documents—such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property—should be kept longer, in particular where it might be necessary to prove basis for capital gain or depreciation purposes.
  3. In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return. The most efficient manner is to keep records together by the specific tax year to which the records relate.
  4. Records you should keep include copies of the tax returns you have filed and the tax forms package; bills, credit card and other receipts; invoices; mileage logs; canceled, imaged or substitute checks and checking account statements; proofs of payment; and any other records to support deductions or credits you claim on your return.
  5. For more information on what kinds of records to keep or how long to retain records, consult your professional tax preparer or other professional tax advisor, or see IRS Publication 552, Recordkeeping for Individuals, which is available by clicking on the embedded link herein, or by going to the official IRS website at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676). 

What If I Made a Mistake?

Errors may delay your refund or result in notices being sent to you. If you discover an error on your return, you can correct your return by filing an amended return using IRS Form 1040X, Amended U.S. Individual Income Tax Return. Here are some additional things to know about amending your federal tax return:

  1. If you need to amend your tax return, use Form 1040X, Amended U.S. Individual Income Tax Return.
  2. Use Form 1040X to correct previously filed Forms 1040, 1040A or 1040EZ. The 1040X can also be used to correct a return filed electronically. However, you can only paper file an amended return.
  3. You should file an amended return if you discover any of the following items were reported incorrectly: filing status, dependents, total income, deductions or credits.
  4. Generally, you do not need to file an amended return for math errors. The IRS normally will automatically make the correction.
  5. You usually do not need to file an amended return because you forgot to include tax forms such as W-2s or schedules. The IRS normally will send a request asking for those documents.
  6. Be sure to enter the year of the return you are amending at the top of Form 1040X. Generally, you must file Form 1040X within three years from the date you filed your original return or within two years from the date you paid the tax, whichever is later.
  7. If you are amending more than one tax return, prepare a 1040X for each return and mail them in separate envelopes to the IRS campus for the area in which you live. The 1040X instructions list the addresses for the campuses.
  8. If the changes involve another schedule or form, you must attach it to the 1040X.
  9. If you are filing to claim an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund.
  10. If you owe additional tax for 2009, you should file Form 1040X and pay the tax as soon as possible to limit interest and penalty charges. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions.

Change of Address

If you move after you filed your return, you should send IRS Form 8822, Change of Address to the Internal Revenue Service. If you are expecting a refund through the mail, you should also file a change of address with the U.S. Postal Service.

For more information on checking refund status, proper recordkeeping, address changes and amended returns, consult your professional tax preparer or other professional tax advisor, or visit the official IRS website at IRS.gov.

Don’t Panic! Some Things to Know If You Receive an IRS Notice

20 April 2010 | Hertsel Shadian

The Internal Revenue Service (IRS) sends millions of letters and notices to taxpayers every year, many of which (not coincidentally) arrive in the wake of tax filing season. Some letters/notices are to alert taxpayers of unpaid or underpaid amounts of tax as determined by the IRS, or conversely, advise of overpaid amounts resulting in refunds or credits towards other liabilities. Some notices warn of impending collection actions by the IRS (e.g., liens or levies) for past failures to pay taxes or even failures to file returns. Some notices are to alert taxpayers of rather simple and mundane corrections made by the IRS to filed tax returns to fix simple mathematical errors. Some letters or notices request further documentation for routine information reported on a return. 

The common and even understandable first reactions to such letters or notices that arrive from the IRS might be confusion, denial, distress or even outright panic. Instead of reacting this way, you are better served by calmly reviewing and trying to understand the letter or notice, and then timely responding directly to the correspondence or immediately contacting your professional tax preparer or tax advisor to obtain assistance. To help you deal with these often unwelcome pieces of mail, here are some things you should know and consider with regard to IRS notices—just in case one shows up in your mailbox.

  1. First and most importantly, don’t ignore these letters and notices. The letters and notices will continue to arrive from the IRS if you do not deal with the underlying reason or reasons causing the IRS to mail the notices to you. The likely negative ramifications of not timely responding to the letters or notices also could get progressively worse if the issues are not properly addressed, including the loss or expiration of various remedies and appeal rights. You cannot deal with the problem if you do not even acknowledge that one might exist.
  2. Second and also very important, don’t panic. Many of these letters can be dealt with simply and painlessly, either by yourself, by your professional tax return preparer, or by a qualified tax attorney.
  3. When you receive a notice or letter from the IRS, immediately read it closely to see exactly what the notice or letter is saying or requesting. Each letter and notice generally will offer specific instructions on what you are asked to do to satisfy the inquiry. If you do not clearly understand the notice, you can contact the IRS at the phone number which is required by law to be listed on the notice or letter. However, be aware that when you communicate with the IRS by telephone or by mail, everything you say or reveal to an IRS agent can and generally will be recorded and all information retained, including possibly for later use against you. Although you should not adopt an attitude of paranoia when dealing with the IRS, if you are at all unsure about contacting the IRS or about where you stand legally with regard to the requested information, you instead should immediately call your professional tax return preparer or a qualified tax attorney for advice on how to proceed. With a tax attorney, you also have the certainty and general protection of attorney-client privilege and confidentiality.
  4. Don’t immediately assume the worst: you are not necessarily in trouble or do not necessarily owe more money when you receive a notice from the IRS. There are a number of reasons why the IRS might send you a notice. Notices may request payment of taxes, may notify you of changes to your account, or may request additional information. The notice you receive normally covers a very specific issue about your account or tax return. Again, if you do not clearly understand the notice or what it is requesting, you can (subject to the warning above) contact the IRS at the phone number listed on the notice or letter. If you are at all unsure about contacting the IRS or about what you might reveal (even in seemingly casual conversation with an IRS employee), you instead should immediately call your professional tax return preparer or a qualified tax attorney.
  5. Don’t immediately assume the notice or letter is correct or accurate. If you receive a correction notice, you should review the correspondence and compare it with the information on your return. If you agree with the correction to your account, then usually no reply is necessary unless a payment is due or the notice directs otherwise. If you do not agree with the correction the IRS made, it is important that you timely respond as requested, or immediately contact your professional tax return preparer or other tax professional to determine how you should respond (including to timely challenge the changes indicated in the notice).
  6. If you choose to handle the matter on your own without counsel or another authorized representative, you should send a written explanation of why you disagree with the notice and include any documents and information you want the IRS to consider, along with the bottom tear-off portion of the notice. (Bear in mind the caution above with regard to communications with the IRS.) Mail the information to the IRS address shown in the upper left-hand corner of the notice. The IRS advises that you should allow at least 30 days for a response, although be aware that the “response” often is a computer-generated form letter that merely states that your correspondence was received and that it is being reviewed.  Additional letters of this same nature may continue to arrive for some time before the matter is resolved.
  7. The IRS advises taxpayers that most correspondence can be handled without calling or visiting an IRS office, and this generally is true. If you have questions, you can call the telephone number in the upper right-hand corner of the notice (again subject to the above caution about communicating with IRS personnel). It is a good idea to have a copy of your tax return and the correspondence available if you call to receive help from the IRS to respond to your inquiry. This information also will be crucial if you choose to seek assistance from your professional tax preparer or from a tax attorney.
  8. Be aware of your rights as a taxpayer. Some notices or letters will request a taxpayer to bring additional information or records to a local IRS office, and sometimes also will request that the taxpayer appear and answer questions. Federal law requires that such notices be accompanied by IRS Publication 1 which includes a notice to the taxpayer of his or her rights (or for a company, its rights) to be represented before the IRS by an authorized representative. Whether or not such notice is included or provided, a taxpayer always has the right to be represented before the IRS by an authorized representative, even if an IRS employee says or implies that you do not need an authorized representative to help you. For more information, click on the following link for IRS Publication 1, Your Rights as a Taxpayer.
  9. Always keep copies with your records of any and all correspondence you send to or receive from the IRS (especially for future reference to help a tax professional that you later might hire to take over the matter for you). Furthermore, to protect you in case you receive contradictory or erroneous advice from an IRS representative, also keep a record of the names and identification numbers of every IRS agent you speak with on the phone with regard to the matter in the letter or notice. All IRS personnel are required to give you their name and identification number, and generally will offer it at the beginning of every phone call.

For more information about IRS notices and bills and how to respond to such correspondence, consult your professional tax preparer or tax advisor, or see Publication 594, The IRS Collection Process. Information about penalties and interest also is available in Publication 17, Your Federal Income Tax for Individuals. These publication are available from the IRS website, www.IRS.gov, and also are available by calling 800-TAX-FORM (800-829-3676), or by clicking on the embedded links herein.

Things to Know About Getting More Time to File your Tax Return

10 April 2010 | Hertsel Shadian

If you can’t meet the April deadline to file your tax return, you can get an automatic six month extension of time to file from the IRS.  Here are some things to know about filing an extension:

  1. Extra time to file is not an extension of time to pay.  An extension will give you extra time to get your paperwork to the IRS, but it does not extend the time you have to pay any tax due. You will owe interest on any amount not paid by the April 15 deadline, plus a late payment penalty if you have not paid at least 90 percent of your total tax by that date. Determining this amount may require your best faith estimate.
  2. File on time even if you can’t pay.  If your return is completed but you are unable to pay the full amount of tax due, the IRS recommends that you not request an extension. Accordingly, unless there is some other compelling reason not to file on time (perhaps as advised by your professional tax advisor or professional tax return preparer), you should file your return on time and pay as much as you can. The IRS will send you a bill or notice for the balance due. If your return is prepared professionally or through tax preparation software, either should be able to provide you with an option to request a payment agreement.  Otherwise, you can apply online for a payment agreement: go to www.IRS.gov and click on the link “Online Payment Agreement Application” at the left side of the home page under Online Services. If you currently are unable to make payments, consult your professional tax advisor or call my office to learn more about your options. If you choose to proceed without professional counsel, you can call the IRS at 800-829-1040 to discuss your options.
  3. Form to file.  Request an extension to file by submitting Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, to the IRS by April 15, 2010, or make an extension-related electronic credit card payment. For more information about extension-related credit card payments, see Form 4868. For U.S. citizens and residents that are or will be out of the country on the due date of the return, different rules apply: see the instructions attached to Form 4868 or see the link below to IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. For military personnel that are outside of the country on the due date of the return, different rules also might apply: see Form 4868 and the link below to IRS Publication 3, Armed Forces’ Tax Guide.
  4. E-file extension.  You can e-file an extension request using tax preparation software with your own computer or by going to a tax preparer who has the software. The IRS will acknowledge receipt of the extension request if you file by computer.
  5. Traditional Free File and Free File Fillable Forms.  You can use both current Free File options to file an extension. Access the “Free File” page at www.IRS.gov (the link can be found at the right side of the home page under Filing and Payments).
  6. Electronic funds withdrawal.  If you ask for an extension via computer, you also can choose to pay any expected balance due by authorizing an electronic funds withdrawal from a checking or savings account. You will need the appropriate bank routing and account numbers. For information about these and other methods of payment, visit IRS.gov or call 800-TAX-1040 (800-829-1040).
  7. How to get forms.  Form 4868 is available for download at www.IRS.gov (including by clicking on any of the embedded links on this page) or may be ordered by calling 1-800-TAX-FORM (800-829-3676). You also can obtain the form at your local IRS office. The IRS advises that telephone requests normally take 10 days to fill, so if you expect to file an extension and have not yet ordered the Form 4868, you should consider one of the alternate methods described above to obtain the form.

For further information about obtaining an extension, consult your professional tax advisor or tax preparer, or see the IRS website at www.IRS.gov.

Additional Links:

  • IRS Form 9465, Installment Agreement Request (PDF 100K)
  • IRS Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad (PDF 348K)
  • IRS Publication 3, Armed Forces’ Tax Guide (PDF 206K)
  • Official Payments Corporation  (link to officially authorized IRS federal payment provider)
  • Link2 Gov Corporation  (link to officially authorized IRS federal payment provider)

New Tax Credit Helps Small Employers Provide Health Insurance Coverage

5 April 2010 | Hertsel Shadian

Many small businesses and tax-exempt organizations that provide health insurance coverage to their employees will now qualify for a special tax credit.  Included in the health care reform legislation, the Patient Protection and Affordable Care Act, approved by Congress and signed by President Obama on March 23, 2010, the credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees.

The goal of the credit is to provide a boost to eligible small businesses by helping them afford health coverage for their employees.  To this end, the government is urging small businesses and tax-exempt employers to look closely at this important tax break—which is already effective—to see if they qualify.

The maximum credit is 35% of premiums paid in 2010 by eligible small business employers and 25% of premiums paid by eligible employers that are tax-exempt organizations.  In 2014, this maximum credit is scheduled to increase to 50% of premiums paid by eligible small business employers and 35% of premiums paid by eligible employers that are tax-exempt organizations.

The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ low and moderate income workers. It is generally available to employers that have fewer than 25 full-time equivalent (FTE) employees paying wages averaging less than $50,000 per employee per year. However, since the eligibility formula is based in part on the number of so-called FTEs, not the number of employees, many businesses will qualify even if they employ more than 25 individual workers.  The maximum credit goes to smaller employers—those with 10 or fewer FTEs—paying annual average wages of $25,000 or less.

Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011. For tax-exempt employers, the IRS will provide further information on how to claim the credit. The IRS plans to use postcards to reach out to millions of small businesses that may qualify for the credit. The postcards will encourage small business owners to take advantage of the credit if they qualify.

More information about the credit, consult your professional tax preparer or tax advisor, or see the additional information available on the IRS Web site at www.IRS.gov

Some Important Facts about the Health Coverage Tax Credit

29 March 2010 | Hertsel Shadian

The Health Coverage Tax Credit (HCTC) pays 80 percent of health insurance premiums for eligible taxpayers and their qualified family members. However, many people who could be receiving this valuable credit don’t know about it, and are missing out on big savings that can help them and their families keep their health insurance.

Here are some of the more important things to know about the HCTC:

  1. The HCTC pays 80 percent of an eligible taxpayer’s health insurance premiums.
  2. The HCTC is a refundable credit, which means it not only reduces a taxpayer’s tax liability but also may result in cash back in his or her pocket at the end of the year.
  3. Taxpayers can receive the HCTC monthly—when their health plan premiums are due—or as a yearly tax credit.
  4. Nationwide, thousands of people are eligible for the HCTC.
  5. You may be eligible for the HCTC if you receive Trade Readjustment Allowances—or unemployment insurance in lieu of TRA—through one of the Trade Adjustment Assistance programs.
  6. You also may be eligible for the HCTC if you are a Pension Benefit Guaranty Corporation payee and are 55 years old or older.
  7. The most common types of health plans that qualify for the HCTC include COBRA, state-qualified health plans, and spousal coverage. In some cases, non-group/individual plans and health plans associated with Voluntary Employee Benefit Associations established in lieu of COBRA plans also qualify.
  8. HCTC candidates receive the HCTC Program Kit by mail. The Kit explains the tax credit and provides a simple checklist to determine eligibility. Also included in the Kit is the HCTC Registration Form.

For more information on the HCTC and how it may benefit you, contact your professional tax advisor or call the HCTC Customer Contact Center toll free at 866-628-HCTC (4282). For those with a hearing impairment, you can call toll free at 866-626-4282 (TTY). You also can visit the HCTC online at www.IRS.gov/hctc (The Health Coverage Tax Credit (HCTC) Program).

Two New Tax Benefits Aid Employers Who Hire and Retain Unemployed Workers

22 March 2010 | Hertsel Shadian

Two new tax benefits are now available to employers hiring workers who were previously unemployed or only working part time. These provisions are part of the Hiring Incentives to Restore Employment (HIRE) Act enacted into law this month.

Employers who hire unemployed workers this year (after Feb. 3, 2010 and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from their share of Social Security taxes on wages paid to these workers after the date of enactment. This reduced tax withholding will have no effect on the employee’s future Social Security benefits, and employers would still need to withhold the employee’s 6.2-percent share of Social Security taxes, as well as income taxes. The employer and employee’s shares of Medicare taxes would also still apply to these wages. In addition, for each worker retained for at least a year, businesses may claim an additional general business tax credit, up to $1,000 per worker, when they file their 2011 income tax returns.

It is hoped that these tax breaks will offer a much-needed boost to employers willing to expand their payrolls. Businesses and nonprofits should keep these benefits in mind as they plan for the year ahead. The two tax benefits are especially helpful to employers who are adding positions to their payrolls. New hires filling existing positions also qualify, but only if the workers they are replacing left voluntarily or for cause. Family members and other relatives do not qualify.

In addition, the new law requires that the employer get a statement from each eligible new hire which certifies that he or she was unemployed during the 60 days before beginning work or, alternatively, worked fewer than a total of 40 hours for someone else during the 60-day period. The IRS is currently developing a form employees can use to make the required statement. Businesses, agricultural employers, tax-exempt organizations and public colleges and universities all qualify to claim the payroll tax benefit for eligible newly-hired employees. Household employers cannot claim this new tax benefit.

Employers claim the payroll tax benefit on the federal employment tax return they file, usually quarterly, with the IRS. Eligible employers will be able to claim the new tax incentive on their revised employment tax form for the second quarter of 2010. Revised forms and further details on these two new tax provisions will be posted on the IRS website at www.IRS.gov likely during the next few weeks.  For further information, consult your professional tax preparer or tax advisor.

Ten Important Tax Facts about Mortgage Debt Forgiveness

15 March 2010 | Hertsel Shadian

In the wake of the recent economic and housing crisis, many taxpayers have found themselves forced to renegotiate or abandon their mortgage debt obligations.  The good news is that if your mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you may be able to claim special tax relief and exclude the debt forgiven from your income. Here are 10 important tax facts you should know about Mortgage Debt Forgiveness.

  1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.
  2. The limit is $1 million for a married person filing a separate return.
  3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
  4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
  5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
  6. Proceeds of refinanced debt used for other purposes—for example, to pay off credit card debt—do not qualify for the exclusion.
  7. If you qualify, you can claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
  8. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions—such as insolvency—may be applicable. IRS Form 982 provides more details about these provisions.
  9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
  10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.

For more information about the Mortgage Forgiveness Debt Relief Act of 2007, consult your professional tax professional or tax preparer, or visit the official IRS website at www.IRS.gov. Another good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments. Taxpayers may obtain a copy of this publication and Form 982 either by downloading them from IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Some Facts to Help Understand the Alternative Minimum Tax

8 March 2010 | Hertsel Shadian

Perhaps one of the most confusing things for individual tax filers to deal with each year at tax filing time is the Alternative Minimum Tax, or AMT.  In the most simple terms, the AMT is an alternate tax that was implemented over four decades ago to ensure that high-earning individuals who benefit from certain tax advantages still pay at least some minimum amount of tax.

Originally, the AMT was intended to mostly affect high income individuals who were able to substantially or completely reduce their income taxes through legitimate tax deductions and credits.  However, because the AMT is not indexed to account for inflation, the AMT now impacts millions more taxpayers than likely ever was contemplated when the law originally was enacted.

Many commentators and tax critics—including many politicians—have decried the AMT as onerous and over-reaching in terms of the number of taxpayers which the law now impacts, especially the number of middle-income taxpayers which are affected.  Congress has introduced numerous proposals for legislation to overhaul the AMT in recent years, but no major revisions to the law have been passed.  Thus, unless and until Congress changes the law, the AMT is a part of the Tax Code and taxpayers should understand its impact.

Here are some facts to know about the AMT and changes to this special tax for 2009:

1. Tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain expenses. These benefits can drastically reduce some taxpayers’ tax obligations. Congress created the AMT in 1969, targeting taxpayers who could claim so many deductions that they owed little or no income tax. (Under the AMT, many deductions and credits available to reduce ordinary income tax are not available to reduce the AMT.)

2. Since the AMT is not indexed for inflation, a growing number of middle-income taxpayers are discovering they are subject to the AMT.

3. You may have to pay the AMT if your taxable income for regular tax purposes plus any adjustments and preference items that apply to you are more than the AMT exemption amount.

4. The AMT exemption amounts are set by law for each filing status.

5. For tax year 2009, Congress raised the AMT exemption amounts to the following levels:

  • $70,950 for a married couple filing a joint return and qualifying widows and widowers;
  • $46,700 for singles and heads of household;
  • $35,475 for a married person filing separately.

6. The minimum AMT exemption amount for a child whose unearned income is taxed at the parents’ tax rate has increased to $6,700 for 2009.

7. If you claim a regular tax deduction on your 2009 tax return for any state or local sales or excise tax on the purchase of a new motor vehicle, that tax also is allowed as a deduction for the AMT.

The IRS has made available on its website an electronic version of what it calls the AMT Assistant for Individuals to help individual taxpayers determine whether they may be subject to the AMT. (The AMT Assistant is an electronic version of the AMT Worksheet found in the Instructions to IRS Form 1040, called the “Worksheet to See if You Should Fill in Form 6251 – Line 45.”)  The AMT Assistant is intended to provide a simple test for taxpayers who fill out their tax returns without using software to determine whether they may be subject to the AMT.

For further information, or for additional help to determine if and how the AMT impacts your individual tax filing, consult your professional tax advisor or tax preparer, or visit the IRS web site at IRS.gov.

Expanded Loss Carryback Option Available for Businesses Under New IRS Procedure

1 March 2010 | Hertsel Shadian

Most businesses now may use losses incurred during the recent economic downturn to reduce income from prior tax years, under an IRS revenue procedure issued in late 2009 which implements relief provided by the Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA). The relief provided under the WHBAA differs from similar relief issued earlier in 2009 under The American Recovery and Reinvestment Act (ARRA) in that the previous relief was limited to small businesses. (See link, Questions and Answers on WHBAA NOL provisions.) The current relief is applicable to any taxpayer with business losses, except those that received payments under the Troubled Asset Relief Program (TARP). The relief also applies to a loss from operations of a life insurance company.

Taxpayers under the revenue procedure may elect to carry back a net operating loss (NOL) for a period of three, four or five years, or a loss from operations for four or five years, to offset taxable income in those preceding taxable years. An NOL or loss from operations carried back five years may offset no more than 50 percent of a taxpayer’s taxable income in that fifth preceding year. This limitation does not apply to the fourth or third preceding year.

The revenue procedure applies to taxpayers that incurred an NOL or a loss from operations for a taxable year ending after Dec. 31, 2007, and beginning before Jan. 1, 2010.  For more information, consult your professional tax advisor or tax preparer.