Hertsel Shadian, Attorney at Law, LLC

Archive for the ‘IRS/Tax Articles’ Category

IRS (Again) Debunks Frivolous Tax Arguments

25 February 2010 | Hertsel Shadian

For most people, taxes simply are a part of life. Many even would say that taxes are the price for living in a free and democratic society. Nevertheless, some people argue that taxes are illegal or illegitimate, or that there are legal ways to avoid paying any taxes at all. Federal tax laws do provide numerous means to legitimately reduce or avoid taxes, and taxpayers are entitled to structure their affairs to legitimately maximize the reduction or avoidance of taxes within those laws. However, with the proliferation of illegitimate promoters selling illegal tax evasion schemes, as well as the increase of tax protesters advancing bogus or confusing arguments for the complete evasion of taxes, taxpayers do need to separate truth from fiction (or unsubstantiated opinion).

On February 5, 2010, the Internal Revenue Service released the 2010 version of its discussion and rebuttal of many of the more common frivolous arguments made by individuals and groups that oppose compliance with federal tax laws. The IRS advises anyone who contemplates arguing on legal grounds against paying their fair share of taxes to first read the 80-plus page document, The Truth About Frivolous Tax Arguments, available on the IRS website at IRS.gov.  The document explains many of the most common frivolous arguments made in recent years and it describes the legal responses that have refuted these claims. The IRS has compiled these arguments in one document because it believes this will help taxpayers avoid wasting their time and money with frivolous arguments and incurring penalties.

Congress in 2006 increased the amount of the penalty for frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position which the IRS identifies or has identified as frivolous.  The IRS highlighted in the document about 40 new cases adjudicated in 2009. Highlights include cases involving injunctions against preparers and promoters of Form 1099-Original Issue Discount schemes and injunctions against preparers and promoters of false fuel tax credit schemes.

If you have any questions about the legitimacy of a particular tax benefit or about a tax avoidance method you have heard promoted, consult a reputable tax professional for further information.

Ten Facts About Claiming Donations Made to Haiti

22 February 2010 | Hertsel Shadian

If you are donating to charities providing earthquake relief in Haiti, you may be able to claim those donations on your 2009 income tax return.  (See earlier article.)  Here are 10 important facts to know about this special provision.

1. A new law allows you to claim donations for Haitian relief on your 2009 income tax return, which you will be filing in 2010.

2. The contributions must be made specifically for the relief of victims in areas affected by the January 12, 2010, earthquake in Haiti.

3. To be eligible for a deduction on your 2009 income tax return, donations must be made after January 11, 2010 and before March 1, 2010.

4. In order to be deductible, contributions must be made to qualified charities and can not be designated for the benefit of specific individuals or families.

5. The new law applies only to cash contributions.

6. Cash contributions made by text message, check, credit card or debit card may be claimed on your federal tax return.

7. You must itemize your deductions in order to claim these donations on your tax return.

8. You have the option of deducting these contributions on either your 2009 or 2010 income tax return, but not both.

9. Contributions made to foreign organizations generally are not deductible. You can find out more about organizations helping Haitian earthquake victims from agencies such as the U.S. Agency for International Development (www.usaid.gov).

10. Federal law requires that you keep a record of any deductible donations you make. For donations by text message, a telephone bill will meet the record-keeping requirement if it shows the name of the organization receiving your donation, the date of the contribution, and the amount given. For cash contributions made by other means, be sure to keep a bank record, such as a cancelled check or a receipt from the charity. Receipts should show the name of the charity, the date and amount of the contribution.

For more information see IRS Publication 526, Charitable Contributions and Publication 3833 , Disaster Relief: Providing Assistance through Charitable Organizations.  Otherwise, consult your professional tax advisor or tax preparer.  To determine if an organization is a qualified charity, visit “Search for Charities” at IRS.gov. Note that some organizations, such as churches or governments, may be qualified even though they are not listed on IRS.gov.

Five Tax Benefits to Offset Education Costs

19 February 2010 | Hertsel Shadian

As anyone paying for college knows, the costs associated with higher education can be very expensive. To help students and their parents, federal tax law offers several benefits in the form of credits and deductions to offset education costs. Following are five helpful tax benefits available to offset those costs:

  1. The American Opportunity Credit.  This credit can help parents and students pay part of the cost of the first four years of college. The American Recovery and Reinvestment Act modifies the existing Hope Credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Eligible taxpayers may qualify for the maximum annual credit of $2,500 per student. Generally, 40 percent of the credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes.
  2. The Hope Credit.  This credit can help students and parents pay part of the cost of the first two years of college. This credit generally applies to 2008 and earlier tax years. However, for tax year 2009, a special expanded Hope Credit of up to $3,600 may be claimed for a student attending college in a Midwestern disaster area as long as the eligible taxpayer does not also claim an American Opportunity Tax Credit for any other student in 2009.
  3. The Lifetime Learning Credit.  This credit can help pay for undergraduate, graduate and professional degree courses—including courses to improve job skills—regardless of the number of years in the program.  Eligible taxpayers may qualify for up to $2,000—$4,000 if a student is in a Midwestern disaster area—per tax return.
  4. Enhanced benefits for 529 college savings plans.  Certain computer technology purchases are now added to the list of college expenses that can be paid for by a qualified tuition program, commonly referred to as a “529 plan.”  For 2009 and 2010, the law expands the definition of qualified higher education expenses to include expenses for computer technology and equipment or Internet access and related services.
  5. Tuition and fees deduction.  Students and their parents may be able to deduct qualified college tuition and related expenses of up to $4,000. This deduction is an adjustment to income, which means the deduction will reduce the amount of an eligible taxpayer’s income subject to tax. The Tuition and Fees Deduction may be beneficial to you if you do not qualify for the American opportunity, Hope, or lifetime learning credits.

Note that a taxpayer cannot claim the American Opportunity and the Hope and Lifetime Learning Credits for the same student in the same year. A taxpayer also cannot claim any of the credits if he or she claims a tuition and fees deduction for the same student in the same year. To qualify for an education credit, a taxpayer must pay post-secondary tuition and certain related expenses for himself or herself, for his or her spouse, or for his or her dependent. The credit may be claimed by the parent or the student, but not by both. Students who are claimed as a dependent cannot claim the credit.

For more information, consult your professional tax advisor or tax preparer, or see Publication 970, Tax Benefits for Education, which can be obtained online at IRS.gov.  Also, for a brief IRS YouTube video on the topic, see the following link:  Education Credits (English/ASL) (Spanish)

Tax Credits for Home Buyers

15 February 2010 | Hertsel Shadian

Tax Credit in General

For first-time homebuyers, there is a refundable credit equal to 10 percent of the purchase price of a home up to a maximum of $8,000 ($4,000 if married filing separately). A first-time homebuyer is an individual who, with his or her spouse if married, has not owned any other principal residence for three years prior to the date of the purchase of the new principal residence for which the credit is being claimed.

Situations in which a taxpayer cannot claim the credit

There are several situations in which a taxpayer cannot claim the first-time homebuyer credit:

  • The taxpayer is a nonresident alien;
  • The taxpayer purchases a home located outside the United States;
  • The taxpayer sells the home or if it stops being the taxpayer’s principal residence in the year the taxpayer purchased the home;
  • The taxpayer receives the home, or any portion of the home, as a gift or as an inheritance; and
  • The taxpayer exceeds the income limits.

The Worker, Homeownership, and Business Assistance Act of 2009 extended and expanded the tax credit that initially had been created in 2008 for first-time homebuyers. The new law extends the deadline for qualifying home purchases from Nov. 30, 2009, to April 30, 2010. If a buyer enters into a binding contract by April 30, 2010, the buyer has until June 30, 2010, to settle on the purchase.

Exception for Members of the Armed Forces.  Members of the Armed Forces and certain federal employees serving outside the U.S. have an extra year to buy a principal residence in the U.S. and still qualify for the credit. An eligible taxpayer must buy or enter into a binding contract to buy a home by April 30, 2011, and settle on the purchase by June 30, 2011.

Purchases made after Nov. 6, 2009

Taxpayers should be aware of some changes to the law that apply to home purchases after Nov. 6, 2009, the date of enactment of the new law.  The new law expands the tax credit to include not just first-time homebuyers, but also long-time residents who buy a new principal residence. They are eligible for a credit of 10 percent of the purchase price up to a maximum credit of $6,500. A long-time resident is an individual who, with his or her spouse if married, has owned and used the same home as a principal residence for any period of 5 consecutive years during the 8-year period ending on the date of purchase of the new principal residence for which the credit is being claimed.

Income Limitation

For people who purchase homes after Nov. 6, 2009, the full credit will be available to taxpayers with a modified adjusted gross income (MAGI) up to $125,000, or $225,000 for joint filers. MAGI is your adjusted gross income plus the total of certain foreign earned income. Those with MAGI between $125,000 and $145,000, or $225,000 and $245,000 for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.

However, for homes purchased before Nov. 7, 2009, existing income limits remain in place. The full credit is available to taxpayers with MAGI up to $75,000, or $150,000 for joint filers. Those with MAGI between $75,000 and $95,000, or $150,000 and $170,000 for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.

Restrictions applicable to purchases after Nov. 6, 2009

Several new restrictions apply to purchases that occur after Nov. 6, 2009:

  • Dependents are not eligible to claim the credit;
  • No credit is available if the purchase price of a home is more than $800,000; and
  • A purchaser must be at least 18 years of age on the date of purchase.

Credit Claimed on a 2009 or 2010 Tax Return

For all qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 individual income tax returns.

A new version of Form 5405, First-Time Homebuyer Credit, (and instructions) became available on Jan. 15, 2010, for taxpayers who purchased a home after Nov. 6, 2009.  The IRS advises that this new version of the form must be used to claim the credit. Likewise, taxpayers claiming the credit on their 2009 returns, no matter when the house was purchased, also must use the new version of Form 5405. According to the IRS (as announced in January, 2010), taxpayers who claim the credit on their 2009 income tax return will not be able to file an electronic return, but instead will need to file a paper return.

Credit Claimed on a 2008 Tax Return

The maximum credit originally was $7,500 ($3,750 if married filing separately). According to the IRS, a taxpayer who chose to claim the credit on their 2008 income tax return for a home purchased in 2009 and who also did not use the February 2009 revision of Form 5405, now may be able to claim the additional $500 on an amended 2008 tax return. Taxpayers should consult their professional tax advisor or tax preparer for more information.

Selling the Home and Other Events that Require Repaying the Credit

Taxpayers who bought homes in 2009 or 2010 and sold them within a 36-month period that begins on the purchase date, must repay the credit. They also must repay the credit if they convert the home to a business or rental property or the lender forecloses on the home. The taxpayer repays the credit by including the amount of the credit as additional tax on the tax return for the year in which the repayment event occurs.

However, taxpayers do not have to repay all or a portion of the credit under the following circumstances:

  • If taxpayers sell the home to someone who is not related to them, the repayment in the year of sale is limited to the amount of gain on the sale;
  • If the home is destroyed, condemned, or disposed of under threat of condemnation and the taxpayer acquires a new principal residence within 2 years of the event, the taxpayer does not have to repay the credit; and
  • If, as part of a divorce settlement, the home is transferred to a spouse or former spouse, the spouse who receives the home is responsible for repaying the credit if required.

For more information or to determine your eligibility for the first-time homebuyer credit, consult your professional tax advisor or tax preparer, and see the additional information avaialble on the official IRS website at IRS.gov.

IRS YouTube Videos on Various Tax Topics

12 February 2010 | Hertsel Shadian

Like many other governmental organizations and corporate entities, the IRS utilizes modern technology in an attempt to reach taxpayers and other individuals to inform them about recent and relevant tax issues. One of these forms of technology is the phenomenon of posting videos on YouTube.com. The videos are cleanly produced and generally provide helpful tax information; however, the videos generally are short and thus not in-depth, so the content of the videos should be considered accordingly.  Taxpayers should consult their professional tax advisor or tax preparer for more detailed information about any of these topics, or visit the official IRS website at IRS.gov.

Below are links to some of the recent YouTube videos as posted by the IRS, most of which are available in both English and Spanish languages, as well as in American Sign Language (ASL).

IRS YouTube Videos:

Five Notable Tax Changes for 2009

10 February 2010 | Hertsel Shadian

As taxpayers get ready to prepare their 2009 individual income tax returns, the Internal Revenue Service wants to advise them about tax law changes that may impact their tax returns.  Here are five notable changes that may show up on your 2009 individual income tax return:

1. The American Recovery and Reinvestment Act (ARRA)

The ARRA provides several tax provisions that affect tax year 2009 individual income tax returns due April 15, 2010. The recovery law provides tax incentives for first-time home buyers, people who purchased new cars, those that made their homes more energy efficient, parents and students paying for college, and people who received unemployment compensation.

2. Expanded IRA Deduction

You may be able to take an IRA deduction if you were covered by a retirement plan and your 2009 modified adjusted gross income was less than $65,000, or $109,000 if you are married filing a joint return.

3. Standard Deduction Increased for Most Taxpayers

The 2009 basic standard deductions all increased. They are:

  • $11,400 for married couples filing a joint return and qualifying widows and widowers
  • $5,700 for singles and married individuals filing separate returns
  • $8,350 for heads of household

Taxpayers can now claim an additional standard deduction based on the state or local sales or excise taxes (as applicable) paid on the purchase of most new motor vehicles purchased after February 16, 2009. You can also increase your standard deduction by the state or local real estate taxes paid during the year or net disaster losses suffered from a federally declared disaster.

4. 2009 Standard Mileage Rates

The standard mileage rates changed for 2009. The standard mileage rates for business use of a vehicle:

  • 55 cents per mile

The standard mileage rates for the cost of operating a vehicle for medical reasons or a deductible move:

  • 24 cents per mile

The standard mileage rate for using a car to provide services to charitable organizations remains at 14 cents per mile.

5. Kiddie Tax Change

The amount of taxable investment income a child can have without it being subject to tax at the parent’s rate has increased to $1,900 for 2009.

For more information about these and other changes for tax year 2009, consult your professional tax advisor or tax preparer, or see Fact Sheet 2010-4 on the official IRS website at IRS.gov

Things to Know About the Government Retiree Credit

8 February 2010 | Hertsel Shadian

Certain government retirees who received a government pension or annuity payment in 2009 may be eligible for the Government Retiree Credit. The American Recovery and Reinvestment Act of 2009 provided this one-time credit of $250 for certain federal and state pensioners.

Here are seven things the IRS recently advised about the Government Retiree Credit:

  1. You can take this credit if you receive a pension or annuity payment in 2009 for service performed for the U.S. Government or any U.S. state or local government and the service was not covered by social security.
  2. Recipients of the Making Work Pay Credit will have that credit reduced by any Government Retiree Credit they receive.
  3. The credit is $250 for individuals and $500 if married filing jointly and both you and your spouse receive a qualifying pension or annuity.
  4. You must have a valid social security number to claim the credit. If married filing jointly, both spouses must have a valid social security number to each claim the $250 credit.
  5. You cannot take the credit if you received a $250 economic recovery payment in 2009.
  6. This is a refundable credit, which means it may give you a refund even if you had no tax withheld from your pension.
  7. To claim the credit, you must complete Schedule M, Making Work Pay and Government Retiree Credits, and attach it to your Form 1040A or 1040.

For information about eligibility for the credit, consult your professional tax advisor or tax preparer.

Do You Have to File a Tax Return?

5 February 2010 | Hertsel Shadian

You must file an individual income tax return if your income for the year is above a certain level. The amount varies depending on your filing status, your age and the type of income you receive.

You should consult your professional tax advisor to determine if you are required to file a tax return.  Otherwise, you can check the Individuals section of IRS.gov, or consult the instructions for Form 1040, 1040A, or 1040EZ for specific details that may affect your need to file a tax return with the IRS this year.

Even if you don’t have to file, e.g., because your income is below the minimum filing threshold, here are eight reasons why the IRS advises you still may want to file a return:

  1. Federal Income Tax Withheld. Even if you are not required to file, you should file to get money back if Federal Income Tax was withheld from your pay, if you made estimated tax payments, or if you had a prior year overpayment applied to this year’s tax.
  2. Making Work Pay Credit. You may be able to take this credit if you have earned income from work. The IRS advises that the maximum credit for a married couple filing a joint return is $800 and $400 for other taxpayers.
  3. Government Retiree Credit. You may be eligible for this credit if you received a government pension or annuity payment in 2009. However, the amount of this credit reduces any making work pay credit you receive.
  4. Earned Income Tax Credit (EITC). You may qualify for the EITC if you worked, but did not earn a lot of money. The EITC is a refundable tax credit; which means you could qualify for a tax refund.
  5. Additional Child Tax Credit. This 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.
  6. Refundable American Opportunity Credit. This education tax credit is available for 2009 and 2010. The IRS advises that the maximum credit per student is $2,500 and the first four years of post-secondary education qualify.
  7. First-Time Homebuyer Credit. The IRS advises that the credit is a maximum of $8,000 or $4,000 if your filing status is married filing separately. The credit applies to homes bought anytime in 2009 and on or before April 30, 2010. However, the IRS reminds you that you have until on or before June 30, 2010, if you entered into a written binding contract before May 1, 2010. The IRS further reminds you that if you bought a home after November 6, 2009, you may be able to qualify and claim the credit even if you already owned a home. In this case, the IRS advises that the maximum credit for long-time residents is $6,500, or $3,250 if your filing status is married filing separately.
  8. Health Coverage Tax Credit. Certain individuals, who are receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, or pension benefit payments from the Pension Benefit Guaranty Corporation, may be eligible for a Health Coverage Tax Credit worth 80 percent of monthly health insurance premiums when you file your 2009 tax return.

For more information about your filing requirements and your eligibility to receive tax credits, consult your professional tax preparer or tax advisor, or visit the official IRS website at IRS.gov.

Haiti Relief Donations Qualify for Immediate Tax Relief

4 February 2010 | Hertsel Shadian

On January 25, 2010, the IRS announced a new tax law provision that allows people who donate to charities providing earthquake relief in Haiti to claim these donations on their 2009 income tax returns (i.e., the returns they are completing this season).

Taxpayers who itemize deductions on their 2009 income tax return qualify for this special tax relief provision, enacted January 22, 2010. Only cash contributions made to these charities after January 11, 2010, and before March 1, 2010, are eligible. This includes contributions made by text message, check, credit card or debit card.

The new law only applies to cash (as opposed to property) contributions. The contributions must be made specifically for the relief of victims in areas affected by the January 12, 2010, earthquake in Haiti. Taxpayers have the option of deducting these contributions on either their 2009 or 2010 income tax returns, but not both.  To get a tax benefit, taxpayers must itemize their deductions on Schedule A. Those who claim the standard deduction, including all short-form filers, are not eligible.  See IRS Publication 501 for more information, or consult your professional tax advisor or tax preparer.

Taxpayers should be sure that their contributions go to qualified charities. Most organizations which are eligible to receive tax-deductible donations are listed in a searchable online database available on www.IRS.gov under Search for Charities. Some organizations, such as churches or governments, may be qualified even though they are not listed on IRS.gov. Donors can find out more about organizations helping Haitian earthquake victims from agencies such as USAID.

The IRS announcement reminds donors that contributions to foreign organizations generally are not deductible. IRS Publication 526, Charitable Contributions, provides additional information on making contributions to charities. Also consult your professional tax advisor or tax preparer for additional information.

Federal law requires that taxpayers keep a record of any deductible donations they make. For donations made by text message, the IRS advises that a telephone bill will meet the record-keeping requirement if it shows the name of the donee organization, the date of the contribution and the amount of the contribution. For cash contributions made by other means, be sure to keep a bank record, such as a cancelled check, or a receipt from the charity showing the name of the charity and the date and amount of the contribution. IRS Publication 526 has further details on the record-keeping rules for cash contributions.  Otherwise, consult your professional tax advisor or tax preparer for more information.

This year’s special Haiti relief provision is modeled on a 2005 law that, in the wake of the December 26, 2004, Indian Ocean tsunami, allowed taxpayers to deduct donations they made during January 2005 as if they made the donations in 2004.

See also IRS Notice 1396, describing this deduction, which is printed in English, Spanish, French and Haitian Creole.

The Expanded Earned Income Tax Credit (EITC)

1 February 2010 | Hertsel Shadian

As taxpayers prepare to file their individual income tax returns for 2009, the IRS wants to alert many lower income earning families about the expanded Earned Income Tax Credit (EITC).  As advised by the IRS, an expanded EITC means larger families will qualify for a larger credit, offering greater relief for people who struggled through difficult financial times during 2009.

The EITC, which is in its thirty-fifth year, is one of the federal government’s largest benefit programs for working families and individuals. According to the IRS, in 2009, nearly 24 million people received $50 Billion in benefits. The average credit was more than $2,000.

Eligibility for the EITC depends on earned income and family size, among other tests. However, single people and childless workers also are eligible, although for smaller amounts. For tax years 2009 and 2010, the American Recovery and Reinvestment Act created a new category for families with three or more children and expanded the maximum benefit for this category.

To qualify for the EITC, earned income and adjusted gross income (AGI) for individuals must each be less than:

  • $43,279 ($48,279 married filing jointly) with three or more qualifying children
  • $40,295 ($45,295 married filing jointly) with two qualifying children
  • $35,463 ($40,463 married filing jointly) with one qualifying child
  • $13,440 ($18,440 married filing jointly) with no qualifying children

The maximum credit for tax year 2009 is:

  • $5,657 with three or more qualifying children
  • $5,028 with two qualifying children
  • $3,043 with one qualifying child
  • $457 with no qualifying children

The maximum amount of investment income is $3,100 for tax year 2009. For families, there are also certain requirements for child residency and relationship that must be met. For additional eligibility information, consult your professional tax advisor or tax preparer.  Information also is available in FS-2010-12 and on the Web at IRS.gov/EITC.