As you know, if you’re serving in a combat zone, your military pay might not be taxable and therefore you might not have to file a tax return.  However, you could still be eligible for the Earned Income Tax Credit.

What’s an earned income credit?

It’s a credit on your federal tax return that’s available to taxpayers who don’t earn a high income. It’s available for single folks with income under $13,440.  For families, it depends on the number of children.  A family with 3 children with income under $48,729 could be eligible for at least a partial credit.  For many military members, their wages fall into the earned income eligibility.

What’s a tax credit?

A credit reduces your taxes dollar for dollar, and part of this credit is available as a refund even if you have no tax.

How does nontaxable combat pay work?

For any month that you’re stationed in a combat zone as an enlisted member, warrant officer or commissioned warrant officer of the military, your earnings for that month are not taxable. For officers, the amount of their income not taxed is capped at the highest enlisted pay. If you have questions about the definition of a combat zone, check out IRS – Military Pay Exclusion – Combat Zone.

Can I still get that tax credit without my pay being taxed?

Yes. There’s a special law just for the military, that allows you to elect (choose) to have your combat pay (that’s not taxable) be considered “earned income” for earned income tax credit calculation only.

Should I elect that?

Probably. However you need to check if your refund increases with that election.  If your spouse has wages or self-employment income, adding your combat pay may reduce or cancel the credit. Once your family income is greater than $16,000 to $21,000, the credit starts to decrease. So be sure to check which choice gets you more money.

If you use TurboTax to prepare your return, we ask about that election when your W-2 shows that you have nontaxable combat pay (box 12, code Q).   If you say yes, be sure to verify that the refund in the refund monitor increased. If your refund is reduced, just go back and change the election to no.

For more information on the military and taxes:

IRS Questions & Answers on Combat Zone Tax Provisions

IRS Tax Information for Members of the Armed Forces

IRS Armed Forces Tax  Guide

I’m in the military. Do I need to file a state return?

Military Spouse Residency Relief Act and State Taxes

Everybody else must buy a home by the April 30, 2010 deadline to qualify for the credit, worth as much as $8,000.

The latest update of the homebuyer credit actually has two versions. There’s the First-Time Homebuyer credit of up to $8,000 on your tax return if you purchase a home and hadn’t previously owned one in three years.  There’s also a credit up to $6,500 for “long time” homebuyers – who owned and lived in a home for five consecutive years out of the past eight, prior to purchasing the replacement home. You do have to pay back the credit if you sell or leave that new home within 36 months after purchase. For more information, check out How to Qualify for the Homebuyer Credit Extended into 2010.

What are the details on the extended date for the military?

Members of the military and certain other federal employees serving outside the United State get an extra year to purchase a residence in the U.S. and receive the credit.  The date has been extended to April 30, 2011.   This extended date applies to members who serve on official extended duty outside of the United State for at least 90 days during the period beginning after December 31, 2008 and ending before May 1, 2010.

Here are a couple of examples:

• Joe, an Army officer, is stationed in Germany from June 1, 2009 until February 1, 2010.  Since he was stationed outside the US for more than 90 days, after 12/31/08 and before 5/1/10, he has until April 30, 2011 to purchase a new home in the US and if eligible, receive the credit.
• Susan is in the Navy and stationed in Japan from March 1, 2008 until March 1, 2009.  She won’t get the extra year to purchase a home because she didn’t meet the 90 days rule.

More good news

If you’ve received the credit, but due to an official move and you have to leave/sell the home, you won’t have to repay the money.

What are the situations that the credit doesn’t have to be repaid?

If the taxpayer sells or stops using the home as a principal residence within 36 months after purchase, the credit is repaid.  However for service members who sell or stop using their home as a principal residence in connection with government orders received for “qualified extended duty service,” the credit does not have to be repaid.  The “qualified extended duty service” is a defined as a period of duty (in excess of 90 days or an indefinite period of time) while serving at a place of duty at least 50 miles away from the principal residence.

Here’s an example.  Larry is in the Air Force and was stationed overseas from May 1, 2009 until February 5, 2010   Starting in March, 2010, he is stationed in Washington, D.C.  He decides to purchase his first home in February, 2011 and qualifies for the $8,000 credit on his tax return.

In November, 2011 he receives orders to California. He decides to rent out the house and move into government quarters in California.  Even though he’s been in the house less than a year, he doesn’t have to pay back the credit to the IRS.

For more information on the military and taxes:

IRS First-Time Homebuyer Credit: Members of the Military

IRS Tax Information for Members of the Armed Forces

IRS Armed Forces Tax Guide

I’m in the military. Do I need to file a state return?

Military Spouse Residency Relief Act and State Taxes

To figure out which state return an active duty military person files depends (in military terms) on their “home of record” or “state of legal residence.”

First let’s define those two terms.

Your “home of record” is the state recorded by the military that was your home when you were enlisted, appointed, commissioned, inducted or ordered in a tour of active duty.

Your “state of legal residence (SLR)” is your “home of record” unless you changed it to another state.  Military members often mistakenly think that by changing the state on their paycheck records changes their SLR.  Nope. In order to change the SLR, a DD Form 2058 must be submitted to the finance officer and accepted.

For more information on requirements for valid changes when filing Form 2058, check out a Fact Sheet on Legal Residence that I discovered on Hill Air Force Base’s website.

From a tax standpoint, your SLR is considered your “domicile” or “resident” state as long as you are on active duty.  Even if you are stationed in another state, you’re still considered a resident of your SLR.

Now that we’ve defined these terms, let’s look at an example.

In 2000 Joe lived in South Carolina and decided to join the military.  It’s now 2009 and he’s stationed in Maryland and he’s living in Virginia. Does Joe file a state tax return for 2009?  If so, does he file a South Carolina and a Virginia and/or Maryland return?

We know that Joe is considered a South Carolina resident (That’s “his home of record” and SLR.)  It depends on each state’s laws if they want their resident military to file a return when they are stationed outside the state.   Let’s see what South Carolina law says.

It says that if Joe is active duty military, home of record is South Carolina and whether he is stationed in South Carolina or another state, he files a South Carolina resident income tax return each year.

Remember that each state is different. If Joe’s “home of record” was in a certain state, he may be required to file a return and then deduct all of his income and pay little or no tax.  That way the state knows he still exists!  And some “home of record” states like South Carolina will tax Joe on his income even if he is stationed outside of the “home of record.”  When California is a “home of record” and the active military is stationed outside of California, he/she is considered a nonresident of California.  To check out your “state of legal residence” laws for filing when stationed outside the state, click on IRS’ State Links website to find your SLR’s state website.

Does Virginia or Maryland expect a tax return from him?

The Servicemember Civil Relief Act states that an active duty member is not considered a resident of a state unless it is his SLR. Joe would only file a Virginia or a Maryland return if he had a nonmilitary 2nd job in that state. If he’s working at Home Depot in Virginia on the weekends, he would file as a Virginia nonresident and only report that W-2.  He would not report any other type of income.

What state return does his wife file?

If Joe is married and his wife works in a civilian job in Virginia she might have to file a state tax return in Virginia. However, if she qualifies under the 2009 Military Spouses Residency Relief Act, she might be able to claim South Carolina as her state of legal residence, along with her husband.

For more information on the military and taxes, read:

Military Spouse Residency Relief Act and State Taxes

Tax Information for Members of the U.S. Armed Forces

IRS – Armed Forces Tax Guide

Can I Efile with a Foreign Address?

Earlier in the tax season, California refunds were delayed. Taxpayers didn’t get any IOUs; California was just saying the checks were late. (I filed my California return the last week in January and didn’t get the refund until mid March.)

The State of California is sending IOUs to taxpayers.

Starting July 2nd, California taxpayers are getting IOUs, also known as a registered warrants, in place of their tax refund checks.  The IOU is not redeemable until October 2, 2009 however there will be 3.75% annual interest included with the redemption. Originally some large banks were offering to accept the IOUs now at full value.  Then they would redeem the IOU in October and get the interest too. However it sounds like many of those banks have changed their minds.  I hear it’s a good idea to check Credit Unions; seems they may have agreed to accept the warrants.

For “everything you wanted to know about CA IOUs and we afraid to ask”, check out this latest TurboTax article “California: Now Issuing IOUs for Income Tax Refunds.”

Child Tax Credits and Deductions for Summer Camp

During the school year, depending on their age, your children are in after-day care at the local center or spend a couple of hours at home alone in the afternoon.  You keep the monthly child care center’s bills in your tax files for the child care tax credit on your next year’s tax return.

Now it is summer and you can’t leave the kids home alone all day while you work. It’s a mixed calendar. The first few weeks the kids are attending the local summer camp, for a couple of weeks they’ll be at the overnight camp a few hours away from home, and then the rest of the summer, your neighbor will be the “baby” sitter at your home. Are these summer expenses eligible for your child care credit?

The day camp expenses are eligible. If the camp costs include a fee for transporting your kid to and from the camp, that’s an eligible cost too.  Before the camp days are over, get the camp’s information (official name, address, and identification number) for your next year’s tax return. The overnight camp costs are not eligible for the child care credit. Sorry.

The dollars that you pay the neighbor can certainly be included in your child care costs.  Let the babysitter know that you will be listing her name, address, and social security on your tax return. And if you pay her more than $1,000, you may be a household employer.  If so, you may have to withhold and pay social security, Medicare, and federal/ state unemployment tax on your payments to the neighbor. Check out IRS Tax Topic 756 and IRS Pub 926 .

If any of your children turn 14 during the summer, you can still claim the child care costs up until the day they turn 14.  So if your son turns 14 on August 15th, you can still deduct his local camp costs through August 14th.

If you have your own business and your kids are old enough to do some work there, maybe you don’t need a sitter or camp this summer. You can employ your kids at a fair-market wage and deduct their wages as a business expense. If your business is a sole proprietorship or a partnership and your child is under age 18, the child’s wages are not subject to social security and Medicare taxes. You could also set up IRAs for them for $5,000 per year or up to their earned income, whichever is less and get their future savings started.

For more detailed information check out:

IRS- Child and Dependent Care Credit

IRS Pub 503 – Child & Dependent Care Expenses

IRS – Family Help in Your Business

First-Time Homebuyers Credit

It’s all over the news. If you buy a home between January 1, 2009 and December 1, 2009, you could qualify for a big homebuyer tax credit.  It’s worth as much as $8,000 or 10 % of your home purchase price, whichever is less.

To be eligible, you can’t have owned a principal residence during the three years prior to purchase date and your adjusted gross income or AGI can’t be more than $95,000 ($170,000 if filing married joint). AGI is basically your taxable income before you subtract your standard or itemized tax deduction and exemptions.

In Live Community, we’re seeing lots of questions about who gets the tax credit if an unmarried couple (or siblings, fishing buddies, sorority sisters, etc.) buys a home in 2009. Let’s say the home’s price is $60,000. Since each person files a separate tax return, does each person get the $6,000 ($60,000 times 10%) credit? Nope!  There’s only one credit per home – but the buyers can divvy it up in many different ways.

The IRS says that the taxpayers can allocate the tax credit in any “reasonable” manner as long as they don’t give the credit to someone who is ineligible for the credit. Huh?

Let’s look at some of the possibilities.

Sam and Suzy have dated forever and decided it’s time to buy a $100,000 house.  It’ll be a first-time purchase for both of them.  The maximum credit for this home is $8,000.

Example 1: Sam plans to pay $30,000 and Suzy to pay $10,000 toward the down payment. They will both be jointly liable for the remaining $60,000 mortgage and have one-half interest in the home as tenants in common. Sam’s adjusted gross income (AGI) is $60,000 and so is Suzy’s.

Option 1: Based on contributions to the purchase, Sam could get 60% of the $8,000 credit or $4,800. Here’s how his 60% is figured:  $30,000 down payment + $30,000 mortgage share /$100,000 purchase price  = 60%.

Suzy could get 40% of the $8,000 credit  or $3,200. That’s $10,000 down payment + $30,000 mortgage share / $100,000 purchase price = 40%.

Note:  Sam’s $4,800 credit plus Suzy’s $3,200 credit equals $8,000.  The total of the credits can’t be more than $8,000.

Option 2: Based on their ownership interests, they could each get 50% of the $8,000 credit, or $4,000.

Option 3: 100% of the credit could go to either Sam or Suzy because both are eligible for the credit.

Example 2: Same as example 1 however Sam’s AGI is $100,000 and Suzy’s AGI $50,000.

Option 1:Since Sam’s AGI is greater than $95,000, he is not eligible for the credit so Suzy takes all of the credit.

Example 3: Same as example 1 however Sam owned a home from 2000 and sold it in 2007.

Option 1: Since Sam owned a home in the 3 years prior to the new purchase, he isn’t eligible for the credit. Just like example 2, Suzy can get all of the $8,000 credit.

Example 4:Same as example 1 however Sam’s AGI is $85,000 and Suzy’s is $60,000. Note:  If the AGI is between $75,000 and $95,000, the amount of homebuyer credit allowed is “phased out” the closer the AGI gets to $95,000.

Option 1: Since Sam’s AGI is half way in the “phase out”, the amount of credit that is allocated to Sam will be reduced by 50%.  Let’s say the credit is split 50/50 with Sam and Suzy.  Suzy’s return will show her share of the credit – $4,000 and since her AGI is less than $85,000, she’ll get all of the $4,000 credit on her tax return.

When Sam files his tax return, he’ll show his share of the credit ($4,000) credit with an AGI of $85,000.  However, the phase-out calculation will limit the credit on his tax return to only $2,000 ($4,000 times 50%).

In this case, only $6,000 of the $8,000 was available as a refund or to reduce taxes.

Option 2: Suzy could get all of the $8,000 credit.

As you can see, the homebuyer tax credit could be a real boost for the housing industry and the economy – and be a great exercise in sharing the credit and handling relationships!

For more information on this great credit, check out Taking the First-Time Homebuyer Credit.

He wanted to know, “What’s the maximum I can get out of those new tax breaks on my 2009 tax return?”

I thought it was an intriguing question.  Being a CPA, I can figure out tax law and add up the numbers. Here are the results. He can save $13,790 in taxes on his 2009 return!

Now remember, this isn’t for everybody. Here’s Brian’s “ideal” situation. He’s married, has one child in college, and his adjusted gross income (taxable income prior to subtracting exemptions and standard or itemized deductions) is less than $150,000.  And here are the details broken down by credit and deduction.

1) Making Work Pay: This is a new $400 credit ($800 if married and filing jointly) that the taxpayer receives by reduced payroll withholding.  Since Brian will be filing joint for 2009, he’ll be getting $800 tax savings during the year through an increase in each paycheck for 2009.  So that’s $800 savings.

2) First-time Homebuyer’s credit:  Brian and his wife haven’t owned a home in more than 3 years.  Why? When they moved from the Midwest to San Diego, they couldn’t afford a house. Now with the drop in prices, they could buy that new home in 2009. Yeah! Since it’s in San Diego, the price will definitely be more than $80,000. Ka Ching… $8,000 credit. For more details see Taking First-Time Homebuyer Credit.

3) New car sales-tax deduction:  Since car sales are way down and so are car prices, Brian could decide it’s time to buy a new car.  Since he’s always wanted a luxury car, he’d use the excuse that he can get the maximum deduction for sales tax on a car priced up to $49,500.   That‘s a lot of money for a car but he does get a tax savings of $990.  (Price $49,500 times 7.775% (San Diego sales tax) = $3,836 deduction. Since his marginal tax rate is 25%, his tax saving is $990 (3,836 times 25%).   Let’s not talk about what his wife would say about that not so big tax savings for a very big car.

4) Energy saving tax breaks: If Brian’s wife has been complaining about how chilly their family room and master bedrooms are (yes, it does get a tad chilly in San Diego!), now is the time to buy new energy-saving sliding-glass doors for those rooms. If the price of each door is $2,500, which would meet the maximum credit of $1,500 ($5,000 times 30%).

5) Bigger tax break on college costs: Their child is in her 4th year of college and her tuition is $10,000 and wouldn’t have qualified for the Hope credit under old law. Since the old HOPE credit has been extended and expanded (and now called American Opportunity credit), they’ll get the maximum credit of $2,500.

Here’s the summary:

Making Work Pay Credit            $    800

Homebuyer Credit                     $ 8,000

New car deduction- tax savings  $    990

Energy credit (new doors)           $ 1,500

College tuition credit                  $ 2,500

TOTAL                                     $13,790

For details on the new tax act, check out  2009 Stimulus Package: What’s In It For You, and When.

This is one of the top questions we are seeing on TurboTax’s Live Community. Here’s the answer.

If your girlfriend has lived with you for all of 2008, her gross income is less than $3,500, and you’ve provided more than half of her total support, you could claim her as a dependent on your tax return. To determine if you pay for more than half of her support, see IRS Pub 17, page 33, support worksheet http://www.irs.gov/pub/irs-pdf/p17.pdf .  Each dependent you claim on your 2008 tax return reduces your income by up to $3,500.

If she files a tax return, she would have to answer “yes” to the question “Are you being claimed as a dependent on anyone’s tax return?”  Note: You can’t claim her as a dependent if living together is in violation of your local law.

What if we’re a family of three with our baby daughter?

Since the baby is your child, lived with you for more than half the year, and doesn’t provide more than half of his/her own support (little hard for a baby to do) , you can claim your daughter as your dependent.

What if my girlfriend’s son (from a previous relationship) also lives with us?  Can I claim him as a dependent?

Usually you can’t claim a child as a dependent if the child can qualify as a dependent for someone else (your girlfriend.) However there is a special exception.  If your girlfriend is not required to file a tax return due to low income and she does not file or files solely to get a refund of withheld income, then you can claim her son as your dependent on your tax return.  If she files only to get an earned income credit, you can’t take her son as your dependent.

Do I still file as single since we’re not married?

As long as you’re the one who paid for more than half the cost of keeping up the home where you all are living and your daughter is claimed as your dependent, you can file as head of household.

Note: If your girlfriend and/or her son are the only dependents listed on your tax return, you cannot file as head of household.

Here’s a list of the documents that you may receive within the next month. Throughout January, I’ll talk about each type.  But for now here’s the list of the typical documents:

Keep an eye out for these documents.  My next blog will talk about W-2s and W-2Gs. Happy Tax Season to all of us.  May our tax preparation be easy and we all get a big refund (how we wish!).

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As a small business owner you probably spend lots of time collecting and categorizing receipts from your business expenses so you can do your taxes.  The makers of TurboTax and QuickBooks are working on a solution that may make this process a snap for you.

We want honest, candid customer feedback during our beta test our new TurboTax product, “ExpensePro.”

What is ExpensePro?

www.ExpensePro.com is a new website we’ve built that automatically tracks and categorizes your business income and expenses to make tax time easy.

The first time you log in to ExpensePro.com, you’ll enter your online account information for your bank accounts and credit cards. After that, ExpensePro will import all your income and expense transactions and auto-categorize them for the IRS so you don’t have to. At the end of the year, you’ll have an easy-to-read Tax Report ready with little effort to help either you or your accountant complete your taxes. ExpensePro will also give you a snapshot of how much you’re making and spending all in one place.

Ready to try it out?  Go here: www.expensepro.com

Let us help you track your business expense and income tracking for FREE!

When a family has a new baby, their priorities are not taxes. Trying to figure out how to get more sleep – yes; taxes – no. But when it comes to tax time, it’s good for them to know that not only has the baby brought goodness into the world but also tax breaks!

We thought we would put together a list of what new parents need to know about taxes.

· Child’s Social Security Number (SSN)

o At the top of the list for tax breaks, be sure to get a social security number for your child prior to filing your return.  You must include your child’s SSN on your tax return in order to claim the child as a dependent and take any deductions or credits related to that child. For the steps in applying for your child’s SSN, see How to Get a Social Security Number.

o Tax return note:  when entering your child’s name on your tax return, be sure it matches exactly the name on the child’s SSN card. If you file electronically and the name doesn’t match the card, the IRS may make you go stand in line at the post office and mail your return.

· Exemption

o On a typical return, a child listed as a dependent, will reduce the family’s income by $3,500 for 2008. This is known as a dependency exemption.

o This $3,500 will start being reduced when your adjusted gross income (see Form 1040, page one, last line) is $239,950 or greater when filing married filing jointly.

o TurboTax will calculate the exemptions for your return.

· Day Care expenses

o If both you and your spouse work, your care expenses can reduce your tax to some degree. It’s the Credit for Child and Dependent Care Expenses. The credit is a percentage (20%-35%) of your child care expenses based (again) on your adjusted gross income.

o When you choose your child care providers, be sure that you write down their social security numbers (SSN) or employer identification numbers (EIN). In order to claim this credit, you will report their name, address, and identification number on Form 2441 with your tax return.

o If you pay someone to look after your child in your home, you may have to file Schedule H- Household Employment Taxes.  TurboTax will help you determine if you need to file this form and if so, how much the additional taxes will be. For further questions, see IRS Topic 756.

o If you receive dependent care benefits from your employer, or have any other questions about this credit, be sure to read IRS Tax Topic 602 .

· Child tax credit

o This is another credit that reduces your tax.  The most you can claim for this credit is $1,000 for each child and once more, if you have a high adjusted gross income (if married filing jointly, over $110,000), the credit starts being reduced.

o Yes, this credit lowers your tax but with the typical return, it can’t be more than your tax.  So if you have two children and your tax is $1,700, you will only get a credit for $1,700, not $2,000.

o There are exceptions to this rule and you may receive an additional child tax credit that is refundable over and above your tax. TurboTax will ask you the right questions and determine your total child tax credit.

o For more information, see IRS Publication 972.

· Earned Income credit

o Depending on the income that you and your spouse earned and the number of children listed on your tax return, you may be eligible for an earned income credit. The maximum amount of credit if you have one child is $2,917 and $4,824 if you have two or more children.

o If you’re filing married filed jointly, you won’t receive any credit if your earned income is much more than $41,000 and you have two or more children. If you have additional questions, see IRS Tax Topic 601

· Adoption expenses

o If you adopted your child, you might also receive a reduction in taxes for those adoption expenses, including lawyer fees and travel expenses, up to a maximum credit $11,650 for 2008. See IRS Tax Topic 607.

o Note: If filing married filing jointly and your adjusted gross income is more than $174,730, the credit will start being phased-out.

o Also check and see if your employer has an Adoption Assistance Plan that helps pay for some or all of your adoption expenses.

· Child’s investment income

o If your child has investment income, beware that if that investment income is greater than $900 in 2008, you may have to file a tax return for the child.

o If the child’s investment income is over $1,800, the income will be taxed at parents’ tax rate.  To save time filing that child’s return, you can elect to include that income on your tax return.

o For more information, see IRS Tax Topic 556

·

Future

College

Expenses

o The two best ways to save for your child’s college expenses are college savings plans and prepaid tuition plans. These programs are known as Section 529 plans and are established and maintained by states.

o Some states have both types and some have one type or the other but every state has at least one type.

o The prepaid tuition plans let you lock in the college’s current price to pay for your child’s future college expenses.  College savings plans don’t have this guarantee.

o Anyone, not just the parents, can contribute to these plans.

o There is no federal deduction when a contribution is made to a plan but you may get a deduction on your state return if you investment in your state’s 529 plan.

o The earnings on these plans are tax-deferred. You don’t pay taxes on the yearly earnings.

o If the money from the plan is used for the child’s college expenses, the distribution is tax free.

o If you start a 529 plan, be sure that you plan to leave the money in the plan until your child is ready for college. If you cancel the plan, you will have to pay tax on the earnings and a possible 10 % penalty.

o Here are some good websites for a better understanding of these college plans

Saving for College

College Savings Plan Network

]]> http://blog.turbotax.intuit.com/2008/12/11/a-new-baby-and-tax-breaks/feed/ 0 turbotaxlee http://blog.turbotax.intuit.com/2008/11/25/whats-new-for-next-tax-season/ http://blog.turbotax.intuit.com/2008/11/25/whats-new-for-next-tax-season/#comments Tue, 25 Nov 2008 07:39:00 +0000 TurboTaxLee http://host2256.pharos.intuit.com/wordpress/?p=26 Full story]]> The end of the tax year is over and there are already Christmas ads on TV so it can’t be that long until January is here and it's the next tax season. If you’re curious about what the new tax season may bring, continue reading. First we’ll talk about the old stuff that got extended.

Alternative Minimum Tax (AMT)
If you are worried about getting hit with Alternative Minimum Tax (but haven’t been hit yet) chances are good that you’ll get by again.  With the “Bail-Out” bill, Congress included keeping the AMT hit down for one more year. To answer your questions on AMT, see "What is the Alternative Minimum Tax (AMT)?"

Certain deductions
Also included with the “Bail-Out” bill, were “extenders” – continuing for one or two more years, certain deductions. If you deducted your sales tax instead of your state and local income tax on your 2007 tax return, you still can for 2008.  Same goes for teachers with their $250 expense deduction and students with their tuition deduction. 

IRA transfers to Charities
If you’re over 70 ½, you can still transfer IRA monies to a charity and not pay tax on those IRA dollars for 2008 and 2009. 

Now let’s talk about the new stuff.

Deduct property taxes without itemizing
If you’re one of those lucky souls who has their home mortgage paid off, chances are you don’t have enough deductions to itemize.  Good news for you! For the next 2 years,  you can deduct your real estate property taxes even though you don’t itemize. Yep!  You get to deduct it right along with your standard deduction.  It is limited to $500 ($1,000 if you’re filing married joint.) For details, see “2008 Property Tax Deduction for Taxpayers who don’t itemize.”  For details, see “2008 Property Tax Deduction for Taxpayers who don’t itemize.”

Buying /bought a new home recently?
If you’ve bought a home after April 8, 2008 or plan to buy prior to July 1, 2009, pay attention.  You could get a “credit” on your tax return up to $7,500!  But beware, it looks like a credit but it is a loan.  Your “credit” must be paid back to the government over a 15 year period at $1500 per year.  For more info, check out “Taking the First Time Homebuyer Credit.”  For more info, check out “Taking the First Time Homebuyer Credit.”  

Pay 0% on capital gains
Starting in 2008 and through 2010, if your regular income is taxed at the 10% or 15 % tax rates, you pay zero % on your long term capital gains sales.  Yes, that’s right! Zero!  If your filing status is single and your taxable income (Form 1040, line 43) is not more than $32,550, you get the zero tax rate on your long term gains.  If your filing status is married filing joint, your taxable income can’t be more than $65,100. For head of house status, that income can’t be more than $43,650.

That’s it for today on what’s new for 2008.  My next blog will talk about what’s new for business owners.  Hope you all have a Happy Thanksgiving! 

During the school year, depending on their age, your children are in after-day care at the local center or spend a couple of hours at home alone in the afternoon.  You keep the monthly child care center’s bills in your tax files for the child care tax credit on your next year’s tax return.

Now it is summer and you can’t leave the kids home alone all day while you work. It’s a mixed calendar. The first few weeks the kids are attending the local summer camp, for a couple of weeks they’ll be at the overnight camp a few hours away from home, and then the rest of the summer, your neighbor will be the “baby” sitter at your home. Are these summer expenses eligible for your child care credit? 

The day camp expenses are eligible. If the camp costs include a fee for transporting your kid to and from the camp, that’s an eligible cost too.  Before the camp days are over, get the camp’s information (official name, address, and identification number) for your next year’s tax return. The overnight camp costs are not eligible for the child care credit. Sorry.

The dollars that you pay the neighbor can certainly be included in your child care costs.  Let the babysitter know that you will be listing her name, address, and social security on your tax return. And if you pay her more than $1,000, you may be a household employer.  If so, you may have to withhold and pay social security, Medicare, and federal/ state unemployment tax on your payments to the neighbor. Check out IRS Tax Topic 756 and IRS Pub 926 .

If any of your children turn 14 during the summer, you can still claim the child care costs up until the day they turn 14.  So if your son turns 14 on August 15th, you can still deduct his local camp costs through August 14th.

If you have your own business and your kids are old enough to do some work there, maybe you don’t need a sitter or camp this summer. You can employ your kids at a fair-market wage and deduct their wages as a business expense. You could also set up IRAs for them for $4,000 per year or up to their earned income, whichever is less and get their future savings started.

For more detailed information on child care credits:
IRS- Child and Dependent Care Credit
IRS Pub 503 – Child and Dependent Care Expenses
IRS-Taxes for Household Employees
IRS – Household Employer’s Tax Guide

Yes, April 15^th is the deadline for your 2007 federal tax return. If your return is just not going to be finished by then, there is a way to save you. File a Form 4868 (Application for Automatic Extension of Time to File) and you have until October 15, 2008 to file. (Note: This is not an extension of time to pay!)

Form 4868 is a simple form. You enter your 2007 tax, the amount that you’ve already paid, and any amount still be to paid (balance due.)

Here are the line items:

Line 4: Enter a reasonable and valid estimate of your tax liability.

(2007 Form 1040, Line 63; Line 1040A, line 37, Line 1040EZ, line 10)

Line 5: Enter the amount that you have already paid with your withholding and estimated payments.

(2007 Form 1040, line 72 (excluding line 69), Form 1040A, line 42, Form 1040EZ, line 9.)

Line 6: Subtract line 5 from line 4 and enter the amount.

If line 5 is more than line 4, you have a refund and need to enter a zero.

Line 7: Enter the amount that you are paying with the filing of this Form 4868.

That’s the basics. Let’s look at various questions that you may have.

How do I use TurboTax to fill out Form 4868 and my state extensions?

Check out File an Extension FAQ on the TurboTax Community site. It will answer your questions on the steps to follow for your federal and state extensions.

What if I don’t file my return or Form 4868 by April 15^th?

You may be charged with a late filing penalty. The penalty is usually 5% of the amount due for each month (or part of a month) that your return is late. The maximum penalty is 25% of your balance due. If your return is more than 60 days late, there is a minimum penalty of $100 or the balance of the tax due, whichever is smaller.

How much should I pay with Form 4868?

The answer is 90% of your total tax liability (the amount on line 4 above)! The IRS urges you to pay as much as you can to reach that 90% level to avoid any interest and /or late payment penalties. Late payment penalty is usually ½ of 1% of any tax due, charged each month the tax is unpaid with a maximum penalty of 25%.

Any helpful hints if I pay with a check?

Make your check out to “United States Treasury” and write your social security number and “2007 Form 4868” on the check. Do not send cash. Do not staple or attach your check to Form 4868.

Can I pay with my credit card?

Yes, you can get an extension if you pay part or all of your balance due using a credit card. You can pay by phone or over the Internet through one of the service providers. See IRS’ Electronic Payment Options for Individuals. Also read the “Can I file a form 4868 over the internet?” section of TurboTax’s File an Extension FAQ. Remember if you use this credit card service, there will be commission fees charged.

What if my return is finished but I don’t have the money to pay the balance due?

The IRS suggests that you don’t request an extension.  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 and will charge interest and penalties only on the unpaid balance. To apply online for a payment agreement, go to IRS’ Payment Plans.

What if

What if I’m out of the country on April 15^th?

If you live outside the U.S. and your main place of work is outside the U.S., or you’re in military service outside the U.S., you qualify for a date of June 16, 2008 to file and pay your balance due without filing a Form 4868. If you need further extended time, file Form 4868 and check the box on line 8.

Is there a delayed filing time for military in combat?

Yes, check out Extension of Deadlines -Combat Service Zone and Armed Forces Tax Guide.

What if I live in a disaster area?  Do I still have to file by April 15th?

Disaster-area taxpayers in four states affected by recent floods, storms and tornadoes may be eligible to get extra time to file without filing an extension on April 15th. the postponement is until May 6 in part of Illinois, May 19 in parts of Georgia and parts of Missouri and May 27 in parts of Arkansas.

How do I file my state extension?  Is it due on April 15th?

The filing extension guidelines for state income tax returns vary from state to state.  Some states will automatically extend the time for you to file if you’ve filed the federal 4868. Other states have their own extension forms to file and due dates. Check out 2007 State Information on TurboTax’ community support site. Click the link to your state. On your state’s information screen, scroll down to the Extension section to see if you need to file a form and the state’s extension date.

]]> http://blog.turbotax.intuit.com/2008/04/08/can%e2%80%99t-file-your-tax-return-by-april-15th-file-an-extension/feed/ 3 turbotaxlee http://blog.turbotax.intuit.com/2008/03/28/understanding-those-part-year-returns/ http://blog.turbotax.intuit.com/2008/03/28/understanding-those-part-year-returns/#comments Fri, 28 Mar 2008 20:33:42 +0000 TurboTaxLee http://host2256.pharos.intuit.com/wordpress/?p=44 Full story]]> In the Live Community, we are seeing a lot of questions about part-year and nonresident returns. In this blog, I’m going to talk about part-year returns. Since there are many questions on the Oregon part-year return, I’m using Oregon as an example. Just remember that not all states handle their part-year return the same as Oregon but most follow a similar pattern.

Before we get started on the "tax and form" theory, I want to be sure you understand how TurboTax determines that you will be filing a part-year return. As you enter the Personal Info for your 1040 return, be sure you indicate "Yes, I was a resident of more than one state in 2007." And on the "Tell Us About Your Move" screen, enter the date you became resident of your current state and name the state you moved from. With this information, TurboTax determines if you will be answering state questions for a resident or a part-year resident return. For Oregon, the part-year return is Form 40P.

Part-year returns are filed when you’ve lived in more than one state during a year. Let’s say you lived in California for 9 months and then moved to Oregon on October 1st.

Most states will have a two column form. In one column TurboTax enters your income as if you were a resident of that state all year. The other column TurboTax enters the portion of income that was earned or received while you were a resident of that state.

Earned income (wages/self employed income): The income you "earned" while you lived in California is taxed in CA and earned in Oregon is taxed in Oregon. For an Oregon part year return, if the Oregon wages are not separately stated on your W-2 then you can compute the Oregon wages by a ratio of days worked in Oregon over total days worked for the year.

Unearned income (such as interest, dividends, alimony, stock sales, and social security benefits): Unearned income is taxed by the state that you lived in when you received the unearned income. If you sold a stock on April 30, 2007, then that sale is reported on your California return. If you received interest income from your California bank but closed the account when you moved, then that interest goes on the California return.

With those two columns,the state return has your total income for the year and the portion of that income that belongs to that state. Different states will handle adjustments/ deductions/ exemptions in different ways. We’ll skip that area.

Now we’re down to figuring out the taxes. Most states will first determine the tax as if you were a resident of that state for all year. Let’s say that tax is $5,000.

Then there will be a calculation to determine the percentage of that state’s income compared to all of your income for the year. Sometime it’s the part year taxable income divided by full year taxable income.

The Oregon percentage is determined by dividing Oregon (modified) adjusted gross income by (modified) federal adjusted gross income. The percentage shows up on line 39 on Form 40P.

If your federal adjusted gross income for all of 2007 is $50,000 and $10,000 of that is considered Oregon’s income then your percentage would be $10,000/ $50,000 or 20%.

The next step is to multiply that full year resident tax ($5,000) by 20% and the tax you will pay to Oregon is $1,000. Whew! Ain’t state taxes fun!

I know this blog has been long and tedious but I do hope it answers some of your questions on your part-year returns.

In Part I, I touched upon the basic principles of income tax reciprocity between states using a fictitious example. In this installment, I will show how state reciprocity is handled for two states that have a reciprocal agreement.

We all know that states like to do things in their own way. It’s what makes the United States so…interesting.  Reciprocal rules are no exception.  In some reciprocal states, you just mark a checkbox on your return, fill in a few lines, and you’re done.  In other states, well…

Say you live in New Jersey and work in Pennsylvania, two that do have reciprocity. But every year, you end up filing a nonresident Pennsylvania return plus a resident New Jersey return. This is because you earned Pennsylvania source income (your wages) and your home state of New Jersey requires you to report all of your income regardless of where you earned it.

If these two state have reciprocity, then why do you have to keep filing a Pennsylvania nonresident return and a New Jersey return? What’s going on?

First of all, Pennsylvania reciprocity rules specify that to avoid filing a nonresident return, you need to submit Form REV-420 to your Pennsylvania employer. This form requests New Jersey state withholding to be taken from your wages, not Pennsylvania withholding.  Second, your Pennsylvania employer needs to grant your request. If and only if both conditions are met, can you only have state tax withheld from New Jersey and not from Pennsylvania. (You’ll see the NJ instead of a PA in Box 15 of your Form W-2).

Otherwise your employer is required by law to continue withholding Pennsylvania tax. This means that you will continue to file returns for both states. So you see that reciprocity often comes with conditions; it isn’t always automatically granted.

If, you are a resident in one of the states listed below and you are also filing a nonresident return in a reciprocal state, ask your payroll department  or your resident state tax board how you can eliminate the need to file 2 state tax returns.  Usually you just need to fill out a form.  After all, reciprocity is designed to make filing easier, not harder!

Here are the states (current as of March 2008) that have reciprocity agreements. The state in bold is your employer state.

• District of Columbia: Allows all nonresidents to exclude DC source income from taxation. However, only Maryland and Virginia have “true” reciprocity with DC (that is, they allow DC residents to exclude MD and VA source income from taxation.)
• Illinois: Iowa, Kentucky, Michigan, Wisconsin
• Indiana: Kentucky, Michigan, Ohio, Pennsylvania, Wisconsin
• Iowa: Illinois
• Kentucky: Illinois, Indiana, Michigan, Ohio, Virginia, West Virginia, Wisconsin
• Maryland: District of Columbia, Pennsylvania, Virginia, West Virginia
• Michigan: Illinois, Indiana, Kentucky, Minnesota, Ohio, Wisconsin
• Minnesota: Michigan, North Dakota, Wisconsin
• Montana: North Dakota
• New Jersey: Pennsylvania
• North Dakota: Minnesota, Montana
• Ohio: Indiana, Kentucky, Michigan, Pennsylvania, West Virginia
• Pennsylvania: Indiana, Maryland, New Jersey, Ohio, Virginia, West Virginia
• Virginia: District of Columbia, Kentucky, Maryland, Pennsylvania, West Virginia
• West Virginia: Kentucky, Maryland, Ohio, Pennsylvania, Virginia
• Wisconsin: Illinois, Indiana, Kentucky, Michigan, Minnesota

The first time I tried to say reciprocity, which I assumed was a horrible misspelling of a real word, it came out of my mouth as "reci-pro-whuuaaah?" You know, the Scooby Doo sound. Fortunately, reciprocity is much easier to explain than it is to pronounce.

To illustrate, let’s start with an income tax situation involving two states that do not have reciprocity. Joan is a full-time New Mexico resident who works in neighboring Colorado.. Because she earns income in Colorado (us tax savvy types call this “Colorado source income”) her employer withholds Colorado taxes from each paycheck. The fact that she earned Colorado source income also means that she will need to file a Colorado tax return even though she does not live there.

So every January, Joan receives her W-2 form from her Colorado employer, which shows her Colorado wages plus the amount of Colorado income tax withheld from her wages. She sees “CO” in Box 15, the taxable Colorado wages she earned in Box 16, and the total year’s worth of income her employer withheld in Box 17.

New Mexico also requires Joan to file an income tax return because she is a resident and she earned taxable income (they don’t care whether she earned it in Colorado, New Mexico, or Timbuktu). Accordingly, Joan files a nonresident state return for Colorado, where she works, plus a resident state return for New Mexico, where she lives.

Because the two states do not have reciprocity, Joan’s income will be taxed by the state it was earned in (Colorado) at Colorado tax rates. On her New Mexico return, she will take a credit for the tax she paid on her Colorado income. (Otherwise, she’ll be double-taxed, and that’s a no-no.) Now, let’s pretend…

… that Colorado and New Mexico have a reciprocal agreement. (They don’t! Remember, we’re just pretending.) How would that change Joan’s filing situation? Well, for starters, Joan’s W-2 would look a little different. Instead of seeing “CO” in Box 15, she’d see “NM”. This means that her employer is withholding New Mexico taxes instead of Colorado taxes on her earnings, even though she is technically earning Colorado source income.

Even better, Joan wouldn’t have to file a nonresident Colorado return anymore. She would simply file a New Mexico resident return as if she had earned the money in New Mexico And the reverse would be true for Colorado residents who work in New Mexico.

Oh, and I forgot to mention the best part. Joan no longer needs to purchase TurboTax State software for Colorado — all she needs is the New Mexico program. Isn’t reciprocity great?

This fictional example shows you the basic principles underlying reciprocity. But in real life, things aren’t always that simple (yep, you knew I was going to say that sooner or later). So in Part II, coming soon, I’ll touch upon a real-life example involving the reciprocal states of New Jersey and Pennsylvania.

The IRS defines your 2nd home as not your primary residence but you use it personally and don’t rent it for more than 14 days per year. This 2nd home can be a condo, mobile home, time-share unit, a boat or recreational vehicle. Remember, per the IRS, like your primary home, the dwelling must include sleeping, cooking, and toilet facilities. See IRS Topic 505 – Interest Expense.

So what do you get to deduct each year on this 2nd home that you don’t rent for more that 14 days?  You can deduct its real estate taxes and mortgage interest that you pay each year on your Schedule A.  Remember that if your mortgages on both homes total more than $1,100,000, there will be a limitation on the amount of interest that you can deduct.  See IRS Publication 936.

When you purchase your 2nd home, you can’t deduct all of the points paid in that year like you did when you purchased your 1st home.  The 2nd home’s points are deducted over the length of the loan.

Note: If you own more than one 2nd home (your primary home in New York, your winter home in Florida, and your summer home in Vermont. – I can dream, can’t I?), you can only deduct the mortgage interest on your New York home and one other home. The mortgage interest on the remaining home is not deductible on your tax return.

You can deduct the real estate taxes that you paid on all of your personal homes. There is no limit.

Like your primary home, you can’t deduct the utilities, maintenance fees etc on your 2nd home.

Let’s talk about when you sell this 2nd home. Often taxpayers think they can take that $250,000/$500,000 exclusion on the gain on their 2nd home. The answer is no. That exclusion amount is only for the sale of your “primary” residence. Your gain on the 2nd home will be taxable on Schedule D and if you have a loss, it’s not deductible.

There is a way to take advantage of the exclusion; however, you’ll have to do some planning. For example, you sell your primary residence and take the exclusion (see the  Home Sales Tax Webinar for the exclusion rules). Then you move into your 2nd home as your primary residence. You live there for at least 2 years (and meet the exclusion rules) and then sell it. You get to take the exclusion again. (Remember that you can take the capital gains exclusion only once every two years.)

Some folks think that you can exchange your vacation home for another and not pay tax on the gain (like-kind exchange). The courts (T.C. Memo 2007-134) recently ruled that the vacation home couldn’t play the like-kind exchange game since it was not held primarily as an investment. So if you sell your vacation home and buy a new one, it looks like you’ll pay the tax on the gain.

For further information:

IRS Publication 17

IRS Tax Topic 701- Sale of Your Home

IRS Pub 523 – Selling Your Home

To figure out which state return an active duty military person files depends (in military terms) on their “home of record” or “state of legal residence.”

First let’s define those two terms.

Your “home of record” is the state recorded by the military that was your home when you were enlisted, appointed, commissioned, inducted or ordered in a tour of active duty.

Your “state of legal residence (SLR)” is your “home of record” unless you changed it to another state.  Military members often mistakenly think that by changing the state on their paycheck records changes their SLR.  Nope. In order to change the SLR, a DD Form 2058 must be submitted to the finance officer and accepted.

For more information on requirements for valid changes when filing Form 2058, check out a Fact Sheet on Legal Residence that I discovered on Hill Air Force Base’s website.

From a tax standpoint, your SLR is considered your “domicile” or “resident” state as long as you are on active duty.  Even if you are stationed in another state, you’re still considered a resident of your SLR.

Now that we’ve defined these terms, let’s look at an example..

Joe lived in San Diego, CA back in 2000 and decided to join the military.  It’s now 2008 and he is stationed in Maryland.  He and his wife Jennifer are living in Virginia.

Does Joe file a state tax return for 2008?  If so, which state?  California, Maryland and/or Virginia?

We know that Joe is considered a California resident (That’s “his home of record” and SLR.)   It depends on each state’s laws if they want their resident military to file a return when they are stationed outside the state.   Let’s see what California law says.

It says that if Joe is active duty military, home of record is California, and stationed in California, then he files a typical California resident tax return.  If he’s stationed outside of California, he is considered a “nonresident” CA for tax purposes. In most cases, he doesn’t need to file a CA return unless he has CA source income such as rental property income. In these circumstances,  CA source income doesn’t include his military W-2 or intangible income like interest, dividends, stock sales etc. So it looks like Joe doesn’t have to file a California return.

Remember that each state is different. If Joe’s “home of record” was in a certain state, he may be required to file a return and then deduct all of his income and pay no tax.  That way the state knows he still exists!  And some “home of record” states will tax Joe on his income even if he is stationed outside of the “home of record.”  To check out your “state of legal residence” laws for filing when stationed outside the state, click on IRS’ State Links website to find your SLR’s state website.

Does Virginia or Maryland expect a tax return from Joe?

The Servicemember Civil Relief Act states that an active duty member is not considered a resident of a state unless it is his SLR. Joe would only file a Virginia or a Maryland return if he had a nonmilitary 2nd job in that state. If he’s working at Home Depot in Virginia on the weekends, he would file as a Virginia nonresident and only report that W-2.  He would not report any other type of income.

Answer for Joe: He doesn’t have a rental property back in California and doesn’t work a second job so there are no state returns to file for Joe.

What state return does his wife file?

Joe’s home of record usually has nothing to do with his wife’s residency.  Like the rest of the nonmilitary world, her residency will probably depend on which state she lives in and its law.

Let’s say that Joe’s wife is employed in Virginia and lived there all year.  She is considered a Virginia resident who has to file a resident Virginia tax return.

What type of return does she file?  Again each state is different.  The state of Virginia says she files a married filing separate resident state return and includes only her income.

If they were living in a different state, she might be required to file a nonresident return with Joe. On the return all of Joe’s income would be deducted and only Jennifer’s income taxed. Again, here’s the IRS’ State Links website to check your state on what type of return needs to be filed by a nonmilitary spouse.

For tax year 2008, Joe and Jennifer will file a married filing joint federal return and Jennifer will file a resident Virginia return.

For more information on the military and taxes, read:

Can I Efile with a Foreign Address?

Tax Information for Members of the U.S. Armed Forces

IRS – Armed Forces Tax Guide

]]> http://blog.turbotax.intuit.com/2008/03/17/i%e2%80%99m-in-the-military-do-i-need-to-file-a-state-return/feed/ 0 turbotaxlee http://blog.turbotax.intuit.com/2007/10/31/san-diego-under-fire-and-its-tax-relief/ http://blog.turbotax.intuit.com/2007/10/31/san-diego-under-fire-and-its-tax-relief/#comments Wed, 31 Oct 2007 15:59:00 +0000 TurboTaxLee http://host2256.pharos.intuit.com/wordpress/?p=58 Full story]]> As you’ve probably heard, San Diego was “under fire” –literally- last week.  You may not know that TurboTax’s headquarters is in San Diego so many of the employees were affected by the fire. It seems that everyone knows someone whose home was damaged or destroyed. The headquarters received soot and smoke but no real damage. My subdivision lost over 10 homes but my home, luckily, was spared.

We, in San Diego, are proud of our firefighters, police, and all who helped save homes and people and contain the fire.

It didn’t take long for the President to declare the  Southern California area as a major federal disaster. In addition to making individuals, businesses, and communities eligible for federal funding, there is usually tax relief from the IRS.  And it was granted yesterday.

For the California fire disaster areas, any IRS tax deadlines between October 21, 2007 and January 31^st, 2008, are extended to January 31^st. For individual taxpayers, the most affected deadline is 4^th quarter estimate due on January 15^th. It’s now January 31^st.

Affected taxpayers also have the option of claiming their 2007 disaster-related casualty losses on their 2007 tax return or amending their 2006 tax return with the 2007 losses. By amending the 2006 return, refunds are received quicker since the IRS expedites such amended returns (time frame is generally 60 days).

For details on handling such casualties, see IRS’ FAQs for Disaster Victims.  Also included on this website are links on how to obtain prior returns and change your address with the IRS.

The California Franchise Tax Boards announced similar tax relief. See Southern California Fire Victims Can See Tax Relief.

Handling such casualties can be complex.  The tax treatment on personal property losses is not the same for business property. Also determining the value of losses can be complex. Keep checking our support site… our plan is to add helpful articles when dealing with such disasters.