Quick Tip-LOOK AT YOUR PAYSTUB!

An employee of a client came in recently and complained that her W-2 was incorrect. Her gross wages were $13,000 with only $29 federal income tax withheld. We checked her W-4 and she claimed married with 5 withholding allowances. The W-2 and her withholding was correct (the higher the number of withholding allowances, the less income tax that is withheld from a paycheck).

We see this issue a lot. What we find is that a majority of people NEVER look at their paystub. A very simple solution is to LOOK AT YOUR PAYSTUB and compare the wages on your paystub to the income tax withheld. If your average tax rate on your tax return is 15%, and your income tax withholding on your paycheck is only 10% of your wages, you may have a balance due when you prepare your income tax return.

Donations to Haiti - Ten Facts

The IRS has a Special Edition Tax Tip (2010-01) regarding claiming donations made to Haiti.

If you are donating to charities providing earthquake relief in Haiti, you may be able to claim those donations on your 2009 tax return. Here are 10 important facts the Internal Revenue Service wants you to know about this special provision.

1. A new law allows you to claim donations for Haitian relief on your 2009 tax return, which you will be filing this year.
2. The contributions must be made specifically for the relief of victims in areas affected by the Jan. 12 earthquake in Haiti.
3. To be eligible for a deduction on the 2009 tax return, donations must be made after Jan. 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 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 andPublication 3833 , Disaster Relief: Providing Assistance through Charitable Organizations. To determine if an organization is a qualified charity visit IRS.gov, keyword "Search for Charities". Note that some organizations, such as churches or governments, may be qualified even though they are not listed on IRS.gov.

http://www.irs.gov/newsroom/article/0,,id=218679,00.html

Homebuyer Tax Credit-processing delay

For taxpayers taking the homebuyer tax credit on your 2009 tax returns, the IRS won't start processing your return until mid-February as IRS computers are being reprogrammed to handle the rule changes. In addition, returns claiming this credit cannot be efiled due to the attachment requirements. As paper returns require extra processing time, don't expect your refund right away.

Required Minimum Distributions (RMD)-Multiple IRAs

Q. If I have more than one IRA, can I calculate in total and take my RMD from one account, or do you have to take RMD's from each account?

A. If a participant has more than one IRA, determine a separate RMD for each IRA based on designated beneficiaries of each IRA. However, the total RMD for all IRAs can be taken from any one or more of the IRAs

2009 Tax-Cancellation of Debt

Generally, cancellation of debt is taxable income. There are exceptions such as bankruptcy, insolvency, or when the cancelled debt is qualified principal residence indebtedness. If no exceptions apply, cancelled debt is included in income in the year the debt is cancelled.

2009 Tax-Child and Dependent Care Expenses

The child and dependent care tax credit is a tax credit of 20-35% (percentage based on a scale depending on your adjusted gross income (AGI)) of $3,000 ($6,000 for two or more qualifying persons) of qualified childcare expenses.

Note: expenses must be for care provided so the taxpayer and spouse can work or actively look for work. The credit is tied to earned income so no credit is allowed if there is no earned income for the taxpayer and spouse.

If you are under an employer plan and have dependent care benefits reported on box 10 of your W-2, the amount of benefits that can be excluded from income is the smallest of:

• $5,000 ($2,500 if Married Filing Separately and not considered unmarried)
• Qualified expenses incurred in 2009. It does not matter when the expenses were paid
• Taxpayer's earned income
• Spouse's earned income

Need a Transcript of a Past Tax Return?

How to Obtain a Transcript of Your Past Tax Information

IRS Tax Tip 2010-13 Taxpayers who need their past tax return information can obtain it from the IRS. Here are nine things to know if you need copies of your federal tax return information. 1. There are two easy and convenient options for obtaining free copies of your federal tax return information — tax return transcripts and tax account transcripts. 2. The IRS does not charge a fee for transcripts, which are available for the current year as well as the past three years. 3. A tax return transcript shows most line items from your tax return as it was originally filed, including any accompanying forms and schedules. It does not reflect any changes you, your representative or the IRS made after the return was filed. In many cases, a return transcript will meet the requirements of lending institutions, such as those offering mortgages and student loans. 4. A tax account transcript shows any later adjustments either you or the IRS made after the tax return was filed. This transcript shows basic data – including marital status, type of return filed, adjusted gross income and taxable income. 5. To request either transcript by phone, call 800-829-1040 and follow the prompts in the recorded message. 6. To request a tax return transcript through the mail, individual taxpayers should complete IRS Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript. Form 4506T-EZ is only for individuals who filed a Form 1040 series return. Businesses, partnerships and individuals who need transcript information from other forms or need a tax account transcript must use the Form 4506T, Request for Transcript of Tax Return. 7. You should receive your tax return transcript within 10 working days from the time the IRS receives your request. Allow 30 calendar days for delivery of a tax account transcript. 8. If you still need an actual copy of a previously processed tax return, it will cost $57 per tax year and take much longer. Complete Form 4506, Request for Copy of Tax Form, and mail it to the IRS address listed on the form for your area. Please allow 60 days for actual copies of your return. Copies are generally available for the current year as well as the past six years. 9. Visit the IRS Web site, IRS.gov, to determine which form will meet your needs. Forms 4506, 4506T and 4506T-EZ can be found at IRS.gov or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676). http://www.irs.gov/newsroom/article/0,,id=105370,00.html

2009 Tax-Health Savings Account (HSA) Limitations

The 2009 Health Savings Account Limitations:

• Self-only, under age 55: $3,000
• Self-only, age 55 or older: $4,000
• Family, under age 55: 5,950
• Family, age 55 or older: $6,950

The minimum annual deductible:

• Self-only coverage: $1,150
• Family coverage: $2,300

The maximum annual deductible and out-of-pocket expense limit:

• Self-only coverage: $5,800
• Family coverage: $11,600

Existing Homeowner Tax Credit-Effective Dates

The effective dates for the $6,500 existing homeowner tax credit are for the purchase of a principal residence after November 6th, 2009 and on or before April 30, 2010 (or purchased by June 30, 2010 with a binding sales contract signed by April 30, 2010).

2009 Tax-Kiddie Tax

For 2009, the Kiddie Tax applies when a child's unearned income (generally investment income such as interest, dividends, capital gains) is over $1,900 and is taxed at the parents' marginal rate if that rate is higher than the child's. A child can file a separate return or elect to report income on the parents' return (Form 8814).

Tax Treatment of Child's Income (For dependents with no earned income):

On Child's Return:

• First $950: Not taxed
• Second $950: Taxed at 10% (0% for capital gains and qualified dividends)
• Amounts over $1,900: taxed at parents' rate for ordinary income and/or capital gains.

On Parent's Return:

• First $950: Not taxed
• Second $950: Taxed at 10%
• Amounts over $1,900: Added to parents' income as ordinary income, qualified dividends, or capital gain distributions.

2009 Tax-Filing Requirements

For 2009, you generally need to file a tax return if your gross income is at least:

Single, under age 65: $9,350

Single, age 65 or older: $10,750

Head of Household, under age 65: $12,000

Head of Household, age 65 or older: $13,400

Married Filing Jointly, both spouses under 65: $18,700

Married Filing Jointly, one spouse 65 or older: $19,800

Married Filing Jointly, both spouses 65 or older: $20,900

Married Filing Separately, any age: $3,650

Qualifying Widower, under age 65: $15,050

Qualifying Widower, age 65 or older: $16,150

If you are not required to file a return but had income tax withheld, you should file a return to get a refund. You may also want to file a return if you qualify for the making work pay credit, the earned income credit, the additional child tax credit, the refundable American Opportunity credit, the first-time homebuyer credit, the refundable credit for prior year minimum tax, or the health coverage tax credit.

Recapture of First Time Homebuyer Credit

Q. If a taxpayer purchased a residence and received the $8,000 First Time Homebuyer Tax Credit, then sold the residence in the following year, would they have to pay back the tax credit?

A. Yes, there is a recapture rule. Recapture applies if the home is sold, or ceases to be a principal residence, within three years of the date of purchase. If this happens, the credit is treated as additional tax in the year sold or ceases to be a principal residence, not to exceed gain on disposition.

2009 Tax-Education Credit/Hope Credit

The American Opportunity/Hope Credit modifies the existing Hope Credit for the 2009 and 2010 tax years.

The 2009 American Opportunity/Hope Tax Credit:

• 100% of the first $2,000 of qualified expenses paid (Hope Credit)
• 25% of the next $2,000 of qualified expenses paid (American Opportunity Credit)

Phase-out Ranges:

• Married filing jointly phase-out range: $160,000 - $180,000
• Single and Head of Household phase-out range: $80,000 - $90,000
• Married Filing Separately: no credit is allowed

Notes:

• Maximum benefit: $2,500 per student
• Up to 40% of the American Opportunity Credit is refundable
• Qualified expenses: tuition, fees, and course materials required for enrollment at an eligible institution.
• Available for the first four years of education

2009 Tax-Child Tax Credit

2009 Child Tax Credit is $1,000 per qualifying child, but there is also an adjusted gross income phaseout. The credit is reduced by $50 for each $1,000 of adjusted gross income above:

• $110,000 if you file married filing jointly
• $75,000 if you file single, head of household, or qualifying widower
• $55,000 if you file married filing separately

Now, there is an Additional Child Tax Credit for taxpayers if any portion of the regular child tax credit was disallowed because the tax was reduced to zero before the entire credit was used (it does not apply if the child tax credit was reduced due to the AGI phaseout above). The Additional Child Tax Credit is the lesser of:

• The disallowed portion of the regular child tax credit, or
• 15% of the taxpayer's earned income in excess of $3,000

2009 Tax-Standard Deduction

2009 Standard Deduction for those who don't itemize deductions:

Single or Married Filing Separately (MFS): $5,700

Married Filing Jointly (MFJ) or Qualifying Widow (QW): $11,400

Head of Household (HOH): $8,350

Additional deduction if 65 or older, or blind:

MFJ, QW, or MFS: $1,100

Single or HOH: $1,400

Dependents: standard deduction is the greater of $950 or earned income plus $300, up to the regular standard deduction.

Property Tax: standard deduction is increased up to $500 ($1,000 for MFJ) for property tax paid by taxpayers who do not itemize deductions.

Sales Tax Paid On Purchase Of New Motor Vehicle: see http://bit.ly/9uDd4

2009 Tax-Personal Exemptions

2009 Personal Exemptions:

Regular Exemption amount per person: $3,650

Exemption if AGI is above maximum phaseout amount: $2,433

2009 Tax-Standard Mileage Rates

2009 Standard Mileage Rates:

Business: $0.55

Medical: $0.24

Moving: $0.24

Depreciation: $0.21

Charitable: $0.14

2009 Tax Changes-Sales Tax on New Vehicle

Individuals who purchased a new motor vehicle after February 16, 2009, may be able to deduct any state or local sales or excise taxes on the purchase. The deduction is claimed on Schedule A (Form 1040) by taxpayers who are itemizing deductions and are not electing to deduct state and local general sales taxes. For taxpayers not itemizing deductions, these taxes increase the standard deduction.

2009 Tax Changes-Education Tax Credit

Per IRS Publication 17 - American opportunity credit - This new education tax credit (a modification of the Hope credit) is available for 2009 and 2010. The maximum credit per student is $2,500 (100% of the first $2,000 and 25% of the next $2,000 of qualified education expenses). The credit is available for the first 4 years of postsecondary education, and 40% of the credit is refundable for most taxpayers. The threshold at which this credit is reduced is higher than that for the Hope and lifetime learning credits. For 2009, the amount of your credit is gradually reduced (phased out) if your modified adjusted gross income (MAGI) is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). You cannot claim a credit if your MAGI is $90,000 or more ($180,000 or more if you file a joint return).

2009 Tax Changes-Unemployment Compensation

For 2009, individuals don't have to pay tax on unemployment compensation up to $2,400 per person; amounts over $2,400 are still taxable.

2009 Tax Changes-Cash for Clunkers

A $3,500 or $4,500 voucher or payment made for such a voucher under the “cash for clunkers” program to buy or lease a new fuel-efficient automobile is not taxable for federal income tax purposes.