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Friday, December 31, 2010

Interest When No Mortgage On Qualified Principle Residence

The broad deductibility of qualified principle residence interest is actually an exception to the general rule.  When debt is not secured by residence, then tracing rules (ie, how was the borrowed money used) are invoked.  Under tracing the rules vary depending on whether the loan proceeds are used for business, personal, investment, or passive activities.  If the proceeds of the loan are used for more than one type of thing, an allocation to determine the interest for each use of loan proceeds is required.  Use the following categories:

Trade or business
Passive activity

Interest that cannot be allocated to some combination of the first four AND is not residential interest, is personal interest.  Personal interest is not deductible.

Thursday, December 30, 2010

Tax Rates - Capital Gain Sales and Dividends

Qualified capital gains and dividends currently are taxed at a maximum rate of 15% (zero% for taxpayers in 10 and 15% federal income tax brackets) for 2010.  The 2010 Tax Relief Act continues this treatment for two years, through December 31, 2012.

Qualified dividends, which continue to be eligible for the reduced tax rates, are dividends received from a domestic corporation or a qualified foreign corporation, on which the underlying stock is held for less than  61 days within a specified 121 day period.

Wednesday, December 29, 2010

Employer Provided Educational Assistance Extended

The provision allowing an employer to provide tax-free education benefits up to $5,250 a year to employees was scheduled to expire at the end of 2010.  The Tax Relief Act extended the current $5,250 exclusion through 2012.

Tuesday, December 28, 2010

Many Tax Benefits to Increase Slightly in 2011


Personal exemptions and standard deductions will rise and tax brackets will widen due to inflation in 2011, the Internal Revenue Service said Thursday.
These inflation adjustments relate to eight tax provisions that were either modified or extended by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that became law on Dec. 17. New dollar amounts affecting 2011 returns, filed by most taxpayers in early 2012, include the following:
• The value of each personal and dependent exemption, available to most taxpayers, is $3,700, up $50 from 2010.
• The new standard deduction is $11,600 for married couples filing a joint return, up $200, $5,800 for singles and married individuals filing separately, up $100, and $8,500 for heads of household, also up $100. The additional standard deduction for blind people and senior citizens is $1,150 for married individuals, up $50, and $1,450 for singles and heads of household, also up $50. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
• Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $69,000, up from $68,000 in 2010.
• The maximum earned income tax credit (EITC) for low- and moderate- income workers and working families rises to $5,751, up from $5,666 in 2010. The maximum income limit for the EITC rises to $49,078, up from $48,362 in 2010.The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.
• The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $102,000 for joint filers, up from $100,000, and $51,000 for singles and heads of household, up from $50,000.
Several tax benefits are unchanged in 2011. For example, the monthly limit on the value of qualified transportation benefits (parking, transit passes, etc.) provided by an employer to its employees, remains at $230. Details on these inflation adjustments can be found inRevenue Procedure 2011-12.
By law, the dollar amounts for a variety of tax provisions, affecting virtually every taxpayer, must be revised each year to keep pace with inflation. Most of the new dollar amounts, including retirement-plan-related adjustments, were announced in October. To avoid confusion, the eight provisions released today were not included in the October announcements, due to the anticipated impact of extender legislation.

Dependent Care Credit

A taxpayer who incurs expenses to care for a child under age 13 or for an incapacitated dependent or spouse to enable him or her to work or look for work can claim a dependent care credit.  A prior tax bill had increased the credit amount from $2,400 to $3,000 (from $4,800 to $6,000 for more than one qualifying individual).  It also raised the maximum credit from 30% to 35% of qualifying expenses and provided for a reduction of the credit, but not below 20%, by one percentage point for each $2,000, or fraction thereof, of Adjusted Gross Income above a $15,000 threshold amount.  The 2010 Tax Relief Act extends the enhanced dependent care credit for two years, through December 31, 2012.

Friday, December 24, 2010

Student Loan Interest Deductible Toward AGI

Up to $2,500 of student loan interest can be deducted above-the-line (Adjusted Gross Income is the line).  Thus this interest is deductible for those utilizing the standard deduction.  Also, the previous elimination of a 60-month rule remains eliminated through the year December 31, 2012.

Thursday, December 23, 2010

Itemizers will have to wait until mid-February to file for 2010

Taxpayers who itemize on their federal tax returns will have to wait until at least mid-February to file, the IRS said Thursday.
The delay is necessary because the IRS needs time to program its systems to accommodate tax breaks included in a compromise tax bill President Obama signed last week.

Child Tax Credit Extended

The 2010 Tax Act extends the $1,000 child tax credit for two years, through December 31, 2012.  The extension includes 'enhancements' made by the prior two tax acts and other bills.  The credit phases out for joint filers starting at adjusted gross income of $110,000 ($75,000 for other filers).  The qualifying child must be under age 17 at the close of the year and satisfy relationship, residency, support, citizenship, and dependent tests.  The credit may be refundable in some cases.

Wednesday, December 22, 2010

Tax Rates For 2011

CCH projects tax rates for 2011 under the 2010 Tax Relief bill as above.  Click on image to enlarge.

Tuesday, December 21, 2010

Making Charitable Contribution From IRA Account

The recently signed bill extends through 2011 a provision that allows seniors who are 701/2 or older to donate up to $100,000 from their individual retirement accounts to charity.  The contribution is not tax deductible, but the withdrawal won't be included in the IRA owners's taxable income for the year.  That feature has made the provision particularly popular with seniors who do not have enough deductions to itemize.

Monday, December 20, 2010

Educators Have $250 Above The Line

Educators who spend their own funds (unreimbursed) for classroom supplies may deduct up to $250 toward Adjusted Gross Income.  Since it is toward AGI it is available to both those who itemize deductions and those who don't.

Saturday, December 18, 2010

New Tax Bill Not Totally About Extension of Prior Acts

For persons whose W2 wages will be less than $106,800 for 2011, the recently signed tax bill reduces the employee share of social security tax to be withheld from 6.2% to 4.2%.  For the self-employed the reduction is to 10.4% of self-employment income up to the threshold.  The reduction for wage-earners amounts to $2,136 for persons earning $106,800.  For a person earning $50,000, withholding tax would be reduced $1,000.  The bill makes no change in the Medicare portion of Social Security taxes.

Friday, December 17, 2010

Vehicle Mileage Rates

Recently the IRS published the standard mileage rates for use in 2011 in Notice 2010-88.  The standard mileage rates can be optionally used by taxpayers to calculate the deductible costs of operating a vehicle.

Starting January 1, 2011:

Regular rate = .51 per mile

Moving expense rate = .19 per mile

Medical rate = .19 per mile

Charity rate = .14 per mile (miles vehicle used for charitable work)

The 2010 rates:

Regular rate = .50

Moving rate = .165

Charity rate = .14

Medical rate = .165

Thursday, December 16, 2010

Tax Tip - No Phase-out of Itemized Deductions for 2010

Currently, for 2010 only, there is no phase-out of itemized deductions or personal exemptions based on a taxpayer's Adjusted Gross Income (AGI).  For those with higher incomes, this may be a reason to "bunch" as many deductions into 2010 as possible.

Under the Senate Bill, passed on December 15, 2010, and forwarded to the House, the phase-out would remain repealed for 2011 and 2012.

Wednesday, December 15, 2010

Tax Tip - Interest Deduction on Form 1040 - 2010

There are three basic types of interest as per the IRS:

Business related interest
Mortgage interest on residential property
Personal interest

Business related interest is beyond to scope of this discussion.  While it can appear on Form 1040 on Schedules C, E, F, and other forms, this information relates to itemized deductions on Form 1040, Schedule A (residential mortgage interest).

Interest that is not business related and not mortgage interest on residential property is generally personal interest.  Personal interest is not deductible even for those who itemize their deductions.

Mortgage interest on residential property includes equity lines up to $100,000 ($50,000 for a married person filing separate returns).  So money borrowed for personal use, such as a personal automobile, may become deductible if it is borrowed on a equity line totaling less than $100,000 (or $50,000 for married filing separate).  Primary mortgage interest is deductible if the borrowed money is used to acquire or improve qualified residential property.  Qualified residential property includes the primary residence and one secondary residence.  Thus, mortgage interest, including equity lines up to $100,000 (or $50,000 for married filing separate) can be deducted on two homes.  A home, while primarily real estate, can include a houseboat, mobile home, or motor home if they include sleeping, bath, and kitchen facilities.  Additionally, qualifying relates to how the property is used rather than how it is owned.  There are special rules in determining how much usage makes a residence primary, or principle, and for married persons filing separate returns.  When an equity line exceeds $100,000 (or $50,000 for married filing separate) interest paid on the excess is personal interest and a pro-rata portion is allocated between deductible and non-deductible.

If a payment is made on December 31, 2010, or before, any associated 2010 interest is deductible on a 2010 1040 even if the due date of the payment is subsequent to December 31, 2010.

Tuesday, December 14, 2010

Tax Tip - Property Tax Deductible in 2010

Personal property taxes, both on real and personal, are deductible for those who itemize deductions on Schedule A of form 1040.  For years 2008 and 2009 there was a provision for a deduction up to $1,000 for those using the standard deduction.  This provision expired for tax years beginning after 2009.   Cash-basis taxpayers, generally all 1040 filers, deduct taxes paid during the year by December 31, 2010.  Documenting payments made close to December 31, 2010, is important.  In some states, counties access property tax on vehicles during the license process.  So, in some cases, property taxes may be paid several times during a year.  On some mortgaged real estate, a property tax factor is paid into an escrow account when mortgage payments are made.  Most escrow agents will pay real estate property taxes during the year accessed.  When paid direct, receipt of payment helps ascertain that a check payment was for property tax.

Monday, December 13, 2010

Tax Tip - Charitable Contributions Deductible in 2010

Only contributions actually made during the tax year are deductible.  'Actually made' does not include unpaid pledge amounts.  It does include gifts over which direct control has been relinquished as of December 31, 2010.  So, a check dated in 2010 and placed in the mail on December 31, 2010, or before, will count as a 2010 contribution although it may not be received by a charity/church or posted by a bank until 2011.  A more certain way is to physically deliver contributions with a date near December 31, 2010, to the charity/church by December 31, 2010.  It is important to have contributions posted to your giving record, as reporting by the charity/church constitutes the IRS required 'written acknowledgement' for gifts of $250 or more.

Non-cash donors of items valued at $500 or more must complete Form 8283 in their personal tax returns.  Generally, if a non-cash item is valued at more than $5,000, an appraisal is required.  In that case, Section B of Form 8283 must be completed.

Charitable contributions are deductible only if you itemize deductions using Form 1040, Schedule A.

Saturday, December 11, 2010

Tax Tip - General - Action Required Before 12/31/10

Specific planning should be done to cause itemized deductions to become deductible on 2010 filed tax returns.  Sometimes it can be desirable to cause itemized deductions to NOT be deductible until 2011 filed tax returns.  Generally, charitable contributions, property taxes, and residential mortgage interest are items that taxpayers can plan which year they become deductible.  I will add three specific messages regarding each of these items.

Tuesday, December 07, 2010

C. Eugene Prescott, CPA

A new practice focus targeted to individuals who are preparing their US Federal tax returns personally.  As the number of self-prepared, online filers, continues to increase, there is also an increase in the number of people encountering some tax complexity, often ambiguity, that in prior years was encountered and handled by paid preparers.  Most tax firms are concerned with production and compliance issues moreso than answering specific questions of individuals that are not also return preparation clients.  My firm is pleased to provide specific answers to specific questions.