Category: Individual Taxes

Income Tax Tips When Selling Your Home

Income Tax Tips When Selling Your Home

(IRS Tax Tip 2017-13)

Homeowners may qualify to exclude from their income all or part of any gain from the sale of their main home.

Below are tips to keep in mind when selling a home:

Ownership and Use. To claim the exclusion, the homeowner must meet the ownership and use tests. This means that during the five-year period ending on the date of the sale, the homeowner must have:

  • Owned the home for at least two years  
  • Lived in the home as their main home for at least two years    Gain.  If there is a gain from the sale of their main home, the homeowner may be able to exclude up to $250,000 of the gain from income or $500,000 on a joint return in most cases. Homeowners who can exclude all of the gain do not need to report the sale on their tax return

Loss.  A main home that sells for lower than purchased is not deductible.

Reporting a Sale.  Reporting the sale of a home on a tax return is required if all or part of the gain is not excludable. A sale must also be reported on a tax return if the taxpayer chooses not to claim the exclusion or receives a Form 1099-S, Proceeds from Real Estate Transactions.

Possible Exceptions.  There are exceptions to the rules above for persons with a disability, certain members of the military, intelligence community and Peace Corps workers, among others. More information is available in Publication 523, Selling Your Home.

Worksheets.  Worksheets are included in Publication 523, Selling Your Home, to help you figure the:

  • Adjusted basis of the home sold
  • Gain (or loss) on the sale
  • Gain that can be excluded

Items to Keep In Mind:

  • Taxpayers who own more than one home can only exclude the gain on the sale of their main home. Taxes must paid on the gain from selling any other home.
  • Taxpayers who used the first-time homebuyer credit to purchase their home have special rules that apply to the sale. For more on those rules, see Publication 523. Use the First Time Homebuyer Credit Account Look-up to get account information such as the total amount of your credit or your repayment amount.
  • Work-related moving expenses might be deductible, see Publication 521, Moving Expenses.
  • Taxpayers moving after the sale of their home should update their address with the IRS and the U.S. Postal Service by filing Form 8822, Change of Address.
  • Taxpayers who purchased health coverage through the Health Insurance Marketplace should notify the Marketplace when moving out of the area covered by the current Marketplace plan.

Making the Most out of Miscellaneous Deductions

Making the Most out of Miscellaneous Deductions (IRS Tax Tip 2017-09)

Miscellaneous deductions are tax breaks that generally don’t fit into a particular tax category.  They can help reduce taxable income and the amount of taxes owed.  For example, some employees can deduct certain work expenses like uniforms as miscellaneous deductions.  To do that, they must itemize their deductions instead of taking the standard deduction on their tax return. 

Here are several tips from the IRS about miscellaneous deductions:  

  • The Two Percent Limit.  Most miscellaneous costs are deductible only if the sum exceeds 2% of the taxpayer’s adjusted gross income (AGI).  For example, before being able to deduct certain expenses, a taxpayer with $50,000 in AGI must come up with more than $1,000 in miscellaneous deductions.  Expenses may include:
    • Unreimbursed employee expenses.
    • Job search costs for a new job in the same line of work.
    • Job tools.
    • Union dues.
    • Work-related travel and transportation.
    • The cost paid to prepare a tax return. These fees include the cost paid for tax preparation software. They also include any fee paid for e-filing a return.
  • Deductions Not Subject to the Limit. Some deductions are not subject to the 2% limit. They include:
    • Certain casualty and theft losses. In most cases, this rule is for damaged or stolen property held for investment. This may include property such as stocks, bonds and works of art.
    • Gambling losses up to the total of gambling winnings.
    • Losses from Ponzi-type investment schemes.

Taxpayers can’t deduct some expenses. For example, personal living or family expenses are not deductible. To claim allowable miscellaneous deductions, taxpayers must use Schedule A, Itemized Deductions. For more about this topic, see Publication 529, Miscellaneous Deductions. Get them on IRS.gov/forms at any time.

Avoid scams. The IRS will never initiate contact using social media or text message. First contact generally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on IRS.gov to find out.

Newlyweds Should Think About Taxes

Summer Newlyweds Should Also Think About Taxes

(IRS Summertime Tax Tip 2017-08 – July 19, 2017)

Spring showers bring summer flowers and weddings typically aren’t far behind. Newlyweds have a lot to think about and taxes might not be on the list. However, there is good reason for a new couple to consider how the nuptials may affect their tax situation.

The IRS has some tips to help in the planning:

  • Report changes in:
    • Name. When a name changes through marriage, it is important to report that change to the Social Security Administration. The name on a person’s tax return must match what is on file at SSA. If it doesn’t, it could delay any refund. To update information, file Form SS-5, Application for a Social Security Card. It is available on SSA.gov, by calling 800-772-1213 or at a local SSA office.
    • Address. If marriage means a change of address, the IRS and U.S. Postal Service need to know. To do that, send the IRS Form 8822, Change of Address. Notify the postal service to forward mail by going online at USPS.com or at a local post office.
  • Consider changing withholding. Newly married couples must give their employers a new Form W-4, Employee’s Withholding Allowance Certificate, within 10 days. If both spouses work, they may move into a higher tax bracket or be affected by the Additional Medicare Tax. Use the IRS Withholding Calculator at IRS.gov to help complete a new Form W-4. See Publication 505, Tax Withholding and Estimated Tax, for more information.
  • Decide on a new filing status. Married people can choose to file their federal income taxes jointly or separately each year. While filing jointly is usually more beneficial, it’s best to figure the tax both ways to find out which works best. Remember, if a couple is married as of Dec. 31, the law says they’re married for the whole year for tax purposes.
  • Select the right tax form. Choosing the right income tax form can help save money. Newly married taxpayers may find they now have enough deductions to itemize them on their tax returns. Newlyweds can claim itemized deductions on Form 1040, but not on Form 1040A or Form 1040EZ.
  • Avoid scams. The IRS will never initiate contact using social media or text message. First contact generally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on IRS.gov to find out.

Members of the Armed Forces Get Special Tax Benefits

Members of the Armed Forces Get Special Tax Benefits (IRS Tax Tip 2017-06)

Members of the military may qualify for tax breaks and benefits. Special rules could lower the tax they owe or give them more time to file and pay taxes. In addition, some types of military pay are tax-free.

Here are some tips to find out who qualifies:

  1. Combat Pay Exclusion. If someone serves in a combat zone, or provides direct support, part or even all of their combat pay is tax-free. However, there are limits for commissioned officers. See Earned Income Tax Credit below for important information.
  2. Deadline Extensions.  Some members of the military, such as those who serve in a combat zone, can postpone most tax deadlines. Those who qualify can get automatic extensions of time to file and pay their taxes.
  3. Special Deductions:
  • Reservists’ Travel.  Reservists whose duties take them more than 100 miles away from home can deduct their unreimbursed travel expenses on Form 2106, even if they do not itemize their deductions.
  • Moving Expenses.  Taxpayers who serve may be able to deduct some of their unreimbursed moving costs on Form 3903. This normally applies if the move is due to a permanent change of station.
  • Uniform.  Members of the military can deduct the cost and upkeep of their uniform, but only if rules say they cannot wear it off duty. Also, they must reduce their deduction by any uniform allowance they get for those costs.
  1. Earned Income Tax Credit or EITC. If those serving get nontaxable combat pay, they may choose to include it in their taxable income to increase the amount of EITC. That means they could owe less tax and get a larger refund. For tax year 2016, the maximum credit for taxpayers is $6,269. It is best to figure the credit both ways to find out which works best.
  2. Signing Joint Returns.  Both spouses normally must sign a joint income tax return. If military service prevents that, one spouse may be able to sign for the other or get a power of attorney.
  3. ROTC Allowances.  Some amounts paid to ROTC students in advanced training are not taxable. This applies to allowances for education and subsistence. Active duty ROTC pay is taxable. For instance, pay for summer advanced camp is taxable.
  4. Separation and Transition to Civilian Life. If service members leave the military and look for work, they may be able to deduct some job search expenses, including travel, resume and job placement fees. Moving expenses may also qualify for a tax deduction.
  5. Tax Help.  Most military bases offer free tax preparation and filing assistance during the tax filing season. Some also offer free tax help after the April deadline. Check with the installation’s tax office (if available) or legal office for more information.

For more, refer to IRS.gov/Military or Publication 3, Armed Forces’ Tax Guide, on IRS.gov.

Summer Camp Costs May Qualify for the Child and Dependent Care Tax Credit

Summer Camp Child and Dependent Care Tax Credit

Many parents send their children to summer day camps while they work or look for work. The IRS urges those who do send their children to summer camps or day care to save their paperwork for the Child and Dependent Care Tax Credit. Eligible taxpayers may be able claim it on their taxes in 2018 if they paid for day camp or for someone to care for a child, dependent, or spouse during 2017.

Here are a few key facts to know about this credit:

  1. Qualifying Person. The care must have been for “qualifying persons.” A qualifying person can be a child under age 13. A qualifying person can also be a spouse or dependent who lived with the taxpayer for more than half the year and is physically or mentally incapable of self-care.
  2. Work-Related Expenses. The care must have been necessary so the taxpayer could work or look for work. For those who are married, the care also must have been necessary so a spouse could work or look for work. This rule does not apply if the spouse was disabled or a full-time student.
  3. Earned Income. The taxpayer — and their spouse if married filing jointly — must have earned income for the tax year. Special rules apply to a spouse who is a student or disabled.
  4. Credit Percentage/Expense Limits. The credit is worth between 20 and 35 percent of allowable expenses. The percentage depends on the income amount. Allowable expenses are limited to $3,000 for care of one qualifying person. The limit is $6,000 if the taxpayer paid for the care of two or more.
  5. Care Provider Information. The name, address and taxpayer identification number of the care provider must be included on the return. The childcare provider cannot be the taxpayer’s spouse, dependent or the child’s parent.
  6. Dependent Care Benefits. Special rules apply for people who get dependent care benefits from their employer.  Make sure you consult your tax advisor to understand those rules.
  7. Special Circumstances. Since every family is different, the IRS has a series of exceptions to the rules in the qualification process. These exceptions allow a greater number of families to take advantage of the credit. Make sure you consult your tax advisor to understand the exceptions.

Even if the childcare provider is a sitter in the home, taxpayers may qualify for the credit. Taxpayers who pay someone to come to their home and care for their dependent or spouse may be a household employer. If you are deemed a household employer, you may have to withhold and pay Social Security and Medicare tax and pay federal unemployment tax for those who provide child care.

Need More Time to Pay Taxes? How to Get Tax Extension

Need More Time to Pay Taxes? How to Get Tax Extension

(The following is IRS Tax Tip 2017-40)

All taxpayers should file on time, even if they can’t pay what they owe. This saves them from potentially paying a failure to file penalty. Taxes are due by the original due date of the return.

Here are four tips for those who can’t pay their taxes in full by the April 18 due date:

  1. File on time and pay as much as possible. Pay online, by phone, with your mobile device using the IRS2Go app, or by check or money order. Visit IRS.gov for electronic payment options.
  2. Get a loan or use a credit card to pay the tax. The interest and fees charged by a bank or credit card company may be less than IRS interest and penalties. For credit card options, see IRS.gov.
  3. Use the Online Payment Agreement tool.  Don’t wait for the IRS to send a bill before seeking a payment plan. The best way is to use the Online Payment Agreement tool on IRS.gov. Taxpayers can also file Form 9465, Installment Agreement Request, with their tax return. Set up a direct debit agreement. With this type of payment plan, there is no need to send a check each month.
  4. Don’t ignore a tax bill.  If so, the IRS may take collection action. Contact the IRS right away by calling the phone number on your bill to talk about options. The IRS will work with taxpayers suffering financial hardship.

Remember to file on time. Pay as much as possible by April 18, 2017, and pay the rest as soon as possible to reduce the interest and penalties. Find out more about the IRS collection process on IRS.gov.

All taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.  

April 1 Deadline Approaches for Taking Required Retirement Plan Distributions

IRS Reminds Taxpayers of April 1 Deadline to Take Required Retirement Plan Distributions

IRS Issue Number:  IR-2017-63

WASHINGTON — The Internal Revenue Service today reminded taxpayers who turned age 70½ during 2016 that, in most cases, they must start receiving required minimum distributions (RMDs) from Individual Retirement Accounts (IRAs) and workplace retirement plans by Saturday, April 1, 2017.

The April 1 deadline applies to owners of traditional (including SEP and SIMPLE) IRAs but not Roth IRAs. It also typically applies to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.

The April 1 deadline only applies to the required distribution for the first year. For all subsequent years, the RMD must be made by Dec. 31. A taxpayer who turned 70½ in 2016 (born after June 30, 1945 and before July 1, 1946) and receives the first required distribution (for 2016) on April 1, 2017, for example, must still receive the second RMD by Dec. 31, 2017. 

Affected taxpayers who turned 70½ during 2016 must figure the RMD for the first year using the life expectancy as of their birthday in 2016 and their account balance on Dec. 31, 2015. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. Worksheets and life expectancy tables for making this computation can be found in the appendices to Publication 590-B.

Most taxpayers use Table III  (Uniform Lifetime) to figure their RMD. For a taxpayer who reached age 70½ in 2016 and turned 71 before the end of the year, for example, the first required distribution would be based on a distribution period of 26.5 years. A separate table, Table II, applies to a taxpayer married to a spouse who is more than 10 years younger and is the taxpayer’s only beneficiary. Both tables can be found in the appendices to Publication 590-B. 

Though the April 1 deadline is mandatory for all owners of traditional IRAs and most participants in workplace retirement plans, some people with workplace plans can wait longer to receive their RMD. Employees who are still working usually can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions. See Tax on Excess Accumulation  in Publication 575. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.

The IRS encourages taxpayers to begin planning now for any distributions required during 2017. An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount in Box 12b on Form 5498. For a 2017 RMD, this amount would be on the 2016 Form 5498 that is normally issued in January 2017.

IRA owners can use a qualified charitable distribution (QCD) paid directly from an IRA to an eligible charity to meet part or all of their RMD obligation. Available only to IRA owners age 70½ or older, the maximum annual exclusion for QCDs is $100,000. For details, see the QCD discussion in Publication 590-B.

A 50 percent tax normally applies to any required amounts not received by the April 1 deadline. Report this tax on Form 5329 Part IX. For details, see the instructions for Part IX of this form.

Check Out Tax Benefits for Higher Education Costs

Check Out Tax Benefits for Higher Education Costs

Below the IRS outlines tax benefits in their IRS Tax Tip 2017-31

Higher education costs paid in 2016 can mean tax savings when taxpayers file their tax returns. If taxpayers, their spouses or their dependents took post-high school coursework last year, they may be eligible for a tax credit or deduction.

Here are some facts from the IRS about tax benefits for higher education.

For 2016, there are two tax credits available to help taxpayers offset the costs of higher education. The American Opportunity Credit and the Lifetime Learning Credit may reduce the amount of income tax owed. Use Form 8863 to claim the education credits.

The American Opportunity Credit (AOC) is:

  • Worth a maximum benefit up to $2,500 per eligible student.
  • Only for the first four years at an eligible college or vocational school.
  • For students pursuing a degree or other recognized education credential.
  • For students enrolled at least half time for at least one academic period during 2016. Taxpayers can claim the AOC for a student enrolled in the first three months of 2017 as long as they paid qualified expenses in 2016.

The Lifetime Learning Credit (LLC) is:

  • Worth a maximum benefit up to $2,000 per tax return, per year, no matter how many students qualify.
  • Available for all years of postsecondary education and for courses to acquire or improve job skills.
  • Available for an unlimited number of tax years

The tuition and fees deduction can reduce the amount of income subject to tax. This deduction may be beneficial for taxpayers who don’t qualify for the American Opportunity Credit or the Lifetime Learning Credit. Use Form 8917 to claim the tuition and fees deduction.

The Tuition and Fees Deduction is:

  • Worth a maximum benefit up to $4,000,
  • Claimed as an adjustment to income,
  • Available even if a taxpayer doesn’t itemize deductions on Schedule A,
  • Limited to tuition and certain related expenses required for enrollment or attendance at eligible postsecondary educational institutions.

Additionally:

  • Beginning in 2016, to be eligible for an education benefit, a student is required to have Form 1098-T, Tuition Statement. They receive this form from the school they attended. There are exceptions for some students. See Publication 970 for more details.
  • They may only claim qualifying expenses paid in 2016.
  • They can’t claim either credit if someone else claims them as a dependent.
  • They can’t claim either AOTC or LLC and the Tuition and Fees Deduction for the same student or for the same expense in the same year.
  • Income limits could reduce the amount of credits or deductions they can claim.
  • The Interactive Tax Assistant tool on IRS.gov can help check eligibility.

What is the Additional Medicare Tax? Will You Be Required to Pay?

What is the Additional Medicare Tax?

Below the IRS explains about the additional Medicare tax.

Some taxpayers may be required to pay an Additional Medicare Tax if their income is over a certain limit. The IRS would like people to know more about this tax.

  • Tax Rate. The Additional Medicare Tax rate is 0.9 percent.
  • Income Subject to Tax. The tax applies to the amount of wages, self-employment income and railroad retirement (RRTA) compensation that is more than a threshold amount. For more information, go to Questions and Answers for the Additional Medicare Tax.
  • Threshold Amount. Filing status determines the threshold amount. For those who are married and file a joint return, they must combine the wages, compensation or self-employment income of their spouse with their own. The combined total income determines if it is over the threshold for this tax. The threshold amounts are
Filing Status Threshold Amount
Married filing jointly $250,000
Married filing separately $125,000
Single $200,000
Head of household $200,000
Qualifying widow(er) with dependent child $200,000
  • Withholding / Estimated Tax. Employers must withhold this tax from wages or compensation when they pay employees more than $200,000 in a calendar year. Self-employed taxpayers should include it for estimated tax liability purposes.
  • Underpayment of Estimated Tax. People who had too little tax withheld or did not pay enough estimated tax may owe an estimated tax penalty. IRS Publication 505, Tax Withholding and Estimated Tax, provides rules and details on estimated taxes.

People who owe this tax should file Form 8959, with their tax return. People should also report any Additional Medicare Tax withheld by their employer or employers on Form 8959. IRS.gov offers more on this topic. Forms and publications are available on IRS.gov/forms anytime.

Taxpayers should keep a copy of their tax return. Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.

Nine IRS Common Filing Errors to Avoid

Nine IRS Common Filing Errors to Avoid

The IRS encourages taxpayers to file an accurate tax return. If a taxpayer makes an error on their return, it will likely take longer for the IRS to process it. This could delay a refund. Avoid many common errors by filing electronically. IRS e-file is the most accurate way to file a tax return. 

The IRS lists the nine most common errors to avoid when preparing a tax return below:

1. Missing or Inaccurate Social Security Numbers. Be sure to enter each SSN on a tax return exactly as printed on the Social Security card.

2. Misspelled Names. Spell all names listed on a tax return exactly as listed on that individual’s Social Security card.

3. Filing Status Errors.  Some people claim the wrong filing status, such as Head of Household instead of Single. The Interactive Tax Assistant on IRS.gov can help taxpayers choose the correct status. E-file software also helps prevent mistakes.

4. Math Mistakes.  Math errors are common. They range from simple addition and subtraction to more complex items. Transactions like figuring the taxable portion of a pension, IRA distribution or Social Security benefits are more difficult and result in more errors. Taxpayers should always double check their math. Better yet, tax preparation software does it automatically, so file electronically.

5. Errors in Figuring Tax Credits or Deductions.  Filers can make mistakes figuring their Earned Income Tax Credit, Child and Dependent Care Credit, the standard deduction and other items. Taxpayers need to follow the instructions carefully. For example, if a taxpayer is age 65 or older, or blind, they should be sure to claim the correct, higher standard deduction. 

6. Incorrect Bank Account Numbers.  The IRS strongly urges all taxpayers who have a refund due to choose direct deposit. It’s easy and convenient.  Be careful to use the right routing and account numbers on the tax return. The fastest and safest way to get a refund is to combine e-file with direct deposit.

7. Forms Not Signed.  An unsigned tax return is like an unsigned check – it’s not valid. Both spouses must sign a joint return. Taxpayers can avoid this error by filing their return electronically. Sign an e-filed tax return digitally before sending it to the IRS.

8. Electronic Filing PIN Errors. When e-filing, the taxpayer signs and validates the tax return electronically with a prior-year Self-Select Personal Identification Number. If they do not have or know their PIN, they should enter the Adjusted Gross Income from their 2015 tax return originally filed with the IRS. Taxpayers should keep a copy of their tax return.

Beginning in 2017, taxpayers using a software product for the first time may need their Adjusted Gross Income (AGI) amount from their prior-year tax return to verify their identity. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return. Do not use the AGI amount from an amended return or a return that the IRS corrected.  

9. Filing with an expired ITIN. A tax return filed with an expired Individual Tax Identification Number (ITIN) will be processed and treated as timely filed, but will be processed without any exemptions or credits claimed. Taxpayers will receive a notice from the IRS explaining that an ITIN must be current before any refund is paid. Once the ITIN is renewed, exemptions and credits are processed and any allowed refund paid. ITIN expiration and renewal information is available on IRS.gov