2. Federal Tax Law

3. Federal Tax Ethics

4. California Specific Tax Course

1. Federal Tax Updates

Federal Tax Updates

The many tax changes are made public towards the end of the year. At least that is what it seems like. The reason is that we as taxpayers and also as tax preparers focused most of our attention to tax matters towards the end of the year and during the start of the year, when tax season begins. Many interested individuals and groups work really hard to convince the ones in the decision making process to pass the new tax laws and as a result to convince them to offer more tax incentives for certain groups or more economically challenged taxpayers. Some of these tax changes can take effect immediately and the decision to pass the new tax change can even happen in tax season and apply for the year for which taxes are being filed.

Every year, there are many new tax credits and tax deductions available to taxpayers. Some special deductions occur as a result of a national disaster and many times it is offered only to the individuals directly affected by these natural disasters. Usually these types of credits or deductions seek to compensate the victim for financial loss as a result of the tragedy. For example, if a natural disaster happens in the United States or anywhere and it affects Americans in some way or other in March, the federal tax laws will allow a credit or deduction to help the families affected. This credit or deduction can most likely be claimed on the tax return that is due by April 15^th. Other new credits or deductions are a result of the economy and the federal and local governments make certain efforts to boost the frail economy. In recent years, many credits, deductions and extensions to these credits and deductions have been a result of the slow economy. Tax changes happen at the start of the year, during the year or at the end of the year depending on the circumstances.

As a concerned taxpayer or tax preparer, you must always watch for the tax changes and the new tax breaks that are enhanced or limited as a result of these tax changes. Always keep your eyes open for the new tax laws and how they will affect your tax filing situation. At year’s end December 31, 2014, there were many expired tax credits and deductions that were a result of the extended credits and deductions of the Tax Increase Prevention Act of 2014 which had originally expired either in 2009, 2011 or 2013. Some of these credits and deductions may be extended and other credits and deductions may not be extended and we may never see them again. A few of these tax incentives have already been approved to be extended beyond the December 31, 2014 extension. However, for many others, there is no word as to there being an additional extension of the tax benefit.

No matter when the tax changes are made aware to the public, you must always look for them and make sure you are in the know-how as to the many tax changes which occur every year. Don’t wait until January to find out the different tax changes. Always be responsive to changes and keep your tax knowledge active. Always strive for tax planning strategies early on. Usually, tax changes will finalize towards the end of the year and usually by November they will be a for sure thing to apply in the new tax season.

2015 Tax benefits increase and Inflation adjustment items

Cost of living standards are almost always known ahead of time. It is not a surprise to know what the tax changes in regards to cost of living standards be available one to two years in advance. Tax changes that will for sure occur on a yearly basis are those which involve the cost of living standards. The cost of living will usually rise every year. We will see adjustments for annual inflation on almost every tax amount, deduction, or credit every year. These amounts for the most part will rise to reflect the rising cost of living standards in the economy of different areas of the United States. Some however, will lower which depends on new information that is gathered about the economy.

These cost of living standards are derived from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey (CES). This information is collected by survey from households and families on their buying habits and expenditures, their income and household size. The cost of living standards vary by location. Changes to taxes become available as new cost of living standards information becomes available. The cost of living standards in California, for example, are different than the cost of living standards in Texas. Many people talk about how much cheaper it is to live in Texas. It seems to be common knowledge that homes are about ten times cheaper in some states than they are in California. 

New information is constantly collected to determine the national cost of living standards. The national cost of living standards are set to try to include every area or region involved. The living standards vary according to region and possible according to culture. The IRS tries to apply the national standards for food, clothing and other items so credits, deductions and special programs such as student aid, state welfare, and benefit programs can apply these standards to their programs. All this would not be possible if there was no such thing as cost of living standards.

The national standards have been established for five necessary expenses. These necessary expenses includes food, housekeeping supplies, apparel and apparel services, personal care products and personal care service and other miscellaneous items. The national standards for food, clothing and other items include an amount for miscellaneous expenses. This amount for miscellaneous expenses is considered a deviation that does not include any portion of expenses that exceed certain standards. This is sort of a non-classified section of the calculation taken into consideration by the national standards.

If a taxpayer does not agree with the cost of living standards for which deductions and deductions are based on, then taxpayers are given the option to use the actual expenses on many cases. This is usually done only if the taxpayer provides the documentation that supports their deductions. However, taxpayers are normally not obligated to provide substantiation at the time of filing their tax return. Taxpayers calculate their actual expenses and are responsible to provide copies of documents that substantiate their deductions when and if they are asked for them. So there is a choice for almost any kind of deduction for claiming the actual expenses or to take the national standard allowance. Therefore, taxpayers can use either the standard provided or make an itemized list of actual expenses. There may be a few requirements or limitation in order to do so. The standard allowance is in the form of a rate per mile, rate per day or simply a whole amount based on your filing status. The taxpayer may have expenses that are higher than the standard allowed amount. Therefore out of fairness, he or she will most of the time have an opportunity to claim the actual amounts if the actual amounts are higher. Other times, the taxpayer will have the option to claim the standard to avoid the time and effort spent in gathering their information to claim the actual costs. 

Changes occur every year to tax rates, tax schedules and tax forms. Everything must change to account for high cost of living increases every year. Most of changes in taxes that occur every year are not really changes but rather they are adjustments. So, in essence, there are really not that many tax changes every year but merely adjustments to allow for the cost of living increases. When new tax rates are announced and new tax laws are passed, annual inflation adjustments are taken into account for every tax provision for the new tax year. These include adjustments to tax rates, tax tables and also to the normal cost of living adjustments. For example, if you are single who earns more than $413,200, you can expect to be taxed at a federal tax rate of about 39.6 percent. Furthermore, if you are married and filing a joint tax return, your tax rate will be 39.6 percent if your income is over $464,850 for 2015. These amounts have increase from last year. Last year, singles who earned $406,750 were liable at the 39.6 percent federal tax rate and married taxpayers who filed married filing jointly were liable for the 39.6 percent federal tax rate if their income was more than $457,600. This is an increase of $6,450 for single taxpayers and $7,250 for married taxpayers who file a married filing jointly tax return for 2015. These are just two examples on how tax rates play a role in taxpayers’ lives. The other tax rates are 10 percent, 15, 25, 28, 33 and 35 percent and dependent on you income is the tax rate that will apply to your tax situation. If you play your cards right towards the end of the year with the proper tax planning tools, you can lower your tax rate to a lower tax bracket if the margins between tax rates are close. As a result of inflation adjustments, you can see how inflation rises every year and how much the tax rate marginal rates rose from tax year 2014 to tax year 2015.

Adjustments for inflation sometimes make a huge difference in new tax figures for the year. In 2015, the standard deduction for a single or married filing separate taxpayer is $6,300. The standard deduction for 2015 for a married taxpayer who is filing as married filing jointly rose to $12,600. Likewise, the standard deduction amount has risen to $9,250 for individuals who file their tax returns as head of household with qualifying child. Everyone gets a higher standard deduction amount this year, even senior and blind taxpayers. The additional standard deduction for a senior (those who are 65 year of age or older) and blind taxpayer who is filing single or head of household is $1,550 for each. Therefore if the single taxpayer is both senior and blind, he or she gets an additional standard deduction of $3,100. On the other hand, if the taxpayer is a married senior or blind, the additional standard deduction amount is $1,250. This is a little bit less than that of single taxpayers. It is important to note, that these standard deduction amounts are in addition to the standard deduction amounts that pertain to these taxpayers’ filing status. The taxpayer’s filing status determines the tax rate or deduction amount the taxpayer is entitled to most of the time.

A taxpayer is allowed a personal exemption amount on his or her tax return for the year. As you already know, a personal exemption is a deduction allowed for each person on your tax return. There is an exemption for yourself, one for your spouse, and an exemption for every dependent on your tax return. We like to call these personal exemption, spousal exemption, and dependent exemption. The personal exemption amount has increased for tax year 2015 to $4,000. In 2014 it was $3,950 and it has been increasing every year by $50. These exemption amounts will be reduced if your adjusted gross income exceeds a certain amount. This process is called phase out. For single taxpayers, the exemption amount starts to be reduced gradually once their income starts going over $258,250 for 2015. Likewise, the personal exemption amounts start to be reduced for married taxpayers filing jointly when their income starts being over $309,900 for 2015. If the adjusted gross income reaches $380,750 for single taxpayers, then there is no personal exemption deduction. The situation is similar with married taxpayers filing a married filing jointly tax return. Their exemptions amounts are completely reduced if the adjusted gross income reaches $432,400 for 2015. Most taxpayers will be claiming exemption amounts on their tax return. However, there are a few taxpayers that will not meet the requirements for claiming personal exemptions on their tax return.     

What about itemized deductions? Itemized deductions are your list of deductions you take on your Schedule A if you don’t wish to use the standard deduction. You want to claim your itemized deductions if the amount is greater than your standard deduction amount. Sometimes, you may just claim the standard deduction amount even if your itemized deductions are greater. It is always your option to claim either one. In this reading material it is assumed that you already know what are itemized deductions and the different basic items in taxation. You already know that your itemized deductions are the list of actual expenses you opt to take on your tax return in place of the standard deduction. If you have a list of your actual expenses and the total is more than that of the standard deduction, you take the actual deductions. Your itemized deductions are also subject to reduction based on your adjusted gross income. Your itemized deductions cannot be reduced by more than 80 percent as a result of the 3% reduction of the amount by which your adjusted gross income exceeds certain limit amounts. Furthermore, your itemized deductions for medical expenses, investment interest expenses, casualty and theft losses, and gambling losses are not reduced as a result of this 3 percent reduction. If you are a single taxpayer, your itemized deduction amounts will start to be reduced once your adjusted gross income reaches $258,250 for 2015. In like manner, the itemized deduction amount will be starting to phase out for married filing jointly taxpayers whose adjusted gross income reaches $309,900.

If your income is over a certain amount and you are claiming many credits and deductions or claiming certain deductions, you may have to pay an Alternative Minimum Tax on your federal tax return. This certain amount is usually based on your filing status. The Alternative Minimum Tax exemption income limit amount for 2015 is $53,600. You would need to worry about filling out the worksheets to see if you are liable for Alternative Minimum Tax if you have an excess of credits and deductions for which you are benefiting under the tax laws. The Alternative Minimum Tax income limit amount for married filing jointly individuals in 2015 is $83,400. The Alternative Minimum Tax is an effort to equalize the tax rate for certain individuals who would otherwise unfair benefit from the tax credits and deductions that the tax law allows them to take.

The Earned Income Credit is for those individuals with low income. This credit comes in very handy after you have overspent your money around the Christmas time. This credit is to benefit especially taxpayers with children. The individual or couple with more children can benefit more from this credit than those with only one child. This credit is also for individuals without children. However, if the taxpayer does not have children, the amount of the EITC is very small. Remember, this is the credit that many Americans were claiming and for which very little regard was shown for the rules. Taxpayers were in violation of the Earned Income Tax Credit rules so miserably that the Internal Revenue Code had to change to provide for penalties at all levels for violation of these EITC rules. Everyone from the taxpayer to the tax preparer have to pay the price for not exercising due diligence when claiming the Earned Income Tax Credit. 

All the Earned Income Credit amounts rise also for tax year 2015. Again these changes are due to the cost of living increase for 2015. For 2015, the Earned Income Credit amount is tops at $6,242 for taxpayers filing jointly who have 3 or more qualifying children. The Earned Income Tax Credit is a yearly benefit for people hard at work to make ends meet. People can file a return just to claim the credit, even if they don't have a filing requirement. This is a refundable credit which means that taxpayers may get money back regardless if they had tax withheld or not. You must qualify and follow strict rules to qualify for the credit. Both tax preparers and taxpayers must exercise due diligence in the calculations this credit. In recent years, most of the due diligence responsibility has been shifted to the tax preparer. There are high penalties involved for tax preparers who neglect to follow the due diligence rules. There will be a $500 penalty accessed to the tax preparer for failure to comply with the EITC due diligence regulations. This ability to access a $500 penalty for each taxpayer for which due diligence has not been properly exercised came about after much abuse of the Earned Income Credit qualification rules. The Internal Revenue Service is holding everyone responsible for any abuse of the Earned Income Tax Credit rules. This responsibility comes in the form of penalties for everyone involved, including the tax preparer.   

When someone dies, everything is over. That is usually the thought on everyone’s mind. Your family is hopefully left with certain security such as insurance that would cover your expenses and their basic living situation when you are gone at least for a temporary period of time. Unfortunately, many individuals don’t think they may die unexpectedly and they don’t think of the consequences of not having the proper insurance to at least cover basic burial expenses. Not everything ends when you die. For example, when a taxpayer dies, the taxpayer still has to file a tax return. Everyone has to file a final tax return. Even if the taxpayer is dead, he or she must have their tax return filed. The estate is responsible for two kinds of taxes. One is the estate tax which has to do with the transfer of assets to the beneficiaries. The other one is the income tax which has to do with the income generated from the assets of the estate. Whichever kind of tax return you may have to file, the fact still remains that you do have to file a tax return when you are dead.  

Estates of decedents who die during 2015 have a basic exclusion amount of $5,340,000. This is the same for tax year 2014 as there is no change. The Estate Tax is a tax on your right to transfer property at the time of your death. It consists of everything you own or everything you have an interest in at the time of your passing. The total of all the items you own is your gross estate. Anything you own is game when considering what items are includable in your estate. Then after you figure your gross estate, you need to figure out your deductions allowed so you can arrive at your taxable estate. Simple estates would not really require a filing of an estate return. Filing a tax return is required for estate with combined gross assets and taxable gifts exceeding $5,340,000 in 2015. There is a portability election for estates of decedents survived by a spouse. An estate can elect to pass any of the decedent's unused exemption to the surviving spouse. This election is made on the estate tax return for the decedent with a surviving spouse. Hence, in order to take this election the decedent return must be filed in a timely manner.

You may also be responsible for gift taxes if you are very generous individual. After all, why should the recipient of the gift be the only one who benefits? The Internal Revenue Service also wants part of that gift. The annual exclusion for gifts remains the same at $14,000 for tax year 2015. Any transfer to an individual is considered a gift as long as you don't receive anything in return for your gift. When making gifts, the donor is generally the one responsible for paying the gift tax. However, the donee may agree to pay the gift tax instead. Usually any gift is a taxable gift. However, there are many exceptions to this rule. Certain gifts are not taxable gifts. For example, gifts that are not more the annual exclusion for the calendar year are not taxable gifts. Also, tuition or medical expenses you pay for someone as not taxable gifts and these gifts fall under the category of educational and medical exclusions. Furthermore, any gifts you make to your spouse are not taxable gifts. Additionally, gifts that you make to a political organization for its use are generally not considered taxable gifts. We know about charitable contributions but maybe never really thought about these contributions to qualifying charities as gifts that are deductible. You must remember, you cannot be too generous and if you are, you would have to pay extra tax on that generosity. The exclusion amount is limited at $14,000 for 2015 and if you the gift is for more than $14,000, you need to complete the worksheets and calculate the gift tax for the amount that is over the $14,000 limit.

Some people cannot qualify for a home by themselves. They seek the help of relatives and friends to help them qualify as co-borrowers on loans. This usually means that these friends and relatives will also be co-owners of the property for the most part. When the time comes and you get your act together, your credit situation fixed or more money at work, then it is time to own the home by yourself. Everyone then starts making the appropriate transfer arrangements to release themselves from this financing arrangement. They transfer the property or their share of ownership of the property to the person who asked them to help. Everyone has to be careful how they handle this situation though. They may be liable for the gift tax if they simply just turn the property over to others. If their share of the property ownership is more than the $14,000, they may have to calculate the gift tax and pay the Internal Revenue Service for being so generous to their friend.

You can also see this situation when someone wins the lottery. They give all their proceeds to a charitable organization because they are very generous and not greedy at all. Then the Internal Revenue Service will send them a letter asking for their fair share of the gift they have made to the charitable organization or to any organization for this matter. Therefore, the moral to the story is - think before you exercise your generosity. Being too generous could cost you dearly.

Employer retirement plans

On another note, employers have an option to set up retirement accounts for their employees. Some employees will weigh into the acceptance of the job whether the employer offers certain benefits such as medical and retirement plans. Some employees place more weight on the benefits offered by their employer than on the wages paid. The employee will more often than not accept a lesser paying job if that job offers the proper benefits such as health insurance and other fringe benefits.

An employer in the United States can set up a tax-advantage financial account set up through a cafeteria plan to use for out of pocket health costs. The annual dollar limit on employee contributions to employer-sponsored healthcare flexible spending arrangements (FSA) remains the same at $2,550 for tax year 2015. There is a limit on the amount that an employee can defer annually under a health care flexible spending account or Health FSA to $2,550 for 2015. A Health FSA permits employees to pay for out-of-pocket medical expenses. Prior to this, the FSA limit was set by the employer and was usually from $2,500 to $5,000. Some employers for various reasons would set lower limits. Now with the new employer-sponsored healthcare spending arrangement act, an employer has less flexibility in setting a Health FSA annual limit. The $2,500 limit applies only to employee contributions and does not apply to employer non-elective contributions and they are called flex credits. These flexible spending arrangements will save you a lot of tax money since you don’t have to pay taxes on the money put aside via this plan.

Foreign Earned Income Exclusion Credit

The tax law allows for a Foreign Earned Income Exclusion credit. As a United States citizen or resident alien, you are taxed on your entire income regardless of where you live. If you live abroad and earn money abroad, you may take advantage of the Foreign Earned Income Exclusion Credit. The foreign earned income exclusion rises to $100,800 for tax year 2015. If you meet certain requirements, you may qualify for the foreign earned income and foreign housing exclusions and the foreign housing deduction. If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income unless you qualify to exclude from income your foreign earnings up to $100,800 in 2015. For these purposes, foreign house exclusion, and the foreign housing deduction, foreign earned income does not include any amounts paid by the United States or any of its agencies to its employees. This credit is made available to alleviate the effect of double taxation and who most probably also have to pay taxes to the foreign country for living and working there. 

Employer Provided Health Coverage

If you are a small business employer who provides health coverage to your employees, you can qualify for a tax credit. The amount of the small business employer health insurance credit is based on the number of employees and how many hours these employees work during the year. The small employer health insurance credit provides that the maximum credit is phased out based on the employer’s number of full-time equivalent employees in excess of 10 and the employer’s average annual wages in excess of $25,800 for 2015. The maximum credit increases to 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers. To be eligible for the credit, a small business employer must pay premiums on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program Marketplace. This is also known as (SHOP). Alternatively, the employer can qualify for an exception to this requirement. This credit is available to eligible employers for two consecutive taxable years. Furthermore, the way the credit works is that if for instance you pay $50,000 a year toward employees' health care premiums and if you qualify for a 15 percent credit, you save $7,500. This credit can be carried back or forward for employers who did not own tax during the year. To be eligible, you must cover at least 50 percent of the cost of employee-only health care coverage for each of your employees and must have less than 25 full-time equivalent employees. These employees must have average wages of less than $50,000 per year.

Additional Medicare Tax

The Additional Medicare tax applies to you if your wages are in excess of $200,000. The Additional Medicare Tax rate is 0.9 percent. You must file IRS Form 8959 to pay this tax and send the form along with the Additional Medicare Tax and your tax return to the IRS. This tax started with tax years after December 31, 2012 and a 0.9% Additional Medicare Tax applies to Medicare wages, self-employment income, and railroad retirement (RRTA) compensation. The amounts are based on incomes of married filing jointly taxpayers that exceed $250,000 for Married filing joint taxpayers and $125,000 for taxpayers who file separately. A taxpayer who is single and file as Single, head of household or qualifying widow (or widower) with dependent child has an income set at $200,000. If the income is more than these set amounts, then a 0.9 percent Additional Medicare Tax applies to you.   

Likewise, taxpayers who are self-employed individuals are also liable for the 0.9 percent Additional Medicare Tax amount. A 0.9% Additional Medicare Tax applies to Medicare wages, self-employment income, and railroad retirement (RRTA) compensation. These amounts are also based on incomes of single taxpayers such as those filing as head of household, single or qualifying widow (or widower) that exceeds $200,000. The amounts exceeding $125,000 for taxpayers filing as married filing separate and the amounts exceeding $250,000 for those filing as married filing jointly will liable for the additional Medicare tax. Medicare wages and self-employment income are combined to determine if income exceeds the Additional Medicare Tax set amounts. All Medicare wages, railroad retirement (RRTA) compensation, and self-employment income currently subject to Medicare Tax are subject to Additional Medicare Tax if paid in excess of the applicable limits for the taxpayer's filing status.

There are no special rules for nonresident aliens and U.S. citizens living abroad for purposes of the Additional Medicare tax provision. Medicare wages, railroad retirement (RRTA) compensation, and self-employment income earned by such individuals will also be subject to Additional Medicare Tax, if in excess of the applicable limits set for their filing status. An employer is responsible for withholding the Additional Medicare Tax from wages or railroad retirement (RRTA) compensation it pays to an employee in excess of $200,000 in a calendar year regardless of filing status. An employer is required to begin withholding Additional Medicare Tax in the pay period in which it pays wages or railroad retirement (RRTA) compensation in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. To account for their Additional Medicare Tax liability, some taxpayers may need to adjust their withholding or make estimated tax payments.

The Additional Medicare Tax was added by the Affordable Care Act (ACA). It applies to wages, railroad retirement (RRTA) compensation, and self-employment income over certain limits. Employers are held accountable for withholding the tax. RRTA is also subject to the Medicare Tax and to the Additional Medicare Tax if it goes over certain amounts. The additional Medicare tax applies only to certain individuals with incomes over certain threshold amounts previously mentioned. The Additional Medicare Tax also applies to many types of income such as income from self-employment.

Net Investment Income Tax

If you are into investments, then you may have to pay the Internal Revenue Service a Net Investment Income Tax for 2015. The investment tax income limits are based on the taxpayer’s filing status. The 3.8 percent Net Investment Income tax applies to individuals, estates and trusts that have certain investment income above certain set amounts. If you are married and are filing as married filing jointly, this threshold amount is $250,000. However, if you are married and filing separately, this set limit is $125,000. This makes sense since you are married and each of you have to file your own tax returns, then the amount is split in half. On the other hand, if you are single and filing as single or head of household, the set limit is $200,000. However, the statutory threshold amount is $250,000 for a person who qualifies for the qualifying widow (widower) with qualifying child filing status.

When we refer to net investment income, we are including income from interest, dividends, capital gains, rental income, royalty income and non-qualified annuities. However, don’t include wages, unemployment compensation, Social Security benefits or alimony. Additionally, you don’t include most self-employment income. The kind of income that is included in the Net Investment Income Tax is passive income that is a result of your investments. Complete Form 8960 to file and figure your net investment income tax.

If you pool your money to make certain investments, you must pay in enough money to cover the tax that will result from the income earned from your investments. This is especially true if this extra income makes you go over the set income thresholds. You must figure withholding not only for the Net Investment income tax but also for the extra income this will add to your overall income. If your withholding or estimated taxes don’t include calculations that include the Net investment income tax, you may be liable for not having paid enough and will probably receive an estimated tax penalty. So either increase your withholding at work or make extra estimated tax payments to avoid an underpayment of estimated tax penalty.   

There is other income to consider in your net investment income tax calculations. For purposes of the net investment income tax, include net gains from the disposition of property other than property held in a trade or business. The net investment income tax does not apply to property held in a trade or business. In addition, the net investment income tax does not apply to certain types of income which are excluded for regular income tax purposes. These excluded types of income are tax-exempt state or municipal bond interest, Veteran Administration benefits or the excluded gain from the sale of a principal residence.

So remember that if there is any income from investments, you may owe the investment income tax. Also, you may owe this tax if your income goes over certain limits. These limits are the income thresholds which apply to your filing status as previously mentioned. If you owe the Net Investment Income Tax, you must use Form 8960 with your tax return.

Same Gender Marriage

It took many states in the United States and many countries in the world to allow equal benefits to their citizens who are in same sex relationships for the Internal Revenue Service to finally follow the lead. States such as California offered the benefit of same sex taxpayers to file jointly on state tax returns. Then, you would have to file another two tax returns to for the taxpayers as single individuals. Now, same sex couples can also file as married filing jointly on their federal tax returns. The tax return figures and filing status for federal will just flow through to the state tax returns. The protections as married individuals under federal tax law have also been incorporated for same-sex married couples started on September 23, 2013. As a result of this new tax benefit for same-sex couples, the Internal Revenue Service has issued tax guidance for employers and employees to help them in following the new regulations regarding same sex couples. These guidelines include instructions on claiming refunds or adjusting FICA tax and employment tax items with respect to certain benefits provided for same sex spouses. The new laws apply regardless of where the couple lives. The couple can live in an area that recognizes same-sex marriage or a one that does not recognize the same-sex marriage. The new same-sex marriage ruling applies to all federal tax laws in the same manner that it applies to all couples filing a married filing jointly or married filing separate return. Couples can file amended returns to take advantage of the new tax law that includes the same-sex benefit provisions. A same-sex couple can file an amended return for prior years under the statute of limitations for filing amended tax returns, which is the later of three years from the date the tax return was filed or two years from the date the tax was paid. Same-sex couples can file an amended return by using Form 1040x for previous years in which they could not take the benefit of the tax law. That is, they can file amended tax returns only if they wish to do so.   

Maybe it is not too late to file an amended return and claim the tax benefits on previously filed tax returns. The statute of limitations for filing amended tax returns, which is the later of three years from the date when the tax return was filed or two years from the date when the tax was paid. Same-sex couples can file an amended return by using Form 1040x to claim tax benefits which they missed out on.  

The IRS has a general rule recognizing a marriage of same-sex spouses that was validly entered into in a domestic or foreign jurisdiction whose laws authorize the marriage of two individuals of the same sex even if the married couple resides in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages. For tax year 2013 and going forward, same-sex spouses generally must file using a married filing separately or jointly filing status. Additionally, for tax year 2012 and all prior years, same-sex spouses who file an original tax return on or after Sept. 16, 2013, generally must file using a married filing separately or jointly filing status. For federal tax purposes, the IRS has a general rule recognizing a marriage of same-sex individuals that was validly entered into in a domestic or foreign jurisdiction whose laws authorize the marriage of two individuals of the same sex.

The same rules apply for same sex married individuals when applying the head of household qualification rules. A taxpayer who is married cannot file using head of household filing status unless he or she can be considered unmarried for tax filing purposes.  However, a same-sex spouse can file using the head of household filing status if he or she can be considered unmarried or in this case not in a same sex marriage for tax purposes and lives apart from his or her spouse for the last 6 months of the tax year plus other requirements. If same-sex couples (who file using the married filing separately status) have a child, the parent who may claim the child as a dependent in the parent with whom the child resides for the longer period of time during the taxable year. If a taxpayer adopts the child of his or her same-sex spouse as a second parent or co-parent, the taxpayer may not claim an adoption credit for expenses incurred in adopting the child of the taxpayer’s spouse. 

In 1996, the Defense of Marriage Act (DOMA) passed in 1996 by Congress and signed by President Bill Clinton, forbade the federal government from recognizing same-sex marriages. However, later the  Windsor decision invalidated Section 3 of the 1996 Defense of Marriage Act (DOMA) that barred same-sex couples who were married from being treated as married under federal law. The notice gives examples of Code requirements under which the marital status of the participants is relevant to the payment of benefits. Additionally, the notice provides guidance on how to satisfy those requirements in light of Windsor and Revenue Ruling 2013-17, and describes when retirement plans must be amended to comply with Windsor, Revenue Ruling 2013-17, and Notice 2014-19 Recognition of marriages of same-sex couples for tax purposes.

Following the Windsor decision, the IRS issued Revenue Ruling 2013-17, which holds that married same-sex couples are now treated as married for all federal tax purposes where marriage is a factor, if the couple is lawfully married under the laws of one of the 50 states, the District of Columbia, a U.S. territory or a foreign jurisdiction. Notice 2014-19 gives additional guidance on how qualified retirement plans should treat the marriages of same-sex couples.

If its terms are inconsistent with Windsor or Revenue Ruling 2013-17, a retirement plan must be amended to comply with Windsor and Revenue Ruling 2013-17. For example, a plan must be amended if it defines “spouse” by reference to section 3 of DOMA, or only as a person of the opposite sex. Not all plans need to be amended in order to be in compliance. An amendment generally is not required if a plan’s terms are not inconsistent with Windsor or with Revenue Ruling 2013-17. Required amendments must be adopted by the later of December 31, 2014, or the applicable date under the IRS’ general amendment guidance for qualified retirement plans, Revenue Procedure 2007-44. Plan sponsors may also, but are not required to, reflect the outcome of Windsor for periods prior to the date Windsor was decided. In such a case, a plan amendment is required. Such optional amendment must be adopted by the later of December 31, 2014, or the applicable date under Revenue Procedure 2007-44.

If an employer provided health coverage for an employee’s same-sex spouse and included the value of that coverage in the employee’s gross income, the employee can file an amended Form 1040 reflecting the employee’s status as a married individual to recover federal income tax paid on the value of the health coverage of the employee’s spouse for all years for which the period of limitations for filing a claim for refund is open. . The Winsor decision which invalidated same sex copies from being able to file as married couple was reversed and now same sex couples can benefit from the tax law as other couples. They no longer have to file as single taxpayers. Same sex couples can now file as married filing jointly or as married filing separately.

The Affordable Care Act

The Affordable Care Act has become a big ticket item. The Affordable Care Act has made health care coverage affordable to millions of low income Americans. The Affordable Care Act contains provisions for health insurance coverage and financial assistance options for individuals and families. This new law is administered by the Internal Revenue Service and is included in the tax code. The provisions require you and each member of your family to have qualifying health insurance and it is called minimum essential coverage. You and everyone on your tax return must have minimum essential health coverage in order to avoid a penalty on your tax return. However, you or your family members can be exempt from coverage or make a shared responsibility payment when you file your federal income tax return if you qualify to be exempt.  

The Small Business Health Care Tax Credit

The Small Business Health Care Tax credit helps small businesses and small tax-exempt organizations afford the cost of offering coverage to their employees. The Small Business Health Care Tax Credit is a tax incentive offered to employers to help fill the health care coverage gap. The Small Business Health Care Tax credit is specifically targeted for those businesses with low and moderate income workers. Furthermore, The Small Business Health Care Tax Credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. This credit rewards the employers for their efforts in providing health care coverage to their employees. In general, the credit is available to small employers that pay at least half the cost of single coverage for their employees. To qualify for the credit for tax years beginning in 2014 and forward, a small employer must contribute toward premiums on behalf of each employee enrolled in a qualified health plan (QHP) offered by the employer through a Small Business Health Options Program (SHOP Exchange). Tax-free treatment for employer-provided health care to an employee’s child has been extended until the end of the year in which the child turns age 17.

The costs and reimbursements under employer health plans for coverage for an employee's eligible children are free of income taxes and FICA and FUTA taxes regardless of dependency tests.  Cafeteria plans are plans that allow employees to choose from a menu of at least one qualified benefit and a taxable benefit (such as cash). Employers with cafeteria plans can permit employees to pay for health coverage for children with pre-tax contributions. This tax benefit also applies to self-employed individuals who qualify for the self-employed health insurance deduction. The Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan on an employee’s Form W-2. Reporting the cost of health care coverage on Form W-2 is for informational purposes only.

The Premium Tax Credit

The Premium Tax Credit is to help low income families afford health insurance coverage. The Premium Tax Credit is part of the Affordable Care Act. The Premium Tax Credit can be claimed in advance or when you file your tax return. Starting in 2014, individuals and families who get their health insurance coverage through the Health Insurance Marketplace may be eligible for the Premium Tax Credit. In general, you may be eligible for the Premium Tax Credit if you buy health insurance through the Health Insurance Marketplace or if you are ineligible for coverage through an employer or government plan and are within the income limits. Your income can be below the poverty line to moderate income levels.

Starting in tax year 2015 and for the first time, taxpayers are able to report their health coverage on their individual tax returns. This reporting will entail simply checking a box to indicate that each one on their tax return has the required necessary health coverage. Some tax preparers are even set up to offer coverage to taxpayers and their families in case they have not yet taken advantage of available health care coverage. However, with the much publicity going on, many families will already have acquired their minimum health care coverage through the exchange.

If you file your tax return using the filing status Single, Married Filing Jointly, Head of Household or Qualifying Widow/Widower, you may be eligible for the premium tax credit if you meet other criteria. However, if you are married and you file your tax return using the filing status Married Filing Separately, generally you will not be eligible for the premium tax credit. As you may already know there are many limitations set in place for those who file as married filing separately.

During enrollment through the Marketplace and using information you provide about your projected income and family composition for the year, the Martketplace will estimate the amount of the premium tax credit you will be able to claim on your tax return. You must file a federal income tax return for any tax year for which you receive advance Premium tax credit payments in any amount or if you plan to claim the premium tax credit. You must file a tax return in this case even if you otherwise would not have made enough money to be required to file a tax return.

The Marketplace is the place to go to for your affordable minimum health insurance coverage and to avoid the fee for not having minimum essential health coverage. That is the purpose of the Health Insurance Marketplace or the exchange. It is designed to make health coverage affordable for everyone. If you get your health insurance coverage through the Health Insurance Marketplace, you may be eligible for the premium tax credit and make purchasing health insurance coverage more affordable. You must however, enroll in the open enrollment periods stipulated by the Department of Health and Human Services. The Department of Health and Human Services administers the requirements for the Marketplace and the health plans offered by this Marketplace. The open enrollment period to purchase health care insurance for 2015 was from November 15, 2014 through February 15, 2015. There was another enrollment period from March 15, 2015 to April 30, 2015. Many changes are still occurring in 2015 for the 2016 tax season.

Your income determines if you qualify for the Premium Tax credit. If you qualify for the Premium Tax Credit, you must get insurance through the Health Insurance Marketplace. You can choose to get the credit now in advance or get the credit later when you file your tax return. If you choose to get the credit now, it can help you pay for your monthly premiums. You can decide if you want to have all, or some or none of the Premium Tax Credit in advance directly to your insurance company. If you receive advance Premium Tax Credit payments in any amount or if you plan to claim the credit, you must file a tax return for that year. If you decide to claim the Premium Tax Credit later when you file your tax return, it will either increase your refund or lower your balance due. Waiting to receive your Premium Tax Credit as a whole when you file your tax return may be a good idea if you would like to get a bigger refund at tax time.

Individual Shared Responsibility Provision

If you have not applied for the proper health coverage by tax time, you will have to figure out at that time if you qualify for exemption, if you qualify for the Premium Tax Credit or if you have to make an individual responsibility payment. The individual shared responsibility provision requires you and each member of your family to have minimum essential coverage, an exemption from the responsibility of having minimum essential coverage, or make a share responsibility payment when you file your return in in 2016. Under the Affordable Care Act, the Federal government, State governments, insurers, employers, and individuals share the responsibility for health insurance coverage beginning in 2014. As a result, you will report minimum essential coverage, report exemptions, or make any individual shared responsibility payment when you file your 2015 federal income tax return in 2016. 

If you and your family need to acquire minimum essential coverage, you can acquire health insurance coverage provided by your employer or health insurance purchased directly from an insurance company. You can acquire health insurance purchased through the Health Insurance Marketplace in the area where you live, where you may qualify for financial assistance. You can also acquire coverage provided under a government-sponsored program for which you are eligible including Medicare, Medicaid, and health care programs for veterans. For purposes of the individual shared responsibility payment, you are considered to have minimum essential coverage for the entire month as long as you have minimum essential coverage for the entire month.

You may be exempt from the requirement to maintain minimum essential coverage and thus will not have to make a shared responsibility payment when you file your 2015 federal income tax return in 2016, if you have no affordable coverage options because the minimum amount you must pay for the annual premiums is more than eight percent of your household income. Also, you may be exempt if you have a gap in coverage for less than three consecutive months. Additionally, you may be exempt from coverage if you qualify for an exemption for one of several other reasons, including having a hardship that prevents you from obtaining coverage, or belonging to a group explicitly exempt from the requirement. Certain groups can be exempt from coverage for various legal reasons, including religious belief reasons.

Thanks to the Affordable Care Act, more Americans can now afford to acquire health coverage and more Americans that did not care to get minimum coverage are now obligated to do so. However, if there is no coverage available to you and your family that costs less than eight percent of your household income, you can qualify for an exemption. You may be exempt from coverage if you have no affordable options because the minimum amount you must pay for the annual premiums is more than eight percent of your household income. You may also be exempt from coverage if you have a gap in coverage for less than three consecutive months. Additionally, you could be exempt if you qualify for an exemption for one of several reasons such as having a hardship that prevent you from obtaining coverage or if you belong to a group exempt from the requirement.

You can find most information at HealthCare.gov to inform yourself on the health insurance options which are available to you, how to purchase health insurance coverage, and how to get financial assistance with the cost of insurance. Additionally, an exemption applies to individuals who purchased their insurance through the Marketplace during the initial enrollment period for 2014, which ran from October 1, 2013, through March 31, 2014. Furthermore, a hardship exemption applied from January 1, 2014, until the start of your health care coverage, which, if you enrolled between March 16 and March 31 would generally have been May 1. This hardship exemption may apply if you have been notified that your health insurance policy will not be renewed and you consider the other plans available to you unaffordable. 

There is an exemption from getting minimum health care coverage and you may qualify for such exemption. How you get an exemption from the requirement to maintain minimum essential health insurance coverage depends upon the type of exemption for which you are eligible. You can obtain some exemptions only from the Marketplace. You can obtain some other exemptions from the IRS. In addition, you can get other exemptions from both the Marketplace and the IRS. These exemptions most likely have to do with not being able to afford coverage due to income being at poverty level income or even below poverty level.  

The individual shared responsibility provision went into effect in 2014. You won’t need to report minimum essential coverage or exemptions or make any individual shared responsibility payment until you file your 2015 federal income tax return in 2016. If you or any of your dependents don’t have minimum essential coverage and don’t have an exemption, you will need to make an additional shared responsibility payment on your tax return. If you must make an individual shared responsibility payment, the annual payment amount is the greater of a percentage of your household income or a flat dollar amount, but is capped at the national average premium for a bronze level health plan available through the Marketplace. You will owe 1/12th of the annual payment for each month you or your dependents don't have coverage or 1/12th of the annual payment for each month you or your dependents don't have an exemption.

Calculation of the penalty amounts imposed due to lack of minimum essential health coverage can be a bit complicated. For 2015, the annual payment amount for not having essential health insurance coverage is whichever is greater of 1 percent of your household income that is above the tax return filing threshold for your filing status or your family's flat dollar amount, which is $95 per adult and $47.50 per child for a maximum of $285. If you or any of your dependents don't have minimum coverage and don't have an exemption, you will need to make an individual shared responsibility payment on your tax return. However, making this shared responsibility payment does nothing to help you with your health insurance costs. Nor does paying your shared responsibility payment offer your minimum essential coverage. Put it more simply, you have not health insurance coverage by paying your shared responsibility payment for not have minimum essential health coverage. In other words, you will be paying a penalty for lack of coverage, but sadly you will not be getting the minimum essential coverage.

New - Reporting Forms 1095-A, 1095-B, and 1095-C

The manner in which the authorities will know about your health coverage compliance depends on your situation. It could be that are already covered at work – there is a tax form for that. It could be that you are covered through the health insurance exchange – there is a tax form for that. Health insurance coverage is reported either on Form 1095-A, Form 1095-B or “Form 1095-C. Depending on what kind of taxpayer you are, you may have to file Form 1095-A, Form 1095-B or Form 1095-C. Starting in tax year 2015 there will be new filing requirements and new forms to complete and file regarding minimum health coverage. The forms required will depend on the different circumstances. Form 1095-A will required of those who purchased their health insurance from the health insurance marketplace. Taxpayers will be required to disclose their health insurance which is purchased through the health insurance Marketplace. Then there is Form 1095-B which is required of individuals and also of providers of minimum essential coverage whom are not exempt from minimum essential coverage. Providers are required by law to furnish Form 1095-B to the recipients of minimum coverage. Finally, there is Form 1095-C which is expected from large employers or Applicable Large Employers. Most taxpayers will have this Form 1095-C to present at tax preparation time.  

There are three new forms on which you can expect to have your minimum essential coverage reported to you. There forms are Form 1095-A, Form 1095-B and Form 1095-C. Minimum health coverage is required by law. The tax laws are in charge of making sure that these health care laws are followed. The tax laws are mainly concerned with the health coverage called the minimum essential coverage (MEC). If your dependent or an individual in your household is eligible for minimum essential coverage, you cannot take the Premium Tax Credit for this individual.

If you are an individual who is enrolled in a qualified health plan through the Marketplace, information will be reported to the Internal Revenue Service on you on Form 1095-A by January 31. Form 1095-A was provided to taxpayers by January 31, 2015 for the preparation of their 2014 tax returns. This reporting will usually be done by qualified Health Insurance Marketplaces. Form 1095-A will be provided to taxpayers in order for them to accurately prepare their tax returns. The information provided on Form 1095-A will facilitate the claiming of the premium tax credit for the taxpayer. If the taxpayer has received any advanced premium tax credit amounts, Form 1095-A will help them reconcile the advance premium tax payments when they actually claim the premium tax credit on their tax return. Form 1095-A is provided to taxpayers because they enrolled in health insurance coverage through the health insurance Marketplace.

Additionally, Form 1095-B is provided certifying that you are indeed in compliance with the minimum essential coverage health insurance requirements. Form 1095-B contains the information needed for you to accurately report your coverage information on your tax return. Take Form 1095-B to your tax preparer to have him or her prepare your tax return accurately. All individuals covered in your health insurance plan are listed on Form 1095-B. This form provides a certification that the taxpayer has complied with health insurance coverage for himself, his spouse and his dependents claimed on his or her tax return. If you look at Form 1095-B, you will see in Part IV asking for a listing of the covered individuals and it includes a column for name, SSN or DOB, and the months covered. So as you can see that Form 1095-B is very straight forward.

Then, we have Form 1095-C which is essentially identical to Form 1095-B except that it pertains to employer health insurance coverage and your employer will usually fill it out and provide it for you. For those of you who are lucky to have your employer worry about your health insurance coverage, this is where all your information about your and your family’s health insurance coverage is reported. This will be the case if your employer is a fairly large employer or an Applicable Large Employer. The employer or employers who are under this category will send you Form 1095-C regarding your health coverage information. You will use Form 1095-C to prepare your tax return and include the pertinent essential coverage information on your tax return. Form 1095-C is what many taxpayers will provide their tax preparer every tax season to have the tax preparer prepare the tax return for the year.

Finally, the Form 1095 filed will depend on your health insurance coverage circumstances. Therefore, whatever your coverage circumstances may be will govern which Form 1095 will apply to you. The coverage circumstances and the coverage you employ will govern whether you will receive the premium tax credit or not. Your circumstances may be as easy as you being exempt from the requirement to acquire minimum essential coverage to your large employer providing health insurance coverage to you regardless if you are exempt from the requirements. However, if you are self-employed you may have to look for your own minimum health coverage though the Marketplace. Again, the different circumstances will determine if you will use Form 1095-A, Form 1095-B or Form 1095-C and the different obligations to provide these forms to the Internal Revenue Service. Ultimately, the penalties and minimum responsibility amounts will be based on the information reported on these forms.     

Extensions of Time to File Your Tax Return

Sometimes special situations gets in the way and you are simply not able to file your tax return by the normal due date. Don’t despair. You can send an automatic extension of time file a tax return. Yes, you heard right, if you cannot file your tax return on time, you can request an automatic extension of time to file. Send the money you owe with the extension, though. Please note that an extension of time to file a tax return does not grant you an extension of time to pay the tax liability. You may be able to get an automatic 6-month extension of time to file your tax return. In order to ask for your extension, you must use Form 4868, Application for Automatic Extension of Time to File U.S. Individual Tax Return. You must file this form by the due date of your tax return for filing your calendar year report or your fiscal year return. This time is usually April 15 or if the 15th falls on a Saturday, Sunday or legal holiday, then the following business day.

Now if you are member of the military, you have many tax advantages which include extended extensions of time to file your tax returns. You especially have special privileges is you are living outside the United States or out of the country when your 6 month extension expires. You also receive special privileges if you are serving in a combat zone or a qualified hazardous duty area.

You can send your request for extension of time to file by mail or you can do it electronically. You can request an automatic extension of time to file a U.S. individual income tax return by electronically filing Form 4868. You can also request an automatic extension of time to file a U.S. income tax return by paying all or part of your estimated income tax due using a credit or debit card or by using EFTPS. Additionally, you can request an automatic extension of time to file a U.S. individual tax return by mailing out Form 4868 to the IRS. Businesses need to fill out Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns. Corporations would file Form 1138, Extensions of Time for Payment of Taxes by a Corporation Expecting a Net Operating Loss Carryback. Therefore, if you are not able to file your tax return on time, whether you are an individual, a business or a corporation, you always have the option to ask for more time. At the time your extension expires, you can always ask for additional time by contacting the IRS and requesting an additional extension of time to file.

When, Where, and How to File

It is common knowledge that April 15 is the due date of your tax return every year. April 15 of each year is the due date for filing your federal individual income tax return if your tax year ends on December 31. If your tax year ends at any other time, then the usual filing deadline would be on the 15^th day of the fourth month after your tax year end. Also, your return is considered filed timely if the envelope is properly addressed and postmarked no later than April 15. Remember, if you cannot file by the due date of your return, then you can request an extension of time to file. It is extremely important that you know that an extension of time to file will not extend the time to pay. You must also realize that an extension of time to file will not save you money on interest and late payment penalties. Finally, as stated previously, an extension of time to file is not an extension of time to pay. 

Most of the western part of the country files their tax return either to Fresno, California or to San Francisco, California. Other the other hand, most of the eastern part of the country files their tax returns to either Kansas City, MO or to Hartford, Connecticut.

Why not file electronically? It is so much easier and many times you can even get the service for free. Filing electronically allows you to receive your refund much faster, usually within 3 weeks after the IRS receives your tax return. If you are getting a refund, you money will be a lot safer and faster if you have it directly deposited into your checking or savings account. Many tax professionals are obligated to offer electronic filing to their clients and there isn't much leeway for them as to the manner of filing their clients' tax returns. So now filing a paper tax return for their clients is no longer an option for many tax professionals. A tax preparer who loses his or her right to file electronically, will simply not be able to offer tax preparation services. A tax preparer who files 11 or more tax returns must file them electronically. The client may not wish to file the tax return electronically. In that case the tax preparer must obtain a signed affirmation from the client that he or she does not wish to file their tax return electronically. The tax preparer may have to attach Form 8948, Preparer Explanation for Not Filing Electronically, to the tax return to explain the reason for filing a paper tax return. If you are a tax preparer who cannot participate in electronic filing for whatever reason, filing Form 8948 for every tax return your prepare will most probably never fly.

IRA - One Rollover per year limit

A rollover allows you to change your IRA account to a different account or to a different kind of IRA. Most of the time IRA rollovers are voluntary, but sometimes you may simply not have a choice. If your ties with the company you work for end, you may be forced to rollover your IRA that you have established with that company. Different companies have different retirement plan set-ups and even work with different financial institutions which deal with their individual retirement account matters. The company which you sever from may not be using the same financial institution which your new employer is using. In this case, your only option would be to rollover your IRA into another IRA with a different banking institution. 

This year, there are very important changes to IRA rollovers what start on January 1, 2015. This change will require you be limited to the number of IRA rollovers you can make within a twelve month period starting January 1, 2015. All IRA types will be treated as one IRA for purposes of the new limitation set by the Internal Revenue Service. There are a few exceptions though. For example, trustee-to-trustee transfers between IRAs will not be affected by the new rule. These types of transfers will not be limited. The same goes with rollovers from traditional to Roth individual retirement accounts. They also will not be limited. This means that if you have these kinds of transactions regarding your IRA transfers and rollovers, the new tax law will not apply to these transfers or rollovers and you can make as many rollovers as you need to make. You don’t have to worry about this new as long as you have less than three IRA rollovers in the year.  

There was a grace period in 2014 to help taxpayers with the new law. Anything that happened in 2014 before the January 1, 2015 set start date, will not count towards the 12 months period for IRAs rolled over in tax year 2015. This transition rule applies only to 2014 distributions and only for different IRAs involved. Starting January 1, 2015, if you rolled over one IRA to another IRA, you done, you cannot rollover another IRA for another 12 month without incurring the early withdrawal penalties. This means that whatever IRAs you were not able to rollover must be included in your gross income and pay the tax on the amount and the 10 percent early withdrawal penalty on these amounts which you included in your federal gross income. There may be other penalties involved such as the excess contribution penalties and the 6 percent excise tax on excess contribution amounts. Remember the one-rollover-per year rule only applies to rollovers. If you transfer funds from one IRA trustee to another, the transfer will not usually be considered a rollover and therefore the one rollover per year rule will not apply to this type of transaction.

Health care: individual responsibility

The health care minimum coverage obligation is hardly new news now. Just in case you don’t own a TV set or you don’t ever logon to the internet, everyone must have basic health insurance coverage in place by now. That is unless you are legally exempt from acquiring minimum coverage. Even if you are legally exempt from acquiring minimum coverage, you should get some form of protection. You and each one of your family members must get minimum essential coverage, qualify for coverage exemption or make a shared responsibility payment when you file your 2015 tax return. Be smart about this. Making the shared responsibility payment on your tax return does not automatically cover you for health insurance. This shared responsibility payment is more of a penalty for not having basic health insurance coverage. If something happens to you, you will probably be restricted to emergency health care at your county hospital and we all know how that is like.

Let’s look at what minimum essential coverage includes. Minimum essential coverage includes health insurance coverage that is provided by your employer. Minimum essential coverage would include coverage purchase through the Marketplace which normally involved some form of financial assistance from the different government agencies. Many individuals are eligible for Medicare, Medicaid, or veteran health benefits and these people also meet the minimum essential coverage requirement. Therefore, minimum essential coverage also includes Medicare, Medicaid or veteran health benefits. Furthermore, there are people who have always have had some form of health insurance which they have purchased from their insurance company. For these people, walking around without health insurance is like driving without car insurance. Still many individuals who are dependent on the welfare system enjoy coverage through the Department of Health & Human Services and therefore have nothing to worry about when it comes to medical problems and meeting the new minimum health insurance coverage regulations. If you have any of the aforementioned, you are set, just indicate such on your tax return or let your tax preparer know the coverage information so they can mark off the correct boxes on your 2015 tax return.

Then again, you may be exempt. How are you considered exempt depends on your exemption eligibility. Being exempt has to do with your income. If the minimum amount of your annual premium is more than 8 percent of your household income, you may be exempt. You may also be considered exempt if there is a gap in coverage of less than three consecutive months. If you are going through some kind of hardship and therefore you are not able to get coverage, you may be exempt for that reason. You could also be exempt if you belong to a group which is exempt from the requirement to acquire coverage. Again, even if you are exempt from acquiring minimum essential health coverage, you should find some kind of protection because you never know what can happen.

Advance payments of the premium tax credit

The government is there to help you afford your minimum essential health coverage. In order to get advance payments of your premium tax credit, you must purchase your minimum essential health coverage through the Health Insurance Marketplace, better known simply as the Marketplace. Part of the Affordable Care Act is the financial assistance in the form of the premium tax credit for taxpayers who qualify for the credit. You can get these assistance payments in advance by providing the correct qualifying information to the Marketplace about the expected household income. You also need to provide information about your family size for the year. Just like when you pay in on every check through withholding, the advance premium tax credit payments will be reconciled at tax time when you file your tax return. If you fail to keep the Marketplace informed about important changes to your life, they may issue too much advance payment or too little and at tax time, your amount which was overpaid or underpaid will affect your refund or amount due when you file your tax return in tax season.

However, if you received too much money in advance for the premium tax credit, you may not have to pay it back. After all, estimating the amounts is not exact science and the end results will be under, over or close enough. The goal is that the amounts are close enough. Paying the amount back depends on your household income and family size. Paying the overpayment back depends on how much money you make under or over the poverty level. If your household income is less than 400 percent of the poverty level, you may be saved from paying the money back or at least will not have to pay the entire amount back. On the other hand, if your income is 400 percent or more above the poverty level, you definitely must repay the entire amount which was overpaid. On the other hand, do the calculations, you most likely will not need to pay the advance Premium tax credit payments back if you qualify.

To figure you credit and claim it or to reconcile your advance premium tax credit payments, you must file Form 8962. You will base your responses to Form 8962 by looking at your Form 1095-A which you received from the Health Insurance Marketplace detailing what has transpired during the tax year. In case you do not received Form 1095-A from the Marketplace, you should contact them in order to request a duplicate of the form. They will send you a copy by mail, email, or they will probably be able to fax you a copy.

Form 1095­A

So remember Form 1095-A is the form used to report minimum essential health coverage enrollment to the Internal Revenue Service. In this Form 1095-A, you will find all the pertinent information on the insurance coverage for the insurance recipient. This is the form that will be used at the end of the tax period to reconcile the information between the Marketplace and the Internal Revenue Service. This is the form that will be required to be furnished by the Marketplace to the insured and to the Internal Revenue Service. This form will also be requested by the tax preparer in order to prepare the taxpayers tax return at tax time. Form 1095-A will be required to be provided in print form. However, the recipient can agree or must consent to receive this form by electronic means if the Marketplace wants to use this method of providing the form.

Medicaid waiver payments

The Medicaid payments that may be excluded from income are the payments excludable under Section 131 of the Internal Revenue Code. These are the Medicaid waiver payments. To be excludable the payments must fall under the “difficulty of care” category. The individuals that would require this type of care are individuals who would need to be in a hospital, nursing facility or care facility in order to get this type of care. Therefore, in order to be able to exclude these payments as waiver payment under section 131, the care must be provided in the provider’s place where the provider and the person taken care of live. Any care that is provided off the care provider’s home is not eligible to be excludable. The care provider’s home must also be the care receiver’s home and the care provider must not have a separate home. The difficulty of care idea requires the care taker to be so devoted to the care of the individual, that it is a requirement for the care taker to also live in the same home as the individual receiving the care. This requirement is very well thought because if it wasn’t, there could be too much room for abuse of the Medicaid waiver payment exclusion provision.

Tax Increase Prevention Act of 2014

On December 19, 2014, a new Tax Increase Prevention Act of 2014 was signed into law. The new tax extenders are part of another extender that expired on December 31, 2013 and even some from 2009. This new tax law affects many tax benefits and deductions that were set to expire at the end of 2014. There extenders include items for individuals such as the tax deduction for mortgage insurance premiums and deductions for qualified tuition and related expenses. Additionally, the new Tax Increase Prevention Act of 2014 includes tax break extensions for business such as the tax credit for research activities and the work opportunity tax credit.

Furthermore, there are many credits and deductions that encompass the environment and energy crisis such as credits for home energy efficiency improvements, alternative vehicle fuels and energy-efficient homes. Remember, these are credit which have already expired, which were extended to the end of 2014 or simply expired at the end of 2014. Many individuals, groups and business are count on these tax breaks to help with the high cost of living. The purpose of these credit and deductions are to help certain individuals and certain businesses and give them incentives to improve their lives or to improve the environment in some way. If the incentives are withdrawn, then the effort invested in the first place will deteriorate. For example, many of these incentives focus on the environment. As a result of these incentives we have cleaner air and our roads are less congested. When it comes to education, our citizens are better educated thanks to the tax incentives for education. Therefore, extending the many tax breaks only makes sense. Individuals and business can continue to enjoy the incentives given in the form of tax credit and tax deductions and in turn everyone benefits as a whole benefits from the fruits of these incentives. We get better air, water, less stress in the highway and better educated individuals.

The American economy is still not doing so great. Therefore allowing for extensions on these tax breaks makes very much sense. These tax provisions can further boost the economy and help taxpayers who are still struggling with their economic situations.

Tuition and fees deduction

One of these expiring deductions which are part of the Tax Increase Prevention Act of 2014 is the tuition and fees deduction. Taxpayers who claim these deductions are individuals who attend school and have qualifying school expenses such as for registration and books. You have a tuition and fees deduction available if you, your spouse or any of your dependents are going to school and you have certain qualifying education expenses to deduct. You can take a tuition and fees deduction on your directly on your Form 1040 return for federal as an adjustment to income. You don’t have to itemize your deductions, in order to take the tuition and fees deduction for you or your qualifying person. However, you probably should compare credits and deductions before you claim the tuition and fees deduction on Form 1040. The American opportunity tax credit or the lifetime learning credit may be a smarter choice to make. You could also take a business expense on Schedule A instead of claiming the tuition and fees deduction. Look at all four of these and make your choice accordingly. You cannot use the same expenses for other credits or deductions if you use them for the tuition and fees deduction. Also, you can only claim one of the deductions or credits and not all four. Choose the one that will give you the better tax advantage.

You can take a tuition and fees deduction that can reduce your taxable income up to $4,000. It is taken as an adjustment to income which means you don’t have to itemize to take the deduction. You can take this tuition and fees deduction if your filing status is single, married filing jointly, head of household, qualifying widow (or widower) but not married filing separately. Additionally, as with many other tax deductions and tax credits, if you may be claimed as a dependent on someone else’s tax return, you will not qualify for the tuition and fees deduction. If you paid your educational expenses with tax free money such as scholarships, fellowships, grants, or certain education savings account funds such as Coverdell education savings account, tax-free savings bond, or employer-provided education, you will not be able to claim the tuition and fees deduction for items paid with these funds.

There are many tax breaks for higher education currently in place. There are so many tax breaks for higher education that the Internal Revenue Service has a booklet that is about eighty pages long to explain the different higher tax credits and deductions available for taxpayers who wish to further their careers. The tuition and fees deduction may expire for good, but there are still many other higher education credits available from which to benefit.

Deduction for educator expenses

Another of these expiring deductions which is part of the Tax Increase Prevention Act of 2014 is the deduction for educator expenses. If you are an eligible educator in the kindergarten through the 12^th grade and if you meet other requirements, you can take an educator expense deduction on your tax return. The amount you can deduct up to $250 for amount you paid for books, supplies, and other items such as equipment for use in the classroom. This credit is not offered to educators higher than the 12^th grade. Those colleges and universities are making a lot of money and it is a shame that they don’t provide their overpaid instructors with supplies for the classrooms. With grade schools and high schools, it is a different story. These classrooms are normally over-packed to accommodate the large amount of students enrolled. These schools are dependent on grants from state and the federal government to operate. For good reason, there is not enough money to go around to provide for supplies for the classroom. They should though. How else can a teacher teach if he or she does not have chalk or paper to perform his or her work. In additional to being a school teacher who teaches grade kindergarten through the 12^th grade, the teacher must have worked at least 900 hours in the school year for providing elementary and secondary education. This will exclude any part time teachers from trying to take an educator expense tax deduction.

You do know that $250 is pocket change and that this is a deduction and not a credit? Not only do teachers who teach kindergarten through the 12^th grade get compensated poorly, but they are getting deductions such as this $250 educator expenses deduction which is quite inadequate. Quite honestly, this deduction should be considered an insult by the taxpayers who have one of the most important professions in the world. So let us assume that you do get this deduction and you are a teacher in the 15 percent tax bracket. Furthermore, let’s just say, for simplification purposes, that the tax rate is roughly about 10 percent. You are giving this teacher a tax benefit of $25 for their hard work - talking about not being worth the effort.

Deduction for state and local general sales taxes

In order for you to deduct certain taxes you paid, you must meet some fairly simple requirements. First, you must have paid the tax in the year you are trying for the deduction. Second, you must be the person responsible for paying the tax. To be responsible for paying the tax means that the tax is imposed on you. This is a very simple concept as it makes very much sense. For the most part, any items you want to deduct can only be claimed if you both paid for the item and you have the responsibility to pay for the item. The requirement to have paid and to be responsible to pay is a requirement for almost every credit and tax deduction you can take.

You can usually take a deduction for only four types of taxes. These taxes are at the personal level and for nonbusiness purposes. If the tax is for business purposes, you are better off claiming a business deduction for it anyways. The four types of taxes that can be deductible are state, local and foreign income taxes, real estate taxes, personal property taxes and general sales taxes. These are the type of taxes that you can take a deduction for on lines 5 through 9 on federal Schedule A of Form 1040.

One of these types of taxes was set to expire at the end of 2014. This is the state and local general sale taxes that normally go on line 5a of Schedule A. Now this tax is part of the Tax Increase Prevention Act of 2014 and they continue to be deductible as usual until December 31, 2014.  

Included in the list of items that can be deducted as taxes paid on Schedule A are any estimated taxes paid to state or local governments during the year, and any prior year state or local tax that you paid in 2015. This would also include any mandatory contributions by employees to a state benefit fund which provides protection against loss of wages. Any taxes that cause an improvement to your property are usually not deductible. You would increase the basis of your property instead. In addition, you cannot deduct federal income taxes, Social Security taxes, transfer taxes, homeowner association fees, estate and inheritance taxes, and service charges for utilities. Most takes are deductible on your Schedule A with your Form 1040 tax return. The ones that are not deductible are federal taxes and the taxes which are specifically noted as not deductible.

Exclusion from income of qualified charitable distributions from IRAs

Sometimes the ability to be able to donate your individual retirement account proceeds to a charitable contribution can be an important tax move. This could be due the taxpayer being in a high tax bracket and making the donation would lower the rate and ultimately provide a greater tax benefit. The last day for making a charitable donation from an IRA was supposed to be December 31, 2014. This benefit became part of the renewed tax credits and deductions of the Tax Increase Prevention Act of 2014. As a result, the exclusion from income of qualified charitable distributions from IRAs was extended and can be claimed in tax year 2014. However, we need to wait and see if this provision will also be extended for tax year 2015. It is hard to tell so you just need to keep your fingers crossed and be ready to take action toward the end of the year when an extension will be announced if there is going to be an extension of this provision for tax 2015.

Credit for certain nonbusiness energy property

Making adjustments for energy conservation to your home could bring both tax savings and also energy savings. Everyone wins when someone decides to make energy conservation improvements to their home. The two residential energy credits are the residential energy efficient property credit and the nonbusiness energy property credit. Taxpayers who make qualified energy efficient improvements to their home can get a credit of 10 percent of the cost. These improvements include adding insulation, energy efficient windows and doors and certain roof installations. However, installation of these items is not included in the credit calculation. Certain high efficiency heating, air conditioning systems, high efficiency water heaters and stoves that burn biomass fuel including the installation costs for these, can be used to claim an energy efficiency credit. The life time limitation on this credit is $500 and only $200 can be used for energy efficient windows. Any qualifying improvements made to the property must have been made to a taxpayer’s principal residence in the United States and placed in service before January 1, 2014. The nonbusiness energy property credit has been extended through December 31, 2014 as a result of the Tax Increase Prevention Act of 2014. There is no information as to any extension beyond December 31, 2014.

Deduction for mortgage insurance premiums

The mortgage Insurance premiums deduction is another one of these items in the Tax Increase Prevention Act of 2014 provision. This deduction was extended through December 31, 2014 and there is no word whether it will be extended beyond December 31, 2014. The mortgage insurance premiums deduction is for qualified mortgage premiums paid in 2014. There are talks about a possible extension of this deduction but nothing has been said for certain.

Pell grants and other scholarships or fellowships

Many taxpayers think that just because money they received for school is money you receive because you are at a lower income tax bracket, that it must be totally tax free. However, some of these grants could be taxable depending on the circumstances. Scholarships and other grants similar to scholarships such as Pell grants and fellowships can be tax free if they meet certain requirements. Normally you will meet the requirements if you are candidate for a degree in a school that is in the business of education by maintaining a regular faculty and a curriculum with the normal student attendance. Also the amounts that you received and want to make excludable are used to pay for tuition and fees required for enrollment at the education institution. Any other amounts which you receive that are not used for these purposes such as amounts used for room and board, travel and amount received for payment for teaching or research must be included in taxable income.

Standard mileage rates for 2015

As with the other deductions and credits adjusted for annual inflation, the standard mileage rates for 2015 are also being adjusted for the cost of living increase in 2015. The standard mileage rate for 2015 is 57.5 cents per mile for miles driven for business purposes. This rate was 56 cents for 2014. However, the standard mileage rate for 2015 decreases for miles driven for medical or moving purposes to 23 cents. For 2014 the rate was 23.5 cents. If you drive your car for charitable organization contribution purposes, the mileage rate is 14 cents per mile driven in 2015. The rates are based on a study of the usual costs of operating a car which includes depreciation, insurance, repairs, maintenance, gas, oil and even tires. The study was probably done a long time ago and now the costs are being adjusted to reflect the new cost of living increases or annual inflation. As to why the cost of mileage driven for medical purposes decreasing seems to be due to the ACA less emphasis placed on deductibility of medical expenses. The medical expense deduction allowances have actually decreased to encourage people to pay for the affordable care act minimum coverage insurance instead. With the new requirements and with more and more taxpayers being enrolled there will be less individuals with high medical costs.

If a taxpayer is claiming accelerated depreciation such as the section 179 deduction, he or she will not be able to deduct the business standard mileage rate of 57.5 cents per miles on that vehicle. The section 179 deduction is considered a deduction for actual business expenses. The standard mileage rate includes depreciation in the 57.5 cents per mile calculation. The code continues to disallow a standard mileage deduction for fleet owners such as taxicabs. A fleet owner is someone who has more than four vehicles used simultaneously such as is common with limousines and taxicabs.

Mailing your return

Make sure you mail your tax return to the correct address. You will see a list of places to mail your tax return. If you happen to mail to the wrong area, it will still get processed but the processing of your tax return may be delayed. There has been a change to where you mail your tax return if you are Missouri resident. Missouri residents need to mail their tax return to a different address starting with tax returns filed for tax year 2014. The complete addresses of where to mail your tax return are listed in Publication 17.

What’s New for Form 1099­B

If you have proceeds from stock transactions, you will receive a Form 1099B from a broker or barter exchange. Form 1099B will show all proceeds of all stock transactions. The new thing to note for this year for Form 1099B is in regard to wash sales which have occurred at market discounts. The sale of a debt instrument which is a wash sale and has occurred at market discount needs to be coded as code “W” in box 1f. Any amount of a wash sale loss will be disallowed and entered in box 1g of Form 1099B.

Changes to Direct deposit

Everyone is on fraud and identity theft watch nowadays. Identity theft has turned into a big money maker for many. Not only are identity theft criminals making money on identity theft but also the businesses which offer the protection against identity theft. You see ads on TV all the time about identity theft programs that can guard your social security and offer you defense against the identity fraud thieves.

The Internal Revenue Service is also cautious about identity theft and fraud. Now you can only have three direct deposits to a single account per year. Once you had three direct deposits into your account, the Internal Revenue Service will send you paper checks instead. This will be done in order to combat fraud and identity theft. How limiting the number of direct deposit to three per year is going to prevent fraud or identity theft is a mystery. You would figure that even after the first try the victim would find out right away that a crime has been committed against him or her.

As many are already aware, identity theft is a crime and the act of someone obtaining and using your name or personal data to obtain economic gain on your good name or information. Most often this kind of fraud involves using your personal information such as your social security number for obtaining items on credit.

The criminal gets information on the victim in a number of ways. Shockingly to hear that criminals use a method called “shoulder surfing” to get your information. This is quite alarming! You mean to tell me that this is so common practice that they even have a name for it. You know that if there is a name for this, it is something that is already happening all the time. Other methods used to get a victim’s information involves digging through threw trashcans for personal information. There are many other means of obtaining the victim’s personal information. The different statute violations will indicate which methods are used by criminals. There are few such as Identification fraud, credit card fraud, computer fraud, mail fraud, wire fraud and financial institution fraud. Violation of these is considered a felony and the penalties for violation of these statutes can be as high as thirty years in prison.

However, how limiting the number of direct deposit to three per year is going to prevent fraud or identity theft is still a good question. You figure that you would catch it right away with the first time it happens. It is not customary that a taxpayer receive more than one direct deposit from his or her taxes in a single year. The last time we checked, taxpayers only file one tax return per year that would require some form of refund. Unless the Internal Revenue Service is paying taxpayer is installments, we don’t see how this new rule affects many taxpayers.   

Direct Pay

Now the Internal Revenue Service gives you the option to use IRS Direct Pay to pay your taxes. The service is safe, easy and free. Previously, the service was available through a third party who would charge you a convenience fee for paying electronically. Now, you can make your tax payment using your checking or savings account with IRS Direct Pay. The best part is that it is a free service. This is a new feature added by the Internal Revenue Service for the taxpayer’s convenience. The taxpayer can now have his or her refund directly transferred to his or her bank account and get the refund much faster than by receiving a paper check. 

Qualified parking exclusion and Commuter transportation benefit

If you live in a large city, you know how horrible finding parking can be. When you do find parking, the expense of parking is really up there. Also, if you live in a large city, you know how congested the traffic is for many trying to get to work. It only makes sense that there are incentives in place for finding alternative transportation methods to commute to work.

Luckily, there are tax incentives for parking and finding alternative methods to commute to work. For tax year 2015, you can exclude qualified parking of $250 per month. You can also exclude $130 of commuter highway vehicle transportation and transit passes. The commuter Parity act of 2015 will provide for exclusion from gross income certain transportation benefits provided by an employer to an employer. This benefit includes a monthly exclusion amount of $235 for transportation in a commuter highway vehicle from home to work. It also includes the exclusion from income of any transit passes provided by the employer. The Commuter Parity Act of 2015 allows the exclusion of $235 per month of qualified parking and an exclusion of $35 for qualified bicycle reimbursement.

Contribution Limit on FSA

An FSA is a flexible spending account arrangement set up through an employer. For 2015 the salary reduction contribution limit that an employee can request is limited to $2,550. A flexible spending arrangement (FSA) is a type of cafeteria plan. This type of plan allows employees to elect to receive cash instead of benefit that can be excluded from wages. If the employee chooses the benefit instead, the benefit will not be considered taxable. The nontaxable benefits that the employee can elect to receive instead of cash are accident and health benefits, adoption assistance, dependent care, group-term life insurance or health savings accounts (HSAs).

Mortgage insurance premiums treated as qualified residence interest

There has been an extension for mortgage insurance premiums (MIP) treated as qualified residence interest. The extension was set through December 31, 2014. This is part of the Tax Increase Prevention Act of 2014. This amount would go on box 4 of Schedule A. There is no word as to any extensions beyond December 31, 2014.

Tax-free distributions from individual retirement plans for charitable purposes

As part of the Tax Increase Prevention act of 2014, you can make a tax-free distribution from an individual retirement plan to your charitable organization. The law was extended through December 31, 2014. You qualify for this extension for your contribution made by December 31, 2014 if you age 70 ½ or older and you made a qualified charitable distribution. Your charitable distribution transfers were made to an eligible charity and it could be up to $100,000 per year. Any amounts distributed can be excluded from income and you don’t have to itemize to enjoy this benefit. This amount distributed can be counted towards meeting the required IRA required minimum distribution. This benefit originally expired at the end of 2013 but was extended to December 31, 2014. However, there is no word of an extension beyond December 31, 2014 at the moment.

There are many other credits and deductions which are part of the Tax Increase Prevention Act of 2014. Credits such as the New Markets Tax Credits Extension Act of 2015 are under review with the possibility of an extension for tax year 2015.

Another credit that does not seem to be in the works to be extended beyond December 31, 2014 is the Work Opportunity Tax Credit. This credit was for employers who hired members of targeted groups and in return would receive a special credit when they provide the paperwork showing that they had hired individuals from certain less privileged groups. This tax incentive was to benefit employees with higher barriers in acquiring employment and employers who hire them benefited by receiving tax incentives.

Another benefit that was part of the extended Tax Increase Prevention Act of 2014 is bonus depreciation. This benefit was a benefit of 50% bonus depreciation for businesses. The extension was through December 31, 2014. There is no word at the moment of any further extensions for this benefit.

Extension of enhanced charitable deduction for contributions of food inventory

The enhanced charitable deduction for contributions of food inventory was part of the Tax Increase Prevention Act of 2014 which has expired again on December 31, 2014. Legislation H.R. 644 will make the enhanced deductions of food inventory a permanent deduction. The America Gives More Act of 2015 was passed on February 12, 2015. This legislation includes items that are of charitable contribution nature. They are IRA charitable rollover, the Enhanced charitable deduction for food inventory and the Enhanced charitable deduction for land conservation.

Extension of increased expensing limitations and treatment of certain real property as Code section 179 property

When taking a depreciation deduction you can take a deduction in increments as part of a depreciation schedule or in equal amounts over the useful life of the asset. When you first place the asset in service, you have an option to expense it using a process called a section 179 depreciation deduction. This depreciation deduction was increased to amounts above the usual $25,000 per year maximum amount. The temporary allowed section 179 depreciation deduction was up to a limit of as much as $500,000 per year. An extension of the Section 179 benefit was approved as part of the extender benefits under the Tax Increase Prevention Law of 2014. This expired on December 31, 2014 and Congress is working on possibly extending the benefit beyond December 31, 2014. If the benefit does not get extended beyond December 31, 2014, it will revert to the $25,000 maximum amount allowed per year.

Small Business Stock

Part of the small business stock that is held for more than five years qualifies to be excluded from gross income. The exclusion has been 50 percent but was temporarily increased to 100 percent through December 31, 2014. The extended temporary exclusion of 100 percent of gain on certain small business stock was set to expire on December 31, 2014 and it does not seem to be any indication of this provision being extended beyond December 31, 2014. Taxpayers had until December 31, 2014 to take advantage of Section 1202 provision which allowed them to exclude 100% of the gain realized on the sale or exchange of qualified small business stock. After that and if the provision is not extended beyond December 31, 2014, the exclusion will revert to only a 50% exclusion. Furthermore, this 50% exclusion will be subject to the Alternative Minimum Tax and therefore not much of a tax savings will be left over after you apply the Alternative Minimum Tax.  

Gains from qualified small business stocks may qualify for a partial or all tax-free rollover of any gain. To qualify, the stock must be from a C corporation and originally issued after August 10, 1993. Now if the 100% exclusion provision that was temporarily extended until December 31, 2014 by means of the Tax Increase Prevention Act of 2014 is not extended beyond December 31, 2014, you will only be allowed to exclude from your income only up to 50% of your gain from the sale or trade. In order to qualify, the stock must have been held by you for more than five years. The exclusion is limited to ten times your basis in all qualified stock or $10 million. You are limited to $5 million if you are married and you file separately. Then you minus any amount of gain form the stock of the same issuer which you used to figure your exclusion in earlier years. You need to report the sale or exchange on Form 8949, part II.

Second generation biofuel producer credit

The second generation biofuel producer credit was extended by means of the Tax Increase Prevention Act of 2014. It will expire on December 31, 2014 for biofuel sold or used after 2014. If the credit is extended, you can continue to claim it beyond December 31, 2014. There is currently no word to whether this credit will be extended beyond December 31, 2014.

Energy-efficient products

The whole world is looking for ways to be more energy efficient. Now we are all well aware of the pollution caused by certain energy producing facilities and products. May individuals are trying their hardest to come up with new ways to create energy that is more environmentally friendly. As a result of this effort, our world will become a cleaner and safer place to live. Taxpayers and companies who are seeking ways to improve the environment will most often be compensated by different new tax laws that reward them for their environmentally sound efforts.

Be on the lookout for possible extensions on tax breaks for energy efficiency products, homes and automobiles. Many of these energy efficiency products were part of the Tax Increase Prevention Act of 2014 that expired on December 31, 2014. There was an extension for tax credits with respect to facilities producing energy from renewable resources and also a credit for energy-efficient new homes. Additionally, there was a credit for the use or production of certain fuels and for alternative fuel vehicle refueling property which have expired on December 31, 2014. Many of these are still in the works for possible extensions for tax years beyond December 31, 2014. Before the December 31, 2014 deadline extension, these credits and tax incentives where part of the American Recovery and Reinvestment Act which had originally expired December 31, 2013.

Self-Employment

Many taxpayers choose to be self employed and enjoy the freedom from being his or her own boss.  Most of the time, self employed individuals are self employed voluntarily for tax purposes, but other times self employment treatment is not voluntary. Your employer could have a different set-up where you are considered to be self employed for tax purposes even though you really are not self-employed. You could be a statutory employee, for example, and be responsible to pay your own taxes on the self-employment income. You would be responsible for filing a tax return just like if you were self employed although you are really not self-employed. The good part of this is that you would be able to deduct business expenses incurred as a statutory employee. What is new in regards to self-employment income? The amount for earnings from self-employment income or that are subject to social security tax is $118,500 for tax year 2015. Therefore, if you earned more than $118,500, the amount that goes over this amount will not be subject to social security taxes. However, in regards to Medicare, there is no such limit. Every penny you earn is subject to Medicare tax.

One of the perks of being self-employed or being treated as a statutory employee is the ability to deduct certain expenses such as your actual car expenses or standard mileage for driving your car for business purposes. The cost of operating your car, van, pickup or panel truck is either the actual costs of operating the vehicle or 57.5 cents for each mile that is for business use in 2015. You can also deduct certain meals and entertainment expenses and the list goes on.

Tax Related Identity Theft

If someone uses your social security number to file a tax return, then you are a victim of tax related identity theft. The tax identity thief may file a tax return or create false documents such as a fake Form W-2 to file fraudulent tax returns with your social security number. Being a victim of tax related identity theft can cause a number of problems with include filing issues with the Internal Revenue Service, not being able to file your tax return electronically, and wages that you have not earned will show for your social security number. Then, if the items do not match with what you are reporting, this could trigger an audit with the Internal Revenue Service and other tax agencies such as your state. However, usually the identity theft goes further than just identity theft for tax purposes. The identity thief usually would also start getting credit cards in your name and will most often ruin your credit and your financial life.

Conclusion

Many changes to the tax laws occurred after many meetings and hearings on the tax issues involved. A whole many of these changes happen toward the end of the year. Some of the changes such as the changes that pertain to annual inflation adjustments are anticipated probably a year or more in advance. However, many others are just a result of interested individuals fighting to get the new tax law changes happens in the course of the year. Every year, there are many new tax credits and tax deductions available to taxpayers. Some special deductions occur as a result of a national disaster and many times it is offered only to the individuals directly affected by these natural disasters. Usually these types of credits or deductions seek to compensate the victim for financial loss as a result of the tragedy. Other new credits or deductions are a result of the economy and the governments make certain efforts to boost the frail economy.

Sometimes new tax laws surface as a result of presidential hopeful promises. We can only look back at President Obama making promises if he got elected President of the United States. As far as promises related to taxation issues, President Obama made a many of them. Some of these promises were met, some have been partially met. For others a similar promise has been met that was close to the original promise. Still other promises are waiting to be met or simply did not make it in the House. For example, President Obama promised to create a tax credit of up $500 for workers who earned less than $8,100. Consequently, on January 20, 2015 a new credit was announced of $500 for two-earner households. It is still to be seen in the tax changes for next year if this credit will finalize. Another promise was for the treatment of same-sex couples with marriage equality under the tax law and even to allow equal adoption rights. This is a good thing as this will increase a child’s chances of a better life. There are still other politician promises to come and maybe see many more tax changes as a result of these promises from politician hopefuls. The more powerful tax changes occur from presidents wanted a second term in office. Obama made many promises, from tax law changes to immigration reforms. Some of the tax changes he promised were met and many were not met.

The most notable tax changes that Obama made was the Affordable Care Act and the treatment of same-sex couples with full equality under the tax law. Now as a result, all or most Americans have to have minimum essential health coverage and all of it is administrated by the Internal Revenue Service through the filing of tax returns. Also, now same-sex couples can enjoy the same tax privileges as all couples under the tax code as a result of the Obama proposed changes.  

Whatever the situation may be, taxpayers and tax preparers must always be on the look-out for new tax law changes. These new tax changes come in the form of tax credits, tax deductions, tax incentives and different ways to save money on your taxes. These tax changes also come in the form of more tax responsibility such as when new taxes are implemented.

This can also mean that tax credits or deductions that we enjoyed before are no longer in existence. Therefore, new taxes can cause our tax bill to increase. Taxpayers and tax preparers must also always be aware of expired tax credits and deductions such in the case with the extended credits and deductions of the Tax Increase Prevention Act of 2014. Some of these credits and deductions may be extended and others we may never see again. If there is no new form to use to claim the credit or deduction, it would be a great indication that this credit or deduction is no longer available. However, some credit and deductions don’t have their own special form to fill out such as some of the deductions that go on Schedule A of Form 1040.

2. Federal Tax Law

Reading Material - Federal Tax Law

There was a time when there was no income tax. The taxing process graduated slowly to what it is now. At one point there was a question of the constitutionality of taxation. Taxes are a necessity. How else can a nation survive and prosper? This topic is your introduction to taxation. In it you will find the very basic tax principles that are necessary to prepare tax returns. Upon reading the material for topic 1, you will encounter almost every topic covered in the basic certification course including the mentioning of publications used in this course. Due to ethics and tax updates requirements that must be met, everything in the reading material matters (everything is game, fine print, help to taxpayers, disclosures and the various tax worksheets).

2014 Filing Requirements for Most Taxpayers

If your filing status is single and you are under age 65 at the end of 2014 you would file a tax return if your gross income was at least $10,150. However, if you were single and 65 or older at the end of 2014 then you would have to file a tax return if your gross income was at least $11,750.

If you were head of household and under age 65 at the end of 2014, you would file a tax return if your gross income was at least $13,050. However, if you were Head of Household and 65 years old or older then you would file a tax return if your gross income was at least $14,600.

The filing requirements change a bit if you are married filing jointly. If you are a married taxpayer, filing a joint tax return and both you and your spouse are under age 65 at the end of 2014, then you must file a tax return if your gross income was at least $20,300. If you were born before January 2, 1950, you are considered to be 65 or older at the end of 2014.

Gross income means all income you received in the form of money, goods, property. Gross income also includes services that is not exempt from tax. You can include in the gross income calculations any income from sources outside the United States. Also any profit from the sale of your main home may be includable in gross income unless you qualify for the exemptions. If you qualify for the sales of your home exemptions then you must determines which amounts of the gain from the sale of your home are includable in gross income.

2014 Filing Requirements for Dependents:

If your parent (or someone else) can claim you as a dependent, you must determine if you must file a tax return. Normally if your gross income was $3,950 or more, you usually cannot be claimed as a dependent. That is, unless you are a qualifying child of the person trying to claim you as a dependent.

In your determination if you must file a return if you are a dependent, you must take into account unearned income that includes taxable interest, ordinary dividends, and capital gain distributions. You must also take into consideration such things like unemployment compensation, taxable social security benefits, pensions, annuities, and distributions income from a trust. Items that must be considered when figuring out your earned income are salaries, wages, tips, professional fees, and taxable scholarship and fellowship grants. Your gross income is the total of your unearned and earned income from all sources.

If you are a single dependent who was not either age 65 or older or blind, you must file a tax return if your unearned income was was more than $1,000, your earned income was more than $6,200 or your gross income was more than the larger of $1,000 or your earned income that is up to $5,850 plus $350. However, if you were a single dependent and were either age 65 or older or blind, you must file a tax return if your unearned income was more than $2,550. This amount rises to $4,100 if you were both 65 or older and blind. In addition, you must also file a tax return if you were single, age 65 or older or blind and your earned income was more than $7,750. This amount is $9,300 if you were both 65 or older and blind. Furthermore, if your gross income was more than the larger of $2,550 or your earned income amount of up to $5,850 plus $1,900. If you were both 65 or older and blind then you must file a tax return if your gross income was $4,100 or earned income of an amount up to $5,850 plus $3,450.

If you were a married dependent and were not age 65 or older or blind, then you must file a tax return if your gross income was at least $5 and your spouse files a separate tax return and she itemizes deductions. You must also file a tax return if you are a married dependent and your unearned income was more than $1,000 or your earned income was more than $6,200. Likewise, you are obligated to file a tax return if you are married dependent and your gross income was more than the larger of $1,000 or your earned income of up to $5,850 plus $350.

On the other hand, if you were a married dependent and you were age 65 or older or blind, then you must file a tax return if your gross income was at least $5 and your spouse files a separate return and itemizes her deductions. You are also obligated to file a tax return if your unearned income was more than $2,200. If you were both age 65 and blind then you must file a tax return is this amount is more than $3,400. Additionally, if your were a married dependent and you were age 65 or older or blind, you are obligated to file a tax return if your earned income was more than $7,400. Furthermore, if you were both 65 or older and blind, then you must file a tax return if your earned income was more than $8,600. In addition, if you are married dependent and your gross income was more than the larger of $2,200 or the income that you actually earned that is up to $5,850 plus $1,550. If you were both 65 or older and blind you must file a tax return if this amount is over $3,400 or your earned income that is up to $5,850 plus $2,750.

You must also file a tax return if you have other circumstances present. For example if you owe special taxes such the alternative minimum tax (AMT). If you owe taxes on individual retirement accounts (IRAs), you most likely will be under obligation to file a tax return. If you had social security or Medicare taxes on tip income that you did not report to your employer, then you must file to pay your share of these taxes. Other situations in which you must file a tax return is when you have write-in taxes such as uncollected social security, Medicare, or railroad retirement tax on tips your reported to your employer. Additionally, you must file a tax return if you have write-in taxes on group-term life insurance and additional tax on health savings accounts. You must also file if you have household employment taxes. However, if you only have household employment taxes and nothing else, then just file Schedule H by itself. You must also file if you have any type of recapture taxes.

Any special circumstances aside from plain Form W-2 wages usually obligate you to file. For instance, if you received Archer MSA, Medicare Advantage MSA, or health savings account distributions. If you had earning from self employment of at least $400 then you are liable for social security taxes and must file to pay your fair share. If you worked for a church or any qualified church-controlled organization and you had wages from these of at least $108.28 then for sure you will be obligated to file a tax return. More recent legislation, if advance payments of the premium tax were made to you or your spouse or dependents as a result of being enrolled through the Health Insurance Marketplace, you must file a tax return. If you had any of these advanced payments you will see them on Form 1095-A from such organization.

As a new tax preparer you must remember that the most important thing in taxation is keeping good records. Any calculations you make to issue credits and deductions must be documented in some form of worksheet. The Internal Revenue Service and state agencies already have many worksheets in place to help you accomplish this. You should incorporate all worksheets and as many worksheets as possible into your your interview packet. By using these worksheets, either the Internal Revenue Service and state worksheets or your own worksheets that request the same information, you are avoiding trouble and creating a paper trail that will help you and your client in case of an audit. These worksheets will help you keep out of trouble in case there is fraud or wrongdoing on behalf of the client.

There the cost of keep up a home worksheet for example, where you list all expenses associated with the upkeep of your home. This worksheet will help you determine if you have paid more than the expenses of keeping up a home for a parent or your dependent children. It is usually useful when you are trying to determine if the individual is head of household for purposes of the head of household filing status.  Items that are taken into consideration in this worksheet are property taxes, mortgage interest, rent, utilities, repairs, property insurance, food consumed and other household expenses. Once you add up all the expenses and take into account what you have paid and what others have paid, then you determine if you paid more than 50% of the upkeep or not. If the total amount you paid is more than the amount others paid, you have met the requirement of paying more than half the cost of keeping up the home.

There are other requirements to determine head of household qualifications. For example, you must determine who is a qualifying person that would qualify you to file as head of household. If the person if your qualifying child and he or she is single, then that person is a qualifying person. It does not matter if you claim an exemption for him or her or not. A qualifying child can be a son, daughter, grandchild who lived with you more than half the year and also has to meet other tests. If this qualifying child is married and you can claim an exemption for him or her, then this person would also be a qualifying person. However, if you cannot claim an exemption for him or her, then you cannot consider him or her a qualifying person for the exemption and head of household filing status.

If the person is your qualifying relative who is your father or mother and you can claim an exemption for him or her, they are a qualifying person that can qualify you for the dependent exemption and head of household filing status. On the other hand, if you cannot claim an exemption for him or her, then they are not to be considered a qualifying person.

Qualifying relatives other than your father or mother who lived with you for more than half the year and he or she is related to you in one of the ways for relatives who do not have to live with you, and you can claim an exemption for him or her, are qualifying persons for the head of household filing status. These qualifying relatives are your grandparents, your brothers or sisters who also have to meet certain other tests. Of course if they did not live with you for more than half of the year, they are not a qualifying person. These are very basic tax concepts that you will too eventually have ingrained in your memory.

If your qualifying relative is not related to you in one of the ways for relatives who do not have to live with you, and they are a qualifying relative only because he or she lived with you all year as a member of your household, then they are not a qualifying person for you to use the head of household filing status. Almost in all cases, if you cannot take an exemption for a qualifying relative, they cannot be a qualifying person for you to benefit from the head of household filing status or their dependent exemption.

Get familiar with the terms qualifying child and qualifying child as they have different tests and requirements that you must meet for the different credits or deductions to take on your tax return. A person, qualifying child or qualifying relative cannot qualify more than one taxpayer for the head of household status in a single year. A child does not qualify you for the head of household filing if he or she is your qualifying child for exemption purposes only as is sometime the case with divorced, legally separated parents or custodial parents. In certain circumstances, the child can be your qualifying child to claim an exemption and for head of household purposes and not be your child for whom you can claim an exemption. Additionally, if you can claim an exemption for a person only because of a multiple support agreement, that individual is not a qualifying person who can qualify you for the head of household filing status.

Furthermore, to claim the head of household filing status, there are five test that you must meet for a child to be your qualifying child and these are the same test to be able to claim an exemption for the dependent. First, you must pass the relationship test. To meet this test, your must be your son, daughter, stepchild, foster-child, or a descendent of these individuals such as your grandchild. You can also meet the requirement in the same if you have other dependents such as your brother, sister, half brother, half sister, stepbrother, stepsister or a descendent of these individuals such as your niece or nephew.

Your child must also meet the age test to claim his or her exemption and for the head of household filing status. For the age test, your child must be under age 19 at the end of the year and younger than you or your younger than your spouse if your married and filing jointly. To meet the age test, your qualifying child can be a student under the age of 24 at the end of the year and younger than you or your spouse if you are married filing jointly. The age does not matter if the child is permanently and totally disabled at any time during the year and this child would also meet the age test to claim the dependent exemption and to qualify for the head of household filing status.

Thirdly, your child must pass the residency test in order to qualify you for the dependent exemption and the head of household filing status. In order to meet this test, your child must have lived with you for more than half of the year. There are exemptions for children who were temporarily absent, children who were born or who died during the year. If you child was kidnapped you must follow certain procedures and abide by certain rules and you can also qualify the residency test. Furthermore, there are exceptions for children of divorced or separated parents.

The fourth test is the support test to be a qualifying child for the dependent exemption and the head of household filing status. To meet this test, the child cannot have provided more than half of his or her own support for the year. If the individual is your qualifying relative then this support test follows different procedures. This will be discussed eventually.

Lastly, to be a qualifying child, the child must meet the jointly return test. This is probably the easiest of the five tests to meet. You most probably not encounter having to file a tax return with this situation at hand. However, you must be prepared in case you do get a client that has a married child and they want to claim the child on their tax return. To meet this test, the child cannot file a joint return the year. That is unless the child files a joint return only to claim a refund and no taxes would be saved by the child filing a joint return.

There are four test that you must meet for a person to be your qualifying relative and to qualify you to claim dependent exemption and the head of household filing status. First, your qualifying relative must not be your qualifying child and thus pass the "Not a Qualifying Child Test". The child is not your qualifying relative if your child is your qualifying child or the qualifying child of any other taxpayer for that matter. Secondly, your qualifying relative must meet either the member of household or the relationship test. Therefore, this person must either live with you all year as a member of your household or this person must be related to you in one of the ways as relatives who do not have to live with you in order to claim their exemptions. If that person was your spouse at any time, that person cannot be your qualifying relative. Thirdly, your qualifying relative must meet the gross income test. In order to meet this test the person's gross income for the year must not be more the regular exemption amount for the year. This amount is $3,950 and changes every year to allow for inflation. Lastly, your qualifying relative must meet the support test. The support test to be a qualifying relative must generally be met by providing more than half of a person's total support during the year for which you want to qualify to claim the dependent exemption or for the head of household filing status.

There are many rules for different items on your tax return. They can easily be confused. However, you must know the difference between the rules serving the different purposes. For example, if you want to claim a dependent exemption and thus qualify to file as head of household, you must have a qualifying child or a qualifying relative and they must pass the different test to be considered are your qualifying person. You must pass the five tests for a qualifying child and the four tests if you have a qualifying relative.

These are are same set of rules and tests that you must abide by in order to claim an exemption for your dependents. Again, you have to deal with the terms qualifying child and qualifying relative and pass the different tests for these. There are preliminary items of which you must be aware. First, you cannot claim any dependents if you, or your spouse when filing jointly, could be claim as a dependent on someone else's tax return. Second, you cannot claim a married individual who files a joint tax return as a dependent unless that joint tax return is filed only to claim for a refund and usually this is a refund only of taxes withheld from your paying sources. Third, you cannot claim a person as a dependent unless this person is either a United States citizen, United States resident alien, United States national, or a resident of Canada or Mexico. Finally, as previously stated, you cannot claim a person as a dependent unless that person is either your qualifying child or your qualifying relative. If you don't pass either of the five tests for a qualifying child or the four tests for a qualifying relative, you will not be able to claim an exemption for the dependent and consequently that will disqualify to use the head of household filing status.

Different rules and exemptions can apply for claiming an exemption for certain adopted children. Likewise, there are exceptions for temporary absences, children who are born or died during the year, children of divorced or parent who lived apart or who are legally separated. When taking the rules and tests for claiming exemptions are also exceptions for children who have been kidnapped. The exception for kidnapped children cannot be used if the person who kidnapped the child is related to the child. Look into all the exceptions when qualifying to claim an individual as a dependent. For example, if the person is disabled and has income from a sheltered workshop then this is would another exception.

When filing your return, you must choose the appropriate filing status from the five filing statuses available for 1040A and 1040 users. (Users of Form 1040EZ must file as single or as married filing jointly, with no dependents.) You select a status by checking the appropriate box directly below your name on page 1 of Form 1040 or Form 1040A, where it says “Filing Status”. The five filing statuses are single, married filing jointly, married filing separately, head of household and qualifying widow with dependent child and they are usually listed in that order on federal and state forms. If you have a choice on which filing status to use, you would choose the filing status that gives you the greater benefit which is usually the lower tax and the higher credits and deductions.

The standard deduction amount depends on your filing status, whether you are 65 or older or blind. You standard deduction also depends on whether someone else can claim you as a dependent or not. Next year you will see a different amount for your standard deduction due to inflation. The standard deduction amounts will generally rise year after year.

If you are filing as single your standard deduction amount is $6,200 for tax year 2014.  If you are married and are using filing status as married filing separately, your standard deduction is also $6,200. If you are married and filing as married filing jointly or if your spouse died and you are filing as qualifying widow or widower, then you will get the highest standard deduction available. The standard deduction amount for both the married filing jointly and the qualifying widow (widower) with child filing status is $12,400. If you qualify the head of household filing status, your standard deduction amount that you can claim is $9,100 for tax year 2014.

If you are born before January 2, 1950, or if you are blind, your standard deduction increases for each filing status. The additional standard for being 65 or older or blind increases by different amounts for the different filing statuses. It is not as before where the additional standard deduction increased by the same amount and was only based on the fact the you were 65 or older or blind and it was the same amount regardless of filing status used. For example, if you are single the additional standard deduction increases by $1,550 for each situation or circumstance such as being 65 or older or being blind. If you are married filing jointly your standard deduction increases by only $1,200 for each circumstance such as being blind or being 65 or older. Additionally, this $1,200 amount also applies to married taxpayers who decide to file as married filing separately.

More Tax Facts:

You can use Form 1040EZ if your filing status is Single or Married Filing Jointly, your taxable income is less than $100,000, and you are not a debtor in a Chapter 11 bankruptcy case filed after October 16, 2005.

There is a fantastic analogy in a Tax Act blog "The Difference Between Form 1040, 1040A and 1040EZ" for using the various tax forms. Filing the three different kinds of returns 1040EZ, 1040A, and 1040 is like having three water glasses of different sizes where Form 1040EZ would be an 8 ounce glass, 1040A would be a 12 ounce glass and Form 1040 would be a 24 ounce glass. Just like you can use a 24 ounce glass to drink 8 ounces or 12 ounces of water, you can use Form 1040 to file tax returns that can be filed on Form 1040EZ and Form 1040A. However, just like you cannot drink 24 ounces of water from an 8 ounce or 12 ounce glass, you cannot file a Form 1040 or 1040A tax return on a Form 1040EZ or a Form 1040 tax return on a Form 1040A. You get the idea?

Here is the entire list of items that allow you to use Form 1040EZ. 

* Only Single or Married Filing Jointly

* No dependents

* Under age 65 and not blind on January 1, 2015

* Only have wages, salaries, tips, taxable scholarship and fellowship grants, unemployment compensation, or Alaska Permanent Fund dividends,

* Taxable interest was not over $1,500

* Taxable income is less than $100,000

* Earned tips are included in boxes 5 and 7 of your Form W-2

* No household employment taxes

* No Chapter 11 bankruptcy case filed after October 16, 2005

* No adjustments to income

* No credits other than the earned income credit

* No advanced payments of the premium tax credit

If your spouse is a nonresident alien, you cannot use Form 1040EZ if he or she cannot file a U.S. tax return.

If your nonresident alien spouse has a social security number or an Individual Tax Identification Number, that would normally mean that they are a resident, otherwise they would normally not have qualified for such an identification number. If your nonresident alien spouse becomes a resident alien before he or she can file a tax return, then you would be able to the requirements and be able to file Form 1040EZ. Likewise, if your nonresident spouse is living with your in the United States and files with you jointly, he or she would be able to qualify for an Individual Identification Number with the Internal Revenue Service and therefore be considered a resident alien instead of a nonresident alien.

You also cannot file a tax return using Form 1040EZ if you owe tax from the recapture of an education credit. If you can claim a credit for excess social security and tier 1 RRTAX tax withheld will won't be able to file Form 1040EZ either. There will also not be a space for any retirement Savings Contributions Credit or the Saver's Credit on Form 1040EZ. Therefore, if you have any of these,  you will not be able to file Form 1040EZ.

There are only certain items you can fit on Form 1040EZ. Just like you cannot fill 12 ounces of water into an 8 ounce glass, you cannot fill your Form 1040EZ with certain items meant for Form 1040. You can try it and in both instances would result in a mess. In the glass of water instance, you would have to mop the floor and the Form 1040EZ instance, you would not find a space for it and if you insert it in the form anyways, you would soon receive a letter from the Internal Revenue Service (IRS). Just like you want to keep that floor dry, you want to keep the Internal Revenue Service (IRS) or the other tax collecting agencies away.

An Individual Tax Identification Number (ITIN) does not entitle you to social security benefits and neither does it allow you to work legally under U.S. law.

An ITIN is only intended to serve the purpose of identifying the individual filing a tax return or being claimed on a tax return for various purposes such as when claiming an exemption. It in the same format as a social security number. Although an individual taxpayer identification number (ITIN) is like a social security number in format, unlike a social security number which serves many purposes, the ITIN number only serves one -identifying the holder. The individual tax identification number (ITIN) does not entitle the holder for social security benefits or to legally work in the United States. If you are working in the United States illegally and someday will have a status adjustment, you should keep all your paystubs to report all your wages to the Social Security Administration to the correct social security number when your legal status becomes adjusted.

If one spouse does not report the correct tax, both spouses may be responsible for any individual taxes assessed by the IRS. You may want to file separately if you believe your spouse is not reporting all of his or her income or if you do not want to be responsible for any taxes due if your spouse does not have enough tax withheld or does pay enough estimated tax.

We often wonder why we even have married filing separately filing status. Many tax professionals tell you right off not to file Married Filing Separately. Why? Basically, if you file Married Filing Separately, you end up paying more tax and end up qualifying for less credit and deductions. Married Filing Separately is notorious for not being chosen as a filing status by many tax professionals and taxpayers. This is so much so that some tax professionals don't care to learn the ins and outs of this filing status. The following are consequences of selecting Married Filing Separately when you file your tax return.

* Tax rate generally is higher.

* Exemption amount for figuring the alternative minimum tax is half that allowed on a joint return.

* Credit for child and dependent care expenses not allowed in most cases

* Amount of exclusion from income under an employer's dependent care assistance program is limited to $2,500 instead of $5,000.

* Earned income credit not allowed.

* Exclusion or credit for adoption expenses not allowed  in most cases.

* Education credits such as the American opportunity credit, lifetime learning credit, or the deduction for student loan interest are not allowed.

* Exclusion of any interest income from qualified U.S. savings bonds you used for higher education expenses are not allowed.

Additionally, if you lived with your spouse at any time during the tax year and you are married filing separately, you are prevented from doing certain things such as claiming certain credits or taking certain deductions. 

* The credit for the elderly or the disabled is not allowed.

* A greater percentage (up to 85%) of any social security or equivalent railroad retirement benefits you received must be included in your income.

* The child tax credit is reduced at half income levels than if you filed jointly.

* The retirement savings contributions credit is is reduced at half income levels than if you filed jointly..

* The deduction for personal exemptions, and Itemized deductions are is reduced at half income levels than if you filed jointly.

* Capital loss deduction limit is $1,500 instead of the $3,000 on a joint return.

* If your spouse itemizes deductions, you cannot claim the standard deduction.

* The basic standard deduction is half the amount allowed on a joint return.

So apparently married filing separately is not the way to go. There are many drawbacks in choosing married filing separately as your filing status. However, sometimes married filing separately is the only option for some taxpayers.

Your filing status is single if on December 31, 2014, you were never married, you were legally separated, according to your state law, under a decree or divorce or separate maintenance. Also you are considered single if you were widowed before January 1, 2015 and you did not remarry in 2014 and you filing status is "Single" if you did not have a dependent child living with you.

You can use the Single filing status is you are unmarried, divorced, legally separated, or widowed as of the last day of the calendar year. If no other filing status applies to you, then you generally must file as "Single".

Even if you do not have to file a tax return, you should file one to get a refund of any federal income tax withheld or you are eligible for the EIC.

Just because you hardly made any money does not mean that your employer has not withheld anything from your check. Depending on how many deductions your claimed on your Form W-4, you may have had federal tax withheld from your check. Almost everyone pays social security and Medicare taxes and these are not the kind of taxes you can get refunded. However, if you had federal withholding or any state tax withheld, you can get file your federal or state tax returns to get these refunded to you if you did not make enough money to even file a tax return. Why would your employer if withhold any money in the first place? You ask. Well, when you first start your job, your employer usually does always get your Form W-4 from you right away. Therefore, your employer is obligated to withhold at a single rate and sometimes with zero exemptions. To avoid any kind of withholding, it is a good idea to give your employer Form W4 immediately.

If you don't make enough money to file a tax return, you should still file if you qualify for the Earned Income Credit, even if you have no dependents. Even if you just earned a $1, and if you are single, head of household, or qualifying widow or married with no dependents you can get $2 dollars back as an Earned Income Credit amount. If you have dependents and you only earned $1 for example, you can get anywhere from $9 to $11 back as an Earned Income Credit amount.  If you look at the EIC table you can see the different income scenarios. Look at the Earned Income Credit qualification rules to see if you qualify for the Earned Income Credit and for how much you qualify.

If you take the EIC even though you are not eligible and it is determined that your error is due to reckless or intentional disregard of the EIC rules, you will not allowed to take the earned income credit for 2 years even if you are otherwise eligible to do so in this year.

As a tax professional you need to have many caveats in mind when it comes to the Earned Income Credit rules. When you prepare tax returns for a fee you have to determine the eligibility for the Earned Income Credit or face steep penalties. $500 per taxpayer can really add up. They say that an ounce of prevention is worth a pound of cure. You don't want to be in front of an Internal Revenue Service agent frantically trying to figure out how you are going to come up with the due diligence proof for the 2,000 tax returns you prepared last year. Imagine two thousand tax returns times $500? That is a million dollars that you would owe the Internal Revenue Service. Let's say you can negotiate the million dollars with the IRS. The negotiated figure is still a lot of money.

You must file Form 8862 if your EIC for a year after 1996 was reduced or disallowed for any reason other than a math or clerical error. File Form 8862 if for 2 years after the most recent tax year for which there was a final determination that your EIC claim was due to reckless or intentional disregard of the EIC rules. Also file Form 8862 if the reason your EIC was reduced or disallowed in an earlier year was because it was determined that a child listed on your Schedule EIC was not your qualifying child. Additionally, if your EIC credit was denied for 10 years due to fraud, then you must file Form 8862 along with your tax return.

You must abide by the four due diligence rule requirements. As a tax professional, you must ask all the questions required on Form 8867. Form 8867 must be used as an interview worksheet and no question should go unasked. Not asking the questions on From 8862 would be a very dangerous task for you as a tax preparer. Please don't think that this is not going to happen to you or that the Internal Revenue Service will only go after the big guys such as H&R Block and Jackson Hewitt. The rules apply to every tax professional even if that tax professional only prepared two tax returns. Remember! Use Form 8862 as a worksheet in your interview and when allowing your clients to take the Earned Income Credit.

Let's take an example when you must use Form 8862 in preparing a tax return for your client. In 2014, your client was age 24, single, and living at home with his parents. He worked and he was not a student and earned $7,500. His parents cannot claim him as a dependent. When he files his tax return, he cannot claim the Earned Income Credit because he is not at least age 25.

Your tax preparation software would most likely catch this mistake because your client is not at least age 25. However, let's say you not only did not fill out the Form 8862 diligence worksheet, but you also did not fill out the correct age in you tax software. As a result, you give your client the Earned Income Credit. This is a tax preparation mistake an also a negligent disregard of the EIC due diligence rules. When the Internal Revenue Service asks for the due diligence requirement record, they will fine fine you $500 for that client if you fail to provide it.

Remember that any refund you receive as a result of taking the EIC will not be used to determine if you are eligible for temporary assistance for needy families, Medicaid and SSI, or supplemental Nutrition Assistance Program and low income housing. The refund you receive because of EIC cannot count as an asset to determine qualification for these benefits.

Everyone must do their part and provide documentation for everything that has transpired. There are steep penalties for everyone for failing to comply. Your employer must provide or send Form W-2 to you no later than January 31, 2015. If you do not get a Form W-2, you still have to report your earnings on your tax return.

You should not file your tax return without Form W-2. Also, if your employer has not sent you a copy of your W-2 yet, then they most probably have not sent a copy to the IRS so asking the IRS for a copy is probably not an option. Besides, if they do have a copy, a copy would not be made available to you since it is too early in the tax year. Your employer has until January 31, 2015 to mail your Form W-2 to you, but has until March 2, 2015 to submit the forms to the Social Security Administration and to the Internal Revenue Service. The good news is that once you ask your employer for Form W-2 and if he refuses, you can file a substitute form to report your wages to the Internal Revenue Service on Form 4852. You have to allow enough mail procesing time after January 31, 2015 and/or visit the employer to make your request before you can file Form 4852. The point is that you must wait until after January 31, 2015 in order to file your substitute wage form. Form 4852 is not a form you would file on January 7th, for example.

In this course we will be reviewing some basic tax preparation concepts regarding income, deductions and credits on your tax return. One of these basic tax preparation items is interest income. When you receive interest income as a nominee, it means that the income is in your name, but it actually belongs to someone else.

You are responsible to report any interest income on your tax return. Your bank is normally only obligated to send you an interest statement if the interest amount is over $10. However, this does not mean that you are not obligated to report your interest if it is less than $10 or if your bank did not send you a statement at the end of the year. If you received a statement as  a nominee of the interest received, the Internal Revenue Service will hold you responsible to report this income on your tax return or name you as the owner of such interest income if you don't file the proper paperwork to let them know who is the real owner. You should not just choose whomever you want as the owner of this interest income, because the person to whom you report the interest income will be obligated to report it on their own tax return if they have a filing requirement.

Another basic income item that that you need to know about in this course is unemployment compensation. You must report on your tax return unemployment compensation that you receive that is the total unemployment compensation paid to you in 2014.

It was good while it lasted. Unemployment compensation was taxable only if the amount was over $2,400. This meant that anything up to $2,400 was completely tax free. Qualifying for unemployment compensation has always been due to contributions to a government unemployment compensation fund program usually through your state employment development department. Please do not include as supplemental unemployment compensation received from a company-financed fund but rather include them as wages subject to tax withholding and possibly subject to social security and Medicare taxes.

Many changes have occurred since Congress enacted the first income tax law. In 1862, Congress enacted the nation's first income tax law in order to support the Civil War effort.

It was in 1862 that the office of Commissioner of the Internal Revenue was established. This individual was given the power to enforce the tax laws. There has not been too much change to this power to now.

The Act of 1862 established the office of the Commissioner of Internal Revenue. The Commissioner was given the power to assess taxes, to enforce the tax laws through seizure of property and income and prosecution and to levy and collect taxes.

Many individuals have tried to influence these new tax laws. Many times the tax laws were changed and amendments issued to make the tax laws a permanent component of our daily life. Taxes are here to stay and will be raised as the need arises for more money.

The fact remains that the powers and authority of the office of Commissioner of Internal Revenue remain very much the same today.

However, today the taxpayer seems to have more power due to social media and the knowledge and advice inseminated by others through the internet. Those books with titles such as "How To Beat the IRS" are real and they offer much advice on how to win your case against the IRS. Some people call these dirty attorney tricks. Regardless of what they are called they still provide guidance and information on Internal Revenue loopholes.

In 1913, the 16th Amendment to the Constitution made the income tax permanent as we have it today. This amendment gave Congress legal authority to tax income of both individuals and corporations.

Amendments like the one in 1913 are brought about through the needs of additional funds of government. Also, many tax changes are incepted due to economy changes such as more employment available to taxpayers or vise versa, if there is high unemployment, then tax laws will take that into consideration too. This is done so and mostly seen by the tax credits or special tax deductions offered though the tax system.

For example on October 22, 1986, President Reagan signed into law the Tax Reform Act of 1986. The act called for an decrease in individual taxation over a five-year period.

Over the years, the tax laws got so complicated that there was a need to simplify the tax code. The tax code and the paperwork to file a tax return was a difficult bureaucratic effort. Additionally, President Reagan wanted to up the economy with his tax law reform. We are living this tax reform presently.

With this October 22, 1986 law that President Reagan signed into law the Tax Reform Act of 1986, the top rate on individual income was lowered from 50% to 28%.

In an effort to reduce the federal budget deficit, the Revenue Reconciliation Act of 1990 was signed into law on November 5, 1990. The emphasis of the 1990 act was increased taxes on the wealthy.

It came to everyone's realization that the wealthy were paying less than the fair share. With this new act came higher taxes and a limitation on itemized deductions. Almost every presidential candidate promises not to raise taxes. President Bush promised not to raise taxes to get elected and then signed the Revenue Reconciliation Act of 1990 in law which did the contrary. It raised taxes and lowered deductions. This was the act that started our "pay as you go system". In this system taxpayers pay their tax in installments as they earn the money. This is usually done weekly or biweekly every time the taxpayer receives a check from their employer. Taxpayers who don't have an employer usually are required to make estimated tax payments throughout the tax year. Other countries have similar tax policies.

Again, in 1993 another act was signed to lessen the tax deficit. On August 10, 1993, President Clinton signed the Revenue Reconciliation Act of 1993 into law.

What was different about the 1993 act to the 1986 was that the Revenue Reconciliation Act of 1993 affect almost every taxpayer, not only the rich. This new tax act decreased the tax planning benefits and tax planning strategies previously enjoyed by many.

Then again in 1997, President Clinton signed a tax revenue act which cut taxes by $152 billion including a cut in capital gain tax for individuals a $500 per child tax credit along with tax incentive for education.

This per child tax credit has now increased to $1,000 per child. The child tax credit started at $400 per child and increased to $500 per child in 1999. It was with this act that Roth IRAs were established. This act also exempted the capital gain taxation of the sale of personal residences of up to $500,000 for married couples and up to $250,000 for single taxpayers. There is also a $600,000 estate tax exemption and family farms and small businesses can qualify for exemption of $1.3 million. It was also at this time that the annual gift tax was corrected for inflation.

We have come a long way from 200 years ago. From 1791 to 1802, the United States government was supported by internal taxes on distilled spirits, carriages, refined sugar, tobacco and snuff, property sold at auction, corporate bonds, and slaves. Now, the government gets their review from more modern items in addition to the items from 100-200 years ago. This includes more modern items such as commerce transacted over the internet and plastic surgery tax.

It all stated in 1791. Before that really. Way before that in some form or other. It is just that things become formal at one point. In 1862, in order to support the Civil War effort, Congress formally enacted the nation's first income tax law and it was a forerunner of our modern income tax.

The nation's first sales taxes were on gold, silverware, jewelry and watches due to the high cost of the War of 1812.

This war resulted in struggles. Individuals did not only have to worry about certain war uncertainties, but by this time they also had to worry about complying with the government and pay tax. During the Civil War, a person earning from $600 to $10,000 per year paid tax at the rate of 3%.

Then In 1868, Congress focused its taxation efforts on tobacco and distilled spirits and eliminated the income tax in 1872.

The government has recently become concerned with public health and has passed certain taxes on tobacco products to discourage their consumption.

Many things have transpired over the years in regards to taxes. For example, in 1895, the U.S. Supreme Court decided that the income tax was unconstitutional because it was not apportioned among the states in conformity with the Constitution.

More recently in 2004, the U.S. was forced to eliminate a corporate tax provision that had been ruled illegal by the World Trade Organization.

Two tax bills signed in 2005 and 2006 extended through 2010 the favorable rates on capital gains and dividends that had been enacted in 2003, raised the exemption levels for the Alternative Minimum Tax, and enacted new tax incentives designed to persuade individuals to save more for retirement.

You must use Form 1040A or Form 1040 if you received interest as a nominee. You must also use Form 1040A or Form 1040 if you received a 2014 Form 1099-INT of U.S. savings bond interest that includes amounts your reported before 2014. If you owned or had authority over one or more foreign financial accounts with a combined value over $10,000 at any time during 2014, then you must use either Form 1040A or Form 1040 to report it.

Practically anything that you receive in exchange for services is taxable income. You don't need to receive any kind of paperwork from anyone in order to report income that is taxable. For example, wages received as a household employee for which you did not receive a Form W-2 because your employer paid you less than $1,900 in 2014 needs to be included in line 1 as taxable income.

Some types of income, such as household employee wages may not require the employer to issue you any kind of documentation if that amount does not go over a certain amount. This amount would be over $1,900 in 2014. This means that if your household employee earned more than $1,900 you would have to fill out the forms to report the amount to government and pay the employment taxes. However, this does not mean that your employee is exempt from reporting this income. The same thing goes with banks. Bank are only required to report your interest income if it goes over $10. This does not mean that you, the account holder, are not required to report the income, even if it is $2.

If you received a state refund of your taxes in 2014, and for the year the tax was paid to the state, you did not file Form 1040EZ or Form 1040A, then none of your state refund would be taxable.

This is a fast way to know if your state refund would be taxable by the forms that you file such as when you file 1040EZ or Form 1040A. What happens if you file your Form 1040EZs and your Form 1040As on Form 1040 like so many professional tax services do? Then you need to fill out the worksheet to figure out the taxable amount. Therefore, do not assume that just because they filed Form 1040 last year, that their state refund was miscalculated.

If you are a child or other dependent, you must file a tax return for 2014 if your gross income was more than the larger of $1,000 or your earned income up to $5,850 plus $350.

If you are a dependent, you must file a tax return for 2014 if you income is over the standard deduction amount for a single taxpayer. The filing status amount for 2014 for a single taxpayer is $6,200. Therefore, if a dependent earned at least $6,200 for tax year 2014, he or she must file a tax return.

If you were married at the end of 2014, even if you did not live with your spouse at the end of 2014 you can use the Married Filing Jointly filing status. However, you don't have to.

It is always your legal right to file your tax return separately. There are a lot of reasons you may want to file married filing separately. You may not trust your spouse. You may still be married but may have been living separate from your spouse for a while now. You may not be speaking to your spouse anymore and filing a tax return together may not even be an option for the two of you. It could be as simple as you just wanting to keep your finances separate from your shopaholic spouse. If you live separate from your spouse you can qualify for the head of household filing status. 

If your spouse died at the end of 2014 and you remarried at the end of 2014 to another spouse you would still file married filing jointly but with a new spouse. If you are remarried to a new spouse, your deceased spouse would have no choice but to file married filing separately.

In order for your child to be your dependent, you must meet certain requirements. The child must  pass the five tests which are the age, residency, support and the joint return test. The child can bypass the age test if the child was a full-time student. These schools according to the rules do not qualify if they are a school that only offer on the job training course, correspondence schools or schools that just offer training over the internet.

A student is a child who during any part of 5 calendar months in 2014 was enrolled as a full-time student at a school that offers course load hours that the school that the school considers to be full-time attendance. Practically any traditional school setting would count for the definition of what schools are qualified to be schools for full-time attendance. For Internal Revenue Service purposes, you would not count on job training, correspondence schools or internet schools. However for this this purpose, you can count student who work on "co-op" jobs in a private industry that are part of school system classroom and practical training.

It is better to use Direct Deposit because your payment is more secure and there is no check to get lost, it is more convenient and you can avoid a trip to the bank to deposit your check and it cost the government less to refund you by direct deposit. It costs you less too. Therefore, it is a win win situation for everyone.

Get your refund faster by direct deposit than you do by check. Using Direct Deposit is more convenient and you don't have to make a trip to your bank or wait in line for a teller to give you your money. Additionally, if you opt for Direct deposit your payment is more secure and there is no chance that your payment will not be received or deposit getting lost. Using Direct Deposit saves everyone money. The government does not have to spend that extra money to print you out a check or on postage to mail you a check. If you are paying, you will save money that you would otherwise have to spend on postage and you will also save your 20 cents that it would cost you to issue a check. Also, now that most post offices have put the service service machines out of service, you would actually have to wait in line to mail out your items. Do it all online and you will save a lot of money. They say that time is money and it is very true here.  Now you can even split your refund and have it deposited in two or three different checking or savings account.

You may have to pay a penalty if the amount owed is at least $1,000 and it is more than 10% of the tax shown on your tax return. However, you will not owe the penalty if your 2013 tax return was for a tax year of 12 full months and there was no tax shown on your 2013 tax return and you were a U.S. citizen or resident for all of 2013. Also, you will not owe the penalty if your 2013 tax return was a tax year of 12 full months and line 7 on your 2014 tax return is at least as much as the tax shown on your 2013 tax return.

One thing is to file your tax return on time, and another thing is to not pay your taxes on time. You can always get an extension to file your tax return, but you cannot get an extension to pay the taxes owed. Well, you can get an extension to pay, but will be penalized with penalties for paying late and interest on the late payments. Failure to pay by the deadline will result in a failure-to-pay penalty of 1/2 of 1 percent of your unpaid taxes. If you pay at least 90 percent of the amount owed with your extension to file request you may avoid the failure-to-file penalty as long as you pay the remaining amount by the extended due date. There are two penalties you need to attend to. One is the late-filing penalty and the other is the late-payment penalty and your goal should be to avoid both. 

If you cannot pay the full amount when you file, you can ask for an installment agreement or ask for an extension of time to pay. Remember your extension of time to file is not an extension of time to pay. This does not mean that you cannot ask for an extension of time to pay, it is just that this extension of time to pay will cost you in interest and penalties.

With our current pay-as-go tax system, taxpayers are obligated to pay their tax every time they get a paycheck. If the taxpayer or employer does not follow the pay-as-you-go system, they have to pay penalties for not making timely payments and also pay interest for the time that the money was not received on time. The IrS will accept your return without the payment but will send you a letter asking you for payment and will have the interest and usually the penalty for not paying your tax will be calculated in that letter. The worst thing you can do is not send your tax return.

If you cannot file on time, you can get an automatic 6-month extension if no later than the date your return is due, you file Form 4868. In order for your extension of time to file to take effect, you must file by the due date of your tax return. 

You have to file this extension on or before April 15 or the due date of your return, which could be either April 16, or April 17 depending on what day of the weekend or holiday April 15 fell on. You cannot realize you did not file your tax return by the due date and all of a sudden decide to send your Form 4868 request for extension of time to file on April 20th. The Internal Revenue Service processing center probably receives thousands of Form 4868 after the required due date and they probably just either toss them away or send you a letter to let you know that the request for an extension of time to file your return has been filed late and ask you to immediately file your tax return. Although, they technically can charge you a late filing penalty, they might waive it if you comply with their letter and send your tax return immediately.

If you get an automatic extension, you have until October 15, 2014 to file your tax return but not to pay the tax you owe. Clear this confusion now, the automatic extension of time to file is not an extension of time to pay your tax.

Remember, our tax system is based on the pay-as-you-go system. You must have paid enough money on every paycheck you received. Upon calculating and reconciling with the Internal Revenue Service, you must owe an amount that is closer to zero. If you did not pay enough to cover your tax during the year and you are really off when you reconcile and file your return with the Internal Revenue Service, you could be liable for certain penalties for failing to pay your taxes as you earned your money.

If you changed your name because of marriage, divorce, etc., be sure to report the change to the Social Security Administration (SSA) before you file your tax return. This prevents delays in processing your tax return and also will prevent any delay in issuing your refund. You want to update your files with the Social Security Administration (SSA) to safeguard your social security benefits.

Notify the Social Security Administration before you file your tax return with the IRS if you or your dependents changed your names. The name and the name of your dependents with the Social Security Administration must match the name with the reports you file with the Internal Revenue Service. Avoid filing your tax return without double checking your Social Security Administration records first because you will encounter the most difficult problem to try to fix the mismatch with the Internal Revenue Service (IRS) if you entered the wrong identifying information for you or your dependents. You should do everything in your power to avoid any kind of letter from the IRS especially a letter something so simple as a a social security number and name mismatch. It will especially be very difficult to straightening out the problem if they disallowed a credit such as the Earned Income Credit because of a social security mismatch. This is where an ounce of prevention is worth a pound of cure.

Identity theft occurs when someone uses your personal information, such as your name, social security number (SSN), or other identifying information, without your permission, to commit fraud or other crimes such as getting a job or filing a tax return to receive a refund. To reduce your risk, protect your Social Security Number by ensuring that your employer is protecting your SSN and be careful when choosing a tax preparer. 

Also, you can ask your employer how they are protecting your number to make sure they are protecting your Social Security Number. You can ask your employer about the company who is doing the payrolls and whether or not they are a company whom can be trusted with your personal information. Be wise when supplying other with your personal information such as your social security number, date of birth and address. Always ask for the name of individuals who take down your personal information and keep a record of this information in case you need to speak to the police in the event you detect identity theft. This is important information you always wish you kept or asked after you encounter problems. I think the most common comment people make to themselves is "This will not happen to me".

If you are a nonresident or resident alien and you do not have and are not eligible to get an SSN, you must apply for an ITIN. They must have an Individual Tax Identification Number (ITIN) in order to file their tax return. It must be noted and it is extremely important that this identification is only used for tax filing purposes.

A Taxpayer Identification Number (ITIN) is an identification number issued by the Internal Revenue Service that is only made available for certain nonresident and resident aliens, their spouses, or dependents who are not eligible to get a Social Security Number (SSN). It is in the same format of the social security number with nine digits. Many undocumented taxpayers make the mistake of given this number to their employers but they should never do this. The employer is under the obligation to fire them if the employee shows them this Internal Revenue Service issued identification card. This is like making a confession to their employer that they are indeed working illegally in the country. In turn if the employer continues their employment, they would run into trouble with the immigration service.

The Presidential Election Campaign Fund is set up to help pay for Presidential election campaigns. This fund gives more financial equality to Presidential candidates who otherwise would not be able to afford to run for office. This election campaign fund also reduces the dependence on large contributions from interest groups. You can contribute $3 for you and $3 for your spouse if you are married filing Married Filing Jointly. Your tax refund will not be lowered if you make the Presidential Election Campaign Fund election.

Your direct deposit request will be rejected and a check will be sent instead if the items in the direct deposit request form are not completely filled out. If any items are crossed out or whited-out your direct deposit will be rejected and a check will be sent instead. If your account in an individual bank account, your financial institution will not allow a joint refund to your account. It is quite needless to say that if your bank account is not in your name, your request for direct deposit would be denied.

A frivolous tax return is one that does not contain information needed to figure the correct tax or shows a substantial incorrect tax because you take a frivolous position or desire to delay or interfere with the tax laws. In addition to any other penalties, there is a penalty of $5,000 for filing a frivolous tax return.

There many frivolous tax return preparation tactics you could take to lower your tax bill, avoid paying taxes or penalties, or even decide not to file a tax return altogether. However, you could suffer the consequences of your misguided actions. Many people or professionals draw from different sources of the law to try to win their case against the tax agencies. These people may quote court cases to try to win their case. The Internal Revenue Service is well aware of these frivolous tax filing tactics. The Internal Revenue Service has come up with various rules to discourage any frivolous tax practices. Section 6651(a)(2) and section 6654 are some of these rules that penalize you for participating in these frivolous tax filing tactics. 

Keep a copy of your tax return, worksheets you used, and records of all items appearing on your tax return until the statute of limitations runs out for that tax return. It is better to just keep a copy of your tax returns for longer than the statute of limitations.

Now with virtual storage it takes less effort and space to keep copies of tax returns indefinitely. At one point, you may not need a copy of your tax returns for Internal Revenue Service purposes, but you may need them for other purpose such as your medical insurance company. It is important to note that you will not be able to get a record of your tax return from the Internal Revenue Service anytime you wish. They follow their statute of limitation to the dot.

The information asked on your tax return is needed to carry out the tax laws of the United States and to figure and collect the right amount of tax. It is imperative that you supply the taxing agencies with the most correct information requested on the tax forms and worksheets.

Form 1040EZ, 1040A and Form 1040 ask you for information about yourself, your spouse if you are married, and your dependents. In turn, the Internal Revenue Service uses the information you supply to calculate the amount of tax you should have been paying throughout the year and therefore the correct of amount of tax to collect. The Internal Revenue Service also uses this information to determine if you qualify for the credits and deductions you are claiming on your tax return.

On or before the first Monday in February of each year the President is required by law to submit to Congress a budget proposal for the fiscal year that begins the following October.

The United States budget process was initiated in 1921 and it was not a formal process. It was until 1974 that Congress was forced to adopt a more formal process. The Congressional Budget and Impoundment Control Act of 1974 was enacted because President Richard Nixon refused to spend funds as the Congress had allocated them and passing a more formal budget process would force President Nixon to spend funds as Congress had indicated.

The Practitioner PIN method allows you to authorize your tax practitioner to enter or generate a taxpayer PIN for signing a tax return. You can electronically sign your tax returns by selecting a five-digit PIN. 

If the taxpayer is married, a PIN is needed for the taxpayer and a PIN is also needed for the spouse when filing a Married Filing Jointly tax return. The newer version of the PIN starting in 2010 will also include Form 1040, Form 4868 and another twenty-one Form 1040-related tax returns. With this new option , now the tax preparer can also electronically sign Form 4868 to request an extension of time to file a tax return. The new method also allows you to authorize the Electronic Return Originator to enter or generate your PIN.

Regardless of the manner that your PIN is generated, to file your tax return electronically, you must sign the tax return electronically using the personal identification number (PIN).

An IRA is an individual retirement arrangement that is a tax-favored personal savings arrangement to set money aside for your retirement. You and your spouse (under age 50) each may be able to contribute up to $5,500 to a traditional IRA or Roth IRA in 2014. The amount of contribution cannot be more than the taxable compensation amount for the year. So if your compensation for the entire year was only $4,000 then your contribution amount cannot be more than $4,000 for the year.

The amount of contribution is generally deductible on your tax return. This deduction may be limited if you (or your spouse if you are married) are covered by a retirement plan at work. It also may be limited if you (or your spouse) are covered by a retirement plan at work and your income exceeds certain levels. A Roth IRA is allowed and deductible similar to a traditional IRA for the most part. However, a Roth IRA may be limited based on your income and your filing status. To contribute to an IRA, you must be age 70 1/2 at the end of the tax year and of course, you must have compensation in order to do so.

You should not contribute more than the allowed amount or the amount that can be deductible per year. If you are age 50 or older, you may owe a penalty if your contributions to an IRA or Roth IRA exceeds $5,500.

An excess IRA contribution occurs if you contribute more than the contributions limit, if you are making regular IRA contributions to a traditional IRA at age 70 1/2 or older. An excess IRA contribution would also occur if you make an improper rollover contribution to an IRA. If it is determined that you made an excess contribution, you will be liable for an excess contribution of 6% per year as long as the excess contributions remains in the IRA. You can avoid the excess contribution penalty by withdrawing the excess contribution from your IRA and any income earned by the due date of your tax return.

You can choose the Married Filing Jointly filing status if you are married and both you and your spouse agree to file together. When you file Married Filing Jointly, you report your combined income and deduct your combined allowable expenses. You can file using the Married Filing Jointly filing status even if one of you had no income or deductions.

Married taxpayers have a choice to either file jointly or to file separately. The better choice always seems to be to opt for Married Filing Jointly. The other options are the Married Filing Separate and the Head of Household filing status. There a number of worksheets and rules that you must follow to determine if you as a married person can file a Head of Household. There are many credits and deductions that you can qualify for by filing Married Filing Jointly or Head of Household that you would not qualified or be allowed to be claimed when you file as Married Filing Separately. One thing is for sure. If you have a choice, choosing Married filing Jointly is much better than using Married Filing Separately.

You must always determine your filing status before you can determine your filing requirements, standard deduction and thus your correct tax.

Your filing requirements are based on your filing status. You can always file a tax return, but you are not always obligated to do so. You want to file a tax return when you are due a refund for example. For tax year 2014, you must file a tax return if you are single (under age 65) and your income was at least $10,150. You must file a tax return if you are Head of household (under age 65) and your income was at least $13,050. You must file a tax return if you are married filing jointly (at least one spouse was under age 65) and your income was at least $21,500. Furthermore, once you determine if you are single, married filing jointly or married filing separately, head of household, then you can look up the amount that corresponds with your filing status. Based on all these, again by looking in the correct tables or using the correct tax rates, you can determine the correct tax to pay.

To qualify for head of household you must be unmarried or be considered unmarried, you must have paid more than half the cost of keeping up a home for the year and have a qualifying person who lived with you for more than half of the year unless this person is your parent.  Add up the amounts contributed and if you amount is more than half the amount others paid, you meet the requirement of paying more than half the cost of keeping up the home to qualify for the head of household status.

If you think you qualify for the head of household filing status, fill out the worksheets and follow the rules. It is worth your try because doing so will give you a lower tax rate than those for single or married filing separately. This would also allow you better credits and higher deductions too.

When you are married both you and your spouse must include all of your income, exemptions, and deductions on your tax return. In some cases, one spouse may be relieved of joint liability for tax, interest, and penalties on a joint return. The spouse seeking relief can seek three types of reliefs - Innocent spouse relief, separation of liability relief, and equitable relief.

For equitable relief you must request relief for any time that the Internal Revenue Service can collect from you. For refunds, you must request them within the statute of limitations regarding refunds. To qualify for innocent spouse relief, you must have filed a joint return with an erroneous item that is solely your spouse's responsibility and you must establish that had no reason to know that tax was understated and that it would be unfair to hold you responsible for the liability. 

For separation of liability relief at the time of your request you must show that you are divorced or legally separated from your spouse with whom you filed the return. You can also show that you are widowed or that you have not been a member of the same household for at lease twelve months before your separation of liability relief request.

If you do not itemize deductions, you are entitled to a higher standard deduction if you are 65 or older at the end of the year. You are considered 65 on the day before your 65th birthday. Therefore, you can take a higher standard deduction for 2015 if you were born before January 2, 1951.

You can also take a higher deduction if you are blind. If you are 65 or older or blind at the end of the 2014 tax year, you can take an additional standard deduction amount of $1,550 for each if you are single or head of household. However, if you are married you can only take an additional standard deduction of $1,200 for being over 65 years old and $1,200 for being blind. Therefore, if you are married and both you and your spouse are over age 65 and one of you is blind at the end of the tax year, you can an additional $3,600 standard deduction amount. If both you and your spouse are over 65 year old and both of you are blind at the end of the year, you can take an additional $4,800 standard deduction amount.

For example, Kevin's wife died January 20, 2013, and by the end of 2013 Kevin had not remarried. During 2014, and 2015, he has continued to keep up a home for himself and his child for whom he can claim an exemption. The last year you can file jointly is the year that your spouse died. Kevin's wife died in January of 2013 so he can file married filing jointly with his deceased wife. If Kevin gets married before the end of the year, then he can file married filing jointly with his new wife.

After that, Kevin can file as Qualifying Widower if he qualifies. He can use the Qualifying Widower filing status for two years after the last year that he filed married filing jointly with this wife. The qualifications for the Qualifying Widower filing status are similar to the head of household filing status. You have to have a qualifying child who lived with you for all of the tax year. You must have paid more than half the cost of the costs of maintaining a home for this child. The qualifying child cannot be a fosterchild but the child can be your stepchild. You can benefit from taking the Qualifying Widow (er) filing status because you qualify for the married filing jointly tax rates if you use this filing status. Using the qualifying widow (er) filing status will entitle you to use the highest standard deduction amount. The married filing jointly and the qualifying widow (er) filing statuses qualify for the highest standard deduction amounts. You can use Form 1040 to file using the qualifying widow (er) filing status and you can use Form 1040A if your taxable income is less than $100,000.

If you could be claimed as a dependent by another person, you cannot claim yourself and you cannot claim anyone else as a dependent. You can file your own tax return though. You can be even be married and file as married filing jointly and still be a dependent on someone else's tax return.

A dependent is either a qualifying child or a qualifying relative and each type of dependent has its own rules to follow. Usually qualifying child rules apply to children and the qualifying relative rules apply to adults you want to claim as dependents. A dependent is not allowed his or her own exemption and therefore not allowed any sort of exemption as when a taxpayer claims someone else on their tax return. A dependent cannot claim his or her own exemption if they are able to be claimed on someone else's tax return. A dependent that can be claimed on someone else's tax return cannot claim his or her own exemption even if the taxpayer who can claim him or her does not actually claim the exemption. Please make a point to ask the question about dependents correctly. The correct question is "Can anyone else claim you as a dependent on another tax return?" The incorrect question would be "Did anyone claim you or is going to claim you  on their tax return?"

If you have a child who was placed with you by an authorized placement agency, you may be able to claim an exemption for that child. However, if you cannot get an SSN or an ITIN for the child, you must get an adoption taxpayer identification number (ATIN) from the Internal Revenue Service for the adopted child. An adoption taxpayer identification number (ATIN) is a issued by the Internal Revenue Service in order for taxpayers to be able to claim their children in the process of adoption.

You need an ATIN if you are in the process of adopting a child and you can claim the child as a dependent or want to claim certain credits for which that child qualifies you. Because of the new tax laws, you must have an identifying number for everyone you claim on your tax return. If you are adopting a child from another country, in order to obtain an adoption tax identification number, the child must be placed in your home for adoption by an authorized placement agency and you have tried to obtain the social security number and you are eligible to claim the child as a dependent on your tax return. 

When it comes to filing taxes there are statute of limitations that obligate you to keep records for a mandated period of time. You need to keep a copy of your tax returns for as long as they may be needed to comply with the administration of any provision of the Internal Revenue Service. You basically must keep your tax return in your power and ready to provide a copy if asked and they can ask you for them as long as the statute of limitation has not run out. This statute of limitations is usually 3 years and this is the period of time in which you can amend your tax return to claim a credit or refund. The statute of limitation period is also the time frame that the Internal Revenue Service can assess additional tax on your tax returns.  

 The period of time called the statute of limitations is different depending on your tax situation. In normal filing situations and if things are done in the order as they should be done, such as filing your tax return on time and paying on time. If you do not have special situation situations that apply to you, then your statute of limitations to keep your reports is 3 years. This period of limitation is 7 years if you filed a claim for a loss from worthless securities or if you had a bad debt deduction. Additionally, if you do not report all of your income, the statute of limitation is 6 years. Your statute of limitation never runs out if you never file a tax return for that year or you filed a fraudulent tax return. Furthermore, if you have employees, your statute of limitations is 4 years after the tax becomes due or paid whichever is later, in case the Internal Revenue Service wants to see your employment tax records.

You can use Form 1040EZ if your filing status is Single or Married Filing Jointly, your taxable income is less than $100,000, and you are not a debtor in a Chapter 11 bankruptcy case filed after October 16, 2005. You must use Form 1040A or Form 1040 if you received interest as nominee. You must also use Form 1040A or Form 1040 if you received a 2014 Form 1099-INT for having U.S. savings bond interest that includes amounts you reported before 2014. If you owned or had authority over one or more foreign financial accounts with a combined value over $10,000 at any time during 2014 you also must use either Form 1040A or Form 1040 to report this transaction. There are a few items that you can fit into a Form 1040EZ form. The rest go on either Form 1040A or Form 1040. You can always start with a Form 1040EZ and if there is not space for the item you have, then you go to a Form 1040A. Finally if there is no space on that Form 1040A for your items you can give up and use a Form 1040 instead. You can save a lot of time, effort and money, if you know what takes what to start out with.

There is a fantastic analogy in a Tax Act blog "The Difference Between Form 1040, 1040A and 1040EZ" for using the various tax forms. Filing the three different kinds of returns 1040EZ, 1040A, and 1040 is like having three water glasses of different sizes where Form 1040EZ would be an 8 ounce glass, 1040A would be a 12 ounce glass and Form 1040 would be a 24 ounce glass. Just like you can use a 24 ounce glass to drink 8 ounces or 12 ounces of water, you can use Form 1040 to file tax returns that can be filed on Form 1040EZ and Form 1040A. However, just like you cannot drink 24 ounces of water from an 8 ounce or 12 ounce glass, you cannot file a Form 1040 or 1040A tax return on a Form 1040EZ or a Form 1040 tax return on a Form 1040A. You get the idea?

Regardless of the manner that your PIN is generated, to file your tax return electronically, you must sign the tax return electronically using the personal identification number (PIN).

For example on October 22, 1986, President Reagan signed into law the Tax Reform Act of 1986. The act called for an decrease in individual taxation over a five-year period.

Over the years, the tax laws got so complicated that there was a need to simplify the tax code. The tax code and the paperwork to file a tax return was a difficult bureaucratic effort. Additionally, President Reagan wanted to up the economy with his tax law reform. We are living this tax reform presently.

Two tax bills signed in 2005 and 2006 extended through 2010 the favorable rates on capital gains and dividends that had been enacted in 2003, raised the exemption levels for the Alternative Minimum Tax, and enacted new tax incentives designed to persuade individuals to save more for retirement.

In this course we will be reviewing some basic tax preparation concepts regarding income, deductions and credits on your tax return. One of these basic tax preparation items is interest income. When you receive interest income as a nominee, it means that the income is in your name, but it actually belongs to someone else.

On or before the first Monday in February of each year the President is required by law to submit to Congress a budget proposal for the fiscal year that begins the following October.

Then again in 1997, President Clinton signed a tax revenue act which cut taxes by $152 billion including a cut in capital gain tax for individuals a $500 per child tax credit along with tax incentive for education.

This per child tax credit has now increased to $1,000 per child. The child tax credit started at $400 per child and increased to $500 per child in 1999. It was with this act that Roth IRAs were established. This act also exempted the capital gain taxation of the sale of personal residences of up to $500,000 for married couples and up to $250,000 for single taxpayers. There is also a $600,000 estate tax exemption and family farms and small businesses can qualify for exemption of $1.3 million. It was also at this time that the annual gift tax was corrected for inflation.

If you changed your name because of marriage, divorce, etc., be sure to report the change to the Social Security Administration (SSA) before you file your tax return. This prevents delays in processing your tax return and also will prevent any delay in issuing your refund. You want to update your files with the Social Security Administration (SSA) to safeguard your social security benefits.

Notify the Social Security Administration before you file your tax return with the IRS if you or your dependents changed your names. The name and the name of your dependents with the Social Security Administration must match the name with the reports you file with the Internal Revenue Service. Avoid filing your tax return without double checking your Social Security Administration records first because you will encounter the most difficult problem to try to fix the mismatch with the Internal Revenue Service (IRS) if you entered the wrong identifying information for you or your dependents. You should do everything in your power to avoid any kind of letter from the IRS especially a letter something so simple as a a social security number and name mismatch. It will especially be very difficult to straightening out the problem if they disallowed a credit such as the Earned Income Credit because of a social security mismatch. This is where an ounce of prevention is worth a pound of cure.

Your direct deposit request will be rejected and a check will be sent instead if the items in the direct deposit request form are not completely filled out. If any items are crossed out or whited-out your direct deposit will be rejected and a check will be sent instead. If your account in an individual bank account, your financial institution will not allow a joint refund to your account. It is quite needless to say that if your bank account is not in your name, your request for direct deposit would be denied.

You can use a scanning device such as "neat" to prepare and transfer documents to the Internal Revenue Service by digitizing paper documents to an electronic storage medium. There are a few digitizing programs that meet the Internal Revenue Service requirements by using export-to-PDF capabilities.

The Act of 1862 established the office of the Commissioner of Internal Revenue. The Commissioner was given the power to assess taxes, to enforce the tax laws through seizure of property and income and prosecution and to levy and collect taxes.

Many individuals have tried to influence these new tax laws. Many times the tax laws were changed and amendments issued to make the tax laws a permanent component of our daily life. Taxes are here to stay and will be raised as the need arises for more money.

Everyone must do their part and provide documentation for everything that has transpired. There are steep penalties for everyone for failing to comply. Your employer must provide or send Form W-2 to you no later than January 31, 2015. If you do not get a Form W-2, you still have to report your earnings on your tax return.

You should not file your tax return without Form W-2. Also, if your employer has not sent you a copy of your W-2 yet, then they most probably have not sent a copy to the IRS so asking the IRS for a copy is probably not an option. Besides, if they do have a copy, a copy would not be made available to you since it is too early in the tax year. Your employer has until January 31, 2015 to mail your Form W-2 to you, but has until March 2, 2015 to submit the forms to the Social Security Administration and to the Internal Revenue Service. The good news is that once you ask your employer for Form W-2 and if he refuses, you can file a substitute form to report your wages to the Internal Revenue Service on Form 4852. You have to allow enough mail processing time after January 31, 2015 and/or visit the employer to make your request before you can file Form 4852. The point is that you must wait until after January 31, 2015 in order to file your substitute wage form. Form 4852 is not a form you would file on January 7th, for example.

The Presidential Election Campaign Fund is set up to help pay for Presidential election campaigns. This fund gives more financial equality to Presidential candidates who otherwise would not be able to afford to run for office. This election campaign fund also reduces the dependence on large contributions from interest groups. You can contribute $3 for you and $3 for your spouse if you are married filing Married Filing Jointly. Your tax refund will not be lowered if you make the Presidential Election Campaign Fund election.

Again, in 1993 another act was signed to lessen the tax deficit. On August 10, 1993, President Clinton signed the Revenue Reconciliation Act of 1993 into law.

What was different about the 1993 act to the 1986 was that the Revenue Reconciliation Act of 1993 affect almost every taxpayer, not only the rich. This new tax act decreased the tax planning benefits and tax planning strategies previously enjoyed by many.

If your spouse is a nonresident alien, you cannot use Form 1040EZ if he or she cannot file a U.S. tax return.

If your nonresident alien spouse has a social security number or an Individual Tax Identification Number, that would normally mean that they are a resident, otherwise they would normally not have qualified for such an identification number. If your nonresident alien spouse becomes a resident alien before he or she can file a tax return, then you would be able to the requirements and be able to file Form 1040EZ. Likewise, if your nonresident spouse is living with your in the United States and files with you jointly, he or she would be able to qualify for an Individual Identification Number with the Internal Revenue Service and therefore be considered a resident alien instead of a nonresident alien.

If your spouse died at the end of 2014 and you remarried at the end of 2014 to another spouse you would still file married filing jointly but with a new spouse. If you are remarried to a new spouse, your deceased spouse would have no choice but to file married filing separately.

The nation's first sales taxes were on gold, silverware, jewelry and watches due to the high cost of the War of 1812.

The information asked on your tax return is needed to carry out the tax laws of the United States and to figure and collect the right amount of tax. It is imperative that you supply the taxing agencies with the most correct information requested on the tax forms and worksheets.

Form 1040EZ, 1040A and Form 1040 ask you for information about yourself, your spouse if you are married, and your dependents. In turn, the Internal Revenue Service uses the information you supply to calculate the amount of tax you should have been paying throughout the year and therefore the correct of amount of tax to collect. The Internal Revenue Service also uses this information to determine if you qualify for the credits and deductions you are claiming on your tax return.

Let's take an example when you must use Form 8862 in preparing a tax return for your client. In 2014, your client  was age 24, single, and living at home with his parents. He worked and he was not a student and earned $7,500. His parents cannot claim him as a dependent. When he files his tax return, he cannot claim the Earned Income Credit because he is not at least age 25.

Your tax preparation software would most likely catch this mistake because your client is not at least age 25. However, let's say you not only did not fill out the Form 8862 diligence worksheet, but you also did not fill out the correct age in you tax software. As a result, you give your client the Earned Income Credit. This is a tax preparation mistake an also a negligent disregard of the EIC due diligence rules. When the Internal Revenue Service asks for the due diligence requirement record, they will fine fine you $500 for that client if you fail to provide it.

You can use Form 1040EZ if your filing status is Single or Married Filing Jointly, your taxable income is less than $100,000, and you are not a debtor in a Chapter 11 bankruptcy case filed after October 16, 2005.

There is a fantastic analogy in a Tax Act blog "The Difference Between Form 1040, 1040A and 1040EZ" for using the various tax forms. Filing the three different kinds of returns 1040EZ, 1040A, and 1040 is like having three water glasses of different sizes where Form 1040EZ would be an 8 ounce glass, 1040A would be a 12 ounce glass and Form 1040 would be a 24 ounce glass. Just like you can use a 24 ounce glass to drink 8 ounces or 12 ounces of water, you can use Form 1040 to file tax returns that can be filed on Form 1040EZ and Form 1040A. However, just like you cannot drink 24 ounces of water from an 8 ounce or 12 ounce glass, you cannot file a Form 1040 or 1040A tax return on a Form 1040EZ or a Form 1040 tax return on a Form 1040A. You get the idea?

Here is the entire list of items that allow you to use Form 1040EZ. 

* Only Single or Married Filing Jointly

* No dependents

* Under age 65 and not blind on January 1, 2015

* Only have wages, salaries, tips, taxable scholarship and fellowship grants, unemployment compensation, or Alaska Permanent Fund dividends,

* Taxable interest was not over $1,500

* Taxable income is less than $100,000

* Earned tips are included in boxes 5 and 7 of your Form W-2

* No household employment taxes

* No Chapter 11 bankruptcy case filed after October 16, 2005

* No adjustments to income

* No credits other than the earned income credit

* No advanced payments of the premium tax credit

If your spouse is a nonresident alien, you cannot use Form 1040EZ if he or she cannot file a U.S. tax return.

If your nonresident alien spouse has a social security number or an Individual Tax Identification Number, that would normally mean that they are a resident, otherwise they would normally not have qualified for such an identification number. If your nonresident alien spouse becomes a resident alien before he or she can file a tax return, then you would be able to the requirements and be able to file Form 1040EZ. Likewise, if your nonresident spouse is living with you in the United States and files with you jointly, he or she would be able to qualify for an Individual Identification Number with the Internal Revenue Service and therefore be considered a resident alien instead of a nonresident alien.

You also cannot file a tax return using Form 1040EZ if you owe tax from the recapture of an education credit. If you can claim a credit for excess social security and tier 1 RRTAX tax withheld will won't be able to file Form 1040EZ either. There will also not be a space for any retirement Savings Contributions Credit or the Saver's Credit on Form 1040EZ. Therefore, if you have any of these,  you will not be able to file Form 1040EZ.

There are only certain items you can fit on Form 1040EZ. Just like you cannot fill 12 ounces of water into an 8 ounce glass, you cannot fill your Form 1040EZ with certain items meant for Form 1040. You can try it and in both instances would result in a mess. In the glass of water instance, you would have to mop the floor and the Form 1040EZ instance, you would not find a space for it and if you insert it in the form anyways, you would soon receive a letter from the Internal Revenue Service (IRS). Just like you want to keep that floor dry, you want to keep the Internal Revenue Service (IRS) or the other tax collecting agencies away.

An Individual Tax Identification Number (ITIN) does not entitle you to social security benefits and neither does it allow you to work legally under U.S. law.

An ITIN is only intended to serve the purpose of identifying the individual filing a tax return or being claimed on a tax return for various purposes such as when claiming an exemption. It in the same format as a social security number. Although an individual taxpayer identification number (ITIN) is like a social security number in format, unlike a social security number which serves many purposes, the ITIN number only serves one -identifying the holder. The individual tax identification number (ITIN) does not entitle the holder for social security benefits or to legally work in the United States. If you are working in the United States illegally and someday will have a status adjustment, you should keep all your paystubs to report all your wages to the Social Security Administration to the correct social security number when your legal status becomes adjusted.

If one spouse does not report the correct tax, both spouses may be responsible for any individual taxes assessed by the IRS. You may want to file separately if you believe your spouse is not reporting all or his or her income or if you do not want to be responsible for any taxes due if your spouse does not have enough tax withheld or does pay enough estimated tax.

We often wonder why we even have married filing separately filing status. Many tax professionals tell you right off not to file Married Filing Separately. Why? Basically, if you file Married Filing Separately, you end up paying more tax and end up qualifying for less credit and deductions. Married Filing Separately is notorious for not being chosen as a filing status by many tax professionals and taxpayers. So much that some tax professionals don't care to learn the ins and outs of this filing status. The following are consequences of selecting Married Filing Separately when you file your tax return.

* Tax rate generally is higher.

* Exemption amount for figuring the alternative minimum tax is half that allowed on a joint return.

* Credit for child and dependent care expenses not allowed in most cases

* Amount of exclusion from income under an employer's dependent care assistance program is limited to $2,500 instead of $5,000.

* Earned income credit not allowed.

* Exclusion or credit for adoption expenses not allowed in most cases.

* Education credits such as the American opportunity credit, lifetime learning credit, or the deduction for student loan interest are not allowed.

* Exclusion of any interest income from qualified U.S. savings bonds you used for higher education expenses are not allowed.

Additionally, if you lived with your spouse at any time during the tax year and you are married filing separately, you are prevented from doing certain things such as claiming certain credits or taking certain deductions. 

* The credit for the elderly or the disabled is not allowed.

* A greater percentage (up to 85%) of any social security or equivalent railroad retirement benefits you received must be included in your income.

* The child tax credit is reduced at half income levels than if you filed jointly.

* The retirement savings contributions credit is is reduced at half income levels than if you filed jointly..

* The deduction for personal exemptions, and Itemized deductions are is reduced at half income levels than if you filed jointly.

* Capital loss deduction limit is $1,500 instead of the $3,000 on a joint return.

* If your spouse itemizes deductions, you cannot claim the standard deduction.

* The basic standard deduction is half the amount allowed on a joint return.

So apparently married filing separately is not the way to go. There are many drawbacks in choosing married filing separately as your filing status. However, sometimes married filing separately is the only option for some taxpayers.

Your filing status is single if on December 31, 2014, you were never married, you were legally separated, according to your state law, under a decree or divorce or separate maintenance. Also you are considered single if you were widowed before January 1, 2015 and you did not remarry in 2014 and you filing status is "Single" if you did not have a dependent child living with you.

You can use the Single filing status is you are unmarried, divorced, legally separated, or widowed as of the last day of the calendar year. If no other filing status applies to you, then you generally must file as "Single".

Even if you do not have to file a tax return, you should file one to get a refund of any federal income tax withheld or you are eligible for the EIC.

Just because you hardly made any money does not mean that your employer has not withheld anything from your check. Depending on how many deductions your claimed on your Form W-4, you may have had federal tax withheld from your check. Almost everyone pays social security and Medicare taxes and these are not the kind of taxes you can get refunded. However, if you had federal withholding or any state tax withheld, you can get file your federal or state tax returns to get these refunded to you if you did not make enough money to even file a tax return. Why would your employer if withhold any money in the first place? You ask. Well, when you first start your job, your employer usually does always get your Form W-4 from you right away. Therefore, your employer is obligated to withhold at a single rate and sometimes with zero exemptions. To avoid any kind of withholding, it is a good idea to give your employer Form W4 immediately.

If you don't make enough money to file a tax return, you should still file if you qualify for the Earned Income Credit, even if you have no dependents. Even if you just earned a $1, and if you are single, head of household, or qualifying widow or married with no dependents you can get $2 dollars back as an Earned Income Credit amount. If you have dependents and you only earned $1 for example, you can get anywhere from $9 to $11 back as an Earned Income Credit amount.  If you look at the EIC table you can see the different income scenarios. Look at the Earned Income Credit qualification rules to see if you qualify for the Earned Income Credit and for how much you qualify.

If you take the EIC even though you are not eligible and it is determined that your error is due to reckless or intentional disregard of the EIC rules, you will not allowed to take the earned income credit for 2 years even if you are otherwise eligible to do so in this year.

As a tax professional you need to have many caveats in mind when it comes to the Earned Income Credit rules. When you prepare tax returns for a fee you have to determine the eligibility for the Earned Income Credit or face steep penalties. $500 per taxpayer can really add up. They say that an ounce of prevention is worth a pound of cure. You don't want to be in front of an Internal Revenue Service agent frantically trying to figure out how you are going to come up with the due diligence proof for the 2,000 tax returns you prepared last year. Imagine two thousand tax returns times $500? That is a million dollars that you would owe the Internal Revenue Service. Let's say you can negotiate the million dollars with the IRS. The negotiated figure is still a lot of money.

You must file Form 8862 if your EIC for a year after 1996 was reduced or disallowed for any reason other than a math or clerical error. File Form 8862 if for 2 years after the most recent tax year for which there was a final determination that your EIC claim was due to reckless or intentional disregard of the EIC rules. Also file Form 8862 if the reason your EIC was reduced or disallowed in an earlier year was because it was determined that a child listed on your Schedule EIC was not your qualifying child. Additionally, if your EIC credit was denied for 10 years due to fraud, then you must file Form 8862 along with your tax return.

You must abide by the four due diligence rule requirements. As a tax professional, you must ask all the questions required on Form 8867. Form 8867 must be used as an interview worksheet and no question should go unasked. Not asking the questions on Form 8862 would be a very dangerous task for you as a tax preparer. Please don't think that this is not going to happen to you or that the Internal Revenue Service will only go after the big guys such as H&R Block and Jackson Hewitt. The rules apply to every tax professional even if that tax professional only prepared two tax returns. Remember! Use Form 8862 as a worksheet in your interview and when allowing your clients to take the Earned Income Credit.

Let's take an example when you must use Form 8862 in preparing a tax return for your client. In 2014, your client  was age 24, single, and living at home with his parents. He worked and he was not a student and earned $7,500. His parents cannot claim him as a dependent. When he files his tax return, he cannot claim the Earned Income Credit because he is not at least age 25.

Your tax preparation software would most likely catch this mistake because your client is not at least age 25. However, let's say you not only did not fill out the Form 8862 diligence worksheet, but you also did not fill out the correct age in you tax software. As a result, you give your client the Earned Income Credit. This is a tax preparation mistake an also a negligent disregard of the EIC due diligence rules. When the Internal Revenue Service asks for the due diligence requirement record, they will fine fine you $500 for that client if you fail to provide it.

Remember that any refund you receive as a result of taking the EIC will not be used to determine if you are eligible for temporary assistance for needy families, Medicaid and SSI, or supplemental Nutrition Assistance Program and low income housing. The refund you receive because of EIC cannot count as an asset to determine qualification for these benefits.

Everyone must do their part and provide documentation for everything that has transpired. There are steep penalties for everyone for failing to comply. Your employer must provide or send Form W-2 to you no later than January 31, 2015. If you do not get a Form W-2, you still have to report your earnings on your tax return.

You should not file your tax return without Form W-2. Also, if your employer has not sent you a copy of your W-2 yet, then they most probably have not sent a copy to the IRS so asking the IRS for a copy is probably not an option. Besides, if they do have a copy, a copy would not be made available to you since it is too early in the tax year. Your employer has until January 31, 2015 to mail your Form W-2 to you, but has until March 2, 2015 to submit the forms to the Social Security Administration and to the Internal Revenue Service. The good news is that once you ask your employer for Form W-2 and if he refuses, you can file a substitute form to report your wages to the Internal Revenue Service on Form 4852. You have to allow enough mail procesing time after January 31, 2015 and/or visit the employer to make your request before you can file Form 4852. The point is that you must wait until after January 31, 2015 in order to file your substitute wage form. Form 4852 is not a form you would file on January 7th, for example.

In this course we will be reviewing some basic tax preparation concepts regarding income, deductions and credits on your tax return. One of these basic tax preparation items is interest income. When you receive interest income as a nominee, it means that the income is in your name, but it actually belongs to someone else.

You are responsible to report any interest income on your tax return. Your bank is normally only obligated to send you an interest statement if the interest amount is over $10. However, this does not mean that you are not obligated to report your interest if it is less than $10 or if your bank did not send you a statement at the end of the year. If you received a statement as a nominee of the interest received, the Internal Revenue Service will hold you responsible to report this income on your tax return or name you as the owner of such interest income if you don't file the proper paperwork to let them know who is the real owner. You should not just choose whomever you want as the owner of this interest income, because the person to whom you report the interest income will be obligated to report it on their own tax return if they have a filing requirement.

Another basic income item that that you need to know about in this course is unemployment compensation. You must report on your tax return unemployment compensation that you receive that is the total unemployment compensation paid to you in 2014.

It was good while it lasted. Unemployment compensation was taxable only if the amount was over $2,400. This meant that anything up to $2,400 was completely tax free. Qualifying for unemployment compensation has always been due to contributions to a government unemployment compensation fund program usually through your state employment development department. Please do not include as supplemental unemployment compensation received from a company-financed fund but rather include them as wages subject to tax withholding and possibly subject to social security and Medicare taxes.

Many changes have occurred since Congress enacted the first income tax law. In 1862, Congress enacted the nation's first income tax law in order to support the Civil War effort.

It was in 1862 that the office of Commissioner of the Internal Revenue was established. This individual was given the power to enforce the tax laws. There has not been too much change to this power to now.

The Act of 1862 established the office of the Commissioner of Internal Revenue. The Commissioner was given the power to assess taxes, to enforce the tax laws through seizure of property and income and prosecution and to levy and collect taxes.

Many individuals have tried to influence these new tax laws. Many times the tax laws were changed and amendments issued to make the tax laws a permanent component of our daily life. Taxes are here to stay and will be raised as the need arises for more money.

The fact remains that the powers and authority of the office of Commissioner of Internal Revenue remain very much the same today.

However, today the taxpayer seems to have more power due to social media and the knowledge and advice inseminated by others through the internet. Those books with titles such as "How To Beat the IRS" are real and they offer much advice on how to win your case against the IRS. Some people call these dirty attorney tricks. Regardless of what they are called they still provide guidance and information on Internal Revenue loopholes.

In 1913, the 16th Amendment to the Constitution made the income tax permanent as we have it today. This amendment gave Congress legal authority to tax income of both individuals and corporations.

Amendments like the one in 1913 are brought about through the needs of additional funds of government. Also, many tax changes are incepted due to economy changes such as more employment available to taxpayers or vise versa, if there is high unemployment, then tax laws will take that into consideration too. This is done so and mostly seen by the tax credits or special tax deductions offered though the tax system.

For example on October 22, 1986, President Reagan signed into law the Tax Reform Act of 1986. The act called for an decrease in individual taxation over a five-year period.

Over the years, the tax laws got so complicated that there was a need to simplify the tax code. The tax code and the paperwork to file a tax return was a difficult bureaucratic effort. Additionally, President Reagan wanted to up the economy with his tax law reform. We are living this tax reform presently.

With this October 22, 1986 law that President Reagan signed into law the Tax Reform Act of 1986, the top rate on individual income was lowered from 50% to 28%.

In an effort to reduce the federal budget deficit, the Revenue Reconciliation Act of 1990 was signed into law on November 5, 1990. The emphasis of the 1990 act was increased taxes on the wealthy.

It came to everyone's realization that the wealthy were paying less than the fair share. With this new act came higher taxes and a limitation on itemized deductions. Almost every presidential candidate promises not to raise taxes. President Bush promised not to raise taxes to get elected and then signed the Revenue Reconciliation Act of 1990 in law which did the contrary. It raised taxes and lowered deductions. This was the act that started our "pay as you go system". In this system taxpayers pay their tax in installments as they earn the money. This is usually done weekly or biweekly every time the taxpayer receives a check from their employer. Taxpayers who don't have an employer usually are required to make estimated tax payments throughout the tax year. Other countries have similar tax policies.

Again, in 1993 another act was signed to lessen the tax deficit. On August 10, 1993, President Clinton signed the Revenue Reconciliation Act of 1993 into law.

What was different about the 1993 act to the 1986 was that the Revenue Reconciliation Act of 1993 affect almost every taxpayer, not only the rich. This new tax act decreased the tax planning benefits and tax planning strategies previously enjoyed by many.

Then again in 1997, President Clinton signed a tax revenue act which cut taxes by $152 billion including a cut in capital gain tax for individuals a $500 per child tax credit along with tax incentive for education.

This per child tax credit has now increased to $1,000 per child. The child tax credit started at $400 per child and increased to $500 per child in 1999. It was with this act that Roth IRAs were established. This act also exempted the capital gain taxation of the sale of personal residences of up to $500,000 for married couples and up to $250,000 for single taxpayers. There is also a $600,000 estate tax exemption and family farms and small businesses can qualify for exemption of $1.3 million. It was also at this time that the annual gift tax was corrected for inflation.

We have come a long way from 200 years ago. From 1791 to 1802, the United States government was supported by internal taxes on distilled spirits, carriages, refined sugar, tobacco and snuff, property sold at auction, corporate bonds, and slaves. Now, the government gets their review from more modern items in addition to the items from 100-200 years ago. This includes more modern items such as commerce transacted over the internet and plastic surgery tax.

It all started in 1791. However, it started before that really. Way before that in some form or other. It is just that things become formal at one point. In 1862, in order to support the Civil War effort, Congress formally enacted the nation's first income tax law and it was a forerunner of our modern income tax.

The nation's first sales taxes were on gold, silverware, jewelry and watches due to the high cost of the War of 1812.

This war resulted in struggles. Individuals did not only have to worry about certain war uncertainties, but by this time they also had to worry about complying with the government and pay tax. During the Civil War, a person earning from $600 to $10,000 per year paid tax at the rate of 3%.

Then In 1868, Congress focused its taxation efforts on tobacco and distilled spirits and eliminated the income tax in 1872.

The government has recently become concerned with public health and has passed certain taxes on tobacco products to discourage their consumption.

Many things have transpired over the years in regards to taxes. For example, in 1895, the U.S. Supreme Court decided that the income tax was unconstitutional because it was not apportioned among the states in conformity with the Constitution.

More recently in 2004, the U.S. was forced to eliminate a corporate tax provision that had been ruled illegal by the World Trade Organization.

Two tax bills signed in 2005 and 2006 extended through 2010 the favorable rates on capital gains and dividends that had been enacted in 2003, raised the exemption levels for the Alternative Minimum Tax, and enacted new tax incentives designed to persuade individuals to save more for retirement.

You must use Form 1040A or Form 1040 if you received interest as a nominee. You must also use Form 1040A or Form 1040 if you received a 2014 Form 1099-INT of U.S. savings bond interest that includes amounts your reported before 2014. If you owned or had authority over one or more foreign financial accounts with a combined value over $10,000 at any time during 2014, then you must use either Form 1040A or Form 1040 to report it.

Practically anything that you receive in exchange for services is taxable income. You don't need to receive any kind of paperwork from anyone in order to report income that is taxable. For example, wages received as a household employee for which you did not receive a Form W-2 because your employer paid you less than $1,900 in 2014 needs to be included in line 1 as taxable income.

Some types of income, such as household employee wages may not require the employer to issue you any kind of documentation if that amount does not go over a certain amount. This amount would be over $1,900 in 2014. This means that if your household employee earned more than $1,900 you would have to fill out the forms to report the amount to government and pay the employment taxes. However, this does not mean that your employee is exempt from reporting this income. The same thing goes with banks. Bank are only required to report your interest income if it goes over $10. This does not mean that you, the account holder, are not required to report the income, even if it is $2.

If you received a state refund of your taxes in 2014, and for the year the tax was paid to the state, you did not file Form 1040EZ or Form 1040A, then none of your state refund would be taxable.

This is a fast way to know if your state refund would be taxable by the forms that you file such as when you file 1040EZ or Form 1040A. What happens if you file your Form 1040EZs and your Form 1040As on Form 1040 like so many professional tax services do? Then you need to fill out the worksheet to figure out the taxable amount. Therefore, do not assume that just because they filed Form 1040 last year, that their state refund was miscalculated.

If you are a child or other dependent, you must file a tax return for 2014 if your gross income was more than the larger of $1,000 or your earned income up to $5,850 plus $350.

If you are a dependent, you must file a tax return for 2014 if you income is over the standard deduction amount for a single taxpayer. The filing status amount for 2014 for a single taxpayer is $6,200. Therefore, if a dependent earned at least $6,200 for tax year 2014 they definitely have to file.  

If you were married at the end of 2014, even if you did not live with your spouse at the end of 2014 you can use the Married Filing Jointly filing status. However, you don't have to.

It is always your legal right to file your tax return separately. There are a lot of reasons you may want to file married filing separately. You may not trust your spouse. You may still be married but may have been living separate from your spouse for a while now. You may not be speaking to your spouse anymore and filing a tax return together may not even be an option for the two of you. It could be as simple as you just wanting to keep your finances separate from your shopaholic spouse. If you live separate from your spouse you can qualify for the head of household filing status. 

If your spouse died at the end of 2014 and you remarried at the end of 2014 to another spouse you would still file married filing jointly but with a new spouse. If you are remarried to a new spouse, your deceased spouse would have no choice but to file married filing separately.

In order for your child to be your dependent, you must meet certain requirements. The child must pass the five tests which are the age, residency, support and the joint return test. The child can bypass the age test if the child was a full-time student. These schools according to the rules do not qualify if they are a school that only offer on the job training course, correspondence schools or schools that just offer training over the internet.

A student is a child who during any part of 5 calendar months in 2014 was enrolled as a full-time student at a school that offers course load hours that the school that the school considers to be full-time attendance. Practically any traditional school setting would count for the definition of what schools are qualified to be schools for full-time attendance. For Internal Revenue Service purposes, you would not count on job training, correspondence schools or internet schools. However for this this purpose, you can count student who work on "co-op" jobs in a private industry that are part of school system classroom and practical training.

It is better to use Direct Deposit because your payment is more secure and there is no check to get lost, it is more convenient and you can avoid a trip to the bank to deposit your check and it cost the government less to refund you by direct deposit. It costs you less too. Therefore, it is a win- win situation for everyone.

Get your refund faster by direct deposit than you do by check. Using Direct Deposit is more convenient and you don't have to make a trip to your bank or wait in line for a teller to give you your money. Additionally, if you opt for Direct deposit your payment is more secure and there is no chance that your payment will not be received or deposit getting lost. Using Direct Deposit saves everyone money. The government does not have to spend that extra money to print you out a check or on postage to mail you a check. If you are paying, you will save money that you would otherwise have to spend on postage and you will also save your 20 cents that it would cost you to issue a check. Also, now that most post offices have put the service service machines out of service, you would actually have to wait in line to mail out your items. Do it all online and you will save a lot of money. They say that time is money and it is very true here.  Now you can even split your refund and have it deposited in two or three different checking or savings account.

You may have to pay a penalty if the amount owed is at least $1,000 and it is more than 10% of the tax shown on your tax return. However, you will not owe the penalty if your 2013 tax return was for a tax year of 12 full months and there was no tax shown on your 2013 tax return and you were a U.S. citizen or resident for all of 2013. Also, you will not owe the penalty if your 2013 tax return was a tax year of 12 full months and line 7 on your 2014 tax return is at least as much as the tax shown on your 2013 tax return.

One thing is to file your tax return on time, and another thing is to not pay your taxes on time. You can always get an extension to file your tax return, but you cannot get an extension to pay the taxes owed. Well, you can get an extension to pay, but will be penalized with penalties for paying late and interest on the late payments. Failure to pay by the deadline will result in a failure-to-pay penalty of 1/2 of 1 percent of your unpaid taxes. If you pay at least 90 percent of the amount owed with your extension to file request you may avoid the failure-to-file penalty as long as you pay the remaining amount by the extended due date. There are two penalties you need to attend to. One is the late-filing penalty and the other is the late-payment penalty and your goal should be to avoid both. 

If you cannot pay the full amount when you file, you can ask for an installment agreement or ask for an extension of time to pay. Remember your extension of time to file is not an extension of time to pay. This does not mean that you cannot ask for an extension of time to pay, it is just that this extension of time to pay will cost you in interest and penalties.

With our current pay-as-go tax system, taxpayers are obligated to pay their tax every time they get a paycheck. If the taxpayer or employer does not follow the pay-as-you-go system, they have to pay penalties for not making timely payments and also pay interest for the time that the money was not received on time. The IrS will accept your return without the payment but will send you a letter asking you for payment and will have the interest and usually the penalty for not paying your tax will be calculated in that letter. The worst thing you can do is not send your tax return.

If you cannot file on time, you can get an automatic 6-month extension if no later than the date your return is due, you file Form 4868. In order for your extension of time to file to take effect, you must file by the due date of your tax return. 

You have to file this extension on or before April 15 or the due date of your return, which could be either April 16, or April 17 depending on what day of the weekend or holiday April 15 fell on. You cannot realize you did not file your tax return by the due date and all of a sudden decide to send your Form 4868 request for extension of time to file on April 20th. The Internal Revenue Service processing center probably receives thousands of Form 4868 after the required due date and they probably just either toss them away or send you a letter to let you know that the request for an extension of time to file your return has been filed late and ask you to immediately file your tax return. Although, they technically can charge you a late filing penalty, they might waive it if you comply with their letter and send your tax return immediately.

If you get an automatic extension, you have until October 15, 2014 to file your tax return but not to pay the tax you owe. Clear this confusion now, the automatic extension of time to file is not an extension of time to pay your tax.

Remember, our tax system is based on the pay-as-you-go system. You must have paid enough money on every paycheck you received. Upon calculating and reconciling with the Internal Revenue Service, you must owe an amount that is closer to zero. If you did not pay enough to cover your tax during the year and you are really off when you reconcile and file your return with the Internal Revenue Service, you could be liable for certain penalties for failing to pay your taxes as you earned your money.

If you changed your name because of marriage, divorce, etc., be sure to report the change to the Social Security Administration (SSA) before you file your tax return. This prevents delays in processing your tax return and also will prevent any delay in issuing your refund. You want to update your files with the Social Security Administration (SSA) to safeguard your social security benefits.

Notify the Social Security Administration before you file your tax return with the IRS if you or your dependents changed your names. The name and the name of your dependents with the Social Security Administration must match the name with the reports you file with the Internal Revenue Service. Avoid filing your tax return without double checking your Social Security Administration records first because you will encounter the most difficult problem to try to fix the mismatch with the Internal Revenue Service (IRS) if you entered the wrong identifying information for you or your dependents. You should do everything in your power to avoid any kind of letter from the IRS especially a letter something so simple as a a social security number and name mismatch. It will especially be very difficult to straightening out the problem if they disallowed a credit such as the Earned Income Credit because of a social security mismatch. This is were an ounce of prevention is worth a pound of cure.

Identity theft occurs when someone uses your personal information, such as your name, social security number (SSN), or other identifying information, without your permission, to commit fraud or other crimes such as getting a job or filing a tax return to receive a refund. To reduce your risk, protect your Social Security Number by ensuring that your employer is protecting your SSN and be careful when choosing a tax preparer. 

Also, you can ask your employer how they are protecting your number to make sure they are protecting your Social Security Number. You can ask your employer about the company who is doing the payrolls and whether or not they are a company whom can be trusted with your personal information. Be wise when supplying other with your personal information such as your social security number, date of birth and address. Always ask for the name of individuals who take down your personal information and keep a record of this information in case you need to speak to the police in the event you detect identity theft. This is important information you always wish you kept or asked after you encounter problems. I think the most common comment people make to themselves is "This will not happen to me".

If you are a nonresident or resident alien and you do not have and are not eligible to get an SSN, you must apply for an ITIN. They must have an Individual Tax Identification Number (ITIN) in order to file their tax return. It must be noted and it is extremely important that this identification is only used for tax filing purposes.

A Taxpayer Identification Number (ITIN) is an identification number issued by the Internal Revenue Service that is only made available for certain nonresident and resident aliens, their spouses, or dependents who are not eligible to get a Social Security Number (SSN). It is in the same format of the social security number with nine digits. Many undocumented taxpayers make the mistake of given this number to their employers but they should never do this. The employer is under the obligation to fire them if the employee shows them them this Internal Revenue Service issued identification card. This is like making a confession to their employer that they are indeed working illegally in the country. In turn if the employer continues their employment, they would run into trouble with the immigration service.

The Presidential Election Campaign Fund is set up to help pay for Presidential election campaigns. This fund gives more financial equality to Presidential candidates who otherwise would not be able to afford to run for office. This election campaign fund also reduces the dependence on large contributions from interest groups. You can contribute $3 for you and $3 for your spouse if you are married filing Married Filing Jointly. Your tax refund will not be lowered if you make the Presidential Election Campaign Fund election.

Your direct deposit request will be rejected and a check will be sent instead if the items in the direct deposit request form are not completely filled out. If any items are crossed out or whited-out your direct deposit will be rejected and a check will be sent instead. If your account in an individual bank account, your financial institution will not allow a joint refund to your account. It is quite needless to say that if your bank account is not in your name, your request for direct deposit would be denied.

A frivolous tax return is one that does not contain information needed to figure the correct tax or shows a substantial incorrect tax because you take a frivolous position or desire to delay or interfere with the tax laws. In addition to any other penalties, there is a penalty of $5,000 for filing a frivolous tax return.

There many frivolous tax return preparation tactics you could take to lower your tax bill, avoid paying taxes or penalties, or even decide not to file a tax return altogether. However, you could suffer the consequences of your misguided actions. Many people or professionals draw from different sources of the law to try to win their case against the tax agencies. These people may quote court cases to try to win their case. The Internal Revenue Service is well aware of these frivolous tax filing tactics. The Internal Revenue Service has come up with various rules to discourage any frivolous tax practices. Section 6651(a)(2) and section 6654 are some of these rules that penalize you for participating in these frivolous tax filing tactics. 

Keep a copy of your tax return, worksheets you used, and records of all items appearing on your tax return until the statute of limitations runs out for that tax return. It is better to just keep a copy of your tax returns for longer than the statute of limitations.

Now with virtual storage it takes less effort and space to keep copies of tax returns indefinitely. At one point, you many not need a copy of your tax returns for Internal Revenue Service purposes, but you may need them for other purpose such as your medical insurance company. It is important to note that you will not be able to get a record of your tax return from the Internal Revenue Service anytime you wish. They follow their statute of limitation to the dot.

The information asked on your tax return is needed to carry out the tax laws of the United States and to figure and collect the right amount of tax. It is imperative that you supply the taxing agencies with the most correct information requested on the tax forms and worksheets.

Form 1040EZ, 1040A and Form 1040 ask you for information about yourself, your spouse if you are married, and your dependents. In turn, the Internal Revenue Service uses the information you supply to calculate the amount of tax you should have been paying throughout the year and therefore the correct of amount of tax to collect. The Internal Revenue Service also uses this information to determine if you qualify for the credits and deductions you are claiming on your tax return.

On or before the first Monday in February of each year the President is required by law to submit to Congress a budget proposal for the fiscal year that begins the following October.

The United States budget process was initiated in 1921 and it was not a formal process. It was until 1974 that Congress was forced to adopt a more formal process. The Congressional Budget and Impoundment Control Act of 1974 was enacted because President Richard Nixon refused to spend funds as the Congress had allocated them and passing a more formal budget process would force President Nixon to spend funds as Congress had indicated.

The Practitioner PIN method allows you to authorize your tax practitioner to enter or generate a taxpayer PIN for signing a tax return. You can electronically sign your tax returns by selecting a five-digit PIN. 

If the taxpayer is married, a PIN is needed for the taxpayer and a PIN is also needed for the spouse when filing a Married Filing Jointly tax return. The newer version of the PIN starting in 2010 will also include From 1040, Form 4868 and another twenty-one Form 1040-related tax returns. With this new option , now the tax preparer can also electronically sign Form 4868 to request an extension of time to file a tax return. The new method also allows you to authorize the Electronic Return Originator to enter or generate your PIN.

Regardless of the manner that your PIN is generated, to file your tax return electronically, you must sign the tax return electronically using the personal identification number (PIN).

An IRA is an individual retirement arrangement that is a tax-favored personal savings arrangement to set money aside for your retirement. You and your spouse (under age 50) each may be able to contribute up to $5,500 to a traditional IRA or Roth IRA in 2014. The amount of contribution cannot be more than the taxable compensation amount for the year. So if your compensation for the entire year was only $4,000 then your contribution amount cannot be more than $4,000 for the year.

The amount of contribution is generally deductible on your tax return. This deduction may be limited if you (or your spouse if you are married) are covered by a retirement plan at work. It also may be limited if you (or your spouse) are covered by a retirement plan at work and your income exceeds certain levels. A Roth IRA is allowed and deductible similar to a traditional IRA for the most part. However, a Roth IRA may be limited based on your income and your filing status. To contribute to an IRA, you must be age 70 1/2 at the end of the tax year and of course, you must have compensation in order to do so.

You should not contribute more than the allowed amount or the amount that can be deductible per year. If you are age 50 or older, you may owe a penalty if your contributions to an IRA or Roth IRA exceeds $5,500.

An excess IRA contribution occurs if you contribute more than the contributions limit, if you are making regular IRA contributions to a traditional IRA at age 70 1/2 or older. An excess IRA contribution would also occur if you make an improper rollover contribution to an IRA. If it is determined that you made an excess contribution, you will be liable for an excess contribution of 6% per year as long as the excess contributions remains in the IRA. You can avoid the excess contribution penalty by withdrawing the excess contribution from your IRA and any income earned by the due date of your tax return.

You can choose the Married Filing Jointly filing status if you are married and both you and your spouse agree to file together. When you file Married Filing Jointly, you report your combined income and deduct your combined allowable expenses. You can file using the Married Filing Jointly filing status even if one of you had no income or deductions.

Married taxpayers have a choice to either file jointly or to file separately. The better choice always seems to be to opt for Married Filing Jointly. The other options are the Married Filing Separate and the Head of Household filing status. There a number of worksheets and rules that you must follow to determine if you as a married person can file a Head of Household. There are many credits and deductions that you can qualify for by filing Married Filing Jointly or Head of Household that you would not qualified or be allowed to be claimed when you file as Married Filing Separately. One thing is for sure. If you have a choice, choosing Married filing Jointly is much better than using Married Filing Separately.

You must always determine your filing status before you can determine your filing requirements, standard deduction and thus your correct tax.

Your filing requirements are based on your filing status. You can always file a tax return, but you are not always obligated to do so. You want to file a tax return when you are due a refund for example. For tax year 2014, you must file a tax return if you are single (under age 65) and your income was at least $10,150. You must file a tax return if you are Head of household (under age 65) and your income was at least $13,050. You must file a tax return if you are married filing jointly (at least one spouse was under age 65) and  your income was at least $21,500. Furthermore, once you determine if you are single, married filing jointly or married filing separately, head of household, then you can look up the amount that corresponds with your filing status. Based on all these, again by looking in the correct tables or using the correct tax rates, you can determine the correct tax to pay.

To qualify for head of household you must be unmarried or be considered unmarried, you must have paid more than half the cost of keeping up a home for the year and have a qualifying person who lived with your for more than half of the year unless this person is your parent.  Add up the amounts contributed and if you amount is more than half the amount others paid, you meet the requirement of paying more than half the cost of keeping up the home to qualify for the head of household status.

If you think you qualify for the head of household filing status, fill out the worksheets and follow the rules. It is worth your try because doing so will give you a lower tax rate than those for single or married filing separately. This would also allow you better credits and higher deductions too.

When you are married both you and your spouse must include all of your income, exemptions, and deductions on your tax return. In some cases, one spouse may be relieved of joint liability for tax, interest, and penalties on a joint return. The spouse seeking relief can seek three types of reliefs - Innocent spouse relief, separation of liability relief, and equitable relief.

For equitable relief you must request relief for any time that the Internal Revenue Service can collect from your. For refunds, you must request them within the statute of limitations regarding refunds. To qualify for innocent spouse relief, you must have filed a joint return with an erroneous item that is solely your spouse's responsibility and you must establish that had no reason to know that tax was understated and that it would be unfair to hold you responsible for the liability. 

For separation of liability relief at the time of your request you must show that you are divorced or legally separated from your spouse with whom you filed the return. You can also show that you are widowed or that you have not been a member of the same household for at lease twelve months before your separation of liability relief request.

If you do not itemize deductions, you are entitled to a higher standard deduction if you are 65 or older at the end of the year. You are considered 65 on the day before your 65th birthday. Therefore, you can take a higher standard deduction for 2014 if you were born before January 2, 1950.

You can also take a higher deduction if you are blind. If you are 65 or older or blind at the end of the 2014 tax year, you can take an additional standard deduction amount of $1,550 for each if you are single or head of household. However, if you are married you can only take an additional standard deduction of $1,200 for being over 65 years old and $1,200 for being blind. Therefore, if you are married and both you and your spouse are over age 65 and one of you is blind at the end of the tax year, you can an additional $3,600 standard deduction amount. If both you and your spouse are over 65 year old and both of you are blind at the end of the year, you can take an additional $4,800 standard deduction amount.

For example, Kevin's wife died January 20, 2013, and by the end of 2013 Kevin had not remarried. During 2014, and 2015, he has continued to keep up a home for himself and his child for whom he can claim an exemption. The last year you can file jointly is the year that your spouse died. Kevin's wife died in January of 2013 so he can file married filing jointly with his deceased wife. If Kevin gets married before the end of the year, then he can file married filing jointly with his new wife.

After that, Kevin can file as Qualifying Widower if he qualifies. He can use the Qualifying Widower filing status for two years after the last year that he filed married filing jointly with this wife. The qualifications for the Qualifying Widower filing status are similar to the head of household filing status. You have to have a qualifying child who lived with you for all of the tax year. You must have paid more than half the cost of the costs of maintaining a home for this child. The qualifying child cannot be a fosterchild but the child can be your stepchild. You can benefit from taking the Qualifying Widow(er) filing status because you qualify for the married filing jointly tax rates if you use this filing status. Using the qualifying widow(er) filing status will entitle you to use the highest standard deduction amount. The married filing jointly and the qualifying widow (er) filing statuses qualify for the highest standard deduction amounts. You can use Form 1040 to file using the qualifying widow(er) filing status and you can use Form 1040A if your taxable income is less than $100,000.

If you could be claimed as a dependent by another person, you cannot claim yourself and you cannot claim anyone else as a dependent. You can file your own tax return though. You can be even be married and file as married filing jointly and still be a dependent on someone else's tax return.

A dependent is either a qualifying child or a qualifying relative and each type of dependent has its own rules to follow. Usually qualifying child rules apply to children and the qualifying relative rules apply to adults you want to claim as dependents. A dependent is not allowed his or her own exemption and therefore not allowed any sort of exemption as when a taxpayer claims someone else on their tax return. A dependent cannot claim his or her own exemption if they are able to be claimed on someone else's tax return. A dependent that can be claimed on someone else's tax return cannot claim his or her own exemption even if the taxpayer who can claim him or her does not actually claim the exemption. Please make a point to ask the question about dependents correctly. The correct question is "Can anyone else claim you as a dependent on another tax return?" The incorrect question would be "Did anyone claim you or is going to claim you  on their tax return?"

If you have a child who was placed with you by an authorized placement agency, you may be able to claim an exemption for that child. However, if you cannot get an SSN or an ITIN for the child, you must get an adoption taxpayer identification number (ATIN) from the Internal Revenue Service for the adopted child. An adoption taxpayer identification number (ATIN) is a issued by the Internal Revenue Service in order for taxpayers to be able to claim their children in the process of adoption.

You need an ATIN if you are in the process of adopting a child and you can claim the child as a dependent or want to claim certain credits for which that child qualifies you. Because of the new tax laws, you must have an identifying number for everyone you claim on your tax return. If you are adopting a child from another country, in order to obtain an adoption tax identification number, the child must be placed in your home for adoption by an authorized placement agency and you have tried to obtain the social security number and you are eligible to claim the child as a dependent on your tax return. 

You can choose the married filing jointly filing status if you are married and both you and your spouse agree to file together. You report your combined income and deduct your combined allowable expenses. You can file using this status even if you had no income or deductions.

You must determine your filing status before you can determine your filing requirements, standard deduction and your correct tax.

If the total amount you paid is more than the amount others paid, you meet the requirement of paying more than half the cost of keeping up the home to qualify for the head of household status.

Both you and your spouse must include all of your income, exemptions, and deductions on your tax return. In some cases, one spouse may be relieved of joint liability for tax, interest, and penalties on a joint tax return. The type of relief available is the innocent spouse relief, the separation of liability and the equitable relief.

If you do not itemize deductions, you are entitled to a higher standard deduction if you are 65 or older at the end of the tax year. You are considered 65 on the day before your 65th birthday. Therefore, you can take a higher standard deduction for 2013 if you were born before January 2, 1950.

You could qualify for the Qualifying widow (er) with dependent child. For example, Kevin's wife died January 20, 2013, and by the end of 2013 Kevin had not remarried. During 2014, and 2015 he had continued to keep up a home for himself and his child for whom he can claim an exemption. Kevin can be married filing jointly for 2013. He can file Qualifying widower with dependent child in 2014 and in 2015.

If you could be claimed as a dependent by another person, you cannot claim yourself or anyone else as a dependent.

If you have a child who was placed with you by an authorized placement agency, you may be able to claim an exemption for that child. However, if you cannot get a SSN or an ITIN for the child, you must get an adoption taxpayer identification number (ATIN) from the IRS for the child. You could always wait and not claim this child on your tax return and amend your return later but that would just cause problems.

If you choose married filing separately as your filing status, the Child Tax Credit and the Retirement Savings Contribution credits are reduced at income levels that are half of those for a joint tax return.

To qualify for Head of Household filing status, at the end of the year you must be unmarried or considered unmarried.

If you and your spouse file separately, and your spouse itemizes her deductions, you must also itemize your deductions.

If you were married on or before December 31, 2014, your filing status for 2014 can never be Single. Your only options would be to file as married filing jointly or married filing separately. You could also try to qualify for the Head of Household filing status. Review the rules for being considered unmarried for filing purposes even though you are married.

For instance, one of these would be that you must provide over half of the cost of keeping up a home for a child, parent, or other qualifying relative to file as Head of Household.

If your child is considered temporarily absent from home, you can still claim him as living with you if he is away because of illness, education, business, vacation or in your child is in the military.

You may be eligible to file as Head of Household even if the child who is your qualifying person has been kidnapped. You can claim Head of Household filing status if the child you qualifies you is presumed by law enforcement authorities to have been kidnapped. The person that allegedly kidnapped your child cannot be a member of your family or of the child's family. In the year of kidnapping, the child lived with you for more than half of the part of the year before the kidnapping. Also, you would have qualified for Head of Household filing status if the child had not been kidnapped.

You may be eligible to file as Head of Household if the individual who qualifies you for this filing status is born or dies during the year. You are considered to have provided more than half of the cost of keeping up a home for this individual if your qualifying child or qualifying relative lived with you for more than half the year he or she was alive. If your parent, for whom you paid for the entire part of the year he or she was alive, more than half the cost of keeping up a home in which he or she lived in.

When filing married filing separate, you must itemize your deductions if you spouse itemizes deductions even if you normally would not itemize or if it would not be in your best interest to do so. For example, Marvyn is married to Clara and for 2014, due to some marital problems, they filed married filing separate. Clara will itemize her deductions of $11,000 because she had qualifying car expenses. Marvyn wants to use the standard deduction on his tax return, because his total itemized deductions amount is only $4,100 for 2014 and it is less than the standard deduction amount. Since Clara will itemize her deductions, Marvyn also has to itemize his deductions but only the the $4,100 amount.

The federal standard deduction amount for a dependent who earned $4,000 from her job is $4,350.

For Head of Household filing purposes, if your father is your qualifying relative and he does not live with you, you must pay more than half the cost of keeping up his home for the entire year.

If on the last day of your tax year you are living together in a common law marriage that is recognized in a state where you now live or in the state where the common law marriage began, for the whole year you are considered married.

If you are the surviving spouse, executor, administrator or the legal representative and the decedent met the filing requirements to file a tax return at the time of his or her death, you must file an amended tax return for a decedent.

You may have to pay a penalty if you are required to file a tax return but fail to do so. If you willfully fail to file a tax return, you may be subject to criminal prosecution.

A person who is a dependent may still have to file a tax return. This depends on the amount of the dependent's earned or unearned income and also gross income.

Age is a factor in determining if you must file a tax return if you are age 65 or older, you are a dependent or if you have gross income of more than $3,950 at the end of the tax year.

For purposes of determining whether you must file a tax return, you must include in your gross income all of the income you earned or which you received from abroad. You must also include any income you can exclude under the foreign earned income exclusion provisions.

Even if you are not required to file a tax return, you should consider filing if you had income tax withheld from your pay. You also want to file to avoid any trouble with the Internal Revenue Service and this will keep you from getting any kind of notice from them. If box 3 of Form 1099-B is blank you should file.

However, you don't have to file a tax return if you only owe household employment taxes. You can send this form by itself.

If more than one filing status applies to you, choose the one that will give you the lowest tax. If you obtained a divorce on December 26, 2014 for example, and at the time of your divorce in 2014 you intended to and did remarry each other on August of 2015. You and your spouse must file your tax return as married filing jointly or married filing separately. This trick will not work anymore. The Internal Revenue Service is well aware of it.

If your spouse died during the tax year, you are considered married for the whole tax year for filing status purposes. If you remarried before the end of the tax year, you must file a joint tax return with your new spouse and therefore the only option for your deceased spouse would be married filing separate.

If you actively participated in a passive rental real estate activity that produced a loss, you generally can deduct the loss from your nonpassive income up to a certain amount. This called a special allowance. Married persons filing separate tax returns who live together at any time during the tax year cannot claim the special allowance.

You can change your filing status by filing an amended tax return using Form 1040X. If you or your spouse (or both) file a separate tax return, you generally can change to a joint tax return any time within three years from the due date of the separate tax return or tax returns.

You can change your filing status by filing an amended tax return using Form 1040X. If you and your spouse file a joint tax return, you cannot choose to file separate tax returns for that year after the due date of the tax return.

A personal representative for a decedent can change from a joint tax return elected by the surviving spouse to a separate tax return for the decedent. The personal representative has one year from the due date (including extensions) of the tax return to make this change.

In qualifying for head of household filing status and in calculating the expenses of keeping up a home, include in the cost of upkeep expenses such as rent, mortgage interest, real estate taxes but do not include the rental value of a home you own. You can include insurance on the home, repairs and utilities and also food eaten in the home.

You may be eligible to file as head of household if the individual who is born or dies during the year qualifies you for this filing status and you must have provided more than half of the cost of keeping up a home which was the individual's main home for the period when the individual lived.

Remember, you can claim an exemption for a qualifying child or qualifying relative if you meet the dependent taxpayer test, the joint tax return test and the citizen or resident test.

The exemptions which you may be able to take are personal exemptions for yourself and your spouse and of course exemptions for your dependends.

Generally, if you are a nonresident alien (other than a resident of Canada or Mexico, or certain residents of India or Korea), you can qualify for only one personal exemption for yourself. You would not be able to claim an exemption for spouse or for your dependents.

If you file a separate tax return, you can claim an exemption for your spouse only if your spouse had no gross income, is not filing a tax return and was not a dependent of another taxpayer.

You generally cannot claim a married person as a dependent if he or she files a joint tax return, unless he or she files only to claim for a refund and no tax liability would exist for either spouse on tax returns if you would file separate tax returns.

You generally cannot claim a married person as a dependent if he or she files a joint tax return, unless taxes were taken out of their pay so they only file a joint tax return to get a refund of what was withheld.

It goes without saying that an adopted child is always treated as your own child.

Although a child can be a qualifying child of more than one person, only one person can actually treat the child as a qualifying child to take an exemption for the child and to claim the head of household filing status. This also holds true for claiming the Child tax Credit and the Earned Income Credit. Also, only one person can actually treat the child as a qualifying child for the Credit for child and Dependent Care Expenses and the exclusion from income for dependent care benefits.

To determine which person can treat the child as a qualifying child to claim certain tax benefits, and regarding the tiebreaker rules, if only one of the persons is the child's parent, the child is treated as the qualifying child of the parent.

There are four tests that must be met for a person to be your qualifying relative. The member of household or relationship test must be met. The gross income test must be met. You must also meet the "Not a qualifying child test". The residency test is not one of these tests. The residency test is to be met for something else.

A qualifying child must be under 19 at the end of the year and younger than you or younger than your spouse. However, a qualifying relative does not have to be under age 19 and younger than you.

To be your qualifying child, a child who is not permanently and totally disabled must be younger than you or your spouse but does not have to be younger than both of you.

A person related to you who is your step-parent, a legally adopted child, a foster child does not have to live with you all year as a member of you household to meet the member of household or relationship test. However, a foster parent does need to live with you all year.

For example, your spouse's uncle who receives more than half of his support from you may be your qualifying relative, even though he does not live with you. If you and your spouse file separate tax returns, your spouse's uncle can be your qualifying relative only if he lives with you all year as a member of your household. 

The year you provide the support is the year you pay for it. If you pay for support with borrowed funds then this is considered provided support by you regardless if you repay the loan or not.

Capital items, such as furniture, appliances, and cars, that are bought for a person during the year can be included in total support. You buy a $150 TV set as a birthday present for your 12-year-old child. The TV set is placed in your child's bedroom and thus it would be considered support for that child. If you buy a $200 power lawn mower for your 13-year-old child and the child is given the duty of keeping the lawn trimmed then you cannot consider this support towards your 13 year old child. Also, if you buy a car for your child and you register it in your name, this cannot be considered support for your child. It does not matter if you both drive the car equally or not.

You have not provided more than half of support when your 17-year-old son, using his own personal funds, buys a car for $4,500 and you provide all the rest of your son's support - $4,000. You have neither provided more than half of support when during the year, your son receives $2,200 from the government under the GI Bill, he uses this amount for his education and you provided the rest of his support - $2,000. Neither have you provided more than half of the support when you and your brother each provide 20% of your mother's support for the year and the remaining 60% of her support is provided equally by two people who are not related to her. 

You can claim an exemption under a multiple support agreement for anyone even for individuals who are not related to you.

For instance, your father lives with you and receives 25% of his support from social security, 40% from you, 24% from his brother (your uncle), and 11% from a friend. Either you or your uncle can take the exemption for your father if the other person signs a statement agreeing not to take the exemption.

The person who agrees to take the exemption must attach Form 2120, or a similar declaration, to his tax return and must keep for his records the signed statements.

If the parents divorced or separated during the year and the child lived with both parents before the separation, the custodial parent is the one with whom the child lived with for the greater number of nights during the rest of the year. A child is treated as living with a parent for a night if the child sleeps at a parent's home, regardless if the parent is present or not. The child is also treated as living with a parent for nights that the child does not sleep at a parent's home as long as he or she is in the company of the parent. 

Most taxpayers have a choice of either taking a standard deduction or itemizing their deductions. If you have a choice, you use the method that gives you the lower tax, of course. 

Some persons are not eligible for the standard deduction. Your standard deduction is zero and you should itemize any deductions your have if your filing status is married filing separate and your spouse itemizes deductions on his or her tax return. If you are filing a tax return for a short tax year because of a change in your annual accounting period, then you cannot take the standard deduction. In addition, you cannot take the standard deduction if you are a non-resident or dual-status alien during the year.

If your itemized deductions are less than the amount of your standard deduction, you can elect to itemize deductions on your federal  tax return rather than take the standard deduction. You can also itemize your deductions if the tax benefit of being able to itemize your deductions on your state tax return is greater than the tax benefit you lose on your federal tax return by not taking the standard deduction. You are not obligated to itemized your deductions just because your total deductions are more than the standard deduction amount. You always have a choice to not itemize if you can do either.

Even if you do not otherwise have to file a tax return, you should file to get a refund of any federal tax withheld, if you are eligible for the Earned Income Credit or even if you are eligible for a refundable credit for prior year minimum tax.

An automatic six month extension to file will not extend the time to pay your tax. You can always pay late but not without charging you interest or penalties on any tax not paid by the original due date of your tax return.

If you are a U.S. Citizen or resident alien, you may qualify for an automatic extension of time to file without filing Form 4868. You qualify if, on the due date of your tax return, you live outside the United States and Puerto Rico and your main place of business or post of duty is outside the United States and Puerto Rico. You also qualify for an automatic extension of time to file without filing Form 4868 if are in the military or naval service on duty outside the United States and Puerto Rico.

You can use Form 1040A if you only had income from wages, salaries, or tips. You can use 1040A if your only adjustments to income you want to claim is a student loan interest deduction. You can also file 1040A if you received dependent care benefits or if you owe tax from the recapture of an education credit or the Alternative Minimum tax. However, you cannot use Form 1040A if you received income from self-employment such as from your business or your farm. 

If your spouse is a nonresident alien, he or she must have either an SSN or an ITIN if you file a joint tax return. He or she must also have either an SSN or an ITIN if you file a separate tax return and claim an exemption for your spouse or if your spouse is filing a separate tax return.

The Presidential Election Campaign fund reduces candidate's dependence on large contributions from individuals and groups and places candidates on an equal financial footing in the general elections. If you want $3 to go to this fund, check the box.

You can check "Single" box on line 1 if on December 31, 2014 you were never married or you were legally separated according to your state law under a decree of divorce or separate maintenance. You can also check "Single" if you were widowed before January 1, 2014 and you did not remarry before the end of 2014 and you did not have a qualifying child to claim qualifying widow(er) filing status.

You can check the "Married Filing Jointly" on line 2 if you were married at the end of 2014 even if you did not live with your spouse at the end of 2014. You also check "Married Filing Jointly" if your spouse died in 2014 and you did not remarry by the end of 2014. If you were married at the end of 2014 and your spouse died in 2015 before filing a 2014 tax return then you need to file as "Married Filing Jointly" for 2014.

If you file a joint tax return, both you and your spouse are generally responsible for the tax and any interest or penalties due on the tax return. You may want to file separate if you believe that your spouse is not reporting all of his or her income. If you do not want to be responsible for any taxes due if you spouse does not have enough tax withheld or doe not pay enough estimated tax, you may want to file as "married filing separate".

The Head of Household filing status is for unmarried individuals who provide a home for certain other persons. You are considered unmarried for this purpose if you were legally separated according to your state law under a decree of divorce or separate maintenance at the end of 2014.

A custodial parent who has revoked his or her previous release of a claim to exemption for a child must include a copy of the revocation with his or her tax return.

If you received a refund, credit, or offset of state of local income taxes in 2014, you may receive a Form 1099-G. If you itemized deductions for the year that the tax was paid to the state or other taxing authorities, you may have to report part or all of the refund on Form 1040 for 2014.

You must include in the total on line 7 of Form 1040A tip income that you did not report to your employer. You must use Form 1040 and Form 4137 if you received tips of $20 or more in any month and did not report the full amount to your employer.

Allocated tips should be shown in box 8 of your Form W-2 and they are not shown in box 1.

Each payer of taxable interest income should send you a Form 1099-INT or Form 1099-OID. You must fill in and attach Schedule B if the total interest received is over $1,500.

Each payer of ordinary dividends should send you a Form 1099-DIV. Enter your total ordinary dividends on line 9a of you Form 1040A. You must fill in and attach Schedule B if the total is over $1,500.

Qualified dividends are eligible for a lower tax rate than other ordinary income. Some dividends may be reported as qualified dividends in box 1b of Form 1099-DIV but are not qualified dividends such as dividends received as a nominee. Dividends you received on any share of stock which you held for less than 61 days during the 121 day period that began 60 days before then ex-dividend date are also not qualified dividends. Neither are qualified dividends any payments you receive in lieu of dividends, but only if you know or have reason to know that those payments are not qualified dividends.

The following is an example of a situation which involves qualified dividends. You bought 10,000 shares of ABC Mutual Fund Common stock on July 8, 2014. ABC Mutual Fund paid a cash dividend of 10 cents a share. The ex-dividend date was July 15, 2013. The ABC Mutual fund advises you that the portion of the dividend eligible to be treated as qualified dividends equals 2 cents per share. Your Form 1099-DIV form ABC Mutual Fund shows total ordinary dividends of $1,000, and qualified dividends of $200. However, you sold the 10,000 shares on August 11, 2013. As a result, you have no qualified dividends from ABC Mutual Fund because you held the ABC Mutual Fund stock for less than 61 days.

To further illustration, you bought 5,000 shares of XYZ Corp. common stock on July 8, 2014. XYZ Corp. paid a cash dividend of 10 cents per share. The ex-dividend date was July 15, 2014. Your Form 1099-DIV from XYZ Corporation shows $500 in Box 1a (ordinary dividends) and in box 1b (qualified dividends). However, you sold th 5,000 shares on August 11, 2014. You held your shares of XYZ Corp. for only 34 days (from July 9, 2013 through August 11, 2013) of the 121-day period. The 121-day period began on May 16, 2013, (60 days before the ex-dividend date) and ended on September 13, 2013. As a result, you have no qualified dividends from XYZ Corporation because you held the XYZ Corporation stock for less than 61 days.

If you or your spouse (if married filing jointly) have any Forms 1099-DIV or substitute statements that show an amount in box 2b (unrecaptured section 1250 gain), box 2c (section 1202 gain) or box 2d (collectibles gain), then you must use Form 1040.

If you received capital gain distributions as a nominee, report on line 10 only the amount that belongs to you. Include a statement showing the full amount you received and the amount you received as a nominee. If you are a nominee, this means that amounts were paid to you but actually belong to someone else.

You should receive a Form 1099-R showing the total amount of any distribution from your IRA before income tax and other deductions were withheld. If you converted part or all of an IRA to a Roth IRA in 2011 and you did not elect to report the taxable amount on your 2012 tax return, you generally should have reported half of it on your 2013 tax return and the other half in your 2014 tax return.

Enter the IRA distribution on line 11a if you rolled over part or all of the IRA distribution from one IRA to another IRA of the same type, from one SEP or SIMPLE IRA to a traditional IRA, or from an IRA to a qualified plan other than an IRA.

Your pensions and annuities are fully taxable if you did not contribute to the cost of the pension or annuity or if you were reimbursed your entire invested cost tax free before 2015.

If you received a lump-sum distribution from a profit-sharing or retirement plan, your Form 1099-R should have the "Total distribution" box in box 2b checked.

You should receive a Form 1099-G showing in box 1 the total unemployment compensation paid to you in 2014. Report this amount on line 13 of Form 1040A. However, if you made contributions to a government unemployment compensation program, reduce the amount you report on line 13 by those contributions.

If you receive an overpayment of unemployment compensation in 2014 and you repaid any of it in 2014, subtract the amount you repaid from the total amount your received.

If you were an eligible educator in 2014, you can deduct on line 16 up to $250 of qualified expenses you paid in 2014.

By April 1st of the year after the year in which you reach age 70 1/2 , you must start taking minimum required distributions from your traditional IRA. If you do not, you may have to pay a 50% additional tax on the amount that should have been distributed.

If you were age 70 1/2 or older at the end of 2014, you cannot deduct any contributions made to your traditional IRA or treat them as nondeductible contributions.

If you owe tax on any excess contributions made on an IRA or any excess accumulations in an IRA, you must use Form 1040.

If you were covered by a retirement plan (401 (k), SIMPLE , etc) at work, your IRA deduction may be reduced or eliminated. Additionally, if were covered by a retirement plan at work, you can still make contributions to an IRA even if you cannot deduct them. Remember, the income earned on your Individual Retirement Account contributions is not taxed until it is paid to you.

If you were not covered by a retirement plan but your spouse was, then you are considered covered by the plan unless you lived apart from your spouse for all of 2014.

You may be able to take the Credit for Child and Dependent Care Expenses if you paid someone to care for your qualifying child whom is under age 13 and whom you claim as your dependent. Also you can be able to claim the credit for your disabled spouse or any other disabled person who could not care for himself or herself. Furthermore, if your child whom you could not claim as a dependent because of the rules for children of divorced or separated parents, then you can possibly claim the Credit for Child and Dependent Care Expenses for that child.

You may be able to take the Credit for the Elderly or the Disabled if by the end of 2014, if you were age 65 or older or you retired on permanent and total disability and you had taxable disability income. 

If you and your spouse paid joint estimated tax but are now filing separate income tax returns, you can divide the amount paid in any way you choose as long as you both agree on the amounts.

If paying the tax when it is due would cause you an undue hardship, you can ask for an extension of time to pay by filing Form 1127 by the time your tax return is due.

As a tax return preparer, you should become familiar with what is expected of you. Anyone who pays you to prepare your tax return must sign it. The tax return preparer needs to include their Preparer tax Identification Number (PTIN) as long as they sign it. The tax return preparer needs to give you a copy of the tax return. Also, anyone who prepares your tax return but does not charge you does not need to sign it. Just make sure you don't have too many of these and it would make sense that these people are related to you in some manner.

If the amount you owe or the amount you overpaid is large, you may want to file a new Form W-4 with your employer to change the amount of income tax withheld from your 2015 pay to avoid the extra withholding. I know many taxpayers who just leave things are they are or claim less allowances on their From W-4 in order to get a larger refund by tax season. This may not be a smart way to save money, but for some it is the only way to it.

If you made any nondeductible contributions to a traditional IRA for 2014, you must report them on Form 8606.

When you prepare tax returns for others, it is important to know which states are community property states. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington (state) and Wisconsin are the nine community property states. This is important because you will have tax filing situations where you must apply the tax laws accordingly and if the state is a community property state, this would make a huge difference in the outcome.

Whether you have community property and community income depends on the state where you are domiciled. This means that even if you live in one state, you may be domiciled in another state. Where you are domicile is important to determine. If you don't determine it, the state where you are domiciled in may come after you for their fair share. Sometimes where you are domiciled is important at the federal level as when you are domiciled in the United States but you live in another country. If you lived in another country but you hold your driver's license, bank accounts, home and practically everything else in the United States, then for tax purposes, you live in the United States. This is quite common in the Mexican border towns where people are living on that side to save money on rent and many other things, but they come across the border for work, school and even their grocery shopping.

With regard to net income from a trade or business (other than a partnership) that is community income, self employment tax is imposed on the spouse who earned the income or the spouse who owns the business.

Community property laws affect how you figure your income on your federal income tax return if you are married, if you live in a community property state or community property country and most commonly when you file separate tax returns.

You have only one domicile even if you have more than one home. If you move into or out of a community property state during the year, you may or may not have community income. Your domicile may depend on where you pay your state income tax. The location of property you own may be a factor in determining your domicile. Additionally, consider the your business and your social ties to the community when determining domicile.

Community property is property that you, you spouse or both of you acquire during your marriage while you are domiciled in a community property state. Also, community property can be property which you and your spouse agree to convert from separate to community property. Furthermore, if you cannot identify the property as separate property, then you would have to consider it community property.

Alimony or separate maintenance payments made prior to divorce are taxable to the payee spouse only to the extent they exceed 50% (his or her share) of the reportable community income. This is so because the payee spouse is already required to report her half of the community income on her tax return.

Gains and losses are classified as separate or community depending on how the property is held. A loss on separate property, such as stock held separately, is a separate loss.

To illustrate further, Henry Wright retired this year after 30 years of civil service. He and his wife were domiciled in a community property state during the past 15 years. If Mr. Wright receives $1,000 per month in retirement pay, $500 of that amount is considered community income, $250 of it is his income, and $250 of it is his wife's income.

If you were born before January 2, 1938, and received a lump-sum distribution from a qualified retirement plan, you may be able to choose an optional method of figuring the tax on the distribution, unless you elect the 10-year tax option. In that case you don't need to follow the community property laws.

To illustrate a little more, Don and Rita White have three dependent children and they live in Nevada. If Don and Rita file separately, Don and Rita can agree that one of them will claim the exemption for one, two or all of their children.

If you think you may owe estimated tax and want to pay the tax separately, determine whether you must pay it by taking into account, half of the community income and half of the deductions. You also take into account all of your separate income and deductions. You also determine if you must pay estimated tax by taking into consideration your own exemption and any exemptions for dependents that you are able to claim and may half you lower you tax liability. 

It is important to note thought, that just because you and your spouse pay estimated taxes jointly, you are not obligated to file a joint tax return. You can each claim half of the amounts paid or you can agree on which amounts each will claim as estimated taxes paid. If you cannot agree on the amounts then that is when you run into trouble and would probably have to seek arbitration.

If you are married, but qualify to file as Head of Household under the rules for married taxpayers living apart and live in a state that has community property laws, your earned income for the EIC, includes the entire amount you earned. This is so even if part of it is treated as belonging to your spouse under your state's community property laws.

In some states a husband and wife may enter into an agreement that affects the status of property or income as community or separate income. Needless to say, it is preferable that this agreement be in writing.

If you are a United States citizen or resident alien and you choose to treat your nonresident alien spouse as a U.S. resident for tax purposes and you are domiciled in a community property state or country, use the community property rules and you must file a joint tax return for the year in which you make the choice.

Treat earned income that is not trade or business or partnership income as the income of the spouse who performed the services to earn the income. Earned income does not include amounts paid by a corporation that are a distribution of earnings and profits.

Community property laws may not apply to an item of community income that you receive but did not treat as community income. You are responsible for reporting all of that income item if you treat the item as if only you are entitled to the income and if you don't notify your spouse of the nature and the amount of the income by the due date for filing the tax return.

Do not treat income and related deductions from a trade or business that are not a partnership as community income that must be split between the spouses. Do not treat income or loss from a trade or business carried on by a partnership as community income. Social Security and equivalent railroad retirement benefits are never treated as community income that must be split between the spouses.

In some states, income earned after separation but before a decree of divorce continues to be community income.

The marital community may end in several ways. When the marital community ends, the community assets (money and property) are divided between the spouses.

In some cases, your combined income tax on separate tax returns may be less that it would be on a joint tax return. If your filing status is married filing separately, you should itemize deductions if your spouse itemizes deductions, because you cannot claim the standard deduction. Also, you cannot exclude any interest income from qualified U.S. savings bonds that you used for higher education expenses if your filing status is married filing separately. There are many limitation for taxpayers who file separately. For instance, you may have to include in income more of any social security benefits which you receive during the year if you file separate than you would if you file a joint tax return.

For 2015, the standard mileage rate for the cost of operating a car, van, pickup, or truck for each business mile is 57.5 cents per mile.

If you have a same-sex spouse whom you legally married in a state (or foreign country) that recognizes same-sex marriage, you and your same-sex spouse generally must use the married filing jointly or married filing separate filing status on the 2014 tax return.

Beginning in 2014, a 0.9% additional Medicare tax applies to Medicare wages, railroad retirement (RRTA) compensation and self-employment income that are more than $125,000 if married filing separately, $250,000 if married filing jointly, or $200,000 for any other filing status.

Beginning in 2013, you may be subject to Net Investment Income Tax (NIIT). The NIIT is 3.8% of the smaller of your net investment income or the excess of your modified adjusted gross income over $125,000 if you are married filing separate or qualifying widow(er) or $200,000 if you use any other filing status.

All spousal IRAs have been renamed Kay Bailey Hutchison Spousal IRAs.

You can deduct the part of your medical and dental expenses that is more than 7.5% of your adjusted gross income if either you or your spouse is age 65 or older.

You cannot have more than $2,500 in salary reduction contributions made to a health FSA for plan years beginning after 2013.

You can no longer claim the plug-in electric vehicle credit or the refundable part of the credit for prior year minimum tax on your 2013 or 2014 tax return.

The contribution limit to your traditional IRA for 2014 if you were age 50 or older before 2015 is $6,500 or your taxable compensation for the year, whichever is smaller.

If contributions on your behalf are made only to Roth IRAs, your contribution limit for 2014 will generally be the smaller of $5,500 or your taxable compensation for the year.

If you're married filing separate, you lived with your spouse at any time during the year, you cannot make a Roth IRA contribution if your modified AGI is $10,000 or more.

Beginning in 2013, you can deduct only the part of your medical and dental expenses that exceed 10% of your adjusted gross income. It has always been 7.5% but now due to the new Affordable Care Act rules, this benefit has diminished to encourage taxpayers to take advantage of the new health care reform laws.

With the start of hurricane season, the Internal Revenue Service encourages individuals and businesses to safeguard their records against natural disasters by taking a few simple steps. The Internal Revenue Service advices to create a backup set of records electronically, store them in a safe place that is stored away from the original set.

Keeping a backup of records - including bank statements, tax returns, insurance policies, etc. - is easier now that many financial institutions provide statements and documents electronically. With documents in electronic form, taxpayers can save them to the cloud, download them to a backup device such as an external hard drive or USB flash drive. Furthermore, when keeping electronic records, taxpayers can burn a copy of them to a CD or DVD.

On June 2, 2014, the Internal Revenue Service announced that interest rates will remain the same for the calendar quarter beginning July 1, 2014. The rates will be 3% for overpayment or 2% if you are a corporation. The rates will be 2% for underpayments or if you are large corporation this rate will be 5%. Any payment portion that exceeds $10,000, the portion of corporate overpayments will be 0.5%.

The statistics of Income (SOI) Division produces the SOI Bulletin on a quarterly basis. Articles included in the publication provide the most recent data available from various tax and information returns filed by U.S. taxpayers. The spring issue of the SOI Bulletin also includes articles on individual income tax rates and shares in 2011, noncash contributions in 2011 and individual foreign earned income and the Foreign tax credit in 2011.

Filing Requirements, standard deduction, filing Status, Dependents, Exemption and filing information

You can choose the Married Filing Jointly filing status if you are married and both you and your spouse agree to file together. When you use this filing status, you report your combined income and deduct your combined allowable expenses. You can file using the MFJ filing status even if you had no income or deductions.

You must determine your filing status before you can determine your filing requirements, the standard deduction and your correct tax.

If the total amount you paid is more than the amount others paid, you meet the requirement of paying more than half the cost of keeping up the home to qualify for the head of household status.

Both you and your spouse must include all of your income, exemptions, and deductions on your tax return. In some cases, one spouse may be relieved of joint liability for tax, interest, and penalties on a joint tax return. You can request innocent spouse relief and be relieved from the responsibility of tax, interest or penalties from your spouses tax return. Not all tax, interest and penalties qualify for relief. Under Separation of Liability relief, you divide the understatement of tax plus interest and penalties on your joint return between you and your spouse. If you qualify for the Separation of Liability relief, you would be only responsible for the amount allocated to you. Equity relief is your last resort and the IRS will consider if equitable relief is an option. Equitable relief is from an understatement or underpayment of tax.

If you do not itemize deductions, you are entitled to a higher standard deduction if you are 65 or older at the end of the tax year. You are considered 65 on the day before your 65th birthday. Therefore, you can take a higher standard deduction for 2014 if you were born before January 1, 1950.

If your spouse dies during the year, you may have many choices as to your filing status. For example, Kevin's wife died January 20, 2013, and by the end of 2013 Kevin had not remarried. During 2014, and 2015 he had continued to keep up a home for himself and his child for whom he can claim an exemption. Kevin can file Married Filing Jointly for 2013. Kevin, will be able to file his return as

Qualifying widower if he has a dependent child in 2014. He will also be able to file Qualifying widower if he has a child and has not remarried in 2015.

A dependent is someone you support and you must have provided at least half of the person's total support in order to claim them as dependents. You can get an exemption for each dependent that you claim on your tax return. If that dependent can be claimed as a dependent by you, they cannot claim him or herself or anyone else as a dependents.

If you have a child who was placed with you by an authorized placement agency, you may be able to claim an exemption for that child. However, if you cannot get a SSN or an ITIN for the child, you must get an adoption taxpayer identification number (ATIN) for the child from the IRS. The individual taxpayer identification number (ITIN) is for dependents who don't qualify for a regular Social Security number. You need to get an ATIN for a child that does not otherwise qualify for an SSN or ITIN. An adopted child is always treated as your own child.

If you choose married filing separately as your filing status, the Child Tax Credit and the Retirement Savings Contribution Credit are reduced at income levels that are half of those for a joint tax return.

To qualify for Head of Household filing status, you must be unmarried or considered unmarried at the end of the year. They say that the Head of Household filing status is one of the most misunderstood tax filing statuses. It seems to be one of the most misunderstood because so many individuals abuse this filing status for the benefits it allows. For example, many married individuals abuse this filing status by saying that they qualify to be considered unmarried for tax filing purposes so they can receive credits that they would otherwise not qualify for if they use the married filing separate filing status. Many misuse the Head of Household filing status in order to get a higher Earned Income Credit amount.

According to the IRS, the Head of Household filing status is for single or unmarried taxpayers who keep up a home for a qualifying person. The Head of Household filing status has some important tax advantages over the single filing status such as a lower tax rate and a higher standard deduction amount that for a single taxpayer. To qualify for Head of Household, you must meet certain filing requirements. Firstly, you must not be married and if you are married, be considered unmarried for tax filing purposes. Second, you must have paid more than half the cost of keeping up a home for the year for a qualifying person. The qualifying person must have lived with you in the home for more than half the year.

If you and your spouse file separately, and your spouse itemizes her deductions, you must generally also itemize your deductions. If you are married, then you and your spouse can file separate tax returns. You always have that option. Married taxpayers can choose between filing a joint tax return or a separate return. They can choose married filing separately, but why would they? For one thing, the married filing separate filing status provides fewer benefits or no benefits at all. Some taxpayers have no choice and they cannot weigh the pros and cons of filing their tax returns married filing jointly or married filing separate, since some have no choice but to file separately. It could be that they separated from their spouse and the spouse is no where to be found. In some states such as California, the tax professional or taxpayer would have to apply the community property rules to married filing separate tax returns. There are nine states that are community property state and they are California, Arizona,

Idaho, Louisiana, Nevada, New Mexico, Washington and Wisconsin. Alaska could be considered a community property state also depending on what the taxpayer elects. Alaska gives their taxpayers the option to make their property community property.

If you were married on or before December 31, 2014, you can either be Married filing jointly or Married Filing separate for tax year 2014? However, you can probably qualify for Head of Household filing status if you can be considered unmarried for 2014 and otherwise meet the other requirements. You must provide over half of the cost of keeping up a home for a child, parent, or other qualifying relative to file as Head of Household. Among other things, the home you support must be the main home for your dependent even if the dependent was away for temporary purposes such as for school, illness, vacation, military or business.

If your child is considered temporarily absent from home, you can still claim him as living with you if he is away because of illness, vacation, education, military service or if the child is away on a business trip.

You may be eligible to file as Head of Household even if the child who is your qualifying person has been kidnapped. You can claim Head of Household filing status if the child is presumed by law enforcement authorities to have been kidnapped by someone who is not a member of your family or the child's family. Also in the year of kidnapping, the child must have lived with you for more than half of the year before the kidnapping. Additionally, you must have met the requirements or would have met the Head of Household filing status requirements if the child had not been kidnapped.  

You may be eligible to file as Head of Household if the individual who qualifies you for this filing status is born or dies during the year. You are considered to have provided more than half of the cost of keeping up a home for this individual if you provided more than half the support for the part of the year he or she was alive or half the cost of keeping up the home he she lived in.

You standard deduction is zero if you are filing Married Filing Separately and your spouse itemizes her deductions. For example, Marvyn is married to Clara and for 2014, due to some marital problems, they filed married filing separate. Clara will itemize her deductions of $11,000 because she had qualifying car expenses. Marvyn wants to use the standard deduction on his tax return, because his total itemized deductions amount is only $4,100 for 2014 and it is less than the standard deduction amount. Since Clara will itemize her deductions, Marvyn also has to itemize his deductions and use the $4,100 amount. 

The standard deduction for a dependent is generally $1,000 or the dependent's earned income plus $350. The results cannot be more than the regular standard deduction plus $350. For a single individual who's earned income plus the $350 is to be more than $6,100 (if that would be the regular standard deduction if the individual would not be a dependent) then the dependent's standard deduction cannot be more than $6,100.

For Head of Household filing purposes, if your father is your qualifying relative and he does not live with you, you must pay more than half the cost of keeping up his home for the entire year. Also, in some circumstances, you do not have to claim a child as dependent to qualify for the Head of Household filing

status. For example, a custodial parent may be able to claim Head of Household filing status even if he or she released a claim for exemptions for the child.

The IRS recognizes common-law marriages as legal marriages. This includes being known in your society as being married as husband and wife. If on the last day of your tax year you are living together in a common law marriage that is recognized in a state where you now live or in the state where the common law marriage began, you would be considered married for the entire year. If you have a valid common-law married that the IRS recognizes, then you can file a federal married filing jointly of married filing separate tax return.

You will determine if a final tax return is required for a decedent if the decedent had a filing requirement at time of death. You must file an income tax return for a decedent if you are the surviving spouse, executor, administrator or legal representative. Write "DECEASED", the decedent's name along with the date of death across the top of the income tax return. However, if filing a joint return write the name and address of the decedent and the surviving spouse in the address field.

If you fail to file a tax return, you may have to pay failure to file and/or a failure to pay penalty. If you do not file by the deadline, you could be liable for a failure to file penalty. You may have to failure to pay a penalty if you are required to file a tax return but fail to do so. If you willfully fail to file a tax return, especially after asked to do so by the IRS, you may be subject to criminal prosecution. Even though you are not able to pay the tax due on your tax return, you should at least file your tax return on time and ask for payment options.

A person who is a dependent may still have to file a tax return. This depends on the amount of the dependent's earned, unearned and gross income. A dependent who has earned income must file if the total is more than $1,000. The parent of a child under age 19 (or 24 if a student), may be able to elect to include the unearned income in the parent's return and the child will not have to file a return.  If the child has both earned and unearned income, then the child must file a return if the income was $1,000 or his or her earned income up to the regular standard deduction plus $350.

Age is a factor in determining if you must file a tax return if you are 65 or older, you are a dependent or you have gross income of more than $3,900 at the end of your tax year. If the dependent's gross income was $3,900 or more, the dependent usually cannot be claimed as a dependent unless the dependent is a qualifying child. 

For purposes of determining whether you must file a tax return, you must include in your gross income all income you earned or received abroad, and any income you exclude under the foreign earned income exclusion.

Even if you are not required to file a tax return, you should consider filing if you had any tax withholding from your paycheck. You should also consider filing if you want to avoid any communication from the IRS. If box 3 (regarding basis of property) of your Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, is left blank.

You do not have to file a tax return if you owe only household employment taxes. If you hire any type of household employees, you may owe household employment taxes. These include housekeepers, maids, basysitters, and gardeners. These people are your employees if you control how they do their work. File Schedule H, Household Employment Taxes, instead. Schedule H can be filed by itself and if you paid any one household employee cash wages of $1,800 or more during the year.

If more than one filing status applies to you, choose the one that will give you the lowest tax. You obtained a divorce on December 26, 2013. At the time of your divorce in 2013 you intended to and did remarry each other on August of 2014. You and your spouse must file your tax return as Married Filing Jointly or Married Filing Separately.

If your spouse died during the tax year, you are considered married for the whole tax year for filing status purposes. If you remarried before the end of the tax year, you must file a joint tax return with your new spouse and your deceased spouse's filing status would be married filing separately.

If you actively participated in a passive rental real estate activity that produced a loss, you generally can deduct the loss from your nonpassive income up to a certain amount. This called a special allowance. Married persons filing separate tax returns who live together at any time during the tax year cannot claim this special allowance.

You can change your filing status by filing an amended tax return using Form 1040X. If you or your spouse (or both) file a separate tax return, you generally can change to a joint tax return any time within 3 years from the due date of the separate tax return or returns. If you and your spouse file a joint tax return, you cannot choose to file separate tax returns for that year after the due date of the tax return. A personal representative for a decedent can change from a joint tax return elected by the surviving spouse to a separate tax return for the decedent. The personal representative has 3 years from the due date (including extensions) of the tax return to make the change.

In qualifying for head of household filing status and in calculating the expenses of keeping up a home, include in the cost of upkeep expenses such as rent, mortgage interest, real estate taxes, insurance on the home, repairs and utilities, and food eaten in the home. The cost of upkeep expenses for calculating the cost of upkeep expenses would not include the rental value of a home you own.

You may be eligible to file as head of household if the individual who is born or died during the year qualifies you for this filing status and you must have provided more than half of the cost of keeping up a home that was the individual's main home for the period during which the individual lived.

There are five tests that must be met for a child to be your qualifying child to be claimed as a dependent. They are the relationship, age, residency, support and joint return tests. Likewise, there are four tests that must be met for a person to by your qualifying relative. These tests are the not your qualifying child test, the member or household or relationship test, the gross income test and the support test. In summary, you can claim an exemption for a qualifying child or qualifying relative if you meet the dependency taxpayer test, joint tax return test, and the citizen or resident test. There are two types of exemptions you can take. They are personal exemptions which include exemptions for yourself

and your spouse. Furthermore, there are the exemptions for dependents which include exemptions for qualifying child and for qualifying relative. 

Generally, if you are a nonresident alien (other than a resident of Canada or Mexico, or certain residents of India or Korea), you can qualify for only one personal exemption for yourself. If you are a nonresident alien you cannot take an exemption for your spouse or for your dependents. Residents of Mexico, Canada and certain residents from  India and South Korea have special privileges in claiming exemptions for their spouses, children and other certain relatives.

If you file a separate tax return, you can claim an exemption for your spouse only if your spouse had no gross income and is not filing a tax return and was not a dependent of another taxpayer. You generally cannot claim a married person as a dependent if he or she files a joint tax return, unless he or she files only to claim for a refund and no tax liability would exist for either spouse on separate tax returns. Additionally, you generally cannot claim a married person as a dependent if he or she files a joint tax return only if they file a joint tax return to get a refund of the withheld taxes. 

Although a child can be a qualifying child of more than one person, only one person can actually treat the child as a qualifying child to take an exemption for the child and the Head of Household filing status. Only one person can take the Child Tax Credit and the Earned Income Credit for that child. Also, only one person can claim the Credit for Child and Dependent Care Expenses and the exclusion from income for dependent care benefits. To determine which person can treat the child as a qualifying child to claim certain tax benefits, and in regards to the tiebreaker rules, if only one of the persons is the child's parent, the child is treated as the qualifying child of that parent.

There are four tests that must be met for a person to be your qualifying relative. The residency test is not one of these tests. A qualifying relative does not have to be under 19 at the end of the year and they don't have to be younger than you. To be your qualifying child, a child who is not permanently and totally disabled must be younger than you or your spouse. As long as the qualifying child is younger than one spouse is enough to meet this test. A step-parent, a legally adopted child or foster child does not have to live with you all year as a member of your household to meet the member of household or relationship test. However, a foster parent must live with you all year as a member of your household in order to meet the member of household or relationship test.

For example, your spouse's uncle who receives more than half of his support from you may be your qualifying relative, even though he does not live with you. If you and your spouse file separate tax returns, your spouse's uncle can be your qualifying relative only if he lives with you all year as a member of your household. The year you provide the support is the year you pay for it even if you pay for the support with borrowed funds.

Capital items, such as furniture, appliances, and cars, that are bought for a person during the year can be included in total support. If you buy a $150 TV set as a birthday present for your 12-year-old child and the TV set is placed in your child's bedroom only for you child to use, it is considered support you provided. If you buy an item that is to benefit the entire family such a lawnmower so the child can keep the lawn trimmed, this item would not be considered support towards the child. Likewise, if you buy

your child a car that is registered in your name and you both use the car equally, this also would not be considered support towards your child.

Nor are you considered to have provided more than half of your child's support if your child, using his personal funds, buys a car for $4,500 and you provided only $4,000 towards his support. Also, you have not provided more than half of your son's support if your son receives $2,200 from the GI Bill and he uses this amount for his education and you provided only $2,000 towards his support. Another instance of you not meeting more than half of your child's support is when you and your brother each provide 20% of your mother's support for the year but a two other people not related to her provide the other 60%. Hence, you do not have to be related to someone to claim an exemption for them under a multiple support agreement.

You can claim an exemption for someone even if you do not meet the more than half of their total support test. For example, if your father lives with you and receives 25% of his support from social security, 40% from you, 24% from his brother (your uncle), and 11% from a friend. Either you or your uncle can take the exemption for your father if the other signs a statement agreeing not to take the exemption. However, you have to have provided at least 10% of your dependent's support in order to do this. The person who agrees to take the exemption under a multiple support agreement must attach Form 2120, or a similar declaration, to his tax return and must keep for his records the signed statements.

If the parents divorced or separated during the year and the child lived with both parents before the separation, the custodial parent is the one with whom the child lived with for the greater number of nights during the rest of the year. A child is treated as living with a parent for a night if the child sleeps at a parent's home, with the parent either present or not present. Additionally, a child is treated as living with a parent for a night if the child sleeps in the company of the parent, when the child does not sleep at a parent's home. 

Most taxpayers have a choice of either taking a standard deduction or itemizing their deductions. If you have a choice, you use the method that gives you the lower tax and higher deduction. Some persons are not eligible for the standard deduction. Your standard deduction is zero and you should itemize any deductions you have if your filing status is married filing separately, and your spouse itemizes deductions on his or her tax return. Also, your standard deduction is zero and you should itemize any deductions you have if you are filing a tax return for a short tax year because of a change in your annual accounting period. In addition, if you are a non-resident or dual-status alien during the year, you should itemize your deductions and your standard deduction is zero. 

Thomas died May 6, 2014. Thomas was single and he would have turned 65 on December 20, 2014. His standard deduction for 2014 is $7,750 because had he not died he would have turned 65 towards the end of the year.

If your itemized deductions are less than the amount of your standard deduction, you can elect to itemize deductions on your federal tax return rather than take the standard deduction. Furthermore, you can itemize your deductions if the tax benefit of being able to itemize your deductions on your state

tax return is greater than the tax benefit you lose on your federal tax return by not taking the standard deduction. At no time are you obligated to take the standard deduction. It is for the most part more beneficial to take advantage of the larger figure but not always as in the case with the state calculations.

Even if you do not otherwise have to file a tax return, you should file to get a refund of any tax withheld, to get the Earned Income Credit if you are eligible or if you are eligible for a refundable credit for prior year minimum tax.

In some cases, your combined income tax on separate tax returns may be less that it would be on a joint tax return. However, you should itemize deductions if your spouse itemizes deductions, and you are not allowed to claim the standard deduction. Also remember that you cannot exclude any interest income from qualified U.S. savings bonds that you used for higher education expenses when you file MFS. Also, when you file Married Filing Separately, more of your Social Security benefits you received during the year become taxable than if you filed a Married Filing Jointly tax return.

Whether you must file a federal income tax return depends on many factors such as your gross income, your filing status used, your age and whether you are a dependent. If you are required to file a tax return but you fail or willfully fail to do so you may have to pay a penalty. Not filing your return is serious business and you could be subject to criminal prosecution for choosing to not file.

Gross income is all income your receive in the form of money, goods, property or services which is not exempt from tax. If you are married and lived with your spouse in a community property state, half of any income received by your spouse may be considered yours. You must file a tax return if you owe any self-employment tax. Usually you would owe self employment tax if your self-employment income is at least $400.

Your filing status generally depends on whether you are single or married at the end of the year. You could be married in March and could have become single by the end of the year. What matters is what is true on December 31st. Therefore, if you could benefit on your taxes by getting married on the last day of the year, then get married. The IRS has no problem with that as long as you stay married and are not going to divorce the following month and try the same scheme every December 31st. Age is a factor in determining if you must file a return only if you are 65 or older at the end of the year.

You must file an income tax return for a decedent if you are the surviving spouse, executor, administrator, or legal representative. You must also file an income tax return for a decedent if the decedent was required to file at the time of death.

If you are single dependent, you must file a return if your earned income was more than $1,000, your earned income of more than $6,100. Additionally, you must file if your gross income was more than the larger of $1,000 or your earned income up to $5,750 plus $350.  If you are single dependent who is blind or age 65 or older, you must file a return if your unearned income was more than $2,500, your earned income was more than $7,600 or your gross income was the larger of $2,500 or your earned income plus $1,850. If you are a married dependent, and you were either age over 65 or blind, you must file a

return if your gross income was at least $5 and your spouse files a separate return and itemizes deductions. 

If you are a married dependent, and you were either age over 65 or blind, you must file a return if your gross income was at least $5 and your spouse files a separate return and itemizes deductions. You must also file if your unearned income was more than $2,200 or your earned income was more than $7,300. If your gross income was more than the larger of $2,200 or your earned income plus $1,550 then you have an obligation to file. To determine whether you must file a return, include in your gross income any income you earned or received abroad and any income you can exclude under the foreign earned income exclusion.

If you are a U.S. citizen and also a bona fide resident of Puerto Rico, you generally must file a U.S. income tax return for any year in which you meet the filing requirements. Your income requirements include income from sources within Puerto Rico. Your income also includes income you received for your services as an employee of the United States or any U.S. agency. If you are a bona fide resident of Puerto Rico for the whole year, your U.S. gross income does not include income from sources within Puerto Rico. Your income does not include all income and does not include income for your services as an employee of the United States or any U.S. agency. If you had income from Guam, the Commonwealth of the Northern Mariana Islands, American Samoa, or the U.S. Virgin Islands, you may have to file a U.S. federal income tax return. Special rules may apply when determining whether you must file a U.S. federal income tax return and you may also have to file a tax return with the possession government.

A person who is a dependent may have to file a return depending on his earned income, unearned income or his gross income. If a dependent child must file an income tax return but cannot file due to age or any other reason, a parent, guardian, or other legally responsible person must file it for the child. The child is obligated to file, only that this child must have a adult to supervise the filing. Additionally, if a dependent child must file an income tax return but cannot sign the return, the parent or guardian must sign the child's name followed by the words "By (your signature), parent for minor child".  If under local law the child's parent has the right to the earnings and actually receives the earnings, then the parent is liable for the tax and also the child.

Earned income for purposes of filing requirements and the standard deduction includes salaries, wages and professional fees. Earned income also includes amounts received as pay for work you actually performed and any part of a scholarship that you must include in your gross income.

You may be able to include your child's interest and dividend income on your tax return if the interest and dividend income was less than $10,000. Additionally, you may be able to include your child's interest and dividend income on your tax return if your child was under age 19 and not federal income tax was withheld under backup withholding rules.

You may have to file a tax return even if your gross income is less than the required amounts if you liable for the Alternative minimum tax or have additional tax on a qualified retirement plan such as an IRA. Even if you do not have to file a tax return, you should file a tax return if you can get money back, you had income tax withheld or want to avoid any possibility of the IRS contacting you.

You must determine your filing status before you can determine whether you must file a tax return, your standard deduction and your tax. You also use your filing status to determine whether you are eligible to claim certain deductions and credits.

If more than one filing status applies to you, choose the one that will give you more deductions and credits and a higher refund. Ultimately, choose the one that gives you the lowest tax.

You are considered unmarried for the entire year if on the last day of your tax year, you are unmarried. You are also considered unmarried for the entire year on the last day of the year, you are legally separated under a divorce or separate maintenance decree. If you are divorced under a final decree by the last day of the year, then you are considered single.

If you obtain a divorce for the sole purpose of filing a tax return as unmarried individuals, and at the time of the divorce you intend to and and do, in fact, remarry each other in the next tax year, you and your spouse must file as married individuals in both years. This has been a scheme for a while now. Taxpayers are still doing this to take advantage of the lower tax rates. Before you try this or other schemes, get advise from the IRS or tax professionals who can enlighten you further. Buying into any tax scheme or tax evasion scheme can be very costly.

If you obtain a court decree of annulment, which holds that no valid marriage ever existed, you are considered unmarried even if you filed joint returns for earlier years. You should amend your tax returns if you have filed returns as married filing jointly for years for which this annulment of marriage applies. There's a difference between a divorce and an annulment. A court grants a divorce to mark the end of a marriage that was was valid, whereas an annulment is for a marriage that at no time was valid. The IRS holds to this idea in applying the tax laws to annulments. For example, Jay and Thelma married in 2008, filed a joint return for that year, and had their marriage annulled after the filing deadline. Because their marriage was declared null and void from its very inception, they're considered to be unmarried at the end of 2008. Consequently, they were ineligible to file jointly and therefore they must undue their joint return by filing a an amended returns as unmarried taxpayers. This means that they will probably be liable for taxes at the single rate and will probably be liable for interest or penalties.

If you are married and are considered unmarried, you may be able to file as Head of household or as qualifying widow(er) with qualifying child. If you are married and are considered unmarried for tax purposes, it does not mean that you can file a return using the single filing status. Therefore, if you are considered married, you and your spouse must file as either married filing jointly or married filing separately. Furthermore, if you are married or considered married, you and your spouse can file as married filing jointly or filing separately but never as single. Also, if you are married and can be considered unmarried for tax purposes, you and/or your spouse can file as Head of Household, married filing jointly, married filing separately, but never as single. You are considered married for the whole year if, on the last day of your tax year, you and your spouse are married and living together. You cannot be considered unmarried for head of household tax purposes if you are married and living together at the end of the year.

For federal tax purposes, individuals of the same sex are married if they were lawfully married in a state or foreign country whose laws authorize the marriage even if the state or foreign country in which they now live does not recognize same-sex marriage. This is different than the registered domestic partnership rules from previous years. Federal never recognized registered domestic partnership so individuals would file a return using married filing jointly for certain states but single for federal tax purposes. All same-sex couples who are legally married will be recognized as such for federal tax purposes, even if the state where they reside does not recognize their union. Same-sex couples are entitled to federal benefits as all married couples. With this rule also come the obligation to file if they are legally married just all other married couples. Now, they too have to file as either "married filing jointly' or "married filing separately".

If individuals of the same sex are married, they generally must use the married filing jointly and married filing separate status. Furthermore, individuals of the same sex can generally use the Head of household filing status if they did not live together the last 6 months of the year and they have a dependent child and meet other requirements.

If your spouse died during the year, you are considered married for the entire year. You don't start filing as qualifying widow or widower until the following year. Additionally, if your spouse died during the year and you did not remarry before the end of the year, your filing status will be married filing joint. You also have the option to file as married filing separately. However, if your spouse died during the year and you remarried before the end of the year, you file a joint return with your new spouse. Consequently, your deceased spouse's filing status has to be married filing separately.

If you live apart from your spouse and meet certain tests, you may be able to file as head of household, even if you are not divorced or legally separated. One of the requirements to file as Head of Household, you must not have lived with your spouse for the last six months of the year. Very important to know is that if you are married, you can use any filing status except single. If your taxable income is more than $100,000 you cannot use form 1040EZ or Form 1040A. You are generally stuck and must use Form 1040.

On a joint return, you and your spouse report your combined income and deduct your combined allowable expenses. You can file a joint return even if one of you had no income or deductions. In order to file jointly, you and your spouse must agree to file jointly. You must both sign the tax forms. Filing jointly with your spouse allows you many benefits which includes a lower tax than your combined tax for the other filing statuses. Filing jointly also allows you a higher standard deduction amount. Filing jointly gives you an advantage and access to certain tax benefits that do not apply to other filing statuses. If you and your spouse each have income, you may want to figure your tax both on a joint return and on a separate return and choose the one that gives you and your spouse the lower combined tax. If you are divorced under a final decree by the last day of the year, you are considered unmarried for the whole year and you cannot choose married filing jointly or separately as your filing status.

If you choose married filing separately as your filing status special rules apply such as you cannot take the credit for child and dependent care expenses in most cases, and the amount you can exclude from income under an employer's dependent care assistance program is limited to $2,500. Also, if you choose

married filing separate as your filing status you will not be allowed to claim the Earned income Credit, the American Opportunity credit, Lifetime Learning Credit or the deduction for student loan interest or tuition and fees deduction.

If you choose married filing separately as your filing status, and you lived with your spouse at any time during the tax year, You cannot claim the credit for the elderly or the disabled and more of your social security or equivalent retirement benefits you receive may be taxable.

Taxpayer Identification Numbers

The Taxpayer Identification Number (TIN) is an identification number used by the Internal Revenue Service (IRS) in the administration of tax laws. Such as the Social Security Number "SSN", the Employer Identification Number. and the Individual Taxpayer identification Number "ITIN". These numbers are what identify you and your dependents and your business on your tax return.

A TIN must be furnished on returns, statements, and other tax related documents. This number must be furnished when filing your returns or when claiming tax treaty benefits. Also a TIN must be on a withholding certificate if the beneficial owner is claiming tax treaty benefits other than from income from marketable securities. This number must also be on a withholding certificate if the beneficial owner is claiming exemption for effectively connected income or exemption for certain annuities. Furthermore, you generally must list on your individual income tax return the social security number (SSN) of any person for whom you claim an exemption. If your dependent or spouse is not eligible to get a SSN, you must list an ITIN instead.

You should apply for a SSN by completing Form SS-5, Application for a Social Security Card, and also submit evidence of identity, age and citizenship or lawful alien status. The IRS requires a Taxpayer Identification Number (TIN) as an identification number for the administration of the tax laws. You can acquire this number from the Social Security Administration (SSA) or by the Internal Revenue Service (IRS). Only the Social Security Administration can issue a Social Security number and all other taxpayer Identification numbers are issued by the Internal Revenue Service (IRS). The taxpayer identification numbers available are:

* Social Security Number (SSN)

* Employer Identification Number (EIN).

* Individual Taxpayer Identification Number (ITIN).

* Taxpayer Identification Number for Pending U.S. Adoptions (ATIN).

* Preparer Tax Identification Number (PTIN).

The IRS previously assigned temporary IRS Preparer Tax Identification Numbers which are not long valid.

You must furnish a Taxpayer Identification Number (TIN) on your income tax returns and all required documents when filing your tax return. You will also be asked for an Taxpayer Identification Number (TIN)

when you contact the Internal Revenue Service (IRS) either on the phone or on any correspondence by mail. Also, a Taxpayer Identification Number (TIN) must be provided when you file your tax returns or when claiming treaty benefits. Furthermore, a Taxpayer Identification Number (TIN) must be on any withholding certificate for claiming tax treaty benefits, exemption of effectively connected income, or exemption for certain annuities.

In addition, a Taxpayer Identification Number (TIN) must also be provided when claiming exemptions for your dependents or your spouse. You generally must list on your tax returns the Social Security number (SSN) or Individual Taxpayer Identification number (ITIN) for any person for whom you are claiming an exemption. You can use either the Social Security Number that was issued by the Social Security Administration or the Individual Taxpayer Identification number (ITIN) that was issued by the Internal Revenue Service (IRS). If the child was born or if the child died in the same year, you don't need a social security number. If the child was born in that year, you should probably apply for a number since it only takes about two to four weeks to receive the Social Security Number from the Social Security Administration or the Taxpayer Identification Number (TIN) from the Internal Revenue Service (IRS). These time frames vary depending on the SSA or IRS specifications or service areas.  If the child died in the same year he or she was born, then instead of a Social Security Number or an Individual Identification Number (ITIN), attach a copy of the child's birth certificate and write "Died" in the appropriate exemption line of the tax return.

You can acquire a Taxpayer Identification Number in various different ways. If you need a Social Security Number from the Social Security Administration, you will need to complete Form SS-5, Application for a Social Security Card. In addition to filling out Form SS-5, you must also submit evidence of your identity, age, and of your U.S. citizenship or lawful alien status. You can get Form SS-5 by calling the Social Security Administration office or on the Web.

If you have a business you can acquire an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). This number is also known as a federal identification number. This number is normally used to identify your business entity. You can acquire this Employer Identification number even for your sole proprietor business but normally it is only given to a sole proprietorship if the sole proprietor has employees. Sole proprietors can use their Social Security number to report their business activities to the Internal Revenue Service (IRS) and are not obligated to get an Employer Identification number (EIN). The Employer Identification Number is also used by estates and trusts whom are required to report their income on Form 1041, U.S. Income Tax Return for Estates and Trusts.

If you, your spouse or your dependents are not legally able to acquire a Social Security Number (SSN), you can apply for an ITIN, Individual Taxpayer Identification Number. This Individual Taxpayer Identification Number is only available for certain nonresident and resident aliens, their spouses and dependents who cannot get a Social Security Number (SSN). This number starts with a 9 in the same format at the Social Security Number (SSN). The Individual Taxpayer Identification Number is only for reporting purposes and does not authorize the individual for any benefits such as the Earned Income Credit. Nor does this ITIN authorize the individual to work in the United States.

You can get an Individual Taxpayer Identification Number (ITIN) by completing IRS Form W-7, IRS Application for Individual Taxpayer Identification Number. Additionally, you are required to furnish documentation substantiating your foreign or alien status and your true identity or the true identity of your spouse or your dependents. You can walk in your documents to an IRS office, mail it to the IRS, or you can process your application through  an Acceptance Agent authorized by the Internal Revenue Service. Acceptance Agents such as colleges, financial institutions and accounting firms who are authorized by the Internal Revenue Service (IRS) assist applications in obtaining their Individual Identification Numbers (ITINs). Once they gather the application and all the required paperwork, they will forward everything to the Internal Revenue Service for processing.

Foreigners who are individuals should either apply for a Social Security Number (SSN) if they meet the requirements for one one Form SS-5 with the Social Security Administration or they should apply for an Individual Taxpayer Identification NUmber (ITIN) on Form W-7. Each applicant for an ITIN must now attach a copy of a federal income tax return at the time that they apply for an ITIN and must use the revised Form W-7, Application for IRS Individual Taxpayer Identification Number. If the taxpayer meets the exceptions to this new requirement of supplying a copy of a federal tax return must prove that they qualify for such exception.

If you have applied to adopt a child or are in the process of legally adopting a U.S. citizen or resident child but who cannot get a Social Security for that child in time to file your tax return, you can apply for an Adoption Taxpayer Identification Number (ATIN) for that child. This is a temporary nine-digit number issued by the Internal Revenue Service to temporary provide a number when you are in the process of adopting your child. Use Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions to apply for an ATIN. However, you cannot use Form W-7A or go through this application process if the child is not a U.S. citizen or resident. Apply for an ITIN instead for the child.

Beginning January 1, 2011, if you are a paid tax preparer you must use a valid Preparer Tax Identification Number (PTIN) on returns you prepare. Use of the PTIN no longer is optional. If you do not have a PTIN, you must get one by using the new IRS sign-up system. Even if you have a PTIN but you received it prior to September 28, 2010, you must apply for a new or renewed PTIN by using the new system. If all your authentication information matches, you may be issued the same number. You must have a PTIN if you, for compensation, prepare all or substantially all of any federal tax return or claim for refund. If you do not want to apply for a PTIN online, use Form W-12, IRS Paid Preparer Tax Identification Number Application. The paper application will take 4-6 weeks to process. If you are a foreign preparer who is unable to get a U.S. Social Security Number, you must meet different requirements.

Foreign entities that are not individuals (i.e., foreign corporations, etc.) and that are required to have a federal Employer Identification Number (EIN) in order to claim an exemption from withholding because of a tax treaty (claimed on Form W-8BEN), need to submit Form SS-4 Application for Employer Identification Number to the Internal Revenue Service in order to apply for such an EIN. Those foreign entities filing Form SS-4 for the purpose of obtaining an EIN in order to claim a tax treaty exemption and which otherwise have no requirements to file a U.S. income tax return, employment tax return, or excise tax return, should comply with the following special instructions when filling out Form SS-4. When

completing line 7b of Form SS-4, the applicant should write "N/A" in the block asking for an SSN or ITIN, unless the applicant already has an SSN or ITIN. When answering question 10 on Form SS-4, the applicant should check the "other" block and write or type in immediately follow it with "For W-8BEN Purposes Only", or "For Tax Treaty Purposes Only", "Required under Reg. 1.1441-1(e)(4)(viii)" or "897(i) Election".

If questions 11 through 17 on Form SS-4 do not apply to the applicant because he has no U.S. tax return filing requirement, such questions should be annotated "N/A". A foreign entity that completes Form SS-4 in the manner described above should be entered into IRS records as not having a filing requirement for any U.S. tax returns. However, if the foreign entity receives a letter from the IRS soliciting the filing of a U.S. tax return, the foreign entity should respond to the letter immediately by stating that it has no requirement to file any U.S. tax returns. Failure to respond to the IRS letter may result in a procedural assessment of tax by the IRS against the foreign entity. If the foreign entity later becomes liable to file a U.S. tax return, the foreign entity should not apply for a new EIN, but should instead use the EIN it was first issued on all U.S. tax returns filed thereafter. If you want to expedite the issuance of an EIN for a foreign entity you can call (267) 941-1099.

An Employer Identification Number (EIN) is also known as a federal tax identification number, and is used to report estate and trust income on Form 1041 and also to identify a business entity. Most businesses have this number and they usually must have it in order to open a bank account unless they want to be forced to use their personal name as the business name.

The ITIN is a tax processing number only available for certain nonresident and resident aliens, their spouses, and dependents who cannot get a Social Security Number (SSN) that begins with the number 9 in the SSN format. To obtain the ITIN, you must complete Form W-7. In addition, you must substantiate your foreign or alien status and true identity by mail. Alternatively, you can substantiate foreign or alien status and true identity by going through an Acceptance Agent authorized by the IRS. If you need to apply for a number, you can visit Acceptance Agents which are entities (colleges, financial institutions, accounting firms, etc.) who are authorized by the IRS to assist applicants in obtaining ITINs. An ITIN, or Individual Taxpayer Identification Number is a 9-digit number, beginning with the number 9 and formatted like an SSN. It is important that you be aware that you cannot claim the earned income credit using an ITIN.

Foreign persons who are individual should apply for a social security number (SSN, if permitted) on Form SS-5 with the Social Security Administration or get an get an ITIN. Each ITIN applicant must now apply using the revised Form W-7 and must attach a federal income tax return to the Form W-7. There is an identifying for almost any situation. For example, you must apply for an ATIN which is a temporary nine-digit number issued by the IRS to individuals who are in the process of legally adopting a U.S. citizen or resident child but who cannot get an SSN for that child in to file their tax return.

Taxable and Nontaxable Income

You can receive income in the form of money, property, or services. This section discusses many kinds of income that are taxable or nontaxable. It includes discussions on employee wages and fringe benefits,

and income from bartering, partnerships, S corporations, and royalties. The information on this page should not be construed as all-inclusive. Other steps may be appropriate for your specific type of business.

Generally, an amount included in your income is taxable unless it is specifically exempted by law. Income that is taxable must be reported on your return and is subject to tax. Income that is nontaxable may have to be shown on your tax return but is not taxable.

You are generally taxed on income that is available to you, regardless of whether it is actually in your possession.

A valid check that you received or that was made available to you before the end of the tax year is considered income constructively received in that year, even if you do not cash the check or deposit it to your account until the next year. For example, if the postal service tries to deliver a check to you on the last day of the tax year but you are not at home to receive it, you must include the amount in your income for that tax year. If the check was mailed so that it could not possibly reach you until after the end of the tax year, and you could not otherwise get the funds before the end of the year, you include the amount in your income for the next year.

Income received by an agent for you is income you constructively received in the year the agent received it. If you agree by contract that a third party is to receive income for you, you must include the amount in your income when the party receives it. For example, you and your employer agree that part of your salary is to be paid directly to your former spouse. You must include that amount in your income when your former spouse receives it.

Prepaid income, such as compensation for future services, is generally included in your income in the year you receive it. However, if you use an accrual method of accounting, you can defer prepaid income you receive for services to be performed before the end of the next tax year. In this case, you include the payment in your income as you earn it by performing the services.

Generally, you must include in gross income everything you receive in payment for personal services. In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options. You should receive a Form W-2, Wage and Tax Statement, from your employer showing the pay you received for your services.

If you provide child care, either in the child's home or in your home or other place of business, the pay you receive must be included in your income. If you are not an employee, you are probably self-employed and must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. You generally are not an employee unless you are subject to the will and control of the person who employs you as to what you are to do and how you are to do it. If you babysit for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you.

Fringe benefits you receive in connection with the performance of your services are included in your income as compensation unless you pay fair market value for them or they are specifically excluded by law. Abstaining from the performance of services such as under a covenant not to compete, is treated as the performance of services for purposes of the fringe benefit rules. You are the recipient of a fringe benefit if you perform the services for which the fringe benefit is provided. You are considered to be the recipient even if it is given to another person, such as a member of your family. An example is a car your employer gives to your spouse for services you perform. The car is considered to have been provided to you and not your spouse. You do not have to be an employee of the provider to be a recipient of a fringe benefit. If you are a partner, director, or independent contractor, you can also be the recipient of a fringe benefit.

If you rent out personal property, such as equipment or vehicles, how you report your income and expenses is generally determined by whether or not the rental activity is a business, and whether or not the rental activity is conducted for profit. Generally, if your primary purpose is income or profit and you are involved in the rental activity with continuity and regularity, your rental activity is a business.

A partnership generally is not a taxable entity. The income, gains, losses, deductions, and credits of a partnership are passed through to the partners based on each partner's distributive share of these items. Partner's distributive share. Your distributive share of partnership income, gains, losses, deductions, or credits generally is based on the partnership agreement. You must report your distributive share of these items on your return whether or not they actually are distributed to you. However, your distributive share of the partnership losses is limited to the adjusted basis of your partnership interest at the end of the partnership year in which the losses took place. Although a partnership generally pays no tax, it must file an information return on Form 1065, U.S. Return of Partnership Income. This shows the result of the partnership's operations for its tax year and the items that must be passed through to the partners.

In general, an S corporation does not pay tax on its income. Instead, the income, losses, deductions, and credits of the corporation are passed through to the shareholders based on each shareholder's pro rata share. You must report your share of these items on your return. Generally, the items passed through to you will increase or decrease the basis of your S corporation stock as appropriate. An S corporation must file a return on Form 1120S, U.S. Income Tax Return for an S Corporation. This shows the results of the corporation's operations for its tax year and the items of income, losses, deductions, or credits that affect the shareholders' individual income tax returns.

Royalties from copyrights, patents, and oil, gas and mineral properties are taxable as ordinary income. You generally report royalties in Part I of Schedule E (Form 1040), Supplemental Income and Loss. However, if you hold an operating oil, gas, or mineral interest or are in business as a self-employed writer, inventor, artist, etc., report your income and expenses on Schedule C or Schedule C-EZ.

The sale or other exchange of virtual currencies, or the use of virtual currencies to pay for goods or services, or holding virtual currencies as an investment, generally has tax consequences that could result in tax liability. This guidance applies to individuals and businesses that use virtual currencies.

Bartering is an exchange of property or services. You must include in your income, at the time received, the fair market value of property or services you receive in bartering. Bartering occurs when you exchange goods or services without exchanging money. An example of bartering is a plumber exchanging plumbing services for the dental services of a dentist. You must include in gross income in the year of receipt the fair market value of goods or services received from bartering. Generally, you report this income on Form 1040, Schedule C, Profit or Loss from Business or Form 1040, Schedule C-EZ, Net Profit from Business. If you failed to report this income, correct your return by filing a Form 1040X. A barter exchange is an organization with members who contract with each other (or with the barter exchange) to exchange property or services. The term does not include arrangements that provide solely for the informal exchange of similar services on a noncommercial basis.

The Internet has provided a medium for new growth in the bartering industry. This growth prompts the following reminder: Barter exchanges are required to file Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, for all transactions unless an exception applies. Refer to Bartering in Publication 525, Taxable and Nontaxable Income, and the Form 1099-B Instructions, for additional information on this subject. Persons who do not contract with a barter exchange or who do not barter through a barter exchange, but who trade services, are not required to file Form 1099-B. However, they may be required to file Form 1099-MISC. If you exchange property or services through a barter exchange, you should receive a Form 1099-B. The IRS also will receive the same information. If you receive income from bartering, you may be required to make estimated tax payments. Refer to Form 1040-ES , Estimated Tax for Individuals, for more information. If you are in a trade or business, you may be able to deduct certain costs you incur to perform services that you barter.

Almost anything you receive as compensation in exchange for services is taxable. You can receive income in the form of money, property or services. Generally, an amount included in your income is taxable unless it is specifically exempted by law. Thus, you are generally taxed on income that is available to you, regardless of whether it is actually in your possession.

For example, if you have a valid check that you received or that was made available to you before the end of the tax year it is considered income constructively received in that year even if you do not cash the check or deposit it to your account until the next year. To demonstrate further, if the post office tries to deliver a check to you on the last day of the tax year but you are not at home to receive it, you must include the amount in your income for that year. Additionally, if a valid check was mailed to you so that it could not possibly reach you until after the end of the tax year, and you could not otherwise get the funds before the end of the year, then you include the amount in your income for the next year. So if you agree by contract that a third party is to receive income for you, you must include the amount in your income when the third party receives it. Also if you and your employer agree that part of your salary is to be paid directly to your former spouse, you must include that amount in your income when your former spouse receives it. Generally, you must include in gross income everything you receive in payment for personal services such as wages, salaries, commissions, fees, tips, fringe benefits and stock options. Generally, you must include in gross income everything you receive in payment for personal services such as wages, salaries, commissions, fees, tips, fringe benefits and stock options.

Generally people are employees and that is not difficult to determine. You just go to work for a company and it is extremely obvious that you are employee. If you have your own business establishment for example it would be very obvious that you  are not an employee. However, there are some individuals for whom this is not so clear. You generally would not be an employee you are not subject to the will and control of the person who employs you as to what you do and how you do are doing what you do.

Fringe benefits you receive in connection with the performance of your services are included in your income as compensation unless you pay fair market value for them or if they are specifically excluded by law. Abstaining from the performance of services such as when you have a covenant not to compete would not be considered a fringe benefit.

A fringe benefit is a form of pay for the performance of services such as allowing an employee to use a business vehicle to commute to and from work. You are the recipient of a fringe benefit if you perform the services for which the fringe benefit is provided. You are considered to be the recipient of a fringe benefit even if it is given to another person. If you are a partner, director, or independent contractor, you can also be the recipient of a fringe benefit. You don't have to be an employee of the fringe benefit provider in order to be a recipient of a fringe benefit.

Money you receive for the use of real estate or other property is taxable to you as rental income and you can deduct the expenses associated with such income. If you rent out personal property, such as equipment or vehicles, how you report your rental income and expenses is generally determined by whether or not the rental activity is a business and whether or not the rental activity is conducted for profit. Generally, if your primary purpose is income or profit and your are involved in the rental activity with continuity and regularity, then your rental activity is a business.

Interest Income

Most interest that you either receive or is credited to your account and that can be withdrawn without penalty is taxable income. Examples of taxable interest are interest on bank accounts, money market accounts, certificates of deposit, and deposited insurance dividends. Interest on insurance dividends left on deposit with the U.S. Department of Veterans Affairs, however, is not taxable. Interest on Series EE and Series I U.S. Savings Bonds generally does not have to be reported until the earlier of when the bonds mature or are redeemed. Interest from these bonds issued after 1989 may be excluded from income if used to pay for qualified higher educational expenses during the year and other requirements are met for the Educational Savings Bond Program. Excludable interest from redeemed U.S. savings bonds used to pay qualified higher education expenses is figured on Form 8815, Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989, and shown on Form 1040A or 1040, Schedule B.

Certain distributions commonly referred to as dividends are actually interest. They include "dividends" on deposits or on share accounts in cooperative banks, credit unions, domestic building and loan associations, domestic federal savings and loan associations, and mutual savings banks. You should receive Copy B of Form 1099-INT, Interest Income, from the payer of these dividends. You must report to the IRS all taxable interest received even if you do not receive Copy B of Form 1099-INT.

If a bond, note, or other debt instrument was originally issued at a discount, part of the original issue discount may have to be included in income each year as interest. Interest income from Treasury bills, notes and bonds is subject to federal income tax, but is exempt from all state and local income taxes. However, interest on some bonds used to finance government operations and issued by a state, the District of Columbia, or a U.S. possession is not taxable at the federal level. Report the amount of any tax-exempt interest received during the tax year. This is an information-reporting requirement only, and does not convert tax-exempt interest to taxable interest. Form 1099-INT or a similar statement should be received from each payer of interest of $10 or more, showing the taxable or tax-exempt interest to be reported. Form 1099-OID, Original Issue Discount, or a similar statement should be received from each payer of taxable original issue discount of $10 or more, showing the amount to be reported.

A nominee is someone who receives, in his or her name, income or interest that actually belongs to another individual. Generally, if you receive a Form 1099 for amounts that actually belong to another person, you are considered a nominee recipient. It may be necessary for you to file with the IRS and furnish to the other owners a Form 1099. If you received interest as a nominee for the actual owner, you need to show that amount below a subtotal of all interest income listed on Schedule B of Form 1040 or Form 1040A. Follow the form instructions for nominees. You must prepare a Form 1099-INT for the interest that is not yours and give Copy B to the actual owner. You must also file a copy of the 1099-INT and a completed Form 1096, Annual Summary and Transmittal of U.S. Information Returns, with the Internal Revenue Service Center. If you receive taxable interest, you may have to pay estimated tax. You must give the payer of your interest income your correct social security number. If you do not, you may be subject to a penalty and backup withholding.

Use Schedule B if you have over $1,500 in taxable interest or ordinary dividends.  You also will use schedule B to report a financial interest in, or a signature authority over, a financial account in a foreign country or you if you received a distribution from, or were a grantor of, or transferor to, a foreign trust. If you received interest or ordinary dividends as a nominee in any amount report this interest or dividend amount that is in your name but does not belong to you. You report any amount of interest on your tax report because interest income is normally taxable. Consequently, you normally would file Schedule B if your interest income is over $1,500.

Interest Received

Most interest that is taxable income is interest that you either receive or is credited to your account and can be withdrawn without penalty. Interest that would be taxable income is interest that you receive on bank accounts, money market accounts and interest received on certificates of deposit. Taxable interest is any interest received that is from certain distributions commonly referred to as dividends or interest income from Treasury bill, notes and bonds. Interest on insurance dividends left on deposit with the U.S. Department of Veterans Affairs is is not taxable income interest. Most interest received that is deemed taxable in any amount should be included on your tax return. A Form 1099-INT or a similar statement should be received from each payer of interest of $10 or more.

A nominee recipient is someone who receives, in his or her name, income or interest that actually belongs to another individual. Therefore, if you receive a Form 1099 for amounts of interest that actually belong to another person, you are considered a nominee recipient and it may be necessary for you to file Form 1099 with the IRS and furnish a copy of this form to the other owner or owners. If you received interest as a nominee for the actual owner, you need to show that amount below a subtotal of all interest income listed on Schedule B. Hence, you must prepare a Form 1099-INT for the interest that is not yours and give Copy B to the actual owner and also send a copy to the IRS. You must give the payer of your interest income your correct social security number. If you do not, you may be subject to a penalty along with backup withholding.

Dividends

Dividends are distributions of property a corporation pays you because you own stock in that corporation. Most dividends are paid in cash. However, dividends may be paid as stock of another corporation or any other property. You also may receive dividends through your interest in a partnership, an estate, a trust, a subchapter S corporation or from an association that is taxable as a corporation. A shareholder of a corporation may be deemed to receive a dividend if the corporation pays the debt of its shareholder, the shareholder receives services from the corporation, or the shareholder is allowed the use of the corporation's property. Additionally, a shareholder that provides services to a corporation may be deemed to receive a dividend if the corporation pays the shareholder service-provider in excess of what it would pay a third party for the same services. A shareholder may also receive distributions such as additional stock or stock rights in the distributing corporation; such distributions may or may not qualify as dividends.

You should receive a Form 1099-DIV, Dividends and Distributions, from each payer for distributions of at least $10.00. Also, if you receive dividends through a partnership, an estate, a trust, or a subchapter S corporation, you should receive a Schedule K-1 from that entity indicating the amount of dividends taxable to you. You must report all taxable dividends even if you do not receive a Form 1099-DIV or Schedule K-1. Dividends are the most common type of distribution from a corporation. They are paid out of the earnings and profits of the corporation. Dividends can either be classified as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates.

Distributions that qualify as a return of capital are not dividends. A return of capital is a return of some or all of your investment in the stock of the company. A return of capital reduces the basis of your stock. A distribution generally qualifies as a return of capital if the corporation making the distribution does not have any accumulated or current year earnings and profits. Once the basis of your stock has been reduced to zero, any further non-dividend distribution is capital gain. Capital gain distributions may be paid by regulated investment companies (e.g. mutual funds, exchange traded funds, money market funds, etc.) and real estate investment trusts (REITs). Capital gain distributions are always reported as long-term capital gains. You must also report any undistributed capital gain that mutual funds or REITs have designated to you in a written notice. Those undistributed capital gains are reported to you on Form 2439. Form 1099-DIV should break down the distribution into the various categories. If it does not,

contact the payer. You must give your correct social security number to the payer of your dividend income. If you do not, you may be subject to a penalty and/or back-up withholding.

Dividends are distributions of property a corporation pays you because you own stock in that corporation. For the most part, dividends are taxable in the same manner as interest income is taxable. Also, you use the same Schedule B to report dividend amounts on your tax return. Dividends may be paid in cash, stock of another corporation and any kind of property such as interest in a partnership.

A shareholder of a corporation may be deemed to receive a dividend if the corporation pays the debt of its shareholder or if the shareholder receives services from the corporation. A shareholder of a corporation may also be deemed to have received a dividend if the shareholder is allowed the use of the corporation's property. A shareholder that provides services to a corporation may be deemed to receive a dividend if the corporation pays the shareholder service-provider in excess of what it would pay a third party for the same services. You should receive a Form 1099-DIV, Dividends and Distributions, from each payer for distributions of at least $10.

If you receive dividends through a partnership, an estate, a trust, or a subchapter S corporation, you should receive a Schedule K-1 from that entity indicating the amount of dividends taxable to you. Dividends are the most common type of distribution from a corporation. They are paid out of the earnings and profits of the corporation and can either be classified as ordinary or qualified.

A return of capital is a return of some or all of your investment in the stock of the company, reduces the basis of your stock and the corporation making the distribution does not have any accumulated or current year earnings and profits. A capital gain distribution may be paid by regulated investment companies (e.g. mutual funds, exchange traded funds, money market funds, etc.) and real estate investment trusts (REITs) and are always reported as long-term. You must give your correct social security number to the payer of your dividend income. If you do not, you may be subject to a penalty and also could be backup withholding.

Refund Offsets

Certain financial debts from your past may affect your current federal tax refund. The law allows the use of part or all of your federal tax refund to pay other federal or state debts that you owe. A tax refund offset generally means the U.S. Treasury has reduced your federal tax refund to pay for certain unpaid debts. The Treasury Department’s Financial Management Service is the agency that issues tax refunds and conducts the Treasury Offset Program. If you have unpaid debts, such as overdue child support, state income tax or student loans, FMS may apply part or all of your tax refund to pay that debt.

You will receive a notice from FMS if an offset occurs. The notice will include the original tax refund amount and your offset amount. It will also include the agency receiving the offset payment and that agency’s contact information. If you believe you do not owe the debt or you want to dispute the amount taken from your refund, you should contact the agency that received the offset amount, not the IRS or FMS.

If you filed a joint tax return, you may be entitled to part or all of the refund offset. This rule applies if your spouse is solely responsible for the debt. To request your part of the refund, file Form 8379, Injured Spouse Allocation.

The Department of Treasury's Bureau of Fiscal Service (BFS), which issues IRS tax refunds, has been authorized by Congress to conduct the Treasury Offset Program (TOP). Through this program, your refund or overpayment may be reduced by BFS and offset to pay past-due child support, Federal agency non-tax debts, state income tax obligations, or certain unemployment compensation debts owed to a state. Generally, these are debts for (1) compensation that was paid due to fraud, or (2) for contributions owing to a state fund that were not paid due to fraud.

You can contact the agency with which you have a debt to determine if your debt was submitted for a tax refund offset. If your debt was submitted for offset, BFS will take as much of your refund as is needed to pay off the debt and send it to the agency you owe. Any portion of your refund remaining after offset will be issued in a check to you or direct deposited for you.

BFS will send you a notice if an offset occurs. The notice will reflect the original refund amount, your offset amount, the agency receiving the payment, and the address and telephone number of the agency. BFS will notify the IRS of the amount taken from your refund. Contact the agency shown on the notice if you believe you do not owe the debt, or if you are disputing the amount taken from your refund. If a notice is not received, contact BFS' TOP and let them know of this. Contact the IRS only if your original refund amount shown on the BFS offset notice differs from the refund amount shown on your tax return.

If you filed a joint return and you are not responsible for the debt, but you are entitled to a portion of the refund, you may request your portion of the refund by filing Form 8379, Injured Spouse Allocation. You may file Form 8379 with your original joint tax return ( Form 1040, Form 1040A, or Form 1040EZ ), with your amended joint tax return ( Form 1040X), or by itself after you are notified of an offset. If you file a Form 8379 with your joint return, write "INJURED SPOUSE" in the top left corner of the first page of the joint return. The IRS will process your Form 8379 before an offset occurs. If you file Form 8379 with your original or amended joint tax return, it may take 11 weeks for electronically filed returns or 14 weeks if you file a paper return, to process your return.

If you file Form 8379 by itself, it must show both spouses' social security numbers in the same order as they appeared on your joint income tax return. You, the "injured" spouse, must sign the form. Follow the instructions on Form 8379 carefully and be sure to attach the required forms to avoid delays. Do not attach the previously filed joint tax return to the Form 8379. Send Form 8379 to the Service Center where you filed your original return and allow at least 8 weeks for the IRS to process your Form 8379. The IRS will compute the injured spouse's share of the joint return, and if you lived in a community property state during the tax year, the IRS will divide the joint refund based upon state law. Not all debts are subject to a tax refund offset. To determine if a debt is owed (other than federal tax), and whether an offset will occur, contact BFS' TOP for further instructions.

The Department of Treasury's Bureau of Fiscal Service (BFS), which issues IRS tax refunds, has been authorized by Congress to conduct the Treasury Offset Program (TOP). Thus, through this Treasury Offset Program (TOP), your refund or overpayment may be reduced by BFS and offset to pay Past-due child support and other federal agency non-tax debts. Also, TOP is used to offset state income tax obligations and certain unemployment compensation debts owed to a state for compensation that was paid due to fraud or for contributions owing to a state fund that were not paid due to fraud. BFS will send you a notice if an offset occurs. The notice will reflect the original refund amount and the your offset amount. You will receive amongst other things, the name, address and the telephone number of the agency receiving your money.

Self-Employed Individuals

Generally, you are self-employed if you carry on a trade or business as a sole proprietor or an independent contractor. You are also self-employed if you are a member of a partnership that carries on a trade or business. If you are otherwise in business for yourself, you are self-employed.

As a self-employed individual, generally you are required to file an annual return and pay estimated tax quarterly. Self-employed individuals generally must pay self-employment tax (SE tax) as well as income tax. SE tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. In general, anytime the wording "self-employment tax" is used, it only refers to Social Security and Medicare taxes and not any other tax (like income tax).

Before you can determine if you are subject to self-employment tax and income tax, you must figure your net profit or net loss from your business. You do this by subtracting your business expenses from your business income. If your expenses are less than your income, the difference is net profit and becomes part of your income on page 1 of Form 1040. If your expenses are more than your income, the difference is a net loss. You usually can deduct your loss from gross income on page 1 of Form 1040. But in some situations your loss is limited. You have to file an income tax return if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 instructions.

Estimated tax is the method used to pay Social Security and Medicare taxes and income tax, because you do not have an employer withholding these taxes for you. Form 1040-ES, Estimated Tax for Individuals, is used to figure these taxes. Form 1040-ES contains a worksheet that is similar to Form 1040. You will need your prior year’s annual tax return in order to fill out Form 1040-ES. Use the worksheet found in Form 1040-ES, Estimated Tax for Individuals to find out if you are required to file quarterly estimated tax.

Form 1040-ES also contains blank vouchers you can use when you mail your estimated tax payments or you may make your payments using the Electronic Federal Tax Payment System (EFTPS). If this is your first year being self-employed, you will need to estimate the amount of income you expect to earn for the year. If you estimated your earnings too high, simply complete another Form 1040-ES worksheet to

refigure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated taxes for the next quarter. See the Estimated Taxes page for more information. The Self-Employment Tax page has more information on Social Security and Medicare taxes.

To file your annual tax return, you will need to use Schedule C or Schedule C-EZ to report your income or loss from a business you operated or a profession you practiced as a sole proprietor. Small businesses and statutory employees with expenses of $5,000 or less may be able to file Schedule C-EZ instead of Schedule C. To find out if you can use Schedule C-EZ, see the instructions in the Schedule C-EZ form. In order to report your Social Security and Medicare taxes, you must file Schedule SE (Form 1040), Self-Employment Tax. Use the income or loss calculated on Schedule C or Schedule C-EZ to calculate the amount of Social Security and Medicare taxes you should have paid during the year. If you made or received a payment as a small business or self-employed individual, you are most likely required to file an information return to the IRS.

When beginning a business, you must decide what form of business entity to establish. Your form of business determines which income tax return form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute.

If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters, and applies to all types of homes.

The employment tax requirements for family employees may vary from those that apply to other employees. On this page we point out some issues to consider when operating a husband and wife business. For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a "qualified joint venture," whose only members are a husband and wife filing a joint return, can elect not to be treated as a partnership for Federal tax purposes.

Generally, you are self-employed if you carry on a trade or business as a sole proprietor or an independent contractor. You are also self-employed is you are member of a partnership that carries on a trade or business. Most self employed individuals are in business for themselves such as when they own a retail establishment.  Additionally, as a self-employed individual, generally you are required to file an annual tax return and to pay estimated taxes quarterly. Self employed individuals must pay self-employment tax as well as the normal income tax. Before you can determine if you are subject to self-employment tax and income tax, you must figure your net profit or net loss from your business.  You have to file an income tax return if your net earnings from self-employment were $400 or more.

Most self-employed individuals must pay estimated taxes. Form 1040-ES, Estimated Tax for Individuals, is used to figure estimated taxes. Form 1040-ES contains a worksheet that is similar to Form 1040. In order to fill out Form 1040-ES correctly you should have your prior year's annual tax return. Form 1040-ES also contains blank vouchers you can use when you mail your estimated tax payments or you may

make your payments using the Electronic Federal Tax Payment System (EFTPS). If this is your first year being self-employed you will need to estimate the amount of income you expect to earn for the year. Also, if you estimated your earnings too high, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. Likewise, if you estimated your earnings too low, simply complete another Form 1040-ES worksheet to recalculate your estimated taxes for the next quarter.

To file your annual business tax return, you will need to use Schedule C or the easier version Schedule C-EZ to report your income or loss from a business your operated or a profession you practiced as a sole proprietor. Will also need to complete Schedule SE if you make a profit and to pay your self-employment taxes. Small businesses and statutory employees with expenses of $5,000 or less may be able to file Schedule C-EZ instead of its more complicated counterpart Schedule C. In order to report your Social Security and Medicare taxes, you must file Schedule SE. You will need to the income or loss calculated on Schedule C or Schedule C-EZ to calculate the amount that needs to be paid for the year. If you made or received a payment as a small business or self-employed individual, you are most likely required to file an information report with the IRS.

When beginning your business, you must decide what form of business entity to establish because your form of business determines which reports you must file. Sole proprietorships, partnerships and corporations have been around forever. The S corporation business structure has been around for a while also. However, the Limited Liability Company (LLC) is a fairly new structure allowed by state stature. If you use part of your home for business, you may be able to deduct expenses for the business use of your home and this deduction is available for any person who uses part of their home to perform their self employment duties.

A small business whose only owners are a husband and wife filing a joint return, can elect not to be treated as a partnership. Thus the husband and wife can file their business taxes directly on Schedule C as sole proprietors. 

Independent Contractor

People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax. If you are an independent contractor, you are self-employed.

You are not an independent contractor if you perform services that can be controlled by an employer such what will be done and how it will be done. This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed. If an employer-employee relationship exists regardless of what the relationship is called, you are not an independent contractor and your earnings are generally not subject to Self-Employment Tax.

However, your earnings as an employee may be subject to FICA (Social Security tax and Medicare) and income tax withholding.

It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.

If you are a business owner or contractor who provides services to other businesses, then you are generally considered self-employed. If you are a business owner hiring or contracting with other individuals to provide services, you must determine whether the individuals providing services are employees or independent contractors. Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be an independent contractor, an employee or common-law employee, a statutory employee or a statutory nonemployee. In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.

Facts that provide evidence of the degree of control and independence fall into three categories are

* Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

* Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

* Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

The business must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another. The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination. If, after reviewing the three categories of evidence, it is still unclear whether a worker is an employee or an independent contractor, Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding can be filed with the IRS. The form may be filed by either the business or the worker. The IRS will review the facts and circumstances and officially determine the worker’s status. It can take at least six months to get a determination, but a business that continually hires the same types of workers to perform particular services may want to consider filing the Form SS-8. Once a determination is made whether by the business or by the IRS, the next step is

filing the appropriate forms and paying the associated taxes. If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker.

All evidence of the degree of control and independence in the worker and business relationship should be considered.  These facts fall into the category of behavioral and financial control. Additionally, the evidence of the degree of control and independence in worker and business or employer relationship is seen in the relationship of the parties involved.

In examining the relationship between the worker and the business, the financial control fact shows whether the business has a right to direct or control the financial and business aspects of the worker's job. Moreover, in examining the relationship between the worker and the business, the relationship of the parties shows the type of relationship the parties had. Furthermore, financial control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job such as the extent to which the worker has unreimbursed business expenses. Also, this fact covers the extent of the worker's investment in the facilities or tools used in performing services. In addition, this fact covers the extent to which the worker makes his or her services available to the relevant market and how the business pays the worker.

Relationship of the parties covers facts that show the type of relationship the parties had such as any written contracts describing the relationship the parties intent to create. This fact also covers the employee-type benefits if any provided by the business such as insurance, pension plans, vacation or sick pay. Also, The relationship fact covers the permanency of the relationship, and the extent to which the services performed by the workers are taken as a key aspect of the regular business of the employer.

Social Security Benefits

The Social Security benefits you received in 2010 may be taxable. You should receive a Form SSA-1099 which will show the total amount of your benefits. The information provided on this statement along with the following seven facts from the IRS will help you determine whether or not your benefits are taxable. How much, if any, of your Social Security benefits are taxable depends on your total income and marital status. Generally, if Social Security benefits were your only income for 2010, your benefits are not taxable and you probably do not need to file a federal income tax return. If you received income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status.

To determine whether some of your benefits may be taxable, first, add one-half of the total Social Security benefits you received to all your other income, including any tax exempt interest and other exclusions from income. Then, compare this total to the base amount for your filing status. If the total is more than your base amount, some of your benefits may be taxable.

The 2014 base amounts are

* $32,000 for married couples filing jointly.

* $25,000 for single, head of household, qualifying widow/widower with a dependent child, or married individuals filing separately who did not live with their spouses at any time during the year.

* $0 for married persons filing separately who lived together during the year.

The Federal Contributions Act (FICA) tax includes the social security tax and Medicare tax. Hence, your income and filing status affect whether you must pay taxes on your social security. Consequently, if your total income is more than the base amount for your filing status, then some of your benefits may be taxable. Now when social security is your only source of income, then this is a different story since your social security benefits may not be taxable and you may not even need to file a federal income tax return.

To illustrate further, if you received Social Security benefits and other income, your benefits will not be taxable unless your MAGI is more than the base amount for your filing status. Another thing, if you and your child both received benefits, but the check for your child was made out in your name, you must use only your own portion of the social security benefits in figuring if any part is taxable to you. If you are married and file a joint return, you and your spouse must combine your incomes and social security benefits when figuring the taxable portion of your benefits. Additionally, even if your spouse did not receive any benefits, you must add your spouse's income to yours when figuring the taxable part if filing a joint return.

Individual Retirement Arrangements (IRAs)

For 2014 and 2015, your total contributions to all of your traditional and Roth IRAs cannot be more than

* $5,500 ($6,500 if you’re age 50 or older), or

* your taxable compensation for the year, if your compensation was less than this dollar limit.

The IRA contribution limit does not apply to rollover contributions, qualified reservist repayments and claiming a tax deduction for your IRA contribution

Your traditional IRA contributions may be tax-deductible. The deduction may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels. The same general contribution limit applies to both Roth and traditional IRAs. However, your Roth IRA contribution might be limited based on your filing status and income. You can’t make regular contributions to a traditional IRA in the year you reach 70½ and older. However, you can still contribute to a Roth IRA and make rollover contributions to a Roth or traditional IRA regardless of your age. If you file a joint return, you and your spouse can each make IRA contributions even if only one of you has taxable compensation. The amount of your combined contributions can’t be more than the taxable compensation reported on your joint return. It doesn’t matter which spouse earned the compensation. If neither spouse participated in a retirement plan at work, all of your contributions will be deductible.

You can contribute to a traditional or Roth IRA whether or not you participate in another retirement plan through your employer or business. However, you might not be able to deduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work. Roth IRA contributions might be limited if your income exceeds a certain level.

Excess contributions are taxed at 6% per year as long as the excess amounts remain in the IRA. The tax can’t be more than 6% of the combined value of all your IRAs as of the end of the tax year. To avoid the excess contributions tax withdraw the excess contributions from your IRA by the due date of your individual income tax return (including extensions); and withdraw any income earned on the excess contribution.

A traditional IRA is a way to save for retirement that gives you tax advantages. An IRA is one of the few legal tax shelters available to taxpayers. It is a tax-favored personal savings arrangement, which allows you to set aside money for retirement. The original IRA is often referred to as a "traditional IRA." You may be eligible for a tax credit equal to a percentage of your contribution. Amounts in your IRA, including earnings from the IRA, are generally not taxed until distributed to you.

There are many common misconceptions about IRAs. First, many think that to contribute to a traditional IRA, you must be over 70 1/2 at the end of the year. This of course it not true. Another misconception is that if you are married both you and your spouse when filing a MFJ tax return, must have taxable compensation in order to contribute to an IRA. You and your spouse can each make IRA contributions even if only one of you has taxable compensation. You can make a contribution on behalf of your spouse and it does not even matter is she did not work or if she earned any compensation for the year.

Distributions from a traditional IRA are fully or partially taxable in the year of distribution. If you made only deductible contributions, your distributions are fully taxable. These IRA distributions are subject to a 10% additional tax if they were made prior to age 59 1/2.

Roth IRA Contributions

The same general contribution limit applies to both Roth and traditional IRAs. However, your Roth IRA contribution might be limited based on your filing status and income. You can’t make regular contributions to a traditional IRA in the year you reach 70½ and older. However, you can still contribute to a Roth IRA and make rollover contributions to a Roth or traditional IRA regardless of your age. If you file a joint return, you and your spouse can each make IRA contributions even if only one of you has taxable compensation. The amount of your combined contributions can’t be more than the taxable compensation reported on your joint return. It doesn’t matter which spouse earned the compensation. If neither spouse participated in a retirement plan at work, all of your contributions will be deductible. You can contribute to a traditional or Roth IRA whether or not you participate in another retirement plan through your employer or business. However, you might not be able to deduct all of your traditional IRA contributions if you or your spouse participates in another retirement plan at work. Roth IRA contributions might be limited if your income exceeds a certain level. Excess contributions are taxed at 6% per year as long as the excess amounts remain in the IRA. The tax can’t be more than 6% of the combined value of all your IRAs as of the end of the tax year. To avoid the excess contributions tax on a

Roth IRA, withdraw the excess contributions from your IRA by the due date of your individual income tax return (including extensions); and withdraw any income earned on the excess contribution.

A Roth IRA is an IRA very similar to a traditional IRA with a few exceptions. To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is set up. Amongst other things, you cannot deduct contributions to a Roth IRA but if you satisfy the requirements, qualified distributions can be tax-free. In addition, you can leave amounts in your Roth IRA as long as you live. Contrary to traditional IRAs, you can continue to make contributions to a Roth IRA even after you reach age 70 1/2.

A Roth IRA is a tax favored account or annuity set up in the United States solely for your benefit or the benefit of your beneficiaries. You can contribute to a Roth IRA if you have taxable compensation and your modified AGI is within certain limits. Additionally, you may be able to roll over amounts from a qualified retirement plan to a Roth IRA. Furthermore, a Roth IRA differs from a traditional IRA in that contributions are not deductible and qualified distributions are not included in income. Regardless of the amount of your AGI, you may be able to convert amounts from either a traditional, SEP, or SIMPLE IRA into a Roth IRA.

Pensions and Annuities

If you receive retirement benefits in the form of pension or annuity payments from a qualified employer retirement plan, all or some portion of the amounts you receive may be taxable. The pension or annuity payments that you receive are fully taxable if you have no investment in the contract because you did not contribute anything or are not considered to have contributed anything for the pension or annuity, your employer did not withhold contributions from your salary, or you received all of your contributions (your investment in the contract) tax free in prior years. If you contributed after-tax dollars to your pension or annuity, your pension payments are partially taxable. You will not pay tax on the part of the payment that represents a return of the after-tax amount you paid. This amount is your investment in the contract, and includes the amounts your employer contributed that were taxable to you when contributed. Partly taxable pensions are taxed under either the General Rule or the Simplified Method. If the starting date of your pension or annuity payments is after November 18, 1996, you generally must use the Simplified Method to determine how much of your annuity payments is taxable and how much is tax free.

If you receive pension or annuity payments before age 59½, you may be subject to an additional 10% tax on early distributions unless the distribution qualifies for an exception. The additional tax does not apply to any part of a distribution that is tax-free or to distributions made as a part of a series of substantially equal periodic payments from a qualified plan that begins after your separation from service, distributions made because you are totally and permanently disabled, distributions made on or after the death of the plan participant or contract holder, and distributions made from a qualified retirement plan after your separation from service and in or after the year you reached age 55.

The taxable part of your pension or annuity payments is generally subject to federal income tax withholding. You may be able to choose not to have income tax withheld from your pension or annuity payments (unless they are eligible rollover distributions) or want to specify how much tax is withheld. If

so, provide the payer Form W-4P, Withholding Certificate for Pension or Annuity Payments, or a similar form provided by the payer. Withholding from periodic payments of a pension or annuity is generally figured the same way as for salaries and wages. If you do not submit the withholding certificate, the payer must withhold tax as if you were married and claiming three withholding allowances. If you do not provide the payer with your correct social security number, tax will be withheld as if you were single and claiming no withholding allowances, even if you submitted a Form W-4P and elected a lower amount. If you pay your taxes through withholdings and not enough is withheld, you may also need to make estimated tax payments to ensure your taxes are not underpaid.

Special rules apply to certain non-periodic payments from qualified retirement plans. If an eligible rollover distribution is paid to you, the payer must withhold 20% of it, even if you intend to roll it over later, unless you choose the direct rollover option. A distribution sent to you in the form of a check payable to the receiving plan or IRA is not subject to withholding.

The pension or annuity payments that you receive are fully taxable if you have no investment in the contract because you did not contribute anything or are not considered to have contributed anything for the pension or annuity. Since your employer did not withhold contributions from your salary and you received all of your contributions tax free in prior years is another reason the payments are fully taxable.

Furthermore, if you receive pension or annuity payments before age 59 1/2, you may be subject to an additional 10% on early distributions unless the distribution was made as part of a series of substantially equal periodic payments from a qualified plan that begins after your separation from service. They could also be subject to the additional 10% on early distributions unless the distribution was made because you were totally and permanently disabled or made on or after the death of the plan participant or contract holder. The distribution would also not be subject to the penalty if made from a qualified retirement plan after your separation from service and made in or after the year you reached age 55.

If you receive retirement benefits in the form of pension or annuity payments from a qualified employer retirement plan, all or some portion of the amounts you receive may be taxable. Additionally, if you contributed after-tax dollars to your pension or annuity, your pension payments are partially taxable. Furthermore, if you receive pension or annuity payments before age 59½, you may be subject to an additional 10% tax on early distributions unless the distribution qualifies for an exception. All in all, the taxable portion of your pension or annuity payment is generally subject to federal income tax withholding.

Withholding from periodic payments of a pension or annuity is generally figured the same way as for salaries and wages. If you do not submit the withholding certificate, the payer must withhold tax as if you were married and claiming three withholding allowances. In regards to pension and annuities distribution, if you pay your taxes through withholdings and not enough is withheld, you may also need to make estimated tax payments to ensure your taxes are not underpaid. 

If some contributions to your pensions and annuity plan were previously included in income, part of the distributions from the arrangement will be excluded from income and you must figure the tax-free portion at the start of payments. The tax-free part of the contributions to your pension or annuity plan

generally remains the same each year, even if the amount of the payment changes. However, the total amount of your pension or annuity that you can exclude from income is generally limited to your total cost.

Pensions – the General Rule and the Simplified Method

If some contributions to your pension or annuity plan were previously included in gross income, part of the distributions from the arrangement will be excluded from income. You must figure the tax-free part when the payments first begin. The tax-free part generally remains the same each year, even if the amount of the payment changes. However, the total amount of your pension or annuity that you can exclude from income is generally limited to your total cost.

If you begin receiving annuity payments from a qualified retirement plan after November 18, 1996, generally you use the Simplified Method to figure the tax-free part of the payments. A qualified retirement plan is a qualified employee plan, a qualified employee annuity, or a tax-sheltered annuity plan or contract.  If you began receiving annuity payments from a qualified retirement plan after July 1, 1986 and before November 19, 1996, you generally could have chosen to use either the Simplified Method or the General Rule to figure the tax-free part of the payments. If you receive annuity payments from a nonqualified retirement plan, you must use the General Rule. Under the General Rule, you figure the taxable and tax-free parts of your annuity payments using life expectancy tables prescribed by the IRS.

If you began receiving annuity payments from a qualified retirement plan after July 1, 1986 and before November 19, 1996, you generally could have chosen to use either the Simplified Method or the General Rule to figure the tax-free part of the payments. If you receive annuity payments from a nonqualified retirement plan you must use the general rule. You must also figure the taxable and tax-free parts of your annuity payments using life expectancy tables prescribed by the IRS. However, if you begin receiving annuity payments from a qualified retirement plan after November 18, 1996, generally you use the Simplified Method to figure the tax-free part of the payments. 

Lump-Sum Distributions

If you receive a lump-sum distribution from a qualified retirement plan or a qualified retirement annuity and you were born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. These optional methods can be elected only once after 1986 for any eligible plan participant. A lump-sum distribution is the distribution or payment, within a single tax year, of a plan participant's entire balance from all of the employer's qualified plans of one kind such as pension, profit-sharing, or stock bonus plans. All of the participant's accounts under the employer's qualified pension, profit-sharing, or stock bonus plans must be distributed in order to be a lump-sum distribution. Additionally, a lump-sum distribution is a distribution that was paid because of the plan participant's death, after the participant reaches age 59½, because the participant, if an employee, separates from service, or after the participant, if a self-employed individual, becomes totally and permanently disabled.

If the lump-sum distribution qualifies, you can elect to treat the portion of the payment attributable to your active participation in the plan by reporting the part of the distribution from participation before 1974 as a capital gain (if you qualify) and the part of the distribution from participation after 1973 as ordinary income. You can also report the part of the distribution from participation before 1974 as a capital gain (if you qualify) and use the 10-year tax option to figure the tax on the part from participation after 1973 (if you qualify). Additionally, you can use the 10-year tax option to figure the tax on the total taxable amount (if you qualify). Furthermore, you can roll over all or part of the distribution. No tax is currently due on the part rolled over. Report any part not rolled over as ordinary income. Finally, you can report the entire taxable part as ordinary income.

If the lump-sum distribution includes employer securities and an amount is reported in box 6 of your Form 1099-R for net unrealized appreciation (NUA), the NUA is generally not subject to tax until you sell the securities. However, you may elect to include the NUA in your income in the year the securities are distributed to you. You should receive a Form 1099-R from the payer of the lump-sum distribution showing your taxable distribution and the amount eligible for capital gain treatment. If you do not receive Form 1099-R by January 31 of the year following the year of the distribution, you should contact the payer of your lump-sum distribution.

You may defer tax on all or part of a lump-sum distribution by requesting the payor to directly roll over the taxable portion into an individual retirement arrangement (IRA) or to an eligible retirement plan. You can also defer tax on a distribution paid to you by rolling over the taxable amount to an IRA within 60 days after receipt of the distribution. A rollover, however, eliminates the possibility of using the special tax rules described above for any later distribution. Mandatory income tax withholding of 20% applies to most taxable distributions paid directly to you in a lump sum from employer retirement plans regardless of whether you plan to roll over the taxable amount within 60 days.

If the lump-sum distribution qualifies, you can elect to treat the portion of the payment attributable to your active participation in the plan using one of five options, such as reporting the part of the distribution from participation before 1974 as a capital gain (if you qualify) and the part of the distribution from participation after 1973 as ordinary income. Use the 10-year tax option to figure the tax on the total taxable amount (if you qualify). You also roll over all or part of the distribution. No tax is currently due on the part rolled over. Report any part not rolled over as ordinary income.

If the lump-sum distribution includes employer securities and an amount is reported in box 6 of your Form 1099-R for net unrealized appreciation (NUA), the NUA is generally subject to tax when you sell the securities and you must include the income in the year of distribution.

Rollovers from Retirement Plans

Most pre-retirement payments you receive from a retirement plan or IRA can be “rolled over” by depositing the payment in another retirement plan or IRA within 60 days. You can also have your financial institution or plan directly transfer the payment to another plan or IRA.

When you roll over a retirement plan distribution, you generally don’t pay tax on it until you withdraw it from the new plan. By rolling over, you’re saving for your future and your money continues to grow tax-deferred. If you don’t roll over your payment, it will be taxable (other than qualified Roth distributions and any amounts already taxed) and you may also be subject to additional tax unless you’re eligible for one of the exceptions to the 10% additional tax on early distributions. If you’re getting a distribution from a retirement plan, you can ask your plan administrator to make the payment directly to another retirement plan or to an IRA. Contact your plan administrator for instructions. The administrator may issue your distribution in the form of a check made payable to your new account. No taxes will be withheld from your transfer amount. If you’re getting a distribution from an IRA, you can ask the financial institution holding your IRA to make the payment directly from your IRA to another IRA or to a retirement plan. No taxes will be withheld from your transfer amount. If a distribution from an IRA or a retirement plan is paid directly to you, you can deposit all or a portion of it in an IRA or a retirement plan within 60 days. Taxes will be withheld from a distribution from a retirement plan, so you’ll have to use other funds to roll over the full amount of the distribution.

You have 60 days from the date you receive an IRA or retirement plan distribution to roll it over to another plan or IRA. The IRS may waive the 60-day rollover requirement in certain situations if you missed the deadline because of circumstances beyond your control. You generally cannot make more than one rollover from the same IRA within a 1-year period. You also cannot make a rollover during this 1-year period from the IRA to which the distribution was rolled over. Beginning after January 1, 2015, you can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs you own. Once this rule takes effect, the tax consequences are that you must include in gross income any previously untaxed amounts distributed from an IRA if you made an IRA-to-IRA rollover (other than a rollover from a traditional IRA to a Roth IRA) in the preceding 12 months, and you may be subject to the 10% early withdrawal tax on the amount you include in gross income.

You can roll over all or part of any distribution of your retirement plan account except

* Required minimum distributions,

* Loans treated as a distribution,

* Hardship distributions,

* Distributions of excess contributions and related earnings,

* A distribution that is one of a series of substantially equal payments,

* Withdrawals electing out of automatic contribution arrangements,

* Distributions to pay for accident, health or life insurance,

* Dividends on employer securities, or

* S corporation allocations treated as deemed distributions.

Distributions that can be rolled over are called "eligible rollover distributions." Of course, to get a distribution from a retirement plan, you have to meet the plan’s conditions for a distribution, such as termination of employment.

An IRA distribution paid to you is subject to 10% withholding unless you elect out of withholding or choose to have a different amount withheld. You can avoid withholding taxes if you choose to do a trustee-to-trustee transfer to another IRA.

A retirement plan distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll it over later. Withholding does not apply if you roll over the amount directly to another retirement plan or to an IRA. A distribution sent to you in the form of a check payable to the receiving plan or IRA is not subject to withholding.

If you have not elected a direct rollover, in the case of a distribution from a retirement plan, or you have not elected out of withholding in the case of a distribution from an IRA, your plan administrator or IRA trustee will withhold taxes from your distribution. If you later roll the distribution over within 60 days, you must use other funds to make up for the amount withheld. The plan administrator must give you a written explanation of your rollover options for the distribution, including your right to have the distribution transferred directly to another retirement plan or to an IRA.

If you’re no longer employed by the employer maintaining your retirement plan and your plan account is between $1,000 and $5,000, the plan administrator may deposit the money into an IRA in your name if you don’t elect to receive the money or roll it over. If your plan account is $1,000 or less, the plan administrator may pay it to you, less, in most cases, 20% income tax withholding, without your consent. You can still roll over the distribution within 60 days.

If you receive an eligible rollover distribution from your plan of $200 or more, your plan administrator must provide you with a notice informing you of your rights to roll over or transfer the distribution and must facilitate a direct transfer to another plan or IRA. Your retirement plan is not required to accept rollover contributions. Check with your new plan administrator to find out if they are allowed and, if so, what type of contributions are accepted.

A rollover occurs when you withdraw cash or other assets from one eligible retirement plan and contribute all or part of it, within 60 days, to another eligible retirement plan. This rollover transaction is not taxable but it is reportable on your federal tax return. You can roll over most distributions from an eligible retirement plan except for

* The nontaxable part of a distribution, such as your after-tax contributions to a retirement plan (in certain situations after-tax contributions can be rolled over),

* A distribution that is one of a series of payments made for your life (or life expectancy), or the joint lives (or joint life expectancies) of you and your beneficiary, or made for a specified period of 10 years or more,

* A required minimum distribution,

* A hardship distribution,

* Dividends paid on employer securities, or

* The cost of life insurance coverage.

The taxable amount of a distribution that is not rolled over must be included in income in the year of the distribution. If an eligible rollover distribution is paid to you, you have 60 days from the date you receive it to roll it over to another eligible retirement plan. Any taxable eligible rollover distribution paid from an employer-sponsored retirement plan to you is subject to a mandatory income tax withholding of 20%, even if you intend to roll it over later. If you do roll it over, and want to defer tax on the entire taxable portion, you will have to add funds from other sources equal to the amount withheld. You can choose to have the payer transfer a distribution directly to another eligible retirement plan or to an IRA. Under this direct rollover option, the 20% mandatory withholding does not apply.

In general, if you are under age 59½ at the time of the distribution, any taxable portion not rolled over may be subject to a 10% additional tax on early distributions unless an exception applies. Certain distributions from a SIMPLE IRA will be subject to a 25% additional tax.

You may defer tax on all or part of a lump-sum distribution by requesting the payer to directly roll over the taxable portion into an IRA. You can also defer tax on a distribution paid to you by rolling over the taxable amount to an IRA within 60 days after receipt of the distribution. However, a rollover eliminates the possibility of using the special tax rules for any later distribution.

Mandatory income tax withholding of 20% applies to most taxable distributions paid directly to you in a lump sum from employer retirement plans regardless of whether you plan to roll over the taxable amount within 60 days.

A rollover occurs when you withdraw cash or other assets from one eligible retirement plan and contribute all or part of it, within 60 days, to another eligible retirement plan. A rollover transaction is not taxable but it is reportable on your federal tax return. You can roll over most distributions from an eligible retirement plan except for the the nontaxable part of a distribution or a distribution that is one of a series of payments made for your life (or life expectancy). You cannot rollover a required minimum distribution or a hardship distribution. Neither could you rollover dividends paid  on employer securities or the cost of life insurance coverage.

You have 60 days to make a rollover from an eligible retirement plan to another eligible retirement plan. In addition, the taxable amount of a distribution that is not rolled over must be included in income in the year of the distribution. As a consequence, any taxable eligible rollover distribution paid from an employer-sponsored retirement plan to you is subject to a mandatory income tax withholding of 20%. In general, if you are under age 59½ at the time of the distribution, any taxable portion not rolled over may be subject to a 10% additional tax on early distributions unless an exception applies.

Capital Gains and Losses

Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal-use items like household furnishings, and stocks or bonds held as investments. When a capital asset is sold, the difference between the basis in the asset and the amount it is sold for is a capital gain or a capital loss. You have a capital gain if you sell the asset for more than your basis. You have a capital loss if you sell the asset for less than your basis. Losses from the sale of personal-use property, such as your home or car, are not deductible. Capital gains and losses are classified as long-term or short-term. If you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. To determine how long you held the asset, count from the day after the day you acquired the asset up to and including the day you disposed of the asset.

Capital gains and deductible capital losses are reported on Form 1040, Schedule D, Capital Gains and Losses, and on Form 8949, Sales and Other Dispositions of Capital Assets. If you have a net capital gain, that gain may be taxed at a lower tax rate than your ordinary income tax rates. The term "net capital gain" means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss for the year. The term "net long-term capital gain" means long-term capital gains reduced by long-term capital losses including any unused long-term capital loss carried over from previous years. Generally, for most taxpayers, net capital gain is taxed at rates no higher than 15%. Some or all net capital gain may be taxed at 0% if you are in the 10% or 15% ordinary income tax brackets. However, beginning in 2013, a new 20% rate on net capital gain applies to the extent that a taxpayer’s taxable income exceeds the thresholds set for the new 39.6% ordinary tax rate ($400,000 for single; $450,000 for married filing jointly or qualifying widow(er); $425,000 for head of household, and $225,000 for married filing separately).

There are a few other exceptions where capital gains may be taxed at rates greater than 15%. First, the taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate. Second, net capital gains from selling collectibles (like coins or art) are taxed at a maximum 28% rate. Third, the portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate. Note that net short-term capital gains are subject to taxation at your ordinary income tax rate. If you have a taxable capital gain, you may be required to make estimated tax payments. However, if your capital losses exceed your capital gains, the amount of the excess loss that can be claimed is the lesser of $3,000, ($1,500 if you are married filing separately) or your total net loss as shown on line 16 of the Form 1040, Schedule D. If your net capital loss is more than this limit, you can carry the loss forward to later years.

Almost everything you own and use for personal or investment purposes is a capital asset. Generally, for most taxpayers, net capital gain is taxed at rates no higher than 15%. If you sell capital assets you may have capital gains which may be taxed at rates greater than 15% such as when the taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate. Also net capital gains from selling collectibles (like coins or art) are taxed at a maximum 28% rate. Another situation

when you get taxed at greater than 15% is when the portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.

If you hold the asset for more than one year before you dispose of it, your capital gain or loss is a long term capital gain. You report you capital gains and deductible capital losses on Schedule D and you may also need to use Form 8949. If your capital losses exceed your capital gains, the amount of the excess loss that can be claimed in one year is no more than $3,000.

Social Security and Medicare Taxes

If you work as an employee in the United States, you must pay social security and Medicare taxes in most cases. Your payments of these taxes contribute to your coverage under the U.S. social security system. Your employer deducts these taxes from each wage payment. Your employer must deduct these taxes even if you do not expect to qualify for social security or Medicare benefits.

In general, U.S. social security and Medicare taxes apply to payments of wages for services performed as an employee in the United States, regardless of the citizenship or residence of either the employee or the employer. In limited situations, these taxes apply to wages for services performed outside the United States. Your employer should be able to tell you if social security and Medicare taxes apply to your wages. You cannot make voluntary social security payments if no taxes are due.

If social security or Medicare taxes were withheld in error from pay that is not subject to these taxes, contact the employer who withheld the taxes for a refund. If you are unable to get a full refund of the amount from your employer, file a claim for refund with the Internal Revenue Service on Form 843, Claim for Refund and Request for Abatement. Attach to Form 843, a copy of your Form W-2 to prove the amount of social security and Medicare taxes withheld, a copy of the page from your passport showing the visa stamp, INS Form I-94, if applicable INS Form I-538, Certification by Designated School Official, and a statement from your employer indicating the amount of the reimbursement your employer provided and the amount of the credit or refund your employer claimed or that you authorized your employer to claim. If you cannot obtain this statement from your employer, you must provide this information on your own statement and explain why you are not attaching a statement from your employer. If applicable, also attach Form 8316, Information Regarding Request for Refund of Social Security Tax Erroneously Withheld on Wages Received by a Nonresident Alien on an F, J, or M Type Visa. File Form 843 (with attachments) with the IRS office where your employer's Forms 941 returns were filed. You can locate the IRS office where your employer files his Form 941 by going to Where to File Tax Returns.

Self-employment income is income that arises from the performance of personal services, but which cannot be classified as wages because an employer-employee relationship does not exist between the payer and the payee. The Internal Revenue Code imposes the self-employment tax on the self-employment income of any U.S. citizen or resident alien who has such self-employment income. However, nonresident aliens are not subject to self-employment tax. Once a nonresident alien individual becomes a U.S. resident alien under the residency rules of the Internal Revenue Code, he or she then becomes liable for self-employment taxes under the same conditions as a U.S. citizen or resident alien.

In spite of the general rules mentioned above, self-employment tax may be imposed on a nonresident alien under the terms of an international social security agreement or Totalization Agreements.

The United States has entered into social security agreements with foreign countries to coordinate social security coverage and taxation of workers employed for part or all of their working careers in one of the countries. These agreements are commonly referred to as Totalization Agreements. Under these agreements, dual coverage and dual contributions of taxes for the same work are eliminated. The agreements generally make sure that social security taxes including self-employment tax are paid only to one country.

The Federal Insurance Contributions Act (FICA) tax includes two separate taxes. One is social security tax and the other is Medicare tax. Different rates apply for each of these taxes. The current tax rate for social security is 6.2% for the employer and 6.2% for the employee, or 12.4% total. The current rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total. Only the social security tax has a wage base limit. The wage base limit is the maximum wage that is subject to the tax for that year. For earnings in 2014, this base is $117,000. There is no wage base limit for Medicare tax. All covered wages are subject to Medicare tax.

Beginning January 1, 2013, Additional Medicare Tax applies to an individual’s Medicare wages that exceed a threshold amount based on the taxpayer’s filing status. Employers are responsible for withholding the 0.9% Additional Medicare Tax on an individual’s wages paid in excess of $200,000 in a calendar year, without regard to filing status. An employer is required to begin withholding Additional Medicare Tax in the pay period in which it pays wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. There is no employer match for Additional Medicare Tax.

Anytime self-employment tax is mentioned, it only refers to social Security and Medicare taxes. Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. This is most common when the individual has her own business and no employer to tell her what to do and how to do her job. All your combined wages, tips, and net earnings in the current year are subject to 2.9% Medicare tax, the self-employment tax and also the social security tax or railroad retirement tax.

In 2013 an additional Medicare tax rate of 0.9 % went into effect and applies to wages, compensation, and self-employment income above a threshold amount received in taxable years beginning after Dec. 31, 2012. You can deduct the employer-equivalent portion of your self-employment tax in figuring your adjusted gross income. This deduction only affects your income tax. Also, under Section 2042 of the Small Business Jobs Act, a deduction, for income tax purposes, is allowed to self-employed individuals for the cost of health insurance.

Social Security and Medicare tax may apply to caregivers. Special rules apply to workers who perform in-home services for elderly or disabled individuals (caregivers). Caregivers are typically employees of the individuals for whom they provide services because they work in the homes of the elderly or disabled

individuals and these individuals have the right to tell the caregivers what needs to be done. For self-employment income earned in 2013 and 2014, the self-employment tax rate is 15.3%.

Tax Benefits for Education

Tax credits, deductions and savings plans can help taxpayers with their expenses for higher education. A tax credit reduces the amount of income tax you may have to pay. A deduction reduces the amount of your income that is subject to tax, thus generally reducing the amount of tax you may have to pay. Certain savings plans allow the accumulated earnings to grow tax-free until money is taken out (known as a distribution), or allow the distribution to be tax-free, or both. An exclusion from income means that you won't have to pay income tax on the benefit you're receiving, but you also won't be able to use that same tax-free benefit for a deduction or credit.

An education credit helps with the cost of higher education by reducing the amount of tax owed on your tax return. If the credit reduces your tax to less than zero, you may get a refund. The two education credits available are the American Opportunity Tax Credit and the Lifetime Learning Credit. There are additional rules for each credit, but you must meet all three of the qualification rules for the two credits. First, you, your dependent or a third party pays qualified education expenses for higher education. Second, an eligible student must be enrolled at an eligible educational institution. Third, the eligible student is yourself, your spouse or a dependent you list on your tax return. If you’re eligible to claim the lifetime learning credit and are also eligible to claim the American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both. You can't claim the AOTC if you were a nonresident alien for any part of the tax year unless you elect to be treated as a resident alien for federal tax purposes.

The Tuition and Fees Deduction expired Dec. 31, 2013. You may claim it on your tax year 2013 or prior years' tax returns. Under current law, the deduction is not available for tax years after 2013. You may be able to deduct qualified education expenses paid during the year for yourself, your spouse or your dependent. You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. The qualified expenses must be for higher education. The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000. This deduction, reported on Form 8917, Tuition and Fees Deduction, is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). This deduction may be beneficial to you if, for example, you cannot take the lifetime learning credit because your income is too high.

You may be able to take one of the education credits for your education expenses instead of a tuition and fees deduction. You can choose the one that will give you the lower tax. Generally, you can claim the tuition and fees deduction if you pay qualified education expenses of higher education, you pay the education expenses for an eligible student, and the eligible student is yourself, your spouse, or your dependent for whom you claim an exemption on your tax return. You cannot claim the tuition and fees deduction if your filing status is married filing separately, if another person can claim an exemption for you as a dependent on his or her tax return (you cannot claim the deduction even if the other person

does not actually claim that exemption), and if your modified adjusted gross income (MAGI) is more than $80,000 ($160,000 if filing a joint return). Additionally, you cannot claim the credit if you were a nonresident alien for any part of the year and did not elect to be treated as a resident alien for tax purposes. You cannot claim a deduction for a credit that you or anyone else claims an education credit for expenses of the student for whom the qualified education expenses were paid and also you cannot claim a credit for student-activity fees and expenses for course-related books, supplies and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.

Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $75,000 ($150,000 if filing a joint return), there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments. For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500. The student loan interest deduction is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Form 1040's Schedule A.

The Qualified Student Loan is a loan you took out solely to pay qualified education expenses that were for you, your spouse, or a person who was your dependent when you took out the loan, paid or incurred within a reasonable period of time before or after you took out the loan and for education provided during an academic period for an eligible student. However, loans from a related person, a qualified employer plan, and Qualified Education Expenses are not qualified student loans. For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. They include amounts paid for tuition and fees, room and board, books, supplies, equipment and other necessary expenses such as transportation.

The cost of room and board qualifies only to the extent that it is not more than the greater of the allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student, or the actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

If you are an employee and can itemize your deductions, you may be able to claim a deduction for the expenses you pay for your work-related education. Your deduction will be the amount by which your qualifying work-related education expenses plus other job and certain miscellaneous expenses is greater than 2% of your adjusted gross income. An itemized deduction may reduce the amount of your income subject to tax. If you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income. This may reduce the amount of your income subject to both income tax and self-employment tax. Your work-related education expenses may also qualify you for other tax benefits, such as the tuition and fees deduction and the lifetime learning credit. To claim a business deduction for work-related education, you must be working, itemize your deductions on

Schedule A (Form 1040 or 1040NR) if you are an employee, file Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040) if you are self-employed and have expenses for education that meet other requirements.

You can deduct the costs of qualifying work-related education as business expenses. This is education is education that is required by your employer or the law to keep your present salary, status or job or the education maintains or improves skills needed in your present work. The required education must serve a bona fide business purpose of your employer. However, even if the education meets one or both of the tests, it is not qualifying work-related education if it is needed to meet the minimum educational requirements of your present trade or business or is part of a program of study that will qualify you for a new trade or business. You can deduct the costs of qualifying work-related education as a business expense even if the education could lead to a degree.

Education you need to meet the minimum educational requirements for your present trade or business is not qualifying work-related education. Once you have met the minimum educational requirements for your job, your employer or the law may require you to get more education. This additional education is qualifying work-related education if is required for you to keep your present salary, status or job, the requirement serves a business purpose of your employer and if the education is not part of a program that will qualify you for a new trade or business. When you get more education than your employer or the law requires, the additional education can be qualifying work-related education only if it maintains or improves skills required in your present work. If your education is not required by your employer or the law, it can be qualifying work-related education only if it maintains or improves skills needed in your present work. This could include refresher courses, courses on current developments and academic or vocational courses.

Qualified tuition programs authorized under section 529 of the Internal Revenue Code — that allow taxpayers to either prepay or contribute to an account for paying a student's qualified higher education expenses. Similarly, colleges and groups of colleges sponsor 529 plans that allow them to prepay a student's qualified education expenses. These 529 plans have, in recent years, become a popular way for parents and other family members to save for a child’s college education. Though contributions to 529 plans are not deductible, there is also no income limit for contributors. 529 plan distributions are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. Qualified expenses include tuition, required fees, books and supplies. For someone who is at least a half-time student, room and board also qualify.

For 2009 and 2010, an ARRA change to tax-free college savings plans and prepaid tuition programs added to this list expenses for computer technology and equipment or Internet access and related services to be used by the student while enrolled at an eligible educational institution. Software designed for sports, games or hobbies does not qualify, unless it is predominantly educational in nature. In general, expenses for computer technology are not qualified expenses for the American opportunity credit, lifetime learning credit or tuition and fees deduction.

Coverdell Education Savings Accounts were created as an incentive to help parents and students save for education expenses. Unlike a 529 plan, a Coverdell ESA can be used to pay a student’s eligible k-12 expenses, as well as post-secondary expenses. On the other hand, income limits apply to contributors, and the total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established. A beneficiary is someone who is under age 18 or is a special needs beneficiary. Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses.

Distributions from Coverdell Education Savings Accounts are tax-free as long as they are used for qualified education expenses, such as tuition and fees, required books, supplies and equipment and qualified expenses for room and board. There is no tax on distributions if they are for enrollment or attendance at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education as determined under state law. Virtually all accredited public, nonprofit and proprietary (privately owned profit-making) post-secondary institutions are eligible. Education tax credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits. If the distribution exceeds qualified education expenses, a portion will be taxable to the beneficiary and will usually be subject to an additional 10% tax. Exceptions to the additional 10% tax include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship.

A scholarship is generally an amount paid or allowed to, or for the benefit of, a student at an educational institution to aid in the pursuit of studies. The student may be either an undergraduate or a graduate. A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research. Generally, whether the amount is tax free or taxable depends on the expense paid with the amount and whether you are a degree candidate. A scholarship or fellowship is tax free only if you are a candidate for a degree at an eligible educational institution, ifou use the scholarship or fellowship to pay qualified education expenses and if it is for qualified Education Expenses.

For purposes of tax-free scholarships and fellowships, these are expenses for tuition and fees required to enroll at or attend an eligible educational institution, and for course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction. However, in order for these to be qualified education expenses, the terms of the scholarship or fellowship cannot require that it be used for other purposes, such as room and board, or specify that it cannot be used for tuition or course-related expenses. Qualified education expenses do not include the cost of room and board, travel, research, clerical help or equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution. This is true even if the fee must be paid to the institution as a condition of enrollment or attendance. Scholarship or fellowship amounts used to pay these costs are taxable.

You may exclude certain educational assistance benefits from your income. That means that you won’t have to pay any tax on them. However, it also means that you can’t use any of the tax-free education expenses as the basis for any other deduction or credit, including the lifetime learning credit. If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. This means your employer should not include the benefits with your wages, tips, and other compensation shown in box 1 of your Form W-2. To qualify as an educational assistance program, the plan must be written and must meet certain other requirements. Your employer can tell you whether there is a qualified program where you work. Tax-free educational assistance benefits include payments for tuition, fees and similar expenses, books, supplies, and equipment. The payments may be for either undergraduate- or graduate-level courses. The payments do not have to be for work-related courses. Educational assistance benefits do not include payments for meals, lodging, transportation and tools or supplies (other than textbooks) that you can keep after completing the course of instruction or for courses involving sports, games, or hobbies unless they have a reasonable relationship to the business of your employer, or are required as part of a degree program.

If your employer pays more than $5,250 for educational benefits for you during the year, you must generally pay tax on the amount over $5,250. Your employer should include in your wages (Form W-2, box 1) the amount that you must include in income. However, if the benefits over $5,250 also qualify as a working condition fringe benefit, your employer does not have to include them in your wages. A working condition fringe benefit is a benefit which, had you paid for it, you could deduct as an employee business expense.

Tax credits, deductions and savings plans can help taxpayers with their expenses for higher education. Additionally, a tax credit reduces the amount of income tax you may have to pay. On the other hand, a deduction reduces the amount of your income that is subject to tax, thus generally reducing the amount of tax you may have to pay. Furthermore, certain savings plans allow the accumulated earnings to grow tax-free until money is taken out (known as a distribution), or allow the distribution to be tax-free, or both.

An education credit helps with the cost of higher education by reducing the amount of tax owed on your tax return. Currently there are two education credits available through the IRS. These credits are the American Opportunity Tax Credit and the Lifelong Learning Credit. There seems to be more credits, but the other benefits available are not considered credits.

In order to take the American Opportunity Credit or the Lifelong Learning Credit, you and your dependent or a third party needs to have paid qualified education expenses for higher education. Furthermore, an eligible student must be enrolled at an eligible educational institution. You can only claim the American Opportunity Credit for yourself, your spouse or for a dependent you list on your tax return.

Generally, you can claim the tuition and fees deduction if you paid qualified education expenses of higher education and the education expenses incurred are for an eligible student. This eligible student is

yourself, your spouse, or your dependent for whom you claim an exemption on your tax return.  Please note that you cannot claim the tuition and fees deduction if your modified adjusted gross income (MAGI) is more than $80,000 ($160,000 if filing a joint return). Also, you cannot claim the tuition and fees deduction if you were a nonresident alien for any part of the year and did not elect to be treated as a resident alien for tax purposes. Additionally, if you or anyone else claims an education credit for expenses of the student for whom the qualified education expenses were paid, then you cannot recycle these expenses for the tuition and fees deduction. Another person can claim an exemption for you as a dependent on his or her tax return. If this is so, you cannot take the tuition and fees deduction even if the other person does not actually claim that exemption.

There is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. This deduction is a student loan interest deduction for interest you paid during the year on a qualified student loan. For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500. You can claim the student loan interest deduction even if you do not itemize deductions on your Form 1040's Schedule A.

A qualified student loan is a loan you took out solely to pay qualified education expenses that were for you, your spouse, or a person who was your dependent when you took out the loan. These education expenses were paid or incurred within a reasonable period of time before or after you took out the loan. Furthermore, the expenses were for education provided during an academic period for an eligible student. Loans solely to pay qualified education expenses that you took out from certain sources are not considered qualified student loans. For examples, loans from related persons, from a qualified employer plan or a corporation where you are a majority stock holder, are not permitted. For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. Such expenses include tuition and fees, room and board, books, supplies, equipment and other expenses such as the cost of transportation. 

The cost of room and board qualifies for the student loan interest deduction only to the extent that it is not more than the greater of a) the allowance for room and board as determined by the eligible institution, which was included in the cost of attendance (as stipulated by federal financial aid) for a particular academic period and living arrangements of the student or b) the actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

If you are an employee and can itemize your deductions, you may be able to claim a deduction for the expenses you pay for your work-related education. Additionally, your work-related education expenses may also qualify you for other tax benefits, such as the tuition and fees deduction and the lifetime learning credit. To claim a business deduction for work-related education, you must be working and must itemize your deductions on Schedule A of Form 1040 if you are an employee. However, if you are a self-employed individual, you would file Schedule C (Form 1040), Schedule C-EZ or Schedule F if you are a farmer or fisherman. To claim the credit, you must also have expenses for education that meet the requirements for qualifying work-related education.

You can deduct the costs of qualifying work-related education as business expenses. Remember that this is education that that is required by your employer or the law to keep your present salary, status or job. The required education must serve a bona fide business purpose of your employer. Also this education is education that maintains or improves skills needed in your present work. Generally this would not be education that qualifies you for a new profession. Even if the education meets one or both of the qualifying tests, it is not qualifying work-related education if it is needed to meet the minimum educational requirements of your present trade or business or if it is part of a program of study that will qualify you for a new trade or business. However, you can deduct the costs of qualifying work-related education as a business expense even if the education could lead you to a degree.

A scholarship or fellowship is tax free if you are a candidate for a degree at an eligible educational institution and you you use the scholarship or fellowship to pay qualified education expenses.

Should you Itemize?

You should itemize deductions if your total deductions are more than the standard deduction amount. Also, if your standard deduction is zero, you should itemize any deductions you have if you're married and filing a separate return, and your spouse itemizes deductions, you are filing a tax return for a short tax year because of a change in your annual accounting period, or you are a nonresident or dual-status alien during the year. You are considered a dual-status alien if you were both a nonresident and resident alien during the year. If you are a nonresident alien who is married to a U.S. citizen or resident at the end of the year, you can choose to be treated as a U.S. resident. If you make this choice, you can take the standard deduction.

You may benefit from itemizing your deductions on Schedule A (Form 1040) if you do not qualify for the standard deduction, or the amount you can claim is limited, had large uninsured medical and dental expenses during the year, paid interest and taxes on your home, had large unreimbursed employee business expenses or other miscellaneous deductions, had large uninsured casualty or theft losses, made large contributions to qualified charities, or have total itemized deductions that are more than the standard deduction to which you otherwise are entitled.

Generally, you must decide whether to itemize deductions or to use the standard deduction. The standard deduction is a dollar amount that reduces the amount of income on which you are taxed. You should itemize deductions if your allowable itemized deductions are greater than your standard deduction. Some taxpayers must itemize deductions because they cannot use the standard deduction. You cannot use the standard deduction if you are married filing as married filing separately, and your spouse itemizes deductions, you are filing a tax return for a period of less than 12 months because of a change in your annual accounting method, or you are a nonresident alien or a dual-status alien during the year. If you are a nonresident alien who is married to a U.S. citizen or resident at the end of the year, you can choose to be treated as a U.S. resident. If you make this choice, you can take the standard deduction. In addition, an estate or trust, common trust fund, or partnership cannot use the standard deduction.

You may benefit from itemizing your deductions on Form 1040, Schedule A if you cannot use the standard deduction, had large uninsured medical and dental expenses, paid interest or taxes on your home, had large unreimbursed employee business expenses, had large uninsured casualty or theft losses, or made large charitable contributions.

You may be subject to limitations on some of your itemized deductions. In addition to these limits, beginning in 2013, your total itemized deductions may be reduced if your adjusted gross income exceeds

* Single - $250,000

* Married filing jointly or qualifying widow(er) - $300,000

* Married filing separately - $150,000

* Head of household - $275,000

Generally, you must decide whether to itemize deductions or to use the standard deduction. You should itemize deductions if your allowable itemized deductions are greater than your standard deduction. Some taxpayers must itemize deductions because they cannot use the standard deduction. For example, you cannot use the standard deduction if you are married filing as married filing separately, and your spouse itemizes deductions. In this case you must also itemize your deductions regardless if the result is less than any of the standard deductions.

Therefore, you cannot use the standard deduction if you are married filing as married filing separately, and your spouse itemizes deductions. If you are filing a tax return for a period of less than 12 months because of a change in your annual accounting method then your standard deduction would also be zero or cannot be used at all. Nonresident aliens or dual-status aliens are also prohibited from using the standard deduction. You may benefit from itemizing your deductions on Form 1040, Schedule A if you had large unreimbursed employee business expenses, had large uninsured medical and dental expenses or if you had large uninsured casualty or theft losses, or made large charitable contributions.

Deductible Taxes

There are four types of deductible non-business taxes. These are:

* State, local and foreign income taxes,

* State, local and foreign real estate taxes

* State, and local personal property taxes, and

* State and local general sales taxes

To be deductible, the tax must be imposed on you and must have been paid during your tax year. Taxes may be claimed only as an itemized deduction on Form 1040, Schedule A, Itemized Deductions. State and local income taxes withheld from your wages during the year appear on your Form W-2. You can

elect to deduct state and local general sales taxes instead of state and local income taxes, but you cannot deduct both. If you elect to deduct state and local general sales taxes, you can use either your actual expenses or the optional sales tax tables. The deduction for state and local general sales taxes expired December 31, 2013. You may claim it on your tax year 2013 tax return if you qualify. Under current law, the deduction is not available for tax years after 2013. You can also deduct any estimated taxes you paid to state or local governments during the year, and any prior year's state or local income tax you paid during the year.

Generally, you can take either a deduction or a tax credit for foreign income taxes imposed on you by a foreign country or a United States possession. As an employee, you can deduct mandatory contributions to state benefit funds that provide protection against loss of wages.

Deductible real estate taxes are generally any state, local, or foreign taxes on real property levied for the general public welfare. They must be charged uniformly against all real property in the jurisdiction at a like rate. Many states and counties also impose local benefit taxes for improvements to property, such as assessments for streets, sidewalks, and sewer lines. These taxes cannot be deducted. However, you can increase the cost basis of your property by the amount of the assessment. Local benefits taxes are deductible if they are for maintenance or repair, or interest charges related to those benefits. If a portion of your monthly mortgage payment goes into an escrow account, and periodically the lender pays your real estate taxes out of the account to the local government, do not deduct the amount paid into the escrow account. Only deduct the amount actually paid out of the escrow account during the year to the taxing authority.

Deductible personal property taxes are those based only on the value of personal property such as a boat or car. The tax must be charged to you on a yearly basis, even if it is collected more than once a year or less than once a year. Some taxes and fees you cannot deduct on Schedule A include federal income taxes, social security taxes, transfer taxes (or stamp taxes) on the sale of property, homeowner's association fees, estate and inheritance taxes, and service charges for water, sewer, or trash collection. You may be subject to a limit on some of your itemized deductions including non-business taxes. In addition to these limits, beginning in 2013, your total itemized deductions may be reduced based on your adjusted gross income.

There are many types of deductible non-business taxes such as state, local and foreign income taxes, local personal property taxes and general sales taxes. However, the deduction for state and local general sales taxes is no longer available for tax years after 2013. So to recap, the deduction for state and local general sales taxes expired December 31, 2013. So before this, you can elect to deduct state and local general sales taxes instead of state and local income taxes. If you elect to deduct state and local general sales taxes, you can use either your actual expenses or the optional sales tax tables. 

Deductible real estate taxes are generally any state, local, or foreign taxes on real property levied for the general public welfare. Additionally, the deductible real estate taxes must be charged uniformly against all real property in the jurisdiction at a like rate. Furthermore, deductible personal property taxes are

those based only on the value of personal property such as a boat or car. In addition, the tax must be charged to you on a yearly basis, even if it is collected more than once a year or less than once a year. 

Home Mortgage Points

The term "points" is used to describe certain charges paid to obtain a home mortgage. Points are prepaid interest and may be deductible as home mortgage interest, if you itemize deductions on Form 1040, Schedule A. If you can deduct all of the interest on your mortgage, you may be able to deduct all of the points paid on the mortgage. If your acquisition debt exceeds $1 million or your home equity debt exceeds $100,000, you cannot deduct all the interest on your mortgage and you cannot deduct all your points.

You can deduct the points in full in the year they are paid, if your loan is secured by your main home (your main home is the one you live in most of the time), paying points is an established business practice in your area, the points paid were not more than the amount generally charged in that area. Additionally, you can deduct points you paid in full if you use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them. Furthermore, the points were not paid for items that usually are separately stated on the settlement sheet such as appraisal fees, inspection fees, title fees, attorney fees, or property taxes. The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. You cannot have borrowed the funds from your lender or mortgage broker in order to pay the points. It is further required that you use your loan to buy or build your main home, that the points were computed as a percentage of the principal amount of the mortgage, and the amount is clearly shown as points on your settlement statement.

You can also fully deduct (in the year paid) points paid on a loan to improve your main home if the requirement are met. Points that do not meet these requirements may be deductible over the life of the loan. Points paid for refinancing generally can only be deducted over the life of the new mortgage. However, if you use part of the refinanced mortgage proceeds to improve your main home, and you meet the requirements, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. You can deduct the rest of the points over the life of the loan. Points charged for specific services, such as preparation costs for a mortgage note, appraisal fees, or notary fees are not interest and cannot be deducted. Points paid by the seller of a home cannot be deducted as interest on the seller's return, but they are a selling expense, which will reduce the amount of gain realized. Points paid by the seller may be deducted by the buyer, provided the buyer subtracts the amount from the basis or cost of the residence. Points you pay on loans secured by your second home can be deducted only over the life of the loan. You may be subject to a limit on some of your itemized deductions, including points.

Points are considered prepaid interest and may be deductible as home mortgage interest, if you itemize deductions on Schedule A (of Form 1040). As a result, you may be able to deduct all of the points paid on the mortgage if you can deduct all of the interest on your mortgage. You can deduct the points in full

in the year they are paid, if you are using the cash method of accounting and paying points is an established business practice in your area.

Interest Expense

Interest is an amount you pay for the use of borrowed money. To deduct interest you paid on a debt you must be legally liable for the debt. There must be a true debtor-creditor relationship. Additionally, you generally must itemize your deductions, unless the interest is on rental or business property or on a student loan. If you prepay interest, you must allocate the interest over the tax years to which it applies. You may deduct in each year only the interest that applies to that year. However, an exception applies to points paid on a principal residence.

Types of interest you can deduct as itemized deductions on Form 1040, Schedule A include investment interest (limited to your net investment income) and qualified residence interest. You cannot deduct personal interest. Personal interest includes interest paid on a loan to purchase a car for personal use. Personal interest also includes credit card and installment interest incurred for personal expenses. Items you cannot deduct as interest include points (if you are a seller), service charges, credit investigation fees, and interest relating to tax-exempt income, such as interest to purchase or carry tax-exempt securities. You can deduct student loan interest on Form 1040 or Form 1040A.

Qualified residence interest is interest you pay on a loan secured by your main home or a second home. Your main home is where you live most of the time. It can be a house, cooperative apartment, condominium, mobile home, house trailer, or houseboat that has sleeping, cooking, and toilet facilities. A second home can include any other residence you own and treat as a second home. You do not have to use the home during the year. However, if you rent it to others, you must also use it as a home during the year for more than the greater of 14 days or 10 percent of the number of days you rent it, for the interest to qualify as qualified residence interest.

Qualified residence interest and points are generally reported to you on Form 1098, Mortgage Interest Statement, by the financial institution to which you made the payments. You can deduct all of the interest on a mortgage you took out on or before October 13, 1987 (grandfathered debt) or a mortgage taken out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt) up to a total of $1 million for this debt plus any grandfathered debt. The limit is $500,000 if you are married filing separately, or for home equity debt other than home acquisition debt taken out after October 13, 1987, up to a total of $100,000. The limit is $50,000 if you are married filing separately. Home equity debt other than home acquisition debt is further limited to your home's fair market value reduced by the grandfathered debt and home acquisition debt. You may be able to take a credit against your federal income tax if you were issued a mortgage credit certificate by a state or local government for low-income housing. Use Form 8396, Mortgage Interest Credit, to figure the amount. You may be subject to a limit on some of your itemized deductions including mortgage interest.

Interest is an amount you pay for the use of borrowed money. To deduct interest you paid on a debt you must be legally liable for the debt, you must have a true debtor-creditor relationship with your lender. You claim interest expenses on Schedule A of form 1040, so you must itemize your deductions to receive the benefit. If you prepay interest, you must allocate the interest over the tax years for which the interest applies.

the benefit. If you prepay interest, you must allocate the interest over the tax years for which the interest applies.

You can deduct as itemized deductions on Form 1040, Schedule A, your net investment income and qualified residence interest. The investment interest is limited to interest from your net investment income. In the old days, personal interest paid on any loan such as a loan on a car, and credit card debt interest paid were deductible. 

Qualified residence interest and points are generally reported to you on Form 1098 by the financial institution to which you made the payments such as interest from grandfathered debts, and any mortgage taken out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt) up to a total of $1 million for this debt plus any grandfathered debt. Also, a home equity debt other than home acquisition debt taken out after October 13, 1987, up to a total of $100,000.

You may be able to take a credit against your federal income tax if you were issued a mortgage credit certificate by a state or local government for low-income housing. To figure the amount of the credit, use Form 8396.

Charitable Contributions

Charitable contributions are deductible only if you itemize deductions on Form 1040, Schedule A. To be deductible, charitable contributions must be made to qualified organizations. Payments to individuals are never deductible. To determine if the organization that you have contributed to qualifies as a charitable organization for income tax deductions, look the Exempt Organizations at the IRS.gov website.

If your contribution entitles you to merchandise, goods, or services, including admission to a charity ball, banquet, theatrical performance, or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received.

For a contribution of cash, check, or other monetary gift (regardless of amount), you must maintain as a record of the contribution a bank record or a written communication from the qualified organization containing the name of the organization, the date of the contribution, and the amount of the contribution. In addition to deducting your cash contributions, you generally can deduct the fair market value of any other property you donate to qualified organizations. See Publication 561, Determining the Value of Donated Property. For any contribution of $250 or more (including contributions of cash or property), you must obtain and keep in your records a contemporaneous written acknowledgment from the qualified organization indicating the amount of the cash and a description of any property contributed. The acknowledgment must say whether the organization provided any goods or services in exchange for the gift and, if so, must provide a description and a good faith estimate of the value of those goods or services. One document from the qualified organization may satisfy both the written communication requirement for monetary gifts and the contemporaneous written acknowledgment requirement for all contributions of $250 or more.

You must fill out Form 8283, and attach it to your return, if your deduction for a noncash contribution is more than $500. If you claim a deduction for a contribution of noncash property worth $5,000 or less, you must fill out Form 8283, Section A. If you claim a deduction for a contribution of noncash property worth more than $5,000, you will need a qualified appraisal of the noncash property and must fill out Form 8283, Section B. If you claim a deduction for a contribution of noncash property worth more than $500,000, you also will need to attach the qualified appraisal to your return. Special rules apply to donations of certain types of property such as automobiles, inventory and investments that have appreciated in value.

You may deduct charitable contributions of money or property made to qualified organizations if you itemize your deductions. Generally, you may deduct up to 50 percent of your adjusted gross income, but 20 percent and 30 percent limitations apply in some cases. You may deduct a charitable contribution made to, or for the use of, any of the qualified organizations that otherwise are qualified under section 170(c) of the Internal Revenue Code. A state or United States possession (or political subdivision thereof), or the United States or the District of Columbia, if made exclusively for public purposes if a qualified organization. A community chest, corporation, trust, fund, or foundation, organized or created in the United States or its possessions, or under the laws of the United States, any state, the District of Columbia or any possession of the United States, and organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals are also qualified. A church, synagogue, or other religious organization, a war veterans' organization or its post, auxiliary, trust, or foundation organized in the United States or its possessions are also qualified. Additional qualified organizations include:

* A nonprofit volunteer fire company.

* A civil defense organization created under federal, state, or local law (this includes unreimbursed expenses of civil defense volunteers that are directly connected with and solely attributable to their volunteer services).

* A domestic fraternal society, operating under the lodge system, but only if the contribution is to be used exclusively for charitable purposes.

* A nonprofit cemetery company if the funds are irrevocably dedicated to the perpetual care of the cemetery as a whole and not a particular lot or mausoleum crypt.

Contributions must actually be paid in cash or other property before the close of your tax year to be deductible, whether you use the cash or accrual method. If you donate property other than cash to a qualified organization, you may generally deduct the fair market value of the property. If the property has appreciated in value, however, some adjustments may have to be made.

In general, contributions to charitable organizations may be deducted up to 50 percent of adjusted gross income computed without regard to net operating loss carrybacks. Contributions to certain private foundations, Veterans organizations, fraternal societies, and cemetery organizations are limited to 30 percent adjusted gross income (computed without regard to net operating loss carrybacks). The 50

percent limitation applies to (1) all public charities (code PC), (2) all private operating foundations (code POF), (3) certain private foundations that distribute the contributions they receive to public charities and private operating foundations within 2-1/2 months following the year receipt, and (4) certain private foundations the contributions to which are pooled in a common fund and the income and corpus of which are paid to public charities. The 30 percent limitation applies to private foundations (code PF), other than those previously mentioned that qualify for a 50 percent limitation, and to other organizations described in section 170(c) that do not qualify for the 50 percent limitation, such as domestic fraternal societies (code LODGE). A special limitation applies to certain gifts of long-term capital gain property.

The organizations listed in this publication with foreign addresses are generally not foreign organizations but are domestically formed organizations carrying on activities in foreign countries. These organizations are treated the same as any other domestic organization with regard to deductibility limitations. Certain organizations with Canadian addresses listed may be foreign organizations to which contributions are deductible only because of tax treaty. For these organizations, in addition to the limitations on the amount of the deduction allowed by section 170 of the Code, the deduction may not exceed the amount allowed as a deduction under Canadian law computed as though the taxable income (in the case of a corporation) or adjusted gross income (in the case of an individual) from sources in Canada is the aggregate income. Other than this, contributions to a foreign organization are not deductible.

Charitable contributions are deductible on your Schedule A itemized deductions. For charitable contributions to be deductible, they must be made to qualified organizations. Don't be fooled, not all organizations are qualified organizations. Some organizations look legit, but you should ask for proof before making your donations to them if you want to be able to deduct it with the IRS.

If your contribution entitles you to merchandise, goods, or services, including admission to a charity ball, banquet, theatrical performance, or sporting event, you can deduct only the amount that exceeds the fair market value of the benefit received. You must fill out Form 8283, and attach it to your return, if your deduction for a noncash contribution is more than $500. If you claim a deduction for a contribution of noncash property worth more than $5,000, you will need a qualified appraisal of the noncash property and must fill out Form 8283, Section B.

For a contribution of cash, check, or other monetary gift (regardless of amount), you must maintain as a record of the contribution a bank record or a written communication from the qualified organization containing the name of the organization, the date and amount of contribution.  In addition to deducting your cash contributions, you generally can deduct the fair market value of any other property you donate to qualified organizations.

For any contribution of $250 or more (including contributions of cash or property), you must obtain and keep in your records a contemporaneous written acknowledgment from the qualified organization indicating the amount of the cash and a description of any property contributed. The acknowledgment must say whether the organization provided any goods or services in exchange for the gift and, if so, must provide a description and a good faith estimate of the value of those goods or services.

Earned Income Credit

The Earned Income Tax Credit (EITC) is a financial boost for people working hard to make ends meet. Millions of workers may qualify for the first time this year due to changes in their marital, parental or financial status. To get the credit taxpayers need to file a return and specifically claim the EITC, even if they aren’t required to file. The EITC is a refundable tax credit. This means taxpayers may get money back, even if they have no tax withheld. Nationwide last year, over 27 million eligible individuals and families received more than $63 billion in EITC. Many special rules apply to the EITC, so taxpayers should review the rules carefully, even when paying someone else to prepare their returns. Generally, the EITC has no effect on welfare benefits. In most cases, EITC payments are not used to determine eligibility for Medicaid, Supplemental Security Income (SSI), supplemental nutrition assistance program (food stamps), low-income housing or most Temporary Assistance for Needy Families (TANF) payments. Though unemployment benefits are not earned income, they are taxable income and may affect the amount of EITC.

The EITC varies based on income and family size. The table showing credit amounts can be found in the Instruction booklets for Forms 1040, 1040A and 1040EZ and in Publication 596, Earned Income Credit. This includes the expanded benefit for families with three or more children. Those who qualify for EITC for tax year 2014, can get a credit from:

* $2 to $496 with no qualifying children;

* $9 to $3,305 with one qualifying child;

* $10 to $5,460 with two qualifying children;

* $11 to $6,143 with three or more qualifying children.

As the list shows, not everyone qualifies for the maximum credit. Last year, the average credit was $2,300. The EITC provides a financial boost for millions of hard-working Americans. However, even though most federal tax refunds are issued in less than 21 days, many factors can affect how long it may take for taxpayers to get their refunds. It is also possible that a tax return could require additional review and therefore take longer to process.

Besides filing a tax return, people must meet various requirements. Some of these requirements apply to everyone. Then there are additional requirements that apply to those who have one or more children, and another set of requirements that apply to people who don’t have a qualifying child. Taxpayers must have earned income, such as wages, tips or the income from running a business or farm. Most other types of income, such as retirement pensions, though usually taxable, do not count as earned income; must have a Social Security number that is valid for employment for self, spouse and any qualifying children.

A person can get the credit even with a small amount of investment income, such as interest from a bank account. However, the amount of investment income is limited to $3,300. The filing status used must be single, head of household, married filing jointly or qualifying widow or widower. A taxpayer

who files as married filing separately cannot get the credit. Generally, to qualify for the EIC, the individual must be either a U.S. citizen or resident alien, cannot be a qualifying child of another person and cannot have filed Form 2555 or Form 2555-EZ which is the form used to claim the foreign earned income exclusion, a tax benefit for Americans who live and work abroad.

In addition, income must be below certain amounts. For tax year 2013, both earned income and adjusted gross income (AGI) must each be less than

* $14,340 ($19,680 married filing jointly) with no qualifying children;

* $37,870 ($43,210 married filing jointly) with one qualifying child;

* $43,038 ($48,378 married filing jointly) with two qualifying children;

* $46,227 ($51,567 married filing jointly) with three or more qualifying children.

You may qualify for the earned income tax credit (EITC), if you worked last year but did not earn a lot of money. EITC is a refundable tax credit meaning you could qualify for a tax refund even if you did not have federal income tax withheld. To qualify for the credit your adjusted gross income (AGI) must be below a certain amount and you must not be a qualifying child of another person, have a qualifying child who meets four tests (the age, relationship, residency and joint return tests) and you are age 25 but under age 65 at the end of the year if you don't have a qualifying child. If you qualify, the amount of your EITC will depend on your filing status, whether you have children and the number of children you have, and the amount of your wages and income.

Child Tax Credit

The Child Tax Credit is an important tax credit that may be worth as much as $1,000 per qualifying child depending upon your income. With the Child Tax Credit, you may be able to reduce your federal income tax by up to $1,000 for each qualifying child under the age of 17. A qualifying child for this credit is someone who meets the qualifying criteria of six tests: age, relationship, support, dependent, citizenship, and residence. To qualify, a child must have been under age 17 – age 16 or younger – at the end of 2010. To claim a child for purposes of the Child Tax Credit, they must either be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption. In order to claim a child for this credit, the child must not have provided more than half of their own support. You must claim the child as a dependent on your federal tax return. To meet the citizenship test, the child must be a U.S. citizen, U.S. national, or U.S. resident alien. The child must have lived with you for more than half of 2014.

The credit is limited if your modified adjusted gross income is above a certain amount. The amount at which this phase-out begins varies depending on your filing status. For married taxpayers filing a joint return, the phase-out begins at $110,000. For married taxpayers filing a separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000. In addition, the Child Tax Credit is

generally limited by the amount of the income tax you owe as well as any alternative minimum tax you owe.

The Child Tax Credit is an important tax credit because it may be worth as much as $1,000 depending upon your income. With the Child Tax Credit, you may be able to reduce your federal income tax by up to $1,000 for each qualifying child under the age of 17. To claim a child for purposes of the Child Tax Credit, they must either be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, and includes a grandchild, an adopted child, a niece or nephew. If the amount of your Child Tax Credit is greater than the amount of income tax you owe, you may be able to claim the Additional Child Tax Credit.

Child and Dependent Care Credit

You may be able to claim the child and dependent care credit if you paid work-related expenses for the care of a qualifying individual. The credit is generally a percentage of the amount of work-related expenses you paid to a care provider for the care of a qualifying individual. The percentage depends on your adjusted gross income. Work-related expenses qualifying for the credit are those paid for the care of a qualifying individual to enable you to work or actively look for work.

Expenses are paid for the care of a qualifying individual if the primary function is to assure the individual's well-being and protection. In general, amounts paid for services outside your household qualify for the credit if the care is provided for (i) a qualifying individual who is your qualifying child under age 13 or (ii) a qualifying individual who regularly spends at least 8 hours each day in your household.

The total expenses that may be used to calculate the credit are capped at $3,000 (for one qualifying individual) or at $6,000 (for two or more qualifying individuals). The dollar limits may differ depending on the tax year in question. The expenses qualifying for the computation of the credit must be reduced by the amount of any dependent care benefits provided by your employer that you exclude from gross income. In general, you can exclude up to $5,000 for dependent care benefits received from your employer. Also, generally, the expenses claimed may not exceed the lesser of your earned income or your spouse’s earned income. A special rule applies if your spouse is a full-time student or incapable of self-care.

For purposes of the child and dependent care credit, a qualifying individual is:

* Your dependent qualifying child who is under age 13 when the care is provided,

* Your spouse who is physically or mentally incapable of self-care and who has the same principal place of abode as you for more than half of the year, or

* Your dependent who is physically or mentally incapable of self-care, and who has the same principal place of abode as you for more than half of the year. For this purpose, whether an individual is your dependent is determined without regard to the individual's gross income, whether the individual files a joint return, or whether you are a dependent of another taxpayer.

An individual is physically or mentally incapable of self-care if, as a result of a physical or mental defect, the individual is incapable of caring for his or her hygiene or nutritional needs, or requires the full-time attention of another person for the individual's own safety or the safety of others. A noncustodial parent may not treat a child as a qualifying individual for purposes of the credit, even if the noncustodial parent may claim an exemption for the child.

If a person is a qualifying individual for only a part of the tax year, only those expenses paid during that part of the year are included in calculating the credit. In addition to paying for the care of a qualifying individual, you must meet all of the following conditions to claim the credit:

* Your payment must be made to a care provider who is not your spouse, the parent of your child who is your qualifying individual, your child under age 19, or a dependent of you or your spouse.

* You must file a joint return if you are married.

* You must provide the taxpayer identification number (usually the social security number) of each qualifying individual on the return on which you claim the credit.

You must report the name, address, and taxpayer identification number (either the social security number, or the employer identification number) of the care provider on your return. If the care provider is a tax-exempt organization, you need only report the name and address on your return. You can use Form W-10 (PDF), Dependent Care Provider's Identification and Certification, to request this information from the care provider. If you do not provide information regarding the care provider, you may still be eligible for the credit if you can show that you exercised due diligence in attempting to provide the required information. If you qualify for the credit, complete Form 2441 and Form 1040 or Form 1040A. If you received dependent care benefits from your employer (this amount should be shown on your Form W-2, you must complete Part III of Form 2441. You cannot claim the child and dependent care credit if you use Form 1040EZ. If you pay a provider to care for your dependent or spouse in your home, you may be a household employer. If you are a household employer, you may have to withhold and pay social security and Medicare taxes and pay federal unemployment tax.

The total expenses that may be used to calculate the credit are capped at $3,000 for one qualifying individual. The expenses qualifying for the computation of the child and dependent care credit must be reduced by the amount of any dependent care benefits provided by your employer that you exclude from gross income. In general, you can exclude up to $5,000 for dependent care benefits received from your employer. The expenses qualifying for the computation of the credit must be reduced by the amount of any dependent care benefits provided by your employer that you exclude from gross income. In general, the expenses claimed may not exceed your earned income or your spouse's earned income, whichever is less.

For purposes of the child and dependent care credit, a qualifying individual is your dependent qualifying child who is under age 13 when the care is provided. Your qualifying individual can also be your spouse who is

physically or mentally incapable of self-care and who has the same principal place of abode as you for more than half of the year. In addition, your qualifying individual can be any dependent who is physically or mentally incapable of self-care, and who has the same principal place of abode as you for more than half of the year. 

For purposes of the child and dependent care credit, an individual is physically or mentally incapable of self-care if, as a result of a physical or mental defect, the individual is incapable of caring for his or her hygiene or nutritional needs and whom requires the full-time attention of another person for the individual's safety or safety of others. A noncustodial parent may not treat a child as a qualifying individual for purposes of the child and dependent care credit, even if the noncustodial parent may claim an exemption for the child.

You must exercise due diligence in claiming the child and dependent care credit. If you do not provide information regarding the care provider, you may still be eligible for the child and dependent care credit if you can show that you exercised due diligence in attempting to provide the required information. 

Estimated Taxes

Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough. Estimated tax is used to pay income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough through withholding or estimated tax payments, you may be charged a penalty. If you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.

If you are filing as a sole proprietor, partner, S corporation shareholder and/or a self-employed individual, you should use Form 1040-ES, Estimated Tax for Individuals (PDF), to figure and pay your estimated tax. If you are filing as a corporation you should use Form 1120-W, Estimated Tax for Corporations (PDF), to figure the estimated tax. You must deposit the payments. If you are filing as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. If you are filing as a corporation you generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return. If you had a tax liability for the prior year, you may have to pay estimated tax for the current year.

If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings. To do this, file a new Form W-4 with your employer. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold. You do not have to pay estimated tax for the current year if you had no tax liability for the prior year, you were a U.S. citizen or resident for the whole year, your prior tax year covered a 12 month period, you had no tax liability for the prior year if your total tax was zero or you did not have to file an income tax return. Estimated tax requirements are different for farmers and fishermen.

To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. When figuring your estimated tax for the current year, it may be helpful to use your income, deductions, and credits for prior year as a starting point. Use your prior year's federal tax return as a guide. You can use the worksheet in Form 1040-ES to figure your estimated tax. You will need to estimate the amount of income you expect to earn for the year. If you estimated your earnings too high, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated tax for the next quarter. You want to estimate your income as accurately as you can to avoid penalties. You must make adjustments both for changes in your own situation and for recent changes in the tax law.

For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return. Using the Electronic Federal Tax Payment System (EFTPS) is the easiest way to pay your federal taxes for individuals as well as businesses. Make ALL of your federal tax payments including federal tax deposits (FTDs), installment agreement and estimated tax payments using EFTPS. If it is easier to pay your estimated taxes weekly, bi-weekly, monthly, etc. you can, as long as you have paid enough in by the end of the quarter. Using EFTPS, you can access a history of your payments, so you know how much and when you made your estimated tax payments.

If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen. However, if your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments. Use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to see if you owe a penalty for underpaying your estimated tax.

The penalty may also be waived if the failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or you retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect. You should also use Form 2210 to request a waiver of the penalty.

Estimated tax is the the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards.  You may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough. Additionally, estimated tax is used to pay income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. Always keep in

mind that if you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.

If you are filing as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. If you are filing as a corporation you generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return. 

You do not have to pay estimated tax for the current year if you had no tax liability for the prior year, you were a U.S. citizen or resident for the whole year and your prior tax year covered a 12 month period. When figuring your estimated tax for the current year, you can use the worksheet in Form 1040-ES to figure your estimated tax. You should always use your prior year's federal tax return as a guide. Remember that it may be helpful to use your income, deductions, and credits for prior year as a starting point. 

If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return. If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty they owe less than $1,000 in tax after subtracting their withholdings and credits, if they paid at least 90% of the tax for the current year, or if they paid 100% of the tax shown on the return for the prior year, whichever is less.

The penalty for underpayment of estimated tax may be waived if the failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty. The penalty may also be waived if you retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.

Refund Returns

When taxpayers are entitled to refunds, Authorized IRS e-file Providers (Providers) should inform them that they have several options. An individual income tax refund may be applied to next year’s estimated tax; received as a Direct Deposit or paper check; or be split so that a portion is applied to next year’s estimated tax and the rest received as a Direct Deposit or paper check. Providers must not direct the payment (or accept payment) of any monies issued to a taxpayer client by the government in respect of a Federal tax liability to the Provider or any firm or entity with which the Provider is associated. The IRS may sanction Providers and individuals who direct or accept such payment. Circular 230 sets forth that endorsing or otherwise negotiating any check (including directing or accepting payment by any means, electronic or otherwise, into an account owned or controlled by the Provider or any firm or other entity with which the practitioner is associated) is disreputable conduct.

Taxpayers often elect the Direct Deposit option because it is the fastest way of receiving refunds. Providers must accept any Direct Deposit election to qualified accounts in the taxpayer’s name at any

eligible financial institution designated by the taxpayer. Qualified accounts include savings, checking, share draft or consumer asset accounts (for example, IRA or money market accounts). Taxpayers should not request a deposit of their refund to an account that is not in their own name (such as their tax preparer’s own account). The taxpayer may not designate refunds for Direct Deposit to credit card accounts. Qualified accounts are accounts held by financial institutions within the United States and established primarily for personal, family or household purposes. Qualifying institutions may be national banks, state banks (including the District of Columbia and political sub-divisions of the 50 states), savings and loan associations, mutual savings banks and credit unions.

By completing Form 8888, Direct Deposit of Refund to More Than One Account, the taxpayer may split refunds between up to three qualified accounts. A qualified account can be a checking, savings or other account such as an individual retirement arrangement (IRA), health savings account (HSA), Archer MSA, Coverdell education savings account (ESA) or TreasuryDirect online account. The taxpayer may also buy up to $5,000 in U. S. Series I Bonds. For example, a taxpayer expecting a refund of $400 may choose to deposit $150 into a checking account, $150 into a savings account, and $100 into an IRA account. Taxpayers may choose the refund splitting option regardless of which Form 1040 series tax form they file.

Providers should caution taxpayers that some financial institutions do not permit the deposit of joint individual income tax refunds into individual accounts or into check or share draft accounts that are "payable through" another institution. Taxpayers should verify their financial institution's Direct Deposit policy before they elect the Direct Deposit option. The IRS is not responsible if the financial institution refuses Direct Deposit for this reason. Taxpayers who choose Direct Deposit must provide Providers with account numbers and routing transit numbers for qualified accounts. The annual tax packages show how to find and identify these numbers. The taxpayer can best obtain this information from official financial institution records, account cards, checks or share drafts that contain the taxpayer’s name and address. The sole exception involves accounts specifically created to receive refunds that repay refund products offered by financial institutions. In those cases Providers may supply the identifying account data. Providers with repeat customers or clients should check to see if taxpayers have new accounts. Some software stores prior year’s information and reuses it unless it is changed. If account information is not current, taxpayers do not receive Direct Deposit of their refunds. Providers must advise taxpayers that they cannot rescind a Direct Deposit election and they cannot make changes to routing transit numbers of financial institutions or to their account numbers after the IRS has accepted the return. Providers must not alter the Direct Deposit information in the electronic record after taxpayers have signed the tax return.

Refunds that are not direct deposited because of institutional refusal, erroneous account or routing transit numbers, closed accounts, bank mergers or any other reason are issued as paper checks, resulting in refund delays of up to ten weeks. While the IRS ordinarily processes a request for Direct Deposit, it reserves the right to issue a paper check and does not guarantee a specific date for deposit of the refund into the taxpayer’s account. Treasury’s Financial Management Service (FMS) issues federal income tax refunds. Neither the IRS nor FMS is responsible for the misapplication of a Direct Deposit

that results from error, negligence or malfeasance on the part of the taxpayer, the Provider, financial institution or any of their agents.

Taxpayers often elect the Direct Deposit option because it is the fastest way of receiving refunds. Providers must accept any Direct Deposit election to qualified accounts in the taxpayer’s name at any eligible financial institution designated by the taxpayer. Additionally, providers should caution taxpayers that some financial institutions do not permit the deposit of joint individual income tax refunds into individual accounts or into check or share draft accounts that are "payable through" another institution. Providers are also obligated to advise taxpayers that they cannot rescind a Direct Deposit election and they cannot make changes to routing transit numbers of financial institutions or to their account numbers after the IRS has accepted the return. Providers can never alter the Direct Deposit information in the electronic record after taxpayers have signed the tax return only if they find a mistake.

Payment Plans

If you're financially unable to pay your tax debt immediately, you can make monthly payments through an installment agreement. As long as you pay your tax debt in full, you can reduce or eliminate your payment of penalties or interest, and avoid the fee associated with setting up the agreement. Before applying for any payment agreement, you must file all required tax returns. You may be eligible to apply for an online payment agreement

Individuals must owe $50,000 or less in combined individual income tax, penalties and interest, and have filed all required returns. Businesses must owe $25,000 or less in payroll taxes and have filed all required returns. If you meet these requirements, you can apply for an online payment agreement.

Even if you're ineligible for an online payment agreement, you can still pay in installments. Complete and mail Form 9465, Installment Agreement Request and Form 433-F, Collection Information Statement.

There may be a reinstatement fee if your agreement goes into default. Penalties and interest continue to accrue until your balance is paid in full. If you are in danger of defaulting on your payment agreement for any reason, contact us immediately. The IRS will generally not take enforced collection actions when an installment agreement is being considered, while an agreement is in effect, for 30 days after a request is rejected, or during the period the IRS evaluates an appeal of a rejected or terminated agreement.

You may be eligible to apply for an online payment agreement if you are an individual that owes $50,000 or less in combined individual income tax, penalties and interest, and have filed all required returns. You may also be eligible to apply for an online payment agreement if you are a businesses who owes $25,000 or less in payroll taxes and have filed all required returns.

Penalties and interest continue to accrue until your balance is paid in full. If you are in danger of defaulting on your payment agreement for any reason, contact the IRS immediately. The IRS will generally not enforce collection actions when an installment agreement is being considered or when the

agreement is in effect. The IRS will also not take action for 30 days after a request is rejected or during the period the IRS evaluates an appeal of a rejected or terminated agreement.

3. Federal Tax Ethics

Federal Tax Ethics

This topic contains concepts governing the recognition of attorney, certified public accountant, enrolled agents, and other persons representing taxpayers before the IRS. Regulations such as rules relating to the authority to practice before the Internal Revenue Service, the duties and restrictions relating to such practice, prescription of sanctions for violating the regulations, the rules applicable to disciplinary proceedings and the availability of official records. Usually, attorneys, CPAs, enrolled agents, and enrolled actuaries can represent taxpayers before the IRS. Under special circumstances, other individuals, including un-enrolled tax return preparers can assist taxpayers on tax matters. Special forms need to be filed to authorize an individual or certain entities to receive and inspect a taxpayer's confidential tax information. In addition, the following information is great for understanding what ethics is. We need to strive to be as ethical as the following reading material is trying to teach. This material goes into detail on what it is to live a good life. These are good concepts to think about.

"Do unto others as you would have them do unto you". Seriously? The golden rule? This rule seems to be more like the "It is ok to do anything to others". Then you need to determine who "others" is. Is it others like me? Would others include animals and other creatures? So according to this rules, it would be alright to be slowly roasted over an open frame. 

Oh, so this only means "Do unto others (humans like me) as you would have them do unto you"?

We can continue to interpret this rule as we wish. We have been doing this for years. We can include in our religious literature and use it for centuries to hurt others. Others has only included "Others like me". What other explanation could there be for these foreigners to come to our land, call it their own, enslave us and force us to convert to their ways? At one time "Others" only included certain people who possessed the power better known as gun powder to force their will upon others. Now we celebrate their triumphs on special legal holidays such as Thanksgiving, Christmas, Independence day etc. Many disguise these so called holidays as "time to spend with family".

Does "Do unto others as you would have them do unto you" mean that you can force feed geese and ducks until their liver explodes to eat foie gras? Or does "Do unto others as you would have them do unto you" mean tying up a new born calf and freeze its movements so that the meat remains tender and then killing it to get the best veal? These acts are all legal. You can do anything to an animal because animals are considered property. The question is: Is it ethical?

Please don't use "Do unto others as you would have them do unto you" or "The Golden Rule" as your measurement of how good you are. 

Ethics is one thing and legal is another. Sometimes they come hand in hand. For instance, the person that constantly breaks the law is not considered an ethical person. Laws are derived from ethics. Something must first be considered unethical or wrong before it becomes illegal.

However, there is also the person who never breaks the law but does all sort of unethical things. For this reason, ethics becomes a very complicated concept to understand. Sometimes we cannot tell is something is unethical since there are no laws that prohibit such an act.

Many times, as is the case with foie gras and veal, ethics is a matter of personal conviction. I don't eat foie gras or veal because I know the torture these animals are put through in their the manufacture of such. I also only eat eggs from cage free hens. I don't eat at fast food places because I know about the little regard for animal life at the farms that produce the meats for these fast food places. I honestly think that fast food places such as McDonalds should disappear from the face of the earth. They are killing and torturing innocent creatures for profit.

However, none of these places are breaking the law. They offer jobs and boast about their food production and how they are able to manufacture cheap and unhealthy food for the masses.

In this course we are more concerned with the tax laws. Practitioners who don't follow the rules are considered unethical. Also, if the practitioner were to find gray areas in the tax law, he or she would be considered unethical. If a practitioner uses gray areas in the tax law to help his clients, he or she would be performing classical unethical acts. If the practitioner is breaking the law, this would not be too much an issue of ethics but more of an issue of crime. The individual breaking the law is not really "unethical" but rather "a criminal". 

There are many criminals in the world, but many more unethical people. Likewise, there are many practitioners who break the law and who pay the price by getting arrested and losing their license to practice or both. However, there are many more unethical preparers who never get in trouble for anything they do because they are within the legal constraints.

If everything that is unethical was written down as being wrong, then the science of ethics would disappear. There would not be such as thing as ethics. In a sense, anything that is wrong and there is no law that prohibits it, is a matter of ethics. If you break ethics rules, you are unethical. If you break legal rules, you are a criminal.  

The practitioner must use reasonable efforts to identify and ascertain the facts, which may relate to future events if a transaction is prospective, and to determine which facts are relevant. The practitioner can never base an opinion on any unreasonable factual assumptions, even assumptions as to future events. Furthermore, the practitioner cannot base an opinion on any unreasonable factual representations, statements or findings or of the taxpayers or any other person. It would also not be reasonable for a practitioner to rely on a projection, financial forecast or appraisal if the practitioner knows or should know that it is incorrect or incomplete or was prepared by a person lacking skills or qualifications. 

Any practitioner who has principal authority and responsibility for overseeing a firm's practice of providing advice concerning federal tax issues must take reasonable steps to ensure that the firm has adequate procedures in effect for all members, associates, and employees. Any such practitioner will be subject to discipline for failing to comply with the requirements if the practitioner knows or should know that one or more individuals that don't comply with section 10.35 and the practitioner fails to take prompt action to correct the noncompliance.

The Secretary of the Treasury, or delegate, after notice and an opportunity for a proceeding, may censure, suspend, or disbar any practitioner from practice before the Internal Revenue Service if the practitioner is shown to be incompetent or disreputable. Additionally, this would also apply if the practitioner fails to comply with any regulation under the prohibited conduct standards or acts with intent to defraud. The Secretary of the Treasury, or delegate may also censure, suspend, or disbar any practitioner from practice if the practitioner willfully and knowingly misleads or threatens a client or prospective client.

You may be wondering what is considered incompetent or disreputable conduct. Incompetent or disreputable conduct for which a practitioner may be sanctioned includes contemptuous conduct in connection with the practice before the Internal Revenue Service, including the use of abusive language or making false accusations or statements, knowing them to be false. This type of conduct would also include willfully disclosing or otherwise using a tax return or tax return information in a manner which is not authorized by the Internal Revenue Service. Also if you fail to sign a tax return when the practitioner's signature is required by the federal tax laws, would be misconduct. It goes without saying that that it it would be misconduct of your part to give false or misleading information that you know to be false or misleading to the Department of the Treasury or any officer or employee thereof, or to any tribunal authorized to pass upon federal tax matters.

When you file a complaint, it would be sufficient to just fairly inform the respondent of the charges brought so that the respondent is able to prepare a defense.

To maintain active enrollment to practice before the Internal Revenue Service, each individual is required to have the enrollment renewed. The effective date of renewal is the first day of the fourth month following the close of the period for renewal. You don't have to wait to receive notification from the Director of the Office of Professional Responsibility of the renewal requirement. You are required to renew regardless if your renewal notification was not received, gets lost in the mail or the Director decided not to send such notification.  

To qualify for continuing tax education credit for an enrolled agent, a course of learning must be a qualifying program designed to enhance professional knowledge in federal taxation or federal taxation related matters. The qualifying tax education program must be a qualifying program consistent with the Internal Revenue Code and effective tax administration. This tax education must be administered by a qualifying sponsor of tax education.

A practitioner may never take acknowledgments, administer oaths, certify papers, or perform official acts as a notary public with respect to any matter administered by the Internal Revenue Service.

A practitioner shall not represent a client before the Internal Revenue Service if the representation involves a conflict of interest. A conflict of interest exists if the representation of one client will be directly adverse to another client. If there is no significant risk that the representation of one or more clients will be materially limited by the practitioner's responsibility to another client, a former client or a third person, or by a personal interest of the practitioner then there is no conflict of interest. I don't think any conflict of interest is prohibited by law and as long as each affected client waives the conflict of interest by giving informed consent, the practitioner can represent the client before the Internal Revenue Service.

Tax advisors should provide clients with the highest quality representation concerning federal tax issues by adhering to best practices in providing advice and in preparing or assisting in the preparation of a submission to the Internal Revenue Service. Best practice includes establishing the facts, determining which facts are relevant, evaluating the reasonableness of any assumptions or representations, relating the applicable law to the relevant facts, and arriving at a conclusion supported by the law and the facts. Simply advising a client to take a position on a document, affidavit or other paper submitted to the Internal Revenue service would not be a best practice action. It would also not be a best practice for the practitioner to advise a client to submit a document, affidavit or other paper to the Internal Revenue Service if such impedes the administration of the federal tax laws. Neither would it be proper conduct to advise your clients to do anything necessary to avoid the payment of tax at all cost. A best practice would be to represent your client in a legal and ethical manner and this means following the tax laws and avoiding tax loopholes. After all, tax dollars benefit everyone.

In cases where any part of the understatement of the tax liability is due to a willful attempt by the return preparer to understate the liability, or if the understatement is due to reckless or intentional disregard of the rules or regulations by the tax preparer, the preparer is subject to the greater of $5,000 or 50% of income derived or to be derived from the misconduct.

A penalty will not be imposed on any part of an underpayment if there was reasonable cause for your position and you acted in good faith in taking that position. However, if you failed to keep proper books and records or failed to substantiate items properly, you should just pay the preparer penalty because you will not be able to avoid the penalty by disclosure.

The penalty for reckless or intentional disregard of a regulation may be avoided by disclosure only if the position represents a good faith challenge to the validity of the regulation and has a reasonable basis. Generally, the accurate-related penalty of any position of a tax underpayment attributable to negligence or disregard of the rules or regulations is 20%.

An understatement in the excess of the amount of tax required to be shown on the tax return over the amount of tax shown on the return for the tax year, reduced by any rebates. There is a substantial understatement if the amount of the understatement for any year exceeds 10% of the tax required to be shown on the tax return for the tax year or $5,000, whichever is greater. The $5,000 turns into $10,000 for a corporation.

Don't engage in disreputable conduct. Any individual engaged in limited practice before the IRS who is involved in disreputable conduct may be disbarred, suspended, or censured.

Many un-enrolled individuals can represent the specific taxpayers before the IRS, provided this individual presents satisfactory identification. You family member can represent you before the Internal Revenue Service. The officer of the corporation can represent the corporation before the IRS. Additionally, any employee can represent the employer before the Internal Revenue Service.

In general, individuals who are not eligible or who have lost the privilege as a result of certain actions cannot practice before the IRS. If an individual loses eligibility to practice, his or her power of attorney will not be recognized by the Internal Revenue Service. Out of courtesy, the Internal Revenue Service will most likely send the individual, his client or both a letter notifying them of such non-recognition.

As for negotiation of taxpayer refund checks, practitioners who are unenrolled income tax return preparers must never endorse or otherwise cash any refund checks issued to the taxpayer.

Being convicted of any criminal offense under the revenue laws or of any offense involving dishonesty or breach of trust is considered disreputable conduct.

The Office of Professional Responsibility presides over a hearing on a complaint for disbarment based on a violation of the laws or regulations governing practice before the Internal Revenue Service.

When there is an issue or disagreement as to the status of tax practitioners, there are many departments involved. An appeal from the initial decision ordering disbarment is made by the Office of Professional Responsibility. 

Individuals can lose their eligibility to practice before the IRS by not meeting the requirements for renewal of enrollment such as when the individual fails to comply with the continuing tax professional education requirements. The practitioner can also request to be placed in an inactive retirement status. Furthermore, individual can lose their eligibility to practice before the Internal Revenue Service by being suspended or disbarred by state authorities to practice as an attorney or certified public accountant. 

A practitioner who knows that his or her client has not complied with the revenue laws or has made an error or omission in any return, has the responsibility to advise the client promptly of the noncompliance. Every practitioner also has the responsibility to advise the client of the consequences of any noncompliance.

An un-enrolled return preparer is permitted to appear as your representative only before customer service representatives, revenue agents, and examination officers, with respect to an examination regarding the return he or she prepared. An un-enrolled tax return preparer cannot represent a taxpayer before other office of the Internal Revenue Service, such as collection or appeals including the Automated Collection System (ACS) unit. An unenrolled tax preparer cannot execute closing agreements or waivers. Unenrolled tax preparers are quite limited in about every aspect of their work when it come to Internal Revenue Service matters. For example, unenrolled tax preparers cannot extend the statutory period for tax assessments or collection of tax.

And talking about being extremely limited, if the un-enrolled tax return preparer does not meet the requirements for limited representation, he or she will be limited to receiving or inspecting your taxpayer information.

By the way, preparing a tax return, furnishing information at the request of the IRS, or appearing as a witness for the taxpayers is not considered practice before the IRS.

However, the following are considered practice before the Internal Revenue Service. Communicating with the IRS for a taxpayer regarding the taxpayer's rights, privileges, or liabilities under the laws and regulations administered by the IRS is one of them. Also, if you represent a taxpayer at conferences, hearings, or meetings with the IRS, it is considered practice before the IRS. Preparing and filing documents with the IRS for a taxpayer or corresponding and communicating with the IRS is also considered practice before the IRS.

A power of attorney is not required in some situations when dealing with the IRS. Situation that does not require a power of attorney is authorizing the disclosure of tax return information through Form 8821. Furthermore, allowing the Internal Revenue Service to discuss tax return information with a third party designee does not require such power of attorney. If you are representing a taxpayer through a non-written consent, you are not required to power of attorney.

After a valid power of attorney is filed, the IRS will recognize your representative. However, if it appears the representative is responsible for unreasonably delaying or hindering the prompt disposition of an IRS matter by failing to furnish, after repeated requests, non-privileged information, the IRS can contact the taxpayer directly. If the representative engages in such conduct, the matter can be referred to the Office of Professional Responsibility for consideration of possible disciplinary action.

The Office of Professional Responsibility is the one responsible for administering and enforcing the regulations governing practice before the IRS. 

Executing claims of refunds is beyond the scope of authority permitted an unenrolled preparer. Likewise, executing closing agreements with respect to a tax liability or specific tax matter is not authorized for unenrolled preparers. An unenrolled tax preparer cannot receive checks in payment of any refund of Internal Revenue taxes, penalties, or interest. All of these are not within the scope of authority permitted an unrolled tax preparer.

The unenrolled preparer who has been determined ineligible for limited practice before the Internal Revenue Service may request, after 2 years following the notice of final determination of ineligibility or decision of appeal, that eligibility for limited practice be reinstated.

An unenrolled preparer may, in a dignified manned, publish, use, or broadcast through any means of communication the names of individuals associated with the firm, a factual description of the services offered and the appropriate fee information.

The unenrolled preparer will be expected to recognize questions, issues and factual situations as expected of enrolled agents.

An unenrolled individual who signs a return as its preparer may act as the taxpayer's representative if accompanied by the taxpayer or by filing a written authorization from the taxpayer.

The unenrolled tax preparer cannot use false, fraudulent, misleading or deceptive advertising and he or she cannot make uninvited solicitation of employment in matters relating to the Internal Revenue Service.

An examining officer, or other Service officer or employee who has reason to believe that an unenrolled preparer's conduct has been or is such as would render the preparer ineligible to appear as the taxpayer's representative before the Internal Revenue Service shall communicate this information to the District Director of the taxpayer.

Any unenrolled preparer who knows that the client has not complied with the revenue laws, or that the client has made an error in or omission from any return, document, affidavit, or other paper that the client is required by law to execute, shall advise the client promptly of the fact of the noncompliance, error or omission.

An attorney is any person who is a member of good standing of the bar of the highest court of any state, territory, or possession of the United States, including a commonwealth, or the District of Columbia.

Enrollment as an enrolled agent based on an applicant's former employment with the Internal Revenue Service may be of unlimited scope. Enrollment as an enrolled agent based on an applicant's former employment with the Internal Revenue Service may also be limited to permit the presentation of matters only of the particular class for which the applicant's former employment has qualified the applicant. Enrollment may also be limited to permit the presentation of matters only before the particular unit or division of the Internal Revenue Service for which the applicant's former employment has qualified the applicant.

Individuals may always appear on their own behalf before the Internal Revenue Service that is why we have enrolled agents.

An applicant for enrollment as an enrolled agent who is requesting such enrollment based on former employment with the Internal Revenue Service must have had a minimum number of years of continuous employment with the Internal Revenue Service during which the applicant must have been regularly engaged in applying and interpreting the provisions of the Internal Revenue Code and the regulations relating to income, estate, gift, employment, or excise taxes. Minimum years of continuous employment must be 5 years. 

The director of the Office of Professional Responsibility must inform the EA enrollment applicant as to the reason for any denial of an applicant for enrollment. The applicant may within 30 days after receipt of the notice of denial of enrollment, file a written appeal of the denial with the Secretary of the Treasury or his or her delegate.

Each individual applying for renewal of their EA enrollment must retain for a period of 4 years following the date of renewal of enrollment the information required with regard to qualifying continuing professional education hours. Such information may include the name of the sponsoring organization, the location, title and description of the content of the program. However, this information may not include the publisher information of the study material used.

Subject to certain limitations, an individual who is not a practitioner may represent a taxpayer before the Internal Revenue Service, even if the taxpayer is not present, provided the individual presents satisfactory identification and proof of his or her authority to represent the taxpayer. For example, an individual may represent a member of his or her immediate family. Furthermore, a regular full-time employee of an individual employer may represent the employer. Also, a general partner or a regular full-time employee of a partnership may represent the partnership.

Any individual may prepare a tax return, appear as a witness for the taxpayer before the Internal Revenue Service, or furnish information at the request of the Internal Revenue Service or any of its officers or employees.

An individual who prepares and signs a taxpayer's tax return as the preparer, or who prepares a tax return but is not required (by the instructions to the tax return or regulations) to sign the tax return may represent the taxpayer before revenue agents, customer service representatives or similar officers and employees of the Internal Revenue Service during an examination of the taxable year or period covered by that tax return. However, this right does not permit such individual to represent the taxpayer before the appeals officers, revenue officers, counsel or similar officers or employees of the Internal Revenue Service. 

A practitioner must, on a proper and lawful request by a duly authorized officer or employee of the Internal Revenue Service, promptly submit records or information in any matter before the Internal Revenue Service unless the practitioner believes in good faith and on reasonable grounds that the records or information are privileged.

A "Declaration of Representative" is a written statement made by a recognized representative that he or she is currently eligible to practice before the Internal Revenue Service and is authorized to represent the particular party on whose behalf he or she acts.

A Durable power of attorney is a power of attorney which specifies that the appointment of the attorney-in-fact will not end due to either the passage of time (i.e. the authority conveyed will continue until the death of the taxpayer) or the incompetency of the principal (e.g. the principal becomes unable or is adjudged incompetent to perform his or her business affairs).

A power of attorney must contain the name, mailing address and the identification number of the taxpayer. The power of attorney must also contain the name and mailing address of the recognized representative and also a description of the matter or matters for which representation is authorized. Also, if applicable, the power of attorney must contain the employee plan number.

A properly completed Form 2848 satisfies the requirements for a power of attorney and a declaration of representative.

The Internal Revenue Service will not accept a power of attorney which fails to include the name and mailing address of the taxpayer, the description of the matter for which representation is authorized or the identification number of the taxpayer such as the social security number and/or employer identification number. 

In general, when a fiduciary is involved in a tax matter, a power of attorney is not required.

If no executor, administrator, or trustee name in the will is acting or responsible for disposition of the matter and the estate has been distributed to the residuary legatee (s) the Internal Revenue Service officials may require the submission of a statement from the court certifying that no executor, administrator, or trustee name under the will is acting or responsible for disposition of the matter, naming the residuary legatee (s), and indicating the proper share to which each is entitled. 

A power of attorney is required by the Internal Revenue Service when the taxpayer wishes to authorize a recognized representative to perform one or more acts on behalf of the taxpayer. A power of attorney is required if there is a waiver offer and/or execution of either a waiver of restriction on assessment or collection of a deficiency in tax, or a waiver of notice of disallowance of a claim for credit or refund. A power of attorney would also be required if there is an execution of a consent to extend the statutory period for assessment or collection of a tax. If there is an execution of a closing agreement under the provisions of the Internal Revenue Code and the regulations thereunder, a power of attorney would be required.

However, a power of attorney is not required in the case of a trustee, receiver , or an attorney (designed to represent a trustee, receiver, or debtor in possession) appointed by a court having jurisdiction over a debtor.

A new power of attorney revokes a prior power of attorney if granted by the taxpayer to another recognized representative with respect to the same matter.

A taxpayer may revoke a power of attorney without authorizing a new representative by filing a statement of revocation with those offices of the Internal Revenue Service where the taxpayer has filed the power of attorney to be revoked. The statement of revocation must indicate that the authority of the first power of attorney is revoked and must be signed by the taxpayer. 

Permission to by-pass a recognized representative and contact a taxpayer directly does not automatically disqualify an individual to act as the recognized representative of a taxpayer in a matter. However, such information may be referred to the Director of Practice for possible disciplinary proceedings. 

Information from both powers of attorney and tax information authorizations is recorded onto the CAF system. Such information enables the Internal Revenue Service personnel who do not have access to the actual power of attorney or tax information authorization to determine whether a recognized representative or a designee is authorized by a taxpayer to receive and/or inspect confidential tax return information. Also, the authorization would be to determine, in the case of a recognized representative, whether that representative is authorized to perform the acts set forth in section 601.504(a.  This also enables the IRS personnel to send copies of computer generated representatives or a designee so authorized by the taxpayer.

A Centralized Authorization File (CAF) number generally will be issued to a recognized representative who files a power of attorney and written declaration for representative or a designee authorized under a tax information authorization.

Any notice or other written communication (or a copy thereof) require or permitted to be given to a taxpayer in any matter before the Internal Revenue Service must be given to the taxpayer and, unless restricted by the taxpayer, to the representative according to procedure. If the taxpayer designates more than one recognized representative to receive notices and other written communications, it will be the practice of the Internal Revenue Service to give copies of such to only one individual so designated (even if there are more than two individuals). In a case in which the taxpayer does not designate which recognized representative is to receive notices, it will be the practice of the Internal Revenue Service to give notices and other communications to the first recognized representative appointed on the power of attorney. Failure to file notice or other written communication to the recognized representative of a taxpayer will not affect the validity of any notice or other written communication delivered to a taxpayer.

Where there is a dispute between two or more recognized representatives concerning who is entitled to represent a taxpayer in a matter pending before the Internal Revenue Service (or to receive a check drawn on the United States Treasury), the Internal Revenue Service will not recognize any of the disputing representatives. 

The Tax Court has its own rules of practice and procedure and its own rules respecting admission to practice before it. Accordingly, a power of attorney is not always required to be submitted by an attorney of record in a case which is docketed in the Tax Court.

Form 2848 is the Internal Revenue Service power of attorney form which may be used by a taxpayer who wishes to appoint an individual to represent him or her before the Internal Revenue Service.

The office of each district director, the office of each service center, the office of each compliance center, the office of each regional commissioner, and the National Office constitute separate and distinct offices of the Internal Revenue Service.

Regulations Governing Practice

The practitioner must use reasonable effort to identify and ascertain the facts, which may relate to future events if a transaction is prospective, and to determine which facts are relevant. Therefore, a practitioner must never base an opinion on any unreasonable factual assumptions (including assumption as to future events). This means that a practitioner cannot base an opinion on any unreasonable factual representations, statements or findings or of the taxpayers or any other person. As a matter of fact, it would be unreasonable for a practitioner to rely on a projection, financial forecast or appraisal if the practitioner knows or should know that it is incorrect or incomplete or was prepared by a person lacking skills or qualifications. 

Any practitioner who has principal authority and responsibility for overseeing a firm's practice of providing advice concerning federal tax issues must take reasonable steps to ensure that the firm has adequate procedures in effect for all members, associates, and employees. Any such practitioner will be subject to discipline for failing to comply with the requirements if the practitioner knows or should know that one or more individuals that don't comply with the code and the practitioner fails to take prompt action to correct the noncompliance.

The Secretary of the Treasury, or delegate, after notice and an opportunity for a proceeding, may censure, suspend, or disbar any practitioner from practice before the Internal Revenue Service if the practitioner is shown to be incompetent or disreputable or fails to comply with any regulation under the prohibited conduct standards or with intent to defraud. The Secretary may also censure, suspend, or disbar any practitioner from practice before the Internal Revenue Service if the practitioner willfully and knowingly misleads or threatens a client or prospective client. 

Incompetence or disreputable conduct for which a practitioner may be sanctioned includes contemptuous conduct in connection with the practice before the Internal Revenue Service, including the use of abusive language or making false accusations or statements, knowing them to be false. This would also include failing to sign a tax return prepared by the practitioner when the practitioner's signature is required by the federal tax laws. Additionally, willfully disclosing or otherwise using a tax return or tax return information in a manner not authorized by the Internal Revenue Service would also be considered disreputable conduct. It is also considered disreputable conduct if the practitioner is knowingly giving false or misleading information to the Department of the Treasury or any officer or employee thereof, or to any tribunal authorized to pass upon federal tax matters.

A complaint is sufficient to just fairly inform the respondent of the charges brought so that the respondent is able to prepare a defense.

To maintain active enrollment to practice before the Internal Revenue Service, each individual is required to have the enrollment renewed. The effective date of renewal is the first day of the fourth month following the close of the period for renewal. Consequently, if you don't receive notification from the Director of the Office of Professional Responsibility of the renewal requirement, the individual is required to renew regardless. 

To qualify for continuing tax education credit for an enrolled agent, a course of learning must be a qualifying program designed to enhance professional knowledge in federal taxation or federal taxation related matters. The course must also be a qualifying program consistent with the Internal Revenue Code and effective tax administration and be sponsored by a qualifying tax education sponsor. 

A practitioner may not take acknowledgments, administer oaths, certify papers, or perform official acts as a notary public with respect to any matter administered by the Internal Revenue Service. In addition, a practitioner shall not represent a client before the Internal Revenue Service if the representation involves a conflict of interest. A conflict of interest exists if the representation of one client will be directly adverse to another client.

PENALTY UNDER SECTION 6694

Prior to amendment by the Act, the penalty under section 6694(a) applied if:

(1) any part of an understatement of liability with respect to any return or claim for refund is due to a position for which there was not a realistic possibility of being sustained on its merits,

(2) any person who is an income tax return preparer with respect to such return or claim knew (or reasonably should have known) of such position, and,

(3) such position was not disclosed as provided in section 6662(d)(2)(B)(ii) or was frivolous.

Prior to amendment by the Act, the penalty under section 6694(b) applied if any part of an understatement was due to:

(1) a willful attempt in any manner by an income tax return preparer to understate the liability for tax; or

(2) to any reckless or intentional disregard of rules or regulations by an income tax return preparer.

Section 8246 of the Act amended several provisions of the Code to extend the scope of the income tax return preparer penalties to preparers of all tax returns, amended returns and claims for refund, including estate and gift tax returns, generation-skipping transfer tax returns, employment tax returns, and excise tax returns. The Act amended section 6694(a) to provide that the penalty would apply if:

(A) the tax return preparer knew (or reasonably should have known) of the position,

(B) there was not a reasonable belief that the position would more likely than not be sustained on its merits, and

 (C)(i) the position was not disclosed as provided in section 6662(d)(2)(B)(ii), or

(ii) there was no reasonable basis for the position.

Although the Act did not alter the standard of conduct under section 6694(b), it increased the amount of the penalty and made the penalty applicable to all tax return preparers.

Section 8246 of the Act amends the standards of conduct under section 6694(a) in two ways. First, for undisclosed positions, the Act replaces the realistic possibility standard with a requirement that there be a reasonable belief that the tax treatment of the position would more likely than not be sustained on its merits. Second, for disclosed positions, the Act replaces the not-frivolous standard with the requirement that there be a reasonable basis for the tax treatment of the position.

The Act also increased the first-tier section 6694(a) penalty for understatements from $250 to the greater of $1000 or 50% of the income derived (or to be derived) by the tax return preparer from the preparation of a return or claim with respect to which the penalty was imposed. The Act increased the second-tier section 6694(b) penalty for willful or reckless conduct from $1000 to the greater of $5,000 or 50% of the income derived (or to be derived) by the tax return preparer.

Under both the prior and current law, disclosure under section 6694(a) is adequate if made on a Form 8275, Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement, attached to the return, amended return, or refund claim, or pursuant to the annual revenue procedure authorized in Treasury Regulation sections 1.6694-2(c)(3) and 1.6662-4(f)(2). In addition, under both the prior and current law, the penalty under section 6694(a) would not be imposed if it is shown that there is reasonable cause for the understatement and the tax return preparer acted in good faith.

In order to provide sufficient time to address issues pertaining to the implementation of the Act, the Service is providing the following transitional relief: For income tax returns, amended returns, and refund claims, the standards set forth under the previous law and current regulations under section 6694 will be applied in determining whether the Service will impose a penalty under section 6694(a). Generally, in applying transitional relief for income tax returns, amended returns or refund claims, disclosure would be adequate if made on a Form 8275, Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement, attached to the return, amended return, or refund claim, or pursuant to the annual revenue procedure authorized in Treasury Regulation sections 1.6694-2(c)(3) and 1.6662-4(f)(2).

For all other returns, amended returns, and claims for refund, including estate, gift, and generation-skipping transfer tax returns, employment tax returns, and excise tax returns, the reasonable basis standard set forth in the regulations issued under section 6662, without regard to the disclosure requirements contained therein, will be applied in determining whether the Service will impose a penalty under section 6694(a).

This transitional relief will apply to all returns, amended returns, and refund claims due on or before December 31, 2007 (determined with regard to any extension of time for filing); to 2007 estimated tax

returns due on or before January 15, 2008; and to 2007 employment and excise tax returns due on or before January 31, 2008. However, no transitional relief is available under section 6694(b) as transitional relief is not appropriate for return preparers who exhibit willful or reckless conduct, regardless of the type of return prepared.

Tax advisors should provide clients with the highest quality representation concerning federal tax issues by adhering to best practices in providing advise and in preparing or assisting in the preparation of a submission to the Internal Revenue Service. Best practice includes establishing the facts, determining which facts are relevant, evaluating the reasonableness of any assumptions or representations, relating the applicable law to the relevant facts, and arriving at a conclusion supported by the law and the facts. Best practices does not mean you would advice a client to take any step necessary to avoid the payment of tax. It would also not be best practice to advise a client to submit a document, affidavit or other paper to the Internal Revenue Service even if this impedes the administration of the federal tax laws. Finally, best practice would not be to advise a client to take a position on a document, affidavit or other paper submitted to the Internal Revenue Service.

In cases where any part of the understatement of the tax liability is due to a willful attempt by the return preparer to understate the liability, or if the understatement is due to reckless or intentional disregard of the rules or regulations by the tax preparer, the preparer is subject to a $5,000 penalty or a penalty of 50% of income derived or to be derived if this is a greater amount.

A penalty will not be imposed on any part of an underpayment if there was reasonable cause for your position and you acted in good faith in taking that position. However, you cannot avoid the penalty by disclosure if you failed to keep proper books and records or failed to substantiate items properly. 

The penalty for reckless or intentional disregard of a regulation may be avoided by disclosure only if the position represents a good faith challenge to the validity of the regulation and has a reasonable basis. Generally, the accurate-related penalty of any position of a tax underpayment attributable to negligence or disregard of the rules or regulations is 20%.

An understatement in the excess of the amount of tax required to be shown on the tax return over the amount of tax shown on the return for the tax year, reduced by any rebates. There is a substantial understatement if the amount of the understatement for any year exceeds 10% of the tax required to be shown on the return for the tax year. This amount would be the amount that exceeds 10% of the tax required to be shown on the return for the tax year or $5,000, whichever is greater. Likewise, for a corporation it would be the greater of the amount that exceeds 10% of the tax required to be shown on the return for the year or $10,000.

A family member, an officer of a corporation, or an employee representing an employer, are unenrolled individual that are able to represent their specific taxpayers before the IRS. This is true as long as this individual presents satisfactory identification proving the relationship to the person that they are representing.

The un-enrolled preparer who has been determined ineligible for limited practice before the Internal Revenue Service may request, after 2 years following the notice of final determination of ineligibility or decision of appeal, that eligibility for limited practice be reinstated.

Enrollment as an enrolled agent based on an applicant's former employment with the Internal Revenue Service may be of unlimited scope or limited to permit the presentation of matters only of the particular class for which the applicant's former employment has qualified the applicant. The enrollment may also be limited to permit the presentation of matters only before the particular unit or division of the Internal Revenue Service for which the applicant's former employment has qualified the applicant. 

Individuals may always appear on their own behalf before the Internal Revenue Service without the need of enrolled agents.

An applicant for enrollment as an enrolled agent who is requesting such enrollment based on former employment with the Internal Revenue Service must have had a minimum number of years of continuous employment with the Internal Revenue Service during which the applicant must have been regularly engaged in applying and interpreting the provisions of the Internal Revenue Code and the regulations relating to income, estate, gift, employment, or excise taxes. Minimum years of continuous employment must be 5 years.

The director of the Office of Professional Responsibility must inform the EA enrollment applicant as to the reason for any denial of an applicant for enrollment. The applicant may file a written appeal of the denial with the Secretary of the Treasury or his or her delegate within 30 days after receipt of the notice of denial of enrollment.

Each individual applying for renewal of their EA enrollment must retain for a period of 4 years following the date of renewal of enrollment the information required with regard to qualifying continuing professional education hours. Include the name of the sponsoring organization, the location, title and description of the program. Also include written outlines, course syllabi, textbook or material required for the course. You don't need to include the publisher information of the study material used.

Subject to certain limitations, an individual who is not a practitioner may represent a taxpayer before the Internal Revenue Service, even if the taxpayer is not present, provided the individual presents satisfactory identification and proof of his or her authority to represent the taxpayer.  First, an individual may represent a member of his or her immediate family. Also, an employer may be represented by his or her regular full-time employee. Additionally, a general partner or a regular full-time employee of a partnership may represent the partnership.

Any individual who prepares the tax return, may appear as a witness for the taxpayer before the Internal Revenue Service, or furnish information at the request of the Internal Revenue Service or any of its officers or employees.

An individual who prepares and signs a taxpayer's tax return as the preparer, or who prepares a tax return but is not required (by the instructions to the tax return or regulations) to sign the tax return may

represent the taxpayer before revenue agents, customer service representatives or similar officers and employees of the Internal Revenue Service during an examination of the taxable year or period covered by that tax return. However, this right does not permit such individual to represent the taxpayer before the appeals officers, revenue officers, counsel or similar officers or employees of the Internal Revenue Service. 

A practitioner must, on a proper and lawful request by a duly authorized officer or employee of the Internal Revenue Service, promptly submit records or information in any matter before the Internal Revenue Service. The individual can decline and notify the IRS that he or she as a practitioner believes in good faith and on reasonable grounds that the records or information are privileged.

Penalty Information for Authorized IRS e-fileProviders

A penalty may be imposed on a return preparer who endorses or negotiates a refund check issued to any taxpayer other than the return preparer. The amounts can add up since there is a penalty of $500 for each check endorsed. The prohibition on return preparers negotiating a refund check is limited to a refund check for return they prepared.

Preparer penalties may be asserted against an individual or firm meeting the definition of a tax preparer under I.R.C. §7701(a)(36) and Treas. Reg. §301.7701-15. Preparer penalties that may be asserted under appropriate circumstances include, but are not limited to, those set forth in I.R.C. §§ 6694, 6695, 6701 and 6713.

Under §301.7701-15(c), Providers are not tax return preparers for the purpose of assessing most preparer penalties as long as their services are limited to "typing, reproduction or other mechanical assistance in the preparation of a return or claim for refund". If an ERO, Intermediate Service Provider, Transmitter or the product of a Software Developer alters the return information in a non-substantive way, this alteration is considered to come under the "mechanical assistance" exception described in §301.7701-15(c). A non-substantive change is a correction or change limited to a transposition error, misplaced entry, spelling error or arithmetic correction.

If an ERO, Intermediate Service Provider, Transmitter or the product of a Software Developer alters the return in a way that does not come under the "mechanical assistance" exception, the IRS may hold the Provider liable for income tax return preparer penalties. See Treas. Reg.§301.7701-15(c); Rev. Rul. 85-189, 1985-2 C.B. 341 (which describes a situation where the Software Developer was determined to be an tax return preparer and subject to certain preparer penalties).

A $500 penalty may be imposed, per I.R.C. §6695(f), on a return preparer who endorses or negotiates a refund check issued to any taxpayer other than the return preparer. The prohibition on return preparers negotiating a refund check is limited to a refund check for returns they prepared.

A preparer that is also a financial institution, but has not made a loan to the taxpayer on the basis of the taxpayer’s anticipated refund, may cash a refund check and remit all of the cash to the taxpayer, accept a refund check for deposit in full to a taxpayer’s account provided the bank does not initially endorse or

negotiate the check, or endorse a refund check for deposit in full to a taxpayer’s account pursuant to a written authorization of the taxpayer.

A preparer bank may also subsequently endorse or negotiate a refund check as part of the check-clearing process through the financial system after initial endorsement. Under Treas. Reg. 1.6695-1(f), a tax preparer, however, may affix the taxpayer's name to a check for the purpose of depositing the check into the account in the name of the taxpayer or in joint names of the taxpayer and one or more persons (excluding the tax return preparer) if authorized by the taxpayer or the taxpayer's recognized representative. The IRS may sanction any income tax return preparer that violates this provision. In addition, the IRS reserves the right to assert all appropriate preparer and non-preparer penalties against a Provider as warranted.

Providers are not tax return preparers for the purpose of assessing most preparer penalties as long as their services are limited to "typing, reproduction or other mechanical assistance in the preparation of a return or claim of refund". If an ERO, Intermediate Service Provider, Transmitter or the product of a Software Developer alters the return in a way that does not come under the "mechanical assistance" exception, the IRS may hold the Provider liable for income tax return preparer penalties. 

The return preparer penalties under IRC 6695 are assessed against preparers who:

* Fail to provide the taxpayer with a copy of the return, $50 per failure, up to a maximum of $25,000 for each calendar year; per IRC 6695(a),

* Fail to sign the return, $50 per failure, up to a maximum of $25,000 for each calendar year, per IRC 6695(b),

* Fail to provide an identifying number, $50 per failure, up to a maximum of $25,000 for each calendar year; per IRC 6695(c),

* Fail to retain a copy of the return or a list of returns prepared, $50 per failure, up to a maximum of $25,000 for each return period, per IRC 6695(d),

* Fail to file a tax return preparer information return or set forth an item in the return as required under IRC 6060, $50 for each failure, up to a maximum of $25,000 for each return period, per IRC 6695(e),

* Negotiate a refund check or misappropriate a refund via electronic means, $500 per failure per IRC 6695(f), or

* Fail to be diligent in determining eligibility for the Earned Income Tax Credit, $500 per failure per IRC 6695(g).

These penalties are generally processed under the pre-assessment penalty procedures.

The prohibition on return preparers negotiating a refund check is limited to cash a refund check and remit all of the cash to the taxpayer, accept a refund check for deposit in full to a taxpayer's account provided the bank does not initially endorse or negotiate the check and to endorse a refund check for

deposit in full to a taxpayer’s account pursuant to a written authorization of the taxpayer. A preparer that is also a financial institution or preparer bank, may subsequently endorse or negotiate a refund check as part of the check-clearing process through the financial system after initial endorsement.

EITC Due Diligence

The IRS will be sending letters starting October 1 to preparers filing questionable EITC claims. The letters talk about the primary issues identified on the returns, talk about the consequences of filing inaccurate claims for EITC and lets the preparer know we will continue to monitor the EITC claims they complete. The IRS will include Letter 5138 notifying preparers that IRS may audit their clients’ returns in this mailing.

Paid preparers must meet four due diligence requirements on returns when considering EITC. The Preparer's toolkit on our EITC Central has information on the law and related regulations. Read more about your responsibilities and learn how to protect yourself from potential penalties in the Due Diligence section of the Tax Preparer Toolkit. It is focused and tiered with a goal of increasing the accuracy of EITC claims filed. Walk your clients through the EITC qualification requirements with this interactive tool and show them if they qualify or not.

If your client's claims about self-employment income seem inconsistent, incorrect or incomplete, you need to ask them more questions. Find out how to meet your due diligence requirements and help your self employed clients reconstruct their business records by taking EITC Schedule C and Record Reconstruction Training. More than 86 percent of professional preparers use tax return preparation software. IRS partnered with software companies to form the IRS/Software Developers Working Group. This group works to improve software and help preparers meet their due diligence requirements.

Complete and submit Form 8867 for all paper and electronic tax returns and for all other EITC claims for claims with qualifying children and also for claims with no qualifying children.  Any person who is a tax return preparer with respect to any return or claim for refund who fails to comply with due diligence requirements imposed by the Secretary by regulations with respect to determining eligibility for, or the amount of, the allowable EITC credit. There is the diligence requirement to ask all the questions required on Form 8867 and to keep a copy of form and EITC calculation worksheets. You also must ask additional questions when the information your client gives you seems incorrect, inconsistent or incomplete. Remember, you must complete and submit the Form 8867 for all paper and electronic tax returns and for all other EITC claims regardless if with children or claims with no children.

The tax return preparer must keep a copy of the Form 8867 and the EIC calculation worksheet. You may feel that this is not you job but you must verify the identity of the person giving you the return information and keep a record of who provided the information and when information was provided. It is your duty to keep copies of any documents your client provided that you relied on to determine eligibility for the amount of the EITC.

To meet your earned income credit due diligence requirements, you must complete the form with information you get from your client. And, you must document, at the time of the interview, any

Additional questions you asked and your client’s replies. I cannot iterate enough, complete all required parts! You must complete Parts I, IV and V for every client, and, either Part II or Part III as required. Always, submit the completed Form 8867 with each EITC electronic return you send or attach the completed Form 8867 to any EITC return or claim for refund you prepare and present to your client to send. Remind your client that Form 8867 must be send in order for their Earned Income Credit be processed correctly. If too many of your clients leave Form 8867 out, the IRS for sure will come knocking on your door.

You need to answer the questions covering EITC eligibility on the Form 8867 using information from your client. But, we don't recommend you ask your clients the questions listed on the form. Use words and terms your client knows and won't misunderstand. For example: Don't ask: What's your marital status? Ask: Are you single or married? Don't ask: Are you head of household? Find out if they qualify by asking all the right questions. Don't ask if they have a qualifying child or a dependent, find out who they lived with during the tax year and for how long. The manner in which you ask the interview questions will determine the accuracy of the responses. Also, you want to avoid any possibility of fraud, so gear your questions in such a way as to be clear of fraud.

If you give your client an EITC return or electronic version to sign and send in, you must attach the completed Form 8867 to it. Be sure to stress the importance of sending in all the forms to the IRS. Form 8867 is extremely important. Follow and make sure the questions are answered on it correctly. If you suspect any wrongdoing or anything wrong with the responses, ask more questions. Ultimately, you are given the responsibility of the accuracy of information that goes on this form. There are high penalties at stake for you and you must do everything is your power to avoid these due diligence penalties.

If the Form 8867 is not included with EITC returns you prepared, you may get a warning letter from the IRS during the filing season. You may also start getting alerts with your acknowledgements that Form 8867 is not being included. You can use all the help you can get, and the IRS is there to help you after all. Furthermore, if Form 8867 is not included with EITC returns you prepared, you may get letter 5364 which is sent to those who prepare paper EITC returns without a Form 8867. Receiving acknowledgement Alerts which are sent electronically to those preparers who e-file EITC returns without Form 8867, is a good thing. You may inadvertently be excluding this extremely important document from your filings and these notifications could be a blessing.

If you have been leaving this form out of your filings, you don't want to submit Form 8867 separately without a tax return because the IRS cannot associate a Form 8867 with a tax return that has already been processed. Therefore, doing so will have no effect on the tax preparer's penalty assessments. You should never send Form 8867 separately. If the IRS continues to receive EITC claims prepared by you missing the Form 8867, they will continue to send warning letters. The IRS can only take so much abuse and may start sending Letter 1125 with the Form 5816, assessing the EITC Due Diligence penalty of $500 for each missing form.

You should start changing your procedures to ensure the Form 8867 is completed and submitted with every EITC claim to avoid the warnings for not submitting Form 8867 with returns. The last thing you

want to do is ignore the letters. You could also make sure that your tax return software is not automatically excluding Form 8867. So, for tax returns submitted electronically, make sure the setting for including the Form 8867 is not disabled and for paper returns, make sure you let your clients know the importance of submitting all the forms you include. In addition, make sure to keep a record of the forms you included in the package your give your clients and personalize Form 8867 as much as possible by asking those additional questions.

If the IRS examines your client's return and deny all or a part of EITC, your client must pay back the amount in error with interest. Furthermore, you client may need to file Form 8862 and may be banned from claiming EITC for the next two years if the IRS finds the error is because of reckless or intentional disregard of the rules. If the error is extreme and due to fraud, your client may be banned from claiming the Earned Income Credit for the next ten years.  

If the IRS examines the EITC claims you prepared and they find you did not meet all four due diligence requirements, you can get A $500 penalty for each failure to comply with EITC due diligence requirements. You will get a minimum penalty of $1,000 if you prepare a client return and IRS finds any part of the amount of taxes owed is due to an unreasonable position. If you just don't care and exercise reckless or intentional disregard for the rules, you will be liable for a minimum penalty of $5,000.

IRS can also penalize an employer or employing firm if an employee fails to comply with the EITC due diligence requirements. However, there are only specific circumstances when an employer is subject to the due diligence penalty.

You should be careful. Tax preparation is your profession and you should always follow the due diligence rules.  If you receive a return-related penalty, you can also face suspension or expulsion. Your firm can also face expulsion from the IRS e-file program. There are so many penalties involved, such as many disciplinary actions by the IRS Office of Professional Responsibility. If you deteriorate your service to such an extent, you can also face injunctions barring you from preparing tax returns or imposing conditions on the tax returns you may prepare.

Obtaining, Handling and Processing Return Information from Taxpayers

An Electronic Return Originator (ERO) originates the electronic submission of returns it either prepares or collects from taxpayers who want to e-file their returns. An ERO originates the electronic submission of a return after the taxpayer authorizes the filing of the return via IRS e-file. The ERO must have either prepared the return or collected it from a taxpayer. An ERO originates the electronic submission by electronically sending the return to a Transmitter that transmits the return to the IRS, by directly transmitting the return to the IRS or by providing a return to an Intermediate Service Provider for processing prior to transmission to the IRS.

The ERO must always identify the paid preparer (if any) in the appropriate field of the electronic record of returns it originates. The ERO must enter the paid preparer's identifying information (name, address, Employer Identification Number (EIN), when applicable and Preparer’s Tax Identification Number (PTIN)). EROs may either transmit returns directly to the IRS or arrange with another Authorized IRS

e‑file Provider (Provider) to transmit the electronic return to the IRS. A Provider, including an ERO, may disclose tax return information to other Providers in connection with e-filing a tax return under Treas. Reg. §301.7216-2(d)(1). For example, an ERO may pass on return information to an Intermediate Service Provider or a Transmitter for the purpose of having an electronic return formatted or transmitted to the IRS.

An ERO that chooses to originate returns that it has not prepared, but only collected, becomes an income tax return preparer of the returns when, as a result of entering the data, it discovers errors that require substantive changes and then makes the changes. A non-substantive change is a correction limited to a transposition error, misplaced entry, spelling error or arithmetic correction. The IRS considers all other changes substantive, and the ERO becomes a tax return preparer. As such, the ERO may be required to sign the tax return as the tax return preparer.

While all Providers must be on the lookout for fraud and abuse in IRS e-file, EROs must be particularly diligent while acting in their capacity as the first contact with taxpayers filing a return. An ERO must be diligent in recognizing fraud and abuse, reporting it to the IRS and preventing it when possible. Providers must cooperate with the IRS' investigations by making available to the IRS upon request, information and documents related to returns with potential fraud or abuse. EROs can find additional information in the article Reporting Fraud and Abuse Within the IRS e-file Program.

Indicators of abusive or fraudulent returns may be unsatisfactory responses to filing status questions, multiple returns with the same address, and missing or incomplete Schedules A and C income and expense documentation. A "fraudulent return" is a return in which the individual is attempting to file using someone else’s name or SSN on the return or the taxpayer is presenting documents or information that have no basis in fact. A potentially abusive return is a return that the taxpayer is required to file but contains inaccurate information that may lead to an understatement of a liability or the overstatement of a credit resulting in a refund to which the taxpayer may not be entitled.

An ERO that is also the paid preparer should exercise due diligence in the preparation of returns involving the Earned Income Tax Credit (EITC), as it is a popular target for fraud and abuse. Section 6695(g) of the Internal Revenue Code requires paid preparers to exercise due diligence in the preparation of returns involving EITC. Paid preparers must complete all required worksheets and meet all record keeping requirements.

To safeguard IRS e-file from fraud and abuse, an ERO should confirm identities and TINs of taxpayers, spouses and dependents listed on returns prepared by its firm. TINs include SSNs, EINs, Adopted Taxpayer Identification Numbers (ATINs) and Individual Taxpayer Identification Numbers (ITINs). To prevent filing returns with stolen identities, an ERO should ask taxpayers not known to them to provide two forms of identification (picture IDs are preferable) that include the taxpayer’s name and current address. Also, seeing Social Security cards, ITIN letters and other documents avoids including incorrect TINs for taxpayers, spouses and dependents on returns. Providers should take care to ensure that they transcribe all TINs correctly.

The TIN entered in the Form W-2, Wage and Tax Statement, in the electronic return record must be identical to the TIN on the version provided by the taxpayer. The TIN on the Form W‑2 should be identical to the TIN on the electronic return unless otherwise allowed by the IRS. The IRS requires taxpayers filing tax returns using an Individual Taxpayer Identification Number (ITIN) to include the TIN, usually a Social Security Number (SSN), shown on Form W-2 from the employer in the electronic record of the Form W-2. This may create an identification number (ITIN/SSN) mismatch as taxpayers must use their correct ITIN as their identifying number in the individual income tax return. The IRS' e-file system can accept returns with this identification number mismatch. EROs should enter the TIN/SSN in the electronic record of the Form W-2 provided to them by taxpayers. Software must require the manual key entry of the TIN as it appears on Form W-2 reporting wages for taxpayers with ITINs. EROs should ascertain that the software they use does not auto-populate the ITIN in the Form-W-2 and if necessary, replace the ITIN with the SSN on the Form W-2 the taxpayer provided.

Incorrect TINs, using the same TIN on more than one return or associating the wrong name with a TIN are some of the most common causes of rejected returns (see "Acknowledgements of Transmitted Return Data" in "ERO Duties After Submitting the Return to the IRS"). Additionally, Name Control and TINs identify taxpayers, spouses and dependents. A Name Control is the first four significant letters of an individual taxpayer’s last name as recorded by the Social Security Administration (SSA) or the first four letters/numbers of a business name. Having the wrong Name Control associated with a taxpayer’s TIN contributes to a large portion of TIN related rejects. The most common example for a return rejecting due to a mismatch between a taxpayer’s TIN and Name Control involves newly married taxpayers. Typically, the taxpayer may file using a correct SSN along with the name used in the marriage, but the taxpayer has failed to update the records with the SSA to reflect a name change. To minimize TIN related rejects, it is important to verify taxpayer TINs and Name Control information prior to submitting electronic return data to the IRS.

The IRS has identified questionable Forms W-2 as a key indicator of potentially abusive and fraudulent returns (see Safeguarding IRS e-file from Fraud and Abuse above). Be on the lookout for suspicious or altered Forms W-2, W-2G, 1099-R and forged or fabricated documents. EROs must always enter the non-standard form code in the electronic record of individual income tax returns for Forms W-2, W-2G or 1099-R that are altered, handwritten or typed. An alteration includes any pen-and-ink change. Providers must never alter the information after the taxpayer has given the forms to them. Providers should report questionable Forms W-2 if they observe or become aware of them. See "Reporting Fraud and Abuse Within the IRS e-file Program".

Addresses on Forms W-2, W-2G or 1099-R; Schedule C or C-EZ; or on other tax forms supplied by the taxpayer that differ from the taxpayer’s current address must be input into the electronic record of the return. Providers must input addresses that differ from the taxpayer’s current address even if the addresses are old or if the taxpayer has moved. EROs should inform taxpayers that when the return is processed, the IRS uses the address on the first page of the return to update the taxpayer’s address of record. The IRS uses a taxpayer’s address of record for various notices that it is required to send to a taxpayer’s "last known address" under the Internal Revenue Code and for refunds of overpayments of tax (unless otherwise specifically directed by taxpayers, such as by Direct Deposit). Providers must never

put their address in fields reserved for taxpayers' addresses in the electronic return record or on Form 8453, U.S. Individual Income Tax Transmittal for an IRS e-file Return. The only exceptions are if the Provider is the taxpayer or the power of attorney for the taxpayer for the tax return.

EROs should advise taxpayers that they can avoid refund delays by having all of their taxes and obligations paid, providing current and correct information to the ERO, ensuring that all bank account information is up-to-date, ensuring that their Social Security Administration records are current and carefully checking their tax return information before signing the return. EROs can do a number of things for clients and customers to avoid rejects and refund delays. First, they can insist on identification and documentation of social security and other identification numbers for all taxpayers and dependents. Second, EROs can exercise care in the entry of tax return data into tax return preparation software and carefully check the tax return information before signing the tax return. Third, don't submit returns claiming dubious items on tax returns or present altered or suspicious documents. Also, ask taxpayers if there were problems with last year's refund; if so, see if the conditions that caused the problems have been corrected or can be avoided this year. Lastly, keep track of client issues that result in refund delays and analyze for common problems; counsel taxpayers on ways to address these problems.

Anytime an ERO enters the taxpayer's PIN on the electronic return, the ERO must, prior to submission of the return, complete an IRS e-file Signature Authorization form which must be signed by the taxpayer. Form 8879, IRS e-file Signature Authorization, authorizes an ERO to enter the taxpayers’ PINs on individual income tax returns and Form 8878, IRS e-file Authorization for Form 4868 and Form 2350, authorizes an ERO to enter the taxpayers’ PINs on Form 1040 extension forms. The ERO must keep Forms 8878 and 8879 for three years from the return due date or the IRS received date, whichever is later. EROs must not send Forms 8878 and 8879 to the IRS unless the IRS requests they do so. Note: Form 8878 is only required for Forms 4868 when taxpayers are authorizing an electronic funds withdrawal and want an ERO to enter their PINs. The ERO may enter the taxpayer's PINs in the electronic return record before the taxpayers sign Form 8878 or 8879, but the taxpayers must sign and date the appropriate form before the ERO originates the electronic submission of the return. The taxpayer must sign and date the Form 8878 or Form 8879 after reviewing the return and ensuring the tax return information on the form matches the information on the return. The taxpayer may return the completed Form 8878 or Form 8879 to the ERO by hand delivery, U.S. mail, private delivery service, fax, email or an Internet website.

Only taxpayers who provide a completed tax return to an ERO for electronic filing may sign the IRS e-file Signature Authorization without reviewing the return originated by the ERO. The ERO must enter the line items from the paper return on the applicable Form 8878 or Form 8879 prior to the taxpayers signing and dating the form. The ERO may use these pre-signed authorizations as authority to input the taxpayer's PIN only if the information on the electronic version of the tax return agrees with the entries from the paper return.

Once signed, an ERO must originate the electronic submission of a return as soon as possible. EROs must not electronically file individual income tax returns prior to receiving Forms W-2, W-2G or 1099-R. If the taxpayer is unable to secure and provide a correct Form W-2, W-2G, or 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., the ERO may electronically file the return after the taxpayer completes Form 4852, Substitute for Form W-2, Wage and Tax Statement or 1099-R, Distributions from

Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., the ERO may electronically file the return after the taxpayer completes Form 4852, Substitute for Form W-2, Wage and Tax Statement or 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., in accordance with the use of that form. If Form 4852 is used, the non-standard W-2 indicator must be included in the record, and the ERO must maintain Form 4852 in the same manner required for Forms W-2, W-2G and 1099-R.

An ERO must ensure that stockpiling of returns does not occur at its offices. Stockpiling is collecting returns from taxpayers or from another Authorized IRS e-file Provider prior to official acceptance in IRS e-file, or after official acceptance to participate in IRS e-file, stockpiling refers to waiting more than three calendar days to submit the return to the IRS once the ERO has all necessary information for origination. The IRS does not consider current filing year returns held prior to the date it accepts transmission of electronic returns stockpiled. EROs must advise taxpayers that it cannot transmit returns to the IRS until the date the IRS accepts transmission of electronic returns. Although holding late returns during periods when IRS electronic filing is not available is not stockpiling, Providers should mail the returns to the IRS mailing addresses in the form's instructions.

Internet Protocol (IP) information of the computer the ERO uses to prepare the return (or originate the electronic submission of collected returns) must be included in all individual income tax returns. The required Internet Protocol information includes:

Public/routable IP address

IP date

IP time

IP time zone

With many different ERO e-filing business models, the computer used to prepare (or originate the electronic submission of collected returns) may not have a public/routable IP address. If the computer used for preparation (or origination of the electronic submission of collected returns) is on an internal reserved IP network, then the IP address should be the public/routable IP address of the computer used to submit the return. If the computer used for preparation (or origination of the electronic submission of collected returns) is used to transmit the return to the IRS, then the IP address should be the public/routable IP address of that computer. If it is not possible to capture the public/routable IP address, then the ERO or software may have to hard code the IP address into each return.

The IRS will reject individual income tax returns e-filed without the required IP address. Any return received by the IRS containing a private/non-routable IP address will be flagged in the Acknowledgement File with an“R" in the Reserved IP Address Code field of the ACK key record indicating that a reserved IP address is present for the return.

The IRS has implemented a Device ID field for electronic return filers and preparers. The IRS will utilize this unique identifier; in addition to key elements we already collect to improve fraud and ID theft

detection. Vendors implementing Device ID in their software should ensure that their privacy notice will cover Device ID.

IRS e‑file returns must contain all the same information as returns filed completely on paper. Forms that have an electronic format must be submitted in the electronic format unless IRS identifies an exception during the tax year. If a form/document can’t be submitted electronically, IRS can accept forms/documents in PDF format. Check the software package to see if this option is offered. EROs are responsible for ensuring that they submit to the IRS all paper documents required to complete the filing of returns. If the documents are not submitted electronically, they may be mailed to IRS. Attach all appropriate supporting documents that the IRS requires to the Form 8453, U.S. Individual income Tax Transmittal for an IRS e-file Return, and send them to the IRS. Refer to page 2 of Form 8453 for the current mailing address. The supporting documents Form 1098-C, Contributions of Motor Vehicles, Boats, and Airplanes (or equivalent contemporaneous written acknowledgement), Form 2848, Power of Attorney and Declaration of Representative (only for an electronic return signed by an agent), and Form 3115, Application for Change in Accounting Method.

EROs must retain the following material until the end of the calendar year at the business address from which it originated the return or at a location that allows the ERO to readily access the material as it must be available at the time of IRS request. An ERO may retain the required records at the business address of the Responsible Official or at a location that allows the Responsible Official to readily access the material during any period of time the office is closed, as it must be available at the time of IRS request through the end of the calendar year.

 * A copy of Form 8453, U.S. Individual Income Tax Transmittal for an IRS e-file Return, and supporting documents that are not included in the electronic records submitted to the IRS;

* Copies of Forms W-2, W-2G and 1099-R;

* A copy of signed IRS e-file consent to disclosure forms;

* A complete copy of the electronic portion of the return that can be readily and accurately converted into an electronic transmission that the IRS can process; and

* The acknowledgement file for IRS accepted returns.

* Forms 8879 and 8878 must be available to the IRS in the same manner described above for three years from the due date of the return or the IRS received date, whichever is later. The Submission ID must be associated with Form 8879 and 8878:

* The Submission ID can be added to the Form 8879 and 8878 or

* the acknowledgment containing the Submission ID can be associated with Forms 8879 and 8878.

If the acknowledgement is used to identify the Submission ID, the acknowledgement must be kept in accordance with published retention requirements for Forms 8879 and 8878. The acknowledgement is not required to be physically attached to Form 8879 and 8878; it can be electronically stored. EROs may electronically image and store all paper records they are required to retain for IRS e-file. This includes Forms 8453 and paper copies of Forms W-2, W-2G and 1099-R as well as any supporting documents not included in the electronic record and Forms 8879 and 8878. The storage system must satisfy the requirements of Revenue Procedure 97-22, 1997-1 C.C. 652, Retention of Books and Records. In brief, the electronic storage system must ensure an accurate and complete transfer of the hard copy to the electronic storage media. The ERO must be able to reproduce all records with a high degree of legibility and readability (including the taxpayers’ signatures) when displayed on a video terminal and when reproduced in hard copy.

The ERO must provide a complete copy of the return to the taxpayer. EROs may provide this copy in any media, including electronic, that is acceptable to both the taxpayer and the ERO. The copy need not contain the social security number of the paid preparer. A complete copy of a taxpayer's return includes Form 8453 and other documents that the ERO cannot electronically transmit, when applicable, as well as the electronic portion of the return. The electronic portion of the return can be contained on a replica of an official form or on an unofficial form. However, on an unofficial form, the ERO must reference data entries to the line numbers or descriptions on an official form. If the taxpayer provided a completed paper return for electronic filing and the information on the electronic portion of the return is identical to the information provided by the taxpayer, the ERO does not have to provide a printout of the electronic portion of the return to the taxpayer. The ERO should advise the taxpayer to retain a complete copy of the return and any supporting material. The ERO should also advise taxpayers that, if needed, they must file an amended return as a paper return and mail it to the submission processing center that would handle the taxpayer's paper return. Refer to the current year’s tax instructions for addresses.

The IRS electronically acknowledges the receipt of all transmissions. Returns in each transmission are either accepted or rejected for specific reasons. Accepted returns meet the processing criteria and IRS considers them “filed” as soon as the return is signed electronically or through the receipt by the IRS of a paper signature. Rejected returns fail to meet processing criteria and the IRS considers them not filed. The acknowledgment identifies the source of the problem using a system of business rules and element names (tag names). The business rules tell why the return rejected and the element names tell which fields of the electronic return data are involved. Information regarding business rules and correcting common errors is available on IRS.gov.

The acknowledgement record of an accepted individual income tax return contains other information that is useful to the originator. The record confirms if the IRS accepted a PIN, if an elected EFW paid a balance due, and if a private/non-routable IP address is present in the return. The ERO should check acknowledgement records regularly to identify returns requiring follow up action and should take reasonable steps to address issues identified on acknowledgement records.

At the request of the taxpayer, the ERO must, provide the Submission ID and the date the IRS accepted the electronic individual income tax return data. The ERO may use Form 9325, Acknowledgment and General Information for Taxpayers Who File Returns Electronically for this purpose. If requested, the ERO must also supply the electronic postmark if the Transmitter provided one for the return.

Rejected electronic individual income tax return data can be corrected and retransmitted without new signatures or authorizations if changes do not differ from the amount on the original electronic return by more than $50 to "Total income" or "AGI," or more than $14 to "Total tax," "Federal income tax withheld," "Refund" or "Amount you owe." The ERO must give taxpayers copies of the new electronic return data.

If the State submission is linked to an IRS submission (also referred to as a Fed/State return), the IRS will check to see if there is an accepted IRS submission under that Submission Id. If there is not an accepted federal return for that tax type, the IRS will deny the State submission and an acknowledgement will be sent to the transmitter. The state has no knowledge that the state return was denied (rejected) by the IRS. Subsequent rejection of state electronic return data by a state tax administration agency does not affect federal electronic return data accepted by the IRS. States determine when they accept as filed state electronic return data received from the Federal/State e‑file Program. Contact the state tax administration agency when problems or questions arise.

If the IRS rejects the electronic portion of a taxpayer’s individual income tax return for processing, and the ERO cannot rectify the reason for the rejection, the ERO must take reasonable steps to inform the taxpayer of the rejection within 24 hours. When the ERO advises the taxpayer that it has not filed the return, the ERO must provide the taxpayer with the business rule(s) accompanied by an explanation. If the taxpayer chooses not to have the electronic portion of the return corrected and transmitted to the IRS, or if the IRS cannot accept the return for processing, the taxpayer must file a paper return. In order to timely file the return, the taxpayer must file the paper return by the later of the due date of the return or ten calendar days after the date the IRS gives notification that it rejected the electronic portion of the return or that the return cannot be accepted for processing. Taxpayers should include an explanation in the paper return as to why they are filing the return after the due date.

EROs should tell taxpayers how to follow up on returns and refunds by pointing out Where’s My Refund. If taxpayers do not have access to the Internet, the ERO should provide taxpayers with the IRS Tele-Tax return information number, (800) 829-4477. Either of these options gives the date of depositing or mailing of their refund. Before checking on refunds, taxpayers should wait at least three weeks from the time the IRS acknowledges acceptance of the return data. Because the IRS updates refund information each weekend, EROs should advise taxpayers not to check more than once a week to avoid checking with no possibility of success. To check on refunds, taxpayers need to enter the first Social Security Number shown on their tax return, the filing status and the exact amount of the refund in whole dollars. If taxpayers do not receive their direct deposit within one week (refund check within 30 days) of the date given, they may call the Refund Hotline number at (800) 829-1954 which has information about taxpayers' refunds (when it becomes available).

Taxpayers often ask EROs to help them when refunds take longer than expected. The IRS may delay refunds for a number of reasons, including errors in Direct Deposit information (refunds then sent by check), financial institution refusals of Direct Deposits (refunds then sent by check) or delays in crediting the Direct Deposit to the taxpayer's account, estimated tax payments differ from amount reported on tax return (for example, fourth quarter payments not yet on file when return data is transmitted), bankruptcy, inappropriate claims for the Earned Income Tax Credit, or recertifications to claim the Earned Income Tax Credit.

The IRS sends a letter or notice explaining the issue(s) and how to resolve the issue(s) to the taxpayer when it delays a refund. The letter or notice contains the contact telephone number and address for the taxpayer to use for further assistance.

If taxpayers' refunds are lost or misapplied, taxpayers do not receive notices or letters or there is no information on Where's My Refund or the Refund Hotline (see Advising Taxpayers about Refund Inquiries above), EROs should advise taxpayers to call the IRS taxpayer assistance number.

The IRS offsets as much of a refund as is needed to pay overdue taxes owed by taxpayers and notifies them when this occurs. The Financial Management Service (FMS) offsets taxpayers' refunds through the Treasury Offset Program (TOP) to pay off past-due child support, federal agency non-tax debts such as student loans and state income tax obligations. Offsets to non-tax debts occur after the IRS has certified the refunds to FMS for payment but before FMS makes the Direct Deposits or issues the paper checks. Refund offsets reduce the amount of the expected Direct Deposit or paper check but they do not delay the issuance of the remaining refund (if any) after offset. If taxpayers owe non-tax debts they may contact the agency they owe, prior to filing their returns, to determine if the agency submitted their debts for refund offset. FMS sends taxpayers offset notices if it applies any part of their refund to non-tax debts. Taxpayers should contact the agencies identified in the FMS offset notice when offsets occur if they dispute the non-tax debts or have questions about the offsets. If taxpayers need further clarification, they may call the Treasury Offset Program Call Center at (800) 304-3107. If a refund is in a joint name but only one spouse owed the debt, the "injured spouse" should file Form 8379, Injured Spouse Allocation.

To review an ERO has many duties and responsibilities. The ERO must have either prepared the return or collected it from a taxpayer. An ERO originates the electronic submission by electronically sending the return to a Transmitter that transmits the return to the IRS or directly transmitting the return to the IRS. The ERO could also be working with a third party transmitter and be providing a return to an Intermediate Service Provider for processing prior to transmission to the IRS. An Electronic Return Originator (ERO) originates the electronic submission of returns it either prepares or collects from taxpayers who want to e-file their returns. Furthermore, the ERO must always identify the paid preparer (if any) in the appropriate field of the electronic record of returns it originates.

A Provider, including an ERO, may choose to originate returns that it has not prepared. The ERO may also disclose tax return information to other Providers in connection with e-filing a tax return. Additionally, the ERO may pass on return information to an Intermediate Service Provider or a

Transmitter for the purpose of having an electronic return formatted or transmitted to the IRS. An ERO that chooses to originate returns that it has not prepared, but only collected and that as a result of entering the data, it discovers errors that require substantive changes and then makes the changes, becomes an income tax return preparer of the returns. A non-substantive change is a correction limited to a transposition error, misplaced entry, spelling error or arithmetic correction. The IRS considers all other changes substantive, and the ERO becomes a tax return preparer. As such, the ERO may be required to sign the tax return as the tax return preparer.

The EROs job in on the line if he or she does not exercise proper operation. EROs can do a number of things for clients and customers to avoid rejects and refund delays. The ERO should always insist on identification and documentation of social security and other identification numbers for all taxpayers and dependents. The ERO should never submit returns claiming dubious items on tax returns or present altered or suspicious documents. Remember to always ask those extra questions! An ERO should ask taxpayers if there were problems with last year’s refund. If the taxpayer does acknowledge that there were problems, then the ERO should see if the conditions that caused the problems have been corrected or can be avoided this year.

4. California Specific Tax Course

General Information

In general, California conforms to federal tax law for the most part. However, any differences between California and federal must be noted in the tax forms in order for you to calculate the California state tax returns correctly. There will be many differences. Your job as tax preparer is to make sure that you apply credits and deductions to tax income correctly. Familiarize yourself with different deductions and credits which federal allows and what differences, if any, with which the state of California does not conform with. There may be new federal tax laws passed that the state of California has not got around to consider yet, and therefore, you may have to make adjustments accordingly. If there is a federal tax deduction or credit, you need to look for the corresponding California state deduction or credit and if there is none, you need to remove it from the California gross income. 

In this reading material, we are mostly concerned with items that differ in preparing your tax returns for California and federal. When there is a difference in your California returns, you must file the difference and make the adjustments on your Schedule CA (Form 540) California Adjustments form for the most part. Usually if both Federal and California agree on the tax laws, there will be no need to file Schedule CA of Form 540. When there are no differences then your California form preparation is very easy and figures simply transfer over from the federal tax return. Maybe this is what tax professionals mean by short form in the tax preparation profession. Not according to H&R Block though. To most H&R Block tax preparation offices, short form means anything that is beyond just filing your tax return with Form W-2. Every tax office or tax professional will normally determine what is considered short form and what is considered long form. It seems that most tax work is a long form tax return. 

In preparing your tax returns please make sure to have an interview packet in place if you don’t already have one. The importance of some sort of interview packet cannot be overlooked. The interview packet will be so helpful in case of an audit and for your paper trail of the way you perform your job. You must be able to substantiate that you are asking the correct questions on each and every interview you have with your tax clients. Your job will become so much easier if you have everything possible in front of you and the question you need to ask should be listed in one packet so that you may not miss anything. You need to prepare a thoroughly complete tax return for your taxpayer client.

Net Operating Loss (NOL) Carryback

Net Operating Loss (NOL). What is it? You know that if you own a business you can manipulate your income to certain extent. You can make decisions towards the end of the year that will allow you to also manipulate your tax rate. Again, this is to a certain extent and it is all legal. The correct name for using time to manipulate your tax return is called tax planning. When you use the tools available to you in tax planning, you forecast your tax liability based on all the facts present at the moment and you work of ways to reduce your tax liability. If you need a loss to offset your income and you know that a business will most likely operate at a loss in the first three years, you may want to venture into a new business. The goal of starting a business is to make a profit and a loss is just something that happens early on in the start of your new venture. This has to do with all the set up expense at the beginning of the business start-up. You may have an NOL as a result.

You should consider tax planning as part of your tax filing practice. You should tell your clients to consider tax planning early on before the start of tax season. There are certain things you can do at the end of the year to lower you rate, such a paying off bills to make them deductible in the current year. This is a very common practice and so common that the Internal Revenue Service and California have placed rules to limit this practice. You usually have limits on what items you can prepay. Usually items which you pay should correspond with the period for which they apply. However, this depends on your basis of accounting which you chose for your business. Your choice of accounting basis is the accrual basis and the cash basis or a hybrid of both. You usually choose the method the first year of operation by filing your first tax return and there you indicate which accounting basis you are using. If you want to change it later on, you would have to ask for special permission. Tax planning is a good tool for your taxpayer clients to use to save money on their taxes. It is also a good tool for you as a tax professional to start your tax season early. You can start as early as November every year.  

One of the tax planning strategies is about knowing how net operating losses will work out for your business. A business would normally incur greater losses in the first years of operation. This is called a Net Operating Loss (NOL). You can either carry your NOL forward or carry it back to other tax years. You would normally incur a loss in your first years of operation and instead of reporting that you made a profit on your business, you would report that you have a loss. You can usually use part of the loss against your other income in the year when it occurred and carry the excess to another period when it is useful for you. California allows both NOL carryovers and NOL carry backs. California requires that you carryback your business loss to the second year before the year in which the loss was incurred, and then the excess to the first preceding year before the loss year. Furthermore, any loss that is not applied in those two years is therefore carried forward to the years after the year in which the loss occurred. There are limits to the carryback amounts depending on the year in which they occurred. For instance, if the loss occurred before January 1, 2015 the loss carryback cannot be more than 75%. However, if the loss occurred after January 1, 2015, the carryback can be 100%. Knowing about net operating loss carryovers and carrybacks is a good for your tax planning business.

Registered Domestic Partners (RDP)

Not too long ago, individuals were filing tax returns as single taxpayers although they were technically married. Then, individuals were filing tax returns for federal tax purposes as single and were filing as married filing jointly/RDP for California. According to the Franchise Tax Board code section 297, domestic partners “are two adults who have chosen to share one another’s lives in an intimate and committed relationship of mutual caring.” Both persons must file a Declaration of Domestic Partnership with the Secretary of State. Upon filing this partnership with the state of California, the individuals are given the same rights and responsibilities that are given to married individuals. Thus, with this new ruling, individuals of the same sex can now file joint tax returns just as married individual do. Federal now allows for individuals of the same sex to file jointly. However, with federal there are special requirements to establish the relationship like the state of California requirement to file a Declaration of Domestic Partnership with the Secretary of State. The requirements are usually established with the individual states or countries that allow same sex marriages. The new federal benefit for same sex couples is a result of many states allowing same sex couples to file tax returns as married individuals. Now both California and federal allow for same sex partners to file a joint tax return.

As with married couples things happen in the relationship that requires a change. Once the same sex couples decide that they no long want to file jointly, they must follow legal procedures to dissolve their partnership. They must file the appropriate paperwork with the California Secretary of State. So once the partnership is dissolved, the individuals go back to filing as single taxpayers for both California and the Internal Revenue Service. However, just like any marriage and divorce process, the individuals can start the same sex marriage process with another partner and start filing as married for both California and federal tax return purposes again.    

Schedule CA (540), California Adjustments

For California tax purposes, you need to know when to use Schedule CA and when to make California adjustments on this schedule CA. Very important to remember that if both the state of California and federal coincide and agree with the tax rules, there are no differences and therefore no need for Schedule CA of Form 540. When California agrees with the federal credits and deductions it is considered conformity. California tax laws conform to the federal tax laws for the most part. When you file tax returns you have to file a tax return for federal and also a tax return for California. California is one of the fifty states which require the filing of a tax return. There are only seven states which don’t require filing of a tax return and California is not one of these states. I’ll mention them here just for fun: These states are Alaska, Florida, Nevada, South Dakota, Texas, Washington (state) and Wyoming. If you prepare tax returns in one of these seven states, you don’t need to worry about filing a state tax return. Even if you live in California, you’ll get a few of those. You know, the taxpayers who move from state to state. At times you your client, the taxpayer, may have live part of the year in California and the other part in another state. Therefore, knowing which states don’t require filing a tax return is good to know and can save you some research time. If you know this, you only need to worry about filing the federal return for this state or for part of the year the taxpayer lived in that no income tax state. California is one of the states that requires the filing of a state tax return.

Military pay

If you have to prepare a tax return involving a soldier, you need to find everything you need to find out about soldiers and military pay. When preparing returns with military pay situations you will most of the time have to deal with nonresident and part-year resident taxpayers. In some situations, the military taxpayer may have lived in California all year but not be liable for California taxes. Other times, the taxpayer may be liable dependent on when the soldier entered the military and when he or her started living in California. As a rule, the military taxpayer is considered a resident of state from which he or she entered the military. The individual does not lose his or her residence or domicile in any state when in compliance with military orders. Likewise, the person does not acquire a new residence or domicile by being in compliance with military orders. Some will be full-year residents, others will be nonresidents and still others will be part-year residents. If you have to file a nonresident California tax return you would have to use Form 540NR. You would use this Form for either a short form or long form California tax return. Active duty military members is included in your California income calculations as taxable income to California only if the military taxpayer is domiciled and stationed in California and the pay is earned in California. The military taxpayer could be living in California but not be domiciled in California. An individual could be domiciled somewhere else if somewhere else is where they do business such as their banking and where they pay a mortgage and where they have their vehicles registered. Being a soldier sometimes involves coming to California from another state and this does not necessarily mean that this soldier is a California resident.

Sick pay received under the Federal Insurance Contributions Act and Railroad Retirement Act

For the most part, sick pay is not taxable, but it could be. Do your homework and make sure that your sick pay is not taxable before you decide not to include on your federal tax return. If you received sick pay benefits, you must report the amount received for personal injury or sickness if the insurance was paid for by your employer. Amounts received from plans paid for by you are usually not taxable for federal tax purposes. If both you and your employer paid for the plan, only the amount received that pertains to what your employer paid is taxable. However, this is true only for your federal tax return. California does not tax any income received due to sick pay under the Federal Insurance Contributions Act or the Railroad Retirement Act. This also holds true for any social security benefits you receive. These amounts must be adjusted on Schedule CA of Form 540. Usually you show an adjustment for any of these amounts since they are not taxable for your California tax return on line 7, column C of Schedule CA of Form 540 or 540NR. You know how these could be taxable on your federal tax return depending on who paid for the plan? Well, for California, it does not matter if the amounts are taxable or nontaxable for federal tax purposes, or if the employer paid for the plan or not, the amounts are nontaxable for California regardless. Therefore, whatever amount that pertains to qualifying sick pay that was included on the federal tax return must be excluded from your California tax return by using Schedule CA. California excludes from income any kind of sick pay that is included on your federal tax return. Then exclude this amount from your California tax return since it is not a taxable item for California.

Income exempted by U.S. treaties

U.S. tax treaties are there for a reason and usually they benefit people who have a stake in other countries. The United States goal is to have strong relations with other countries. Everyone is better off with more friends that will hopefully be there for you in case of trouble. The U.S. has treaties with several countries. Usually part of the various treaties is to offer tax breaks to residents of that country who derive income from the United States. The treaties listed usually state which breaks are to be allowed and along with that declaration there is usually the tax savings that will be received by the resident of those countries with which the United States has treaties. If no treaties exist between the United States and the country the resident of that country who is doing business and deriving income from the United States, that individual will have to pay taxes accordingly by filling our Form 1040NR. Most individual U.S. states honor the treaty provisions that the United States may have with the certain countries. However, California has certain limitations and income derived that is normally exempt by U.S. treaties could be taxable for California. Any income derived that is normally exempt by U.S. treaties may be excludable for California only if it is specifically stated in the treaty that the income is exempt income from state income tax. Remember, California taxes adjusted gross income from all sources. Once you figure the amount to be excluded from federal that is not excludable for California, enter is on line 7 of Schedule CA of Form 540 or Form 540NR. Tax matters that have to do with the United States doing business internationally will be most of the time be a nonconformity item for California tax purposes.

Ridesharing fringe benefits

Ridesharing saves the taxpayer a lot of money and it also saves a lot of headaches for many drivers trying to get to and from work. Under federal tax law, if you give your employee transportation money that is so small that it is impractical to keep track of it in your accounting records, you can exclude it from income. This is considered a de minimis transportation benefit. There are other qualified transportation benefits. You can exclude from income any benefits you received such as a transit pass, qualified parking, rides in commuter highway vehicles between employee’s home and the work place and qualified bicycle commuting reimbursements. Transit passes qualify only if a voucher is readily available for direct distribution and from a voucher provider who does not impose fare media charges or other restrictions. Qualified bicycle commuting reimbursements cannot be excluded if the reimbursements are provided in place of pay. A commuter highway vehicle is a vehicle which seats at least six adults besides the driver. Qualified parking is parking you provide to your employee on or near your business or parking on or near the place your employee take public transportation such as public parking near the bus or train station. This is true as long as the parking is not near the employee’s home. This is quite obvious, the parking should not be near your home and there is probably a mention in the tax rules for this because some taxpayer have already tried doing this. 

Under California tax law there are no monthly limits for the exclusion of qualified transportation benefits. If any of these benefits are more than the limits placed, you cannot exclude the excess for federal but you can for California. California law provides income exclusions for compensation or the fair market value of benefits received for participation in a California ridesharing arrangement such as subsidized parking, commuting in third party vanpool, private commuter bus, subscription taxipool and monthly passes provided for employees and the employee dependents. Enter any transportation and ridesharing fringe benefits received and included on your federal tax return on line 7, column B of Schedule CA. Besides the benefit of a less congested highway, California still offers more benefits in the form of tax savings. Isn’t this fabulous?

Qualified Stock Options (CQSOs)

When you own stock in a company, you become a stakeholder in such company in the home that someday you will get paid for your efforts. Getting paid in more stock is fine too, as long as you do get paid. Some companies give you the option to get paid with stock instead of a paycheck. When you report the income that you did not receive depends on when you received the option, when you exercise the option, or on when you sale the stock received. Getting paid in this manner is considered a stock option. There are statutory stock options and nonstatutory stock options. If you receive a statutory stock option, you normally don’t include any amount in your gross income when you receive or exercise your stock option. However, if you are granted a nonstatutory stock option, you may have to include the amount in income, but this would depend on whether the value of the option can be readily determined. If the option is traded on an established market then this should not be any problem. However, most nonstatutory stock options are not readily determinable so you must include in income the fair market value of the stock received when you exercise the option or when you sell the stock received.

If you received your qualified stock options that is issued on or after January 1, 1997 and before January 1, 2002, you can exclude the income from those stocks if the amount is $40,000 or less and your exercised options are not for more than 1,000 shares with a combined fair market value of less than $100,000 which is determined at the time the options are granted. If there is an amount included in federal income that qualifies for the California exclusion, enter it on line 7, column B of Schedule CA to exclude it from California taxable income. Investing in stock can be an extremely rewarding experience. It can also be another form of gambling for many. I am surprised it is not classified as gambling winnings in the tax code.  

Earnings of American Indians

Native Americans have endured many prejudice situations. In a way it is good that Native Americans are also subject to taxation for federal tax purposes. At least if Native Americans pay taxes, hopefully the prejudice towards them will stop. Earnings of American Indians are subject to federal taxation and many of that taxation rules are specifically written for them. Federally recognized tribes are their own legal entities established similar to the way states are established. They are set up like states and are given rights similar to rights given to state entities. Therefore, similar to the residents of the states, the residents of the Indian tribes are liable for taxes just as other residents. Income received by Indians from reservations sources is usually taxable for federal tax purposes. However, California does not tax the income of tribal members who live in Indian reservations and who receive income from their tribal sources. Any income received for services performed by tribal members while living or being domiciled on their reservation is nontaxable for California tax purposes regardless of who paid it. If the earnings from a Native American are taxable by federal you must make them excludable by California by entering them on line 7, column B to exclude them from the total income reported to California. The earnings of American Indians are usually subject to federal taxation similarly to income of residents from the fifty U.S. states, but are usually not subject to California taxation and therefore it must be subtracted from your California gross income total. It is important to note that if the Native American is not domicile or residing in a reservation, he or she will owe California tax. In this case the income would be the same as the federal amount and just transfer over from the federal tax return to the California tax return. There are many rules in place for Native American when it comes to California taxation matters. California taxation of natives is based on whether the Native American lives in or outside of the reservation.

Clergy housing exclusion

Ministers and religious leaders can be found everywhere. These religious leaders are there to provide guidance to individuals who seek advice. Usually if there is family crisis, the family will go to these religious leader to help them get though it and hopefully find solutions. It seems that everywhere you look there is a minister from one religion and another religion. For federal tax purposes a minister may be exclude from the income the fair rental value of a home or housing allowance plus utilities provided as compensation for his or her ministerial services. The minister needs to report the income received from the religious organization for his or her services. If the minister is self employed, he or she can file an application so that he or she does not have to pay social security tax on his or her self employment income. In order to qualify for this exception, the individual must be opposed to certain public insurance for religious or conscientious reasons but not for economic reasons. This can be done by filing IRS Form 4361.

The Franchise Tax Board also allows for the housing exclusion. The member of the clergy or minister can exclude the rental value from income of a home furnished by religious worker’s employer or the rental allowance paid as part of the minister’s compensation that is to be used to provide the minister a home. California also allows for the exclusion of the clergy’s rental allowance from income. When federal only allows the exclusion up to the fair rental value of the home, California allows any amount necessary to provide such housing. California does not limit the exclusion as federal does. If you claimed a housing allowance on your federal tax return and you were not able to claim the entire amount because it was limited by the fair market value of the housing, enter the difference on Schedule CA. Enter this amount that was in excess of the federal permitted amount on California Schedule C, line 7 Column B. Ministers are very business individuals and it only makes sense that they get some tax breaks on their housing situation. The clergy or ministers get tax breaks when it comes to housing issues.

Housing exclusion for state‑employed clergy

Some religious workers or clergy are stated-employed. Allowance for state-employed clergy is a little different. Starting January 1, 2003, up to 50% of gross salary may be allocated for either the rental value of a home or the rental value allowance provided to rent a home. If the amount of the federal exclusion for members of the clergy is less than the California allowable amount, enter the difference on Schedule CA, line 7, column B. Likewise if the amount of the federal exclusion is greater than that of California enter the difference on Schedule CA line 7, column C. California has limits set for exclusion of the rental value of state-employed clergy and it looks like they are less of a benefit than what federal tax law allows.

Merchant seamen, rail carriers, motor carriers, and air carriers

Merchant seamen and others such as rail carriers, motor carries, and air carriers are in a special classification for federal tax purposes. If you are a nonresident of California, you may exclude from your income compensation for the performance of duties of certain merchant seamen. If you are nonresident of California, you may also exclude from your gross income compensation of an employee of a rail carrier, motor carrier, or air carrier. In preparation of a tax return for a nonresident employee of merchant seaman, rail carrier, motor carrier, or air carrier, enter any amount which you included in federal income which does not qualify for the California exclusion on Schedule CA of Form 540NR, line 7, column B.

In-Home Supportive Services (IHSS) supplementary payments

Certain individuals need special care and more often require their caretakers to live with them in the home. In-home supportive services (IHSS) supplementary payments are payments funded by the government for in home care of certain individuals. This is one of the jobs that takes a very special and patient person to perform. The question of “difficult of care” makes these payments received by qualified care facilities nontaxable for federal tax purposes. The rule applies mainly to care provider facilities but also to individual care providers. If an individual has his or her own home and only stays a few nights at the care recipient’s home, the payments received are taxable to the recipient. However, if the individual that provides the care does not have his or her separate home and lives in the care recipient’s home, the payments are completely tax free to the IHSS provider for federal tax purposes. On the other hand, California law allows an exclusion from gross income of IHSS supplementary payments received by providers. California allows a complete exclusion of IHSS payments due to the fact that the IHSS providers only received these supplementary payments if they paid a sales tax on the IHSS services they provide. Usually, the supplementary payments are equal to the sales tax paid. Therefore, including supplementary payments in income and paying California personal income tax on these amounts would be considered double taxation. If you included any IHSS supplementary payments in federal wages, enter the amount on Schedule CA line 7, column B to exclude them from California gross income since those payments are not taxable for California tax purposes. There should not be any double taxation for amounts which the recipient already paid a state tax.

United States Savings Bonds

Most taxpayers are on the cash basis of accounting and don’t even know it. Some including many corporations are on the accrual basis of accounting. If you own U.S. savings bonds, you must pay federal tax on the interest received from these bonds. When you report the interest, depends on which type of taxpayer you are. Normally, there are two kinds of taxpayers. One is the accrual method taxpayer and the other is the cash method taxpayer. Most taxpayers are cash method taxpayers. Many large businesses and corporations are accrual method taxpayers. If you are an accrual method taxpayer, you report interest on the bond when the interest is earned. If you are a cash method taxpayer, you report interest on these bonds when the interest is available to you or when you receive it. Most interest income received regardless of when you need to pay tax on the interest is taxable for federal tax purposes. However, for California tax purposes any interest received from United States bonds (or obligations) are nontaxable. It is important to note though, that California does not consider Federal National Mortgage Association (Fannie Mae), Government National Mortgage Association (Ginnie Mae), or Federal Home Loan Mortgage Corporation (Freddie Mac) to be federal obligations. Therefore, interest you receive from these investments are taxable to California. The interest on United States bonds that is included in your federal income must be adjusted for California tax purposes on Schedule CA of Form 540 or Form 540NR, line 8, column B. Making this adjustment on Schedule CA will exclude the interest from being included in the total California taxable gross income amount. When it comes to investments and United States savings bonds, your basis of accounting could make a different on the timing of your tax obligation.  

Non-California bonds - Other states

Non-California bonds from other states are taxable for California tax purposes. If you received interest from your investments in bonds from state or localities, you will not need to pay tax on these bonds for federal tax purposes because federal does not tax them. Usually this is true if the bonds were issued by one of the fifty states, Washington D.C., any of the possessions of the United States. Also some of the bonds issued by Indian tribal governments are treated as if they were issued by a state and thus are not taxable. However, the Indian tribal bonds that are not taxable for federal tax purposes are only those bonds which are issued after 1982.

However, California taxes the interest received from bonds that are not from California except the United States Bonds previously discussed. This means that if you hold any non-California bonds other than federal U.S. bonds, such as Indian tribal bonds, or bonds received from the other states or possessions, you need to look forward to paying the tax on the interest earned from these bonds. The interest that is taxable to federal and that is not taxable to California must be accounted for by entering the amount on Schedule CA line 8, column C. You have to look at your federal tax return closely to see exactly what kind of bonds are taxable and included or excluded from federal taxable and based on the facts, make your Schedule CA adjustments accordingly. Some bonds you may need to subtract from California gross income and some bonds you may add to California gross income. If the bonds are California bonds they will usually not be taxable for California tax purposes.

Loans made to a business located in an enterprise zone

California offers tax breaks for businesses located in economically challenged business zones. You can get tax breaks if you make loans to businesses located in an enterprise zone. California has tax incentives for taxpayers who invest in or operate a business within an enterprise zone. These tax incentives are the Hiring credit, Sales or use tax credit, Business expense deduction, Net interest deduction, and a Net operating loss (NOL) deduction.

California allows an interest net interest deduction on business loans and mortgage loans. You must meet certain criteria in order to qualify for the net interest deduction on business loans within a designated enterprise zone. First, the funds must be loaned within the time period allowed for designation of the enterprise zone. This is the time that includes the date of designation and after this date, and the period before the designation expires. The business must be located within the designated enterprise zone. Furthermore, the loan proceeds must be used only for the purpose of the business within the enterprise zone. Finally, the business owners must not also be the lenders. If the loan takes longer to pay that the designated time of doing business within stipulated time and once the designation period expires, you can no longer deduct interest for the loans. If you have this kind of interest deduction for your California tax return, you must make an adjustment since federal does not have such deduction to use on your federal tax return. You must fill out Form FTB 3805Z to claim this incentive on your California tax return. You must first fill out Form 3805Z and then transfer the amounts to your Schedule CA of Form 540 or 540NR, line 8, column B along with “FTB 3805Z” net to the dotted line on Form 540 or 540NR, line 14 to indicate you are claiming the a net interest deduction for a business operated within an enterprise zone. It may be worthwhile to look into making business loans to businesses located in certain enterprise zones.

Settlement payment interest from persecution during Ottoman Turkish Empire

So many cultures and people have been persecuted for being different or not being like the rest of the population. California understand that such a problem existed during the Ottoman Turkish Empire. Under federal and California tax law, any gross income includes all income regardless of source, unless the income is specifically listed as excluded. Federal law does not specifically exclude income derived from settlement payments from the persecution during the Ottoman Turkish Empire. Items that are specifically listed as excludable in both California and federal law codes are payments for Holocaust restitution payments for victims or their heirs of the Holocaust. Although interest on payments from the Ottoman Turkish Empire are similar to the circumstances behind the Holocaust restitution payments, they are not specifically excluded and therefore they are taxable at the federal level.

However, any eligible individual who persecuted during the Ottoman Turkish Empire and who receives interest income from settlement payments may exclude the interest income from California gross income. This exclusion applies for any of the victims directly affected or for the heirs of these persecuted victims. The Ottoman Turkish Empire persecution occurred from 1915 until 1923. The individual or their heirs would be the qualifying individuals for the California exclusion from their gross income. Enter the interest received from settlement payments from persecution during the Ottoman Turkish Empire on Schedule CA of Form 540 or Form 540NR, line 8, column B to deduct it from the amount reported on your federal gross income. As with all differences in tax treatment, if there is nonconformity with credits and deductions, you note this nonconformity by filling out California Schedule CA and deducting it or adding it to California gross income. Settlement payment interest from persecution during Ottoman Turkish Empire must be deducted from federal gross income by filling out California CA. If you have settlement payments from persecution during the Ottoman Turkish Empire, benefit from being able to exclude the interest from these on your California tax return.

Exempt interest dividends (Mutual Funds)

Interest income from Mutual Funds is exempt interest for federal tax purposes. Most interest you receive is taxable and you must pay taxes to the Internal Revenue Service on such interest. However, some interest you receive may be tax-exempt interest. For example, interest from Series EE and Series I bonds issued after 1989 may be excluded from income if it is used to pay for qualified educational expenses and you meet other qualifications.

But what is a mutual fund? It is an investment company that pools money from many people and in turn invests that pooled money in stocks, bonds and other investments. Accordingly, when using a mutual fund, your investment is more secured since your investment is more spread out. You also a better investment opportunity because there is more pooled together for large investments. The idea that you have professionals doing the work for you makes it a less risky investment. The company invests in large amounts of securities at once so the costs associated with these investments are smaller that if you were to invest on your own. Don’t get me wrong, there are still risks in investing in these types of securities. The return you received from investing in a mutual fund is a type of dividend and most are tax exempt interest dividends.

California does not tax dividends paid by a mutual fund that is due to interest received from U.S. obligations, California State or municipal obligations if at least 50% of the fund’s assets would be exempt from California tax when held by the individual. However, California does tax any dividends derived from other states or municipalities in other states. California taxes any income regardless of source unless it is specifically excludable for California tax purposes. If the item is an item that is tax free for California tax purposes, this same item would have to be included if it is paid by another state. Include on Schedule CA line 8, column B any value of U.S. and California or municipal obligations that is at least 50% of the fund’s total assets, enter the part that is attributed to U.S. obligations and which was included in federal adjusted gross income. On the other hand, if the dividends received were for a state other than California or any other state municipalities and which were exempt for federal tax purposes, you must subtract them from California gross income by entering that amount in Schedule CA line 8, column C. If the interest income derived is not of a California source, usually you would be liable for the tax on these for California tax purposes.

Noncash patronage dividend from farmers' cooperatives or mutual associations

People who are mutually associated in their trade will often do better in their business due to the mutual cooperation of various members. The more people involved, the strong the association will become. Mutual associations are especially useful in pooling money together to promote the products. It is a common practice for farmer’s to joint together and form such mutual associations for marketing and distribution of their produce. Taxability of patronage dividends depends on when you receive it or on when you redeem them. Patronage dividends you receive in cash from a cooperative organization are includable in your income. However, you do not have to include patronage dividends which were received on property bought for your personal use, or on capital assets or depreciable property bought for business use. However, you must take into account the adjusted basis and if the dividend is more, you will need to report the excess to the Internal Revenue Service. These rules apply to both taxable and tax-exempt cooperatives.

Noncash patronage dividends are taxed by federal when they are received. However, California allows you to choose when to report the dividends. California will let you elect to report your dividend in gross income either when it was received or when it was redeemed. If you want to change the election later on, you must get special permission from the Franchise Tax Board. If you chose to include the noncash patronage dividend in the year redeemed enter it on Schedule CA, line 9, column B and then enter the actual amount redeemed on Schedule CA, line 9, column C. Use Schedule CA to enter the amounts to deduct it from the federal amount if it was included in income in the federal tax return but it is not taxable for California tax purposes. Again, California Schedule CA is to make adjustments for the differences or nonconformity items between federal and California. If the California treatment of the dividends coincides with the federal treatment of the dividends, then there is no need for an adjustment and therefore the item simply flows through to California from the federal tax return.

Controlled Foreign Corporation (CFC)

Controlled Foreign Corporations are sometimes used to artificially defer tax by means of offshore entities which have a lower tax. Certain types of income of Controlled Foreign Corporations must be included in the federal gross income of the U.S. shareholder in the year the income is earned by the CFC even if the income is undistributed. In certain circumstances, earnings of CFC may be deferred from U.S. tax if not actually distributed to the U.S. shareholder. Taxability of Controlled Foreign Corporations (CFC) can get a bit complicated. California taxes Controlled Foreign Corporation dividends in year distributed and not in the year earned. This is different from the federal treatment of CFC by the Internal Revenue Service. If CFC dividends are earned in one year and distributed in a later your they may be included in your federal income for the year earned, so you must make an adjustment for California. Enter the dividends earned on Schedule CA, line 9, column B to account for the federal and California nonconformity. On the other hand, enter the dividends for the year distributed on Schedule CA, line 9, column C. California taxes CFC dividends in the year the dividends were distributed and federal taxes dividends in the year earned, therefore, one year you will have to make one adjustment and the other year you will have to make another adjustment for the same dividends in question. Some years the year of distributions will be the same as the year earned and no adjustment will be necessary. Remember, Schedule CA is there to reconcile the differences between federal and California items.

Distributions of pre-1987 earnings from S corporations

There are advantages to every type of business organization. Many taxpayers think that the best business organization for them is the S corporation. An S corporation is similar to a partnership. It elects to pass corporate income, losses, deductions, and credits through to the shareholders for federal tax purposes. Consequently, the S corporation shareholder report the S corporation income on their personal income tax returns and pay the individual income tax rates on this pass through income. The S corporation status allows individuals to avoid double taxation on the corporate income. There are certain qualifications you must meet in order to be considered an S corporation. You have to qualify and you can also lose your S corporation status if you don’t maintain the requirements.

At one point before 1987 there was no S corporation status election at the California taxation level. All corporations were corporations for California. Then in 1987 California started allowing for the election of S corporation status. If the distributions from the S corporation exceed the California balance in the accumulated adjustments account (AAA), you have a distribution from pre-1987 earnings. To account for the differences with your federal tax return, enter distributions from pre-1987 earnings on Schedule CA, line 9, column C. You also need to enter any earnings in any later year that the corporation was a federal S corporation but a California regular C corporation on Schedule CA, line 9, column C to account for the difference in the accumulated adjustments account (AAA) balance. Now California allows for the election of S corporation status, so the tax returns for federal and California will match for the most part. However, if there are any differences you need to account for them on Schedule CA. Management of an S corporation is so much easier now that California recognizes this type of business entity for California tax purposes.  

Regulated Investment Company (RIC)

Investing in a regulated investment company can be a very beneficial investment and tax saving move for many taxpayers. Capital gain distributions are always reported as long-term capital gains on your federal tax return. You must also report any undistributed capital gain that a Regulated Investment Company has designated to you. The Internal Revenue will tax your undistributed capital gain form an Regulated Investment Company the year when you have earned the income. However, California will tax the distribution from a RIC in the year distributed not the year it was earned. If the year in which it was distributed turns out to also be the year it was earned, then there will not be any need for any adjustment on Schedule CA of Form 540. If on the other hand, the capital gain from a Regulated Investment Company is earned in one year and distributed in a later year, enter the amount which was included in your federal tax return for year earned to adjust it from California on Schedule CA, line 9, Column B. Enter the amount not yet reported on your federal tax return for the year it was distributed on Schedule CA of Form 540 or Form 540NR, line 9, column C. This will reconcile the income to meet the California requirement of reporting the RIC in the year distributed rather than in the year it was earned. Remember, you will only do this if the year distributed and the year earned are different years. If they are not different, there is no need for an adjustment on California Schedule CA.

State income tax refund

Federal tax withholding is not deductible on your federal tax return because it is money placed in advance of the anticipated money due on your taxes. California tax withholding is state withholding and the federal tax system considers it a tax expense and allows a deduction on Schedule A of Form 1040. The Internal Revenue Service taxes any California tax refund from which you have gained a tax benefit. If there was no tax benefit from the state refund, then it is usually nontaxable on your federal tax return. If you filed form 1040A in the previous year or you did not itemize your deductions in the previous year, you usually do not need to worry about including your state refund in your federal tax return. If the client itemized last year and you are trying to include the state refund in the taxable wages for federal, complete the worksheet and double check before you do include it. You can fill out the worksheet to make sure on the amount if any which would be taxable. You only need to worry about including your California refund on your federal tax return when you itemize in the previous year. The only manner in which you can benefit from a deduction on any state or local taxes paid is by itemizing your deductible expenses and the state and local taxes paid is one of the deductions you can take. If you paid any state or local taxes in the previous year, you usually calculate the state and local taxes paid and get a tax deduction for these on Schedule A of Form 1040. You only need to worry about the determination of whether your California state refund is taxable or not taxable for your federal income tax return. If you did include any California state income tax refund in your federal tax return because it was taxable to federal, then you need to exclude it from your California state tax return. Regardless, if this calculation was correct on your federal tax return or not correct, if you calculated an amount of the California state refund received as taxable for federal, you need to reverse that amount for California tax purposes. California state refund is not taxable income on you California tax return. Enter this amount on Schedule CA of Form 540 or Form 540NR, line 10, column B to reverse it from the federal adjusted gross income amount. If California taxed your state refund, it would be considered double taxation and double taxation is usually not allowed. When double taxation happens, there is usually a credit to compensate for the extra expense (or the double expense).

Alimony received by a nonresident alien

Alimony is usually taxable by the recipient and deductible by the payer for federal tax purposes. It should be taxable regardless if the recipient includes the alimony on his or her tax return or even if the recipient did not have a filing obligation. If you make payments to a spouse or former spouse under a divorce or separate maintenance decree or written separation agreement, you are considered to made alimony payments for federal tax purposes. As long as the payment divorce or separate maintenance decrees or written separation agreements do not say that the payment is not alimony, the payment is alimony. If you have a liability which will continue to make payments after the death of your spouse or former spouse, then the payments are not alimony. In order for the payments to be considered alimony, they must not be treated as child support or a property settlement. Just because the payments are under a divorce or separation instrument does not mean that they are alimony. The payments called for in the agreement could be child support, noncash property settlements, payments due to community property income, payments that are for the payer’s property upkeep or for the use of the payer’s property. The payments could also be voluntary payments made by the payer and thus are considered a gifted item.  

For California, alimony received was not included in the federal tax return because the payment was for a nonresident alien spouse must be included on the California tax return. To do so, enter the amount not included in the federal tax return because the spouse was a nonresident alien, on Schedule CA of Form 540 or Form 540NR, line 11, column C to account for it in California gross income and make sure tax is paid on this income since it is taxable for California. For the state of California, alimony received regardless of what type is taxable to the recipient and deductible by the payer.  

Business, trade, or profession conducted partially in California

Any business, trade, or profession which is conducted partially in California will go through an apportionment formula. For the most part California is in conformity with federal as to what income received is taxable income. Mainly, all income received for all sources is taxable income for both Federal and California and they coincide with this rule. However, there are few differences that are due to income earned outside of California or income earned by California partial year residents. It could be an adjustment due to a military pay adjustment issue. Compensation for military service members who are domiciled outside of California is exempt from California tax, for example. If a nonresident owns a business carried on within California such income has a source in California and it is taxable for California. Thus, gross income for this business would be included in the nonresident’s adjusted gross income from all sources for federal purposes. The amount that applies to California will have to be figured out by using an apportionment formula dependent on the percentage of income that was derived from California sources. The nonresident is not normally liable for income earned outside of California but he or she does need to pay tax on income earned from California sources as a nonresident of California. This is different from residents of California who are liable for tax on all income regardless of source. Some states offer a credit for taxes paid to others states in an effort to avoid double taxation of the same income. Most state, including California, offer a credit for taxes paid to other states. This is similar to the credit available by federal for taxes paid to other countries. Credits for taxes paid to other states in the case of California, and credit offered by federal for taxes paid to other countries, is to alleviate any double taxation involved.   

Asset expense election (IRC Section 179)

The idea behind the accelerated depreciation concept is that the equipment use will be more useful in the first years of service. After that, the machine will still be useful, but there will probably be more modern replacements for the equipment. Most companies replace their equipment often to the latest technology after only a few years or even a few months of owning the equipment. This makes perfect business sense. This makes so much perfect sense that the IRC code allows for a section 179 deduction. The section 179 deduction allows you to deduct most if not all of the of the asset in the first year of placing the asset in service. Of course, the deduction is subject to certain requirements and limitations.

The amounts allowed for a section 179 deduction have increased tremendously in the past few years. For federal tax purposes and in accordance with IRC section 179, you can opt for an asset expense election. When you depreciate property you need to recover the cost of property that will have useful life of more than one year. You don’t have a choice really. When you buy property, your property will be useful for many years. So it is only fair that you expense the item over the time for which it will be useful. This is called depreciation. Many expenses need to be matched to the income that it generates. If you buy property to be used in your business, the cost of this property needs to be spread out to the periods in which it was used. This concept of matching expenses to the income generated can be seen in other items too, such prepaid items. So if you prepay your rent, for example, it only makes sense that the rent be match to the corresponding periods. The same is true for property that you will use for a number of years. All that said, there is a special rule when it comes depreciating property. You can elect to recover the cost of property ahead of time. Both federal and California have this benefit available. This is called section 179 deduction. You elect to deduct the entire cost of the property or you can elect to deduct only a part of it. However, for federal there is a maximum limit that you can deduct and this limit usually cannot be over $500,000. There are other limitations you must obey. For example, if the value of the property exceeds $2,000,000, you must reduce your section 179 by the amount that is over $2,000,000 and your section 179 deduction will be reduced to zero if the value of your property placed in service in 2014 is more than $2,500,000. This is for federal tax purposes though.

California, although similar to federal amounts, has different amounts and limitations in mind. California differs on the amounts that you can deduct. California only allows a section 179 expense election of $25,000 and only up to $200,000 instead of the federal $500,000. Another thing, California does not conform to the section 179 expense allowed by federal for off-the-shelf software and certain qualified real property. If you take section 179 deductions on your federal tax return, make sure you make the necessary California adjustments by filling out Form FTB 3885A and then transfer those figures over to Schedule CA of Form 540 or Form 540NR. If you need to take a section 179 deduction, you can usually choose how much to deduct in the first year the property was placed in service.

MACRS recovery period for nonresidential real property

MACRS stands for Modified Accelerated Cost Recovery System. Most property is subject to MACRS depreciation deduction and must be depreciated according to the schedule set by the Internal Revenue Service. MACRS is the accelerated depreciation system used for assets placed in service after 1986. It stands for Modified Accelerated Cost Recovery System. This depreciation system is composed of two other depreciation systems and they are the General Depreciation Systems (GDS) and the Alternative Depreciation System (ADS). You have a choice if you want to use these systems instead of the MACRS system. There are limitations on which properties can be depreciated using the MACRS depreciation system so pay close attention when you are depreciating your property to make sure you are indeed using the correct depreciation system.

For California tax purposes the nonresidential real property recovery period is different. You need to know that the recovery period is 39 years for California tax purposes. California did not conform to federal but now California and federal are in conformity as to the recovery period. California started conforming to the federal recovery period on January 1, 1997. Before this, the recovery period was 31.5 years for California. So any property that was placed in service before January 1, 1997 (but after May 13, 1993) should continue to be depreciated using the old California recovery period of 31.5 years. Therefore, if you have a property which was placed in service before the California conformity with federal on the recovery period of 39 years, you should use Form FTB 3885A to show the adjustment that you must make on Schedule CA of Form 540 or Form 540NR).

Depreciation of assets acquired prior to January 1, 1987

There have been many differences in the manner of depreciation between California and the federal tax system over the years. It seems as if there was a lack of communication between the Internal Revenue Service and the state of California before. Now they are more in sync with each other and seem to be more conformity than before (before the internet era). As a result of the differences in the past, if you have assets that you are currently depreciating which were acquired before January 1, 1987, there are special adjustments that must be made for California. Federal allows a rapid write-off of tangible personal property and buildings over recovery periods which were shorter than economic useful lives under the Accelerated Cost Recovery System (ARS). California law generally did not conform to federal law but did allow ACRS for certain residential rental property constructed in California on or after July 1, 1985, and before January 1, 1987. Use form 3885A to figure the depreciation adjustment and the transfer amount to include on Schedule CA of Form 540 or Form 540NR).

Additional depreciation (IRC Section 168(k))

Compared to California, the Internal Revenue service is very generous with its depreciation allowance for its taxpayers. Federal law allows an additional 30% first year depreciation deduction and AMT depreciation adjustment for property placed in service after September 10, 2001 and this amount is increased to 50% for property placed in service after May 5, 2003. California did not conform to provisions for assets placed in service on or after September 11, 2011, and before January 1, 2005. Furthermore, federal law allows an additional 50% first year special depreciation for certain qualified property acquired on or after January 1, 2007, and before January 1, 2015 but California does not conform to this provision. You need to use Form FTB 3885A to figure the adjustment to make on Schedule CA of Form 540 or Form 540NR. California is not as generous in its depreciation allowance and therefore you must make an adjustment to account for the differences.

Depreciation of qualified leasehold improvements and qualified restaurant property acquired before January 1, 2015

California leasehold improvements must be recovered within 39 years and not 15 year like the Internal Revenue Service has in place. Improvements you make to property which you lease are deductible business expenses. However, expenses that you incur before the start of business must be amortized just like when you depreciate property. Treat these expenses as capital expenditures. Any leasehold improvements and qualified restaurant property must be recovered within 15 years. Federal law requires a 15 year recovery period. However, for California tax purposes, qualified leasehold improvements and qualified restaurant property must be recovered over a 39 year recovery period. If you have this sort of amortization requirement, use Form FTB 3885A to figure your adjustments that must be made on Schedule CA of Form 540 or Form 540NR. California tax law allows a less rapid recovery period than the Internal Revenue Service allows.

Amortization of goodwill and certain other intangibles

Goodwill is an intangible which possesses no physical form and so do other intangibles. Intangibles real but formless and they are usually deductible through a process similar to depreciation called amortization. Amortization is a way of deducting capital expenditures over a fixed number of years. Deducting amortization costs over a period of time is similar to deducting depreciation costs over a period of time. Examples of items that can be amortized are goodwill and other intangibles which are similar to goodwill. A value is placed on a business over time and customer loyalty over time. Goodwill is usually built up as customers get to know the business as a result the business providing a great service. Goodwill of a business and customer loyalty comes with a good name, a good reputation and other factors that have to do with the way the business treats its customers. Goodwill is also the trust that customers place on the business and how the customers add a certain value to the manner in which the business conducts itself. Other intangibles are items that are on paper similar to goodwill. Intangibles are more virtual such as going concern value, workforce in place, patents and licenses to name a few. These don’t have any physicality to them but they are often very valuable. Intangible (section 197 intangibles) such as goodwill must be amortized over 180 months per federal rules.

These types of intangibles receive the same treatment for California tax purposes. However, there is one exception. For section 197 property acquired before January 1, 1994, basis must be amortized over the remaining federal amortization period. Calculate the adjustment on Form FTB 3885A and then transfer it to Schedule CA of Form 540 or Form 540NR. If you have to amortize certain intangibles such as goodwill, there is a tiny difference in the California allowed treatment of these dependent on when they were acquired. 

Business property moves into California

When you move your business to California, you must adjust to the beautiful capricious weather and make certain other adjustments to your business such as your depreciation methods. However, if the method of depreciation used in the other state is a California acceptable method, there is nothing to worry about. You can just continue using it as if you never moved. Your depreciation may be different if you lived in a state other than California. All depreciation methods used must be acceptable to California. If you moved your business property to California, you must adjust your depreciation and the useful life of the property to acceptable California methods. If you were using an unacceptable depreciation method before your move into California, use the straight-line method to compute the basis in the property.

Enterprise Zone (EZ), or Local Agency Military Base Recovery Area (LAMBRA) business expense deduction

California offers tax incentives to empower certain economically challenged business communities. The LAMBRA program is a program which was developed to attract reinvestment and to create employment opportunities on certain former military bases in California which were closed. The tax benefits of the program are similar to the Enterprise Zone Program. The benefits include using up to 100% Net Operating Loss (NOL) carry-forward up to 15 years. Firms can earn state tax credits of $31,544 or more for each qualified employee who they hire up to $2 million per year. These are among the many California tax benefits for LAMBRA program members. The California enterprise zone or the Local Agency Military Base Recovery Area (LAMBRA) businesses may elect to immediately expense up to $40,000 of the cost of qualified business property.

For federal purposes, you can take a section 179 deduction for any assets that qualify for the section 179 deduction. Federal has no deduction or similar deduction for the enterprise zone or LAMBRA business. California has a section 179 deduction for qualified business property. However, the deduction is a different amount than that of federal. If you take a section 179 deduction for California tax purposes, you may not use that property to calculate either the Enterprise Zone (EZ) or the Local Agency Military Base Recovery Area (LAMBRA) business expense deduction. By the way, you can only take an EZ or LAMBRA business expense deduction on property purchased or placed in service on or before December 31, 2013. To calculate these business expense deductions use Form FTB 3805Z or Form FTB 3807. Once you calculate the business deductions on these forms, transfer the amounts over to Schedule CA of Form 540 or Form 540NR, line 12, line 17 or line 18, column B. If you have any depreciation deduction to make, use Form FTB 3885A and then transfer the amounts to Schedule CA of Form 540 or Form 540NR. In the form of tax breaks or incentives, California is able to fortify certain communities and their businesses.

Accelerated depreciation for property on Indian reservations

The Internal Revenue code offers faster accelerated depreciation periods for property placed in service in Indian reservations. Recovery periods for qualified property placed in service on an Indian reservation after 1993 and before 2015 are shorter than those listed in previous years. For example, if the property class 3-year property, the recovery period for the property placed in service in an Indian reservation is only 2 years. Furthermore, if the property is a 15-year property, the recovery period for this property if it is placed in service in an Indian reservation is only 9 years. The property must be used in an active business in operation in an Indian reservation for the property to be qualified property. Property that would not be qualified would be property that is used or located outside an Indian reservation on a regular basis, unless it is infrastructure property that is available to the general public. Property that is depreciated under ADS, would not be qualifying property either.

For federal tax purposes, certain property on Indian reservations is subject to special MACRS recovery periods. This all has to do with the Job Creation and Worker Assistance Act of 2002. However, California does not conform to this new provision. You need to depreciate such property as normal by filling out form FTB 3885A to figure the adjustment to make on Schedule CA of Form 540 or Form 540NR. If a more accelerated depreciation method was used for federal tax purposes, then a higher amount was allowed and you need to claim a smaller amount for California. Therefore, you must make the adjustment on Schedule CA. California is not a generous with the depreciation systems in Indian reservations as federal.  

Amortization of pollution control facilities

All pollution control facilities should be offered generous tax breaks for their part in controlling pollution. A pollution control facility is a facility to rid of or control pollution or contamination by removing or altering or preventing the omission of pollutants, contaminants, wastes or heat and which the government has jurisdiction and control. Federal tax law provides for accelerated write-off of pollution control facilities. California also provides a write-off just like federal but only for facilities located in California. Use Form FTB 3885A to enter an amortization deduction on your California tax return. You will have amounts in your federal tax return and if the federal amount and the California amounts are different you need to make an adjustment on Schedule CA of Form 540 or Form 540NR, line 12, line 17, or line 18, column C. It only makes sense that California only offers tax breaks for pollution control facilities located in California. Regardless of where the pollution control facility is located, it is beneficial to the entire world since everything is interconnected.  

Expenditure for tertiary injectants incurred in the crude oil industry

The allowance of tax breaks for expenditures for tertiary injectants incurred in the crude oil industry sounds like  a tax break for the big oil companies. Crude oil in the purest form must be refined in order to produce gasoline, diesel fuel, kerosene and other products. The crude oil must go through a process before it can reach our gasoline stations and factories. It goes without saying, if the price of crude oil goes up, gas prices will also go up.

For federal tax purposes, there are “qualified tertiary injectant expenses” that can be deducted in the process of obtaining crude oil for the production of the crude oils final products such as gasoline. A taxpayer is allowed a deduction for the taxable year an amount equal to the qualified tertiary injectant expenses of the tertiary injectants which are injected during the tax year. Therefore, the Internal Revenue Service allows a deduction for the cost of tertiary injectants which are part of the tertiary recovery system.

California only allows a depreciation deduction if the tertiary injectant qualifies as property used in a trade or business or is held for the production of income. If you have deducted tertiary injectant amounts on your federal tax return which do not qualify for the California allowable deductions, enter the amounts on Schedule CA of Form 540 or Form 540NR, line 12, column C. You should attach any schedules used in the calculations of the tertiary injectants placed in service during the tax year. You should also complete the California depreciation form FTB 3885A to take any of the California allowed deductions.

Reduced recovery periods for fruit bearing grapevines replaced in a California vineyard on or after January 1, 1992, as a result of phylloxera infestation on or after January 1, 1997, as a result of Pierce’s disease

Phylloxera and Pierce’s disease infestation of grape crops rapidly destroyed many grape farmers’ businesses.  Pierce’s disease and phylloxera infestations are the nightmares which preoccupy grape farmer’s minds. These diseases can cause the grape farmers to go bankrupt in a short period of time. When Phylloxera disease first was discovered, it ruined many European families and nearly destroyed every wine producing grape vine in the world. In an attempt to find a cure, the Phylloxera disease spread to the United States and destroyed many grape vines in Napa California. Pierce’s disease seems to be spread or transmitted by the Phylloxera microscopic louse and other larve types of insects. Federal tax law has allowed for accelerated recovery periods for grapevines replaced in California vineyards on or after January 1, 1992 as a result of the phylloxera infestation on or after January 1, 1997 and as a result of Pierce’s disease. Federal law requires a 10-year recovery period for fruit bearing vines for purposes of accelerated cost recovery and a 20-year recovery period for an alternative depreciation system. However, California only allows 5 years for accelerated depreciation cost recovery and 10-year recovery periods for alternative depreciation systems. For phylloxera infestation prepare a schedule for depreciation computations of grapevines placed in service on or after January 1, 1992 and also for grapevines placed in service on or after January 1, 1997 for Pierce’s disease. Then, fill out Form FTB 3885A and attach both Form 3885A and the schedules showing your calculations to your California tax return. Many grape farms are in northern California’s Napa county. It behooves California to offer tax incentives to ameliorate the farmer’s situation for a faster recovery. A disaster in the grape industry can drastically devastate the California economy.

Income forecast method of depreciation

If you have clients who are in the entertainment industry, you need to know how to depreciate certain intangibles such as films and sound recordings which are customary in the entertainment industry. If you are taking depreciation deductions for certain intangibles such as films, videos, sound recordings, copyrights, books or patents, you can choose the income forecast method of depreciation. The other option is to use the straight line depreciation method. The entertainment industry products usually generate most of their income in the first years of its inception and for that reason using the forecast method of depreciation is more advantageous that using the straight line depreciation option. If you have assets which are placed in service after August 5, 1997, federal only allows the income forecast method of depreciation on films, video tapes, sound recordings, copyrights, books, patents and certain other specified similar property. California did not conform to this requirement only for assets placed in service after December 31, 1997. If you have any depreciation for California property which is placed in service before December 31, 1997 and which deviate from the federal, use form FTB 3885A to figure the depreciation adjustment to enter on Schedule CA of Form 540 or Form 540NR. You only need to worry about using the income forecast method of depreciation for certain depreciable intangibles that are common in the media and the entertainment industry. The income forecast method of depreciation is more advantageous over the straight line method of depreciation due to the nature of entertainment products being depreciated. If you have tax clients in the entertainment business, make sure you allow them the most advantageous depreciation method to use and most of the time it will be the income forecast method of depreciation.

Clean fuel vehicles first year deduction & Clean fuel and electric vehicles classified as luxury automobiles

Electric run vehicles is the thing of the now present and production of such keeps improving. Federal and California are offering every incentive possible to accelerate the more modern process. You can get a higher depreciation deduction for automobiles that run primarily on electricity. To get the maximum depreciation deduction for these automobiles, they must be passenger vehicles and they must mainly run on electricity. For Internal Revenue Service purposes, the original purchaser of a qualifying gas-electric car was able to deduct $2,000 for the year the vehicle was first used and that was before 2006. Many models qualified for the clean-fuel vehicle deduction. Except that California does not conform to federal tax law for the first year deduction on clean air fuel.

Today, there are more than 20 models of plug-in vehicles available on the market. These cars are not that expensive either. Not only that, but you get a plug-in electric vehicle drive vehicle credit too! The electric vehicles which are candidates for the credit include passenger vehicles and light trucks. The credit could $2,500 for automobiles acquired after December 31, 2009. Furthermore, you qualify for higher credit amounts dependent on the battery size or battery capacity of the vehicle. However, the maximum credit you can get with your federal tax return is limited to no more than $7,500.

There are vehicles which are equipped to qualify as clean burning fuel vehicles. Most of these vehicles are electric vehicles or a hybrids which most operate on plug-in electricity. Federal law allows a modified depreciation limitation equivalent to triple the normal limitations for other luxury vehicles for vehicles which were placed in service after August 5, 1997 and before January 1, 2005. California conforms to this provision but only for vehicles placed in service after December 31, 1997. If the federal amounts you calculate for these credits differ from federal, you must account for the deference on form FTB 3885A and make the adjustment on Schedule CA of Form 540 or Form 540NR. In addition, if you have a first year clean air fuel deduction for federal, add the amount deducted back to California by enter the deduction on Schedule CA of Form 540 or Form 540NR, line 36, column B.

Start-up expenses (IRC Section 195)

What is IRC Section 195? Section 195(b) provides that start-up expenditures that may be allowed as a deduction spread equally over a period of not less than 60 months that begins when the business begins. The start expenses include practically any expense that occurs before the day the business started transacting its business. These expenses include items like investigation costs and other necessary expenses such as legal fees to get the business started on the right track. There are certain limitations such as not being able to deduct an expense for which you will get a credit or deduction in another part of your federal tax return. For tax years after January 1, 2010, you can claim a deduction for start-up expenses of $10,000 which is an increase the former $5,000 allowed. The phaseout threshold was increase too from $50,000 to $60,000. However, California does not conform with the increase and the maximum allowable deduction for start-up expenses for California stays at $5,000. So what happens to the excess if you have expenses that are more than federal or California permits to be deducted? You amortized the excess expenses over a 180-month period. What this means is that California and federal amounts will be different so you have to make an adjustment on Form FTB 3885A to figure the depreciation adjustment to enter on Schedule CA of Form 540 or Form 540NR. If the California allowable expenses match with the federal amount at no more than $5,000, then there is no adjustment needed on Schedule CA of Form 540 or Form 540NR. California is low on the deduction allowed of $5,000 when federal allows double the amount.  

Cellular phones

Owning a cell phone now is like owning a microwave. It is so inconvenient to not own one. For the longest time, cellular phones were treated as listed property for federal depreciation purposes. We can only guess that this action was due to the fact that cellphones nowadays are such as necessity just like shoes are a necessity that we simply cannot live without. The IRS stipulates that if your employer provides you with a cell phone or reimburses you for use of your cellphone in your business, it is a nontaxable transaction as long as the use of the phone is primarily for business. It goes without saying that if the cellphone use of an employer provided cellphone or reimbursement is not primarily for business use, the reimbursement or the employer provided cellphone use would generally be taxable. Recordkeeping requirements have also become more lax under the new federal tax rule. There are certain increases with which California does not conform. Use Form FTB 3885A to figure the amortization adjustment that differs with federal regard cellular phone use and allowable deductions to enter on Schedule CA of Form 540 or Form 540NR.

Penalty assessed by professional sports league

For federal practically every expenses which is necessary for the performance of your business is a deductible expense. No quite though, there are few exceptions. You cannot deduct illegal bribes or outright breaking of the law, for instance. Certain penalties and fines are deductible as business expenses for federal tax purposes and others are not. For example, a penalty for late performance or nonperformance of a contract is a deductible penalty. However, penalties paid for violation of laws are not deductible. A penalty or fine paid by an owner of a professional sports franchise imposed by the professional sports league is a deductible business expense for federal tax purposes but not for California. Enter any amount for this kind of deduction permitted by federal but not by California on Schedule CA of Form 540 or Form 540NR, line 12, column C to reverse the deduction on your California tax return.

Cancellation of Debt Income (CODI)

Think twice before you call your credit card company and negotiate your debt with them. You may have to pay taxes on the amount cancelled. However, if you can cancel part of you debt, the amount you save is far greater than the tax which you will pay on the cancelled debt. Well, you have to also consider you tax bracket. This sounds very much like when an taxpayer does not want to work because doing so will cause him or her to pay more taxes. The amount received is far greater than what will be owed on his or her taxes. Again, this depends on your tax bracket.

If your credit card company cancels all or part of your debt to amicably settle what you owe them, there may some tax implications. The money forgone by the credit card company is most likely taxable income. You must include the canceled amount of the debt in gross income unless you qualify to exclude it. Some people may not be aware that they have a taxable transaction when they have a forgiven debt. Many of these debts are specifically excludable such as when your home gets repossessed by the bank. If this home is your principal residence then any amount still owed on the home repo is cancelled debt which qualifies for exclusion from gross income. Federal elected under IRC Section 108(i) to defer recognition of cancellation of debt income in connection with the reacquisition of an applicable debt instrument after December 31, 2008 and before January 1, 2011. The deferral period is five taxable year for cancellation of debt income which occurred in 2009, or four taxable year for a cancellation of debt income that occurred in 2010. However, California did not conform to this recognition of cancelation of debt income. Therefore, you must make adjustments in your California tax return. For federal tax purposes, income has been ratably taxed over five years and for California the income has been included in income during the previous taxable years and you recognized the CODI for federal tax purposes in the current year. You must enter the federal cancellation of income amount Schedule CA, line 12, column B to adjust it for California tax purposes.

Donated agricultural products transportation credit

Depending on your tax rate and tax bracket, you may donate agricultural products and get a credit for transporting it. Use FTB Form 3547 to figure the Donated Agricultural Products Transportation Credit. This credit is a credit for transportation of agricultural products which you donate to nonprofit charitable organizations. The FTB Form 3547 is use on your personal California tax return as well as on your pass through entities such as S corporation, estates, trusts, partnerships and your limited liability companies (LLCs) which are treated as partnerships. When you claim the Donated Agricultural Products Transportation Credit, you are allowed a credit of 50% of the eligible transportation costs paid or incurred in connection with transporting of any donated agricultural products donated to nonprofit charitable organizations. Federal does not allow such a credit. Also, you cannot claim a credit on your California tax return for any expenses for which you claim a deduction on parts of your tax return such as your itemized deductions. If you claimed any of these items on other parts of your federal tax return, you need to adjust the amounts on your California tax return for the same items. Make the adjustments on Schedule CA of Form 540 or Form 540NR, line 12, line 17, or line 18, column C. 

Credit for employer-paid child care center and services & Credit for employer-paid child care plan

Only imagine how frustrating it would be to have to miss going to work because you don’t have a babysitter for your children. Many single moms go through this sad experience too many times. What is even worst is actually leaving your kids locked up in your home alone in order for you to go to work. If anyone finds out that you have left your children unattended, they will most probably notify the child protective services and then you would be obligated to miss work to take care of the legal troubles. Luckily, many employers now provide child care facilities for their employees’ children in order to help the employee with the high cost of child care. There are tax breaks for having a child care center to which the employee can take their children to and not worry about missing work due to not being able to find a babysitter for their child. Employers can claim an employer-provided childcare facilities and services on their federal tax returns. The credit is 25% of the qualified childcare facility expenditures plus 10% of qualified childcare resource and referral expenditures paid or incurred during the tax year. There is a credit limit of $150,000 per year. However, for California tax purposes the credit for employer-paid child care center and service and employer-paid child care plan have expired. The credits started in 1994 and were allowed for expenses incurred before January 1, 2012. In dealing with California tax returns, you need to watch for this because there are credit carryovers allowed and for which you must make adjustments if there are credit carryovers. You need to fill out From FTB 3540 which is the form used for Credit Carryover and Recapture Summary.

Disabled access credit for eligible small businesses

Depending on what type of business you have or which kind of services you offer, you may be forced by the licensing authorities to install the necessary equipment or make the necessary changes to your building before the start of business to allow ease of access to the physically challenged. Some businesses may make the adjustments voluntarily and other businesses such as schools may be forced to renovate with the disabled access changes. The disabled access credit is available for small businesses. For federal tax purposes, small businesses can take up to 50% credit on qualified business expenditures made for the benefit of disabled individuals. Therefore, when a small business adapts their facilities to make it more accessible to disabled individuals, they get regarded with a disabled access credit of 50% of the cost of the expenses to do so. Small business must fall under the eligibility requirements in order to take the disabled access credit such having gross receipts for the preceding tax year that does not exceed $1 million or which had no more than 30 full-time employees in that preceding year. If the expense is used toward calculating the disabled access credit, then this same expense cannot be used to get a business deduction which would be considered receiving double benefit for the same expense. That is for federal tax purposes. That is true for California tax purposes as California conforms to this provision too. However, for California tax purposes, the maximum disabled access credit can only be $125. Use Form FTB 3548 to take the disabled access credit for eligible small business on your California tax return.

Indian employment credit

The federal government and tax law offer many incentives to employer to hire Native Americans. These incentives are in the form of an Indian Employment credit. To provide employers an incentive to hire Native Americans who live on or near an Indian Reservation, employers are given an Indian Employment Credit. There are many rules which must be followed in order to take the credit. For example, you must hire Native Americans who can prove their blood lines or enrolled members of certain tribes. There must be some sort of proof of enrollment status. Second, all services performed by the employee must be performed within an Indian reservation. Third, the employee must maintain his or her principal residence on or near the Indian reservation where the services are performed. These are only a few requirements in order to claim the Indian Employment Credit for federal tax purposes. The credit is a nonrefundable credit available to employers for wages and health insurance costs paid or incurred by the employer after January 1, 1994. However, California does not conform to the federal Indian employment credit. You can make an adjustment on Schedule CA of Form 540 or Form 540NR, line 12, line 17, or line 18, column B for any business expenses denied under federal tax law because the expenses used for the credit cannot be used for a double deduction for federal tax purposes.

Real Estate Professionals – Material participation in a rental real estate activity

A real estate professional closes real estate deals as his or her profession. The rules for passive activities cannot apply to them in the same manner as people who are not real estate agents or realtors. If you are in the business of selling property as a real estate professional, your tax situation will be different that those individuals who are not real estate professionals. Being a real estate professional makes your real estate activities not passive activities. To qualify as a real estate professional your services in real property trade or businesses in which you materially participated are more than half of the personal services you performed in all trades or businesses during the tax year and you performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated. A person who participates is a real estate trade or business develops or redevelops real property, constructions or reconstructs real property, acquires or converts real property, rents or leases real property, operates, manages or brokers real property.

The above are the rules for real estate professionals to receive special tax treatment as professionals that are in the business real property for federal tax purposes. For federal tax purposes, rental real estate activities are not automatically considered passive activities. California does not conform to federal in this aspect of the tax law and these activities are automatically considered passive under California tax law. Use FTB Form 3801 to figure out which adjustments to make on Schedule CA of Form 540 or Form 540NR, line 12 or line 17. You must complete the California passive activity worksheet and the California adjustment worksheet to ease through the correct items to include as passive activities for your California tax return.

Research credit

Nowadays it is all about technology. If you are in the business of finding new ways to improve technology and ultimately improve the way to do business, you are in for this research credit. An individual can received a credit for increased research activities. The credit is extended to other organizations such as estates, trusts and corporations. For federal tax returns, the credit is claimed on Form 6765. The research credit is only for expenses paid for qualified research. The type of research conducted for credit qualifications is usually research for discovering information which is technological in nature and the discovery is usually intended for the improvement of the taxpayers business. All of the activities conducted in the research must be part of the process of acquiring the new technology to improve the taxpayer’s business or business function. Furthermore, the research credit would normally not be allowed for certain activities such drug testing, or research in the arts or humanities. Additionally, federal tax law requires that any deductions for research expenses be reduced by the amount of the credit allowed. California conforms to federal tax law with the exception that any research expenses be reduced only by the part of the credit that pertains to the California credit. Also, California requires that the California tax bracket be used for calculating the elective research credit amount. Make the adjustment for the research expenses which were deducted on the federal tax return but which don’t apply to California on Schedule CA of Form 540 or Form 540NR, line 12, line 17, or line 18, column C. In addition, enter the California research expenses after any reduction adjustment for California on Schedule CA of Form 540 or Form 540NR, line 12, line 17, or line 18, column B. Remember adjustments must only be made to reflect the differences between California and federal.

Property for which a public utility provided an energy conservation subsidy on or after January 1, 1995, and before January 1, 1997

Another big one on the list of improvements is energy conservation. You have an energy conservation project goin on, there is probably a credit for that. You may be able claim certain credit on your federal tax return for residential energy conservation. There are credits from the Internal Revenue Service for property you buy with the purpose of conserving energy. You can get a credit of 10 percent of the cost of qualified energy-saving equipment you add to your main home. There is also another credit called the Energy Efficient Property Credit which is 30 percent of the cost of energy saving equipment installed on or in your home such solar panels for water heaters, and solar electric equipment.

You as the taxpayer can benefit further by taking energy saving measures in your home. For example, federal tax law allows you to excludes certain subsidy received directly or indirectly by a public utility for the purchase or installation of energy conservation equipment for your home, minus the adjusted basis of the property received. For California, however, there is nonconformity for amounts received after December 31, 1994 and before January 1, 1997. If the federal amounts and the California amounts are the same and the both federal and California coincide with the credit, then there would be not adjustment needed on Schedule CA of Form 540 or Form 540NR. On the other hand, if you have to make adjustments use Form FTB 3885A to figure the adjustment to enter on the California Schedule CA.    

Employer wage expenses for Work Opportunity Credit

There are certain employee groups who need that extra push in order to gain employment. If you employee is part of a targeted group, you will be able to claim a credit for offering work opportunity for these employee groups. For federal tax law employers can claim the Work Opportunity Tax Credit (WOTC) for all targeted group employees listed. The employer can claim the WOTC if they targeted employees began work after December 31, 2013 and before January 1, 2015. The employer must obtain certification that the hired individual is a member of the targeted group before the employer can claim the WOTC. The employer can obtain such certification by filing Form 8850 with the employer’s state workforce agency within 28 days after the targeted worker begins work. The employer who claims the credit must reduce their wage expense by the amount of the credits. California does not conform to federal on this and has no similar credit. If the wage expenses were reduced due to the federal Work Opportunity Tax Credit, you need to add them back to the California wage deductions by entering the amount of the federal Work Opportunity Credit that reduced the federal wage deductions on California Schedule CA of Form 540 or Form 540NR, line 12, line 17, or line 18, column B. You don’t need to worry about the WOTC itself since California has no such credit. You just need to make sure you receive the wage expense deductions against your California wages since you cannot just transfer the wage expense totals from federal as when the credit is not claimed.  

Qualified clinical testing expenses

In order to motivate companies to make treatment drugs that would otherwise would not yield a profit, the Orphan Drug credit has been created. The Orphan Drug credit is geared more towards pharmaceutical companies than to individual taxpayers. The drugs created are the type of drug that would cure rare conditions. Taxpayers can claim the Orphan Drug Credit which gives them a 50% credit for having qualified clinical testing expenses for testing drugs to cure rare diseases or conditions. For federal tax purposes, you cannot use the same expenses you use for the credit as a deduction in other parts of your tax return. Doing so would trigger a double credit for the same items. Since California does not have an Orphan Drug Credit, any expenses that were used for the credit must be reversed in order to benefit from these expenses on your California tax return. To do this, you must enter the amounts that reduced the federal deduction for qualified clinical testing expenses on Schedule CA of Form 540 or Form 540NR, line 12, line 17, or line 18, column B. Although California does not have such a credit, it is important to consider this credit in your California tax calculations since some of the expenses that are deductible toward your federal taxes are used in a different manner for California tax purposes. 

Business expense at a club that discriminates

Clubs which discriminate should not be allowed to be open. However, every club has the right to do business as they which under federal tax law. Unfortunately, discrimination is a freedom exercised by many. There is not much any of us can do about clubs that discriminate. According to the law, clubs can discriminate as long as they are truly private. What constitutes a public club and a private clubs is where it gets a bit more complex. The Supreme Court forced the Boys Clubs to admit girls and now the Boys Clubs is known as the Boys and Girls Clubs. The rule change was because the boys accepts all boys into the clubs, therefore it was really public. For federal tax purposes, any reasonable expense incurred necessary to perform your business, it a deductible expense for your federal tax return. It is not taken into account whether the club discriminates or not, but rather if the club is conducive for business communication or negotiation talks between partners or between the business and the clients. There are limitations in place to ensure that the deduction will not be abused. For example, expenses of taking your wife along will be allowed as business deductions for tax purposes if the client takes his wife along and the presence of your wife at the meeting would be an acceptable norm. To elaborate further, if you invite the client to dinner, it would probably be impractical not to invite his or her spouse. Therefore, you would have to take your spouse along and can deduct the cost for the client’s spouse’s dinner and your spouse’s dinner as well. Smart. You can have the IRS pay the bill. That’s what many people think, isn’t it? Not quite true. The IRS and California help you with part of the bill through a tax deduction on your tax return. You can go out to dinner all the time and make it tax deductible for both federal and California tax purposes if your meal expense meets the requirements.      

Many states that include California and Minnesota have laws in place to make discrimination unacceptable. Some states such as California have managed to not allow tax breaks or tax deductions to clubs which discriminate. California has taken it a notch further by also disallowing individuals from taking tax deductions for business expenses incurred at a club that discriminates. If you take a business deduction for a business deduction incurred at a club that discriminates, you must make an adjustment on your California tax return for this expense on your Schedule CA of Form 540 or Form 540NR, line 12, line 17, or line 18, column C. You must do this even if the deduction is perfectly deductible for federal tax purposes. California has taken certain action to prevent discrimination. If the club discriminates, do deduction for business conducted in such club will be deductible. 

Commercial revitalization deduction

The federal government has set certain provisions to designate certain communities as renewal communities. Once the area is designated as a renewal community, the community is eligible for certain tax incentives which include a commercial revitalization deduction under section 14001. As a renewal community which has met certain criteria, federal law allows a deduction of 50% of any qualified revitalization expenses to any qualified revitalization building in the year in which the building is placed in service or a deduction of those expenditures ratably over 120 months that begins with the months that the building is placed in service. Not for California though. If you have such a deduction which is allowed on your federal tax return, you must make an adjustment on your California tax return on Schedule CA of Form 540 or Form 540NR, line 12, line 17, or line 18, column C. California should have such a credit, but it does not. There are many buildings and communities in California in great need of rehabilitation.

Small Employer Health Insurance Credit

If you qualify as a small business employer, you have an incentive under federal tax law to offer your employees health insurance coverage. For federal tax purposes, a small employer can be eligible for a small business health care tax credit. In order to be eligible, the employer must have fewer than 25 full-time equivalent employees, average annual wages of its employees that are less than $50,000, paid a uniform percentage for all employees that is equal to at least 50% of the premium cost of employee-only insurance coverage. By equivalent employee it means that any employees who are not fulltime count as a fraction of an employee. For example, a half time employee counts as 50% of an employee. Most organizations can be eligible employers, even exempt organizations. The employer must reduce any insurance deductions for the amount of the credit. However, for California purposes you don’t need to reduce your insurance deductions and the entire amount of insurance is deductible. To make the adjustment on your California tax return, enter any insurance deductions not permitted on federal on you California tax return by filling out Schedule CA of Form 540 and Form 540NR, line 12, column B. California adds an additional incentive for small business employers to offer health insurance to their employees by placing less restrictions on health insurance deductibility.

Gain on sale of personal residence

A long time ago you were allowed to take a federal tax deduction only once in your lifetime on the sale of your principal residence. Since then, the rules have softened. Now you are able to qualify to exclude the gain on your home as many times as you need to exclude the gain as long as you meet the requirements and not just once in your lifetime as was required before. You may qualify to exclude up to $250,000 of the gain of your personal residence from your income. This amount goes up to $500,000 if you are filing a joint tax return. You can qualify for the exclusion if you meet the ownership test and the use test. To meet the ownership and use tests, you must have owned and used your home as you main home for at least two years of five years prior to date of sale. You should be able to exclude the entire amount if you have not excluded any gains on the sale of your personal home in the two year period prior to the sale of home. California conforms to this provision except that California offers an additional perk to the deal. California taxpayers serving in the Peace Corps during the 5 year period ending on the date of the sale may reduce the two year period by the period of service that does not exceed 18 months. You can report any differences in the amounts reported by federal and California by completing California Schedule D of Form 540 or Form 540NR. After you complete schedule D, transfer the amounts to Schedule of Form 540 or Form 540NR, line 13, column B if the gain is less than that reported to federal. If the gain is more than that reported on your federal tax return, then transfer the amount to schedule CA of Form 540 or Form 540NR, line 13, column C.

Undistributed capital gains for regulated investment company (RIC) shareholders

You must report amounts received from Regulated Investment Companies in your income even if you have not constructively received them. Constructive receipt means you actually have the money at hand meaning that it is made the income is made available to you without restrictions. If the RIC paid a tax on the capital gain, you can receive a credit for the tax since it is considered paid by you. You will see all these transactions on Form 2439 sent to you by the mutual fund. There you will see the amount of the undistributed capital gains and the tax paid by them, if any. To claim the credit you must attach Copy B of Form 2439 to your federal tax return. Not for California though. For California, do not enter any of the amounts of the undistributed capital gains on California Schedule D of Form 540 or Form 540NR.

Capital loss carrybacks

Almost all your personal use items that are used for personal or investment purposes are considered a capital asset. This would include everything from your home, furniture, stocks and bonds that have as investments. If you sell your car, for example, you could have a capital gain from the sale. Once you sell your capital asset, the difference between your basis in the assets and the amount you sell it for is either a capital gain or capital loss. The cost would normally be the amount you paid for the item. However, there are other things to take into consideration especially if the item was received as a gift and you did not pay anything for or you don’t know the cost. The time you held the item will determine if it is long term or if it is short term. The gain or loss is considered long term capital gain or loss if it is held for more than one year. Therefore, if the item is held for less than one year, it is considered short term.

If you have a gain from the sale of a capital asset, you would normally report it as income regardless of the amount. However, if you have a loss, you can only deduct up $3,000 and no more than that. However, if you have a capital loss which is greater than $3,000, then you must figure out what to do with the excess. You either carry it forward into future tax years or carry it back to tax years for which you have already filed a tax return. Federal allows a carryback but California does not. You must report the amount of California capital gains and losses on California Schedule D of Form 540 or Form 540NR to account for the differences.

IRA basis adjustments

An IRA may be a great way to save for your retirement. There are many tax savings and benefits in place for investing in an individual retirement account. The cost basis of your traditional IRA is the sum of any nondeductible contributions to your IRA minus any withdrawals or distributions of nondeductible contributions. Cost basis in your traditional IRA is dependent on whether or not you made any nondeductible contributions to the traditional IRA. You may have differences between federal and California depending on when contributions were made to your IRA. You may also have differences between federal and California amounts if you changed residency. Your amounts could also be different due to differences in California and federal self-employment income. You may need to calculate your IRA basic for California differently than what you have calculated for federal.

Roth IRAs

There are benefits offered by investing in a Roth IRA which you may not get when you invest in a traditional individual retirement account. You can make contributions to a Roth IRA regardless of your age. You may also be able to claim a credit for federal for contributions you make to your Roth IRA. If you contribute too much to a Roth IRA, you may be liable for a 6% excise tax penalty. California conforms to federal tax law on contributions, conversions, and distributions of Roth IRAs. The only thing that could be different is the taxable amount of a distribution due to basis differences. Compare the benefits of investing in a Roth IRA and the benefits of investing in a traditional individual retirement account and choose the one the gives you the greater tax benefit.

Railroad retirement benefits

Usually filing a tax return is not required if your only income for the tax year is only from Social Security benefits or Railroad Retirement benefits. Not always though and you must know the maximum amounts in order to avoid any errors when reporting your social security or railroad retirement benefits. Your Social Security or railroad retirement benefits may be taxable if you have other income and your income goes over a certain amount or the base amount for your filing status. Social Security and railroad retirement benefits can only be taxable for federal though, not California. These also include Annuities or Pensions by the Railroad Retirement board or any payments by the Railroad Retirement Board. If after calculating your Social security or railroad retirement benefits and any amount is taxable for federal and thus included in federal income, you must make an adjustment to reverse it on your California tax return. Do this on California Schedule CA of Form 540 or Form 540NR, line 16, column B. Social security and railroad retirement benefits are never included in your income for California tax purposes.

Pension plan – small business tax credit for new retirement plan expenses

If you are a small business, you can enjoy the benefits of starting a pension plan for your employees. By doing so, you will be able to take a small business tax credit for your new retirement plan expenses. Federal tax law allows you to claim a tax credit for the ordinary and necessary costs of starting a business retirement plan. If you qualify you can use Form 8881 to claim the Credit for Small Employer Pension Plan Startup Costs. You would qualify for this credit if you had 100 or fewer employees who received at least $5,000 from you for the preceding year. The federal credit is 50% of you ordinary and necessary eligible startup costs. The maximum amount of the credit is $500. California does not have a credit like this. The federal deduction is reduced by the amount of the credit. Therefore, you must enter the amount of the income tax credit on Schedule CA of Form 540 or Form 540NR, line 12, line 17, or line 18, column B to reverse it on your California tax return. Any deductions against gross income for that federal allows and for which California does not conform to, need to be excluded from California gross income.

Canadian Registered Retirement Savings Plans (RRSP)

There are some U.S. taxpayers who hold interest in two popular Canadian retirement plans to get favorable U.S. tax treatment and therefore save money on their federal tax return. In 2014, the Internal Revenue Service eliminated the special annual reporting requirements that taxpayers with Canadian retirement plans. The two most popular Canadian retirement plans are the Canadian Registered Retirement Savings Plan (RRSP0 and the Registered Retirement Income Fund (RRIF). With the new tax change, many Americans and Canadians with these retirement plans can now automatically qualify for tax deferral in a similar manner that is available to participants in U.S. individual retirement accounts (IRAs) and 401(k) plans. American citizens and resident aliens can continue to enjoy the special tax treatments as long as they continue to be tax compliant and continue to include any distributions as income on their U.S. tax returns. This is not to say that the tax treatment is the same as those with IRAs, just similar. Federal tax law allows taxpayers to defer taxation on their RRSP earnings until the time of distribution. These provisions do not apply for California tax purposes. Therefore, California residents with RRSP earnings must include these earnings in their taxable income in the year earned. Include these earnings from RRSP distributions on Schedule CA of Form 540 or Form 540NR, line 8, line 9, or line 13, column C.

Group term life insurance

People acquire group term life insurance because this type of insurance is less expensive than individual insurance coverage. There are benefits for tax purposes in acquiring this type of insurance. You can exclude the first $50,000 of group-term life insurance coverage provided under a policy carried directly or indirectly by your employer. If the amount goes over the $50,000, the amount in excess must be included in income and according to the Internal Revenue Service Premium Table. The amounts in excess are also subject to social security and Medicare taxes. If the employer pays any cost of the life insurance, or the employer arranges for the premium payments and the premiums paid by at least one employee subsidize those paid by at least one other employee, a taxable fringe benefit arises once coverage exceeds $50,000. This is called the straddle rule.

California taxes the cost of group term life insurance for retirees funded by the transfer of excess pension assets. Enter the amount of the cost excluded for federal purposes on Schedule CA of Form 540 or Form 540NR, line 16, column C.

Health Savings Account (HSA) – Contributions

If you are a qualifying individual, you can benefit from tax-exempt benefits of a Health Savings Account (HSA). This is a tax exempt trust or custodial account you can set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. A trustee can be a bank, an insurance company, or anyone else who is approved by the Internal Revenue Service. You can establish an HSA through a trustee that is different from your health plan provider. Most employers already have the trustee information available in their area. Contributions made to your HSA account remain in your account until you use them.

You can claim a tax deduction for contributions you or anyone other than your employer makes to your HSA account. You don’t have to itemize your deductions in order to claim a deduction for your contributions to an HSA. If your employer makes the contributions, you may exclude it from gross income. Not for California though. You cannot exclude the contributions from W-2 wages which were made by your employer. California simply does not conform to this. Enter the amount of California nonconformity on Schedule CA of Form 540 or Form 540NR, line 7, column C. Also enter the amount from Schedule CA of Form 540 or Form 540NR, column A, line 25, in column B, line 25.

Health Savings Account (HSA) – Distributions

Another benefit of an HSA is that interest or other earnings from the HSA assets in the account is that they are tax free. If you leave your job, you can take the HSA with you to your other job or even if you leave the work force. Your distributions could be tax free if you pay for qualified medical expenses. Therefore, any distributions not used for qualified medical expenses are includable in federal gross income. Consequently, the amount that is taxable by federal tax law is not taxable for California. Enter an adjustment to reflect this on Schedule CA, line 21f, column A, in line 21f, column B to exclude the amount from the taxable federal amount.

Health Savings Account (HSA) – Interest or Dividend Income

Interest or dividend income on the assets of the HSA accounts are tax free. However, California wants you to pay tax on the interest from HSAs. These interest amounts and taxable dividends earned on any HSAs are taxable for California in the year earned. Due to this treatment of interest or dividends earned and the fact that they are not taxable to California but are taxable to federal, California has a basis in the HSA account. You will need to make the adjustment on the flow thorough amounts from federal to California by entering the amounts of interest earned on Schedule CA, line 8, column C. Any taxable dividends earned for the current year need to be entered on Schedule CA, line 9, column C.

Unemployment compensation

You must be able to identity what constitutes unemployment compensation and what does not. Usually it is very simple. You go to the unemployment office and you seek compensation because you are out of work. If you are out of work and cannot work because you were injured or are handicapped, then that is another story. Your benefits received from the unemployment office in this case could be completely tax free for federal and California tax purposes. Unemployment compensation includes amounts received by the United States or California. Unemployment compensation does not included amounts such as worker’s compensation payments, supplemental unemployment benefits and unemployment benefits from a private club to which you voluntarily contribute. You must include your unemployment compensation in your gross income. Some folks receive hefty amounts in unemployment compensation and it would be best for them to have federal withholding taken out of the amounts received. You should opt for withholding so that you don’t end up short when you file their federal tax return. Withholding is voluntary and at one point in the employment process someone will ask you if you would like to have money withheld from your unemployment compensation checks. As far as California is concerned, unemployment is not taxable so you don’t have to worry about asking for California tax withholding from your unemployment compensation. Unemployment compensation is not taxable on your California tax return. For California, you need to adjust your federal gross income which includes the unemployment part. Whatever amount of unemployment compensation you have included in your federal tax return comes right out by entering it as an adjustment on California Schedule CA, line 19, column B. The unemployment compensation is not taxable to California therefore it should not be included in your California gross income.

Paid Family Leave (PFL)

If you have a family emergency, you should be able to leave work without suffering any repercussions. The Paid Family Leave (PFL) program allows employees to leave work for a specified amount of time for family emergencies. An employee can ask for time off to tend to the birth of his or her child and to take care of a newborn. Another occasion which qualifies for the family leave is when a placement agency places a child with the employee and the employee needs time to get adjusted to the new situation and better care for the child. Furthermore, if the employee has a spouse, child or parent whom has serious health conditions, he or she can take time off to take care of them. If the employer is unable to work due to some illness he or she can request some time off under the family leave act to request time off to care for the illness. You basically can take a leave of absence under the family leave act for any emergency that arises involving your immediate family or yourself. Your immediate family is your spouse, your son or daughter, or your parents.

Due to the fact that the Paid Family Leave (PFL) program is administered by the Employment Development Department (EDD), any pay received from the program is tax free for California tax purposes. This type of compensation is taxable for federal tax purposes, however. Any amount received is not taxable to California, therefore, enter it on Schedule CA of Form 540 or Form 540NR, line 19, column B. Because of the regulations the govern the practices of the paid family leave (PFL) program, many working individuals can receive the proper time off in order to tend to their family needs in case of an emergency.

Incentive for Turf Removal

You see commercials on the incentives for removal of your water wasting landscape. There are many incentives in place for water conservation projects. It seems that almost every water department is promoting the conservation of water. There are number of things you can do to conserve water. You can get rid of your beautiful lawn, change your toilets for more water efficient ones, and get of hold of this, you can get rail barrels installed. Apparently, the reason that turf removal has gained popularity is due to the high advertising place on this process and the especially the high incentives given for switching from grass and the greens to the dry stuff. California offers rebates, vouchers and other water conservation plans such as turf removal water conservation programs. If you get any kind of incentive in cash and this amount was taxable for federal, you can deduct it from your California tax return by entering the amount on Schedule CA of Form 540 or 540NR, line 21f, column B. Any of these items are not taxable for California tax purposes.

California lottery winnings

For federal tax purposes, gambling and lottery winnings are taxable on your tax return. Anything that is considered gambling is taxable for federal tax purposes. Gambling could be in the form of lotteries, horse races, raffles, casinos, California lottery winnings, and any prizes that you win. You can deduct gambling expenses up to the gambling winnings for federal tax purposes. For California tax purpose, essentially the rules are the same as federal and gambling winnings are taxable and the expenses of gambling are deductible up to the winnings. This is true, unless the winnings are from the California lottery. Winnings from the California lottery are not taxable for California and therefore any gambling expenses you have for these California lottery winnings are not deductible expenses. When you prepare your California tax return, make sure you include gambling winnings that are not from the California lottery. If you had California lottery tickets and you have included them in your federal tax return because they are taxable for federal, you must make an adjustment for California. Enter the amounts that are not taxable for California on line 21a, column B of Schedule CA to subtract the winnings from your California gross income. You also need to make sure that you have adjusted any gambling expenses claimed on your federal Schedule A that pertain to California lottery winnings. If you are not claiming the income, you cannot claim the expenses that pertain to that income.  

Reward from a crime hotline

Are you a whistleblower? Believe it or not, claiming rewards for reporting a crime is a profession for some. Like in every profession, you get compensated for your services. Just like there are bounty hunters, there are people who are pros at doing this kind of work. For example, did you know that the Internal Revenue Service, the IRS Whistleblower Office, to be more specific, pays you up to 30 percent of the additional money it collects from its clients for your whistleblower services? This sounds very much like a commission. You only get paid if you deliver results! Then you have to pay taxes to the Internal Revenue Service on the amounts you received from the Internal Revenue Service for your services. Amounts you receive for reporting crime are taxable by the Internal Revenue Service.

For California amounts received for reporting crime are also taxable. That is, unless, the amounts for reporting crime are for amounts authorized by a government agency, by a nonprofit organization or the amounts are received from a crime hotline that is established by a government agency. If the amounts for crime compensation is from an authorized government agency or any of the above mentioned, then you must exclude the amount from California gross income by entering it on the California Schedule CA, line 21f, column B. Any amount of compensation for reporting criminal activity that is taxable by federal but should be taxable by California should be removed from California gross income. If you have a crime to report such as tax evasion, you most like will receive a reward for reporting such crime to the proper authorities. Then look closely at the implications of making the reports both tax wise and safety wise. Whatever you do, be very discreet. 

Wrongful incarceration payments

Just imagine how horrible it must be to incarcerated for any crime. Now, imagine how much more horrible it would be to be incarcerated for something you did not do. No compensation or tax deduction would ever be enough to repay the victim of wrongful incarceration. To top it off, once you do receive this compensation for this horrendous crime against you, you have to pay taxes on it. Imagine that. Well, unfortunately, this is true. You have to pay taxes on wrongful incarceration payments for federal tax purposes. This is simply disgraceful. In order to receive a completely tax free treatment for your compensation for incarceration, you must have “suffered physical injuries and physical sickness while incarcerated.” What!? No, this is just not right! The state of California does not think this is right either. You can exclude 100% of the wrongful incarceration compensation amount for California tax purposes. Thank G-d someone is using their brain and thinking right. Enter whatever wrongful incarceration amount which is taxable for federal tax purposes on your California Schedule CA, line 21f, column B.       

Grants paid to low-income individuals

Many individuals start out in life as low income individuals. There are many low income families doing their best to send their kids to school. Any help available to these low income families will make a difference in their lives. Every tax season, for example, there are many low income families who anticipate the Earned Income Credit to catch up on bills incurred during the holidays. There are grants offered to low income taxpayers by the Internal Revenue Service. These grants are available to taxpayers who usually don’t have a filing obligation. This payment offered by the Internal Revenue Service and it is called Stimulus payment. To qualify for the stimulus payment, your income has to be at least $3,000. In addition, the taxpayer can qualify for a payment of $300 for each child who meets the requirements and is under 17 years old.

Talking about grants for low-income taxpayers, if you receive a grant to construct or retrofit your dwelling for energy efficiency, the proceeds are not taxable for California tax purposes. You can exclude any amounts received for such grants under California tax law. Federal tax law does not allow for any exclusion from such grants. Therefore, you must make an adjustment to allow for this exclusion under California tax law by entering the amount which was included on your federal gross income on California Schedule CA, line 21f, column B.

Death benefits received from the State of California for military members killed in the line of duty

California pays death benefits to families for military members killed in military duty. Death benefits paid to the members of a military member killed in the line of duty is nontaxable income and excluded from federal gross income. Section 1477 of Title 10 of the U.S. code and the HEART Act of 2008 (Heroes Earnings Assistance and Relief Tax Act) provides that any money received by survivors as a result of death of a military member will be excludable from federal taxation. This income is excludable under Section 134 of the IRS Code. California conforms with the federal HEART Act of 2008 with respect to the rollover of death gratuity payments into a retirement account such as an IRA without applying any contribution limits to the amounts. This means that there would not be any penalties for exceeding the contribution IRA or retirement plan limits.  

If you receive a death gratuity from the state of California, this amount can be excluded if the military member died or was killed after March 1, 2003. The military member must have been on duty when he or she died or was killed. If the amount received which covers this period is taxable for federal, you can exclude it from California income by entering the amount on California Schedule CA of Form 540 or Form 540NR, line 21f, column B.

Mortgage forgiveness debt relief

If you are experiencing problems with your mortgage payments there is a plethora of assistance from many organizations. The United States economy has been shaky for a while now and all this help available is a result of the bad U.S. economy. All this trouble seems to have started on September 11, 2001, but maybe it started before then. The Internal Revenue Service passed the Mortgage Debt Relief Act of 2007 to ameliorate the situation. With a few requirements and restrictions, basically this act allows you to exclude much, if not all, of the mortgage debt cancellation. Remember, debt cancellation is usually includable in income for federal tax purposes and for California tax purposes too. California conforms to federal tax law to a certain extent. After January 1, 2014, you are not allowed by California to exclude the cancelation of debt for your principal home. Therefore, once you complete your federal tax return and exercise your legal right under the Mortgage Debt Relief Act of 2007 to exclude your mortgage debt on your main home, you need to reverse this exclusion from your California tax return. Enter the exclusion amount from your federal tax return on your California Schedule CA of Form 540 or Form 540NR, line 21f, column C.

Federal subsidies for prescription drug plans

If you have excluded any federal subsidies for prescription drug plan from your federal tax return, you need to reverse the exclusion for California tax purposes. California does not conform to federal tax law for this provision. Therefore, enter any amounts excluded for federal tax law on Schedule CA of Form 540 or Form 540NR, line 21f, column C.

American Indians per capita payments

The Per Capita Act and the Indian Tribal Judgement Funds Use or Distribution Act allow for Indian tribes to make payments to Indian tribe members. There are regulations in place that state that interest and investment income from the funds while held in a trust will not be subject to federal taxation. These regulations also state that per capital distributions from tribal trusts are to be excluded from taxation. However, if per capita payments that do not meet certain requirements and are made from an Indian tribe’s private bank account are taxable to the Indian tribe member receiving the per capita payments. The state of California does not agree on taxing Indian tribe members who live in Indian tribes that are affiliated with their tribe which are sourced from the same Indian tribe in which they are a member. In addition, California does not tax per capita payments received by a nonresident of California. On the other hand, if the Indian tribe member resides outside their affiliated reservation, California will tax those per capita benefits received by the tribal member who is residing outside their tribal country. Whatever amounts that are included in your federal tax reports and which are excludable for California must be entered on Schedule CA, line 21f, column B to exclude them from California taxable income. Calculations must be figure out carefully and care must be exercised as to the source of the tribal payments and also take into consideration where the tribal member resides.

Educator expenses

Some schools are not able to fully provide teachers with the proper teaching supplies such as paper, chalk, or whiteboard markers. The educator is left with having to pay for these supplies out of his or her own pocket. For federal tax purposes, you can deduct up to $250 of any unreimbursed expenses for books, supplies, and other items such as equipment that needs to be used in the classroom. The expenses are qualified expenses only if they are necessary for you to perform your work as an eligible educator. Only expenses that are incurred in the tax year are deductible. Not for California though. California does not conform to the federal deduction for educator expenses. Enter any educator credit amount on your California Schedule CA, line 23, column B to put it back in the gross income total.

Self-employed health insurance deduction

Self-employed individuals usually have to get their health insurance coverage. Many jobs offer health insurance coverage and many job acceptance decisions are based on whether the employer offers health insurance or not. Health insurance is quite expensive and some self employed individuals must usually get their own health insurance coverage. Currently California conforms to federal tax law on almost every aspect of the self-employment health insurance deduction. California conforms to items which include items such as the IRC Section 36B refundable credit of coverage under a qualified health plan and the deductions allowed on federal Schedule A for out-of-pocket expenses. As a self employed individual you can generally take a deduction for medical, dental or long term care insurance premiums that you as a self employed person are obligated to pay for yourself since you have no employer to cover you. California conforms to most of the federal self-employed insurance deduction except for one thing. California does not allow a deduction for adult children who provide more than half of their own support. You do qualify to include coverage for your adult children under federal tax law and if you do have such a deduction on your federal tax return, you must adjust your California tax return by entering the amount of the federal deduction which pertains to the adult child’s amount of the medical insurance expense on the California Schedule CA, line 33, column C.

Student loan interest deduction

Student loans can help can be a huge help when attending school. With the high cost of attending college, many times being able to receive these student loans will determine if you will pursue your higher education or not. If you have student loans, keep track of your interest paid on those student loans so you can deduct the interest on your federal tax return. You may be able to deduct up to $2,500 of the interest you actually paid for the year. You have a gross income limitation which means that your interest deduction may be reduced if your gross income goes over a certain amount. Other than that, the other qualifications in order to claim the deduction are not too harsh. As long as you don’t file married filing separately or be able to be claimed on someone else’s tax return, you should be fine to claim the deduction. California mainly conforms to the federal tax law, except for issues involving residency status. If the taxpayer is a not a California domiciled military taxpayer, or a spouse of a non-California domiciled military taxpayer who resides in a community property state. If your student loan deduction for federal tax purposes involves any of these, enter the corresponding amounts on your California Schedule CA, line 33, column C to exclude the deduction from your California tax return.

Tuition and fees deduction

Talking about students and the tax benefits of being a student, federal tax law also allows another deduction for tuition and fees paid. In addition to claiming the tuition and fees deduction, you can use your fees expenses to claim the American opportunity tax credit or lifetime learning credit. If you have a business, you can also use these fees to claim a business expense and these expenses would otherwise qualify as a business expense for your business. As with the student loan interest deduction, you cannot be able to be claimed as a dependent by someone else or use the married filing separately filing status to claim the tuition and fees deduction. Anyways, this is all true for federal tax purposes and the maximum amount you can claim is $4,000 for qualified education expenses. However, this is not true for California. California does not have such a deduction. Therefore, if you have such a deduction on your federal tax return, you must reverse it for California tax purposes by entering the federal deducted amount on your California Schedule CA, line 34, column B.

Domestic production activities

Every country prefers their products to be produced domestically. Producing products at home means that more people will gain employment and more businesses will do business with each other at the local level. If you are a business owner, you may want to take advantage of the domestic production activities deduction. If you have qualified production activities within the United States including Puerto Rico, you have adjusted gross income, and you have paid W-2 wages to your employees, you may qualify for the domestic production activities deduction (DPAD) for federal tax purposes. However, for California tax purpose this deduction is not possible since California has not conformed to federal tax law in regard to this deduction. Enter any amounts of the DPAD that you may have from your federal tax return on your California Schedule CA, line 35, column B to reverse the deduction for California tax purposes.

Annual tax paid by a limited partnership

A partnership is easier to create and get started than many of the other business organizations available to business owners. A partnership issues a K-1 form to its partners to report the income that pertains to each. Schedule K-1 is similar to Form W-2 or more like a Form 1099-Misc to report miscellaneous income for nonemployees. One individual alone cannot be a partnership. In order for a partnership to be a partnership, there has to be at least two individuals partaking in this type of business risk. The partnership is an entity that passes through income to the owners. The owners of the partnership include their share of income on their individual tax returns. When a partnership is a limited partnership and it pays its annual tax, federal tax law allows for a deduction. If you have such a deduction on your federal tax return, you need to exclude it for California tax purposes. Do this by entering the deduction amount on your California tax return Schedule CA, line 39. California specifically disallows a deduction for annual tax paid by a limited partnership.

Franchise tax or income taxes paid by an S corporation

The same thing goes for benefits of setting up an S corporation if you are able to meet the requirements for S corporation status. An S corporation is technically a corporation but it operates more like a partnership. The income from the S corporation passes through to its shareholders in the same manner in which it passes through to the owners of a partnership. You must pass certain qualification in order to be considered an S corporation. Not only must you meet certain qualifications to be an S corporation, but you must also maintain your qualifications. If you fall short of the qualifications, your corporation will revert to a C corporation and you will lose your S corporation status. You entire tax situation and set will change as a result of failure to maintain your S corporation status. If you have a franchise tax or income tax incurred in your S corporation, you can deduct them as a deduction on your federal tax return. California does not conform to such benefit and specifically disallows the deduction. You must reverse the deduction on your California Schedule CA, line 39 to adjust this disagreement between federal and California.

State, local, and foreign income taxes paid

Some people pay taxes and don’t even know it. Their employer deducts a certain amount from their check and these amounts are distributed to the different tax agencies such as California withholding, local tax SDI, federal and social security taxes. Other individuals or businesses which transact business overseas, will probably have paid some form of foreign tax to the foreign government. You can deduct payments you make for deductible taxes on your federal tax return. A deductible tax is one that you are responsible to pay and one that you actually paid. You can deduct state, local and foreign taxes, real estate taxes, taxes paid for personal property and general sales taxes that you paid for in the year. You can also deduct estimated taxes paid. If you have any amounts which for these types of taxes on your federal tax return, you need to make an adjustment on your California tax return. You must include these amounts on your California tax return to exclude them because California does not allow a deduction for any of these taxes, not even for taxes paid for State Disability Insurance (SDI). Just like you cannot your federal tax withholding on your federal tax return, you cannot deduct any state taxes paid on your California tax return. So it is not really that California does not conform to federal, it is just that these are usually taxes withheld at the California level. If you have any of these taxes on your federal tax return for which you qualified to take a deduction, enter them on your California Schedule CA, line 39 to reverse the deduction from your California tax return.

Other Adjustments

There are so many other deductions which cannot be covered in this short tax course. If you have any other adjustments for which you can take a federal deduction but not for California, you enter it on your California Schedule CA to either remove it from California or to add to California. Once you review Schedule CA, you will become familiar with where every possible deduction goes. Sometimes federal tax law allows a deduction for a natural disaster such as the recent Philippines Disaster Contribution for which California has no such deduction, you need to know where on your California tax return to make the adjustment. These types of other adjustments usually go on your California Schedule CA, line 41. Every time you have a certain deduction or credit for federal tax purposes, you should always find out if California conforms to the federal deduction or credit and if not, you must make adjustments accordingly. 

Other Basic California Tax Items

If two or more taxpayers including a parent claim the same child as a qualifying child for a particular tax year, the person shall be treated as the qualifying child of the taxpayer who is the parent. However, if none of the taxpayers is the parent, then the taxpayer with the highest adjusted gross income for taxable year shall be able to claim the head of household filing status. 

The head of household filing status is probably the filing status with which the state of California is most preoccupied. This is for good reason too. This is the most abused filing status of all the filing statuses. Many people are too liberal when it comes to applying the Head of household rules for either federal or California tax filings. To qualify for the head of household filing status benefit, you must have a child whom qualifies you to claim the head of household filing status. You must be unmarried or be considered unmarried on the last day of the year. You must have paid for more than half the cost of keeping up a home. Furthermore, you must have a child who lived with you for more than half of the year or a qualifying person such as your parent who does not need to live with you. People seek to receive the lowest possible tax rate available to them. If you qualify for the head of household filing status, you rate will be lower than that of a single or married filing separate taxpayer. Also, taxpayers who use the head of household filing status qualify for certain credits that they may not qualify for if they are single or if they file married filing separate. Married taxpayers want to file head of household instead of married to get credits offered by federal.

To be head of household, you must provide more than half of a person's total support during the calendar year to meet the support test. This is in addition to the other requirements which you must meet. To determine whether you have provided more than half the support compare the amount you contributed for the person's support to the entire amount of support the person received from all sources.

One of the challenges of qualifying for the head of household filing status is meeting the support test. To meet the support test, you must have provided more than half the cost of the upkeep of a home for your qualifying child or relative. The child or qualifying relative must also be your dependent, therefore the support test usually goes both ways. You must have provided more than half the total support of a home for the qualifying person and usually, you must also have provided more than half of the support for the qualifying relative or child in order for them to be your dependent. Support test for a qualifying child and a qualifying relative are a bit different but very similar. So everything can be as easy as having a child living with you all year and your being the only provider for the home in which that child lives.

You are considered to have chosen to treat your nonresident alien spouse as a resident alien if you and your nonresident alien spouse or RDP filed a joint tax return in a previous year. You are also considered to have chosen to treat your nonresident alien spouse/RDP as a resident alien if you choose to treat your nonresident alien spouse/RDP as a resident so you can file a joint tax return. Furthermore, you are considered to have chosen to treat your nonresident alien spouse/RDP as a resident alien if you have not revoked the choice by the extended due date for filing the tax return at issue.

If a person who is not a U.S. citizen, an alien, wants to file a tax return, sometimes there are certain restrictions. If the alien is a nonresident alien, this person will usually not be able to qualify for the head of household filing status. This is true, even if you are just a nonresident alien for only part of the year and even if you meet all the other requirements for the head of household filing status. The good news, that if your spouse is a nonresident alien, you are considered unmarried for tax purposes. This is a true statement if if you want to be considered head of household and benefit from this filing status. You can also treat your spouse as a resident alien for tax purposes and filing married filing jointly. These are federal tax rules to which California conforms.

If you are married at the end of the year, no one can qualify you for the Head of Household filing status because you are married. This is true unless you qualify to be considered unmarried for tax purposes.

You can be considered unmarried for tax filing purposes. To be considered unmarried for tax filing purposes is not a choice if you lived with your spouse at any time during the last six months of the tax year. The basic tax rule is that if you are married on the last day of the year, you are married. If you are single, then of course you are considered unmarried for tax filing purposes. So once you determine that you are indeed able to be considered unmarried for tax purposes. What then? You want to be able to qualify for Head of household filing status, so you must also meet the other requirements. You must meet other tests such as filing a separate tax return, paying more than half of the upkeep of your home which is the main home for you child for more than half the year, and you must be able to claim that child as a dependent by claiming their exemption. 

If the person is your parent, he or she does not have to live with you to qualify you for the Head of Household filing status.

The person that qualifies you does not have to be a child. That person can be your parent whom does not have to live with you in order to qualify you. You do however have to provide more than half the upkeep of that person’s home. If you pay for more than half the cost of the upkeep of that person’s home, you have provided more than half the upkeep. In determining if you provided more than half the upkeep of the home, you only consider items for the home itself, such as utilities and repairs. Any  expenses for which you have paid for that persons clothing, education, medical, vacations, life insurance or transportation are deductible expenses. There expenses are geared toward calculating if you can claim an exemption for the person instead. For the home, you include only costs paid for rent, mortgage interest, real estate taxes, insurance, repairs, utilities and the food eaten in the home. You must support a home for the qualifying individual and must have paid more than half of that support for the individual.

If you are married at the end of the year, you cannot qualify for the Head of Household filing status if you lived with your husband or wife during any part of the last six months of the year. You are married, living with your spouse and therefore you do not meet the requirements to be considered unmarried.

There are many taxpayers who break the tax rules every year. They contend that no one knows that their spouse did indeed live with them. Some people go as far as getting separate addresses in order to try to hide the fact that they lived together. Sometimes with the help of a little know how from the tax preparer, the taxpayer goes around the rules and files as he or she wishes to file. If the taxpayer was married at the end of the year and the spouse was a nonresident alien at any time during the year, then this would be the only way that they can be considered unmarried for tax purposes or for head of household purposes. Other than this, they are pretty much set to be considered married and they would have to file a married filing jointly or married filing separately tax return for the year. Otherwise, it would be considered breaking the rules and this is the reason California has come up with tougher enforcement efforts on head of household tax returns.

Only certain relatives can qualify you for the head of household filing status. If the qualifying person is not your relative, you cannot qualify for the Head of Household filing status. 

However, the person can be related to you in a legal manner. The qualifying person can be your eligible foster child placed under your care by authorized placement agency or by the courts. Once this eligible foster child is placed with you by the authorized agencies, you are able to claim an exemption for the child. If for some reason, the child does not qualify for you to take exemption for him or her, you cannot count this child as your qualifying child for head of household purposes. You must be able to claim an exemption for the person whom qualifies you for the head of household filing status. The qualifying person must be related to you either by blood or by legal means such as when you have a foster child or an adopted child to be considered as your qualifying child for head of household purposes.

For example, you paid $5,100 in child care, you are single and you earned $28,000 for the entire year. You have on qualifying child. Your child and dependent care expenses credit for tax year 2014 is $420.

If you pay someone for child care expenses which you incur which allow you and your spouse to work or look for work will qualify you to take a child and dependent care expenses credit on your California tax return. You can take the credit if you file as single, married filing jointly, qualifying widow or widower, head of household filing status. However, you cannot take the child and dependent care expenses credit if your filing status is married filing separately. Your child and dependent care expenses credit is a percentage of the federal credit and it depends on your income. In order to figure out the California amount, you must first figure out the federal amount and then apply the percentage to the federal child and dependent care expenses credit amount. The rules for federal and California concerning the child and dependent care expenses credit are very much alike. For example, both federal and California require that your dependent qualifying child be under age 13 at the time child care is provided. If the care is provided for another person, such as a handicapped individual, then of course, the age requirement is disregarded. 

In order to get a refund for the child and dependent care credit, you must have a tax liability. If you have no tax liability for California, you cannot get a refund because the child and dependent care expenses credit is a nonrefundable credit. Non refundable credits only cancel tax liability. Refundable credit are calculated at the end and it is refundable even if there is no tax liability and it is applied to the tax liability if there is any.

Refundable credits are treated the same ways as your payments either through withholding or through estimated payment which you make during the year. On the other hand, a nonrefundable credit is one that is cut off or cancelled at the amount of taxes owed. If your tax liability is only $159 and your child and dependent care expenses credit is $420, then you cannot get received more than $159 for this credit. Therefore, your child and dependent care expenses credit in this situation would be $159 and not the $420. This is true for both your federal and California tax returns. Let's assume in this case that your federal tax liability is $159 and your state liability is $159, then your child and dependent care expenses credit for both federal and California will both coincide at $159 each. This is due to the fact that the child and dependent care expenses credit is limited to your tax liability or otherwise a nonrefundable credit.

For example, Juan and Maria Escobedo are married and keep up a home for their two pre-school children. In tax year 2015, they claimed their children as dependents. Juan earned $25,200 and Maria earned $8,200. They paid $5,900 in work related child care expenses. Their child and dependent care expenses credit amount before taking into account any tax calculations is $738.

We are assuming here in this example that Juan and Maria Escobedo have a tax liability of more than the $738 for California and for federal this amount would be more. However, if their tax liability was $350 for California, their child and dependent care expenses credit could not be more than $350 for California. Also, if their tax liability for federal was $960, then their child and dependent care expenses credit could not be more than $960. Enough about refundable and nonrefundable credits. We think you already got the idea. California child and dependent care expenses credit was a refundable credit until January 1, 2011. After, the credit switched to be a nonrefundable credit. The refundable and nonrefundable credit idea also applies to other credits and it is not just restricted to the child and dependent care expenses credit. The Earned Income credit for example is a refundable credit and if you already exhausted your tax liability, you get whatever is left over as a refund and therefore whatever is left over is "refundable" to you. 

To claim the Child and Dependent Care Expenses Credit for California, you must complete and attach FTB Form 3506 to your California tax return.

Remember schedule 3 for claiming child and dependent care expenses for federal on Form 1040A? You can't use this schedule anymore. To claim the child and dependent care expenses credit on your federal tax return your only option now is to prepare your child and dependent care expenses credit on Form 2441. To claim the child and dependent care expenses credit on your your California, you need to use FTB Form 3506 and then attach it to you California form 540 to claim the California child and dependent care expenses credit for California. And talking about discontinued tax forms, we don't have form 540A anymore since this form was discontinued for tax years after 2013.

In tax year 2015, if your gross income is $45,000 and your federal child and dependent care expenses credit amount was $480, then your California Credit is $206.

For Federal the Child and Dependent care expenses credit is a non-refundable credit and for California the credit is also nonrefundable. It used to be that the credit was a refundable credit for California, but recently the rules were changed and now the credit is nonrefundable just like the federal child and dependent care credit.

The percentage of the federal Child and Dependent Expenses Care credit that is allowed for California for taxpayers who earned more than $90,000 in 2015 is 34%.

If your income is $40,000 or less, the percentage is 50 percent. If your income is over $40,000 but less than $70000, the percentage of the federal credit is 43 percent and from over $70,000 to $100,00 it is 34 percent. So remember, first you figure out the federal child and dependent care expenses credit amount and then take a percentage of that credit. Your California child and dependent care expenses credit depends on the amount you calculate for federal tax purposes. Therefore, get IRS form 2441 and do the calculations there first, then get FTB form 3506 and do the calculations there to arrive at the California credit amount.

In tax year 2015, to qualify for the California child and dependent care expenses credit, your federal adjusted gross income must be $100,000 or less.

If your income for California is over $100,000, then you don't qualify for any child and dependent care credit. The $100,000 limit amount is only for California and not for federal. You still get a child and dependent care expenses credit for federal purposes if your income goes over $100,000. This credit amount for federal would be 20 percent of the qualifying amount paid. Therefore, look at the percentage limits carefully when calculating your child and dependent care expenses credit. Just because you receive a credit for federal, does not necessarily mean you will receive one on your California tax return. You already know that though, we don't have to tell you. Once you fill out IRS form 2441 and the Franchise Tax Board form 3506, you will see the limitations. You can use these two forms as worksheets and eventually after many calculations, all of this will be ingrained in your mind.

In tax 2014, if you are head of household and you would like to qualify for renter's credit, you would not qualify if your income is over $75,536.

Another credit which was previously refundable but now it is nonrefundable, is the renter's credit. To qualify for the renter's credit your must have been a California resident for the entire year and your California adjusted gross income (AGI) must have been $37,768 or less if you are single, or married filing separately. Your California income must have been $75,536 or less if you are married filing jointly, head of household or if you are qualifying widow (widower). The property for which you paid rent must not have been exempt from property tax. You must have paid rent for at least half the year for a property which was your principal residence. The renter's credit amounts are $60 for a single or married filing separate individual or $120 for individuals who file as head of household , married filing jointly, or as qualifying widow or widower.

You must have not, as with most credits, not have been able to be claimed on someone else's tax return as a dependent.  If for more than half of the year, you lived in the home of a parent, foster parent, or legal guardian in 2015 who can claim you as a dependent, then you do not qualify for the renter's credit.

The non-refundable renter's credit qualification record must be kept with your records; therefore, you should not mail it.

The nonrefundable renter's credit, as with the other credits, must be carefully substantiated. With the California nonrefundable renter's credit it is little simpler as it basically only requires that you answer a few questions as to the qualifications. There is a qualification record which you must fill out and keep for your records. If you are preparer, you should be able to present this qualification record to the Franchise Tax Board individual inquiring about how you determine that the taxpayer qualified for the renter's credit. As with other credit, you must ask the right questions to make sure your client qualifies for the nonrefundable renter's credit. For most of us, the computer produces a qualification record automatically. However, we cannot just tell an auditor that the computer created the qualification record automatically. You must make sure you ask the taxpayer the questions presented in the qualification record. Otherwise, what good is it for? It does nobody any good to just print the qualification record.

One of the main qualification questions to be concerned with is that the taxpayer paid rent for a least 6 months of the year. To qualify for renter's credit, you must have paid rent for at least 6 months of the tax year and your principal resident must have been in California.

If your filing status was married filing separate, you are still able to claim the California renter's credit.

Many credits are not allowed if you are married filing separately. However, the renter's credit is allowed for individual who file married filing separately. If you are single or married filing separately, you are allowed a California nonrefundable renter's credit of $60. 

If a single employer withheld California State Disability Insurance (SDI) from your wages at more than .9% of your gross wages you should contact the employer for a refund.

The key to claiming the credit for excess SDI withheld is how many employers you worked for. If you just worked for one employer, you will not be able to claim the credit for excess SDI withholding. If your taxpayer client wants you to give him or her a credit for excess SDI withheld and they only had one employer, tell him or her that they cannot claim a credit for excess SDI withheld. As a good tax preparer, you need to always make sure the figures from the Form W-2s are calculated correctly. This is especially true if you know that the Form W-2 tax forms are from a small company or if they were handwritten or if they are basically prepared by hand as when they are typewritten instead of computer generated. Not that computers are perfect, but it is more assuring to see forms which are generated by a payroll software.

One thing to remember though, to claim the excess SDI withheld credit, you must have two or more employers.

If you only had one employer, then your employer made a mistake in the SDI withholding calculations. Therefore, you must ask your employer for a refund instead. You may be entitled to claim a credit for excess SDI on Form 540 if you had two or more employers during 2014, you received more than $101,636 in wages and if the amounts of SDI (or VPDI) withheld appear on your Forms W-2. This amount is $104,378 for tax year 2015. Look at your form W-2 and if more than $939.40 (at 0.9 percent) was deducted for 2015, there is an error. If you have more than one Form W-2, add the amounts that correspond to SDI withholding and again if the amount is over $939.40 for all Form W-2s, you can claim the credit for excess SDI withholding.

If you discover that you made an error on your California income tax return after you filed it, use Form 540X to amend your tax return.

You should amend your tax return if you forgot to claim a credit, a deduction or if you simply made an adding error. Adding errors are usually caught right away by the Franchise Tax Board and maybe you don't need to file an amended return for that. You should file a Form 540X return to fix your return if the Franchise Tax Board already issued your refund or processed your return and they did not catch the error. If you missed the credit for excess SDI withholding credit for example, you can file the amended Form 540X return to claim the credit or any missed credit for that matter. Many will tell you that filing an amended California tax return is not a good idea. Maybe it is not a good idea if you are committing tax fraud or are trying to hide income to avoid paying tax. However, if everything is as it should be, with the taxpayer reporting only the correct items, credit or deductions, then there is nothing to worry about. If someone tells you that filing an amended tax return is not a good idea, tell them that you don't worry about stuff like since you don't commit tax fraud.

For purposes of claiming the California Child and Dependent Care Expenses Credit, if your child turns age 13 during the year, the child is a qualifying person only for the part of the year he or she was 12 years old.

In tax year 2015, if your wife did not work all year because she was not able to care for herself for the entire year there are special considerations to take into account. For example, if you worked and earned $21,050 and have one qualifying child for the Child and Dependent Care Credit, paid $2,000 for child care, you can qualify for $310 child and dependent expense credit. The $310 amount is 1/2 of the $620 federal amount.

If you only paid rent for one month in 2015, you don't qualify to claim the renter's credit.

Beginning in taxable year 2010, persons who have entered into a same-sex marriage outside the State of California that is valid according to the laws of the jurisdiction in which the marriage was contracted must file their California income tax return using either the joint or separate filing status. Starting in 2013, this same rule or benefit also applies for federal tax returns.

If there is no difference between your federal and California income or deductions, do not file a Schedule CA (540).

Only file California Schedule CA if there are differences with California and federal deductions or income differences. Your federal return may be allowing or disallowing certain credit or deductions which California does not conform to. Remember that you only file California Schedule CA to make adjustments for nonconformity items on your federal tax return. There is a long list of items for which California does not conform to and therefore you must account for these nonconformity adjustment items on your California Schedule CA.

Many individuals can be your qualifying persons for the Child and Dependent Card Credit. A child who is under the age of 13 can qualify you for the dependent care credit. A dependent of the taxpayer who is physically or mentally unable to care for himself or herself can be a qualifying person. Furthermore, a spouse of the taxpayer who is physically or mentally unable to care for himself or herself can be a qualifying person for the dependent care credit.

Additionally, one of the requirements to qualify to claim the Child and Dependent Care Credit for California is that you pay for care or have paid for care in order for you and you spouse can work or can look for work.

California and federal coincide with many credit and tax rules. For example, both California and federal obligate you to timely pay 100% of your tax or you will be faced interest and penalty charges. On time filing for both entities is usually April 15th of every year. You can always pay later, but if you do, you must know that you will be responsible for interest and penalties on the unpaid amounts.

The Internal Revenue should enact a renter's credit just like California allows. For California, you qualify for the Nonrefundable Renter's Credit if you rented a property for more than half the year that was not exempt from California property tax in 2015. Rents are getting very high and many cannot afford to pay rent anymore. The Internal Revenue Service allows for mortgage interest deductions and it is only fair that this same benefit be allowed in form of a renter's credit for the ones who cannot qualify or who don't care to buy a home and pay a mortgage.

Slowly the IRS is coinciding with the state of California in tax rules. For the longest time, California has been allowing same sex couples to file their tax returns jointly. In California, all domestic partners are required to either file joint or separate tax returns under the new law. Now, under the federal new law, same sex couples can file jointly for federal tax purposes. Now the way same sex couples file for federal will just transfer over to California tax returns and adjustments or filing status are no longer needed in the California tax return. That sure makes every one's job easier.

Another credit to look into for California is the Credit for Dependent Parent. You may not claim the Credit for Dependent Parent if you used the single, head of household, qualifying widow (er), or married/RDP filing jointly filing status. Claim this credit only if you were married at the end of 2015 and you used the married filing separately, qualifying widow(er) filing status. In order to claim this credit, you spouse must not have been a member of your household during the last six months of the year. Additionally, you must have furnished over one-half the household expenses for your dependent mother's or father's home, whether or not they lived in your home.

Your federal tax return does not allow an excess SDI credit. That must be so due to the fact that federal does not have SDI withholding. You may be entitled to claim a credit for excess SDI (or VPDI) only if more than 0.9% of your wages was over withheld from more than one employer. You only have to worry about calculating this if you received more than $104,378 in wages and if you had more than one employer. If you only had one employer and the withholding was more than 0.9% was withheld, then you need to ask your employer to refund the overwithheld amount. 

If you and your spouse paid joint estimated taxes but are now filing separate income tax returns, one of you may claim the entire amount paid or both can split the amounts in whichever way you wish.

You have the freedom to contribute to your account as your wish. Things do happen. If you and your spouse are both contributing by making estimated tax payments and then later divorce or file your tax returns as married filing separately, you can decide how to treat the estimated payments made to the account. The problem would arise when the married couple is fighting or don't agree as to how to allocate the payments.

Attach a doctor's statement to the back of Form 540 indicating that you or your spouse are visually impaired the first time you file a tax return to claim the blind exemption credit.

If you attach a doctor's statement every time you file your tax return, you will just be creating extra work for everyone. Once you attach the doctor's statement the first time, you will have set a trigger in the account and therefore, there is no need for any more attachments.

What if I can't file by April 15, 2016, and think I owe tax? You can estimate the amount you owe by completing Form 3519 and sending the estimated amount with your extension of time file. You do not have to file until you are ready to file but do have to pay by the original due date. You will not be able to avoid penalties or interest by just filing on time without sending in the money. Once you are ready to file or once the automatic extension time is up, you must indicate on that form that you have paid the amount owed in a timely manner.

If all your Form W-2s were not received by January 31, 2016, you need to file your tax return with the Forms W-2 you receive and also with the Form W-2s you did not received. You should be able to get a copy by visiting your employer. If, after you tried to get the form, you were not successful, then you can file a substitute Form W2. This substitute Form W-2 can be used for both your federal tax return and your state tax return.

Therefore, if you never received a Form W-2 and you asked your employer for one and employer refuses to issue a form, you should complete Form FTB 3525 with your wage and withholding information in order for you to file your tax return.

You don't always have to prepare your tax return in the same manner as your prepare your federal. For example, if you didn't itemize deductions on your federal tax return it is possible to itemize deductions on your California tax return.

The head of household filing status is for taxpayers who are either unmarried and or meet the requirements to be considered unmarried or considered not in a registered domestic partnership and maintain a home for a relative who lived in them for more than half the year. 

An eligible foster child is a child for head of household purposes is a child placed with you by an authorized placement agency or by a judgment, decree, or other order of a court of competent jurisdiction.

Generally, if two or more people keep up the same home, only one of the people could pay more than half the costs and qualify for the head of household filing status. When two or more families occupy the same dwelling, each family may be treated as keeping up a separate home if each family maintains separate finances and neither contributes to the support of the other family.

The taxpayer who provides more than half the cost of maintaining a separate home is treated as keeping up that separate home. To determine whether you paid more than half the cost of keeping up your home do not include costs of clothing and vacations, costs for education and transportation, or costs for medical treatment and life insurance.

There are rules for determining the support of the home and there are rules for determining support of an individual to meet the support test. The items considered to be support items for upkeep of the home are home things such as electricity, gardening, cleaning, maid service and rent or mortgage. Items for support of a dependent are items that are strictly just for the dependent in meeting the support test. These items that only pertain to the individual are items such as clothing, vacations, medical insurance, education and any medical treatment. Cost of food pertains to the support of the household, unless the food is specific for the dependent. This could be the case when the dependent needs special food due to allergies or for medical reasons. Other than that, food is considered a household expense that goes toward the calculations you make for support of the home. This is similar to buying a television set for your child and your treatment of this television set depends on where in the house you hook it up to. If you place the set in the living room, then the TV is household expense that goes in the calculation of support of the home. However, if the set is placed in the dependents room, then it can be considered in the calculation of support for the child.

If someone lived with you for exactly six months does not mean that the person lived with you more than half the year for head of household purposes. The rule is the the individual must have lived with you for more than half of the year. If the child lived with you exactly six months and exactly six months with another person, you cannot go choosing who will be able to claim head of household for that child. The rule is that the child must have lived with you for more than six months.

If you have joint custody of your child, to qualify for head of household filing status, you must still meet all the requirements for the head of household filing status. You must have a child that must have lived with you for more than half the year. In addition, you must have paid more than half the cost of keeping up your home for that qualifying individual. You must also have provided more than half the support for the child such as clothing, entertainment and any expenses that pertain just to the dependent's support.

If you were married as of the last day of the year, and you did not live with your spouse at any time during the last six months of the year, to determine how many days your home was your qualifying person's main home, add together half the number of days that you, your spouse, and your qualifying person lived together in your home. Then you add together all the days that you and your qualifying person lived together in your home without your spouse.

If you were married as of the last day of the year and you lived with your spouse at any time during the last six months of the year, you cannot qualify for the head of household filing status.

It is specifically stated in the California head of household rules that in order to qualify for the head of household filing status and you are married or in a registered domestic partnership, you must not have lived with your spouse at any time during the last six months of the year. The qualification stipulations for the head of household filing status are very clear. They specifically disallow claiming the head of household filing status if the couple lived together at any time during the last six months of the tax year.

You are considered to have chosen to treat your nonresident alien spouse/RDP as a resident alien if you and your nonresident alien spouse/RDP filed as joint return in a previous year. You are also considered to have made this choice if you chose to treat your nonresident alien spouse/RDP as a resident so you could file the joint tax return. Furthermore, you are considered to have chosen to treat your nonresident alien spouse as a resident alien if you have not revoked the choice to treat your nonresident alien spouse as a resident by the extended due date for filing the return at issue.

The Head of Household (HOH) filing status gives you the benefit of a lower tax and a higher standard deduction than that of a Single or Married Filing separate filing status.

Sometimes you have a choice of filing status. Many times you don't have a choice. The five filing status options are single, married filing jointly, married filing separately, head of household, and qualifying widow or widower. Each filing status gives you a different standard deduction amount on your federal tax return and at two different standard deduction amounts on your California tax return. If you are single and qualify for the head of household filing status, your standard deduction for California is $7,984 which is the married filing jointly standard deduction amount. This amount is better than the $3,992 amount for a single or married filing jointly taxpayer for 2014. The head of household filing status gives you a better tax rate and this filing status also allows you to claim some credit or deductions which are not allowed if you choose the married filing separate filing status. Therefore, for California it is worth the extra effort to gather the qualification requirements for the head of household filing status.

For same sex couples, you are in a domestic partnership if you have entered into a registered domestic partnership. You are also in a domestic partnership if you have not filed a notice of termination of domestic partnership with the Secretary of State and the six month waiting period for the notice to become final has passed. If your registered domestic partnership was not annulled or you have entered into another registered domestic partnership after the annulment.

The same sex domestic partnership law is part of the California Family Code section 297 which provides benefits which are customarily beneficial to married taxpayers. This California law provides for taxpayers who live together as partners to be able to file their tax returns are married filing jointly taxpayers. Just as a marriage can be dissolved, the partnership can be dissolved. Just like with married individual, individuals involved in a domestic partnership can be considered not in a domestic partnership for head of household purposes. The rules to do are similar as those of married taxpayers.

Effective for taxable years beginning on or after January 1, 2007, RDPs under California law must file their California income tax returns using either the married/RDP filing jointly or married/RDP filing separately filing status. If you are in a registered domestic partnership, you may qualify to use the head of household filing status if you are in the process of ending your relationship or you meet the requirements to be considered not in a registered domestic partnership.

You must meet the same head of household requirements that married individuals meet to be considered head of household for tax purposes or to be considered not in a registered domestic partnership. These requirements include not having lived with your partner at any time during the last six months of the year. You must have a qualifying child or qualifying relative who qualifies you to claim the head of household filing status. The child must have lived with you for more than six months of the year and you must be able to claim an exemption for the qualifying child. If you have a qualifying person instead, your qualifying can be a parent who does not have to live with you. In either case, you must have supported a home for the qualifying person for more than 50 percent of the support of the home. If the qualifying person is your parent, the parent can be your qualifying relative even if you cannot claim an exemption for your parent if the only reason that keeps you from claiming the parent is the fact that the parent earned more than the amount allowed to claim an exemption. 

You were not in a registered domestic partnership if your registered domestic partnership was legally terminated under a final decree of dissolution. Neither a petition for termination nor an interlocutory decree of termination is the same as a final decree. Until the final decree is issued, a registered domestic partnership remains in a registered domestic partnership.

An individual who is single, married or in a registered domestic partnership, can meet the requirements to be considered head of household. If the individual is married or is in a registered domestic partnership, the individual must meet the requirements. Unless he or she does so, he or she cannot be considered unmarried or not in a registered domestic partnership for tax purposes.

A same sex couple can be in a registered domestic partnership if the individual files the appropriate paperwork with the State of California. A registered domestic partner is a person who has filed a Declaration of Domestic Partnership with the California Secretary of State. A person is a registered domestic partnership has the same benefits and rights as do married individuals in the State of California. Therefore, same sex individuals can file their returns as married individual and enjoy the same tax benefits as married individuals who file as married filing jointly.

You must be entitled to claim a dependent exemption credit for your parent to be head of household. That is true if your parent meets the requirements of a qualifying relative. That is also true if you have paid more than half the cost of keeping up a home that was your parent's main home for the entire year. Your parent's main home could have been his or her own home or any other living accommodation.

For 2015, you were married or an RDP at the end of the year if you were married, of course.  You are not considered married at the end of 2014 if you received a domestic partnership, or you filed a Notice of Termination of Domestic Partnership with the California Secretary of State and the six-month waiting period for the notice to become final has passed. You are considered married if your spouse/RDP died in 2015 and you did not remarry or enter into another registered domestic partnership.

There are five tests which you must normally meet in order claim a dependent on your tax return. You must meet the support test, gross income test, member of household or relationship test, the joint return test and the citizenship or residency test. The support test is met if you provide more than 50 percent of the persons support in the year. The gross income test is met if your child does not make more than the federal personal exemption amount for the year. If your child makes more than this amount which is $4,000 for tax year 2015, then you usually cannot claim this child’s exemption or claim the child as a dependent. The child must usually be related to you legally or by blood and live in your household for more than six months of the year. Furthermore, the child must not have file a joint tax return if done so, there would not be any additional tax owed than if the child filed as single. The residency test is met if your child is a citizen of the United States, a U.S. resident alien or a resident of Canada or Mexico. In meeting the residency test, a temporary absence may be due to illness, education, business vacation or military service. A temporary absence can also due to incarceration.

When counting the amount of time which a dependent lives with you, you don't count time away from home due to temporary absences. Time away for certain things such as school is considered temporary absence and this time would count as time in home. If the individual is gone for military purposes, this is also considered a temporary absence. If your dependent is away due medical or vacation then this is also considered to be away on temporary absence and these count as time spent in the home. The other temporary absences are time away due to business, illness and education. The person is temporarily absent if it is reasonable to assume that the person will return after the temporary absence and you continue to keep up the home for this person after the absence. For example, you temporary absent child is away on temporary absence and his or her room is waiting for him or for her to return home. You probably should not rent out your dependent's room it the child is temporarily absent from home.

To qualify for head of household filing status, your qualifying relative's gross income must be less than the federal exemption amount for the year in question. The qualifying relative must pass the support test in order for you to be able to claim head of household for using this individual as your qualifying person. If your child earns more than the federal exemption amount, then he or she does not pass the support test and therefore you will not be able to claim an exemption for this individual and you will not qualify for the head of household filing status unless you have another individual whom qualifies you.

This is true unless the person qualifying you for the head of household filing status is your parent. Then the support test for this person does not count. Your parent can earn any amount and still qualify as your qualifying person for the head of household filing status.

http://www.irs.gov/uac/Newsroom/In-2015,-Various-Tax-Benefits-Increase-Due-to-Inflation-Adjustments

http://www.taxpolicycenter.org/taxfacts/Content/PDF/file_threshold.pdf

http://www.eitc.irs.gov/Tax-Preparer-Toolkit/dd/consequences

http://www.irs.gov/uac/Additional-Medicare-Tax-What-You-Need-to-Know

http://www.irs.gov/Individuals/Net-Investment-Income-Tax

http://www.irs.gov/Affordable-Care-Act/Individuals-and-Families/The-Premium-Tax-Credit

http://www.irs.gov/taxtopics/tc304.html

http://www.irs.gov/instructions/i109495c/ar01.html

http://www.irs.gov/pub/irs-pdf/p974.pdf

http://www.irs.gov/pub/irs-pdf/f1095a.pdf

http://www.irs.gov/pub/irs-pdf/f1095c.pdf

http://www.irs.gov/pub/irs-pdf/p17.pdf

http://www.irs.gov/pub/irs-pdf/p334.pdf

http://www.irs.gov/pub/irs-pdf/p527.pdf

http://www.irs.gov/pub/irs-pdf/p225.pdf

http://www.irs.gov/uac/RDA-2015-03-17-2014-Publication-225

http://www.irs.gov/uac/Tax-Increase-Prevention-Act-of-2014:-Extenders

http://www.irs.gov/uac/Newsroom/IRS-Clarifies-Application-of-One-Per-Year-Limit-on-IRA-Rollovers-Allows-Owners-of-Multiple-IRAs-a-Fresh-Start-in-2015

https://www.congress.gov/bill/113th-congress/house-bill/5771

http://www.irs.gov/Affordable-Care-Act/Individuals-and-Families/Individual-Shared-Responsibility-Provision

http://www.irs.gov/Affordable-Care-Act/Individuals-and-Families/Important-Information-about-Advance-Payments-of-the-Premium-Tax-Credit-and-Your-Tax-Return

http://www.irs.gov/Individuals/Certain-Medicaid-Waiver-Payments-May-Be-Excludable-From-Income

http://www.irs.gov/taxtopics/tc457.html

http://www.irs.gov/taxtopics/tc458.html

http://www.irs.gov/taxtopics/tc503.html

http://www.irs.gov/pub/irs-pdf/f1040sa.pdf

http://www.irs.gov/Retirement-Plans/Charitable-Donations-from-IRAs

http://www.irs.gov/uac/New-Law-Renews-IRA-Transfers-to-Charity-for-2014-Owners-Must-Act-by-Dec-31

http://www.irs.gov/Credits-&-Deductions/Individuals/Nonbusiness-Energy-Property-Credit

http://www.irs.gov/instructions/i5695/ch01.html#d0e30

Topic 421 – Scholarships, Fellowship Grants and Other Grants at http://www.irs.gov/taxtopics/tc421.html

http://www.irs.gov/uac/Newsroom/New-Standard-Mileage-Rates-Now-Available;-Business-Rate-to-Rise-in-2015

Where to file and page 1 Mailing your return find at http://www.irs.gov/pub/irs-pdf/p17.pdf

What’s New at http://www.irs.gov/instructions/i1099b/

1099B instructions at http://www.irs.gov/pub/irs-pdf/i1099b.pdf

Direct deposit at page 1 of http://www.irs.gov/pub/irs-pdf/p17.pdf

Identity Theft by the United States Department of Justice at http://www.justice.gov/criminal-fraud/identity-theft/identity-theft-and-identity-fraud

Topic 152 – Refund Information at http://www.irs.gov/taxtopics/tc152.html

Certain Medicaid Waiver Payments May Be Excludable From Income  At http://www.irs.gov/Individuals/Certain-Medicaid-Waiver-Payments-May-Be-Excludable-From-Income

Transportation expenses and parking at What is New page 2 and page 9 at http://www.irs.gov/pub/irs-pdf/p15b.pdf

H.R.990 - Commuter Parity Act of 2015 at https://www.congress.gov/bill/114th-congress/house-bill/990

Reporting Mortgage Insurance Premium…  at http://www.irs.gov/uac/Recent-Development-2015-01-07-2014-Form-1098

New Law Renews IRA Transfers to Charity for 2014 at http://www.irs.gov/uac/New-Law-Renews-IRA-Transfers-to-Charity-for-2014-Owners-Must-Act-by-Dec-31

H.R. 855 New Markets Tax Credit Extension Act of 2015 at https://www.govtrack.us/congress/bills/114/hr855

Work Opportunity Tax Credit at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Work-Opportunity-Tax-Credit-1

Depreciation Tax Extenders Big Bonus for Business Owners at  http://www.forbes.com/sites/ashleaebeling/2014/12/18/depreciation-tax-extenders-big-bonus-for-business-owners/

Enhanced Deduction for Food Inventory Donations at https://www.independentsector.org/food_inventory_deduction

Tax Entenders at https://www.independentsector.org/tax_extenders

Section 179: Increased Limit for 2014 Approved at http://www.nolo.com/legal-encyclopedia/section-179-increased-limits-likely-2014-2015.html

Gains on Qualified Small Business Stock  at http://www.irs.gov/pub/irs-pdf/p550.pdf

100% exclusion on Qualified Small Business Stock  at http://www.journalofaccountancy.com/issues/2013/nov/20138431.html

Instructions for Form 6478 for second generation biofuel producer credit   http://www.irs.gov/instructions/i6478/ar01.html#d0e31

Energy Incentives for Businesses in the American Recovery and Reinvestment Act of 2009  at http://www.irs.gov/uac/Energy-Incentives-for-Businesses-in-the-American-Recovery-and-Reinvestment-Act, at http://www.irs.gov/uac/The-American-Recovery-and-Reinvestment-Act-of-2009:-Information-Center and at http://www.irs.gov/irb/2015-20_IRB/ar06.html

Multi-employer pension plans at http://www.irs.gov/Retirement-Plans/Employee-Plans-News-New-Relief-for-Single-Employer-and-Multiemployer-Defined-Benefit-Plans

Topic 751 – Social Security and Medicare Withholding Rates at http://www.irs.gov/taxtopics/tc751.html

Tax Related Identity Theft at http://www.irs.gov/pub/irs-pdf/p5199.pdf

Most Tax Return Preparers Must Use IRS e-file at http://www.irs.gov/Tax-Professionals/e-File-Providers-&-Partners/Most-Tax-Return-Preparers-Must-Use-IRS-e-file

http://www.politifact.com/truth-o-meter/promises/obameter/

IRS 1040EZ Instructions,

History of U.S. Taxes

Publication 552

https://www.law.cornell.edu/uscode/text/26/61

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/How-long-should-I-keep-records

http://blog.taxact.com/the-difference-between-form-1040-1040a-and-1040ez/

http://www.neat.com/helpcenter/irs-electronic-document-requirements/

http://www.irs.com/articles/determining-your-filing-status

http://www.irs.gov/uac/Newsroom/Earned-Income-Tax-Credit-Do-I-Qualify

http://www.irs.gov/Individuals/EITC-Income-Limits,-Maximum-Credit--Amounts-and-Tax-Law-Updates

http://www.irs.gov/publications/p15/ar02.html#en_US_2015_publink1000202367

http://apps.irs.gov/app/vita/content/globalmedia/earned_income_credit_table_1040i.pdf

http://www.irs.gov/Individuals/International-Taxpayers/Nonresident-Spouse-Treated-as-a-Resident

http://www.irs.gov/Individuals/General-ITIN-Information

http://www.irs.gov/taxtopics/tc752.html

http://www.irs.gov/pub/irs-prior/fw3--2014.pdf

http://www.irs.gov/uac/Form-4852,-Substitute-for-Form-W-2,-Wage-and-Tax-Statement,-or-Form-1099-R,-Distributions-From-Pensions,-Annuities,-Retirement-or-Profit-Sharing-Plans

http://www.irs.gov/taxtopics/tc418.html

http://www.eitc.irs.gov/Tax-Preparer-Toolkit/dd/lawandregs

http://www.infoplease.com/ipa/A0005921.html

http://en.wikipedia.org/wiki/Tax_Reform_Act_of_1986

http://en.wikipedia.org/wiki/Omnibus_Budget_Reconciliation_Act_of_1990

http://en.wikipedia.org/wiki/Pay-as-you-go_tax

http://www.taxprophet.com/archives/pubs/rra_nl.html

http://en.wikipedia.org/wiki/Taxpayer_Relief_Act_of_1997

http://www.irs.gov/taxtopics/tc756.html

http://www.irs.gov/publications/p929/ar02.html

http://www.irs.gov/publications/p501/ar02.html

http://www.irs.gov/Individuals/Get-your-refund-faster-Tell-IRS-to-Direct-Deposit-Your-Refund-to-One,-Two-or-Three-Accounts

http://www.irs.gov/uac/Newsroom/Eight-Facts-on-Late-Filing-and-Late-Payment-Penalties

http://www.irs.gov/uac/Newsroom/Report-Name-Change-before-You-File-Taxes

http://www.irs.gov/Individuals/International-Taxpayers/Taxpayer-Identification-Numbers-%28TIN%29

http://www.irs.gov/instructions/i1040gi/ar01.html#d0e1886

http://www.irs.gov/Tax-Professionals/The-Truth-About-Frivolous-Tax-Arguments-Section-III

http://en.wikipedia.org/wiki/United_States_budget_process

http://www.irs.gov/Tax-Professionals/e-File-Providers-&-Partners/Practitioner-PIN-Method-for-Forms-1040-and-4868-Modernized-e-File

http://www.irs.gov/taxtopics/tc451.html

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits

http://www.irs.gov/publications/p501/ar02.html

http://www.irs.gov/publications/p554/ch01.html

http://www.irs.gov/taxtopics/tc551.html

http://apps.irs.gov/app/vita/content/globalmedia/standard_deduction_chart_65_or_older_4012.pdf

http://www.irs.gov/Individuals/Adoption-Taxpayer-Identification-Number

http://www.irs.gov/pub/irs-drop/rp-13-35.pdf

http://www.irs.gov/taxtopics/tc559.html

 https://en.wikipedia.org/wiki/Golden_Rule

IRS Publication 470

IRS Circular 230

IRS Publication 947

IRS Publication 216

IRS Form 8275-R Instructions

https://www.ftb.ca.gov/forms/2014/14_1001.pdf

https://www.ftb.ca.gov/professionals/taxnews/2014/February/Article_5.shtml

https://www.ftb.ca.gov/individuals/faq/dompart.shtml

http://www.usatoday.com/story/money/personalfinance/2014/04/26/these-states-have-no-income-tax/8116161/

https://www.ftb.ca.gov/forms/misc/1032.pdf

http://caltax.org/homepage/Conformity_Chart_110113.pdf

http://www.irs.gov/publications/p525

                IRS Publication 525

http://www.irs.gov/Individuals/International-Taxpayers/Tax-Treaty-Overview

Tax Treaty Overview

http://www.irs.gov/pub/irs-pdf/p15b.pdf

Publication 15 B Employee Fringe Benefits (page 19)

http://www.irs.gov/taxtopics/tc427.html

                Stock options

http://www.irs.gov/Government-Entities/Indian-Tribal-Governments/ITG-FAQ-%234-Answer-What-are-the-tax-implications-of-being-a-federally-recognized-tribe%3F

Tax Status of Tribes

 http://www.irs.gov/pub/irs-tege/rr67_284.pdf

                Indian Tribes income

http://www.irs.gov/taxtopics/tc417.html

                Housing for Clergy

https://www.ftb.ca.gov/Archive/Law/legis/09_10bills/AB1612_Final.pdf

http://www.irs.gov/Individuals/Certain-Medicaid-Waiver-Payments-May-Be-Excludable-From-Income

http://www.irs.gov/publications/p17

https://www.ftb.ca.gov/forms/misc/1126.pdf

                Enterprise Zone Tax Incentives

https://www.ftb.ca.gov/Archive/Law/legis/03_04bills/SB1689_041204.pdf

http://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently-Asked-Tax-Questions-&-Answers/Capital-Gains,-Losses-and-Sale-of-Home/Mutual-Funds-(Costs,-Distributions,-etc.)/Mutual-Funds-(Costs,-Distributions,-etc.)-1

http://www.irs.gov/taxtopics/tc403.html

https://www.tradeking.com/education/mutual-funds/tax-guide

http://www.irs.gov/publications/p17/ch08.html

http://www.irs.gov/irm/part4/irm_04-061-007.html#d0e10

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporations

http://www.irs.gov/taxtopics/tc404.html

http://www.irs.gov/pub/irs-pdf/f2439.pdf

https://www.ftb.ca.gov/forms/2014/14_540nrcains.pdf

http://www.irs.gov/publications/p946/ch02.html#d0e1894

http://www.irs.gov/publications/p946/ch04.html#d0e3795

http://www.irs.gov/publications/p946/ch04.html

http://www.irs.gov/taxtopics/tc704.html

http://www.irs.gov/publications/p535/ch08.html

http://www.hcd.ca.gov/financial-assistance/enterprise-zone-program/lambra/

http://www.irs.gov/publications/p946/ch04.html

https://www.law.cornell.edu/uscode/text/26/169

http://science.howstuffworks.com/environmental/energy/crude-oil-market.htm

http://www.irs.gov/irm/part4/irm_04-041-001-cont01.html

http://winefolly.com/review/no-cure-for-grape-phylloxera/

https://winegrapes.tamu.edu/grow/pierce.html

http://www.irs.gov/publications/p946/ch01.html

http://www.pwc.com/en_US/us/tax-services/newsletters/entertainment-media-communications-tax/assets/pwc-volume-15-pdf.pdf

http://www.irs.gov/publications/p946/ch05.html

http://www.irs.gov/uac/Car-and-Truck-Expense-Deduction-Reminders

http://www.irs.gov/pub/irs-pdf/p463.pdf

http://www.plugincars.com/cars

http://www.irs.gov/Businesses/Plug-In-Electric-Vehicle-Credit-IRC-30-and-IRC-30D

http://www.irs.gov/pub/irs-drop/rr-99-23.pdf

http://www.irs.gov/uac/IRS-Issues-Guidance-on-Tax-Treatment-of-Cell-Phones;-Provides-Small-Business-Recordkeeping-Relief

http://www.irs.gov/publications/p535/ch11.html

http://www.irs.gov/taxtopics/tc431.html

https://www.ftb.ca.gov/forms/2013/13_3547.pdf

http://www.irs.gov/pub/irs-pdf/f8882.pdf

http://www.irs.gov/pub/irs-pdf/i3800.pdf

http://www.irs.gov/pub/irs-pdf/f8826.pdf

http://www.irs.gov/publications/p925/ar02.html#en_US_2014_publink1000104591

http://www.irs.gov/pub/irs-pdf/i6765.pdf

http://www.irs.gov/uac/Newsroom/Energy-Efficient-Home-Improvements-Can-Lower-Your-Taxes

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Work-Opportunity-Tax-Credit-1

http://www.irs.gov/pub/irs-pdf/f8820.pdf

http://minnesota.cbslocal.com/2012/08/20/good-question-why-can-some-clubs-discriminate/

http://www.irs.gov/irb/2006-09_IRB/ar13.html

http://www.irs.gov/uac/Small-Business-Health-Care-Tax-Credit-Questions-and-Answers:-Who-Gets-the-Tax-Credit

http://www.irs.gov/pub/irs-tege/eotopicg04.pdf

http://portal.hud.gov/hudportal/HUD?src=/topics/rental_assistance/phprog

http://www.irs.gov/taxtopics/tc701.html

http://www.irs.gov/publications/p17/ch38.html#en_US_2014_publink1000174965

http://www.irs.gov/taxtopics/tc409.html

http://www.irs.gov/publications/p17/ch17.html

http://www.irs.gov/taxtopics/tc423.html

http://www.irs.gov/Retirement-Plans/Retirement-Plans-Startup-Costs-Tax-Credit

http://www.irs.gov/instructions/i8938/ch01.html

http://www.irs.gov/uac/Newsroom/IRS-Simplifies-Procedures-for-Favorable-Tax-Treatment-on-Canadian-Retirement-Plans-and-Annual-Reporting-Requirements

http://www.irs.gov/Government-Entities/Federal,-State-&-Local-Governments/Group-Term-Life-Insurance

http://www.irs.gov/publications/p969/ar02.html

http://www.irs.gov/publications/p969/ar02.html

http://www.irs.gov/taxtopics/tc418.html

http://www.irs.gov/irm/part6/irm_06-630-001-cont01.html

http://www.dailynews.com/environment-and-nature/20140514/rip-out-your-lawn-get-paid-double-says-drought-minded-metropolitan-water-district

http://www.irs.gov/taxtopics/tc419.html

http://www.irs.gov/uac/Whistleblower-Informant-Award

http://www.irs.gov/pub/irs-wd/1045023.pdf

http://www.irs.gov/publications/p3/ar02.html

http://www.irs.gov/pub/irs-drop/n-10-15.pdf

https://www.ftb.ca.gov/forms/2013/13_1032.pdf

http://www.irs.gov/Individuals/The-Mortgage-Forgiveness-Debt-Relief-Act-and-Debt-Cancellation-

http://www.irs.gov/pub/irs-pdf/p4681.pdf

http://www.irs.gov/uac/Newsroom/Frequently-Asked-Questions:-Retiree-Drug-Subsidy

http://www.irs.gov/pub/irs-drop/n-12-60.pdf

http://www.irs.gov/taxtopics/tc458.html

http://www.irs.gov/taxtopics/tc851.html

http://www.irs.gov/uac/Newsroom/Dont-Miss-the-Health-Insurance-Deduction-if-Youre-Self-Employed

https://www.ftb.ca.gov/professionals/taxnews/2015/January/01.shtml

http://www.irs.gov/taxtopics/tc456.html

http://www.irs.gov/pub/irs-pdf/i8903.pdf

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Partnerships

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporations

http://www.irs.gov/taxtopics/tc503.html

http://www.irs.gov/publications/p501/ar02.html

https://www.ftb.ca.gov/forms/2014/14_1540.pdf

http://www.irs.gov/taxtopics/tc602.html

https://www.ftb.ca.gov/forms/2014/14_3506ins.pdf

https://www.ftb.ca.gov/individuals/faq/ivr/203.shtml

https://www.ftb.ca.gov/individuals/faq/ivr/227.shtml

https://www.ftb.ca.gov/individuals/faq/dompart.shtml

http://www.investopedia.com/terms/o/orphan-drug-credit.asp

http://www.investopedia.com/terms/g/group-term-life-insurance.asp

http://www.edd.ca.gov/disability/sdi_contribution_rates.htm

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