Hera’s Income Tax School

2016

Annual Federal Tax Refresher Course 

Table of Contents

2. Federal Tax Law

3. IRS Rules that govern ethics

   References

x. Introduction

Complete the Annual Federal Tax Refresher Course online with our approved tax preparation school. Annual Federal Tax Refresher Course (Hours are listed in accordance with IRS Annual Federal Tax Refresher Course requirements. This includes the 6 hour Annual Federal Tax Refresher Course as required by the IRS to get the IRS Record of Completion). 6 Hours: federal tax law, Tax Refresher/Updates, and practice procedures. To get the Record of Completion you must complete the the Annual Federal Tax Refresher Course, the knowledge-based comprehension test and other required continuing professional education (CE) by December 31, 2015. Remember, you have to complete additional continuing education in addition to the Annual Federal Tax Refreshed Course for the Record of Completion from the IRS. Many preparers are exempt from taking the Annual Federal Tax Refresher course.

After you register for the Annual Federal Tax Refresher Course, proceed with the following:

The 6 Hr Annual Federal Tax Refresher Course consists of the following items. Complete the Annual Federal Tax Refresher Course plus the knowledge-based comprehension test.

Begin the Annual Federal Tax Refresher Course right away and advance at your own pace. Paying the registration fees for the Annual Federal Tax Refresher Course is registering. Once you have registered for the Annual Federal Tax Refresher Course, please go to “Student Login” above.

The new tax updates part of the Annual Federal Tax Refresher Course includes recent changes of tax rules such as adjustments for annual inflation and the filing requirement threshold amounts. Hence, the Annual Federal Tax Refresher Course also covers the new exemption and standard deduction amounts. In this part of the Annual Federal Tax Refresher Course we will review the Additional Medicare Tax, the Net Investment Income Tax, same gender marriage issues, the ACA Health Insurance Premium Tax Credit and ACA Individual Shared Responsibility Payment. Due dates and extensions are also covered in this part of Annual Federal Tax Refresher Course. All these items are covered in the first domain of the Annual Federal Tax Refresher Course.

The General review or tax law part of the Annual Federal Tax Refresher Course will cover basic tax issues such as filing status, claiming dependents, using correct SSN or other identification numbers for exemptions claimed. Furthermore, taxable and non-taxable wages, interest, dividend income, taxable state and local refunds, and self-employment are also covered in this part of Annual Federal Tax Refresher Course. Also covered in this part of Annual Federal Tax Refresher Course are social security benefits, IRAs, pensions, annuities, and capital gains. In this part of the Annual Federal Tax Refresher Course you will also be able to review income adjustment items such as deductible part of SE tax, student loan interest and tuition and fees deductions. Other items reviewed in this

1. Federal Tax Updates

Cost of living standards

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. 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. The cost of living standards in California, for example, are different than the cost of living standards in Texas. 

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.

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.

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. 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. 

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. 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.

Adjustments for inflation

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.

Personal exemption

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.     

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.

Alternative minimum tax

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.

Earned Income credit

All the Earned Income Credit amounts rise 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 of 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.  

Decedents

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 estates 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.

Gift tax

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 are 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 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.

Employer retirement plans

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.

Foreign Earned Income Exclusion Credit

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.

Employer Provided Health Coverage

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 owe 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.

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.

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.

Net Investment Income Tax

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.

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.   

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. If you owe the Net Investment Income Tax, you must use Form 8960 with your tax return.

Same Gender Marriage

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 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.

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 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.  

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 six 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 couples from being able to file as married couples was reversed and now same sex couples can benefit from the tax law as other couples.

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 don't qualify to be exempt.  

The Small Business Health Care Tax Credit

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.

The Premium Tax Credit

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.

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.

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. 

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.

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 for 2015 is over. The last enrollment period for 2015 was from March 15, 2015 to April 30, 2015. Many changes are still occurring in 2015 for the 2016 tax season. The open enrollment period to purchase health care insurance for 2016 is from November 15, 2015 through January 31, 2016.

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.

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.

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.

You can find most information at HealthCare.gov to inform yourself on the health insurance options which are available to you. You can also find out how to purchase health insurance coverage and how to get financial assistance with the cost of insurance. Additionally, an exemption applies to individuals who purchase their insurance through the Marketplace during the enrollment period for 2015, which runs from November 1, 2015, through January 31, 2015. Additionally, if after February 15, 2016 you have not enrolled yet, you can only enroll if you have a life changing even such as getting married or having a baby. You can also qualify for the Special Enrollment Period if you are adopting a child or placing a child for adoption or foster care.  

There is an exemption from getting minimum health care coverage and you may qualify for such exemption. 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. 

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 it 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 one 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.

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

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.

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.

Additionally, Form 1095-B is provided to certify 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.

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 you 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.

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.

Extensions of Time to File Your Tax Return

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 April 15 falls on a Saturday, Sunday or legal holiday, then your tax return is due 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 if 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 Internal Revenue Service. 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

The due date for filing your federal individual income tax return is April 15 when your tax year ends Dec. 31. If your tax year ends at any other time, then the usual filing deadline would be on the 15th day of the fourth month after your tax year ends. Also, your return is considered filed timely if the envelope is properly addressed and postmarked no later than April 15.

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 three weeks after the Internal Revenue Service receives your tax return. If you are getting a refund, your 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 eleven 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.

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 individual retirement account (IRA) which 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. These changes 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.

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 month 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 are done, you cannot rollover another IRA for another 12 months 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 that you must 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

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. 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.

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.

Advance payments of the premium tax credit

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 your expected household income. You also need to provide information about your family size for the year.

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.

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.

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 taxpayer's 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.

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.

Remember, these are credits 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 counting on these tax breaks to help with the high costs of living. The purpose of these credits 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 businesses can continue to enjoy the incentives given in the form of tax credits and tax deductions and in turn everyone as a whole benefits from the fruits of these incentives.

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 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.

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 your deductions 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 can forget about trying to claim the tuition and fees deduction for items paid with these funds.

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 12th 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 12th grade. Those colleges and universities are making a lot of money and it would be 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 12th grade, the teacher must have worked at least 900 hours in a school year for providing elementary and secondary education.

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, both you paid for the item and you have the responsibility to pay for the item.

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 types of taxes that you can take a deduction for on lines five through nine of your 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 taxes 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 listed 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.

Credit for certain nonbusiness energy property

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.

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.

Pell grants and other scholarships or fellowships

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

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 for medical and moving purposes 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.

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.

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 returns to a different address starting with tax returns filed for tax year 2014.

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

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. It is shocking to hear that criminals use a method called “shoulder surfing” to get your information.

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. 

Qualified parking exclusion and Commuter transportation benefit

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 employee. 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.

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 in 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

Many of 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

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.

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

Being a victim of tax related identity theft can cause a number of problems which include filing issues with the Internal Revenue Service, not being able to file your tax return electronically, and the reporting wages to your name which you have not earned will show for your social security number.

Concluding comments on tax updates

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 great many of them. Some of these promises were met and some have been partially met. For others a similar promises has been met that were 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.

2. Federal Tax Law

Constitutionality of taxation

Can you believe there was a time when there was no income tax? Not only that, but the taxing of individuals was considered unconstitutional for short while. The taxing process graduated slowly to what it is now. Although at one point there was a question of the constitutionality of taxation, it was just a matter of minor adjustments.

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.

Information on your tax return

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. 

Some information on tax returns is absolutely imperative and your tax return will not be processed without it. The return that is missing such important information will be returned to the taxpayer and thus the filing of your tax return will be delayed. The filing of the return may also be considered late if such information is missing because usually the Internal Revenue Service will simply send back the entire return for corrections to be made.

Filing requirements

Everyone who makes money must file a tax return for the most part. Some will be exempt from filing if their income does not fall within certain guidelines. Filing your tax return will most probably be obligatory. However, sometimes it will be in your best interest to file even if filing is not mandatory. You must determine your filing status before you can determine whether you must file a tax return, your standard deduction and your tax. 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 also use your filing status to determine whether you are eligible to claim certain deductions and credits. 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. 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.

Most income counts when you determine if you must file a tax return or not. 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, babysitters, 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 $1,900 or more during the year. 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.

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.

The obligation to file a tax return is based on income earned and not on the age of the taxpayer. Under certain guidelines, you may be able to include your child's certain unearned income on your own tax return. 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. However, this rule does not apply for income which your child earns from income received from an employer. Such would be the case with child actors, actresses and singers.

The income you received could be income you receive from any source and does not necessarily have to be from employment. The source of this income could be from retirement for instance. 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 Internal Revenue Service contacting you.

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. Of the many fines and penalties for not abiding by the tax filing requirements and rules, criminal prosecution could be one of them. 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. If you have household employment taxes and the only reason you would need to file a tax return is to pay these taxes, you can send Schedule H in by itself.

One of your filing statuses is the single filing status. If your filing status is single and you are under age 65 at the end of 2015 you would file a tax return if your gross income was at least $10,300. However, if you were single and 65 or older at the end of 2015 then you would have to file a tax return if your gross income was at least $11,850. Sometimes filing a tax return is not required if you did not earn sufficient money, but you may want to file to get tax benefits such as the Earned Income Tax Credit.

Another filings status is the head of household filing status. If you were head of household and under age 65 at the end of 2015, you would file a tax return if your gross income was at least $13,250. 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 $14,800. The head of household filing status has more requirements to be met than the other filing statuses. Once of these requirements is to have supported a home for your dependent for more than half the cost of maintaining the home.

Another filing status is the married filing jointly filing status. The requirements call for either you being married or not being married at the end of the year. 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 2015, then you must file a tax return if your gross income was at least $20,600. If you were born before January 2, 1951, you are considered to be 65 or older at the end of 2015. If one taxpayer is over 65 most likely than not, the spouse is also 65 or older and thus both can take an extra deduction for being over age 65.

Besides the income level guidelines, 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 need to file Schedule H by itself. You must also file if you have any type of recapture taxes.

There are many circumstances where you must file a tax return even if the amounts you are dealing with are small amounts. 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, then you must file a tax return. 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 credit 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.

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 Earned Income Tax Credit. Also, 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 you 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, right at the start of your job. 

As we have already mentioned, even 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.

Usually you would owe self-employment tax if your net earnings from self-employment income are at least $400. So after you have calculated your total employment income and deduct the business expenses, you will be liable for self-employment tax if your net earnings from self-employment is $400 or more and you also must file a tax return. If your net earnings from self-employment are less than $400, you should file a tax return anyways to reconcile any 1099-Misc tax forms which you may have received from other businesses or individuals. Say you have received $50,000 in total from all the people you do business with and all your expenses and deductions for different items such as equipment, your net income is less than $400 or even at a loss, you should let the tax agencies know that you are operating below the $400 and avoid them asking you why you have not filed.

Filing Requirements for Dependents

If you are a child or other dependent, you must file a tax return for 2015 if your gross income was more than the larger of $1,000 or your earned income up to $5,950 plus $350. If you are a dependent, you must file a tax return for 2015 if you income is over the standard deduction amount for a single taxpayer. The filing status amount for 2015 for a single taxpayer is $6,300.

Normally if your gross income was $4,000 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. If you qualify to be claimed as a dependent, you are a dependent even if the person who can claim you does not indeed claim you on their tax return. 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 more than $1,000, your earned income was more than $6,300 or your gross income was more than the larger of $1,000 or your earned income that is up to $5,950 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 $7,850. This amount is $9,400 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 $5,950 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 $5,950 plus $350.

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 $6,300. 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 $5,950 plus $350.

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 the tax return for the child. The child is still 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 so is 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.

Keeping records

Any calculations you make to issue credits and deductions must be documented in some form of worksheet. In a way, you as the tax preparer are the credits and deductions issuer. 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 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.

There are the costs of keeping 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 in the home 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 percent 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.

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. It is a good idea to store your backup records to cloud where they will not burn or be destroyed by any natural disaster. 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.

The client may need a copy of the tax return because he or she lost the copy you provided when you prepared the tax return the first time. They may need to show the bank a copy for the last three years in order to qualify for a mortgage and they may need to look you up and ask you to provide them with another copy. Alternatively, they may request the copy from the Internal Revenue Service but this usually takes longer. You as a tax preparer are legally required to provide a copy upon your tax client's request. You can charge for the copy but you must be able to produce it upon request.

Exemptions

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

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. 

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, to claim the Head of Household filing status or for any other credit or deduction. 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 either. 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 your 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.

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. 

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 which includes $350. For example, if the child earned $3500, the standard deduction would be $3,850. The standard deduction amount would not be less than $1,000.

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 $4,000 at the end of your tax year. If the dependent's gross income was $4,000 or more, the dependent usually cannot be claimed as a dependent unless the dependent is a qualifying child. 

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 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) for the child from the IRS.

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. Also, 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.

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 than your spouse but does not have to be younger than both of you. It should go without saying that an adopted child is always treated as your own child.

The qualifying person must usually be related to you in order for you to claim him or her as a dependent. 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. Things will be different if you and your spouse file separate tax returns, however. If your spouse's uncle can be your qualifying relative only if he lives with you all year as a member of your household in this case. Qualifying relatives would usually be people from your extended family such as uncles and aunts. However, these extended family members would not include cousins, not even your uncle or aunt's children. In order to claim the cousins they must live with you and they must qualify under other rules. These same qualifying relatives extend to your spouse's family as long as you and your spouse are filing as married filing jointly. If you and your spouse are filing as married filing separate, then you cannot include her extended family such as her uncles and aunts unless they lived with you.

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.

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 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?" The second question implies that you have no intention of following the rules. You are suggesting to your client that as long as a dependent is not claimed by someone else, your client can claim him or her. The first question is the correct question because it appropriately shows regard for the tax rules regarding dependents.

Furthermore, to claim there are five test that you must meet for a child to be your qualifying child and these are the tests to be able to claim an exemption for the dependent. First, you must pass the relationship test. To meet this test, your dependent 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 way if you have other dependents such as a brother, sister, half-brother, half-sister, stepbrother, stepsister or a descendent of these individuals such as your niece or nephew. Any young child will do except that if they are not related to your, you must have other documentation ready such as placement documents from child protective services.

Your child must also meet the age test for you to claim his or her exemption. 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.

Thirdly, your child must pass the residency test in order to qualify you for the dependent exemption. In order to meet this test, your child must have lived with you for more than half of the year. There are exceptions for children who were temporarily absent, children who were born or who died during the year. If your 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. 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. If you provided more than half of the child's support, you have met the support test. If you have provided exactly half of the support, you have not met the support test.

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 will 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 for the year. However, the child can file a tax return for the year and you can still claim him or her as a dependent on your tax return. That is so as long as the child files a joint return only to claim a refund and no taxes would be saved by the child filing a joint return. 

The test for qualifying relatives are slightly different and all under similar but different tax rules. There are four tests that you must meet for a person to be your qualifying relative and to qualify you to claim dependent exemption. First, your qualifying relative must not be your qualifying child and thus you must 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 $4,000 for 2015 and changes every year to allow for inflation. Lastly, your qualifying relative must meet the support test.

You must know the difference between the rules serving the different purposes. For example, if you want to claim a dependent exemption, you must have a qualifying child or a qualifying relative and they must pass the different tests to be considered who is your qualifying person. You must pass the five tests for a qualifying child and the four tests if you have a qualifying relative. You should make the five tests a part of your interview packet so that you have them in front of you when you ask your client qualifying questions. You should do the same with the four tests for the qualifying relative.

There are many 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.

Different rules and exemptions can apply for claiming an exemption for certain adopted children. Adopted children are your children and there is not distinction on tax returns when following the rules. 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 into account, there 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.

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 2015 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.

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.

Qualifying relatives other than your father or mother, who lived with you for more than half the year and who are related to you in one of the ways for relatives, do not have to live with you in order to claim their exemption. However, you must be able to claim an exemption for him or her and therefore are qualifying persons for you to be able to claim their exemption. These qualifying relatives are your grandparents, your brothers or sisters who also have to meet certain other tests.

Multiple Support

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 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 others sign 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. Only the person who is claiming the exemption must attach Form 2120 to the tax return. The others don't attach Form 2120 to their return. Doing so will just confuse the people processing their tax return. The people who are not claiming the exemption can always keep a copy of Form 2120 for their records if they wish to do so but it is not necessary.

To further illustrate, your mother lives with you and receives 20% of his support from social security, 45% from you, 10% from her brother (your uncle), 10% from a friend and 15% from another friend. Either you or your uncle and the other two friends can take the exemption for your mother if the other persons sign 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.

Children of divorced or separated parents

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 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. 

Child absent from home

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 the exemption and even file as head of household if the child who is your qualifying person has been kidnapped. You can do so if the child who 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 the exemptions if the child had not been kidnapped.

If the child is away because of school for example, you are expecting the child to return when he or she graduates. Furthermore, the child is temporarily absent due to vacation and you are expecting the child to return soon from his or her vacation. If at any time you believe that your child will never return, you cannot consider him or her as being temporarily away from the home and thus you can consider him or her as being away on temporary absence.

Filing Status

If more than one filing status applies to you, choose the one that will give you the lowest tax. Your filing status is the filing status that applies to you at the last day of the year. If you obtained a divorce on December 26, 2015 and at the time of your divorce in 2015 you intended to and did remarry each other on August of 2016. You and your spouse must file your tax return as Married Filing Jointly or Married Filing Separately. Nice try! The Internal Revenue Service is already in the know about this trick. There is an easier way to do this. Choose the filing status which will give you the lowest tax but do it legally. You and your spouse must file your tax return as married filing jointly or married filing separately. The Internal Revenue Service is well aware of "get married in December and divorce in January" trick. Unbelievable that this was a trick that some taxpayers pulled some time ago. Anyways, choose the best filing status that applies to you and do it honestly. No tricks! 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. However, stay married!

You must determine your filing status before you can determine your filing requirements, the standard deduction and your correct tax. 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 married filing jointly filing status even if you had no income or deductions. If you lived apart at the end of the year, it may be worthwhile to look into the head of household filing status instead. 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. This of course is one of the many requirements to qualify for the head of household filing status. One of these is that you did not live with your spouse at any time during the last six months of the year.

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.

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 2015, you must file a tax return if you are single (under age 65) and your income was at least $10,300. You must file a tax return if you are Head of household (under age 65) and your income was at least $13,250. You must file a tax return if you are married filing jointly (one spouse was over age 65) and your income was at least $21,850. 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.

When filing your tax 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 or on whether someone else can claim you as a dependent. 

Each filing status requires a different dollar amount. If you are filing as single your standard deduction amount is $6,300 for tax year 2015. If you are married and are using filing status as married filing separately, your standard deduction is also $6,300. 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 $12,600. If you qualify the head of household filing status, your standard deduction amount that you can claim is $9,250 for tax year 2015.

If you are blind or over the age of 65 you have more care requirements such as more medical attention and the need for special services. The tax laws are only concerned with the age that is on paper. If you are born before January 2, 1951, or if you are blind, your standard deduction increases for each filing status. The additional standard deduction for being age 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 that 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 $1,250 for each circumstance such as being blind or being 65 or older. Additionally, this $1,250 amount also applies to married taxpayers who decide to file as married filing separately.

Head of household

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.

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

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. First, 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.

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. The period for which the child was not present in the home can be considered as if they were there as long as it pertains to these reasons. 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 the dependent is 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, then this parent can still qualify you for the head of household filing status. 

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 at any time during the last six months of the year. Very important to know is that if you are married and if you qualify, you can practically use any filing status except single. If you are married, you would not use the qualifying widow (or widower) filing status, of course. If your taxable income is more than $100,000 you cannot use form 1040EZ or Form 1040A.

One of the requirements for the head of household filing status is that you pay for the upkeep of a home for your qualifying dependent. 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.

No all dependents have to live you in order for you to qualify for the head of household filing status. You can qualify for the head of household filing status if you have a qualifying child or if you support your parent's home. 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. For dependents who don't need to live with you to qualify you as head of household, you must support a home for them for more than half the support of the home in which you both live in order to claim the head of household filing status.

If the person is your qualifying child and he or she is single, then that person is a qualifying person. 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. 

If you are able to claim your mother or father, maybe you can qualify for the 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 head of household filing status. Additionally, your parents can live in their own home - a home which you have supported for more than half of the upkeep. However, you must be able to claim an exemption for your parent and if you cannot claim an exemption for him or her, then they are not to be considered a qualifying person. 

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. The same goes for children that are born or who die during the year. 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. Furthermore, 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.

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.

A person, qualifying child or qualifying relative cannot qualify more than one taxpayer for the head of household filing 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 the 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.

The correct form

Even if everything does fit into Form 1040, you should file the correct forms with the Internal Revenue Service. 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, 12 ounces or 24 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 (in one filling), you cannot file a Form 1040 or 1040A tax return on a Form 1040EZ or a Form 1040 tax return on a Form 1040A.

Form 1040EZ

Form 1040EZ is the easiest tax form there is. Form 1040EZ is usually the first tax form that a taxpayer files after they get their first job. There are many items that allow you to use Form 1040EZ. You can only file as single or married filing jointly when you use Form 1040EZ. You are not allowed to claim any dependents on Form 1040EZ. You must also be under age 65 and not blind on January 1, 2016. The items of income you can report on Form 1040EZ can only be from wages, salaries, tips, taxable scholarships and fellowship grants. You can only report your unemployment compensation or Alaska Permanent Fund dividends on Form 1040EZ.

If your taxable interest income was not over $1,500, you can file your tax return on Form 1040EZ. If your interest income is over this amount, sorry, but you must file Form 1040A or Form 1040. In order to file Form 1040EZ, your total taxable income has to be less than $100,000. If you have tips, your tips must be only tips which are included in boxes 5 and 7 of your Form W-2. Additionally, you cannot have household employment taxes to use Form 1040EZ. Other items to consider when considering if you can file Form 1040EZ is that you cannot have had a Chapter 11 bankruptcy case that was filed after October 16, 2005 to report on your tax return. You also cannot have any adjustments to income. Your credits are limited only the Earned Income Credit. Furthermore, you cannot include any advanced payments of the premium tax credit on Form 1040EZ.

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 RR tax withheld you will not be able to file Form 1040EZ either. There will also not be any space for any retirement Savings Contributions Credit or the Saver's Credit 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) to let you know of the error.

Form 1040A

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.

Taxpayer Identification Numbers

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. 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 a nonresident or resident alien and you do not have and are not eligible to get an SSN, you must apply for an ITIN. You 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.

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 Taxpayer Identification Number (TIN) is an identification number used by the Internal Revenue Service (IRS) in the administration of tax laws. The Internal Revenue Service issues other numbers too, such as the Social Security Number "SSN", the Employer Identification Number in addition to the Individual Taxpayer identification Number "ITIN".

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 the social security number (SSN) of any person for whom you claim an exemption on your individual income tax return. 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). It seems that we mentioned all the possible TINs and here they are again just in case we missed them. The taxpayer identification numbers available are social security number (SSN), the Employer identification number (EIN), Individual taxpayer identification number (ITIN), the taxpayer Identification number for pending U.S. Adoptions (ATIN), and the preparer tax identification number (PTIN).

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.

The purpose of an ITIN is to file your tax returns. 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 deter any use of the ITIN for an impermissible purpose, the IRS carefully screens to whom they issue this number. 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. You cannot claim the earned income credit using an ITIN.

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 a 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.

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 who 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).

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).

Foreigners who are individuals should either apply for a Social Security Number (SSN) if they meet the requirements for 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.

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 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".

Foreign persons who are individuals 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.

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 own complete personal name as the business name.

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. However, if you are not issued the same number, this would not be anything important to worry about since your taxpayers probably have other more important issues with which to be concerned. 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.

Adoption taxpayer identification numbers

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.

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. 

Practitioner PIN

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).

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 his or her PTIN as long as he signs it. The 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.

Change of name

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. By the way, 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 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.

Identity theft

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. Preparers should ensure that they notify their clients of the precautions they are taking to safeguard their personal information.

You know that part of the reason the Internal Revenue Service invented PTINs was due to the fact that tax preparers were also victims of identity theft for a while. A taxpayer or supposed taxpayer would visit an unsuspecting tax professional only to walk away with a copy of the tax return which listed the tax preparer's social security number by the signature line. Then later this individual posing as a tax client would open credit cards and personal loans in the tax professional's name and totally ruin his or her credit and reputation.

Also, the taxpayer can and most likely will, ask their employer how they are protecting the employees social security number to make sure the employer is protecting their 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 others 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.

Married filing separate

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. 

If you choose married filing separately as your filing status, certain 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. In addition, 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.

In some cases, your combined income tax on separate tax returns may be less that it would be on a joint tax return. However, if you must itemize your deductions, your spouse must itemize his or her deductions too. As a result of this, you will not be 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 as married filing separate. Also, when you file Married Filing Separately, more of your Social Security benefits you received during the tax year become taxable than if you filed a Married Filing Jointly tax return.

Married individuals always have the legal right to files their returns as either married filing jointly or married filing separately. However, if one spouse does not report the correct tax, both spouses may be responsible for any individual taxes assessed by the Internal Revenue Service. 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.

There are a few consequences of selecting Married Filing Separately when you file your tax return. First off, your tax rate would generally be higher. In figuring the alternative minimum tax, the exemption amount is half of that which is allowed on a joint tax return. Moreover, the credit for the child and dependent care expenses in most cases would not be allowed. Also, if you file married filing separately, the amount of exclusion from income under an employer's dependent care assistance program is limited to $2,500 instead of the full $5,000. As you may already know, the Earned Income Tax Credit will not be allowed for individuals using the married filing separate status. If you choose to file as married filing separate on your tax return, you have a higher tax rate and less deductions and credit. In most cases, the exclusion or credit for adoption expenses is not allowed. Other credits that are not allowed are the education credits such as the American opportunity credit, lifetime learning credit, or the deduction for student loan interest. Still on the subject of education, the exclusion of any interest income from qualified U.S. savings bonds you used for higher education expenses are also not allowed if you file married filing separately on your tax return.

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. Furthermore, the credit for the elderly or the disabled is not allowed as a consequence of filing as married filing separately. You also have to include a greater percentage (up to 85%) of any social security or equivalent railroad retirement benefits you received in your income. In addition, the child tax credit is reduced at half income levels than if you filed jointly.

If you choose this filing status, the retirement savings contributions credit is reduced at half income levels than if you filed jointly. Married filing jointly is definitely the more advantageous selection of filing status. Furthermore, the deduction for personal exemptions, and your itemized deductions could be reduced at half income levels than if you filed jointly. Your capital loss deduction limit is $1,500 for choosing to file separately instead of the $3,000 on a joint return. Moreover, if your spouse itemizes her deductions, you cannot claim the standard deduction on your tax return which would be half the amount allowed on a joint tax return.

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 nowhere 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 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.

If you were married on or before December 31, 2015, you can either be Married filing jointly or Married Filing separate for tax year 2015. However, you can probably qualify for Head of Household filing status if you can be considered unmarried for 2015 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 you actively participated in a passive rental real estate activity that produced a loss, you generally can deduct the loss from your non-passive income up to a certain amount. This called a special allowance.

Relief of liability

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 spouse’s 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.

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 least twelve months before your separation of liability relief request.

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 does not pay enough estimated tax, you may want to file as "married filing separate". If things were great for you and your spouse at first and now things changed and you are having second thoughts on your decision to trust him or her, you can keep things separate, even filing your tax returns.

Married filing jointly

On a joint return, you and your spouse report your combined income and deduct your combined allowable expenses. You can file a joint tax 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.

You can check the "Married Filing Jointly" filing status on line 2 if you were married at the end of 2015 even if you did not live with your spouse at the end of 2015. You also check the "Married Filing Jointly" filing status if your spouse died in 2015 and you did not remarry by the end of 2015. If you were married at the end of 2015 and your spouse died in 2016 before filing a 2015 tax return then you need to file as "Married Filing Jointly" for 2015. After that you can possibly qualify for the qualifying widow (or widower) filing status for at least two years if you have a child who qualifies you.

If you were married at the end of 2015, even if you did not live with your spouse at the end of 2015 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 plenty of reasons you may want to file married filing separately. You may not trust your spouse. It sounds like it is time for a divorce! If you live separate from your spouse and you have a qualifying child living with your, you can probably qualify for the head of household filing status. 

If your spouse died at the end of 2015 and you remarried at the end of 2015 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.

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 as 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 the Married Filing Jointly filing status. The other options are the Married Filing Separate and the Head of Household filing status. There are 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 which 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.

Married but considered unmarried

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 2015. 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 do in fact, remarry each other in the next tax year, you and your spouse must file as married individuals in both years.

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. In essence, you are considered to have never married in the first place. Your marriage never existed and thus has become void. Therefore, you should amend your tax returns if you have filed returns as married filing jointly or married filing separate for years for which this annulment of the 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 Internal Revenue Service holds to this idea in applying the tax laws to annulments. For example, Jay and Thelma married in 2015, 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 2015. Consequently, they were ineligible to file jointly or even as married filing separately and therefore they must undue their joint return by filing an amended returns as unmarried taxpayers.

If you are married and are considered unmarried, you may be able to file as Head of household or as qualifying widow(or widower) 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.

Common Law marriage

Marriage does not always have to be a ceremony which is performed on paper. 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. Common law marriage exists more in the older states like the thirteen colony states. As long as you are married, this marriage does not have to be on paper. That is what common law marriage is. There are many stipulations that determine if you are indeed in a common law marriage. One of these would be if you hold certain items jointly such as bank accounts and other property. Another requisite is that the couple be known in their community as holding a relationship as a married couple. 

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 or married filing separate tax return.

Same sex marriage

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 tax law 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 the same federal tax benefits as all married couples. With this rule also comes the obligation to file if the taxpayers are legally married just as all other married couples. Now, they too have to file as either "married filing jointly' or "married filing separately". If two 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 at any time during the last six months of the year and they have a dependent child and meet other requirements. Remember the tax filing requirements and benefits are exactly the same as those for other married couples. 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 2015 tax return.

Itemized deductions or the standard deduction

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. 

When a taxpayer dies, his standard deduction is what it would have been at the end of the year if he or she would not have died. For example, Thomas died May 6, 2015 and he was single and he would have turned 65 on December 20, 2015. His standard deduction for 2015 is $7,850 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. You are not obligated to itemize your deductions just because your total deductions are more than the standard deduction amount.

Many changes have occurred with the start of the new Affordable Care Act. Certain deductions such the medical and dental deductions to claim on Schedule A, are not yielding such a great tax benefit anymore. Soon less and less people will have any medical or dental expenses to claim on Schedule A of Form 1040. 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. 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.

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 2015, 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 2015 and it is less than the standard deduction amount. Since Clara will itemize her deductions, Marvyn also has to itemize his deductions but only use the $4,100 amount.

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 2015 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 $1,250 for being over 65 years old and $1,250 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 $3,750 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 $5,000 standard deduction amount.

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 2015 if you were born before January 1, 1951. This is why it is important to ask all pertinent information on your client. Some of us look older than we really are, so be safe and ask for the date of birth and not if we are 65 or over. This is especially true if your client is a woman. 

You can be considered head of household or if your spouse died, you can file as qualifying widow (or widower) with qualifying child. For example, Kevin's wife died January 20, 2015, and by the end of 2015 Kevin had not remarried. During 2016, and 2017, 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 2014 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. However, if he does not get married, he can file as married filing jointly or separately for the first year and as qualifying widower for the next two years.

Qualifying Widow (or widower)

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 foster child but the child can be your stepchild. You can benefit from taking the Qualifying Widow (or widower) filing status because you qualify for the married filing jointly tax rates if you use this filing status. Using the qualifying widow (or widower) filing status will entitle you to use the highest standard deduction amount. The married filing jointly and the qualifying widow (or widower) filing statuses qualify for the highest standard deduction amounts. You can use Form 1040 to file using the qualifying widow (or widower) filing status and you can use Form 1040A if your taxable income is less than $100,000.

Standard deduction for dependent

The federal standard deduction amount for a dependent who earned $4,000 from her job is $4,350. This is so because the dependent earned only $4,000. Therefore the standard deduction for the dependent would be $4,000 plus $350. The standard deduction for the dependent cannot be more than the regular standard deduction of $6,300 for a single person in 2015. The standard deduction for the dependent would also not be less than $1,000 for the tax year. In this case, the standard deduction would be the larger of $1,000 or her earned income plus $350. This calculation is for dependents who are not over 65 years old or blind. If the dependent is over 65 or blind the standard deduction would be additional $1,000. Therefore, if the dependent is both over 65 years old and blind the standard deduction amount would increase by an additional $2,000.

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 $4,000 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.

Single

You can check "Single" box on line 1 if on December 31, 2015 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, 2015 and you did not remarry before the end of 2015 and you did not have a qualifying child to claim qualifying widow(er) filing status.

The single filing status is easy to figure out. You simply are not married. Your filing status is single if on December 31, 2015, 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, 2016 and you did not remarry in 2015 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".

The Earned Income Credit

The Earned Income Credit has been the most abused tax credit. 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.

There are many tax and legal consequences if you choose to disregard the EITC rules. For example, 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.

The process of following due diligence when issuing the Earned Income Credit is very much laid out for you. Due diligence comes in packs of four. 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. You can also integrate the questions on Form 8862 and use it as a substitute for Form 8862. As long as you ask the correct questions, you should be fine.

Let's take an example when you must use Form 8862 in preparing a tax return for your client. In 2015, 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 you $500 for that client if you fail to provide it. You must always use Form 8862 or the questions contained in Form 8862 before you issue any Earned Income Tax Credit amounts.

Almost all money received must be used in your calculations of the EITC. However, 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.

Income

Gross income is all income you 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. Before you can do anything, you must know the income that you are dealing with. Based on this income, you will be able to determine the steps to take. Gross income means all income you received in the form of money, goods, property. Gross income also includes services that are 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 sale of your home exemptions then you must determine which amounts of the gain from the sale of your home are includable in gross income. 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.

Everyone must do their part and provide documentation for everything that has transpired as far as what income was received. 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, 2016. 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, 2016 to mail your Form W-2 to you, but has until March 2, 2016 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, 2016 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, 2016 in order to file your substitute wage form. Another requirement is that you ask your employer for a copy before your use Form 4852.

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 2015 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 2015. 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.

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. The under $10 amount that your bank did not send you a form because it was not required is still taxable income.

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 inform who is the real owner. If you received interest income as a nominee, you received this income for someone else. Therefore, you are not required to report this amount on your own tax return. 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 2015 Form 1099-INT of 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 2015, then you must use either Form 1040A or Form 1040 to report it.

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. The same holds true for each payer of ordinary dividends. They should send you a Form 1099-DIV showing the ordinary dividends received. 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. The payer of interest income or ordinary dividends received will send you a Form 1099-INT or Form 1099-DIV for any amount. If you don't receive a Form 1099-INT or Form 1099-DIV, you still must report on your tax return whatever amount you have received.

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.

For example, you bought 10,000 shares of ABC Mutual Fund Common stock on July 8, 2015. ABC Mutual Fund paid a cash dividend of 10 cents a share. The ex-dividend date was July 15, 2014. 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, 2014. 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.

For example, you bought 5,000 shares of XYZ Corp. common stock on July 8, 2015. 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 the 5,000 shares on August 11, 2015. You held your shares of XYZ Corp. for only 34 days (from July 9, 2014 through August 11, 2014) of the 121-day period. The 121-day period began on May 16, 2014, (60 days before the ex-dividend date) and ended on September 13, 2014. 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, the amounts received are amounts which were paid to you but actually belong to someone else.

State refunds

If you received a refund, credit, or offset of state of local income taxes in 2015, 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 2015.

If you received a state refund of your taxes in 2015, 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 normally 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. Not always though. You need to fill out the worksheet to figure out the taxable amount.

Unemployment compensation

Unemployment compensation is taxable income for federal. You should receive a Form 1099-G showing in box 1 the total unemployment compensation paid to you in 2015. 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 2015 and you repaid any of it in 2015, subtract the amount you repaid from the total amount your received.

You must report on your tax return unemployment compensation that you receive that is the total unemployment compensation paid to you in 2015. Before, unemployment compensation was taxable only if the amount was over $2,400.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.

Tip income

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. Indeed all tip in taxable. Many taxpayers think that if they don't received at least $20 they don't have to report the tip income on their tax return. All tip income is taxable even if you are not required to report it to your employer.

Some tax history

If you know the history of taxation, you have a conversation piece for your customers to make things more interesting. Makes everything so much easier to understand and to explain when you know the history behind the entire thing. 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. It was then that 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, there is a difference now and it has to do with the media.

By 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 for additional funds of government.

President Reagan made a huge contribution to our current tax laws. For example on October 22, 1986, President Reagan signed into law the Tax Reform Act of 1986. The act called for a 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%.

Later on and 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 affects 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. This all started in 1791 or even before. 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%.

Many things have transpired in the process of a more fair tax. Beginning in 1868, Congress focused its taxation efforts on tobacco and distilled spirits and eliminated the income tax in 1872. Tobacco laws have changed and it started from tax making money from producing it to trying to complete eradicate the habit. The government has recently become concerned with public health and has passed certain taxes on tobacco products to discourage their consumption. Now the government is trying to discourage tobacco product consumption by charging high taxes on the products. Others tax changes have transpired in the process of candidates to office wanting to get elected or re-elected to office.

Direct Deposit

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. Direct deposit costs the Internal Revenue Service less to refund your overpayment. It costs you less to receive the money like this 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 Internal Revenue Service 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 office locations have put the self-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 time. Now you can even split your refund and have it deposited in two or three different checking or saving accounts.

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 most probably not allow a joint refund to your account.

Underpayment penalty

If you don't pay enough or what you pay is not enough to cover most of your tax, you may have to pay a penalty for not having paid enough. You may have to pay a penalty if the amount you 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 2015 tax return was for a tax year of 12 full months and there was no tax shown on your 2015 tax return and you were a U.S. citizen or resident for all of 2015. Also, you will not owe the penalty if your 2015 tax return was a tax year of 12 full months and line 7 on your 2016 tax return is at least as much as the tax shown on your 2015 tax return.

You must pay your tax on time, even if you don't file on time. 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 let time pass, the penalties alone can be more than the original amount.

Ask the Internal Revenue Service for an extension of time to pay. 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. 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. As result of 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 Internal Revenue Service will accept your return without the payment but will send you a letter asking you for payment and the interest and usually the penalty for not paying your tax will be calculated in that letter.

Failure to file

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. Also, if you fail to file and refuse to file, you can be liable for criminal prosecution.

Frivolous tax return

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. 

Automatic extension of time to file

An automatic six month extension to file will not extend the time to pay your tax. You can always pay late but not without the Internal Revenue Service 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.

If you cannot file on time, you can get an automatic six 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. Form 4868 must be sent by the due date of your tax return and not later. 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 as if you never sent an extension. If you get an automatic extension, you have until October 15, 2016 to file your tax return but not to pay the tax you owe.

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 tax return with the Internal Revenue Service, you could be liable for certain penalties for failing to pay your taxes as you earned your money. This usually means that you pay every time you receive a paycheck from your employer. If you are self-employed, this means that you will send money at least every three months through estimated tax payments.

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. However, even if this option is approved, you are still liable for certain penalties and interest. If you hardship request gets approved, you can count on paying more money to cover the additional interest charged for any extensions of time to pay. 

Presidential election campaign fund

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. And you know what interest groups do. They shift important laws to their advantage. 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. If you want help avoid of having leaders who are bought off by special lobbying groups, contribute to the presidential election campaign fund

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.

Budget proposal

Everyone needs a budget, even the United States Treasury. 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 Congress had allocated them and passing a more formal budget process would force President Nixon to spend funds as Congress had indicated.

Individual retirement accounts

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 2015. 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.

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 2014 and you did not elect to report the taxable amount on your 2015 tax return, you generally should have reported half of it on your 2014 tax return and the other half in your 2015 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.

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.

The contribution limit to your traditional IRA for 2015 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 2015 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 adjusted gross income (AGI) is $10,000 or more. Now, all spousal IRAs have been renamed Kay Bailey Hutchison Spousal IRAs.

Your individual retirement account (IRA) may be reduced or eliminated. 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 2015.

You need to start receiving items invested from your retirement once you reach age 70 1/2 otherwise you will be penalized for not doing so. 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 2015, 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 made any nondeductible contributions to a traditional IRA for 2015, you must report them on Form 8606.

Lump sum distributions

If you were born before January 2, 1936, 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.

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 2016. 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.

Statute of limitations

Keep a copy of your tax returns, 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 still need them for other purposes 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 statute of limitations 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 a copy of 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 period of time called the statute of limitations is different depending on your tax situation. The statute of limitations is applied 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.

Other agencies may require a tax return for a period of time which is beyond the statute of limitation the Internal Revenue Service requires. Your insurance company may need a copy of your tax return for longer periods, for instance. You may have property for which you figured depreciation that requires you to keep your records for many years. This would be the case with real estate transactions, where you keep records for long periods to calculate basis and depreciation when you sell or exchange the property.

Amending your tax return

Mistakes can happen on your tax return and amending the mistakes on your tax returns is a simple process. Sometimes amending the tax return has to do with you changing your mind about filing status. For example, you filed as married filing separately and you then you change your mind and decide that you are better off to file as married filing jointly. 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. 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 and the returns were not filed appropriately, you must file an amended tax return for a decedent in order to correct any errors. 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. 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. If you make a mistake on your tax return, you can always amend it to fix the problem.

Decedents

Everyone who is required to file a tax return has to file a tax return. Taxpayers file a tax return for the first time, a final tax return and many tax returns in between. 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. You must file an income tax return for a decedent if you are the surviving spouse, executor, administrator, or legal representative. You must file an income tax return for a decedent if the decedent was required to file at the time of death.

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 jointly. 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.

Educator expense credit

If you were an eligible educator in 2015, there is still a possibility that you could deduct up to $250 of qualified educator expenses you paid in 2015. This provision has expired as of December 31, 2014. There is no word as this provision being extended further than the December 31, 2014 expiration time.

Credit for Child and Dependent Care Expenses

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 or other qualifying dependent in need of care 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. There are many rules to follow. The care must be for an eligible dependent and must be for care while you are at work or looking for work. If your spouse did not work then you will not qualify for the credit unless they were not able to work because of a disability or because they were a full time student at a school which meets the requirements. 

Credit for the elderly or the disabled

If you meet the requirements, you may be able to take the credit for the elderly or the disabled. You may be able to take the Credit for the Elderly or the Disabled if by the end of 2015, if you were age 65 or older or you retired on permanent and total disability and you had taxable disability income. This credit is a nonrefundable credit and unfortunately, due to the low income most elderly taxpayers receive, it is not a credit which would help much. If it was refundable, that would be a whole different story.

Estimated tax payments

If you and your spouse paid joint estimated tax payments 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. The husband can claim the entire amount or the wife can claim the entire amount. On the other hand, you can also divide the amount in whichever manner best fits your tax situations. It is your choice as to which way the two of you decide to use the payments. If you are unable to decide in which way to divide the payments then both must allocate the payments according to the tax imposed. The result will be that you will have to prorate the amounts of the estimated taxes by the amounts each of you owe on your tax returns.

Form W-4

The amount of tax withheld needs to be as close to the actual amount of tax at the end of the year. 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 2016 pay to avoid any unnecessary extra withholding for tax year 2016. Many taxpayers may just want to leave things as they are or claim less allowances on their From W-4 in order to get a larger refund by tax season.

You must fill out a Form W-4 and give it to your employer at the beginning of your employment with him or her. If you family size changes, you must fill out another Form W-4 to reflect the new information. If you have a newborn in the family, you need to add another withholding exemption to your Form W-4. If you don't notify your employer of the new information in family size, you may have money overwithheld from your paycheck. This just means that you will receive more money back at the end of the year. On the other hand, if your withholding exemptions change and you no longer have a dependent, it is imperative that your fill out a new Form W-4 with your employer.

There are only nine states which are community property states. 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 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.

With regards 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.

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 your business and your social ties to the community when determining domicile. Eventually it should become very apparent where the taxpayer truly lives.

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.

Take precautionary steps to avoid any trouble down the line. 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 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 though, that just because you and your spouse pay estimated taxes jointly, this does not mean that 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 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 Earned Income Tax Credit includes the entire amount you earned.

Taxpayers who are married and decide to file separate tax returns may agree in the manner in which to claim their children. The couple can decide how to distribute the exemptions amongst them. 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. One thing is for sure, the child can only be claimed once. Many taxpayers make the mistake of claiming the same child whom the spouse already claimed.

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. 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 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.

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. 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 normally 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.

Additional Medicare Tax

Beginning in 2013, 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. The employer is responsible to withhold the additional Medicare tax from the wages if the employer pays you more than $200,000 in one calendar year. You must file Form 8959 with the IRS if you owe the additional Medicare tax.

Tax changes

With the advent of the internet and storage to the cloud, more information is available to taxpayers and available faster than before. Important items such as immediate changes to charges and IRS interest charges. For example, 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%. Furthermore, 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. Information becomes available to taxpayers in real time. For example, 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, 2014 or your 2015 tax return.

Net Investment Income Tax

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 (or widower) or $200,000 if you use any other filing status. This tax applies to individuals who have income from investments and only if their income exceeds the amounts mentioned for their filing status. The net investment income tax applies to investment income from such items as interest, dividends, capital gains, rental income, royalty income and certain non-qualified annuities.

Taxable and Nontaxable Income

Practically everything received in exchange for services is taxable income unless it is specifically stated as excluded 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.

The timing of the receipt of money is extremely important. 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. You must report income in the year in which you constructively received it. 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.

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.

Don't forget that the timing of the receipt of your income is very important. 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 regardless if you cash the check or deposit the check into 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 someone else, be it your spouse, your child, you must include that amount in your income when the people who specify receive it. Generally, you must include in gross income everything you or your agents receive in payment for personal services such as wages, salaries, commissions, fees, tips, fringe benefits and stock options.

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. 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. 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. The partnership filing is only an information return.

In general, similar to a partnership, 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. This is considered self-employment income and generally you must also pay a self-employment tax.

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. Bitcoin is the most popular virtual currency out there. The manner in which Bitcoin works takes some figuring out. Once you become involved with Bitcoin, it too may be your preferred currency, especially if your business activities are illicit. As you already know, your illicit business activities are also subject to taxation.

Fringe benefits

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.

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 excludable 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 the value of 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.

Employers offer fringe benefits to encourage employees to offer better job performance. Fringe benefits are mainly offered as a prize to employees for job performance and to keep the employees happy. Happy employees are more loyal and thus help the company advance faster.

Bartering

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 would be the activities of 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 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 Internal Revenue Service will also receive the same information. If you receive income from bartering, you may be required to make estimated tax payments. If you are in a trade or business, you may be able to deduct certain costs you incur to perform services that you barter. As you already know, 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.

Income received is taxable either way if you are an employee or not considered an employee. The only thing different is the type of tax your pay. If you are an employee, your employer takes care of some of your employment taxes. However, if you are not an employee, there are some taxes the people that pay you for which they are not responsible to pay such as your self-employment taxes or social security and Medicare taxes. 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.

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 you 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 income 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.

A return of capital is a return of some or all of your investment in the stock of a 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.

Refund Offsets

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.

The Bureau of Fiscal Service (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.

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 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 own 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.

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.

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. Additionally, 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.

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. A husband and wife would file their self-employment income on one Schedule C and two Schedule SEs to report their self-employment tax. Each would get credit for half of the income for self-employment tax purposes. Each spouse must properly allocate their earnings for social security and Medicare tax purposes. Therefore, 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. 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.

Form 1040-ES, Estimated Tax for Individuals, is used to figure estimated taxes. In order to fill out Form 1040-ES correctly you should have your prior year's annual tax return. 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. 

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 you operated or a profession you practiced as a sole proprietor. Will also need to complete Schedule SE if you make a profit. 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.

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.

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. And with that come some benefits such as being able to claim a mileage deduction for your car. 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 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. Therefore, 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 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.

There are few facts which provide evidence of the degree of control and independence. These facts usually fall into three categories. The first category is called behavioral. Does your employer or company have the right to control what you do and how you do your job? If yes, then you are an employee. Secondly, there is the financial fact. Does your employer control certain business aspects such as tools used, how you are paid and reimbursement of expenses? If so, you are their employee. Third, is your employer/employee relationship written in some form such as through your pension plan, insurance, vacation pay? Although this by itself does not indicate the relationship it is a great indicator that you are their employee.

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. You also may be subject to penalties and interest for taxes which were not paid on time.

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.

The 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. By relationship we mean the manner in which the employer and employee do business. If the employee has a lot of freedom as to how and when he or she does his or her work, then that employee may be an independent contractor. If the employer issues orders as to how to do the work, when to get the work done and the employer usually oversees the manner in which the work is done, then the worker is most probably an employee.

Social Security Benefits

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 2015, 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 2015 base amount is $32,000 for married couples filing jointly. This base amount is $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. Many benefits deteriorate for married taxpayers who prefer to file as married filing separately. For taxpayers who file married filing separately and lived together during the year the base amount is none.

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 you are filing a joint tax return.

Individual Retirement Arrangements (IRAs)

For tax year 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. 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.

Your traditional IRA 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.

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.

There are many common misconceptions about IRAs. First, many taxpayers think that to contribute to a traditional individual retirement account (IRA), you must be over 70 1/2 at the end of the year. This of course it not true. It is quite the contrary, if you are over 70 1/2 contributions are limited. Another misconception is that if you are married both you and your spouse when filing a married filing joint tax return, you must have taxable compensation in order to contribute to an individual retirement account (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

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 you must also 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

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 also 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 rollover the amount 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 individual retirement account 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. The payments 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. 

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.

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.

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 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.

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 rollover 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 rollover 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. Usually the plan administrator has the instructions and steps to take in this case. 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 on a distribution from a retirement plan, so you’ll have to use other funds to rollover the full amount of the distribution.

You have 60 days from the date you receive an IRA or retirement plan distribution to rollover 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 rollover. 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 rollover all or part of any distribution of your retirement plan account with a few exceptions. You cannot rollover required minimum distributions.  If you have a loan treated as a distribution, you will not be able to do a rollover on that amount. Additionally, you cannot rollover any distributions due to hardship. Distributions of excess contributions and related earnings are also not eligible for rollover. A distribution that is one of a series of substantially equal payments too cannot be rollover. In addition, you cannot rollover withdrawals electing out of automatic contribution arrangements. If you have distributions to pay for accident, health or life insurance, you cannot use these distributions for a rollover. Also will not qualify as items for rollovers any dividends on employer securities, or S corporation allocations treated as deemed distributions. Distributions that can be rollover 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 rollover 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 rollover the distribution 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 have it rollover. 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 rollover 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 rollover 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 rollover 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). You can also not rollover 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. This would include any cost of life insurance coverage.

The taxable amount of a distribution that is not rollover 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 have it rollover 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 have it rollover later. If you do have it rollover, 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. 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. You may defer tax on all or part of a lump-sum distribution by requesting the payer to directly rollover 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.

A rollover transaction is not taxable but it is reportable on your federal tax return. You can rollover most distributions from an eligible retirement plan except for 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 for which it is sold 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 percent. Some or all net capital gain may be taxed at zero percent 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 (or widower); $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 or your total net loss as shown on line 16 of the Form 1040, Schedule D. The amount is $1,500 if you are filing as married filing separately. If your net capital loss is more than these limits, you can carry the loss forward to later years.

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. The rest, if you have more, can be carried forward to other years. 

Social Security and Medicare Taxes

Your payments of social security and Medicare taxes contribute to your coverage under the United States 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.

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.

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.

Despite 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 foreign 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. 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. For earnings in 2015, this base is $118,500. 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 the social security and Medicare taxes primarily for individuals who work for themselves. This is most common when the individual has his or her own business and no employer to tell him or her what to do and how to do his or 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. Self-employment tax is another name for the social security tax and the Medicare tax. It is composed of the two taxes with the exception that when you work for someone else, that employer is liable for half of your social security taxes. The half part of the social security tax for which the employer is liable is called employment tax.

In 2013 an additional Medicare tax rate of 0.9 percent 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 2015, the self-employment tax rate is 15.3%.

Tax Benefits for 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.

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 and again at the end of 2014. You may claim it on your tax year 2013 and 2014 or prior years' tax returns. Under current law, the deduction is not available for tax years after 2014. 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).

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.

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.

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.

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, the American Recovery and Reinvestment Act of 2009 (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 private 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, if you 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 and 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. 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.

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.

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 who 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 called 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 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 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 if you are an employee. However, if you are a self-employed individual, you would file Schedule C, 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. 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 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 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.

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, in 2015, your total itemized deductions may be reduced if your adjusted gross income exceeds $258,250 if you are single, $309,900 if you are married filing jointly or a qualifying widow (or widower).

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. You may end up using $0 as your itemized deduction total amount on Schedule A. Consequently, you cannot use the standard deduction if you are married and 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. You can deduct state, local and foreign income taxes on Schedule A. You can also deduct state, local and foreign real estate taxes. In addition, you can deduct state, local personal property taxes and also the 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 2014. 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 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. 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.

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.

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.

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.

You can deduct as itemized deductions on 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 on Form 8396 against your federal income tax if you were issued a mortgage credit certificate by a state or local government for low-income housing.

Charitable Contributions

Charitable contributions are deductible only if you itemize deductions on Schedule A. To be deductible, charitable contributions must be made to qualified organizations. 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 is 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.

In addition, qualified organizations include a nonprofit volunteer fire company. A qualified is also 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 is another of these qualified organizations. A nonprofit cemetery company is a qualified nonprofit organization 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 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 itemized deductions. For charitable contributions to be deductible, they must be made to 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 the donations with the IRS. Remember that 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 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 EITC is a refundable tax credit. 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.

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. Unfortunately, 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.

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

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 2015. 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 2015.

The child tax 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

The Child and Dependent Care 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 a qualifying individual who is your qualifying child under age 13 or 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.

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 certain conditions to claim the credit. For instance, 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. In addition, you must file a joint return if you are married.

Furthermore, 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 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.

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 from the dependent care provider.

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 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.

Generally, most taxpayers will avoid a 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.

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. 

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

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.

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.

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.

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. In order to 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.

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 Internal Revenue Service 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. IRS Rules That Govern Ethics

IRS has Rules that govern ethics

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 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. It is such a relief that filing a complaint with the IRS both as a practitioner or as taxpayer does not involve filing so much legal complicated paperwork like when filing a lawsuit.

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.  

Continuing tax education

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. 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. 

Each individual applying for renewal of their EA enrollment must retain for a period of four 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.

More rules on tax practitioners

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.

Best practice

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.

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.

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. For example, 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. 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.

Tell your client there is a problem

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. 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.

Representation before the IRS

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 comes 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 two years following the notice of final determination of ineligibility or decision of appeal, that eligibility for limited practice be reinstated.

More on unenrolled preparers

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.

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.

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.

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 five years. 

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. Of course, individuals may always appear on their own behalf before the Internal Revenue Service that is why we have enrolled agents.

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.

Power of Attorney

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. 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. 

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.

Fiduciary

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. 

Offices within the IRS

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. 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. 

PENALTY UNDER SECTION 6694

Prior to amendment by the Act, the penalty under section 6694(a) applies if 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. The penalty also applies if 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 such position was not disclosed as provided in section 6662(d)(2)(B)(ii) or was frivolous. However, prior to amendment by the Act, the penalty under section 6694(b) applied if any part of an understatement was due to a willful attempt in any manner by an income tax return preparer to understate the liability for tax or to any reckless or intentional disregard of rules or regulations by an income tax return preparer.

Additionally, 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. Moreover, the Act amended section 6694(a) to provide that the penalty would apply if the tax return preparer knew (or reasonably should have known) of the position and there was not a reasonable belief that the position would more likely than not be sustained on its merits. Hence, the position was not disclosed as provided in section 6662(d)(2)(B)(ii), or 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. 

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.

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. 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.

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. 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. 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 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 of $50 per failure, up to a maximum of $25,000 for each calendar year; per IRC 6695(a). Penalties may also be assessed if he or she fails to sign the return of $50 per failure, up to a maximum of $25,000 for each calendar year, per IRC 6695(b). If the tax return preparers fails to provide an identifying number he or she may incur a $50 per failure, up to a maximum of $25,000 for each calendar year; per IRC 6695(c). Furthermore, if the preparer fails to retain a copy of the return or a list of returns prepared may incur a $50 per failure, up to a maximum of $25,000 for each return period, per IRC 6695(d).

A preparer may incur a $50 penalty for failure to file a tax return preparer information return or set forth an item in the return as required under IRC 6060. This penalty can go up to a maximum of $25,000 for each return period, per IRC 6695(e). Negotiating a refund check or misappropriation of a refund via electronic means is a huge no no and may cause the tax preparer a $500 penalty per failure per IRC 6695(f). 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. Also, if the tax professional fails to exercise due diligence in determining a taxpayer eligibility for the Earned Income Tax Credit he or she may be liable for a $500 penalty per failure per IRC 6695(g). These penalties are generally processed under the pre-assessment penalty procedures and can always be appealed.

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.

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 enter 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.

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. 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.

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 various documents 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. You must make available 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. You must also retain copies of Forms W-2, W-2G and 1099-R and a copy of signed IRS e-file consent to disclosure forms. You must also retain 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. In addition, the acknowledgement file for IRS accepted returns must be kept in your office and ready to provide to the IRS when requested. Furthermore, forms 8879 and 8878 must be available to the IRS in the same manner for three years from the due date of the return or the IRS received date, whichever is later.

The IRS electronic system provides a submission ID which 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 separately. 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. 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 the public/routable IP address, the IP date, the IP time and the IP time zone.

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. Any 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.

The ERO 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 re-certifications 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.

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/

Important Health Insurance Marketplace Dates found online at http://www.healthcare.gov

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

10 countries banned Macdonalds by Serusha Govender found at http://www.thedailymeal.com/10-countries-banned-mcdonalds/9414

Factory Farming - Hell on Earth by Mercy for Animals found at http://www.mercyforanimals.org/the-problem

Ethics of NBC by Think Progress found at http://thinkprogress.org/media/2014/04/06/3423457/nbc-journalism-ethics-bush-paintings/

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