Have I Missed Any Deductions or Credits? Year End Review: Being Prepared for Tax Season

by Bryan Miller, Senior Tax Analyst

The American Recovery and Reinvestment Act (ARRA) of 2009 put into place many deductions for the individual taxpayer that should be taken advantage of prior to the end of year 2010. This is part of an overall plan by our government to strengthen and rebuild the economy, but it translates into lower taxable income for you. Some of the benefits may be obvious if you participated in a program to receive a specific tax benefit, but some of the credits and deductions are not as obvious. This is part of an overall plan by our government to strengthen and rebuild the economy. To ensure you have planned and positioned yourself for the best available deductions and credits, here is a rundown checklist:

Homebuyer Credit One of the more obvious deductions, but you should remember the date was pushed back this year. If you purchased and closed on your home by September 30, 2010, you may be eligible for up to an $8,000.00 tax credit. The home must be your primary residence, and the have rules changed for each tax year since 2008, in case you are filing or amending any of your past 3 years returns. Documentation requirements apply for any year, and you will need to file a paper return rather than e-file along with Form 5405.
See http://www.irs.gov/newsroom/article/0,,id=204671,00.html for all the details.

COBRA Individuals who involuntarily lost their jobs between September 1st, 2008 and May 31st, 2010 may be able to reduce the cost of COBRA health insurance premiums.

Energy Star Credits 30% of the cost of qualified Energy Star products may be taken as a tax credit up to $1,500.00. For example, if you purchased and installed a qualifying Energy Star product by December 31st, 2010 that costs $5,000.00, you may receive the full $1,500.00 credit ($5000 x .30% = $1500) on your return! Not all Energy Star products qualify. The credit applies mainly to HVAC, insulation, roofing, heating and cooling systems, windows and doors, as well as some appliances and alternative energy systems. See the Energy Star website for a full list and description.

Earned Income Tax Credit This credit has been a staple for many households to help make ends meet, and is bigger for tax year 2010. Also, more families will qualify for the Additional Child Tax Credit since earned income is set at only $3,000.00. The minimum earned income was slated to be $12,550.00 before the American Recovery and Reinvestment Act (ARRA), but was subsequently lowered. This credit may apply even if no tax is due – which would result in a refund for the taxpayer. See the IRS website or your tax professional for advice on this additional child tax credit.

Making Work Pay Tax Credit What was meant to be a blessing has for some turned out to be a curse. This credit allowed taxpayers to take more pay home out of their checks by adjusting the tax withholding downward. You won’t need to adjust this yourself; Uncle Sam took care of this for you. There are some people who may find themselves negatively affected by this credit. Some taxpayers may find out they did not have enough income tax withheld. This may result in a smaller refund, or they may owe this coming tax season. Taxpayers who may have been affected include: married couples with two incomes, individuals with multiple jobs, social security beneficiaries who work, dependents, undocumented workers and pensioners. You can check your 2010 withholding and adjust it accordingly using the IRS withholding calculator.

$250 for Social Security Recipients, Veterans and Railroad Retirees – Call 1-866-234-2942 and select option #1, or visit Did I receive a 2009 Economic Recovery Payment?

Unemployment Benefits – The first $2,400.00 of unemployment benefits will be excluded from income in tax year 2010. Be sure to check your withholding.

Money Back for New Vehicles and Increased Transportation Subsidy - These are leftovers from 2009 purchases of certain vehicles, or an increase of employer-provided commuter highway vehicle benefits for mileage and parking. See page 2 of Publication 15-T for more details.

Be sure to check for any carryover items from previous tax years that may benefit you in this tax year. And for a more broad scope of how the IRS is utilizing your money to recover the economy on both a national and local level, visit http://www.whitehouse.gov/recovery or http://www.recovery.gov/Pages/default.aspx.

End of the year tax tip: Deplete Your FSA Account – Use It or Lose It

Deplete health FSA accounts. Employees who participate in their employer’s health flexible spending account (FSA) should keep in mind that medical expenses reimbursed under the account generally must be incurred during the participant’s period of coverage (normally 12 months) under the FSA. Although IRS has allowed employers to provide an additional 2 1/2-month grace period in which employees can incur expenses and still obtain reimbursements of these amounts, many employers have not availed themselves of this opportunity. Therefore, an employee whose period of coverage ends on Dec. 31 should be sure to deplete his health FSA before the year’s end (e.g., by getting new contact lenses) or he’ll lose what’s left in the account. Expenses are treated as having been incurred when the participant is provided with the medical care that gives rise to the expenses, and not when the participant is formally billed or charged for, or pays for, the medical care, different than if you itemized medical expenses which must be paid before you can deduct.

Employer reimbursements of amounts paid for nonprescription drugs (i.e., “over-the-counter” drugs, like antacid, allergy medicine, pain reliever, or cold medicine) are considered expenditures for medical care, and thus qualify for reimbursement, even though amounts paid for over-the-counter drugs are not deductible under Code Sec. 213. However, other medical expenses that aren’t deductible under Code Sec. 213, such as the cost of purely cosmetic surgery, can’t be reimbursed under a health FSA. It is important to note – starting in 2011, over the counter (OTC) medications will no longer be reimbursable with FSA funds, unless the OTC product is specifically prescribed by a doctor.

IRS Announces Expanded Use of Twitter Feeds to Inform Taxpayers

The IRS is all a-twitter about its presence on Twitter. Earlier this week, the IRS announced it would be expanding its use of the popular social media networking tool Twitter, in an effort to share timely information with both taxpayers and tax professionals. The IRS will have two useful feeds to follow – @IRSnews and @IRStaxpros.

@IRSnews currently provides the latest in federal tax news and information for the general user. The messages on this Twitter feed will include easy to use information, tax tips, tax law changes and important IRS programs. If you currently have a Twitter account, you can follow @IRSnews by going to http://twitter.com/IRSnews.

@IRStaxpros is designed for any tax professionals looking to stay on top of current IRS news. Follow this feed at http://twitter.com/IRStaxpros. Spanish tax information can be found at http://twitter.com/IRSenEspanol.

If you don’t care to follow the IRS on Twitter, you can get your IRS news by going to the IRS website at www.irs.gov.

If you’d like to join JK Harris and Company on twitter, you can find us at http://twitter.com/jkharris. We tweet about tax topics, tax news, our clients’ success stories and more. We would love to hear from you – contact us on the blog or at twitter with your tax questions or back tax issues.

Former New York Legislator Pleads Guilty to Tax Evasion

On this blog, we have often discussed the importance of filing your tax returns each year and filing them on time. We should also mention it is equally important to file complete and accurate returns. Falsifying your tax returns is something the IRS and the government does not look kindly on.

Former Republican State Senator Vincent Leibell pleaded guilty in court this morning to filing false tax returns for 2003 through 2006. He also admitted trying to influence a grand jury investigating corruption in Putnam County, New York.

Leibell resigned last Thursday, about a month before his eighth term as Senator was set to end. After spending 28 years in the Senate and Assembly, Leibell was elected to serve as the Putnam County Executive.

More details on this story at: http://www.lohud.com/article/20101204/NEWS01/12040336/Source-Leibell-s-charges-include-obstruction-of-justice-tax-evasion.

‘Tis the season…. To prepare for tax season!

It’s never too early to start preparing for the next tax season. You may find that you can still squeeze in some last minute tax strategies to help save you money on your 2010 return. It’s a little trickier this year than most, since tax rates are scheduled to change for 2011. With the uncertainty about next year’s tax rates, some taxpayers are looking to accelerate their income into 2010 at the known tax rate rather than waiting to see what 2011 holds. For now, here are some tried and true ways to save on your taxes:

*Max out your 401(K) or other employer sponsored retirement plan. Contributions to a 401(K) or 403(b) have to be made by the end of the year, so now is the perfect time to lower your taxable income while padding your retirement account.

*Make your charitable contributions by December 31st to be able to claim them on your 2010 tax return.

*Giving any large cash gifts? You are allowed to gift up to $13,000 (for 2009 and 2010) per person, to any number of people without having to file a gift return. Of course, if you give a check, the recipient must cash the check by the end of the year.

*Pay your property taxes by the end of the year in order to deduct them on your 2010 return.

*Sell of any stocks or investments that have fallen in value. You can take the losses in 2010, if you sell before the end of the year.

*The energy efficient home improvement credit is set to expire at the end of 2010. If you are thinking of making some home improvements (new insulation, more efficient windows, doors or HVAC system), act now to take advantage of this credit.

*Previously, a computer counted as a qualified expense for section 529 college savings plans. This will expire at the end of 2010.

TIGTA Reports Possible $576 Million in Back Taxes Owed From Non-filers For 2007

According to an article published by Accounting Today, the Treasury Inspector General released a report stating the IRS could unearth up to $1.3 billion in unpaid taxes by making better use of currency report data. These reports could help pinpoint non-filers who have generated enough income from certain financial transactions, but have failed to file a tax return.

TIGTA estimated over 40,000 potential non-filers in 2007 could owe as much as $576 million in back taxes, penalties and interest, while under-reporters could owe as much as $758 million in back taxes, penalties and interest for the same period. Read the full article below:
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The Internal Revenue Service could unearth as much as $1.3 billion in unpaid taxes, penalties and interest by making better use of currency report data to identify taxpayers with potentially unreported income, according to a new government report.

The report, by the Treasury Inspector General for Tax Administration, assessed the IRS’s use of currency reports to address nonfilers and under-reporters. Banks and other financial institutions are required to file reports on currency and suspicious transactions, which are in turn used by law enforcement officials to battle a range of financial crimes, such as narcotics trafficking, tax evasion and financing of terrorist activities.

TIGTA identified a number of individuals who have enough cash to engage in currency transactions totaling at least $20,000, but did not file tax returns even though they appeared to have a filing requirement.

TIGTA also identified a number of other individuals engaged in similar currency transactions who filed tax returns, but reported income that did not appear sufficient to cover their basic living expenses. The difference between their income and expenses raises questions about whether additional income sources should have been reported.

TIGTA estimated that 42,804 potential nonfilers may collectively owe as much as $576 million in delinquent taxes, penalties and interest for 2007. TIGTA also estimated there are 78,770 potential under-reporters who may owe as much as $758 million in additional taxes, penalties and interest for 2007.

TIGTA recommended that, as resources become available, the IRS should explore the feasibility of making greater use of currency transaction reports to pursue additional nonfilers and under-reporters for audit.

IRS management agreed with the recommendation. However, IRS management did not commit to pursuing additional potential under-reporters for audit, nor did they agree with the outcome measure because of concerns with the selection criteria used. TIGTA maintains that the potential $1.3 billion of increased revenue is reasonable considering the assumptions used to make the estimate.

Posted by JK Harris