Wednesday, October 8, 2008

What Is Considered Nontaxable Income ?

Believe it or not, some types of income you receive are not taxable. Be careful when you add up your gross income to determine whether you have a filing requirement that you do not include any non-taxable income.

- Some types of income that are not taxable include:
-Child support payments,
-Welfare benefits,
-Life insurance proceeds received because of the death of an individual,
-Interest on certain state or local government obligations,
-Accident and health insurance proceeds, including certain long term care insurance contracts,
-Certain property received as a gift or inheritance,
-Benefits received under any law administered by the Department of Veteran's Affairs,
-Amounts received under a worker's compensation act for an occupational sickness or injury,
-Qualified distributions from Coverdell Education Savings Accounts (formerly called Education IRAs); refer to Individual Retirement Arrangements (IRAs) for more information,
-Certain Roth IRA distributions; refer to Roth IRA Distributions for more information,
-Certain amounts withdrawn from Medical Savings Accounts (MSA's) to pay medical expenses, and
-Limited amounts of dependent care assistance paid through a dependent care assistance program.
-Death gratuity benefits paid to survivors of deceased armed forces members for deaths occurring after September 10, 2001.
-Homeowners assistance program payments, subject to certain limits, paid after November 11, 2003, by the Department of Defense.

For tax years after 2002, Dependent Care Assistance Program paid by the military for military personnel.

All or a part of your Social Security or Railroad Retirement Benefits may be nontaxable.
Some scholarship and fellowship grants may be non-taxable.

Are child support payments considered taxable income?

There are more and more calls coming into tax resolution firms concerning child support issues. Even if clients call in for other issues, somewhere in the tax consultation it still comes up more often than not.

I hate to break it to clients but the answer to the question is no. Child support payments are neither deductible by the payer nor taxable to the payee. Child support payments cannot be considered when calculating if you have enough income to be required to file, either. A lot of clients have made the mistake of adding the total of the money paid to child support and deducting it from their total gross income. This is also done in the reverse. If you add child support money to your gross income you are not accurately assessing your filing requirement.
Clients call in thinking they only have a certain amount of years to file and are rudely awakened to find out otherwise.

I had a client today who was wondering why he didn't get a refund for three years. After doing some home work by doing a practitioner call, I discovered through another senior tax consultant that if a client owes child support they are in a position to get their refund taken. It actually happens all the time. So if you're a deadbeat Dad or Mom and you think Uncle Sam is gonna let you slide, think again!

Tuesday, October 7, 2008

Tax & Accounting Acronyms

In a world where we must communicate on many different levels and styles, such as my daughter Brionna just a few minutes ago informed me about: LMHO—laugh my head off, JK—just kidding, SUP—whats up, NM—not much, and WBU—what about you. All are very common IM and text language or acronyms used to communicate. Is there any wonder that there is a tax language and accounting language? Some of the words I am glad there is an acronym so I don't have to get tongue tied every time I want to speak about or say a term. This is not The List, but here are some really common ones used in their world:

Accumulated Adjustment Account
Adjusted Current Earnings
Accumulated Earnings and Profits
Applicable Federal Rate
Adjusted Gross Income
Alternative Minimum Tax
Alternative Minimum Taxable Income
Additional Paid In Capital
Assessment Statute Expiration Date
Beginning of Year
Carryback; e.g., NOL C/B
Cumulative Bulletin - Issued by the IRS
Chief Counsel's Advice (IRS writing)
Carryforward; e.g., NOL C/F
Certified Fraud Examiner
Closely Held Corporation
Charitable Lead Annuity Trust
Charitable Lead Unitrust
Charitable Remainder Annuity Trust
Charitable Remainder Trust
Charitable Remainder Unitrust
Collection Statute Expiration Date
Debit Memo
Distributable Net Income of a fiduciary 1041 income tax return
Date of Death
Domestic Production Activities Deduction (IRC Sec. 199)
Domestic Production Gross Receipts (IRC Sec. 199)
Employee Business Expenses
Errors & Omissions, as in E & O Insurance
Earnings & Profits
End of Year
Employee Stock Ownership Plan
Family Limited Partnership
Fair Market Value
Foreign Personal Holding Company Income
Field Service Advice (IRS writing)
Fiscal Year End
Generally Accepted Accounting Principles
General Counsel Memorandum (IRS writing)
Internal Legal Memorandum (IRS writing)
Internal Revenue Bulletin
Internal Revenue Code
Income in Respect of a Decedent - IRD
Internal Revenue Manual
Limited Liability Company
Limited Liability Partnership
More Likely Than Not
Multi Member LLC
Minimum Required Distribution
Net Operating Loss
Not for Profit Organization
NonCash Fringe Benefit (per Paychex)
Other Adjustments Account
Personal Holding Company
Private Letter Ruling
Personal Service Corporation
Publicly Traded Partnership
Personal Use Company Car (Paychex)
Qualified Domestric Relations Order
Qualified Production Activity Income (IRC Sec. 199)
Required Beginning Date
Required Minimum Distribution
Record of Federal Tax Liability (not to be confused with ROTFL)
Same As Last Year
Service Center Advice
Single Member LLC
Technical Advice Memoranda (IRS writing)
Tax Court (i.e. United States Tax Court)
Trust Fund Recovery Penalty
Tenants in Common
Tentative Minimum Tax
Unrelated Business Income Tax
Uniform Gift to Minors Act
Unreimbursed Partnership Expenses
Uniform Principal and Income Act - used by trusts ; note that some states have adopted different versions, look yours up here
Uniform Transfers to Minors Act
Zero Balance Account (used by controlled corporations)
Discussion Forum / Other Acronyms
For Your Information
In My Opinion
In My Humble Opinion
In Other Words
Laughing out loud
Original Poster - the person who originally asked the question
Rolling on the Floor Laughing (Not to be confused with ROFTL)
(Not Related to NOL), S*** Out of Luck

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How To Write Off Your Home Office Without Getting Audited

If you use a portion of your home regularly and only for your business purposes, you can deduct a part of the operating expenses and depreciation of your home on your tax return.

Qualifying for a home office deduction means the owner must meet two tests. First, the home office must be the primary place of business for the activities of the business. It is not a requirement that the activity be full-time. A home office is determined to be a primary place of business if it is used for the majority of managerial or administrative purposes such as scheduling appointments, ordering supplies and keeping records. There can be no other fixed location for such activities.

Second, the space used must be used regularly and exclusively for the activity. You are not required to dedicate a full room to the activity but the space allotted cannot be used for personal purposes. In 2007, the United States Tax Court did hold that keeping some personal papers in a home office will not void the exclusive use test.

An office in the home deduction cannot exceed the gross income derived from the home-based activity. Any unused losses can be carried forward until used.
Will the deduction of a home office cause the IRS to audit my tax return? While there is no statistical evidence to support a such a claim, you should be aware of the requirements to claim an office in home deduction and keep all the necessary paper work and documents to use a home office.

The following is a list of pro-ratable deductible items which can be used on Form 8829: mortgage interest, real estate taxes, insurance, repairs and maintenance, utilities and of course depreciation. If you have doubts about whether you can accurately prepare your own return using this deduction, retain the help of a tax professional or tax resolution firm. The deduction can help reduce your tax liability, but if prepared incorrectly, you will be AUDITED.

Ammending Or Correcting Tax Returns

Many tax returns are submitted every year that are not correct in either math or missing forms. Sometimes the service center will make corrections for tax preparers. Other times you are not required to amend these returns. A tax consultant at a reputable tax resolution firm can give you good advice by looking at the filings to determine if they must be amended.

If you used the wrong filing status, your total income is incorrect, or your deductions or credits are wrong, you need to amend the return to insure you are not assessed inaccuracy penalties and to avoid audit situations.

To amend a return you would use a form 1040x to correct a form 1040, 1040a or a 1040EZ.If you are filing to claim an additional refund, wait until you have received your original refund (you may cash that check)]. Be sure to enter the year of the return you are amending at the top of Form 1040X. The form has three columns. Column A is used to show original or adjusted figures from the original return. Column C is used to show the corrected figures. The difference between the figures in Columns A and C is shown in Column B. There is an area on the back of the form where you explain the specific changes being made on the return and the reason for each change. If the changes involve another schedule or form, attach it to the 1040X. For example, if you are filing a 1040X because you have a qualifying child and now want to claim the Earned Income Credit, you must attach a Form 1040 Schedule EIC (PDF) to show the qualifying person's name, year of birth, and social security number.

Generally, to claim a refund, Form 1040X must be received within 3 years from the date you filed your original return or within 2 years from the date you paid the tax, whichever is later.
Just remember when you make adjustments on a federal return this can effect your state returns also. Make sure your tax preparer looks at your state returns to see if they must be adjusted or amended.

Corporations would use Form 1130 Corporation Application for Tentative Refund in order to carry back a net operating loss from the current year in lieu of filing Form 1120X. The filing deadline for this form is December 31, 2005 to carryback a 2004 net operating loss to 2002 and 2003.

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Monday, October 6, 2008

IRS Humor

I know this is usually a some what serious blog but I couldn't resist these jokes and humor. I hope know one is offended. I mean to just lighten things a bit.

Q: Ever wonder why the IRS calls it Form 1040?A: Because for every $50 that you earn, you get $10 and they get $40.

Income tax forms should be printed on Kleenex because so many of us have to pay through the nose.

The latest income-tax form has been greatly simplified. It consists of only three parts:1. How much did you make last year?2. How much do you have left?3. Send amount listed in part 2.
"65% of people say that cheating on your income tax is worse than cheating on your spouse. The other 35% were women." --Jay Leno

"The IRS said today anyone with a refund coming from their 2001 taxes will lose it if they don't pick it up by April 15th. If it is more then three years they will just keep it. How come it doesn't work that way with back taxes?" —Jay Leno

A new arrival, about to enter hospital, saw two white coated doctors searching through the flower beds."Excuse me," he said. "Have you lost something?""No," replied one of the doctors. "We're doing a heart transplant for an income-tax inspector and want to find a suitable stone."

What did the terrorist that hijacked a jumbo-jet full of I.R.S. agents do?He threatened to release one every hour if his demands weren’t met.

Post Office just recalled their newest stamps:They had pictures of IRS agents on them, and people couldn’t figure out which side to spit on.