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✒️Tax Tip 101: Income from canceled debt There are two basic ways that a lender can handle a foreclosure if the amount of the debt is more than the sale price of the house. It can cancel the remainder of the debt, or it can turn it into unsecured debt that you still owe. If the lender cancels the debt, you may have to report the forgiven amount to the Internal Revenue Service as income in the year it is canceled. Under the Mortgage Forgiveness Debt Relief Act, signed into law in 2007, you can exclude up to $2 million in forgiven debt if it directly relates to your principal residence. The act is effective for debt forgiven until December 31, 2014. If the canceled debt applies to a second home or business office, the act does not apply and you may have to include it in your taxable income for the year. Interest on leftover debt Depending on the laws in your state, a lender may choose to take any debt left after the foreclosure and sale of your house and convert it to unsecured debt that you still owe to the lender. The interest you pay on this debt is no longer directly related to a property, so it does not qualify for the mortgage interest deduction. If it appears that your property will sell for less than the total loan, consider working out a "short sale" deal with the lender before foreclosure proceedings begin. A short sale allows you to sell your property to a third party for less than the amount you owe on the debt, with the lender's permission. You may be able to negotiate a deal with the lender so you do not have to make nondeductible interest payments after the sale.
✒️Tax Tip 101: Deadline for filing a 2014 corporation or S-corporation return or extension.
✒️Tax Tip 101: Other compensation. Many other amounts you receive as compensation for sickness or injury are not taxable. These include the following amounts. Compensatory damages you receive for physical injury or physical sickness, whether paid in a lump sum or in periodic payments. See Court awards and damages under Other Income, later. Benefits you receive under an accident or health insurance policy on which either you paid the premiums or your employer paid the premiums but you had to include them in your income. Disability benefits you receive for loss of income or earning capacity as a result of injuries under a no-fault car insurance policy. Compensation you receive for permanent loss or loss of use of a part or function of your body, or for your permanent disfigurement. This compensation must be based only on the injury and not on the period of your absence from work. These benefits are not taxable even if your employer pays for the accident and health plan that provides these benefits. Reimbursement for medical care. A reimbursement for medical care generally is not taxable. However, it may reduce your medical expense deduction. If you receive reimbursement for an expense you deducted in an earlier year, see Recoveries , later. If you receive an “advance reimbursement” or “loan” for future medical expenses from your employer without regard to whether you suffered a personal injury or sickness or incurred medical expenses, that amount is included in your income, whether or not you incur uninsured medical expenses during the year. Reimbursements received under your employer's plan for expenses incurred before the plan was established are included in income. Amounts you receive under a reimbursement plan that provides for the payment of unused reimbursement amounts in cash or other benefits are included in your income. For details, see Publication 969.
✒️Tax Tip 101: If you are not able to file your federal individual income tax return by the due date, you may be able to get an automatic 6-month extension of time to file. To do so, you must file Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return by the due date for filing your calendar year return (usually April 15) or fiscal year return. This form is also available en español. Special rules may apply if you are: living outside the United States out of the country when your 6-month extension expires, or serving in a combat zone or a qualified hazardous duty area. You can also go to Filing Information in Publication 17, Your Federal Income Tax (HTML page), for more information regarding the rules for automatic extensions and filing federal individual income tax returns. Extensions for Corporations, Partnerships, REMICs, and Certain Trusts Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns Form 1138, Extension of Time for Payment of Taxes by a Corporation Expecting a Net Operating Loss Carryback Other Extension Forms Form 2350 Application for Extension of Time to File U.S. Income Tax Return (For U.S. Citizens and Resident Aliens Abroad Who Expect To Qualify for Special Tax Treatment) Form 4768 Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes Form 5558 Application for Extension of Time to File Certain Employee Plan Returns Form 8809 Application for Extension of Time to File Information Returns Form 8868, Application for Extension of Time To File an Exempt Organization Return. Form 8892, Application for Automatic Extension of Time to File Form 709 and/or Payment of Gift/Generation-Skipping Transfer Tax
✒️Tax Tip 101: OVERVIEW Inheritance taxes are taxes that a person needs to pay on money or property they have inherited after the death of a loved one. Here are the basics. Get every deduction you deserve TurboTax Deluxe searches more than 350 tax deductions and credits so you get your maximum refund, guaranteed. Start for Free Introduction An inheritance tax is a state tax that you pay when you receive money or property from the estate of a deceased person. Unlike the federal estate tax, the beneficiary of the property is responsible for paying the tax, not the estate. However, as of 2014, only eight states impose an inheritance tax. And even if you live in one of those states, many beneficiaries are exempt from paying it. Comparison with estate tax The key difference between estate and inheritance taxes lies in who is responsible for paying it. An estate tax is levied on the total value of a deceased person's money and property and is paid out of the decedent’s assets before any distribution to beneficiaries. However, before an estate tax is due, the value of the assets must exceed certain thresholds that change each year, but generally it’s at least $1 million. Because of this threshold, only about 2 percent of taxpayers will ever encounter this tax. How inheritance tax works Once the executor of the estate has divided up the assets and distributed them to the beneficiaries, the inheritance tax comes into play. The tax amount is calculated separately for each individual beneficiary, and the beneficiary must pay the tax. For example, a state may charge a 5 percent tax on all inheritances larger than $2 million. Therefore, if your friend leaves you $5 million in his will, you only pay tax on $3 million, which is $150,000. The state would require you to report this information on an inheritance tax form. States with an inheritance tax The federal government does not have an inheritance tax. The eight states that impose an inheritance tax include Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania and Tennessee. Of course, state laws are subject to change, so if you are receiving an inheritance, check with your state's tax agency. The tax rates on inheritances can be as low as 1 percent or as high as 20 percent of the value of property and cash you inherit. Inheritance tax exemptions Depending on your relationship to the decedent, you may receive an exemption or reduction in the amount of inheritance tax you must pay. For example, most states exempt a spouse from the tax when they inherit the property from another spouse. Children and other dependents may qualify for the same exemption, though in some cases, only a portion of the inherited property may qualify. Generally, the higher rates of tax will be paid by those who inherit property from a decedent with whom they have no familial relationship.
✒️Tax Tip 101: Taxation of U.S. Resident Aliens Taxable Income A U.S. resident alien's income is generally subject to tax in the same manner as a U.S. citizen. If you are a U.S. resident alien, you must report all interest, dividends, wages, or other compensation for services, income from rental property or royalties, and other types of income on your U.S. tax return. You must report these amounts whether they are earned within or outside the United States. Tax U.S. resident aliens are generally taxed in the same way as U.S. citizens. This means that their worldwide income is subject to U.S. tax and must be reported on their U.S. tax return. Income of resident aliens is subject to the graduated tax rates that apply to U.S. citizens. Resident aliens use the Tax Table and Tax Rate Schedules which apply to U.S. citizens found in the Instructions for Forms 1040, 1040A, or 1040EZ. Filing Status U.S. resident aliens can use the same filing statuses available to U.S. citizens. You can claim the same deductions allowed to U.S. citizens if you are a resident alien for the entire tax year. You should refer to the Form 1040 and its instructions for more information on how to claim your allowable deductions. Claiming Exemptions You can claim personal exemptions and exemptions for dependents according to the dependency rules for U.S. citizens. You can claim an exemption for your spouse on a Married Filing Separate return if your spouse had no gross income for U.S. tax purposes and was not the dependent of another taxpayer. You can claim this exemption even if your spouse has not been a resident alien for a full tax year or is an alien who has not come to the United States. You can claim an exemption for each person who qualifies as a dependent according to the rules for U.S. citizens. The dependent must be a citizen or national of the United States or be a resident of the United States, Canada, or Mexico for some part of the calendar year in which your tax year begins. Get Publication 501, Exemptions, Standard Deduction, and Filing Information for more information. Refer also to Aliens - How Many Exemptions Can Be Claimed? CAUTION: Your spouse and each dependent must have either a Social Security Number or an Individual Taxpayer Identification Number in order to be claimed as an exemption or a dependent. Deductions U.S. resident aliens can claim the same itemized deductions as U.S. citizens, using Schedule A of Form 1040. These deductions include certain medical and dental expenses, state and local income taxes, real estate taxes, interest you paid on a home mortgage, charitable contributions, casualty and theft losses, and miscellaneous deductions. If you do not itemize your deductions, you can claim the standard deduction for your particular filing status. For further information, see Form 1040 and its instructions. Tax Credits U.S. resident aliens generally claim tax credits and report tax payments, including withholding, using the same rules that apply to U.S. citizens. The following items are some of the credits you may be able to claim: child and dependent care credit, credit for the elderly and disabled, child tax credit, education credits, foreign tax credit, earned income credit, and adoption credit. For further information, see Form 1040 and its instructions. Forms and Due Dates U.S. resident aliens should file Form 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents, Form 1040A, U.S. Individual Income Tax Return or Form 1040, U.S. Individual Income Tax Return at the address shown in the instructions for those forms. Generally, the due date for filing the return and paying any tax due is April 15 of the year following the year for which you are filing a return. You are allowed an automatic extension to June 15 to file if your main place of business and the home you live in are outside the United States and Puerto Rico on April 15. You can get an automatic extension of time to file until October 15 by filing Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, on or before April 15 (June 15 if you qualify for the June 15 extension). See the instructions for the form you are filing for more information.
✒️Tax Tip 101: Improvements versus repairs Money you spend on your home breaks down into two categories, taxwise: the cost of improvements versus the cost of repairs. You add the cost of capital improvements to your tax basis in the house. Your tax basis is the amount you'll subtract from the sales price to determine the amount of your profit. A capital improvement is something that adds value to your home, prolongs its life or adapts it to new uses. There's no laundry list of what qualifies, but you can be sure you'll be able to add the cost of an addition to the house, a swimming pool, a new roof or a new central air-conditioning system. It's not restricted to big-ticket items, though. Adding an extra water heater counts, as does adding storm windows, an intercom, or a home security system. (Certain energy-saving home improvements can also yield tax credits at the time you make them.) The cost of repairs, on the other hand, is not added to your basis. Fixing a gutter, painting a room or replacing a window pane are examples of repairs rather than improvements.
✒️Tax Tip 101: Who claims student loan interest, the parent or the student? Generally, the person whose name is on the loan gets to deduct the student loan interest. This person is legally obligated to make the interest payments on the loan. For example, if you are legally obligated to pay the interest but someone else (such as a parent) pays it for you, it's as if you paid the interest. Therefore, you get to deduct it. There is one notable exception to this rule: If a parent claims a student as a dependent but the student is legally obligated to pay the interest on the loan, then neither the student nor the parent may deduct the student loan interest.
✒️Tax Tip 101: How to determine who qualifies Here’s how to determine which of your kids will qualify you for the credit: 1) Age Test To qualify, a child must have been under age 17 (i.e., 16 years old or younger) at the end of the tax year for which you claim the credit. 2) Relationship Test The child must be your own child, a stepchild, or a foster child placed with you by a court or authorized agency. An adopted child is always treated as your own child. ("An adopted child" includes a child lawfully placed with you for legal adoption, even if that adoption is not final by the end of the tax year.) You can also claim your brother or sister, stepbrother, stepsister. And you can claim descendents of any of these qualifying people — such as your nieces, nephews and grandchildren — if they meet all the other tests. 3) Support Test To qualify, the child cannot have provided more than half of his or her own financial support during the tax year. 4) Dependent Test You must claim the child as a dependent on your tax return. Bear in mind that in order for you to claim a child as a dependent, he or she must: 1) be your child (or adoptive or foster child), sibling, niece, nephew or grandchild; 2) be under age 19, or under age 24 and a fulltime student for at least five months of the year; or be permanently disabled, regardless of age; 3) have lived with you for more than half the year; and 4) have provided no more than half his or her own support for the year. 5) Citizenship Test The child must be a U.S. citizen, a U.S. national or a U.S. resident alien. (For tax purposes, the term "U.S. national" refers to individuals who were born in American Samoa or in the Commonwealth of the Northern Mariana Islands.) 6) Residence Test The child must have lived with you for more than half of the tax year for which you claim the credit. There are important exceptions, however: A child who was born (or died) during the tax year is considered to have lived with you for the entire year. Temporary absences by you or the child for special circumstances, such as school, vacation, business, medical care, military services or detention in a juvenile facility, are counted as time the child lived with you. (There are also some exceptions to the residency test for children of divorced or separated parents. For details, see the instructions for Form 1040, lines 51 and 6c, or Form 1040A, lines 33 and 6c.) 7) Family Income Test The child tax credit is reduced if your modified adjusted gross income (MAGI) is above certain amounts, which are determined by your tax-filing status. The phase out threshold is $55,000 for married couples filing separately; $75,000 for single, head of household, and qualifying widow or widower filers; and $110,000 for married couples filing jointly. For each $1,000 of income above the threshold, your available child tax credit is reduced by $50.
✒️Tax Tip 101: Why file for an extension? Filing an extension automatically pushes back the tax filing deadline and protects you from possible late-filing penalties that can mount up at a rate of 5 percent of the amount due with your return for each month that you're late. If you owe $2,500 and are three months late, for example, the late-filing penalty would be $375. If you're more than 60 days late, the minimum penalty is $100 or 100 percent of the tax due with the return, whichever is less. Filing for the extension wipes out the penalty.
✒️Tax Tip 101: Get up-to-date refund information using Where's My Refund? or the IRS2Go mobile app. Where's My Refund? is updated no more than once every 24 hours, usually overnight. Refunds are generally issued within 21 days after we receive your tax return. You should only call if it has been longer.
✒️Tax Tip 101: Tax tips for musicians If you spent money to run your music business, you should be able to deduct it from your income taxes. The IRS says in Publication 535: "To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business." Here are some categories to think about (while keeping in mind that you'll have to separate business use from personal/pleasure use, at least in the eyes of the IRS): Instruments Equipment/gear & accessories (amps, pedals, effects, straps, carrying cases) Consumable supplies (such as drum skins & sticks, guitar strings & picks) Music business books, record company directories, venue directories Subscriptions to trade magazines (such as Billboard and CMJ)) Sheet music and "How-To" books and manuals Promotional: CD/tape duplication (for demos), photos, bios Office supplies: paper, envelopes, photocopies, stamps Fees related to maintaining your website and e-mail access for your music-related activities Rent for storing your gear and for your practice space Membership in professional organizations, associations & unions Professional fees (attorney, manager, agent, accountant) Copyright and registration fees Lessons & instruction Travel expenses
✒️Tax Tip 101: What happens when I cash out my 401k? The amount of taxes owed on your 401(k) distribution will depend on what tax bracket you are in when the income is added to your taxable income. Additionally, you may be subject to a 10 percent penalty if you are under age 59 1/2.
✒️Tax Tip 101: Proving your casualty deduction To claim a casualty loss deduction on your federal income tax, you must prove to the IRS that you are the rightful owner of the property. Most importantly, you must notify the IRS of any reimbursement you anticipate receiving from an insurance company or a lawsuit that is likely to result in a monetary settlement. You must reduce your deductible loss by these proceeds since the deduction only covers unrecoverable losses.
✒️Tax Tip 101: If you have a child with special needs you already know it can be expensive to provide care. One small bit of good news: many of the expenses you incur will be deductible on your income tax return (if you claim your child as a dependent). Most of the special needs items will be deductible as medical expenses, and total deductions must be at least 10% of your income before they begin to qualify. Still, it can be helpful to keep track of deductible expenses. A few of the more notable items that families often overlook: Special school instruction (which can include lodging, meals, transportation and other expenses not normally deductible). This deduction requires the school to focus on adaptive education for people with neurological or physical limitations. Home modifications required by your child’s condition. For example, air conditioning construction costs might be deductible if required for respiratory illness. Accessibility remodeling is normally deductible, too. Some kinds of modifications may be only partially deductible if they also increase the value of your home. Travel and registration costs for conferences and seminars. If your child’s doctor will write a letter explaining how the conference will help you and your child deal with his special needs, the costs may be deductible as a medical expense. Attendant care at work. If your child has a job that requires attendant care, the portion of those costs not covered by other programs may be deductible. Of course, if your child has a job that may mean that the deduction is on his return, not on yours, depending on how much of his support he can provide with his own earnings.
✒️Tax Tip 101: The Importance of the 2% Floor To deduct workplace expenses, your total itemized deductions must exceed the standard deduction. You must also meet what’s called "the 2% floor." That is, the total of the expenses you deduct must be greater than 2% of your adjusted gross income, and you can deduct only the expenses over that amount. Once you are sure you qualify to deduct work-related expenses as an employee, you’ll have to be sure your deductions qualify. All expenses must be incurred during the tax year, must be trade- or business-related, and must be “ordinary and necessary.” The expenses don’t have to be required, however: In IRS-speak, a necessary expense is simply one that is helpful and appropriate for your business. And, of course, the costs can’t be reimbursed by your employer.
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✒️Tax Tip 101: Should a Police Officer seek the help of a professional tax preparer, especially one who is familiar with filing tax returns on behalf of law enforcement personnel? Answer: Yes. It is very wise for a career police officer and/or a public safety official to develop a long-term business relationship with a professional tax preparer who is experienced in filing tax returns on behalf of law enforcement personnel, especially if that tax preparer is familiar with all of the job related deductions that the individual is legally entitled.