What Income is Taxable? Nontaxable?

What Income is Taxable? Nontaxable?

IRS Tax Tip 2007-29 Generally, most income you receive is taxable. But there are some situations when certain types of income are partially taxed or not taxed at all. A complete list is available in IRS Publication 525, Taxable and Nontaxable Income. Some common examples of items that are not included in your income are: Adoption Expense Reimbursements for qualifying expenses Child support payments Gifts, bequests and inheritances Workers' compensation benefits Meals and Lodging for the convenience of your employer Compensatory Damages awarded for physical injury or physical sickness Welfare Benefits Cash Rebates from a dealer or manufacturer Tax Exempt Interest from municipal bonds and tax exempt bond mutual funds. Although this interest is not taxable it must be reported on line 8b of Form 1040 or 1040A. Examples of items that may or may not be included in your income are: Life Insurance If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. Scholarship or Fellowship Grant. If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify. These examples are not all-inclusive. For more information, visit the IRS Web site at IRS.gov to view or download Publication 525 from the Forms and Publications section or call 800-TAX-FORM (800-829-3676). Links: Publication 525, Taxable and Nontaxable Income (PDF 290K)

More Direct Deposit Options- Split Your Refund

More Direct Deposit Options- Split Your Refund

IRS Tax Tip 2007-28 Starting in 2007, taxpayers have more choices and flexibility for the direct deposit of 2006 federal income tax refunds. For the first time, taxpayers can split refunds among up to three accounts held by as many as three different U.S. financial institutions, such as banks, mutual funds, brokerage firms or credit unions. The split-refund option is available to taxpayers who choose direct deposit regardless of whether they filed the original returns on paper or in electronic format using Form 1040, 1040A, 1040EZ, 1040-PR, 1040NR, 1040NR-EZ or 1040-SS. However, taxpayers filing Form 1040-EZ-T, Request for Refund of Federal Telephone Excise Tax, or Form 8379, Injured Spouse Allocation, cannot opt to split their refund. To split direct-deposit refunds among two or three accounts or financial institutions, taxpayers should complete new Form 8888, Direct Deposit of Refund to More Than One Account. Taxpayers can continue, though, to use the direct deposit line on Form 1040 to electronically send their refunds to one account. The IRS will electronically deposit refunds to taxpayers’ accounts held by a U.S. financial institution, providing that an accurate account number and American Bankers Association (ABA) routing number is supplied and the financial institution accepts direct deposits for the type of accounts designated. Taxpayers should verify routing and account numbers with their financial institutions. IRS assumes no responsibility for taxpayer or preparer error. Note that taxpayers can do things much faster electronically than by paper. For those filing their taxes electronically, the refund is deposited in their account within two weeks. A paper check refund takes three weeks. Those filing taxes on paper, the process is longer. They get their direct deposit refund within four to six weeks or paper checks within six weeks. By using the IRS’ popular Where’s My Refund? Feature, taxpayers can track their refunds. Taxpayers can access Where’s My Refund? online at IRS.gov or by calling 800-829-1954. Links: Split Your Refund Among up to three accounts with Direct Deposit Where's My Refund?

Can You Use Schedule C-EZ?

Can You Use Schedule C-EZ?

IRS Tax Tip 2007-27 Your business may be eligible to use the abbreviated Schedule C-EZ instead of the longer Schedule C when reporting business profit and loss on your 2006 Form 1040 federal income tax return. The maximum deductible business expense threshold for filing Schedule C-EZ is $5,000. Schedule C-EZ, Net Profit from Business (Sole Proprietorship), is the simplified version of Schedule C, Profit or Loss from Business (Sole Proprietorship). Schedule C-EZ: • Has an instruction page and a one-page form with three short parts — General Information, Figure Your Net Profit, and Information on Your Vehicle. • Includes a simple worksheet for figuring the amount of deductible expenses. If that amount does not exceed $5,000, and if your business did not have a net loss, you should be able to use the C-EZ instead of Schedule C. Schedule C: • Is two pages long and is divided into five parts — Income, Expenses, Cost of Goods Sold, Information on Your Vehicle, and Other Expenses. • Requires more detailed information than the C-EZ. The instruction package is nine pages long. • Must be used when deductible business expenses exceed $5,000 and/or when a business has a net loss. Using Schedule C-EZ can save time and money and reduce paperwork burden for newly-eligible businesses. More information about Schedule C-EZ and reporting net profit for sole proprietorships can be found on the IRS Web site at IRS.gov. Publication 334, Tax Guide for Small Business (PDF 407K)

Changes to Tax Law for 2006

Changes to Tax Law for 2006

IRS Tax Tip 26 Taxpayers should be aware of important changes to the tax law before they complete their 2006 federal income tax forms. Here are some changes that may affect your return. New energy-saving tax credits. A residential energy credit may be taken for amounts paid for qualified energy saving items installed in connection with a taxpayer’s home. Alternative motor vehicles. Taxpayers may be able to take a credit if they place an alternative motor vehicle (including a qualified hybrid vehicle) or alternative fuel vehicle refueling property in service. Taxpayers can no longer take a deduction for clean-fuel vehicles or refueling property. IRA deduction expanded. A taxpayer may be able to take an IRA deduction if they were covered by a retirement plan and their modified AGI is less than $85,000 if married filing jointly or qualifying widow(er). o For purposes of taking an IRA deduction, earned income includes any nontaxablecombat pay received by a member of the U.S. Armed Forces. New rules on donations to charity. To be deductible, clothing and household items donated to charity after Aug. 17, 2006, must be in good used condition or better. However, this rule does not apply to a contribution of any single item for which a deduction of more than $500 is claimed and for which the taxpayer includes a qualified appraisal and Form 8283 with the taxpayer’s return. IRA distribution for charitable purposes. A distribution from an IRA that was made directly by the trustee to a qualified charitable organization may be nontaxable if the taxpayer was at least 70 ½ when the distribution was made. Tax on children’s income. Form 8615 must be used to figure the tax of children under 18 with investment income of more than $1,700. The election to report a child’s investment income on a parent’s return and the special rule for when a child must file Form 6251 now apply to children under age 18. Extenders Legislation. This new legislation affects a number of areas, most significantly state and local sales tax, higher education tuition and fees, and educator expenses. See IRS.gov for specific instructions on how to claim these deductions on paper tax returns (most electronic filing software packages will automatically take these late changes into account). Also new this year, two changes may affect the amount of your refund or the way in which you choose to receive your refund. Telephone Excise Tax Refund. Individual taxpayers will be able to request a refund if they paid the federal excise tax on long-distance or bundled service. New Split Refund Option. Taxpayers choosing direct deposit for their refunds may be able to split their refunds among up to three accounts. For more information, visit the IRS Web site at IRS.gov. Also, see Publication 553, Highlights of 2006 Tax Changes, and the instruction book for Form 1040. Links: Telephone Excise Tax Refund Form 1040 instructions (PDF 941K)

Guidelines for Roth IRA Contributions

Guidelines for Roth IRA Contributions

IRS Tax Tip 2007-25 Taxpayers confused about whether they can contribute to a Roth IRA should consider guidelines based on the following categories: Income Limits To contribute to a Roth IRA, you must have compensation (e.g., wages, salary, tips, professional fees, bonuses). These limits vary depending on your filing and marital statuses. Age There is no age limitation for Roth IRA contributions. Contribution Limits In general, if your only IRA is a Roth IRA, the maximum 2006 contribution limit is the lesser of your taxable compensation or $4,000 ($5,000 if 50 or older). The maximum contribution limit phases out depending on your modified adjusted gross income. Spousal Roth IRA You can make contributions to a Roth IRA for your spouse provided you meet the income requirements. Time Contributions to a Roth IRA can be made at any time during the year or by the due date of your return for that year (not including extensions). Roth IRA contributions are not tax deductible and are not reported on your tax return. On the other hand, you do not include in your gross income, and therefore are not taxed on, any qualified distributions or distributions that are a return of your regular Roth IRA contributions or that are rolled over into another Roth IRA. For complete information and definitions of terms, get Publication 590, Individual Retirement Arrangements. Visit the IRS Web site at IRS.gov, or call 800-TAX-FORM (800-829-3676) to request a free copy of the publication. Links: Publication 590, Individual Retirement Arrangements (PDF461K)

Missing a Form 1099?

Missing a Form 1099?

IRS TAX TIP 2007-24 If you receive certain types of income, you may get a Form 1099 for use with your federal tax return. Form 1099 is an information return provided by the payer of the income. You should receive your Form 1099-series information returns by January 31, 2007. The payer deadline to mail Form 1099-series is January 31, 2007. If you have not received an expected Form 1099 within a few days after that, contact the payer, to secure the missing information. If you still do not receive the form by February 15th, call the IRS for assistance at 800-829-1040. In some cases, you may obtain the information that would be on the Form 1099 from other sources. For example, your bank may put a summary of the interest paid during the year on the December or January statement for your savings or checking account. If you are able to get the accurate information needed to complete your tax return, you do not have to wait for the Form 1099 to arrive. Form 1099-series is not a required attachment to your return, except when you receive a Form 1099-R, or Form 1099-INT that shows federal income tax withheld. You will not usually attach a 1099-series form to your return, except when you receive a Form 1099-R that shows income tax withheld. You should keep a copy of all the 1099s that you receive with your tax records for the year. There are several different forms in this series, including: Form 1099–B, Proceeds From Broker and Barter Exchange Transactions Form 1099–DIV, Dividends and Distributions Form 1099–INT, Interest Income Form 1099–MISC, Miscellaneous Income Form 1099–OID, Original Issue Discount Form 1099–R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Form SSA–1099, Social Security Benefit Statement If you file your return and later receive a Form 1099 for income that you did not fully include on that return, you should report the income and take credit for any federal income tax withheld by filing Form 1040X, Amended U.S. Individual Income Tax Return. Form 1040X and instructions are available on the IRS Web site at IRS.gov or by calling 800-TAX-FORM (800-829-3676). Links: Form 1040X, Amended U.S. Individual Income Tax Return (PDF 123K) Instructions for Form 1040X (PDF 43K) Forms and Publications

The Earned Income Tax Credit

The Earned Income Tax Credit

IRS TAX TIP 2007-23 The EITC is for people who work, but have lower incomes. If you qualify, it could be worth up to $4,500 this year. So you could pay less federal tax or even get a refund. That’s money you can use to make a difference in your life. Did you know that in Tax Year 2005, over 22 million taxpayers received $41.4 billion dollars in EITC – making the credit a great investment in the lives of those who claim it? However, the IRS estimates 20 to 25% percent of people who qualify for the credit do not claim it. At the same time, there are millions of Americans who have claimed the credit in error, many of whom simply don’t understand the criteria. This year, it’s even easier to determine whether you qualify for the EITC. The EITC Assistant, an interactive tool available on IRS.gov, removes the guesswork from eligibility rules. Just answer a few simple questions about yourself, your children, your living situation and your income to find out if you qualify and to estimate the amount of your EITC. You will see the results of your responses right away. The EITC is based on the amount of your earned income and whether or not there are qualifying children in your household. If you have children, they must meet the relationship, age and residency requirements. Additionally, you must file a tax return to claim the credit. If you were employed for at least part of 2006, you may be eligible for the EITC based on these general requirements: You earned less than $12,120 ($14,120 if married filing jointly) and did not have an any qualifying children You earned less than $32,001 ($34,001 if married filing jointly) and have one qualifying child You earned less than $36,348 ($38,348 if married filing jointly) and have more than one qualifying child In addition you must meet a few basic rules: You must have a valid Social Security Number You must have earned income from employment or from self-employment. Your filing status cannot be married, filing separately. You must be a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien and filing a joint return. You cannot be a qualifying child of another person. If you do not have a qualifying child, you must: be age 25 but under 65 at the end of the year, live in the United States for more than half the year, and not qualify as a dependent of another person You cannot file Form 2555 or 2555-EZ (related to foreign earn income) Members of the military can elect to include their nontaxable combat pay in earned income for the earned income credit. If you make the election, you must include in earned income all nontaxable combat pay you received. If you are filing a joint return and both you and your spouse received nontaxable combat pay, then each of you can make your own election. The amount of your nontaxable combat pay should be shown on your Form W-2 in box 12 with code Q. For more information about the EITC, go to IRS.gov or see Publication 596, Earned Income Credit, which contains eligibility criteria and instructions for claiming the tax credit. Copies of the publication are available in English and Spanish and can be found on IRS.gov or by calling 800-TAX-FORM (800-829-3676). Free help and tax preparation is available at our Volunteer Income Tax Assistance sites or contact your tax preparer for more details. Links: EITC Assistant Earned Income Tax Credit Publication 596, Earned Income Credit (EIC) (PDF 373K) Free File Tax Topic 601, Earned Income Credit AARP Tax-Aide EITC Public Service Announcement (MP3)