With the internet and computer technology, the ability for many workers to perform their regular work duties and work from home is increasing at a rapid rate. Employers are looking at this option closer with the economic downturn causing many companies to aggressively seek any cost savings measures. There are good tax breaks (deductions) available for persons who maintain an office in their home, but the rules are specific and strict. For example, you can't use your dining room as an office and get the deductions. The office must be used exclusively for business.

The Best Way to Reduce your Taxes is to Keep Good Records

If you are not currently tracking your personal and household expenses, we suggest that you start right away. It can mean many dollars in tax savings to you at filing time and make things much easier should you ever have to deal with the IRS on any issues. The time spent will be well worth it! You may choose any recordkeeping system suited to your business that clearly shows your income and expenses (kind of records to keep). The time you are required to keep records includes the period of time during which you can amend your tax return to claim a credit or refund, or that the IRS can assess more tax.

More parents and students can use a federal education credit to offset part of the cost of college under the new American Opportunity Credit. This credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Income guidelines are expanded and required course materials are added to the list of qualified expenses. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.

In many cases, the American Opportunity Credit offers greater tax savings than existing education tax breaks. Here are some of its key features:

• Tuition, related fees and required course materials, such as books, generally qualify. In the past, books usually were not eligible for education-related credits and deductions.
• The credit is equal to 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
• The full credit is available for taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less ($160,000 or less for filers of a joint return). The credit is reduced or eliminated for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and lifetime learning credits.
• Forty percent of the American opportunity credit is refundable. This means that even people who owe no tax can get an annual payment of the credit of up to $1,000 for each eligible student. Existing education-related credits and deductions do not provide a benefit to people who owe no tax. The refundable portion of the credit is not available to any student whose investment income is taxed, or may be taxed, at the parent’s rate, commonly referred to as the kiddie tax.

Though most taxpayers who pay for post-secondary education qualify for the American Opportunity Credit, some do not. The limitations include a married person filing a separate return, regardless of income, joint filers whose MAGI is $180,000 or more and, finally, single taxpayers, heads of household and some widows and widowers whose MAGI is $90,000 or more.

There are some post-secondary education expenses that do not qualify for the American Opportunity Credit. They include expenses paid for a student who, as of the beginning of the tax year, has already completed the first four years of college. That’s because the credit is only allowed for the first four years of a post-secondary education.

Students with more than four years of post-secondary education still qualify for the lifetime learning credit and the tuition and fees deduction.

Many Energy Improvements Qualify for Expanded Tax Credits

People who weatherize their homes or purchase alternative energy equipment may qualify for either of two expanded home energy tax credits: the non-business energy property credit and the residential energy efficient property credit.

Non-business Energy Property Credit

This credit equals 30 percent of what a homeowner spends on eligible energy-saving improvements, up to a maximum tax credit of $1,500 for the combined 2009 and 2010 tax years. This means that a homeowner can get the maximum credit by spending at least $5,000 on qualifying improvements. Homeowners must make the improvements to an existing principal residence; this tax credit is not available for new construction.

Due to limits based on tax liability, other credits claimed by a particular taxpayer and other factors, actual tax savings will vary. The cost of certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass all qualify, along with labor costs for installing these items. In addition, the cost of energy-efficient windows and skylights, energy-efficient doors, qualifying insulation and certain roofs are also eligible for the credit, though the cost of installing these items does not count.

Residential Energy Efficient Property Credit

Homeowners going green should also check out a second tax credit designed to spur investment in alternative energy equipment. The residential energy efficient property credit, equals 30 percent of what a homeowner spends on qualifying property such as solar electric systems, solar hot water heaters, geothermal heat pumps, wind turbines, and fuel cell property. Qualifying property purchased for new construction or an existing home is eligible for the credit. Generally, labor costs are included when calculating this credit. Also, no cap exists on the amount of credit available except in the case of fuel cell property.

Not all energy-efficient improvements qualify for these tax credits. For that reason, homeowners should check the manufacturer’s tax credit certification statement before purchasing or installing any of these improvements. The certification statement can usually be found on the manufacturer’s Web site or the product packaging. Normally, a homeowner can rely on this certification. The IRS cautions that the manufacturer’s certification is different from the Department of Energy’s Energy Star label, and not all Energy Star labeled products qualify for the tax credits.

New Vehicle Purchase Incentive

New car buyers can deduct the state or local sales or excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. There is no limit on the number of vehicles that may be purchased, and eligible taxpayers may claim the deduction for taxes paid on multiple purchases. However, the deduction is limited to the tax on up to $49,500 of the purchase price of each qualifying new vehicle. Qualifying new vehicles must be purchased, not leased, after Feb. 16, 2009, and before Jan. 1, 2010.

Taxpayers who buy a new vehicle may deduct state or local fees or taxes that are similar to a sales tax whether or not their state imposes a sales tax. To qualify, the fees or taxes must be assessed on the purchase of the vehicle and must be based on the vehicle’s sales price or as a per-unit fee.
The amount of the deduction is reduced for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers. This deduction is available regardless of whether a taxpayer itemizes deductions on Schedule A. Itemizers claim the deduction on either Line 5 or Line 7 of Schedule A.

AMT Exemption Increased for One Year

For tax-year 2009, Congress raised the alternative minimum tax exemption to the following levels:
• $70,950 for a married couple filing a joint return and qualifying widows and widowers, up from $69,950 in 2008
• $35,475 for a married person filing separately, up from $34,975
• $46,700 for singles and heads of household, up from $46,200
Under current law, these exemption amounts will drop to $45,000, $22,500 and $33,750, respectively, in 2010.

Other Changes

The standard mileage rate for business use of a car, van, pick-up or panel truck is 55 cents for each mile driven. The standard mileage rate for the cost of operating a vehicle for medical reasons or as part of a deductible move is 24 cents per mile. The rate for using a car to provide services to charitable organizations is set by law and remains at 14 cents a mile.

The value of each personal and dependency exemption is $3,650, up $150 from 2008. Most taxpayers can take personal exemptions for themselves and an additional exemption for each eligible dependent. This is one of more than three dozen individual and business tax provisions that are adjusted each year to keep pace with inflation. A complete rundown of these changes can be found in 2009 Inflation Adjustments Widen Tax Brackets, Change Tax Benefits.

The amount of taxable investment income a child can have without it being taxed at the parent's rate is $1,900, up $100 from 2008.

There are several modifications to the definition of a qualifying child. For example, the child must be younger than the taxpayer, unless the child is totally and permanently disabled. These changes affect who can claim various tax benefits including the dependency exemption, child tax credit, credit for child and dependent care expenses, head of household filing status and the EITC.

A new rule applies to the noncustodial parent in situations where a couple is divorced or legally separated after 2008. To claim a child as a dependent, the noncustodial parent must attach Form 8332 or a similar statement to his or her tax return. For pre-2009 divorces and separations, the noncustodial spouse still has the option of attaching certain pages from the divorce decree or separation agreement, instead of Form 8332.

A $3,500 or $4,500 voucher or payment made for such a voucher under the CARS “cash for clunkers” program is not taxable to the consumer buying or leasing a new car.

Unemployment benefits up to $2,400 received in 2009 are tax free for unemployed workers. Every person who receives unemployment benefits can exclude the first $2,400 of these benefits on their return. Unemployment benefit amounts over $2,400 are taxed.

National Taxpayer Advocate Delivers Annual Report to Congress; Focuses on Taxpayer Service, Collection and Preparer Regulation

National Taxpayer Advocate Nina E. Olson today released her annual report to Congress, warning that increased demands on the IRS have eroded the agency’s ability to meet taxpayer service needs and expressing concern that IRS collection practices are harming financially struggling taxpayers without producing significant revenue gains.

In the preface to the report, Olson noted that she is required by statute to identify taxpayer problems, but she wrote that “the IRS in many respects has had an extremely successful year.” She cited, in particular, the IRS’s success in implementing significant legislative changes designed to stimulate the economy in the midst of the filing season.

Among the key issues and themes identified in this year’s report:

Telephone Service.  The report designates the IRS’s declining ability to answer telephone calls as the most serious problem facing taxpayers. Olson notes that the IRS has set a target for FY 2010 of answering only 71 percent of calls from taxpayers seeking to speak with a customer service representative about account questions, down from 83 percent in FY 2007.

“In other words, the IRS is planning to be unable to answer about three of every 10 calls it receives,” Olson said, adding that the IRS expects those who get through will have to wait an average of 12 minutes. The report states that this projected level of service is barely above the level of 69 percent notched in 1998, when Congress passed the landmark IRS Restructuring and Reform Act due in large part to concerns about inadequate taxpayer service.  “This level of service is unacceptable,” Olson wrote.

Examination and Collection Issues.  The report contains a detailed assessment of IRS examination and collection practices, concluding that many practices have been developed piecemeal and that the IRS lacks an effective overarching strategy to maximize voluntary compliance.  The report also concludes that IRS collection practices often harm taxpayers without producing revenue.

In particular, the report cites IRS lien filing policies as the second most serious problem facing taxpayers.  The IRS uses automated systems to file liens against taxpayers in a variety of situations, even when the taxpayer possesses minimal or no property and the lien will do little more than damage the taxpayer’s financial viability and access to credit.  A study conducted by Olson’s office found no obvious causal relationship between the number of lien notices filed and the amount of overall revenue collected.  Over the past decade, the IRS increased its lien filings by nearly 475 percent – from about 168,000 in FY 1999 to nearly 966,000 in FY 2009, yet overall inflation-adjusted collection revenue declined by 7.4 percent during this period.

A second study found that IRS procedures for determining a taxpayer’s ability to pay outstanding tax liabilities may be driving some taxpayers into long-term noncompliance because the IRS fails to consider other debts such as credit card balances, school loans, and actual hospital or medical bills. Other tax systems, including Sweden’s, consider the taxpayer’s overall financial picture.

“Any taxpayer with these debts will tell you that these creditors don’t go away,” Olson said. “Taxpayers are placed in the intolerable position of agreeing to pay the IRS more than they can actually afford (given their other debts) and then defaulting on the IRS payment arrangements when they channel payments to unsecured creditors in order to get some peace. Thus, the IRS itself fosters noncompliance by its failure to take a holistic approach to the taxpayer’s debt situation.”

The National Taxpayer Advocate recommends that Congress require the IRS, before imposing a lien, to make a determination that the benefits of filing the lien outweigh the harm to the taxpayer and will not jeopardize the taxpayer’s ability to comply with future tax obligations.

Data Concerns.  The report expresses concern that the IRS does not maintain sufficient reliable data to assess the effectiveness of its collection practices in several respects.  First, the IRS theoretically tracks the specific source of all payments received on delinquent accounts, but a TAS study found the majority of payments received either were not coded or were coded as coming from “miscellaneous” sources.  The absence of this information makes a thorough assessment of the effectiveness of IRS collection practices impossible.  Second, the amount of revenue the IRS collects is difficult to parse because the IRS itself uses multiple measures of what it calls “collection yield” or “enforcement revenue.”

Third, the report states that the quality of IRS’s data reporting is uneven. Olson’s office found that the official IRS Data Book for FY 2008 revised collection revenue totals downward by $32 billion, or 27 percent, for FY 2005, FY 2006, and FY 2007 combined, without explanation.  “There is an astonishing lack of transparency as to what is included in these revenue figures and how they are computed,” Olson said.  “The failure to highlight and explain revisions of such magnitude erodes confidence in IRS’s data reporting,” she added.

Preparer Regulation.  The report praises the IRS for moving ahead with plans to regulate federal income tax preparers. Olson called the plan, which the IRS issued earlier this week, a “significant, far-reaching initiative.”

However, Olson expressed concern that one aspect of the plan may create a significant gap in the new rules that may be widely and increasingly exploited.  Under current law, anyone may prepare a tax return for compensation, with no training, licensing, or oversight required.  While attorneys, CPAs, and Enrolled Agents must pass difficult examinations to practice, others (known as “unenrolled preparers”) are not required to do so.  To protect taxpayers and improve tax compliance, Olson has proposed since 2002 that unenrolled preparers be required to register with the IRS, pass an examination, and complete periodic continuing education courses.

The IRS plan announced this week would impose these requirements on return preparers who sign tax returns but not on preparers who meet with taxpayers and prepare their returns if someone else signs them.  To minimize cost and burden, a return preparation business may decide to employ one “signing” preparer who is certified under the new IRS rules and an unlimited number of “nonsigning” preparers.  The nonsigning preparers would not have to register, pass an exam, or take continuing education courses, and the signing preparer would be unable to thoroughly review every return he signs (in part because the interview with the taxpayer is central to accurate preparation of the return).

Olson noted that the burden of the new rules themselves may cause more return preparation businesses to employ nonsigning preparers.  “We are concerned that excluding nonsigning preparers could create an exception that swallows the rule,” the report states.  The report notes that not all nonsigning preparers need to be covered to protect taxpayers and recommends that the IRS consider extending the new rules to apply to all unenrolled nonsigning preparers.

Rethinking the “Pay Refunds First, Verify Eligibility Later” Approach to Tax Returns Processing.  Under current procedures, the IRS processes income tax returns before it processes most information returns, including Forms W-2, Wage and Tax Statement, and Forms 1099, which report interest, dividends, and other payments.  “This sequence makes little logical sense,” the report states.  From a taxpayer perspective, the sequence leads to millions of cases where taxpayers inadvertently make overclaims that the IRS does not identify until months later, exposing the taxpayer not only to a tax liability but to penalties and interest charges as well.  From the government’s perspective, this sequence creates opportunities for fraud and requires the IRS to devote resources to recovering refunds that should not have been paid and that it often cannot recover.  This sequence also prevents the IRS from making pre-populated returns available as an option to taxpayers.

The report recommends that Congress direct the Treasury Department to prepare a report identifying the administrative and legislative steps required to allow the IRS to receive and process information reporting documents before it processes tax returns.  It recommends setting a goal of making these changes within six years.

Running Social Programs through the Tax System.  Volume 2 of the report contains an analysis of social benefits provided through the tax code, with an emphasis on refundable credits.  Refundable credits have been associated with high overclaim rates.  However, the report states that where noncompliance involving refundable credits exists, the refundable nature of the credit is not the primary driver of the noncompliance.  The report notes that some provisions of the tax code not involving refundable credits also are associated with high overclaim rates and concludes that the manner in which a provision is designed is a larger determinant of compliance rates than refundability.  In particular, the IRS can more precisely administer tax benefits when the eligibility criteria reflect data that the IRS can verify through automation.  The report proposes certain design elements to assist policymakers in enacting programs that maximize both participation and compliance.

The second volume of this year’s report also presents in-depth studies on the IRS’s use of notices of federal tax liens, the subsequent compliance behavior of delinquent taxpayers, and tax administration aspects of a consumption tax such as a value-added tax as well as an assessment of ombudsman offices across the Federal government.

Assessing tax administration today, Olson concludes that the IRS “is subject to three diverging forces – increased responsibility for non-core tax administration duties, increasing demand for taxpayer service (including telephone assistance) and declining resources to meet that demand, and collection policies that mask a laissez faire attitude toward taxpayer harm under the guise of ‘efficiency.’”

“The taxpayer is wedged in the middle of these forces, being pulled in all directions, but never the right one,” Olson writes.

Federal law requires the National Taxpayer Advocate to submit an Annual Report to Congress each year identifying at least 20 of the most serious problems encountered by taxpayers and to make administrative and legislative recommendations to mitigate those problems.  Overall, this year’s report identifies 21 problems, provides updates on two previously identified issues, makes dozens of recommendations for administrative change, proposes 11 recommendations for legislative change, and analyzes the 10 tax issues most frequently litigated in the federal courts during the past fiscal year.

The Internal Revenue Service recently announced an expedited process that will make it easier for financially distressed homeowners to avoid having a federal tax lien block refinancing of mortgages or the sale of a home. Tax Liens can also affect the purchase of a home.

Low and moderate income workers can take steps now to save for retirement and earn a special tax credit in 2008 and the years ahead. The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to Individual Retirement Arrangements (IRAs) and to 401(k) plans and similar workplace retirement programs.
 

Wage Compensation for S Corporation Officers...

Corporate officers are specifically included within the definition of employee for FICA (Federal Insurance Contributions Act), FUTA (Federal Unemployment Tax Act) and federal income tax withholding under the Internal Revenue Code. When corporate officers perform services for the corporation, and receive or are entitled to receive payments, their compensation is generally considered wages.