Year End Tax Tidbits 2012

Year End Tax Tidbits 2012
As the end of the year approaches, here is some year-end planning information.  As it is every year, I know the number of listed topics is a bit overwhelming. For these tax topics and others about which you have questions, feel free to contact me.

Withholding for 2013
If you think your withholding should be adjusted for 2013 (e.g. your income will either increase or decrease; you have additional dependents; you have fewer dependents; you marred in 2012 or will marry in 2013,  you divorced in 2012 or your divorce will become final in 2013), we need to talk about adjusting your withholding.

Reminders for Individual Filers ~  

IRA and Roth IRAs

You may contribute to your IRA or Roth IRA for 2012 as long as you do it by April 15, 2013.  If your income is too high to make a contribution to your IRA or Roth IRA, you may contribute to a non-deductible IRA.  Your contribution may be as much as $5,000 plus an additional $1,000 if you're over 50 years of age.  If you participate in a retirement plan at work, the amount of your deductible IRAs is limited.  If the IRS considers you high income, phase outs also apply to contributions to Roth IRAs.

Employer Plans: 401(k)s, 403(b)s, 457s, SIMPLE IRAs, etc.
For plans other than SIMPLEs, the maximum contributions to retirement plans increased for 2012.  For 401(k)s, 403(b)s, 457s, and other retirement plans, you may contribute up to $17,000 in salary deferrals plus an additional $5,500 if you're over 50 years of age.  For SIMPLE IRAs, you may contribute up to $11,500 plus $2,500 if you're over 50 years of age.

Saver's Credit
For 2012, if you contribute to your retirement plan at work or to a traditional IRA and your income is lower than the income thresholds (less than $28,750 to less than $57,500 depending upon your filing status), you qualify for the Saver's Credit.  You must be at least 18 years of age, not a full-time student, and not claimed as a dependent on someone else's tax return.  Depending on your income, the tax credit is from 10% of your contribution to as high as 50% of your contribution.

Investment Income
The lower 15% tax rates on long-term capital gains (held over 1 year plus 1 day) and qualified dividends may expire in 2013.  The capital gains rate for some investors is zero in 2012. The zero-percent rate is limited to taxpayers in the 10% to 15% income tax brackets.   Capital gains rates will likely increase after 2012.

College Savings Accounts – 529 Plans
529 Plans allow you to contribute to a college account and if the funds are used for higher education, any amount you pull out is tax free.  529 Plans are clearly an excellent strategy for saving for higher education for family members.

Kiddie Tax
The kiddie tax applies to dependents under the age of 19 and also includes dependents under the age of 24 who are full-time students.  Income up to $950 is tax-free in 2012.  The next $950 is taxed at 10%, and income above that amount is taxed at your tax rate.

Gift Tax Exclusion
The annual exclusion for tax year rises from $13,000 in 2012 to $14,000 in 2013 for gifts to individuals who are citizens of the U.S.  Any gifts over this amount require that a gift tax return be filed.  For gifts to spouses who are not citizens of the United States, a non-taxable gift is limited to $139,000 (for 2013 $143,000). If you gift something that is non-cash (e.g. stock), I do not recommend gifting any asset that is worth less than what you paid for it.

Charitable Contributions (cash or check)
Both charitable contributions in the form of cash or check require a receipt from the charity.  This means that if you attend church on Sunday and put $10.00 cash in the collection plate, you cannot take a deduction without a receipt from your church.  If you pay by check, your canceled check is your receipt unless the total of your contributions is $250 or more.  Because of recent tax court cases, the best practice is to obtain a receipt for every donation.

Non-Cash Charitable Contributions 
Don't forget that non-cash charitable deductions require documentation and if the value of your donation exceeds $250, a detailed receipt from the charity.  You cannot simply say "3 bags of clothing.  If you need my non-cash charitable contribution worksheet to arrive at the deductible amount, let me know and I'll email it to you.

Charitable Travel
You may still deduct local charitable mileage at 14 cents per mile, but you cannot deduct charitable travel unless there is "no significant element of personal pleasure."  If you travel for a charity (a chorus, symphony, fraternal organization, etc.), you cannot deduct your expenses unless you can prove that all or most of that trip was directly related to the charitable work.

Unreimbursed Employee Business Expenses
For those of you who deduct expenses related to your employment, the IRS is actively auditing these deductions.  Labor laws state that if you incur expenses related to your employment, your employer is required to reimburse you.  If your expenses are reimbursable by your employer and you fail to request reimbursement, you do not qualify for any deduction.  

Use Tax
If you made a purchase on the Internet and did not pay sales tax, you are required to pay sales tax to your state when you file your tax return.

Home equity interest and refinancing
Unless you substantially improve your home with funds from a home equity loan, your mortgage interest deduction may be limited.  The total of your home equity debt is limited to $100,000 for you to be able to deduct the interest.  Any interest paid on loans that exceed $100,000 is considered personal interest and is not deductible.  Home equity interest is not deductible for AMT purposes.

Educator Expense Deduction
For credentialed teachers, the teacher's educator expenses deduction of $250 is scheduled to expire after 2011.

IRA conversions to Roth IRAs
Roth Conversions – if you converted any retirement funds to your Roth IRA in 2012, you have six months to move those funds back to your retirement account to avoid paying income taxes.  This strategy is especially good if the value of those funds is worth less today than they were when you made the transfer to your Roth.

Roth Conversions that took place in 2010
Don’t forget that if you converted a traditional IRA to a Roth IRA in 2010, unless you elected to pay the tax on your 2010 tax return, you’ll pay 50% of the tax when filing your 2011 tax return and 50% of the tax when filing your 2012 return.

Roth Conversions that take place after 2010
All taxpayers are allowed to convert a traditional retirement funds with tax-deferred growth to a Roth IRA that grows tax-free.  Conversions are included in income during the tax year in which the conversion is completed, and must be completed no later than December 31st.  Removing the Roth IRA conversion cap, however, doesn't mean anyone can contribute to a Roth IRA, but it does mean that anyone can convert a retirement account to a Roth IRA.  Please contact us before doing a Roth conversion to discuss your individual situation.

IRA/Retirement Plans Minimum Distributions for those over age 70 (MRD)
For those of you who are over 70 years of age, you are required to take a required minimum distribution each year.  Make sure you take your distribution before 12/31/12.  The penalties for not taking the distribution are severe.

Alternative Minimum Tax (AMT)
There's is bipartisan support for an AMT patch so that middle income taxpayers won't pay AMT for 2012.  Without a 2012 patch, an estimated 21 million households will have to pay more AMT in 2012.

Estate Taxes
Until the end of 2012, estate tax will apply only to estates valued at more than $5 million.  The maximum estate tax rate is 35%.  For 2013 the tax is scheduled to revert back to estates valued at over $1 million with a maximum rate of 55%.  Congress must act to extend the more favorable treatment.

Flexible Spending Accounts (FSAs), Cafeteria Plans, Section 125 Plans
If your company offers these plans, the enrollment period is often times toward the end of the year.  Remember that whatever amount you elect to contribute to your plan comes out of your wages tax-free.  You pay no income tax, social security tax, or Medicare tax on the amount you contribute for your projected medical expenses for 2013 (not including over-the-counter drugs unless you have a prescription) and/or dependent care expenses (not including overnight camps).  The key to how much you elect to contribute either for dependent care or medical expenses is to not contribute more than you will spend in a calendar year plus 2 months 15 days.  Should you not spend what you contributed, you forfeit that amount for that calendar year.  

Medicare Part B
In 2012, if you're not considered high income, your Medicare B premium that covers doctors’ visits and outpatient procedures will increase to $99.90 per month.  If you're covered by Medicare and you're considered high income, you can expect a Medicare Part B surcharge.  The surcharge is based on your 2009 tax return.  The surcharge begins at adjusted gross income of over $85,000 if you're single and $170,000 if you're married.  If your income decreased since 2009, you can dispute the surcharge, but you must do it right away.   If you plan to dispute the charge, make sure you call the local Social Security office to file your dispute right away.

Your broker will now report your tax basis to the IRS when you sell
When your broker sends you a letter that asks you to verify the basis of your investments (that’s the amount you paid for the investment), make sure you look at what the broker says is your basis.  If there is an error, notify your broker that the basis they reflect is not correct.  A problem could occur if you have held the investment for a long time or transferred that investment to your current broker, etc.

Stock Options
Companies who issue stock options are now required to report to the IRS the grant date and the exercise price of any stock options that were exercised by employees.

Tax Credit for First Four Years of College
Through 2012, the American Opportunity Credit of up to $2,500 is designed to help parents and students pay part of the cost of the first four years of college. The credit is available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. Tuition, related fees, books, equipment (including laptop computers) and other required course materials generally qualify. 

Reminders for Business Filers ~

Form 1099-K
Starting in 2011, you received Form 1099-K from the party that processes credit card payments made to your business.  Originally the IRS was going to require that credit card payments be tracked and reported separately from other payments on business tax returns.  The IRS has backed off on this recordkeeping requirement for the business but they will still compare the amount reported on Forms 1099-K with the total income you report on your business tax return.

Office in Home
If you have an office in home, your office must be used exclusively for your business and regularly for your business (little personal use is allowed).  Also, the 1st business related trip of the day from your qualified home office is not deductible unless you qualify under special rules.  It is considered part of your personal commute.  The trips after that 1st stop of the day are deductible business miles if the stop is business related.

Telephone expense
If you have a business that you operate in your home, you must have a separate business telephone line to deduct your telephone expenses.  If you have a personal phone from which you make business calls, you may deduct only the business long-distance amount as telephone expense.

Business Use versus Personal Use Property Deductions
This is a category that includes home computers, auto expenses, etc.  The IRS examines the personal use versus the business use.  How much of the time do you spend on your computer that is personal use as opposed to business use?

Travel and Meal & Entertainment Expense
In addition to a receipt, make sure you keep a log noting the name of the client, the purpose of the meeting, the cost, and who attended.  Your credit card statement is not considered substantiation.

Business travel expense
Keep a log of your business mileage.  Without a mileage log, no deduction is allowed.  Again, keep track of the name of the client and business purpose of the meeting.  Most of you use the standard mileage rate. For 2012, it is 55.5 cents per mile.

Forms 1099-MISC
The IRS is now penalizing businesses that file these forms later than the required filing deadline.  So, if you paid more than $600 to a business or individual for services rendered, you are required to issue Form 1099-MISC.  Forms must be mailed to the recipients no later than January 31, 2013.  Your forms must be mailed to the IRS no later than February 28, 2013 (April 1, 2013 if e-filed).  If you are required to issue the forms and do not, your deduction may be disallowed by the IRS.

Business Inventory
The IRS continues to place an increased emphasis on the physical inventory of businesses as of December 31st each year.  Make sure that if your business does have inventory, you count that inventory the last day of each year. 

Sales Tax
Sales and use tax audits are increasing.  In general, you must pay sales or use tax on any item you purchase that is not re-sold (e.g. office supplies, equipment, etc.).  You must collect sales tax on any item sold to non-exempt customers.  This is includes items purchased online on which you paid no sales tax.

Corporate records 
To avoid losing the S Corp or C Corp liability protection, make sure that your corporate records are maintained on an annual basis.  S and C corporations are required to maintain minutes while LLC's have no such requirement.

Section 179 Expense for Businesses
The maximum Section 179 deduction and investment limit for 2012 is $139,000 for $560,000 in qualifying property.  In addition to California, many states do not conform to these larger limits so an adjustment will be made on your state return.

Bonus Depreciation
For purchases made in 2012, bonus depreciation is 50% for qualified investments and property purchases.  Bonus depreciation is set to expire after 2012.

This written advice is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.

Good News! IRS Expands Offers in Compromise!

Good News!  IRS Expands Offers in Compromise!

Courtesy:  Ronald A. Marini, JD, LLM in Taxation - 
Marini & Associates, PA - Attorneys at Law in Miami, FL
Offer in Compromise Pre-Qualifier online tool
OIC booklet

The IRS has completely revamped its offer in compromise guidelines to greatly increase the number of taxpayers who will be able to qualify. The new guidelines are announced in a news release by the IRS (IR-2012-53, May21,2012). 

The most revolutionary change is the methodology of calculating the offer amount. The amount of the offer in compromise has always been determined by the amount of the reasonable collection potential (RCP). RCP is determined by adding the net realizable value of the taxpayer's assets to his (Net Disposable Income x 12 months). 

Offer Amount = RCP = net assets + (Net Disposable Income x 12).

Net Disposable Income (NDI)* is defined as an estimate of the taxpayer's ability to pay based on an analysis of gross income, less necessary living expenses, for a specific month. 

In the past a taxpayer who wanted to pay the offer amount in 5 monthly installments would multiply his monthly NDI by 48 months to arrive at the amount.  A taxpayer who wanted to pay the offer amount over a 24 month period was required to multiply his monthly NDI by 60 months to arrive at NDI. In both cases NDI was added to the net realizable value of the taxpayer's assets to arrive at RCP, or the "offer amount". 

Under the new offer in compromise guidelines NDI will be arrived at by multiplying the monthly NDI by 12 if the offer can be paid in 5 monthly payments or less. If the taxpayer needs 24 months to pay the offer amount in full then the NDI will be determined by multiplying the monthly NDI by 24. The deferred payment option which allows payment over the life of the statute is no longer available.

Example:  A taxpayer who has $50,000 in realizable equity in assets, and monthly NDI of $2,000, will pay $74,000 [$50,000 + ($2,000 x 12 months)] if the offer amount can be paid in 5 months or less, and $98,000  [$50,000 + ($2,000 x 24 months)] if the offer will be paid over a 24 month period. This compares to offer amounts under the old guidelines of $146,000, or $170,000, respectively. The higher the monthly NDI, the greater the discrepancy.

The new guidelines also include changes to the necessary living expenses:

1. Payments on delinquent State taxes may be allowed in full or in part.
2. Minimum payments on student loans guaranteed by the federal government will be allowed for the taxpayer's post-high school education (note it says nothing about loans incurred by parents to pay for their children's' tuition).
3. When the taxpayer owns a vehicle that is six years or older or has mileage of 75,000 miles or more, the IRS will allow additional operating expenses of $200 or more per vehicle.
4. The first $400 per vehicle of retired debt will not be added back to monthly available income.

Another welcome modification; the calculation of so-called "dissipated assets" has been radically altered. While the exact details are subject to numerous exceptions, and clarifications, in general assets which have been dissipated three years or more prior to the submission of the offer in compromise will not be included in the RCP. For example, if the offer is submitted in 2012, any asset dissipated prior to 2010 should not be included

* NDI is sometimes referred to as Future Income.

Offer in Compromise - Documentation Checklist

OFFER IN COMPROMISE 
Documentation Checklist 

Documents being included when submitting an Offer (Form 656) to the IRS. 

                            TOPIC                

1. Completed and signed Form 433-A and (433-B if applicable).
2. Explanation of Circumstances (see Form 656, Part VI). 
3. Most recent three (3) months bank statements for every checking and savings accounts.
4. Proof of mortgage and monthly payment or rent payment.  (Monthly mortgage statement, cancelled checks, rent receipt, etc.)
5. Proof of any extraordinary expenses, such as: medical expenses, doctor bills, court judgments, etc. 
6. Proof of any mandated child support orders.
7. Appraisal or current market analysis (CMA) for each parcel of real estate. 
8. Every car/truck/boat/RV/trailer/motorcycle/snowmobile/jet ski/ATV, etc. appraisal and copy of registration. (Use Blue Book value, NADA Guides and/or Dealer appraisal letter).
9. Explain source of funds to conclude Offer. (e.g. “Borrow from relatives.”)
10. Copy of most recent three (3) months household bills and proof of payment.  (Utilities, cable, telephone etc.)
11. Must be in current tax filing compliance.  [Necessary to prove taxpayer’s filing compliance for all tax periods due, personal and business (if applicable)]. 
12. Brief statement on taxpayer’s work history and education.
13. Proof of estimated tax payments (if applicable) current year only. 
14. Most recent three weeks pay-stubs.
15. Any other specific items. 

This information is  provided by Stephen B Jordan - EA of Salem, NH USA

Please copy and distribute freely
Offer in Compromise is an option under the law.
It's there for your protection...
If you qualify, why not take it?
Resolve your tax debt on a permanent basis.

Manage Stress

Manage Stress
The Basics
When you take steps to manage stress, you help protect yourself from serious health problems like heart disease and depression.
Take Action!
Try meditating to help you relax.
The Basics
Not all stress is bad. Stress can help protect you in a dangerous situation. But preventing and managing chronic (ongoing) stress can help lower your risk for serious health problems like heart disease, obesity, high blood pressure, and depression.

You can prevent or reduce stress by:
♦ Planning ahead
♦ Deciding which tasks need to be done first
♦ Preparing for stressful events

Some stress is hard to avoid. You can find ways to manage stress by:
♦ Noticing when you feel stressed
♦ Taking time to relax
♦ Getting active and eating healthy
♦ Talking to friends and family

What are the signs of stress?
When people are under stress, they may feel:
♦ Worried
♦ Angry
♦ Irritable
♦ Depressed
♦ Unable to focus

Stress also affects the body. Physical signs of stress include:
♦ Headaches
♦ Back pain
♦ Problems sleeping
♦ Upset stomach
♦ Weight gain or loss
♦ Tense muscles
♦ Frequent or more serious colds

Use this tool to better understand your stress.

What causes stress?
Stress is often caused by some type of change. Even positive changes, like winning a contest or getting a job promotion, can be stressful. Stress can be short-term or long-term.

Common causes of short-term stress:
♦ Too much to do and not enough time
♦ Lots of little problems in the same day, like a traffic jam or running late
♦ Getting lost
♦ Having an argument

Common causes of longer-term stress:
♦ Death of a loved one
♦ Chronic (ongoing) illness
♦ Caring for someone with a serious illness
♦ Problems at work
♦ Money problems

What are the benefits of managing stress?
Managing stress can help you:
♦ Sleep better
♦ Control your weight
♦ Get sick less often and heal faster
♦ Lessen neck and back pain
♦ Be in a better mood
♦ Get along better with family and friends

Take Action!
Being prepared and in control of your situation will help you feel less stress. Follow these 9 tips for preventing and managing stress.

1. Plan your time.
Think ahead about how you are going to use your time. Write a to-do list and figure out what’s most important – do those things first. Be realistic about how long each task will take.

2. Prepare yourself.
Prepare ahead of time for stressful events like a job interview or a hard conversation with a loved one.
• Picture the event in your mind.
• Stay positive.
• Imagine what the room will look like and what you will say.
• Have a back-up plan.

3. Relax with deep breathing or meditation.
Deep breathing and meditation are 2 ways to relax your muscles and clear your mind.
• Find out how easy it is to use deep breathing to relax.
• Try meditating for a few minutes today.

4. Relax your muscles.
Stress causes tension in your muscles.  Try stretching or taking a hot shower to help you relax. Check out these stretches you can do at your desk.

5. Get active.
Physical activity can help prevent and manage stress. It can also help relax your muscles and improve your mood.
• Aim for 2 hours and 30 minutes a week of moderate aerobic activity, like walking fast or biking.
• Be sure to exercise for at least 10 minutes at a time.
• Do strengthening activities – like sit-ups or lifting weights – at least 2 days a week.

6. Eat healthy.
Give your body plenty of energy by eating vegetables, fruits, and protein.

7. Drink alcohol only in moderation.
Don’t use alcohol and drugs to manage your stress. If you choose to drink, drink only in moderation. This means no more than 1 drink a day for women and no more than 2 drinks a day for men.

8. Talk to friends and family.
Tell your friends and family if you are feeling stressed. They may be able to help.

9. Get help if you need it.
Stress is a normal part of life. But if your stress doesn’t go away or keeps getting worse, you may need help. Over time, stress can lead to serious problems like depression, post-traumatic stress disorder (PTSD), or anxiety.
• If you are feeling down or hopeless, talk to a doctor about depression.
• If you are feeling anxious, find out how to get help for anxiety.

A mental health professional (like a psychologist or social worker) can help treat these conditions with talk therapy (called psychotherapy) or medicines.

Lots of people need help dealing with stress – it’s nothing to be ashamed of!

courtesy: healthfinder.gov

50 Good Reasons to See Your Tax Advisor

50 Good Reasons to See Your Tax Advisor
1.  Changed your job address
2.  Changed jobs
3.  Big raise or bonus
4.  Exercised a stock option
5.  Retired
6.  Married or divorced
7.  Had a child  
8.  Adopted a child
9.  Child off to college
10. Child finished college
11. Opened an account for a child
12. Received unemployment
13. Started receiving Social Security benefits
14. Started receiving a pension
15. Cashed in an IRA
16. Won a prize
17. Won big at casino or track
18. Won the lottery
19. Served as paid executor
20. Received a director's fee
21. Won a lawsuit
22. Received alimony
23. Paid alimony
24. Sold stocks or securities
25. Invested in mutual funds
26. Opened a qualified retirement account
27. Sold your home
28. Bought a home
29. Helped kids buy a home
30. Refinanced your home
31. Remodeled your home
32. Started a business
33. Wrote a living trust
34. Added someone to title on your home
35. Bought rental property
36. Remodeled rental property
37. Started renting out your home
38. Let a friend move into a rental property at reduced rent
39. Sold rental property
40. Began using your car for business
41. Sold your business car
42. Became a telecommuter
43. Allowed spouse to use business car
44. Cashed in EE Bonds
45. Inherited money
46. Inherited an IRA or pension
47. Reached age 59 1/2
48. Reached age 70 1/2
49. Became disabled
50. New tax law questions (Tax Code is constantly changing)

Claim a Child as Dependent - How to Claim a Child as Dependent Video

Claim a Child as Dependent - How to Claim a Child as Dependent Video

video courtesy: About.com

Married Filing Jointly vs. Married Filing Separately -- Getting to Know ...

video courtesy: H&R Block

IRS Data Retrieval - FAFSA

video courtesy: Florida State University

Eleven tax myths, debunked

Eleven tax myths, debunked Courtesy: Kelly Phillips Erb TAXGIRL

1. You have to itemize to take advantage of tax deductions.Yes, many of the most popular tax deductions (think home mortgage interest and medical expenses, for example) require you to itemize, or file a Schedule A, in order to take advantage of the benefit. But not all tax deductions require you to itemize. A number of deductions can be found on the front of your federal form 1040 at the Adjusted Gross Income section (generally, lines 23-37). Those deductions are sometimes called “above the line” deductions and are available to you whether you itemize or claim the standard deduction. They include such popular items as the Tuition and Fees Deduction, Alimony and Moving Expenses. The take away? Save those receipts and keep good records even if you don’t itemize.

2. You don’t have to claim payments received so long as they are under $600. This is probably one of the most repeated tax myths out there. So, let me clear it up for you quickly: income is income, no matter the amount. The threshold for required reporting from the payor is $600 which means that if payments are at least $600, a federal form 1099 must be issued. Some folks believe that if no 1099 is actually issued, you don’t have to report it. That’s not true. You have to report all of your income, from whatever source, on your tax return unless it’s otherwise excluded.

3. Head of Household status applies to anyone with kids. At some point, I realize that almost all parents assert to their kids in a very loud voice that they are the head of the house. But that definition and the one allowable by IRS are not the same: you can only file as Head of Household (HOH) if you are unmarried (!) and provide a home for a dependent. That means you must be single, divorced, or otherwise unmarried at the end of the tax year and (1) you paid more than 50% to keep a home for the entire tax year for a parent who was a dependent OR (2) you paid more than 50% to keep a home for the entire tax year with your dependent (there are some exceptions to this rule). You are considered unmarried for purposes of HOH even if you were not divorced or legally separated at the end of the tax year if all of the following apply:
  ♦ You lived apart from your spouse for the last 6 months of the tax year (don’t count temporary absences for business, medical care, school, or military service) AND
  ♦ You file a separate tax return from your spouse AND
  ♦ You paid over half the cost of keeping up your home for the tax year AND
  ♦ Your home was the main home of your child, stepchild, or foster child for more than half of the tax year AND
  ♦ You can or could claim (under the rules for children of divorced or separated parents) this child as your dependent.

4. You’re out of the woods with IRS if you make it 3 (or 5 or 7) years without filing a return. For most taxpayers, the statute of limitations – meaning the time the IRS has to examine your tax return – is three years following the date of filing or the due date of your tax return, which ever is later. But. There’s a bit exception to this rule: if you don’t file a return at all, the statute of limitations never actually runs. In that event, you’ll want to hold onto your records, well, for forever (really, it’s much less work to simply file).

5. You are not responsible for mistakes on your return made by your tax professional. Tax professionals are human and they make mistakes just like anybody else (hopefully, fewer than anybody else when it comes to tax returns). It happens. However, that doesn’t excuse you as a taxpayer. You still have a responsibility to read and understand your returns before you sign them. And if there’s a problem, it has to be fixed and that becomes your responsibility. The extent of the tax professional’s responsibility might figure into any mitigation for penalties (or any civil or contract claims you might have against the tax professional) but the IRS buck stops with you.

6. Fixing a mistake on a tax return will result in an audit. Taxpayers are often afraid to amend their tax returns because they feel that it might increase the chance of an audit. But that’s wrong, wrong, wrong. Amending your return when you find that you’ve made a mistake is a good thing. Amended returns don’t increase your risk of audit but mistake-laden ones do.

7. After the age of 55, you can sell your house tax-free. Well, true… in 1996. The rule used to be age dependent but changed under President Clinton (which may or may not have contributed to the bubble). Now, the rule is that a taxpayer can exclude from gross income up to $250,000 ($500,000 for a married couple filing jointly) of capital gains on the sale of a personal residence so long as you’ve lived in it for two of the last five years. This rule doesn’t apply to second homes or vacation homes – and it’s not a one-time deal. You can sell and sell and sell and exclude away so long as you meet the rest of the criteria.

8. Minors don’t have to file and pay taxes. This can be true but isn’t always. Whether or not a child must file a federal income tax return — and the rate at which the child pays tax — depends on whether it is earned income (income from wages, salary or self-employment) or unearned income (generally passive income like money earned from dividends and interest). Even if a child’s income is to be taxed at the child’s parents’ tax rate, that does not necessarily mean that the income has to be included on the parents’ tax return; the child can opt to file a separate return (and in fact, that can sometimes be preferable for all kinds of reasons, including the dreaded AMT).

9. Getting the biggest tax refund possible is the best possible result at tax time.  Yes, getting a refund is much more fun that owing at the end of the year. But moderation, folks. The average refund last year was nearly $3,000. That’s a lot of money. Your money. And you’re not getting paid any interest while the government hangs onto your cash. Plan wisely.

10. Employer-provided health insurance is taxable. There have been a lot of rumors flying fast and furious about what’s happening to employer-provided health insurance for 2012. The amount of benefits paid on your behalf will appear on your form W-2 as a reported item in Box 12, using code DD. Under the new health care plan, there may be a penalty for a taxpayer who is not covered by health insurance. The reporting requirement will eventually assist the IRS in verifying that taxpayers have coverage. Additionally, the new reporting requirements will help identify those taxpayers who will be subjected to the so-called Cadillac tax on high-dollar insurance plans (effective in 2018).

11. Receipt of a refund means the IRS agreed with my tax return. No. Receipt of a refund means that the IRS mailed (or direct deposited) money that you said you were entitled to. It does not mean that the IRS agrees with what you reported; it merely means that the initial information you included didn’t raise any flags, your math didn’t stink and the Treasury didn’t offset your refund with any federal obligations.

What is Portability of the Estate Tax Exemption?

What is Portability of the Estate Tax Exemption?

A New Estate Tax Election for Surviving Spouses

Courtesy: Julie Garber, About.com Guide 

See More About: estate taxes estate tax exemption

On December 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 into law. A big part of this new law is modification of the federal estate tax rules, including offering "portability" of the federal estate tax exemption between spouses for the 2011 and 2012 tax years. But what does "portability" of the estate tax exemption mean?

Definition of Portability of the Estate Tax Exemption
In simple terms portability of the federal estate tax exemption between married couples means that if the first spouse dies and doesn't use up all of his or her federal exemption from estate taxes, then the exemption that the deceased spouse didn't use will be transferred to the surviving spouse's exemption so that he or she can use the deceased spouse's unused exemption plus his or her own exemption when the surviving spouse later dies.

Examples of Portability of the Estate Tax Exemption
Some examples using numbers should help to illustrate the concept of portability of the federal estate tax exemption between spouses:

Result Without Portability
Assume Bob and Sue are married and have all of their assets jointly titled and their net worth is $8,000,000, Bob dies first and the federal estate tax exemption is $5,000,000 on the date of his death, and there isn't portability of the estate tax exemption between spouses:
Under these facts, when Bob dies his estate won't need to use any of his $5,000,000 estate tax exemption since all of the assets are jointly titled and the unlimited marital deduction allows Bob to transfer his share of the joint assets to Sue without incurring any federal estate taxes.  Assume that at the time of Sue's later death the federal estate tax exemption is still $5,000,000, the estate tax rate is 35%, and Sue's estate is still worth $8,000,000.  With Bob's $5,000,000 estate tax exemption completely wasted, when Sue later dies she can only pass on $5,000,000 free from federal estate taxes. Thus, Sue's estate will owe about $1,050,000 in estate taxes after her death:
$8,000,000 estate - $5,000,000 exemption = $3,000,000 taxable estate
$3,000,000 taxable estate x 35% estate tax rate = $1,050,000

Result With Portability
Assume Bob and Sue are married and have all of their assets jointly titled and their net worth is $8,000,000, Bob dies first and the federal estate tax exemption is $5,000,000 on the date of Bob's death, and there is portability of the estate tax exemption between spouses:
As above, when Bob dies his estate won't need to use any of his $5,000,000 estate tax exemption since all of the assets are jointly titled and the unlimited marital deduction allows Bob to transfer his share of the joint assets to Sue without incurring any federal estate taxes.  Assume that at the time of Sue's later death the federal estate tax exemption is still $5,000,000, the estate tax rate is 35%, and Sue's estate is still worth $8,000,000.  Enter portability of the estate tax exemption - With full portability of the estate tax exemption between spouses, under these facts Bob's unused $5,000,000 estate tax exemption will be added to Sue's $5,000,000 exemption, in turn giving Sue a $10,000,000 exemption.  Since Sue has "inherited" Bob's unused estate tax exemption and she can pass on $10,000,000 free from federal estate taxes at the time of her death, Sue's $8,000,000 estate won't owe any estate taxes at all:
$8,000,000 estate - $10,000,000 exemption = $0 taxable estate
Thus, portability of the estate tax exemption will save the heirs of Bob and Sue $1,050,000 in estate taxes.

Of course, these examples illustrate how portability of the estate tax exemption between spouses really works in the same way that the AB Trust system works but without the need for setting up AB Trusts.

Understanding Federal Estate Taxes
What is the Federal Estate Tax?
What is the Exemption From Estate Taxes?
Exemption From Estate Taxes: 1997 - 2013