Eight Tips for Taxpayers Who Receive an IRS Notice

Receiving a notice from the Internal Revenue Service is no cause for alarm. Every year the IRS sends millions of letters and notices to taxpayers. In the event one shows up in your mailbox, here are eight things you should know.
1. Don’t panic. Many of these letters can be dealt with very simply.
2. There are a number of reasons the IRS sends notices to taxpayers. The notice may request payment of taxes, notify you of a change to your account or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.
3. Each letter and notice offers specific instructions on what you need to do to satisfy the inquiry.
4. If you receive a notice about a correction to your tax return, you should review the correspondence and compare it with the information on your return.
5. If you agree with the correction to your account, usually no reply is necessary unless a payment is due.
6. If you do not agree with the correction the IRS made, it is important that you respond as requested. Respond to the IRS in writing to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the lower left corner of the notice. Allow at least 30 days for a response from the IRS.
7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right corner of the notice. When you call, have a copy of your tax return and the correspondence available.
8. Keep copies of any correspondence with your tax records.

Tax Tips for Recently Married Taxpayers

If you’ve recently updated your status from single to married, you’re not alone – late spring and summertime is a popular period for weddings. Marriage also brings about some changes with your taxes. Here are several tips for newlyweds from the IRS.

• Notify the Social Security Administration  It’s important that your name and Social Security number match on your next tax return, so if you’ve taken on a new name, report the change to the Social Security Administration. File Form SS-5, Application for a Social Security Card. The form is available on SSA’s website at www.ssa.gov, by calling 800-772-1213, or visiting a local SSA office.
• Notify the IRS if you move  IRS Form 8822, Change of Address, is the official way to update the IRS of your address change. Download Form 8822 from IRS.gov or order it by calling 800-TAX-FORM
  (800-829-3676).
• Notify the U.S. Postal Service  To ensure your mail – including mail from the IRS – is forwarded to your new address, you’ll need to notify the U.S. Postal Service. Submit a forwarding request online at www.usps.com or visit your local post office.
• Notify your employer  Report your name and/or address change to your employer(s) to make sure you receive your Form W-2, Wage and Tax Statement, after the end of the year.
• Check your withholding  If you both work, keep in mind that you and your spouse’s combined income may move you into a higher tax bracket. You can use Publication 505, Tax Withholding and Estimated Tax, to help determine the correct amount of withholding for your marital status, and it will also help you complete a new Form W-4, Employee's Withholding Allowance Certificate. Fill out and print Form W-4 online and give it to your employer(s) so the correct amount will be withheld from your pay.
• Select the right tax form  Choose your individual income tax form wisely because it can help save you money. Newlywed taxpayers may find that they now have enough deductions to itemize on their tax returns rather than taking the standard deduction. Itemized deductions must be claimed on a Form 1040, not a 1040A or 1040EZ.
• Choose the best filing status  A person’s marital status on Dec. 31 determines whether the person is considered married for that year for tax purposes. Tax law generally allows married couples to choose to file their federal income tax return either jointly or separately in any given year. Figuring the tax both ways can determine which filing status will result in the lowest tax, but filing jointly is usually more beneficial.

Bottom line: planning for your wedding may be over, but don’t forget about planning for the tax-related changes that marriage brings.

Ten Tax Tips for Individuals Selling Their Home

The Internal Revenue Service has some important information for those who have sold or are about to sell their home. If you have a gain from the sale of your main home, you may be able to exclude all or part of that gain from your income.
Here are 10 tips from the IRS to keep in mind when selling your home.

1. In general, you are eligible to exclude the gain from income if you have owned and used your home as your main home for two years out of the five years prior to the date of its sale.
2. If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).
3. You are not eligible for the full exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.
4. If you can exclude all of the gain, you do not need to report the sale of your home on your tax return.
5. If you have a gain that cannot be excluded, it is taxable. You must report it on Form 1040, Schedule D, Capital Gains and Losses.
6. You cannot deduct a loss from the sale of your main home.
7. Worksheets are included in Publication 523, Selling Your Home, to help you figure the adjusted basis of the home you sold, the gain (or loss) on the sale, and the gain that you can exclude. Most tax software can also help with
this calculation.
8. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.
9. Special rules may apply when you sell a home for which you received the first-time homebuyer credit. See Publication 523, Selling Your Home, for details.
10. When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive mail from the IRS. Use Form 8822, Change of Address, to notify the IRS of your address change.

How to Get a Transcript or Copy of a Prior Year’s Tax Return from the IRS

Taxpayers should keep copies of their tax returns, but if they cannot be located or have been destroyed during natural disasters or by fire, the IRS can help. Whether you need your prior year’s tax return to apply for a loan or for legal reasons, you can obtain copies or transcripts from the IRS.
Here are 10 things to know if you need federal tax return information from a previously filed tax return.
1. Get copies of your federal tax return via the web, phone or by mail.
2. Transcripts are free and are available for the current and past three tax years.
3. A tax return transcript shows most line items from your tax return as it was originally filed, including any accompanying forms and schedules. It does not reflect any changes made after the return was filed.
4. A tax account transcript shows any later adjustments either you or the IRS made after you filed your tax return. This transcript shows basic data including marital status, type of return filed, adjusted gross income and taxable income.
5. To request either type of transcript online, go to IRS.gov and use the online tool called Order A Transcript. To order by phone, call 800-908-9946 and follow the prompts in the recorded message.
6. To request a 1040, 1040A or 1040EZ tax return transcript through the mail, complete IRS Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript. Businesses, partnerships and individuals who need transcript information from other forms or need a tax account transcript must use Form 4506-T, Request for Transcript of Tax Return.
7. If you order online or by phone, you should receive your tax return transcript within five to 10 days from the time the IRS receives your request. Allow 30 calendar days for delivery of a tax account transcript if you order by mail.
8. If you need an actual copy of a previously filed and processed tax return, it will cost $57 for each tax year you order. Complete Form 4506, Request for Copy of Tax Return, and mail it to the IRS address listed on the form for your area.  Copies are generally available for the current year and past six years. Please allow 60 days for delivery. 
9. The fee for copies of tax returns may be waived if you are in an area that is declared a federal disaster by the President. Visit IRS.gov, keyword “disaster,” for more guidance on disaster relief.
10. Forms 4506, 4506-T and 4506T-EZ are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Renting Your Vacation Home

Income that you receive for the rental of your vacation home must generally be reported on your federal income tax return.
However, if you rent the property for only a short time each year, you may not be required to report the rental income.
The IRS offers these tips on reporting rental income from a vacation home such as a house, apartment, condominium, mobile home or boat:
•Rental Income and Expenses  Rental income, as well as certain rental expenses that can be deducted, are normally reported on Schedule E, Supplemental Income and Loss.
•Limitation on Vacation Home Rentals  When you use a vacation home as your residence and also rent it to others, you must divide the expenses between rental use and personal use, and you may not deduct the rental portion of the expenses in excess of the rental income.

You are considered to use the property as a residence if your personal use is more than 14 days, or more than 10% of the total days it is rented to others if that figure is greater. For example, if you live in your vacation home for 17 days and rent it 160 days during the year, the property is considered used as a residence and your deductible rental expenses would be limited to the amount of rental income.
•Special Rule for Limited Rental Use  If you use a vacation home as a residence and rent it for fewer than 15 days per year, you do not have to report any of the rental income. Schedule A, Itemized Deductions, may be used to report regularly deductible personal expenses, such as qualified mortgage interest, property taxes, and casualty losses.

Job Search Expenses Can be Tax Deductible

Summertime is the season that often leads to major life decisions, such as buying a home, moving or a job change. If you are looking for a new job that is in the same line of work, you may be able to deduct some of your job hunting expenses on your federal income tax return.

Here are seven things you need to know about deducting costs related to your job search:
1. To qualify for a deduction, your expenses must be spent on a job search in your current occupation. You may not deduct expenses you incur while looking for a job in a new occupation.
2. You can deduct employment and outplacement agency fees you pay while looking for a job in your present occupation. If your employer pays you back in a later year for employment agency fees, you must include the amount you received in your gross income, up to the amount of your tax benefit in the earlier year.
3. You can deduct amounts you spend for preparing and mailing copies of your résumé to prospective employers as long as you are looking for a new job in your present occupation.
4. If you travel to look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area to which you travelled. You can only deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity unrelated to your job search compared to the amount of time you spend looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job.
5. You cannot deduct your job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one.
6. You cannot deduct job search expenses if you are looking for a job for the first time.
7. The amount of job search expenses that you can claim is limited. To determine your deduction, use Schedule A, Itemized Deductions. Job search expenses are claimed as a miscellaneous itemized deduction and the total of all miscellaneous deductions must be more than two percent of your adjusted gross income.

Tips on How to Fix Errors Made on Your Tax Return

If you discover an error after you file your tax return, you can correct it by amending your return. Here are 10 tips from the Internal Revenue Service about amending your federal tax return:
1. When to amend a return Generally, you should file an amended return if your filing status, number of dependents, total income, tax deductions or tax credits were reported incorrectly or omitted.  Additional reasons for amending a return are listed in the instructions.
2. When NOT to amend a return In some cases, you do not need to amend your tax return.  The IRS usually corrects math errors or requests missing forms – such as Forms W-2 or schedules – when processing an original return.  In these instances, do not amend your return.
3. Form to use Use Form 1040X, Amended U.S. Individual Income Tax Return, to amend a previously filed Form 1040, 1040A, 1040EZ, 1040NR or 1040NR-EZ.  Make sure you check the box for the year of the return you are amending on the Form 1040X.  An amended tax return cannot be filed electronically.
4. Multiple amended returns If you are amending more than one year’s tax return, prepare a separate 1040X for each return and mail them in separate envelopes to the appropriate IRS processing center (see "Where to File" in the instructions for Form 1040X).
5. Form 1040X The Form 1040X has three columns. Column A shows original figures from the original return. Column B shown the changes you are making.   Column C shows the corrected figures. There is an area on the back of the form to explain the specific changes and the reasons for the changes.
6. Other forms or schedules If the changes involve other schedules or forms, attach them to the Form 1040X.  Failure to do this will cause a delay in processing.
7. Additional refund If you are amending your return to get an additional refund, wait until you have received your original refund before filing Form 1040X.  You may cash that check while waiting for any additional refund.
8. Additional tax If you owe additional tax, you should file Form 1040X and pay the tax as soon as possible to limit interest and penalty charges.
9. When to file Generally, to claim a refund, you must file Form 1040X within three years from the date you filed your original tax return or within two years from the date you paid the tax, whichever is later.
10. Processing time Normal processing time for amended returns is 8 to 12 weeks.

Did you receive a letter or notice from the IRS?

Each year, the Internal Revenue Service sends millions of letters and notices to taxpayers for a variety of reasons, but that doesn’t mean you need to worry. Here are eight things you should know about IRS notices — just in case one shows up in your mailbox. 

1. Don’t panic. Many of these letters and notices can be dealt with simply and painlessly.
2. There are a number of reasons the IRS sends notices to taxpayers. The notice may request payment of taxes, notify you of a change to your account or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.
3. Each letter and notice offers specific instructions on what you need to do to satisfy the inquiry.
4. If you receive a correction notice, you should review the correspondence and compare it with the information on your return.
5. If you agree with the correction to your account, usually no reply is necessary unless a payment is due.
6. If you do
7. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number

not agree with the correction the IRS made, it is important that you respond as requested. Write to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the lower left part of the notice. Allow at least 30 days for a response. in the upper right corner of the notice. Have a copy of your tax return and the correspondence available when you call.

 

Eight Things to Know about Medical and Dental Expenses and Your Taxes

If you, your spouse or dependents had significant medical or dental costs in 2011, you may be able to deduct those expenses when you file your tax return. Here are eight things the IRS wants you to know about medical and dental expenses and other benefits.
1. You must itemize You deduct qualifying medical and dental expenses if you itemize on Form 1040, Schedule A.
2. Deduction is limited You can deduct total medical care expenses that exceed 7.5 percent of your adjusted gross income for the year. You figure this on Form 1040, Schedule A.
3. Expenses must have been paid in 2011 You can include the medical and dental expenses you paid during the year, regardless of when the services were provided. You’ll need to have good receipts or records to substantiate your expenses.
4. You can’t deduct reimbursed expenses Your total medical expenses for the year must be reduced by any reimbursement. Normally, it makes no difference if you receive the reimbursement or if it is paid directly to the doctor or hospital.
5. Whose expenses qualify You may include qualified medical expenses you pay for yourself, your spouse and your dependents. Some exceptions and special rules apply to divorced or separated parents, taxpayers with a multiple support agreement or those with a qualifying relative who is not your child.
6. Types of expenses that qualify You can deduct expenses primarily paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or treatment affecting any structure or function of the body. For drugs, you can only deduct prescription medication and insulin. You can also include premiums for medical, dental and some long-term care insurance in your expenses. Starting in 2011, you can also include lactation supplies.
7. Transportation costs may qualify You may deduct transportation costs primarily for and essential to medical care that qualify as medical expenses. You can deduct the actual fare for a taxi, bus, train, plane or ambulance as well as tolls and parking fees. If you use your car for medical transportation, you can deduct actual out-of-pocket expenses such as gas and oil, or you can deduct the standard mileage rate for medical expenses, which is 19 cents per mile for 2011.
8. Tax-favored saving for medical expenses Distributions from Health Savings Accounts and withdrawals from Flexible Spending Arrangements may be tax free if used to pay qualified medical expenses including prescription medication and insulin.

The Child Tax Credit: 11 Key Points

The Child Tax Credit is available to eligible taxpayers with qualifying children under age 17. The IRS would like you to know these eleven facts about the child tax credit.
1. Amount With the Child Tax Credit, you may be able to reduce your federal income tax by up to $1,000 for each qualifying child under age 17.
2. Qualification A qualifying child for this credit is someone who meets the qualifying criteria of seven tests: age, relationship, support, dependent, joint return, citizenship and residence.
3. Age test To qualify, a child must have been under age 17 – age 16 or younger – at the end of 2011.
4. Relationship test To claim a child for purposes of the Child Tax Credit, the child must be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption.
5. Support test In order to claim a child for this credit, the child must not have provided more than half of his/her own support.
6. Dependent test You must claim the child as a dependent on your federal tax return.
7. Joint return test The qualifying child can not file a joint return for the year (or files it only as a claim for refund).
8. Citizenship test To meet the citizenship test, the child must be a U.S. citizen, U.S. national or U.S. resident alien.
9. Residence test The child must have lived with you for more than half of 2011. There are some exceptions to the residence test, found in IRS Publication 972, Child Tax Credit.
10. Limitations The credit is limited if your modified adjusted gross income is above a certain amount. The amount at which this phase-out begins varies by filing status. For married taxpayers filing a joint return, the phase-out begins at $110,000. For married taxpayers filing a separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000. In addition, the Child Tax Credit is generally limited by the amount of the income tax and any alternative minimum tax you owe.
11. Additional Child Tax Credit If the amount of your Child Tax Credit is greater than the amount of income tax you owe, you may be able to claim the Additional Child Tax Credit.

Tax Tips for the Self-employed

There are many benefits that come from being your own boss. If you work for yourself, as an independent contractor, or you carry on a trade or business as a sole proprietor, you are generally considered to be self-employed.

Here are six key points the IRS would like you to know about self-employment and self- employment taxes:
1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.
2. If you are self-employed you generally have to pay self-employment tax as well as income tax. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure self-employment tax using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.
3. You file an IRS Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business, with your Form 1040.
4. If you are self-employed you may have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year.
5. You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.
6. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.

Ten Tax Benefits for Parents

Your kids can be helpful at tax time. That doesn't mean they'll sort your tax receipts or refill your coffee, but those charming children may help you qualify for some valuable tax benefits. Here are 10 things the IRS wants parents to consider when filing their taxes this year.

1. Dependents In most cases, a child can be claimed as a dependent in the year they were born. For more information see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.
2. Child Tax Credit You may be able to take this credit for each of your children under age 17. If you do not benefit from the full amount of the Child Tax Credit, you may be eligible for the Additional Child Tax Credit. For more information see IRS Publication 972, Child Tax Credit.
3. Child and Dependent Care Credit You may be able to claim this credit if you pay someone to care for your child or children under age 13 so that you can work or look for work. See IRS Publication 503, Child and Dependent Care Expenses.
4. Earned Income Tax Credit The EITC is a tax benefit for certain people who work and have earned income from wages, self-employment or farming. EITC reduces the amount of tax you owe and may also give you a refund. IRS Publication 596, Earned Income Credit, has more details.
5. Adoption Credit You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child. If you claim the adoption credit, you must file a paper tax return with required adoption-related documents.  For details, see the instructions for IRS Form 8839, Qualified Adoption Expenses.
6. Children with earned income If your child has income earned from working, they may be required to file a tax return. For more information, see IRS Publication 501.
7. Children with investment income Under certain circumstances a child’s investment income may be taxed at their parent’s tax rate. For more information, see IRS Publication 929, Tax Rules for Children and Dependents.
8. Higher education credits Education tax credits can help offset the costs of higher education. The American Opportunity and the Lifetime Learning Credits are education credits that can reduce your federal income tax dollar-for-dollar. See IRS Publication 970, Tax Benefits for Education, for details.
9. Student loan interest You may be able to deduct interest paid on a qualified student loan, even if you do not itemize your deductions. For more information, see IRS Publication 970.
10. Self-employed health insurance deduction If you were self-employed and paid for health insurance, you may be able to deduct any premiums you paid for coverage for any child of yours who was under age 27 at the end of the year, even if the child was not your dependent. For more information, see the IRS website.

Several Reasons to File Your Tax Return Electronically

1. Safety and security.  E-file providers must meet strict guidelines and provide the best in encryption technology. You receive an acknowledgement within 48 hours that the IRS received your return. If the IRS rejects the return, the receipt will explain why so you can quickly correct and resubmit.
2. Faster refunds. An e-filed tax return normally means a fast refund. If you combine e-file and direct deposit the IRS can typically issue your refund in as few as 10 days. About three of four taxpayers receive a refund and last year the average refund was approximately $2,900.
3. More payment options. If you e-file you can file early and set an automatic payment withdrawal date for any date on or before the April due date. You may also pay by paper check or even by credit card.
4. It’s easy. You can e-file through your tax preparer, use commercial tax preparation software or through Free File, the free tax preparation and e-filing service available exclusively at www.irs.gov.
Starting in January 2012, any paid preparer or firm that reasonably anticipates preparing and filing 11 or more Form 1040 series returns, Form 1041 returns or a combination of both generally must use IRS e-file.  These tax return preparers must be authorized IRS e-file providers so they can transmit tax returns electronically. More information for paid preparers is available at www.irs.gov.

Ten Tips to Help You Choose a Tax Preparer

Many people look for help from professionals when it’s time to file their tax return. If you use a paid tax preparer to file your return this year, the IRS urges you to choose that preparer wisely. Even if a return is prepared by someone else, the taxpayer is legally responsible for what’s on it. So, it’s very important to choose your tax preparer carefully.
This year, the IRS wants to remind taxpayers to use a preparer who will sign the returns they prepare and enter their required Preparer Tax Identification Number (PTIN).

Here are ten tips to keep in mind when choosing a tax return preparer:
1. Check the preparer’s qualifications. New regulations require all paid tax return preparers to have a Preparer Tax Identification Number. In addition to making sure they have a PTIN, ask if the preparer is affiliated with a professional organization and attends continuing education classes. The IRS is also phasing in a new test requirement to make sure those who are not an enrolled agent, CPA, or attorney have met minimal competency requirements. Those subject to the test will become a Registered Tax Return Preparer once they pass it.
2. Check on the preparer’s history. Check to see if the preparer has a questionable history with the Better Business Bureau and check for any disciplinary actions and licensure status through the state boards of accountancy for certified public accountants; the state bar associations for attorneys; and the IRS Office of Enrollment for enrolled agents.
3. Ask about their service fees. Avoid preparers who base their fee on a percentage of your refund or those who claim they can obtain larger refunds than other preparers.  Also, always make sure any refund due is sent to you or deposited into an account in your name.  Under no circumstances should all or part of your refund be directly deposited into a preparer’s bank account.
4. Ask if they offer electronic filing.  Any paid preparer who prepares and files more than 10 returns for clients must file the returns electronically, unless the client opts to file a paper return.  More than 1 billion individual tax returns have been safely and securely processed since the debut of electronic filing in 1990.  Make sure your preparer offers IRS e-file.
5. Make sure the tax preparer is accessible.  Make sure you will be able to contact the tax preparer after the return has been filed, even after the April due date, in case questions arise.
6. Provide all records and receipts needed to prepare your return. Reputable preparers will request to see your records and receipts and will ask you multiple questions to determine your total income and your qualifications for expenses, deductions and other items. Do not use a preparer who is willing to electronically file your return before you receive your Form W-2 using your last pay stub. This is against IRS e-file rules.
7. Never sign a blank return. Avoid tax preparers that ask you to sign a blank tax form.
8. Review the entire return before signing it.  Before you sign your tax return, review it and ask questions. Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.
9. Make sure the preparer signs the form and includes their PTIN.  A paid preparer must sign the return and include their PTIN as required by law. Although the preparer signs the return, you are responsible for the accuracy of every item on your return.  The preparer must also give you a copy of the return.
10. Report abusive tax preparers to the IRS. You can report abusive tax preparers and suspected tax fraud to the IRS on Form 14157, Complaint: Tax Return Preparer. Download Form 14157 from www.irs.gov or order by mail at 800-TAX-FORM (800-829-3676).