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Reporting Rental Income

Tue, 21 Feb 2012 05:44:05 +0000

Income from rental properties is reported on Schedule E. Property owners are subject to income tax only on the net amount of rental income after various rental-related expenses have been taken into account. Here's some tips for preparing a Schedule E a little more understandable.

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How to Prepare a Tax Return for a Sole Proprietor

Tue, 21 Feb 2012 04:18:18 +0000

Sole proprietors are people who work for themselves in their own business. They may be called freelancers, independent contractors, or entrepreneurs. Sole proprietors could be working under their own name or through a single-member limited liability company. In either case, a sole proprietor reports his or her income on Schedule C.

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Social Security Tax Rate to Remain at 4.2% for All of 2012

Tue, 21 Feb 2012 01:53:57 +0000

Congress has voted in favor of extending for the entire year of 2012 the temporary reduction in the employee's portion of the Social Security tax. Currently, employees pay 4.2% of their wages in Social Security taxes, a rate that has been in effect since January 2011 and was scheduled to expire at the end of February 2012. HR 3630, the Middle Class Tax Relief and Job Creation Act of 2012, extends this 4.2% rate through the end of 2012. The House voted in favor of HR 3630 by 293 to 132; the Senate approved the legislation by a vote of 60 to 36. President Obama has not yet signed the bill into law.

Employers still pay the normal rate of 6.2% of wages into the Social Security program. For 2012, Social Security taxes are assessed on wages up to the annual wage base limit of $110,100.

Self-employed persons will pay a combined 10.4% in Social Security taxes, instead of the normal 12.4%, reflecting both the employer's and the employee's share of Social Security taxes.

This payroll tax holiday does not change Medicare taxes, which are assessed on all wage and self-employment income at a rate of 2.9%, with half paid by the employee and half paid by the employer.

The payroll tax holiday began has a one-year rate reduction for the employee-portion of Social Security taxes in 2011 (HR 4853, the Tax Relief Act). This was then extended for two months through the end of February 2012 (HR 3765). It has now been extended through the end of 2012 (HR 3630).

To prevent Social Security from losing tax revenue, Congress mandated that revenues be transferred from the general fund to the Social Security trust funds to make up for the tax reduction.

The rate reduction also applies to employees covered by the Railroad Retirement System.

The previous, two-month extension of the payroll tax holiday passed in December 2011...

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New Form 8949 for Capital Gains

Sun, 12 Feb 2012 06:59:24 +0000

People with capital gains transactions to report will need to use Form 8949 along with Schedule D. Form 8949 is a brand new tax form, and debuts for the 2011 tax year. Individuals will detail the sale of capital assets, such as stocks, mutual funds and bonds, on Form 8949 before summarizing those details on the Schedule D.

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Still Waiting For Your W-2?

Tue, 07 Feb 2012 06:23:06 +0000

Employers are required to issue a Form W-2 to report wage income and tax withholdings by January 31st of each year. If you haven't received your W-2, the quickest resolution is to talk to your employer and obtain a copy. As a general rule, it's best to wait for your W-2 before filing your tax return, as the W-2 may differ slightly from your final paystub of the year, and the W-2 has additional information you'll need that's not found on your paystub (such as your employer's tax identification number).

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Finding Free Tax Preparation Services

Tue, 07 Feb 2012 05:42:59 +0000

Taxpayers who earn $50,000 or less can receive free tax preparation assistance through the VITA, the Volunteer Income Tax Assistance program. This program is funded in part by the IRS and are staffed by tax preparers who volunteer their time and who receive training from the IRS and state tax agencies. You can locate a VITA site near you by calling1-800-906-9887 (toll free) or by utilizing the VITA site locator found on the IRS Web site.

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Tips for Resolving Disputes over Dependents

Tue, 24 Jan 2012 07:53:00 +0000

Quite frequently readers will ask how they can resolve disagreements among family members over who get's to claim a dependent. It's helpful to start with some ground rules, and my number one rule here is to prevent (if at all possible) the IRS from getting involved in family disputes. Now the IRS will get involved only if two or more people attempt to claim the same person as a dependent. So if at all possible, it's best to resolve your differences before anyone has filed their tax return.

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Differences between Dependents, Head of Household, and Earned Income Credit

Tue, 24 Jan 2012 06:56:55 +0000

People often ask me about whether they can claim dependents, whether they qualify for the head of household filing status, and whether they qualify for the earned income credit. These three tax benefits are very closely related, as are designed to help minimized the tax burden for working families. The rules in this area often cause confusion, because each tax benefit has its own, separate requirements.

The first thing to start with is dependents, for that is a common element is all three tax incentives. Both head of household and the earned income credit require that a taxpayer claim (or be eligible to claim) dependents. Dependents are, roughly speaking, persons who depend on another for their financial support, and the usual example here are children. But sons and daughters aren't the only types of relationships that can exist between a taxpayer and a dependent. Parents, grandparents, nieces and nephews, and other family relations can also qualify. The important thing to remember about dependents is there are two ways to qualify as a dependent: either under the qualifying child criteria or under the qualifying relative criteria. Claiming a dependent opens several tax saving benefits to a taxpayer: the taxpayer gets to claim one personal exemption for each dependent, and may also be eligible for the earned income credit, child tax credit, child care tax credit, education tax credits or deductions for that dependent, and medical expenses for that dependent. (By eligible to claim a dependent, I am referring to the situation where a custodial parent may waive the dependent's personal exemption in favor of the other parent, but retain eligibility for head of household and the earned income credit, a situation I call sharing the dependent-related tax breaks.)

Head of household is a separate tax benefit, one that functions by widening the income brackets to which each tax rate applies. For example, compare the income brackets for single and head of household filers found in the 2011 tax rates. To be eligible for head of household status, a taxpayer must have at least one dependent and be unmarried. So, this tax benefit is particularly well-suited for single parents. Now dependents can be of any number of family relations, but for Head of Household, the dependent must be closely related to the taxpayer by birth or marriage, such as children, parents, grandparents, nieces and nephews. There's a further restriction for Head of Household in that the dependent person must actually reside with the taxpayer, and the taxpayer must actually provide more than half of the total financial support of the dependent person. These two requirements are not always the case for dependents. For example, parents can be claimed as dependents under the qualifying relative criteria, and the parents don't necessarily need to reside with the taxpayer. But for head of household purposes, parents would need to reside with the taxpayer if the taxpayer wants to use them as their qualifying person.

The earned income credit is a refundable tax credit for lower-income families that in many cases results in the taxpayer having a negative effective tax rate, in other words that the taxpayer receives more back from the IRS than they paid in through income tax withholding. For the purpose of the earned income credit, only closely-related dependents will qualify. Specifically, children, grandchildren, brothers and sisters, nieces and nephews can qualify a taxpayer for the earned income credit. But parents, grandparents and other types of relationships won't qualify due to the age test, in which the dependent person must be under 19 or under 24 and a full-time student.

What often causes frustration are situations in which a taxpayer is caring for a younger person, but there's no relation by blood or marriage. In such cases, taxpayers might find they are eligible only for the single filing status and the dependent's personal exemption, but not head of household or the earned income credit.

Tax preparation software often includes questionnaires to help taxpayers determine whether they are eligible to claim a dependent, eligible for head of household, and eligible for the earned income credit. Many of these interview questions may seem repetitive, but that's because in each case the criteria are slightly different. The IRS has a Web tool for helping taxpayers figure out if they qualify for the earned income credit, called the EITC Assistant. But the IRS does not have (as far as I'm aware) similar Web tools for evaluating dependents and head of household situations.

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When to Expect Your Federal Tax Refund

Tue, 24 Jan 2012 04:08:46 +0000

The Internal Revenue Service issues federal tax refunds on a schedule, which they call the "refund cycle." For tax returns accepted by the IRS by 11 am on Wednesday, the IRS issue refunds the following week, with direct deposits issued on Wednesdays and checks mailed out on Fridays. By accepted, we mean that the IRS's computers have acknowledged the receipt of an electronically filed return.

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Tips for Finding the Right Tax Professional For You

Tue, 17 Jan 2012 06:50:09 +0000

Consumers have a wide range of choice when it comes to preparing their tax return. You can prepare a tax return using forms downloaded directly from the IRS, use tax preparation software from independent software publishers, or hire a professional tax preparer. You can even combine these choices, for example you could draft out your tax return on paper forms or using software before seeking out professional help.

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