Making Gifts Can Be Taxable

Eight Tips to Determine if Your Gift is Taxable

If you gave money or property to someone as a gift, you may owe federal gift tax. Many gifts are not subject to the gift tax, but the IRS offers the following eight tips about gifts and the gift tax.

1. Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or to a charity. If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual exclusion for the year. For 2011 and 2012, the annual exclusion is $13,000.

2. Gift tax returns do not need to be filed unless you give someone, other than your spouse, money or property worth more than the annual exclusion for that year.

3. Generally, the person who receives your gift will not have to pay any federal gift tax because of it. Also, that person will not have to pay income tax on the value of the gift received.

4. Making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than deductible charitable contributions).

5. The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. The following gifts are not taxable gifts:

• Gifts that are do not exceed the annual exclusion for the calendar year,
• Tuition or medical expenses you pay directly to a medical or educational institution for someone,
• Gifts to your spouse,
• Gifts to a political organization for its use, and
• Gifts to charities.

6. You and your spouse can make a gift up to $26,000 to a third party without making a taxable gift. The gift can be considered as made one-half by you and one-half by your spouse.

If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, even if half of the split gift is less than the annual exclusion.

7. You must file a gift tax return on Form 709, if any of the following apply:

• You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year.
• You and your spouse are splitting a gift.
• You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until some time in the future.
• You gave your spouse an interest in property that will terminate due to a future event.

8. You do not have to file a gift tax return to report gifts to political organizations and gifts made by paying someone’s tuition or medical expenses.

For more information see Publication 950, Introduction to Estate and Gift Taxes. Both Form 709 and Publication 950 are available at www.IRS.gov.

Farm Income and Deductions: 10 Key Points

Farm Income and Deductions: 10 Key Points

You are in the business of farming if you cultivate, operate or manage a farm for profit, either as an owner or a tenant. A farm includes livestock, dairy, poultry, fish, fruit and truck farms. It also includes plantations, ranches, ranges and orchards.

Here are 10 key points for farmers regarding income taxes.

1. Crop insurance proceeds

You must include in income any crop insurance proceeds you receive as the result of crop damage. You generally include them in the year you receive them.

2. Sales caused by weather-related condition

If you sell more livestock, including poultry, than you normally would in a year because of weather-related conditions, you may be able to postpone until the next year the reporting of the gain from selling the additional animals.

3. Farm income averaging

You may be able to average all or some of your current year's farm income by allocating it to the three prior years. This may lower your current year tax if your current year income from farming is high, and your taxable income from one or more of the three prior years was low. This method does not change your prior year tax, it only uses the prior year information to determine your current year tax.

4. Deductible farm expenses

The ordinary and necessary costs of operating a farm for profit are deductible business expenses. An ordinary expense is an expense that is common and accepted in the farming business. A necessary expense is one that is appropriate for the business.

5. Employees and hired help

You can deduct reasonable wages paid for labor hired to perform your farming operations. This includes full-time and part-time workers. You must withhold Social Security, Medicare and income taxes for employees.

6. Items purchased for resale

You may be able to deduct, in the year of the sale, the cost of items purchased for resale, including livestock and the freight charges for transporting livestock to the farm.

7. Net operating losses

If your deductible expenses from operating your farm are more than your other income for the year, you may have a net operating loss. You can carry that loss over to other years and deduct it. You may get a refund of part or all of the income tax you paid for past years, or you may be able to reduce your tax in future years.

8. Repayment of loans

You cannot deduct the repayment of a loan if the loan proceeds are used for personal expenses. However, if you use the proceeds of the loan for your farming business, you can deduct the interest that you pay on the loan.

9. Fuel and road use

You may be eligible to claim a credit or refund of federal excise taxes on fuel used on a farm for farming purposes.

10. Farmers Tax Guide

More information about farm income and deductions is in IRS Publication 225, Farmer’s Tax Guide, which is available at www.irs.gov.

Tax Changes for 2011 - 2013

14 Big Changes for Tax Years 2011-13

Some changes have already happened, some will happen this year if Congress doesn't act, and then there's next year...

There are “no good things” for taxpayers in any of these changes. . . OUCH and then some !

Already Gone

The first five items to watch expired at the end of 2011:

1. The Alternative Minimum Tax (AMT) Patch—Kiely says that, going forward, this could mean millions will pay the AMT who were never subject to it before.

2. Charitable Contribution of IRA Assets—A taxpayer who was receiving required minimum distributions (RMDs) from an IRA and wished to contribute that money to charity could have had it sent directly from the IRA custodian to the charity. In so doing it would bypass the individual’s tax return, lowering total income and possibly income tax as well. Alas, no longer.

3. State Sales Tax Deduction—Taxpayers will no longer be able to deduct state sales tax. Since it has been a choice of whether to deduct state sales tax or state income tax, residents of states without an income tax will lose out.

4. Home Energy Tax Credit—This credit for $500 is no longer available.

5. School Teachers’ Expense Deduction of $250—Teachers who have been dipping into their own pockets to help provide for their students can no longer rely on this deduction.

On Their Way Out

Five measures also expire at the end of 2012—again, barring Congressional action. They are:

1. Payroll Tax Cut of Two Percentage Points—This will go away, resulting in the resumption of the customary 6.2% rate.

2. Top Income Tax Rate of 35%—This will change to 39.6%.

3. Capital Gains Tax Rates—Both the 0% and the 15% brackets will disappear, to be replaced by a single bracket of 20%.

4. Qualified Dividends Tax Rate—This bracket, which taxes qualified dividends at 15%, will disappear entirely and those dividends will be taxed as ordinary income.

5. American Opportunity Education Credit—This, too, will disappear.

Coming Next Year

Four tax increases scheduled to take effect in 2013 are:

1. Net Investment Income Tax—This will be 3.8% for filers making over $200,000 (individuals) or $250,000 (married)

2. Phaseout of Personal Exemption—For a number of years the personal exemption was phased out as your income went up. While the phaseout expired (briefly), it is set to resurrect in 2013.

3. Itemized Deductions Limit—The “Pease” limit on itemized deductions will hit those with incomes over $150,000.

4. Flexible Spending Account Limits—These are being cut from $5,000 to $2,500.

Then the biggest of them all . . . . Obama-care

Home Office Deduction

Work at Home? You May Qualify for the Home Office Deduction

If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The IRS has the following six requirements to help you determine if you qualify for the home office deduction.

1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:

• as your principal place of business, or

• as a place to meet or deal with patients, clients or customers in the normal course of your business, or

• in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.

2. For certain storage use, rental use or daycare-facility use, you are required to use the property regularly but not exclusively.

3. Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

4. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on Form 1040 Schedule C, Profit or Loss From Business.

6. If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.

For more information see IRS Publication 587, Business Use of Your Home, available at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

• Publication 587, Business Use of Your Home
• Instructions: Form 8829, Expenses for Business Use of Your Home

YouTube Videos:

Home Office Deduction - English| Spanish| ASL

Owe Taxes - New Program May Help

New IRS Fresh Start Initiative Helps Taxpayers Who Owe Taxes

The Internal Revenue Service has expanded its "Fresh Start" initiative to help struggling taxpayers who owe taxes. The following four tips explain the expanded relief for taxpayers.

Penalty relief Part of the initiative relieves some unemployed taxpayers from failure-to-pay penalties. Penalties are one of the biggest factors a financially distressed taxpayer faces on a tax bill.The Fresh Start Penalty Relief Initiative gives eligible taxpayers a six-month extension to fully pay 2011 taxes. Interest still applies on the 2011 taxes from April 15, 2012 until the tax is paid, but you won't face failure-to-pay penalties if you pay your tax, interest and any other penalties in full by October 15, 2012.

1. The penalty relief is available to two categories of taxpayers:

* Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to this year's April 17 tax deadline.

* Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.

To qualify for this penalty relief, your adjusted gross income must not exceed $200,000 if married filing jointly or $100,000 if your filing status is single, married filing separately, head of household, or qualifying widower. Your 2011 balance due can not exceed $50,000.

Taxpayers who qualify need to complete a new Form 1127A to request the 2011 penalty relief. The new form is available on www.irs.gov or by calling 1-800-829-3676 (TAX FORM).

2. Installment agreements An installment agreement is a payment option for those who cannot pay their entire tax bill by the due date. The Fresh Start provisions give more taxpayers the ability to use streamlined installment agreements to catch up on back taxes and also more time to pay.

The new threshold for requesting an installment agreement has been raised from $25,000 to $50,000. This option requires limited financial information, meaning far less burden to the taxpayer. The maximum term for streamlined installment agreements has been raised to six years from the current five-year maximum.

If your debt is more than $50,000, you'll still need to supply the IRS with a Collection Information Statement (Form 433-A or Form 433-F). You also can pay your balance down to $50,000 or less to qualify for this payment option.

With an installment agreement, you'll pay less in penalties, but interest continues to accrue on the outstanding balance. In order to qualify for the new expanded streamlined installment agreement, you must agree to monthly direct debit payments.

You can set up an installment agreement with the IRS through the On-line Payment Agreement (OPA) page at www.irs.gov

3. Offer in Compromise Under the first round of Fresh Start in 2011, the IRS expanded the Offer in Compromise (OIC) program to cover a larger group of struggling taxpayers. An Offer in Compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed.

The IRS recognizes many taxpayers are still struggling to pay their bills so the agency has been working on more common-sense changes to the OIC program to more closely reflect real-world situations.

Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.

4. More information A series of eight short videos are available to familiarize taxpayers and practitioners with the IRS collection process. The series "Owe Taxes? Understanding IRS Collection Efforts," is available on the IRS website, www.irs.gov.

The IRS website has a variety of other online resources available to help taxpayers meet their payment obligations.

Links:

• Offer in Compromise
• The What Ifs of an Economic Downturn
  

YouTube Video:

Fresh Start - English

Standard Deduction vs Itemizing

Standard Deduction vs. Itemizing: Seven Facts to Help You Choose

Each year, millions of taxpayers choose whether to take the standard deduction or to itemize their deductions. The following seven facts from the IRS can help you choose the method that gives you the lowest tax.

1. Qualifying expenses - Whether to itemize deductions on your tax return depends on how much you spent on certain expenses last year. If the total amount you spent on qualifying medical care, mortgage interest, taxes, charitable contributions, casualty losses and miscellaneous deductions is more than your standard deduction, you can usually benefit by itemizing.

2. Standard deduction amounts -Your standard deduction is based on your filing status and is subject to inflation adjustments each year. For 2011, the amounts are:
Single . . . . . . . . . . . . . . . $5,800
Married Filing Jointly . . . . . $11,600
Head of Household . . . . . . . $8,500
Married Filing Separately . . . $5,800
Qualifying Widow(er) . . . . . $11,600

3. Some taxpayers have different standard deductions - The standard deduction amount depends on your filing status, whether you are 65 or older or blind and whether another taxpayer can claim an exemption for you. If any of these apply, use the Standard Deduction Worksheet on the back of Form 1040EZ, or in the 1040A or 1040 instructions.

4. Limited itemized deductions - Your itemized deductions are no longer limited because of your adjusted gross income.

5. Married filing separately - When a married couple files separate returns and one spouse itemizes deductions, the other spouse cannot claim the standard deduction and therefore must itemize to claim their allowable deductions.

6. Some taxpayers are not eligible for the standard deduction - They include nonresident aliens, dual-status aliens and individuals who file returns for periods of less than 12 months due to a change in accounting periods.

7. Forms to use - The standard deduction can be taken on Forms 1040, 1040A or 1040EZ. To itemize your deductions, use Form 1040, U.S. Individual Income Tax Return, and Schedule A, Itemized Deductions.

These forms and instructions may be downloaded from the IRS website at www.irs.gov.

Helpful Publications:

• Publication 17, Your Federal Income Tax (PDF)
• Schedule A, Itemized Deductions (PDF)

Energy Efficient Tax Credits

Tax Credits Available for Certain Energy-Efficient Home Improvements

Would you like to get some credit for qualified home energy improvements this year? Perhaps you installed solar equipment or recently insulated your home?

Here are two tax credits that may be available to you:

1. The Non-business Energy Property Credit

Homeowners who install energy-efficient improvements may qualify for this credit. The 2011 credit is 10 percent of the cost of qualified energy-efficient improvements, up to $500. Qualifying improvements includeadding insulation, energy-efficient exterior windows and doors and certain roofs. The cost of installing these items does not count. You can also claim a credit including installation costs, for certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass fuel. The credit has a lifetime limit of $500, of which only $200 may be used for windows. If you've claimed more than $500 of non-business energy property credits since 2005, you can not claim the credit for 2011. Qualifying improvements must have been placed into service in the taxpayer’s principal residence located in the United States before Jan. 1, 2012.

2. Residential Energy Efficient Property Credit

This tax credit helps individual taxpayers pay for qualified residential alternative energy equipment, such as solar hot water heaters, solar electricity equipment and wind turbines. The credit, which runs through 2016, is 30 percent of the cost of qualified property. There is no cap on the amount of credit available, except for fuel cell property. Generally, you may include labor costs when figuring the credit and you can carry forward any unused portions of this credit. Qualifying equipment must have been installed on or in connection with your home located in the United States; geothermal heat pumps qualify only when installed on or in connection with your main home located in the United States.

Not all energy-efficient improvements qualify so be sure you have the manufacturer’s tax credit certification statement, which can usually be found on the manufacturer’s website or with the product packaging.

If you're eligible, you can claim both of these credits on Form 5695, Residential Energy Credits when you file your 2011 federal income tax return. Also, note these are tax credits and not deductions, so they will generally reduce the amount of tax owed dollar for dollar. Finally, you may claim these credits regardless of whether you itemize deductions on IRS Schedule A.

You can find Form 5695 at IRS.gov.

Claiming the Adoption Tax Credit

Six Facts for Adoptive Parents

If you paid expenses to adopt an eligible child in 2011, you may be able to claim a tax credit of up to $13,360.

Here are six things the IRS wants you to know about the expanded adoption credit.

1. The Affordable Care Act increased the amount of the credit and made it refundable, which means you can get the credit as a tax refund even after your tax liability has been reduced to zero.

2. For tax year 2011, you must file a paper tax return, Form 8839, Qualified Adoption Expenses, and attach documents supporting the adoption. Taxpayers claiming the credit will still be able to use IRS Free File or other software to prepare their returns, but the returns must be printed and mailed to the IRS, along with all required documentation.

3. Documents may include a final adoption decree, placement agreement from an authorized agency, court documents and/or the state’s determination for special needs children.

4. Qualified adoption expenses are reasonable and necessary expenses directly related to the legal adoption of the child. These expenses may include adoption fees, court costs, attorney fees and travel expenses.

5. An eligible child must be under 18 years old, or physically or mentally incapable of caring for himself or herself.

6. If your modified adjusted gross income is more than $185,210, your credit is reduced. If your modified AGI is $225,210 or more, you cannot take the credit.

For more information see the Adoption Credit FAQ page available atwww.irs.gov or the instructions to IRS Form 8839, which can be downloaded from the website or ordered by calling 800-TAX-FORM (800-829-3676).

Links:

• Form 8839 (PDF)
• Instructions for Form 8839 (PDF)
• Adoption Benefits FAQs
• Publication 4903, Affordable Care Act Expands Adoption Tax Credit Flyer (PDF)

Video:

• Claiming the Adoption Credit

Education Tax Credits

Education Tax Credits Help Pay Higher Education Costs

Two federal tax credits may help you offset the costs of higher education for yourself or your dependents. These are the American Opportunity Credit and the Lifetime Learning Credit.

To qualify for either credit, you must pay postsecondary tuition and fees for yourself, your spouse or your dependent. The credit may be claimed by either the parent or the student, but not both. If the student was claimed as a dependent, the student cannot file for the credit.

For each student, you may claim only one of the credits in a single tax year. You cannot claim the American Opportunity Credit to pay for part of your daughter's tuition charges and then claim the Lifetime Learning Credit for $2,000 more of her school costs.

However, if you pay college expenses for two or more students in the same year, you can choose to take credits on a per-student, per-year basis. You can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your spouse's graduate school tuition.

Here are some key facts the IRS wants you to know about these valuable education credits:

1. The American Opportunity Credit

• The credit can be up to $2,500 per eligible student.
• It is available for the first four years of postsecondary education.
• Forty percent of the credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes.
• The student must be pursuing an undergraduate degree or other recognized educational credential.
• The student must be enrolled at least half time for at least one academic period.
• Qualified expenses include tuition and fees, coursed related books supplies and equipment.
• The full credit is generally available to eligible taxpayers whose modified adjusted gross income is less than $80,000 or $160,000 for married couples filing a joint return.

2. Lifetime Learning Credit

• The credit can be up to $2,000 per eligible student.
• It is available for all years of postsecondary education and for courses to acquire or improve job skills.
• The maximum credited is limited to the amount of tax you must pay on your return.
• The student does not need to be pursuing a degree or other recognized education credential.
• Qualified expenses include tuition and fees, course related books, supplies and equipment.
• The full credit is generally available to eligible taxpayers whose modified adjusted gross income is less than $60,000 or $120,000 for married couples filing a joint return.

If you don't qualify for these education credits, you may qualify for the tuition and fees deduction, which can reduce the amount of your income subject to tax by up to $4,000. However, you cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction and should consider which is more beneficial for you.

For more information about these tax benefits, see IRS Publication 970, Tax Benefits for Education available at www.irs.gov or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).

Links:

• The American Recovery and Reinvestment Act of 2009: Information Center
• American Opportunity Credit
• Form 8863, Education Credits

Mortgage Debt Forgiveness

Mortgage Debt Forgiveness: 10 Key Points

Canceled debt is normally taxable to you, but there are exceptions. One of those exceptions is available to homeowners whose mortgage debt is partly or entirely forgiven during tax years 2007 through 2012.

The IRS would like you to know these 10 facts about Mortgage Debt Forgiveness:

1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.

2. The limit is $1 million for a married person filing a separate return.

3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.

4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.

5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.

6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.

7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.

8. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.

9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.

10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.

For more information about the Mortgage Forgiveness Debt Relief Act of 2007, visit www.irs.gov. IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments, is also an excellent resource.

You can also use the Interactive Tax Assistant available on the IRS website to determine if your cancelled debt is taxable. The ITA takes you through a series of questions and provides you with responses to tax law questions.

Finally, you may obtain copies of IRS publications and forms either by downloading them from www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

• Form 982
• Form 1099-C
• Publication 4681

Videos:

Mortgage Debt Forgiveness: English | Spanish | ASL