Questions for the Tax Lady: January 5th, 2011

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question: When is the earliest that I can file my tax return with the IRS?

I love that you want to get a jump on filing your taxes. In theory, you can file your taxes as soon as you receive all your W-2s, 1099s, or other tax-related documents. However, this filing season you might have to wait until mid-February to file. Congress waited until the very last minute to pass the “tax compromise” which means the IRS is still scrambling to update the tax forms and processing systems. So, who will have to wait?

1. Taxpayers who itemize deductions on Schedule A.
2. Taxpayers who claim the Higher Education Tuition and Fees Deduction.
3. Taxpayers claiming the Educator Expenses Deduction.

In addition to the delays, the IRS is urging anyone who falls into any of the three categories above to file electronically. With all the changes to the forms, filing electronically will ensure you file the updated versions of the forms and help you detect any mistakes before you file. No specific date has been given yet, but the IRS should announce it shortly.

So, if you claim the standard deduction and do not plan to claim the tuition and fees deduction, or the educator expenses deduction, you are free to file as soon as you receive all your tax information. Otherwise, you can spend the next month and a half getting organized so filing will be a snap!

Question: I am currently on a payment plan with the IRS, but my income has been reduced significantly over the past few months. Is it possible for me to renegotiate with the IRS to lower my monthly payment?

I commend you for getting out ahead of your financial issues, instead of waiting until you default on your installment agreement with the IRS.

Most IRS tax debt programs are based on your financial situation right now. So, when you income declines or you lose a job, you may be able to negotiate a lower payment. Your first step is to call the IRS (800-829-1040) as soon as you think you have a problem.

You will probably have to provide documentation for your decreased income, such as your W-2s or an updated profit and loss statement for your business. So, gather your documents and call the IRS. And good luck on getting a little relief in this still-shaky economy.

Tax Hikes to Expect in 2011

As we wait for Congress to take up a handful of tax and financial issues, taxpayers across the country are wondering what tax laws will change in 2011. A handful of tax cuts and incentives are scheduled to expire at the end of the year, and unless Congress takes action Americans are going to pay more taxes in 2011. These hikes are going to affect more than just taxpayers making over $200,000 per year. There are dozens of tax changes on the horizon that could hit families of all kinds of different income levels. To help readers of my blog prepare for the potential changes, I have put together the following list of tax hikes to expect in the coming year.

Income Tax Rates

Depending on what action Congress takes on the Bush tax cuts, income tax rates could increase significantly in 2011. President Obama has urged congress to only allow the cuts to expire for taxpayers making over $200,000. However, Congress must decide the fate of these tax rates and unless they pass legislation in the next few months, tax rates will increase for all taxpayers. For more information on the impact of the Bush tax cuts check out this blog entry I posted a few weeks ago.

Estate Tax

As many of you already know, the estate tax expired at the end of last year and was not extended. Therefore taxpayers who inherited a sizeable amount of money this year did not have to pay the standard estate tax. Next year the tax is scheduled to be reinstated at a higher rate (55%). It will also target taxpayers receiving smaller estates. Additionally, if Congress does take up the issue they might instate a retroactive tax that could affect Americans who thought they were able to avoid the estate tax.

Dividends

Qualified dividends are currently taxed at 15% because of the Bush tax cuts. However, if the cuts are allowed to expire, that rate will increase to nearly 40% for some taxpayers. This could represent a significant increase to taxpayers who rely on income from dividends.

Capital Gains

Another area the Bush tax cuts would impact is the capital gains rates. Depending on how Congress acts, the rates could rise to 20% in 2011. The increase is likely to only hit high-income taxpayers, and if you are worried about the hike then you might want to consider selling off some of your gains in 2010. However, you should always speak with a financial advisor to determine the most advantageous strategy.

Sin Taxes

Lots of taxpayers have seen drastic increases on cigarette taxes over the past year as local government agencies seek sources of additional revenue. However, these are not the only sin taxes that have increased. As part of the health care reform bill an indoor tanning tax was instituted, and going in to 2011 you can expect to see many more sin tax increases, especially at state and local levels.

Marriage Penalty

Married taxpayers should be concerned about another looming tax hike in 2011. Unless Congress addresses the issue, the "marriage penalty" will return next year, which has significant implications on couples that have significantly different income levels. Luckily, some of these taxpayers might be able to avoid the penalty by filing separately.

Deduction Caps

Although not a direct tax hike, the new deduction caps looming in 2011 will force many high-income taxpayers to pay more to Uncle Sam. President Obama has expressed interest in limiting the value of deductions at 28%, but has faced significant opposition. Many charitable groups have spoken out against this tax change, with fear that it will result in fewer donations from Americans.

Business Taxes

Small and large businesses should also expect tax increases in the next year. There are going to be higher SECA taxes for owners of S firms and partnerships, restrictions on worker classifications, and an elimination of the deduction for domestic production.

Audits

The last thing that any taxpayer wants to hear is that the likelihood of an IRS audit will increase in the next year. However, the White House has been pushing the IRS to crackdown on both small businesses and individuals. Earlier in the year Treasury Secretary Timothy F. Geithner even asked Congress for additional funds to support the increased collection efforts.

5 Tax Law Changes you MUST Know About

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10 Smart Tax Planning Moves to Make in 2010

A lot is changing in the tax world. Many of the changes are intended to improve the state of the U.S economy. While next year’s tax return should not look very different from this year’s, there are a few changes in particular which taxpayers should be aware of and prepare for throughout the year. To help my readers looking for some tax planning tips for 2010, I have compiled the following list.

1. Stay Organized

Although being aware of tax changes will certainly serve you well, the information will do you little good without the receipts and documentation. Throughout 2010, keep a filing folder or cabinet neatly organized with important receipts, documents, and tax information, which will be needed, come tax time.

2. Childcare Tax Credit

The childcare tax credit is currently set to $1,000 for each qualifying child, provided guardians do not exceed the income limits. However, President Obama recently said, at his State if the Union address, that he was planned to double the childcare tax credit to make life easier on struggling parents given the rough economy. While it is too soon to tell when or if this proposal will go in to place, it is definitely a credit for parents to look out for.

3. Estate Tax Changes

If you had a loved one, who would normally be subject to estate taxes, pass away in 2010, it is important to know that these taxes will not apply this year. If you are the heir or one of the heirs, it will lie on you to make the proper tax moves with the inheritance. On the other hand, if you have a will, you may want to make temporary changes to your will for the year if you planned donate a larger portion to charity or avoid over taxation, which you would normally be subject to. Remember to reverse the changes next year, as the estate tax will be higher than ever when it returns. These changes are quite drastic and if you are confused, you may want to consider hiring an estate tax attorney to make sure you make the right choices.

4. Making Work Pay Errors

When the Obama administration instituted the making work pay credit last year, many working Americans were happy to receive an additional $400 by the end of 2009 on their pay stubs. However, a major error was overlooked in the distribution, and some taxpayers who had more than one job and received the $400 for each job. The credit is was intended to apply to only one job. Taxpayers who experienced this error will be required to fill out a schedule M form in 2010 to return any overages. The credit will also be given this year, but the error is unlikely to repeat itself. However, whereas last year’s credit was distributed over 9 months, this year’s credit will be distributed over 12 months, so expect a smaller bump to your paycheck.

5. Roth IRA Changes

With the income limits for converting an IRA to a Roth IRA eliminated for 2010, a great potential retirement saving move has been opened to many Americans who did not qualify for it before. However, be aware of conversion costs in the form of previously untaxed amounts. Luckily though, when the change was made, lawmakers put some thought into this and are allowing taxpayers to pay half of the conversion costs in 2011, and the other half in 2012.

6. Energy Efficient Upgrades

If you were planning on making energy efficient upgrades to your home, you may want to do so now, as the tax savings approved in last year’s stimulus bill are set to expire at the end of the year. The highly beneficial changes allow you to claim up to $1,500 in credits, and possibly even more if you plan to install solar panels to your home.

7. Health Care Changes

Although President Obama had hoped to have healthcare legislation passed last year, the bills are still on the table and no decisions have been made just yet. However, legislation is supposed to be passed in coming months, and some tax changes may come with it. While most changes effecting tax law will not be put in to affect until months or years later, a few tax changes could be streamlined and affect your next tax return. Be on the lookout for these changes, and make the appropriate tax moves to offset any big changes.

8. Homebuyers Tax Credits

The recently expanded homebuyer’s tax credit is still eligible for another few months. If you were hoping to buy your first home in 2010, entering in to a binding contract by or before April 30, 2010 will allow you to take the $8,000 tax credit on either your 2009 or 2010 tax return. The sale will need to be settled by June 30, 2010 in order to fully qualify for the tax credit. In addition to the first time homebuyer’s credit, a long-time resident credit was added, in the amount of $6,500 for taxpayers who purchased a second primary home. The requirements for the long-time resident credit are that the taxpayer must have owned and lived in the first home for five consecutive years out of the past eight years.

9. Required Minimum Distribution Returns

Taxpayers who are over the age of 70-1/2 and hold certain savings plans such as a traditional IRA caught a break in 2009, when the required minimum distribution (RMD) was dropped for the year. However, RMDs have been re-instituted for 2010, and taxpayers who are required to pay them will need to take out the minimum amount to avoid being penalized.

10. Stay Updated

As you can see, several potential tax changes will occur 2010. In order to avoid being left uninformed come tax time 2011, stay updated on tax changes throughout the year. Check the IRS newsroom occasionally to see if they have any tax announcements that pertain to you. Also check out my tax center’s Tax Help Blog as well as my personal blog for daily tax tips and news—I try my best to stay on top of the newest tax news and as soon as I know, I will post the information to my blogs.

Questions for the Tax Lady: January 25th, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: Roni, does your law firm offer tax preparation services?

No, Roni Deutch, A Professional Tax Corporation does not offer tax preparation services. However, there are dozens of Roni Deutch Tax Center locations across the country offering tax preparation, in addition to a handful of other financial services. To find the Roni Deutch Tax Center location nearest you, click here or call 1-800-230-1083.

Question #2: What are the income limits for the 2010 home buyer’s credit?

Income limits for eligible homebuyers for the 2010 tax year are $125,000 for single buyers and $225,000 for couples. This was a significant increase from the 2009 credit, which had $75,000 and $150,000 limits.