Wednesday, September 24, 2014

IRS Commissioner: Premium Tax Credit-Changes in Circumstances

The Internal Revenue Service commissioner discusses what you should do if you have a change in circumstances that affects advance payments of the premium tax credit you may have received. For even more information, go to

Saturday, September 20, 2014

How Homeowners Can Get The Maximum Tax Refund.

How Homeowners Can Get The Maximum Tax Refund.
Owning a home. Ask any homeowner what's so great about owning versus renting, and most will say "the tax deductions!" That's right because all homeowners who itemize their taxes are able to deduct 100% of their mortgage interest and property taxes from their income tax returns. But how do you get the maximum tax refund for homeowners? If you don't own a home yet, there may be good reasons, but the advantages of owning a home far outweigh renting. There are really only two reasons not to own a home-you may live rent free with your parents or friends or perhaps you are planning on moving in 3 years or less. Even if you are single, but plan on staying in the area for more than 3 years, consider buying a home.
The major tax incentive to owning a home is that it allows you to deduct the interest you pay for your mortgage. This is usually the biggest tax break for most people, because a significant amount of your house payment goes toward interest during the early years of a mortgage. The major advantages of being a homeowner when tax season comes around?
Deductible mortgage interest including "points" when you buy your home.
Deductible property taxes on your return.
Deductions for improvements made to your home when you sell.
Up to $500,000 in tax free capital gains profit when you sell your home.
To get the maximum tax refund for homeowners you will have to use Form 1040 and itemize your deductions. If you're in a 28% tax bracket, the government effectively subsidizes about a third of your borrowing costs, making your home more affordable. Also, your closing costs and points are tax deductible, and hundreds of thousands of dollars of any capital gains profit that you realize when you sell your home are exempt from income taxes.
At tax time, it's critical to know what you're entitled to, so you can claim it. So, here are five essential tax tips to get the maximum tax refund for homeowners.
1. Fill out the long form at least once and learn to itemize your deductions.
Nearly 40% of homeowners lose out on the number one tax advantages every year when they fail to itemize their income taxes. If you own a home and otherwise have a fairly simple return, it might be tempting just to take the standard deduction or file Form 1040A. In some cases where your mortgage, property taxes and income are low enough, the standard deduction may be a larger deduction than your itemized deductions. But you'll never know unless you fill out both forms at least once.
So before you start filling in Form 1040A or 1040EZ, get your paperwork together and answer the questions on tax software like TurboTax, which will automatically do the math on whether itemizing or taking the standard deduction will result in the lowest tax bill.
Why do the extra work? You can only pay less tax, never more by filling out the longer Form 1040.
2. Home office deduction.
The average home office deduction is over $3,000. Of course there are special IRS rules on what you can claim as a home office. The space you claim as your home office cannot be exempted from capital gains tax when you sell your home. Visit the website for complete details.
3. Tax relief for loan modifications, foreclosures and short sales.
The Making Home Affordable ® Program (MHA) ® is an important part of the Obama Administration's comprehensive plan to stabilize the U.S. housing market by helping homeowners get mortgage relief and avoid foreclosure. To meet the various needs of homeowners across the country, Making Home Affordable ® programs offer a range of solutions that may be able to help you take action before it's too late. You may be able to refinance and take advantage of today's low mortgage interest rates and reduce your monthly mortgage payments.
While the long-term housing outlook began improving in 2011, loan modifications are projected to be the peaking this year. Distressed homeowners who are on the brink of a short sale, loan modification or foreclosure should be aware that normally, any mortgage balance that is wiped out by one of these outcomes is taxed as what the IRS calls Cancellation of Debt Income, or CODI.
Under the Mortgage Debt Forgiveness Relief Act of 2007, the IRS is currently not charging income taxes on CODI incurred through a loan modification, short sale or foreclosure on most residences through 2012. But banks are taking many months, or even years, to work out new mortgages. If you see any of this happening in your future, don't put things off. Get free advice from a housing expert atMakingHomeAffordable.Gov. or call 888-995-HOPE (4673) to speak with an expert.
4. The tax consequences of a refinance or property tax appeal.
Homeowners everywhere are working on applying for a lower property tax bill on the basis of the last few years' decline in their home's value. Those who have equity have tried to refinance their existing home loans into the 4% to 5% rates of the last few years. These strategies offer some of the biggest savings today. But here's a small warning for homeowners who are able to cut these costs. Property taxes and mortgage interest, the very costs you're minimizing, are also the basis for the major tax benefits of being a homeowner. So plan ahead for your tax deductions to go down along with your taxes and interest.
5. Don't forget the closing costs.
If you bought or refinanced your home, you may be focused on your mortgage interest and property tax deductions that you forget all about your closing costs. Remember that any origination fees or discount points that were paid to your mortgage lender at closing are tax deductible on your return. When you finance a home, you may pay what are called "points." Points lower the interest rate on your mortgage by effectively prepaying a portion of the interest at closing. Points are paid by the borrower to the lender as part of the loan deal, and they are a percentage of the loan. Points may also be called loan origination fees, maximum loan charges, loan discount or discount points. If you can't figure out exactly what you paid, look for your HUD-1 settlement statement. It is full of line item credits and debits that you should have received from your escrow provider or title attorney at closing.
Helpful Hint:There are two things you can count on when you become a homeowner: You get more tax breaks, and your taxes get more complicated. Whether you've purchased a single-family home, townhouse or condominium, tax breaks are available to you. It's time to get familiar with tax forms because that's where you will have to provide all the details about your new tax-deductible expenses.
Don't forget PMI premiums on your tax return. PMI is private mortgage insurance premiums on certain mortgages. If you make a down payment of less than 20%, you are generally required to carry private mortgage insurance. This type of insurance is paid for by the buyer but protects the lender in case the borrower stops paying on the loan. PMI premiums can be deducted if the mortgage was issued after 2006. This deduction may be changed in 2012 so check the IRS website for current information.
Final Thought: There are also huge tax savings on the gain when you sell. If you are going to live in your home for at least 5 years considering buying a home just for this reason. When you sell your home, the amount of your gain from the sale is tax-free if you meet the criteria. If you are married, you can have up to $500,000 profit on the sale, and you won't have to pay tax on the earnings. If you are single, you can earn up to $250,000 profit without paying any federal tax. There's only one catch: You have to own and occupy your home for at least two of the past five years. Visit for more information.

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Wednesday, September 17, 2014

Sunday, September 14, 2014

Is Social Security Taxable?

There's a simple calculation that will help determine if your Social Security benefits may be taxable.

Wednesday, September 10, 2014

Federal Gift Tax - When This Tax Has to Be Paid

Definition of a Gift
The IRS defines a gift as "giving property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. The gift tax applies whether the donor intends the transfer to be a gift or not." In other words, if you make a transfer for which you receive nothing or less than the fair market value of the property in return, it is a gift. If you sell your house to a relative for less than the fair market value, the difference is a gift. A promise to make a gift is not enough and a gift must be made of your own free will voluntarily. The gift must be delivered and accepted without the ability to revoke it and be a present interest (you no longer retain control over the property). The gift transaction date is considered to be the date title passes, in the case of cash when the check is cashed. Taxable gifts are reported using IRS Form 709 where a running tally is kept that is used against your unified federal gift and estate tax lifetime exemption (the amounts are cumulative). If a gift is taxable, the donor, not the recipient pays the tax. A ?le of Forms 709 should be maintained through one's lifetime.
Non-Taxable Gifts
A) The annual gift tax exclusion is $14,000 for 2014. This is the amount an individual may give, free of gift tax and without impacting his/her lifetime exemption, to as many individuals as he/she wishes. A married couple may double the amount. For example, a married couple may gift $28,000 to any one of their children; if a child is married they may gift $28,000 to their child (gift splitting) and their child's spouse (totaling $56,000 cash or property at fair market value).
B) Tuition, if you pay it directly to the school (no other incidental expenses)
C) Medical expenses you pay directly
D) Gifts to your spouse (if your spouse is a U.S. citizen)
E) Gifts to a political organization for its use
F) Gifts to qualifying charities if not a partial interest (this can be very complex if trusts are involved)
2014 unified estate/gift tax exemption
Gift and estate taxes have a unified federal gift and estate tax lifetime exemption of $5.34 Million per individual for 2014 ($10.68 Million for a married couple); this is the total amount of taxable gifts and taxable estate property and that can be transferred without paying gift or estate taxes. A taxable gift is other than noted above (for example the excess of a gift from one person to another over the $14,000 annual exclusion is a taxable gift). A surviving spouse can add any unused exclusion of the spouse who died most recently to their own, enabling transfers of up to $10.68 million tax-free, if an estate tax return is filing on behalf of the deceased with this election made. Gifts made during your lifetime will reduce the unified tax exemption against your taxable estate at time of death. If you exceed the limit, you will owe tax of up to 40% on the amount in excess. Gift tax applies to lifetime taxable gifts; estate tax applies to property left at death. Gifts are generally valued at cost basis while estate property is valued at fair market value at date of death.
Gifting Strategies
Gifts made during your lifetime will reduce your taxable estate, if you gift property away before the event of death, your estate will not be worth as much. This may especially matter if you are gifting property that will increase in value such as stocks or closely held business interest, art/collectibles etc. At the same time gifts in excess of the $14,000 annual exclusion reduces your estate tax exemption (they are unified as noted above). For example if a married couple gifts $250,000 cash to a single child for ten years, their estate will be worth $2.5 Million less, and their unified exemption will decrease from $10.68 to $8.18 Million.
As an example if stock is given, totaling $250,000 fair market value at time of gifting however originally purchased for $100,000 (cost basis) the value of the gift is the cost basis of $100,000. The stock at the time of the parent's death may be worth many times more than $250,000, thus if the transfer was not made, it would increase the estate value and possibly the estate tax as estate property gets a 'step up' in basis to fair market value at time of death. Thus gifting appreciating assets shelters the gain from estate tax. If the recipient then were to sell the stock in the example they would pay capital gains tax; also the cost basis would include any gift taxes paid on the transfer. Certain valuation discounts may apply to the value of stock/membership interest for closely held businesses such as a FLP due to a lack of liquidity. You need to get a professional appraisal at the time you make the transfer for any asset that is either not cash or publicly traded securities, especially if it is a hard to value asset, like a piece of real estate or a share in the family business.
A family limited partnership (FLP) can be an effective way to manage and control family assets while providing for the tax-effective transfer of wealth to others. The parents gift the majority of the partnership interest to family members in the form of limited partnership interests. Limited partners do not manage the partnership and the operating agreement can specify restriction on sale or borrow against their partnership interests.
Another use of the annual exclusion is to put money in Section 529 College savings plans, setting up a separate account for each family member you want to benefit.
Pay tuition and medical expenses without the payment being treated as a taxable gift to the student or patient, as long as the payment is made directly to the school or provider
Speak with an estate and gift tax attorney regarding various irrevocable trusts that you can gift to on behalf of beneficiaries such as a grantor retained annuity trust (GRAT) a Irrevocable Life Insurance Trust.
Crummey Notices
Typically the annual exclusion is used to fund a trust such as an Irrevocable Life Insurance Trust. In doing this, beneficiaries receive 'Crummey powers' which is the right for 30 or 60 days, to withdraw from the trust the yearly gift attributable to that beneficiary. A Crummey notice must be sent each year to the beneficiaries letting them know about their right to withdraw their portion of the annual gift to the trust. The IRS in an audit can and will ask for them.
State Gift Taxes
Many states have estate or inheritance taxes and they do not all follow the Federal estate tax system. This means the state applies different tax rates or exemption amounts. The exemption amount for your particular state will vary. Consult with a CPA or estate tax Attorney on specific state law and potential options to mitigate state estate or inheritance taxes.
Same Sex Marriages
The IRS states "For federal tax purposes, the terms "spouse," "husband," and "wife" includes individuals of the same sex who were lawfully married under the laws of a state whose laws authorize the marriage of two individuals of the same sex and who remain married. Also, the Service will recognize a marriage of individuals of the same sex that was validly created under the laws of the state of celebration even if the married couple resides in a state that does not recognize the validity of same-sex marriages"
Non-US Citizen Spouse
If your spouse is not a U.S. citizen you must file a gift tax return if your gifts to your spouse total more than $145,000 per year. Additional gifts to a non-citizen spouse count against your $5.34 million lifetime exclusion and must be reported on Form 709. Certain large gifts or bequests from certain foreign persons must be reported on Form 3520.
When to file Form 709
If you make gifts in excess of the annual exclusion, you must file Form 709, which is the United States Gift (and Generation-Skipping Transfer) Tax Return. The return is due by April 15 of the year after you make the gift, if you are on extension for form 1040 (form 4868), the extended due date applies to your gift tax return (October 15). To request an automatic six-month extension to file Form 709 without an extension for form 1040, you can file Form 8892. If any gift tax amounts are owed they are due April 15th, if not paid on time, interest and penalties may result. Married couples cannot file a joint gift tax return. Each spouse files their own Form 709 for taxable gifts. Gifts may be "split" with your spouse, doubling the annual exclusion from $14,000 to $28,000 to any one person.
The current federal gift/estate tax rate is 40%.

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Saturday, September 6, 2014

Tuesday, September 2, 2014

6 Things To Ask Your Tax Preparer

Even though tax season is over, it will return again in future years and the same issues may pop up as in the past. If you do your own taxes, you can ask yourself the same questions when you prepare them to see if any of the ideas apply to you. This article serves as a handy reference of things to have at your fingertips for any tax season.
There are some assumptions being made here which will be stated in this paragraph. The tax rules being assumed here are the Canadian Tax Code, using Ontario as the province levying the taxes. These ideas can be applied to the other provinces of Canada, but always check with the Canada Revenue Agency or applicable tax agency for changes, which occur frequently. These concepts can be applied to other countries, but the same caveat applies. The situation referred to here as a personal income tax situation. For self-employment or any kind of business, some of the rules may be different.
Does my refund depend on the income taxes I have paid throughout the year? The answer is yes. The government will only give you money as a refund if you have paid income taxes during the year, or you paid more than the amount of income taxes you "should pay" according to the tax calculations. The refund is calculated only on your taxable income, and not on other money you receive from the government. Examples of money that would not be taxed are lottery winnings or gifts. Other monies that are not taxed are credits like the GST/HST credit, Ontario Trillium Benefit, or the Child Tax Benefit. What this means is that if you are thinking of claiming a credit, or putting money into an RRSP, you should check the money you earned during the year and see how much taxes you have actually paid. The taxes in question here are only the income taxes - not property taxes, HST or taxes in the form of registrations or fees. How do you know if you are paying income taxes? Your pay stub will show the taxes being deducted. If you have a casual job, a temporary job or self-employment, there may not be any taxes deducted because you are either not expected to make much money, or you are expected to pay all the taxes when you file them at the end of the year. If you haven't paid any income taxes throughout the year, do not expect a refund at tax time.
Can my tax return be changed in a following year? The answer is yes. When would you do this? If you discover a credit that you could have claimed after the fact, but did not claim it, you can file for an adjustment and have the return recalculated at any time. Many people believe that once a tax return is calculated that it is carved in stone. This simply is not true, however it is easier to claim credits in the current year versus going back into previous years. The rules sometimes change if you are going back to previous years versus claiming in the current year because adjustments may affect credits that you received, or because the income used to calculate the credits would be changed. You can also file for an adjustment if you made a mistake, or if you something happened in a later year which affects the tax returns of prior years. An example of this would be a tuition amount from going to school that was not claimed in the year in occurred.
Do I have to file taxes by the April 30th deadline if I am getting a refund? The answer is no in most cases. If you are receiving a refund, you can usually file after the deadline and not have any issues with paying interest or penalties. This is because interest will not be charged when the government owes you money. The ideal thing to do however if you are getting a refund is to file taxes well in advance of the April 30th deadline. You will get the money sooner, not be in long lineups, will not have as many mistakes on your tax return, and will likely receive the money faster because the government is not as busy processing returns. If for some reason you cannot file taxes by April 30th such as being out of town for example - you can file them after April 30th, but you may have to pay interest or penalties if you owe money to the government.
Should I file taxes if I don't owe any money and I am not getting a refund? The answer is generally yes. If you are not paying taxes or getting a refund, filing taxes on time would be advantageous for you if you are receiving credits from the government. Examples of these credits are the GST/HST credit, the Ontario Trillium Benefit, and the Canada Child Tax Benefit. Whenever you receive money from the government, you should keep your records with them up to date and accurate. If you file taxes late, or have issues with your records, credits may get withheld or reduced because if there is a possibility that you may owe the government money, you will have delays receiving the money.
Should I keep track of carry forward amounts? The answer is yes. A carry forward amount is a credit that would allow you to get taxes paid back in a future year. Examples of this are tuition fees or RRSP contribution room. If you go to school in 2010 as an example, and you did not earn much money in 2010, you can carry forward that tuition credit to the following year. You can use the credit in 2011, 2012 or any other year until the credit is used up. The same applies for RRSP contribution room. If you do not contribute to an RRSP in 2010, the room is still available. You can put money in 2011, 2012 or future years until the room is used up. Keep the documents that show what you have left until the room or situation has been used to offset taxes that you would have paid. Bring this information to your tax preparer so they can update whatever tax credit was started in previous years. The good news is that the government keeps track of carry forwards in the Notice of Assessment statement that is given to you after filing your taxes. Therefore, it is not mandatory that you have to keep track of these carry forwards, but it is easier for you if you do.
Is getting a refund a good thing at the end of the tax year? The answer is that it depends. In a given tax year, for whatever money you make, you will pay a given amount of taxes by April 30th. You may pay more taxes during the year and then get some of it back at the end of the year, or pay less in taxes during the year and then have to pay more at the end of the year. Either way, the same amount of money is paid throughout the year, but the timing is different. You can influence the refund by paying taxes earlier, or getting more deductions which will be accounted for later in the year. You can get more deductions using popular methods like RRSP contributions, tuition credits, medical expenses or business expenses. If this option is not available for you, you can ask your employer to take more taxes off each pay cheque, thereby paying taxes in advance. This would generate a refund if you paid more taxes than you should by the end of the tax year. Why would you do this? The majority of people like to get a refund instead of paying taxes at the end of the tax year. Two reasons for this are that saving money is difficult, or if it is difficult to anticipate how much money will be needed to pay the tax bill at the end of the year. If this is your situation, you can essentially get the government to hold money for you until tax time, and then get some of your money back as a refund. If saving money is not an issue, you are better to pay as little tax as possible and pay more at tax time, because you can invest the money during the year.
Taxes are on ongoing exercise, and the more you know what will happen, the better prepared you will be when doing taxes.

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