Friday, October 28, 2011

Identity Theft and Your Tax Records

The IRS does not initiate communication with taxpayers through e-mail. Before identity theft happens, safeguard your information.
What do I do if the IRS contacts me because of a tax issue that may have been created by an identity theft?
If you receive a notice or letter in the mail from the IRS that leads you to believe someone may have used your Social Security number fraudulently, please respond immediately to the name, address, and/or number printed on the IRS notice.
Be alert to possible identity theft if the IRS issued notice or letter:
  • states more than one tax return was filed for you, or
  • indicates you received wages from an employer unknown to you.
An identity thief might also use your Social Security number to file a tax return in order to receive a refund. If the thief files the tax return before you do, the IRS will believe you already filed and received your refund if eligible.
If your Social Security number is stolen, it may be used by another individual to get a job. That person’s employer would report income earned to the IRS using your Social Security number, making it appear that you did not report all of your income on your tax return.
If you have previously been in contact with the IRS and have not achieved a resolution, please contact the IRS Identity Protection Specialized Unit, toll-free at 1-800-908-4490.
What do I do if I have not been contacted by IRS for a tax issue but believe I am a victim of identity theft?
If your tax records are not currently affected by identity theft, but you believe your IRS records may be at risk due to a lost/stolen purse or wallet, questionable credit card activity, credit report, or other activity, you need to provide the IRS with proof of your identity.
You should submit a copy, not the original documents, of your valid Federal or State issued identification, such as a social security card, driver's license, or passport, etc, along with a copy of a police report and/or a completed IRS Identity Theft Affidavit - Form 14039. Please send these documents using one of the following options:
Mailing address:
Internal Revenue Service
P.O. Box 9039
Andover, MA 01810-0939
FAX: Note that this is not a toll-free FAX number
You may also contact the IRS Identity Protection Specialized Unit, toll-free 1-800-908-4490 for resource information and guidance.
Hours of Operation: Monday – Friday, 8:00 a.m. – 8:00 p.m. your local time (Alaska & Hawaii follow Pacific Time).

What do you do if you receive a paper letter or notice via mail claiming to be the IRS but you suspect it is a scam?
  1. Contact the IRS to determine if it is a legitimate IRS notice or letter.
  2. If it is a legitimate IRS notice or letter, reply if needed.
  3. If caller or party that sent the paper letter is not legitimate, contact the Treasury Inspector General for Tax Administration at 1-800-366-4484. You may also fax the notice/letter you received plus any related or supporting information to TIGTA. Note that this is not a toll-free FAX number 1-202-927-7018.

Thursday, October 20, 2011

In 2012, Many Tax Benefits Increase Due to Inflation Adjustments

WASHINGTON — For tax year 2012, personal exemptions and standard deductions will rise and tax brackets will widen due to inflation, the Internal Revenue Service announced today.
By law, the dollar amounts for a variety of tax provisions, affecting virtually every taxpayer, must be revised each year to keep pace with inflation. New dollar amounts affecting 2012 returns, filed by most taxpayers in early 2013, include the following:
  • The value of each personal and dependent exemption, available to most taxpayers, is $3,800, up $100 from 2011.
  • The new standard deduction is $11,900 for married couples filing a joint return, up $300, $5,950 for singles and married individuals filing separately, up $150, and $8,700 for heads of household, up $200. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.
  • Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700, up from $69,000 in 2011.
Credits, deductions, and related phase outs.
  • For tax year 2012, the maximum earned income tax credit (EITC) for low- and moderate- income workers and working families rises to $5,891, up from $5,751 in 2011. The maximum income limit for the EITC rises to $50,270, up from $49,078 in 2011.The credit varies by family size, filing status and other factors, with the maximum credit going to joint filers with three or more qualifying children.
  • The foreign earned income deduction rises to $95,100, an increase of $2,200 from the maximum deduction for tax year 2011.
  • The modified adjusted gross income threshold at which the lifetime learning credit begins to phase out is $104,000 for joint filers, up from $102,000, and $52,000 for singles and heads of household, up from $51,000.
  • For 2012, annual deductible amounts for Medical Savings Accounts (MSAs) increased  from the tax year 2011 amounts; please see the table below.
Medical Savings Accounts (MSAs)
Self-only coverage
Family coverage
Minimum annual deductible
Maximum annual deductible
Maximum annual out-of-pocket expenses
The $2,500 maximum deduction for interest paid on student loans begins to phase out for a married taxpayers filing a joint returns at $125,000 and phases out completely at $155,000, an increase of $5,000 from the phase out limits for tax year 2011. For single taxpayers, the phase out ranges remain at the 2011 levels.
Estate and Gift
For an estate of any decedent dying during calendar year 2012, the basic exclusion from estate tax amount is $5,120,000, up from $5,000,000 for calendar year 2011. Also, if the executor chooses to use the special use valuation method for qualified real property, the aggregate decrease in the value of the property resulting from the choice cannot exceed $1,040,000, up from $1,020,000 for 2011.
The annual exclusion for gifts remains at $13,000.
Other Items
  • The monthly limit on the value of qualified transportation benefits exclusion for qualified parking provided by an employer to its employees for 2012 rises to $240, up $10 from the limit in 2011. However, the temporary increase in the monthly limit on the value of the qualified transportation benefits exclusion for transportation in a commuter highway vehicle and transit pass provided by an employer to its employees expires and reverts to $125 for 2012.
  • Several tax benefits are unchanged in 2012. For example, the additional standard deduction for blind people and senior citizens remains $1,150 for married individuals and $1,450 for singles and heads of household.

Wednesday, October 19, 2011

IRS Wrongly Demanded Repayments of First-Time Homebuyer Credit

The Internal Revenue Service mistakenly sent notices to approximately 80,000 taxpayers telling them they needed to repay the First-Time Homebuyer Tax Credit.
A new report by the Treasury Inspector General for Tax Administration found that 27,728 taxpayers were notified they had a repayment obligation even though they had purchased their homes in 2009, when there was no repayment obligation. In addition, the information provided by a vendor hired by the IRS to use third-party data to identify individuals who may have disposed of their principal residences was unreliable, resulting in 53,558 individuals who incorrectly received notices to repay the Homebuyer Credit.
The First-Time Homebuyer Tax Credit was a program aimed at stimulating the housing industry. While it helped prop up the industry, especially in the wake of the mortgage crisis, the quick ramp-up and shifting requirements left the IRS issuing the tax credits to thousands of taxpayers who did not fit the qualifications, including minors. The IRS was then forced to demand repayments of the tax credits that had been issued incorrectly, as well as from homeowners who fit into the various recapture provisions if they didn’t hold onto their homes long enough.
The TIGTA report found that the IRS is having difficulty determining which taxpayers have to repay the First-Time Homebuyer Credit. The report acknowledged that the IRS accurately issued the vast majority of the notices, over 5.2 million, informing taxpayers of the need to repay the credit.
However, at the same time, the IRS did not send notices or sent incorrect notices to 61,427 households due to programming errors or incorrect information on the tax accounts. Of those 61,427 households, 12,495 individuals were notified that they did not have to repay the Homebuyer Credit, when in fact they did have a repayment obligation; 27,728 taxpayers were notified that they had a repayment obligation despite having purchased their home in 2009 (only 2008 purchases have a repayment obligation); 2,152 individuals who bought their house in 2008 were incorrectly notified that they did not have a repayment obligation unless they sold their house; 18,220 did not receive a notice reminding them of their repayment requirement; and 832 deceased individuals may have been sent an incorrect notice regarding repayment.
“The IRS processed the vast majority of Homebuyer Credit Claims accurately,” said TIGTA Inspector General J. Russell George in a statement. “However, IRS officials still need to eliminate the programming errors that resulted in thousands of taxpayers being misinformed about their repayment status.”
The Homebuyer Credit was created by Congress in 2008 to help stimulate the housing industry by encouraging people to purchase their first homes. Subsequent legislation in 2009 and 2010 revised, extended and expanded the Homebuyer Credit in an attempt to help boost a sluggish real estate market. The Homebuyer Credit was a refundable credit that could result in a tax refund when the credit exceeded the tax liability, even if no income tax was withheld or paid.
Each of the laws with Homebuyer Credit provisions contained different credit amounts, qualification requirements and repayment requirements. Individuals who received the Homebuyer Credit for a home purchased in 2008 are required to pay back the total amount received for the Homebuyer Credit over 15 years beginning in 2010. There are some exceptions. In addition, individuals who received the Homebuyer Credit in 2008, 2009 or 2010 generally must repay the entire amount they received, if, during the three-year period beginning on the purchase date and after the year for which the individual received the homebuyer credit, they dispose of the home or it ceases to be their principal residence. If the disposition is a sale, the repayment requirement is applicable to the extent there is a gain on the sale of the home.
“The scope of the FTHBC was unprecedented in that it required the development of a comprehensive and balanced strategy to administer the credit amid the many unique situations that could trigger the recapture provisions, and to provide information to affected taxpayers to assist them in complying with their tax reporting obligations,” wrote IRS Wage and Investment Division Commissioner Richard C. Byrd Jr. in response to the report.
TIGTA recommended that the IRS ensure that Homebuyer Credit repayment notices are accurately issued; correct erroneous purchase dates on tax accounts; and discontinue using third-party vendor data to identify individuals who may have disposed of their principal residents unless the reliability can be significantly improved.
The IRS agreed with two of TIGTA’s recommendations. For the remaining recommendation relating to accurately issuing notices, the IRS indicated it is replacing some of its notices with an online tool for taxpayers to obtain their Homebuyer Credit repayment status. It plans to make the Web-based tool available to taxpayers for the 2012 filing season.
Michael Cohn, Accounting Today

Saturday, October 15, 2011

Can I Go To Jail For Un-Filed Taxes?

If the IRS determines that you are a "habitual" non-filer, they may refer your case to the CID - Criminal Investigation Division, and this department will determine if you should be prosecuted. Failure to file a tax return, when you are required to do can be a misdemeanor, punishable by penalties, interest, wage garnishment, and jail time. However, in some cases you can be charged with a felony and subject to a 5 year prison sentence. (With a misdemeanor you can receive up to one year in jail and $25,000 in fines for each year that you didn't file).
Because I am not an attorney, I will limited my legal words to the above paragraph. Just realize that the answer is "yes" You can go to jail because of un-filed tax returns.
The point I am trying to make is, tax payers who have years of un-filed tax returns are in a criminal status. They have one foot on legal and one foot on illegal. Un-filed taxes, year after year is a serious matter, which can bury a tax payer in debt, for a life-time. Even when a tax payer doesn't file a tax return, the IRS will file what is called a "substitute tax return"
In other words, the IRS files a tax return for you. The problem is, 1) the IRS is not aware of all of your possible deductions, and 2) if the IRS believes that you owe back taxes, the penalties and interest will continue to occur on the tax liability, until paid, or placed into bankruptcy. (See bankruptcy attorney) A tax payer could end up owing more than the actual tax bill. (Usually the IRS does not collect on debts over 10 years old - there are stipulations)
So to make a long story short. There are many variables in the consequences of un-filed tax returns. Even if you don't have the money, it is always best to file a return and work out the details with an Enrolled Agent or Tax Attorney on how to eliminate the debt, decrease the taxes, or request an Installment Agreement.
It is certain, if you owe the IRS and you have assets, the assets are subject to IRS rules. Trying to hide the assets before the IRS catches up to you, is not a good idea. This is only a short cut to the jail house. Talk to an attorney.
The best solution is to file the tax return(s), even if you don't have the money. If there was illness, a hurricane, flood, fire, death in the family, insanity, depression, drugs, prescribed medications, etc., the IRS may reduce or eliminate the penalties. (You will need to provide proof)
If you lost your job, and have been under a cloud, just be honest. Talk to your doctor, document the doctor's visit, file your taxes and ask for an abatement of penalties. The IRS will not consider any viable solutions for your tax problem, until "all" un-filed tax returns are filed.
IRS CIRCULAR 230 Disclosure:

Under U.S. Treasury Department regulations, we are required to inform you that, unless expressly indicated, any tax advice contained in this postl, or any attachment hereto, is not intended or written, to be used, and may not be used to (a)avoid penalties imposed under the Internal Revenue Code (or applicable state or local tax law provisions) or (b)promote, market, or recommend to another party any tax-related matters addressed herein.

Wednesday, October 12, 2011

How to Make Corrections on Your Tax Returns

Making an error on one's tax return is common, understandable, and sometimes, even acceptable or inevitable. You may have entered the wrong values in your tax return, omitted some incomes, made erroneous claims, or even forgot to claim a deduction. If you make an error, the IRS kindly provides an avenue to allow you to make the necessary amendments. The tips below will help you in case you ever make an error in your tax returns.
Mathematical Errors
For simple math errors and some uncomplicated omission errors here and there, the IRS advises the taxpayer not to file an amendment as it is not necessary. The IRS will make the basic corrections without getting back to you. Errors that need amendments are those that impact on ones tax liability.
Having said that, it is important to note that mathematical errors and other simple errors can trigger extra scrutiny on your form and so, you want to avoid such probability. Therefore, ensure that you counter check and do the math a second time to ensure that there are no such simple errors. Furthermore, with e-filing, small errors such as omissions and addition errors are eliminated, as the software does the additions automatically and reminds you of areas that you have not entered information. It also helps with other simple errors.
Other Significant Errors
For substantial errors (such as understated incomes or overstated deductions or credits), the IRS advises the taxpayer to file an amendment as early as possible. With the increased sophistication of the tax reviewing system, the IRS can now much more easily catch mistakes. Therefore, the chances of being identified and audited by the IRS because of such errors are higher now than they were before. The IRS system is able to compare and check off entries from corresponding taxpayers' returns and so, if the amounts conflict, it may be a matter of time before your get an audit notice.
Filing an amendment to alert the IRS of an error may also get your tax penalties waved. The IRS waives penalties if the taxpayer is deemed to have been genuinely unaware of the liability (and it is not an issue of fraud or negligence).
To file an amendment, you need to fill out Form 1040X, "Amended Return Form" with the correct information.
Details at the Narrative Section of Amendment
The amendment Form 1040X has a narrative section that enables the taxpayer explain the reason of the error or the nature of the error. It is best for the taxpayer to provide as detailed information as possible so that the case will be clear to the person reviewing the form. Unclear corrections with scanty explanations can be a direct route to an IRS audit. Therefore, ensure that whoever gets a hold of the return will easily understand the error being corrected and the reasons for the error. Clarity at this section can also contribute to the IRS waiving any tax penalties for unpaid taxes.
State and Federal Corrections
One of the important notes for making a correction on the Form 1040X is to ensure that you make any relating state tax corrections. The Federal and State tax authorities do a lot of information sharing. The State Tax administrations usually get alerted to the corrections made on Federal taxes and therefore, if you do not file a corresponding amendment for the State taxes, you will be setting yourself up for an audit. Therefore, ensure that all related taxes are filed for a given error.
If you need help in this area, give us a call at 865-984-6329

Article Source:

Monday, October 10, 2011

Hobby or Business? Why It Matters

Millions of Americans have hobbies such as sewing, woodworking, fishing, gardening, stamp and coin collecting, but when that hobby starts to turn a profit, it might just be considered a business by the IRS.

Definition of a Hobby vs a Business

The IRS defines a hobby as an activity that is not pursued for profit. A business, on the other hand, is an activity that is carried out with the reasonable expectation of earning a profit.
The tax considerations are different for each activity so it's important for taxpayers to determine whether an activity is engaged in for profit as a business or is just a hobby for personal enjoyment.
Of course, you must report and pay tax on income from almost all sources, including hobbies. But when it comes to deductions such as expenses and losses, the two activities differ in their tax implications.

Is Your Hobby Actually a Business?

If you're not sure whether you're running a business or simply enjoying a hobby, here are some of the factors you should consider:
  • Does the time and effort put into the activity indicate an intention to make a profit?
  • Do you depend on income from the activity?
  • If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
  • Have you changed methods of operation to improve profitability?
  • Do you have the knowledge needed to carry on the activity as a successful business?
  • Have you made a profit in similar activities in the past?
  • Does the activity make a profit in some years?
  • Do you expect to make a profit in the future from the appreciation of assets used in the activity?
An activity is presumed to be for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training, or racing horses).
The IRS says that it looks at all facts when determining whether a hobby is for pleasure or business, but the profit test is the primary one. If the activity earned income in three out of the last five years, it is for profit. If the activity does not meet the profit test, the IRS will take an individualized look at the facts of your activity using the list of questions above to determine whether it's a business or a hobby. (It should be noted that this list is not all-inclusive.)
Business Activity: If the activity is determined to be a business, you can deduct ordinary and necessary expenses for the operation of the business on a Schedule C or C-EZ on your Form 1040 without considerations for percentage limitations. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is appropriate for your business.
Hobby: If an activity is a hobby, not for profit, losses from that activity may not be used to offset other income. You can only deduct expenses up to the amount of income earned from the hobby. These expenses, with other miscellaneous expenses, are itemized on Schedule A and must also meet the 2 percent limitation of your adjusted gross income in order to be deducted.

What Are Allowable Hobby Deductions?

If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.
Note: Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the "hobby loss rule."
Deductions for hobby activities are claimed as itemized deductions on Schedule A, Form 1040. These deductions must be taken in the following order and only to the extent stated in each of three categories:
  • Deductions that a taxpayer may claim for certain personal expenses, such as home mortgage interest and taxes, may be taken in full.
  • Deductions that don't result in an adjustment to the basis of property, such as advertising, insurance premiums, and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
  • Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.
If your hobby is regularly generating income, it could make tax sense for you to consider it a business because you might be able to lower your taxes and take certain deductions.
Give us a call if you're not sure whether your hobby is actually a business and we'll help you figure it out.

IRS CIRCULAR 230 Disclosure:

Under U.S. Treasury Department regulations, we are required to inform you that, unless expressly indicated, any tax advice contained in this post, or any attachment hereto, is not intended or written, to be used, and may not be used to (a)avoid penalties imposed under the Internal Revenue Code (or applicable state or local tax law provisions) or (b)promote, market, or recommend to another party any tax-related matters addressed herein.

Thursday, October 6, 2011

A Tax Lesson for Unmarried Couples

Making mortgage payments on a residence doesn't automatically entitle you to related tax deductions.

In a 2011 decision, the U.S. Tax Court ruled that an unmarried taxpayer could not deduct home mortgage interest that she paid until she became an equitable co-owner of the property with her boyfriend and was legally obligated to make the mortgage payments. On her 2007 Form 1040, the taxpayer had attempted to deduct a full year's worth of interest. However, her name was not added to the property deed and the mortgage document until the middle of 2007. Before then, she was not an equitable co-owner of the property under state law nor did she have any legal obligation to pay interest on the mortgage. Therefore, she was not entitled to any mortgage interest deductions.
Since this is probably becoming an increasingly common situation, as more couples opt to remain unmarried, here is the full story on this case and the lesson for taxpayers.
The Story
In 2003, the taxpayer began living with her boyfriend in a Massachusetts home he had purchased in 2002. Initially the taxpayer paid rent to the boyfriend. In 2004, he quit his job and went back to school, and the taxpayer began paying more of the couple's living expenses. In late 2006, they had a child together, and the boyfriend decided to become a stay-at-home dad. In 2007, the taxpayer decided she should have an ownership stake in the home, since she had been paying most of the bills for some time and apparently would continue to do so. In June of 2007, her name was added to the property deed and the mortgage document, and she began making the monthly mortgage payments directly to the lender. (Before then, the taxpayer's contributions towards the house payments had been given to the boyfriend, and he had paid the lender.)
On her 2007 Form 1040, the taxpayer deducted $16,358 of mortgage interest, which was apparently 100% of the interest paid during that year. However the lender sent a Form 1098 (Mortgage Interest Statement) to the Internal Revenue Service showing that she had only paid $5,974, which was apparently the amount of interest paid after her name was added to the mortgage. Based on this discrepancy, the IRS audited the taxpayer and disallowed all but $5,974 of her mortgage interest deduction. Seeking relief, she went to the Tax Court.
The Tax Court's Decision
The court noted that home mortgage interest can generally be deducted only by a person who is legally obligated to pay the mortgage (in other words a person who is named as an obligor on the mortgage document). However, there is an exception to the preceding general rule for interest paid on a real estate mortgage when a person is a legal or equitable owner of the real estate but is not directly liable for the debt.
The determination of whether or not a person has legal or equitable ownership is a matter of state law. The taxpayer claimed that she had established equitable ownership by the beginning of 2007 by paying for a portion of the house payments over the preceding years and by paying for some improvements to the home. She also claimed that she and her boyfriend reached an oral agreement in early 2007 that she was entitled to share in any profit from selling the home, which led to her name being added to the property deed and mortgage document in June of 2007. However, the Tax Court decided she had no equitable ownership under Massachusetts law until her name was placed on the property deed and the mortgage document in June of 2007.
Apparently still searching for a way to give the taxpayer a break, the Tax Court then looked beyond Massachusetts state law for additional factors that could potentially give her an equitable ownership stake. According to the court, these factors included:
  • whether she had a right to possess the property and enjoy the use, rents or profits thereof
  • whether she had a duty to maintain the property
  • whether she was responsible for insuring the property
  • whether she bore the risk of loss if the property was damaged or destroyed
  • whether she was obligated to pay taxes on the property
  • whether she had the right to improve the property without the official owner's (boyfriend's) consent
Unfortunately for the taxpayer, consideration of these additional factors also weighed against concluding that she had any equitable ownership in the property before her name was placed on the property deed and the mortgage document. Therefore, the Tax Court agreed with the IRS that she should only be allowed to deduct $5,974 of mortgage interest on her 2007 return.
The Lesson for Taxpayers
Just because you pay the bills does not mean you are automatically entitled to the related tax deductions (although it can't hurt). In this case, the taxpayer did not take the necessary steps to establish that she was a co-owner of her residence until June of 2007. As a result, she lost valuable deductions for mortgage interest that she apparently paid. This case provides yet another illustration of why you should keep your tax professional informed about what you are up to all year. If you wait until return filing time, it might be way too late to get the best tax results for yourself

Original article

Wednesday, October 5, 2011

Can I Wipe Out Back Taxes by Filing Bankruptcy?

The answer is Yes. However, as with most laws pertaining to the Federal Government, there are conditions and certain stipulations. You can discharge back taxes owed to the IRS, by filling a Chapter 7 Bankruptcy, only if the following conditions apply:
1. The taxes must be "income taxes." Payroll taxes or illegal behavior which resulted in penalties can not be discharged in a bankruptcy.
2. You must not have committed fraud or have been found guilty of tax evasion.
3. The tax debt "must" be three years old. This is the stipulation which catches many bankruptcy taxpayers in the cross fire. The tax return must have been originally due, at least three years before you file for bankruptcy.
4. You must have filed "all" of your past due tax returns, including the tax return for the debt you wish to discharge at least two years before filing for bankruptcy.
5. The income tax owed, must have been accessed by the IRS at least 240 days before you file your bankruptcy petition, or must not have been assessed yet. (Consult with your attorney. This rule can change under certain circumstances)
Bankruptcy due to unpaid taxes is not uncommon, and usually is due to lost of income, (job) long term illness or death in the immediate family.
Trying to file for bankruptcy with assets in the hundreds of thousands of dollars may not go over very well with the Federal courts. Speak to an attorney to find out your options. However, before you make the appointment with a BK Attorney, you will need to file "all" of your tax returns. A substitute return, which the IRS has filed for you will not meet the requirements. You must file your own return(s). And in some cases, once taxpayers have filed their past due returns, they have found that the IRS owes them, when all the refunds and amount owed is calculated!
It's a different ball game when you file a Chapter 13 Bankruptcy. Your Attorney can help explain the details, and the approximate monthly payment. At the end of the day, the question you will want to ask your Attorney, concerning a Chapter 13, is: "How much, if anything, will I owe the IRS after my Chapter 13 is discharged?
The IRS is very much aware of the hardships taxpayers are experiencing due to lost of income, illness or death in the immediate family. The IRS has set up the hardship status, for taxpayers who qualify. To learn more on hardship status and if you qualify, call the IRS and ask questions. Just remember, it's a Federal crime to lie to a Federal Agent. Are IRS customer service agents considered Federal Agents? I wouldn't want to be the one to find out. Just be honest, without saying too much.
In order to prepare for Bankruptcy, you will need to file all past due tax returns. We can assist you in the preparation of past year returns. Give us a call at 865-984-6329.
Article Source:
IRS CIRCULAR 230 Disclosure:

Under U.S. Treasury Department regulations, we are required to inform you that, unless expressly indicated, any tax advice contained in this blog post, or any attachment hereto, is not intended or written, to be used, and may not be used to (a)avoid penalties imposed under the Internal Revenue Code (or applicable state or local tax law provisions) or (b)promote, market, or recommend to another party any tax-related matters addressed herein.

Monday, October 3, 2011

2012 Federal Income Tax Brackets (IRS Tax. Rates)

Every year around this time, tax experts get together and use inflation data to project what the next year’s income tax brackets will look like. Last year, we had the added complexity of the fight over the fate of the Bush-era tax cuts, which could have changed the tax landscape entirely.
Ultimately, the tax cuts stayed in place and the 2011 income tax brackets were essentially a slightly modified version of the 2010 tax brackets. This year, there is no such drama, so it’s really just a matter of adjusting the brackets (and the standard deduction) for inflation.
Over the past year, inflation has averaged 2.43%, which is slightly below the average over the past 20 years, but higher than the previous year, when inflation ran at 1.48%. While the IRS uses a somewhat convoluted approach to make their adjustments, the good folks at the Tax Foundation have already run the numbers.

Federal Income Tax Brackets for 2012

Here’s a quick rundown of what the Federal income tax brackets are expected to look like in 2012:
Tax Bracket Married Filing Jointly Single
10% Bracket $0 – $17,400 $0 – $8,700
15% Bracket $17,400 – $70,700 $8,700 – $35,350
25% Bracket $70,700 – $142,700 $35,350 – $85,650
28% Bracket $142,700 – $217,450 $85,650 – $178,650
33% Bracket $217,450 – $388,350 $178,650 – $388,350
35% Bracket Over $388,350 Over $388,350
And here are a few related points:
  • The personal and dependency exemption will rise to $3,800
  • The standard deduction for married filing jointly will rise to $11,900
  • The standard deduction for singles will rise to $5,950
Looking ahead, last year’s fighting resulted in a two year extension of the Bush-era tax cuts, which means that their currently set to expire at the end of 2012. As for what 2013 has in store for us, your guess is as good as mine.

The original article can be found at
2012 Federal Income Tax Brackets (IRS Tax Rates)

Saturday, October 1, 2011

Tax Deductions - Qualifying Medical Expenses

Medical expenses, including mileage for medical travel, are an allowable tax deduction. There are however, various rules that apply to this qualification. Firstly, the IRS provides a list of the medical costs that qualify for the deduction. You can get this list from the IRS website. However, because the list keeps changing every now and then with new inclusions and exclusions, it is wise to check the website every so often to keep updated on these changes. Secondly, the medical deduction is an itemized tax deduction and can therefore, be claimed by a taxpayer who chooses to itemize their deductions. The amount of medical expense that is deductible is the excess of 7.5% of one's Adjusted Gross Income (AGI).
History of the Deductible Medical Expense
Tax deduction for medical expense was introduced into the tax code in 1942 under the United States Revenue Act, which began in President Franklin Delano Roosevelt's regime. The initial deductible medical expenses were expenses that were termed as "extraordinary." The law was passed during World War II and was more of a relief for those (namely the veterans of the war) who had gotten into medical complications and incurred medical expenses in relation to the battles. In fact, the law was ideally passed as a temporary law to cater for the war period. However, the deduction outlasted the war and was adjusted in both 1944 and 1954 to make it more of a general medical deduction claim as opposed to a war-related claim. In 1954, the deduction was also moved to Section 213 of the tax code, thus giving it a permanent status. Over the years, the lower limit of the medical expense that one can deduct has changed between 3% to the current 7.5% of the Adjusted Gross Income (AGI). Other changes that have occurred over the years affecting the medical costs deduction are what kinds of medical expenses "qualify" or are allowable for deductions.
Limitations of Medical Deductible Medical
Only a small portion of taxpayers claim the medical expense deduction. There are various reasons for this. Firstly, there are few taxpayers who opt to itemize their tax deductions as opposed to having standard deductions; in the 2010 tax season, only 30% of those who filed returns choose to itemize their deductions. For you to itemize deductions on Section A of the tax returns on Form 1040, you will need to claim the amount that exceeds 7.5% of your AGI. This amount is set to be increased to 10% in 2013. Therefore, if your itemized deductions add up to less than the rate of the standard deduction, it is financially better to go for the standard deduction. For the 2010 tax year, the standard deduction was $5,700.00 for individuals, $11,400.00 for married filing jointly, and $8,400.00 for head of household. Many taxpayers' itemized deductible expenses are less than that of the standard deduction thus, explains the reason for less people opting for itemizing.
Another reason why the medical expenses deduction is not common is that most of the higher-income earners with deductible expenses high enough for itemization will usually have their medical insurance provided by their employer and therefore, they cannot claim against the insurance premiums. However, for the individuals who pay for their own medical insurance, then the premiums can easily qualify as an itemized deduction under the medical expense deduction. The average health insurance premiums for 2009 for example, were at $13,375.00, which is much higher than the standard deduction rate.
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