MCA's Tax Talk

Hello Readers,

It’s been a while since my last post, and I am very happy to report back to it. Todays post will very briefly discuss some of your most important rights as a taxpayer.

1. Protection of Your Rights - As a taxpayer the employees of the  IRS have to explain and protect your rights throughout your involvement with them.

2. Privacy and Confidentiality – Unless authorized by law, the IRS cannot disclose the information you give them. You have the right to ask questions, so ASK AWAY !

3. Payment of Only the Correct Amount of Tax – By law you are required to pay ONLY the current amount of tax due and there are monthly payment plans.

4. Appeals and Judicial Review – If there is any disagreements about the amount of tax liabilty or any type of actions, you have the right to have your case reviewed by the Appeals Office.

Check back soon for more important information that you need to know as a taxpayer

Happy Friday!

Tax time (for preparers) is the most wonderful time of the year [think Staples “Back to School” song. This is the time of the year when we see all of our clients again, and meet a few new ones (if we’re fortunate). It’s also the busiest time of the year. I apologize for not continuing my walk-through for “Help I Just Got An Audit Notice from the IRS.” When things slow down a hair, I’ll get right back on it.

Tax Talk soon!

Congratulations First Time Homebuyers!
(Answers to Frequently Asked Questions Regarding Your Taxes) 

Congratulations homeowner! You’ve successfully completed one of the biggest investments of your life.

Homeownership is the American dream. There are many tax advantages that come from ownership. This sheet answers some Frequently Asked Questions that many 1st time homebuyers have.

How should I expect my taxes to change?
As a first time homebuyer, you may have the opportunity to itemize your taxes. This is because home mortgage interest and real estate taxes are tax deductible. Itemizing your deductions also opens the way for you to take advantage of additional deductions such as gifts to charity, certain medical expenses, even tax preparation fees. These deductions (and more) are only available to taxpayers that itemize. An itemized return is a bit more complex than the standard deduction, but it can lower your tax bill tremendously.

Starting in 2008, even if you don’t itemize your return, your standard deduction can be increased by $500 ($1,000 if married filing jointly) because you’ve paid real estate taxes. These must be taxes that would have been deductible had you itemized.

How do I take advantage of the First Time Homebuyer Credit?
The American Recovery and Reinvestment Act (ARRA) provided one of the biggest incentives to buying a home this year. True first-time homebuyers may qualify for (up to) an $8,000 federal tax credit. You must have bought or entered into a binding contract to buy your home before April 30, 2010. You must close on the home on or before June 30, 2010, and the home must be in the U.S. For homes purchased after November 6, 2009, the credit is available to taxpayers with modified adjusted gross income (MAGI) of up to $125,000 ($225,000 for married filing jointly), the home can cost up to $800,000.  If you purchased your home before November 7, your (MAGI) must not exceed $75,000 ($150,000 for married filing jointly). To take advantage of the First Time Homebuyer Credit, you will be required to fill out IRS Form 5405.

I heard that the First Time Homebuyer Credit was expanded to include “long-time” homeowners, is that true?
Yes, the ARRA made additional modifications (effective November 7, 2009), to include “long-time” homebuyers who are purchasing a new home. If you have maintained your same principle residence for any five of the prior eight years before buying your new home, you may be eligible for a credit of up to $6,500. This credit does not affect the tax treatment of the sale of your current home (i.e. you still can exclude capital gain up to $250,000).

Are my points deductible?
As a general rule, the answer is no, they would be deducted over the term of the mortgage. But you can deduct the points if you meet the following nine tests defined by the IRS:

1. Your loan is secured by your main home (your main home is the one you live in most of the time).
2. Paying points is an established business practice in your area.
3. The points paid were not more than the amount generally charged in that area.
4. You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them.
5. The points were not paid for items that usually are separately stated on the settlement sheet such as appraisal fees, inspection fees, title fees, attorney fees, or property taxes.
6. The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. You cannot have borrowed the funds from your lender or mortgage broker in order to pay the points.
7. You use your loan to buy or build your main home.
8. The points were computed as a percentage of the principal amount of the mortgage, and
9. The amount is clearly shown on your settlement statement.

Are my Mortgage Insurance Premiums deductible?
Yes, if you itemize, the premiums you pay or accrue during 2009 are deductible. That information would be included on line 13 of your itemized deductions.

What do I need to bring to my accountant for my tax return preparation?
Typically for your home you’ll need two things 1) proof of real estate tax payments and 2) proof of mortgage interest and points payment. If you paid $600 or more of mortgage interest, your mortgage holder will issue a Form 1098 (or similar statement). If you bought your home during that year the points will be included. If your mortgage holder also pays your property taxes out of your escrow account, that information will be found on the same form. You may also receive documentation from the state with exact amount paid (in Bergen County, we typically receive a white card showing exactly what was paid for the year). If you itemize, there’s much more that you should bring to your preparer. MCA can provide you with a Tax Organizer Checklist to help you prepare everything that you need, please contact us for your organizer.

How long should I keep my records?
Now that you more than likely will itemize it’s vitally important that you keep full and accurate records. These are necessary to support whatever deductions you take. You must keep your records for as long as they are important for meeting any provision of the federal tax law.

Generally speaking, keep records that support an item of income or deduction appearing on a return until the period of limitations for the return runs out (generally 3 years).

Your tax preparation will probably be very different than before, especially because of the added benefits that you should take advantage of. Please contact us if you would like to receive a free Tax Organizer Checklist, our information is below. At MCA Certified Tax Preparers, we do more than simply prepare your taxes, we educate you so that you keep more money in your pocket instead of paying it in taxes.

MCA Certified Tax Preparers
Marc Adams
52 Woodbine Street, Suite D
Bergenfield, NJ 07621

201-338-4606
marc_adams@mcataxprep.com
http://www.mcataxprep.com

TAX ADVICE DISCLOSURE: Pursuant to the requirements of Internal Revenue Service Circular 230, we advise you that any federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of: (1) avoiding penalties that may be imposed under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction or matter addressed in this communication. This information is provided solely and exclusively for general, non-specific educational purposes. The information given in this communication is not meant to be a substitute for the services of a professional tax advisor. Please consult your advisor before taking any actionable item in this article.

Attention first time homebuyers. The Internal Revenue Service today released the new form that eligible homebuyers need to claim the first-time homebuyer credit this tax season and announced processing of those tax returns will begin in mid-February. The IRS also announced new documentation requirements to deter fraud related to the first-time homebuyer credit.

This article has been shortened for your benefit. Feel free to read the entire article in full on the IRS website http://www.irs.gov/newsroom/article/0,,id=218336,00.html.

The new form and instructions follow major changes in November to the homebuyer credit by the Worker, Homeownership, and Business Assistance Act of 2009. The new law extended the credit to a broader range of home purchasers and added new documentation requirements to deter fraud and ensure taxpayers properly claim the credit.

With the release of Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, and the related instructions, eligible homebuyers can now start to file their 2009 tax returns. Taxpayers claiming the homebuyer credit must file a paper tax return because of the added documentation requirements.

Some of these early taxpayers claiming the homebuyer credit may see tax refunds take an additional two to three weeks.

In addition to filling out a Form 5405, all eligible homebuyers must include with their 2009 tax returns one of the following documents in order to receive the credit:

A copy of the settlement statement showing all parties’ names and signatures, property address, sales price, and date of purchase. Normally, this is the properly executed Form HUD-1, Settlement Statement.

For mobile home purchasers who are unable to get a settlement statement, a copy of the executed retail sales contract showing all parties’ names and signatures, property address, purchase price and date of purchase.
For a newly constructed home where a settlement statement is not available, a copy of the certificate of occupancy showing the owner’s name, property address and date of the certificate.
In addition, the new law allows a long-time resident of the same main home to claim the homebuyer credit if they purchase a new principal residence. To qualify, eligible taxpayers must show that they lived in their old homes for a five-consecutive-year period during the eight-year period ending on the purchase date of the new home. The IRS has stepped up compliance checks involving the homebuyer credit, and it encouraged homebuyers claiming this part of the credit to avoid refund delays by attaching documentation covering the five-consecutive-year period:

Form 1098, Mortgage Interest Statement, or substitute mortgage interest statements,
Property tax records or
Homeowner’s insurance records.
The IRS also reminded homebuyers that the new documentation requirements mean that taxpayers claiming the credit cannot file electronically and must file paper returns. Taxpayers can still use IRS Free File to prepare their returns, but the returns must be printed out and sent to the IRS, along with all required documentation.

Normally, it takes about four to eight weeks to get a refund claimed on a complete and accurate paper return where all required documents are attached. For those homebuyers filing early, the IRS expects the first refunds based on the homebuyer credit will be issued toward the end of March.

The fact that the IRS has selected your return for an audit does not mean that you’ve been dishonest or even that an error has been made. In fact, very many times an audit results in no change to your tax return at all.

The IRS has a few methods of selecting returns:

One method is Computer Scoring - In this case, returns are chosen based on its score. The DIF (Discriminant Function System) is a computer program used by the IRS that rates your tax return and determines if there is a good chance that change will be needed.

A second computer score is the UIDIF Unreported Income DIF which rates your return for the potential of unreported income. Often people talk about Red Flags. Do you think that the DIF and the UIDIF may the venue that raises those flags?

Information Matching – Sometimes a return may be selected because some information doesn’t match up. For example, maybe your W2 doesn’t match what was reported by your employer. More often than not, it may be that your 1099 or 1098 doesn’t match what you have reported.

Related Examinations- Sometimes you may be selected if someone “close” to you has an audit scheduled. For example, if your partner in your partnership is being audited because his income doesn’t seem to be in line with the partnership’s income, then perhaps the same problem may exist with your return. Great! Now you have the pleasure of meeting with an IRS agent.

Potential participants in abusive tax avoidance. Sometimes, the IRS will identify a tax avoidance scheme or person who promotes such. In such a case related returns may be selected for an audit. (Make sure you have a good and honest preparer, it could destroy you otherwise).

There are other reasons that your return may be selected. More often than not these are local in nature. For instance, to make sure that a particular preparer is complying with good practice, your return may be selected. (Make sure you have a good and honest preparer, it could destroy you otherwise).

Does this help? I hope so; it’s good to have an idea as to why your return is selected for an audit. If you prepare (or have your return prepared) as honestly as possible, then there is no need to really worry about audits. But if you do get a letter or inquiry how do you proceed?

Next up: How are audits conducted; If Your Return Is Examined

If you listen to the radio regularly, you’ll hear more and more commercials regarding tax representation. IRS audits are increasing and if you are contacted by the IRS the first thought that most people get is to panic!

Although audits are up, they still do not occur as much as you may think. The IRS stated that audit rates increased in 2007, both for overall individual rates and for higher-income taxpayers. One out of 11 individuals with incomes of $1 million or more faced an audit in 2007. Overall, the total individual returns audited increased by 7 percent. Audits of individuals with incomes over $200,000 reached 113,105 returns, up 29.2 percent from the prior year total of 87,885. The IRS increased audits of individual returns with income of $100,000 or more, auditing 293,188 of these returns in 2007, up 13.7 percent from last year’s total of 257,851.

We are now in 2010 and you can bet that audits will increase. The next few posts will talk about what you should do when you are contacted by the IRS. If you have specific questions, please feel free to post those also.

Help! I received a notice of tax deficiency, what did I do wrong? The next post will explain how audits are selected.

The first time homebuyer credit issued by the US congress has seemed to have had met it’s goal. Homebuying is up, and the economy is being helped. With so many new homes being purchased, many questions have arisen. I’ve created a FAQ for first time (and newer) homebuyers that may prove helpful. Please feel free to follow this link to the html article First Time Homebuyer FAQ.

I just received a FREE copy of Intuit’s TurboTax for Business clients. I’m wondering if they’re trying to put tax preparers out of business! My poll is informal, but I’m interested (especially for you business owners). If you received a free copy of TurboTax would you prepare your own taxes, or would you still use a professional? I visited a client of mine recently who is doing very well in his business, his vote was use a professional (simply because your expertise should be spent on building your business).

What’s your opinion? I’d love to hear from you!