Did you know that past due financial obligations can affect your current federal tax refund? The Department of Treasury’s Financial Management Service (FMS), which issues IRS tax refunds, can use part or all of your federal tax refund to satisfy certain unpaid debts.

Here are the facts about how your tax refund may be used to offset certain types of debts:

1. If you owe federal or state income taxes, your refund will be offset to pay those taxes. If you had other debt such as student loan debt or child support debt, the FMS will apply as much of your refund as is needed to pay off the debt and then issue any remaining refund to you. This won’t be a surprise to you, because you will receive a notice if an offset occurs. The notice will include the original refund amount, your offset amount, the agency receiving the payment and its contact information.

2. Contact the agency shown on the notice, not the IRS, if you believe you do not owe the debt or you are disputing the amount taken from your refund.

3. You’ll need to file IRS Form 8379, Injured Spouse Allocation, if you filed a joint return and you’re not responsible for the debt but you are entitled to a portion of the refund. You’ll need to attach Form 8379 to your original Form 1040, Form 1040A, or Form 1040EZ or file it by itself after you are notified of an offset. Form 8379 can be downloaded from the IRS website at www.irs.gov.  You can file Form 8379 electronically. If you file a paper tax return you can include Form 8379 with your return, write “INJURED SPOUSE” at the top left of the Form 1040, 1040A or 1040EZ. IRS will process your allocation request before an offset occurs.

4. If you are filing Form 8379 by itself, it must show both spouses’ Social Security numbers in the same order as they appeared on your income tax return. You, the “injured” spouse, must sign the form. Do not attach the previously filed Form 1040 to the Form 8379. Send Form 8379 to the IRS Service Center where you filed your original return.

5. The IRS will compute the injured spouse’s share of the joint return. Contact the IRS only if your original refund amount shown on the FMS offset notice differs from the refund amount shown on your tax return.

6. Follow the instructions on Form 8379 carefully and be sure to attach the required forms to avoid delays. If you don’t receive a notice, contact the Financial Management Service at 800-304-3107, Monday through Friday from 7:30 a.m. to 5 p.m. (Central Time).

Are you stressed about tax time? Does the thought of doing your taxes give you a headache?  Tax preparation doesn’t have to be painful, if you follow some basic tips.

1. Don’t put off doing your taxes until the last minute. When you rush, you are more likely to make mistakes. You may even make mistakes that could cost you money.  So start them now if you haven’t already.

2. Use the IRS website. There were more than 300 million visits to www.irs.gov last year. Go to the “1040 Central” to check for the latest news and find answers to your questions about tax filing.

3. Use Free File. Free File is available exclusively at www.irs.gov. Everyone can find an option to prepare their tax return and e-file it for free. If you made $57,000 or less, you qualify for free tax software that is offered through a private-public partnership with manufacturers. If you made more than $57,000 and/or are comfortable preparing your own tax return, there’s Free File Fillable Forms, the electronic versions of IRS paper forms. Visit www.irs.gov/freefile for options.

4. Try IRS e-file. The majority of taxpayers now use IRS e-file, which is the safest, easiest and most common way to file a tax return. If you owe taxes, you can file immediately and pay later (by the April 17 tax deadline). Best of all, when you combine e-file with direct deposit  the IRS can generally issue your refund in as few as 10 days.

5. Don’t put off filing your taxes if you can’t pay. If you can’t pay the full amount of taxes you owe by the mid-April deadline, you should still file your return by the deadline and pay as much as you can to avoid penalties and interest. More than 75 percent of taxpayers eligible for an Installment Agreement can apply using the web-based Online Payment Agreement application available at www.irs.gov. To find out more about this simple and convenient process, type “Online Payment Agreement” in the search box at www.irs.gov.  You can also contact the IRS to discuss your payment options.

6. Request an extension of time to file – but pay on time. If the deadline clock is ticking, you can get an automatic six-month extension through Oct. 15. However, this extension of time to file, which must be filed or postmarked by the April 17 deadline, does not give you more time to pay any taxes due. If you have not paid at least 90 percent of the total tax due by the April deadline you may also be subject to an estimated tax penalty. You can obtain an extension through Free File at www.irs.gov/freefile. Or, file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, available for downloading at www.irs.gov or by calling 800-TAX-FORM (800-829-3676) to have a paper form mailed to you. Allow at least 10 days for mailed forms and publications.

Daniel Stoica Accounting Professional

Did you or anyone in your family have significant medical or dental expenses last year?  If you did, you may be able to deduct those expenses when you file your tax return.

The following information will help you consider your medical or dental expenses when you file your tax return.

1. First of all, you must itemize your qualifying medical and dental expenses using Form 1040, Schedule A.

2. On Form 1040, Schedule A, you can deduct medical care expenses that exceed 7.5% of your adjusted gross income for the year.

3. You can include the medical and dental expenses you PAID during the year, regardless of when the services were provided. Make sure you have good receipts or records to prove your expenses.

4. You cannot count any expenses that have been reimbursed to you. Your total medical expenses for the year must be reduced by any reimbursement. Normally, it makes no difference if you receive the reimbursement or if it is paid directly to the doctor or hospital.

5. You may include qualified medical expenses you pay for yourself, your spouse and your dependents. However, check with the IRS or a tax professional if you are divorced or separated because some exceptions and special rules apply to divorced or separated parents, taxpayers with a multiple support agreement or those with a qualifying relative who is not your child.

6. You can deduct expenses primarily paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or treatment affecting any structure or function of the body. For drugs, you can only deduct prescription medication and insulin. You can also include premiums for medical, dental and some long-term care insurance in your expenses. Starting in 2011, you can also include lactation supplies.

7. You may deduct transportation costs that are essential to medical care that qualify as medical expenses. You can deduct the actual fare for a taxi, bus, train, plane or ambulance as well as tolls and parking fees. If you use your car for medical transportation, you can deduct actual out-of-pocket expenses such as gas and oil, or you can deduct the standard mileage rate for medical expenses, which is 19 cents per mile for 2011.

8. Distributions from Health Savings Accounts and withdrawals from Flexible Spending Arrangements may be tax free if used to pay qualified medical expenses including prescription medication and insulin.

For additional information about medical and dental expenses, see Publication 502, Medical and Dental Expenses or Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

Some Helpful Links:

• Publication 502, Medical and Dental Expenses (PDF)
• Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans (PDF)

Daniel Stoica Accounting Professional

The Earned Income Tax Credit (EITC) is a popular tax credit for low-and moderate-income workers and working families. Approximately one in five eligible taxpayers do not claim the EITC, but many who do claim the credit do so incorrectly or are even ineligible. In order to ensure that the credit is taken by those taxpayers who do qualify, the IRS is now requiring all paid tax return preparers to file a due diligence checklist, or Form 8867, with any federal tax return that is claiming the EITC. This form is normally required to be completed and filed in a preparer’s records, but now the form must also be included with the returns.

Unlike most deductions and credits, the EITC is refundable, meaning that taxpayers can get it even if they owe no tax. For 2011 tax returns, the maximum credit is $5,751.

To make sure that eligible taxpayers receive the correct credit amount, this new reporting regulation requires preparers to file the Form 8867 with each return that claims the EITC, effective January 1, 2012. In addition, the penalty for noncompliance with the due diligence requirement has increased from $100 to $500.

More information about EITC and the due diligence requirement for tax return preparers is available on IRS.gov.

Daniel Stoica Accounting Professional

The IRS has introduced regulations for 2010 that will require tax preparers to file a “due diligence check-list”, the 8867 Form, with tax returns that claim the Earned Income Tax Credit (EITC).

The due diligence stipulation was passed in Congress more than ten  years ago. It was put in place to lessen error on tax returns that claim the EITC. These are generally prepared by tax professionals.

The 8867 Form, or Paid Preparer’s Earned Income Credit Check-list, was developed by the IRS in order to assist preparers in verifying eligibility information from taxpayers. Preparers must keep copies of these forms or other documents in case the IRS needs to review them. Beginning January 1^st, 2012, the 8867 Form will need to be filed with every tax return claiming the EITC.

REG-140280-09 will provide more information on this requirement. Taxpayers who wish to comment on this regulation must do so no later than November 10^th, 2011. A public hearing on the matter will be held on November 7^th, 2011.

The Earned Income Tax Credit is available to low and moderate income taxpayers and their families. The benefits are based on income, family size and filing status. The EITC is refundable and taxpayers can receive the credit even if they don’t owe taxes. The maximum credit is $5,751 for the 2011 tax year.

One in five taxpayers will be able to claim the EITC, but many of them incorrectly figure the amounts or find out they don’t qualify. The IRS is taking this new step to make sure the credit is offered to taxpayers who are eligible. More than 26 million taxpayers got $59 billion in EITC in 2009 alone, and nearly 66% of those returns were prepared by professional tax preparers.

Daniel Stoica Accounting Professional

College costs are getting higher while financial aid is dwindling, so now is the time to check into tax breaks for college students. There are several different ways you can lower your college costs by taking advantage of every break the IRS has to offer.

The IRS offers several deductions and credits for college students that you can use to help pay for your education. Below is a list of some of the tax breaks you should look into to offset the costs of higher education.

1. American Opportunity Tax Credit: You can save up to $2,500 with credits from the American Opportunity Tax Credit and could even be eligible for a $1,000 tax refund, even if you don’t owe any taxes.
2. Lifetime Learning Credit: With this credit, you can get even more tax credits for a longer amount of time, but you can only use one credit per year of college.
3. Tuition and Fees Tax Deduction: This is a deduction on your income for tuition and fees, not a credit. You can save on the amount that is equal to your deduction. You can save about $280 in taxes with this deduction. If you don’t qualify for credits because of your income, you can use this deduction instead.
4. Student Loan Interest Deduction: The average student loan amount is about $24,000 and interest on those loans can get expensive. But the IRS has offered a way for college students to take a deduction on their interest without itemizing. It is closely related to tuition and fee deductions as it lowers your taxable income.
5. Work Related Education Expense Deduction: If you don’t qualify for any other credits or deductions, you can take this deduction, but you have to meet some IRS guidelines. You can take this deduction if you are in college to enhance your skills in your current job field, and you would record it on Schedule A. This deduction is subject to a 2% of Adjusted Gross Income before you will save anything.

It is more important than ever for college students to find a way to save on their education because of the rising expense. Most taxpayers don’t know that these credits and deductions are available to them. To find out if you qualify for any of these savings, you can talk to a tax professional and financial advisor or call the IRS to request information. You can also visit the IRS website at irs.gov to get more information on these credits and deductions.

Daniel Stoica Accounting Professional

More than half of the people who filed their taxes got refunds this year, a little more than usual, but the amount of those refunds has surged over the last ten years. Many Americans have overpaid on their taxes throughout the year to get a larger refund at tax time.

Last year’s refunds averaged over $3,000, and this year’s average is not far behind, according to the Internal Revenue Service. This is nearly twice as much as the $1,700 average from 1999.

Current tax data from the IRS shows the growth in refunds hasn’t been limited to any one income level. People who suffered job or investment losses during the recession overpaid inadvertently, giving them bigger refunds.  The past decade also brought short-lived tax benefits where many taxpayers may not have adjusted their withholdings. A few examples include: the American Opportunity Education Credit; the Home-Buyer Credits; and the Expanded Child Credit.

Tax professionals and other financial advisors often frown on large tax refunds because they add up to interest-free loans to the government, thereby reducing investment capital in the same amounts. Many advise that it’s better to have the money in hand every month and invest it, spend it or just let it earn interest.  To many Americans, thought, a $3,000 check looks a lot better than $3,000 coming out of their paychecks over the year.

If your refund seems too big or too small, fixing it usually means making changes to your W-4. It’s the form your employer uses to figure withholdings on your paycheck. Amending it involves three worksheets and two tables, which is sometimes overwhelming to the average person.

The W-4 can be a headache even for people familiar with the 1040. A withholding allowance isn’t the same thing as an exemption. It’s intimidating for even the most seasoned taxpayers. If you aren’t comfortable filling out your own W-4, don’t try. It’s better to hire a tax professional.

If you pay a professional to do your taxes, he or she will most likely give you free help with your W-4. Most accountants do offer it. H&R Block doesn’t charge to fill out your W-4, if you are using them to prepare your taxes. Turbotax has a W-4 feature as part of its software program. The IRS also offers a withholding calculator at the IRS website. Make sure you have your paycheck and your tax return when you have this done to avoid any complications or delays.

Daniel Stoica Accounting Professional

Tax Topic 416  Farming and Fishing Income

If you have income from your farming or fishing business, you may be able to avoid making any estimated tax payments by filing your return and paying your entire tax due on or before March 1st of the year your return is due.
This rule generally applies if at least 2/3 of your total gross income was made from farming or fishing in either the current or the preceding year. If March 1st falls on a weekend or legal holiday, you have until the next business day to file your return and pay the tax.

If you choose not to file by March 1st, you can make a single estimated tax payment by January 15th to avoid an estimated tax penalty.
If these special rules do not apply, you may have to make quarterly estimated tax payments.
For more information on estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax.

Income and expenses from farming are reported on Form 1040, Schedule F (PDF).
Additionally, self-employment tax may be required if net earnings from farming are $400 or more.
Self-employment tax is figured on Form 1040, Schedule SE (PDF).
For additional information, refer to Topic 554, Self-Employment Tax.
For more information on farming, refer to Publication 225, Farmer’s Tax Guide.

Income and expenses from fishing are reported on either Form 1040, Schedule C (PDF) or Form 1040, Schedule C-EZ (PDF).
Fishermen may also be required to file Form 1040, Schedule SE (PDF) to figure self-employment tax if their net earnings from fishing are $400 or more.
For general information about the rules applying to individuals, including commercial fishermen, who file Schedule C or C-EZ, refer to Publication 334, Tax Guide for Small Business.
Also see the article titled “Fishing Tax Center” on IRS.gov for additional information on fishing income, deductions, and other tax issues for commercial fishing.
If your trade or business is a partnership or corporation, see Publication 541, Partnerships, or Publication 542, Corporations.

Tax Topic 413 – Rollovers from Retirement Plans

A rollover occurs when you withdraw cash or other assets from one eligible retirement plan and contribute all or part of it within 60 days to another eligible retirement plan.

This transaction is not taxable but it is reportable on your Federal Tax Return.

You can roll over most distributions from an eligible retirement plan except for:

1. The nontaxable part of a distribution, such as your after-tax contributions to a retirement plan (in certain situations after-tax contributions can be rolled over),
2. A distribution that is one of a series of payments based on your life expectancy, or the joint life expectancy of you and your beneficiary, or paid over a period of ten years or more,
3. A required minimum distribution,
4. A hardship distribution,
5. Dividends on employer securities, or
6. The cost of life insurance coverage.

Further exclusions exist for certain loans and corrective distributions.

Any taxable amount of a distribution that is not rolled over must be included in income in the year of the distribution.

If a distribution is paid to you, you have 60 days from the date you receive it to roll it over to another eligible retirement plan.
Any taxable distribution paid from an employer-sponsored retirement plan to you is subject to a mandatory withholding of 20%, even if you intend to roll it over later.
If you do roll it over, and want to defer tax on the entire taxable portion, you will have to add funds from other sources equal to the amount withheld.
You can choose to have your employer transfer a distribution directly to another eligible retirement plan or to an IRA.
Under this option, the 20% mandatory withholding does not apply.

In general if you are under age 59 1/2 at the time of the distribution, any taxable portion not rolled over may be subject to a 10% additional tax on early distributions unless an exception applies.
For a list of exceptions refer to Tax Topic 558.
Certain distributions from a SIMPLE IRA will be subject to a 25% additional tax.