For the first time, the IRS allowed self-employed seniors to deduct Medicare Part B premiums for the 2010 tax season. Before the 2010 tax year, the IRS didn’t allow premiums to be deducted. This new rule was set in early 2011, but it was not widely publicized. It was just included on the 1040 for tax season. The new rule contradicts the “Business Expenses Publication 535″, which states that deducting Medicare Part B premium payments is not allowed. But a statement released by the IRS requested that taxpayers ignore the statement on Publication 535 and go ahead and the deductions on the new 1040. Self-employment health insurance includes all of the insurance premiums paid for owners of sole-proprietorships, partnerships, S-type corporations, and limited liability companies (LLC).

How To Take The Deduction

The deduction is located on Line 29 of the 1040, “Standard Tax Form”. The deduction is on the first page of the tax form, so you don’t need to claim it as an itemized deduction.

Welcome Addition

Small-business owners feel this inclusion on the 1040 is a huge savings, because Medicare for self-employed seniors costs about $4,500.00. If your spouse and family are included, the costs could become very expensive. Consequently, many individuals who qualify see this as a good deal.

The Healthcare is Deducted Twice

You can deduct this premium cost twice. Because healthcare costs are an allowable expense for businesses, it means you can deduct this expense in your taxable business income. The expense is removed before including the income on your tax return. As an added tax benefit, the same premium cost is deducted again on Line 29 of the Standard Tax Form. The IRS has actually allowed  the deduction twice.

What about Medicare Part C and Part D?

Since there was no announcement about the inclusion of Part B premium deductions, the IRS is still not giving the deductions for Part C or Part D premiums. Part C is for self-employment premiums for Medicare Advantage HMO insurance and Part D is prescription drug coverage for the self-employed. There has been no mention of the Medicare Supplemental Insurance products, or Medigap, either. As the IRS releases more information about this inclusion in the 1040, there will be clear rules about how to handle all of the self-employment healthcare plans.

On the IRS website, they have given a clear description of the Part B deduction, which is noted below.

Medicare Part B:

Medicare Part B is a supplemental medical insurance. Premiums you pay for Medicare Part B are a medical expense. If you applied for it at age 65 or after you became disabled, you can include in medical expenses the monthly premiums you paid. If you were over age 65 or disabled when you first enrolled, check the information you received from the Social Security Administration to find out your premium.

Please contact a tax professional if you would like more information about this deduction.

Daniel Stoica Accounting Professional

When someone in the Armed Forces dies in combat from wounds, injury or disease, his or her tax liability is forgiven by the Internal Revenue Service.

It is granted for the year of death and the previous tax year that ended before the soldier began their service in active duty in a combat zone. The same applies to unpaid taxes for the years ending before they began their tour. If the spouse pays any taxes due after the time of death, the IRS will issue a refund.

If a soldier died outside of a combat zone, but was in a support position, the forgiveness rules also apply.

If a member of the military dies from wounds or injuries that occurred due to terrorist or foreign military action, their tax liability is also forgiven.

How to claim the forgiveness or refund.

A 1040X form is used to claim a refund.

Once the tax liability is forgiven, the deceased military person’s representative must do the following:

-File a 1040 form if a return has not yet been filed. A 1040X should be filed if the return has been filed. The 1040X must be filed for each year that is requesting a forgiveness. A description on the line for “total tax” should be placed on the return.

-An attachment showing total tax liability of the deceased must be provided before a forgiveness can be granted. The Department of Defense or Department of State will provide the representative with a certification. It must be attached to the request. A 1310 form should be attached as well. This form is a statement from the person who is claiming the refund on behalf of the deceased military member.

-If there is not enough tax information to file a claim, but the certification is received, the representative will need to file a 1040X form as well as a 1310 form. There is a filing deadline for these claims. The time frame is three years from the date of filing or two years from the tax payment, whichever date is later.

All returns and claims must be filed and one of these addresses:

For U.S. postal service: Internal Revenue Service, PO box 4053, Woburn, MA 01888.

For a private delivery service: Internal Revenue Service, stop 661, Andover, MA 05501

Please consult with a tax or accounting professional if you have any questions about this information.

Daniel Stoica Accounting Professional

You can get tax relief on the money you spend on education expenses. These benefits are for part-time and full-time students, married students, and parents of dependent students.  Check with your tax professional, but there are a few credit options to choose from for educational expenses.  

There are a few to choose from.

Hope Tax Credit

You can reduce your federal tax by as much as $1,800 for each student on tuition and fees that are not paid by student loans. You may take this claim for two years, if you:

• Have not yet completed the first two years of your education,
• Are enrolled in a program that leads to a degree, certificate, or other diploma,
• Are enrolled as at least a half-time student in your major for one semester during the year,
• Don’t have any felony convictions that are drug related.

School tuition and fees, minus any grants or scholarships, qualify for the Hope Credit. Check with your school’s financial aid office to find out if books and supplies are covered because they generally aren’t. This tax credit does not cover room and board, insurance, transportation, or medical fees.

To claim a Hope Tax Credit, you must file using the 1040 or 1040A and attach the 8863 (Education Credits). Itemizing your deductions is not required.

Lifetime Learning Tax Credit

You might be able to claim a Lifetime Learning Credit of up to $2,000 for education expenses paid for students enrolled in eligible higher education. There is no limit on the number of years the lifetime learning credit can be claimed for each student.

You can claim this credit if your family has children enrolled at an eligible college or university. The Lifetime Learning Tax Credit:

• Isn’t based on the student’s course load and it is allowed for more than one course,
• It isn’t limited to students in their first two years of college,
• Can be claimed for expenses for graduate-level courses,
• Has no limit on the number of years the credit can be claimed for each student,
• Doesn’t increase based on the number of students receiving qualified expenses.

To claim a Lifetime Learning credit, you need to file using the 1040 or 1040A and attach the 8863 (Education Credits). Again, you don’t have to itemize your deductions.

Tuition and Fees Deduction

You can reduce income that is taxed by up to $4,000 for tuition and related expenses. Tuition and fees required for enrollment at an eligible college, university, or vocational school are qualifying expenses. These expenses must have been made by the taxpayer, the taxpayer’s spouse, or the taxpayer’s dependent.

To claim this deduction, you must file the 1040 and, once again, you do not have to itemize your deductions.

Student Loan Interest Deduction

If you have student loans, you might be able to deduct up to $2,500 in yearly interest. In order to qualify, you should have used the loan for higher education expenses, including tuition, fees, room, board, supplies, and other related expenses.

If you have already paid at least $600 in interest on your student loans during the year, you will receive a 1098-E (Student Loan Interest Statement) from the bank, a government agency involved in student loans, or from your school’s financial aid office.

To claim this deduction, you must file the 1040 or 1040A. Itemizing deductions is not required here, either.

Before you decided on which credit or deduction works best for you, seeking the advice of a tax professional or your school’s financial aid counselor would help you find out which one will benefit you most.

Daniel Stoica Accounting Professional

According to most tax professionals, people often don’t realize that the income they earn from auctions and consignment sales are taxable.  The Tax Gap is the amount of tax that goes unpaid every year and  this blog will help taxpayers understand what income they need to report and the deductions they might be able to take.

The Tax Gap results from taxpayers under-reporting their taxable income. Most people know they have to pay their taxes, but most need a better understanding of their full obligations.

What Is Taxable?
Income from all auctions and consignment sales are taxable. But there are certain exceptions to this. The income is generally categorized as either business or ordinary income. This income may qualify for capital gain treatment. There are also some situations in which income is excluded from taxable income.

Business income earned from an auction or consignment is taxed just like earned income from any other retail or service business. This includes income tax, self-employment tax, employment tax, or excise tax. A retail or service business owner has to include this income as business income.

A person must report money received from a sale whether it’s income from a business or not.  Reportable income is the income received that is above the original cost of the item. This money can be business income or capital gains.

Income resulting from auctions similar to a garage or yard sale is not required to be reported. However, there might be exceptions to this. If an online garage sale turns into a business with recurring sales and the purchase of items for resale, it is considered an online auction business.

Some people do sell products or services online as a hobby. This income must be reported, but expenses are limited in deductions. The deductions must not be more than the income and can only be taken if the deductions are itemized on your 1040, Schedule A, Itemized Deductions.

What’s a Deductible Expense?
Auction and consignment sellers are in the business of making a profit and can deduct expenses that are claimed as ordinary and necessary. An ordinary expense is one that is common in a business. A necessary expense is one that is helpful for a business. Auction and consignment fees and commissions that are verifiable are allowable business expenses.

Expenses related to personal, living, or family matters are not deductible. There are, however, expenses that are partly personal and partly business-related. The business portion of these expenses are the only ones that are deductible.

A common expense issue is a home that is also used for business. A person might be able to deduct expenses for the business use in their home if they use one part of their home exclusively for the business, generally referred to as an exclusive use requirement.

Auction and consignment sellers, however,  may figure their deduction to the expenses that relates to the space in the residence that is used on a regular basis to store inventory and/or product samples if the residence is the only location of their auction or consignment business. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation.

These rules can get tricky, so it’s a good idea to seek the advice of a tax professional to find out what you must claim as income and what you can and can’t deduct as an expense.

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

The cop who tried to write off his flattop haircut. The interstate cheeseburger incident. These are just a couple of examples of some strange things people have tried to claim as deductions on their taxes.

According to Behold Bankrate, the following are some of this year’s strangest, but true, attempts at claims for tax deductions.

For several years, Behold Bankrate has published a list of some of the strangest tax deduction attempts desperate taxpayers thought they could slip past the IRS. Everything from breast implants to barking security systems have been added to some taxpayer’s 1040s in an effort to get as much of a tax break as possible.

This is meant to deter anyone considering trying to dupe the IRS by trying to claim their pet parrot as a speech therapy tool. The IRS doesn’t take attempts to get out of your tax obligations lightly.

With that said, here are just a few of Bankrate’s 10 strangest tax deductions of 2011. For a complete list, please visit http://www.bankrate.com/finance/taxes/10-craziest-tax-deductions-for-2011-2.aspx.

The tale of the wedding deduction! This is, and always has been, a nondeductible expense, but it turns up every year in different forms. Many people try to use that $50,000 wedding as a business travel and entertainment expense. “I had a client who insisted on deducting the cost of his wedding,” said a Massachusetts CPA. “He could not understand why this was not deductible as a charitable donation, and I could not understand where he expected to take the deduction. Like he was nice enough to marry her?”

The “Tony Soprano” Incident! Tax preparation can sometimes involve not quite on the up-and-up “negotiations”, as a New Jersey CPAs tells. “The manager and family member of a famous entertainer suggested the purchase of a $2 million building for office and production space, certain it would be a $2 million write-off that year,” the CPA says. “When the manager found out that it would take over 30 years to recover the expense, the manager was angry, embarrassed and annoyed. At one point, a suitcase with a very large amount of cash was given as an incentive to his accountant to somehow ‘make it work.’ The money was refused and the outrageous claim never made it onto the tax return, at least not the one the accountant prepared!”

The Subscription Ploy! Sometimes a self-employed person will try to take as much of a deduction as they can with dues and subscriptions, as a Massachusetts CPA found out, completely by accident. “A self-employed real estate professional had thousands of dollars in dues and subscriptions. When we reviewed the details of the account, the client was trying to deduct some personal subscriptions to adult magazines. We convinced the client that this type of subscription was considered a nondeductible personal expense.”

So, before you try to deduct something you aren’t sure about, it’s probably a good idea to ask your tax professional before you add it to your tax return. It keeps the IRS from possibly auditing you, and it will keep you off this list.

Danie Stoica Accouting Professional

Tax Topic 352 – Which Form – 1040, 1040A or 1040EZ?

Which Tax Form Should I Use?

The three forms used for filing individual federal income tax returns are:

Form 1040EZ (PDF)
Form 1040A (PDF)
Form 1040 (PDF).

Individual taxpayers recently advised they will no longer receive income tax packages in the mail from the IRS.

Form 1040EZ is the simplest form to fill out. You may use Form 1040EZ if you meet all the following conditions:

1. Your filing status is single or married filing jointly
2. You claim no dependents
3. You, and your spouse if filing a joint return, were under age 65 on January 1, 2011, and not blind at the end of 2010
4. You have only wages, salaries, tips, taxable scholarship and fellowship grants, unemployment compensation, qualified state tuition program earnings, or Alaska Permanent Fund dividends, and your taxable interest was not over $1,500
5. Your taxable income is less than $100,000
6. Your earned tips, if any, are included in boxes 5 and 7 of your Form W-2
7. You did not receive any advance earned income credit payments
8. You do not owe any household employment taxes on wages you paid to a household employee
9. You are not a debtor in a Chapter 11 bankruptcy case filed after October 16, 2005
10. You are not claiming the additional standard deduction for real estate taxes, net disaster losses, or qualified motor vehicle taxes
11. You do not claim a student loan interest deduction, an educator expense deduction, or a tuition and fees deduction, and
12. You do not claim an education credit, retirement savings contributions credit, or a health coverage tax credit

If you file Form 1040EZ, you cannot itemize deductions or claim any adjustments to income or tax credits (other than the earned income credit).

If you cannot use Form 1040EZ, you may be able to use Form 1040A if:

1. Your income is only from wages, salaries, tips, taxable scholarships and fellowship grants, interest, or ordinary dividends, capital gain distributions, pensions, annuities, IRAs, unemployment compensation, taxable social security or railroad retirement benefits, and Alaska Permanent Fund dividends
2. Your taxable income is less than $100,000
3. You do not itemize deductions
4. You did not have an alternative minimum tax adjustment on stock you acquired from the exercise of an incentive stock option
5. You received advance earned income credit payments, dependent care benefits, or if you owe tax from the recapture of an education credit or the alternative minimum tax, and
6. Your only adjustments to income are the IRA deduction, the student loan interest deduction, the educator expenses deduction, and the tuition and fees deduction.

If you file Form 1040A, the only credits you can claim are the credit for child and dependent care expenses, the earned income credit, the making work pay credit, the credit for the elderly or the disabled, education credits, the child tax credit, the additional child tax credit, the government retiree credit, and the retirement savings contribution credit.

Finally, you must use Form 1040 under certain circumstances, such as:

1. Your taxable income is $100,000 or more
2. You have certain types of income such as unreported tips, certain nontaxable distributions, self-employment earnings, or income received as a partner, a shareholder in an “S” Corporation, or a beneficiary of an estate or trust
3. You itemize deductions or claim certain tax credits or adjustments to income, or
4. You owe household employment taxes

A complete list of conditions outlining when Form 1040 must be used is in the instructions for Form 1040A.

What is the Simplest Tax Form for Your Situation?

IRS Tax Tip 2011-03,  January 05, 2011

To file your 2010 individual tax return, you’ll have to decide which form to use…unless you e-file.  This year, choosing which form to file will be even more important since the IRS will no longer be mailing paper tax packages. The IRS is taking this step because of the continued growth in electronic filing, the availability of free options to taxpayers and to help reduce costs. Taxpayers can still get forms and instructions online at http://www.irs.gov, at local IRS offices or from participating community outlets like many libraries and post offices.

If you file your return using IRS e-file, the system will automatically decide which form you need.

Here are some general rules to consider when deciding which paper tax form to file.

Use the 1040EZ if:

• Your taxable income is below $100,000
• Your filing status is Single or Married Filing Jointly
• You and your spouse – if married — are under age 65 and not blind
• You are not claiming any dependents
• Your interest income is $1,500 or less

Use the 1040A if:

* Your taxable income is below $100,000
* You have capital gain distributions
* You claim certain tax credits
* You claim adjustments to income for IRA contributions and student loan interest

If you cannot use the 1040EZ or the 1040A, you’ll probably need to file using the 1040. Among the reasons you must use the 1040 are:

* Your taxable income is $100,000 or more
* You claim itemized deductions
* You are reporting self-employment income
* You are reporting income from sale of property

You can gain quick and easy access to IRS forms and instructions or find out more about e-file by visiting http://www.irs.gov. Tax products are available 24 hours a day, seven days a week and often appear online well before they are available on paper. To view and download tax products, visit the IRS website and select Forms and Publications.

Links:

* Form 1040EZ, Individual Income Tax Return (PDF 105K )
* Form 1040A, Individual Income Tax Return (PDF 138K)
* Form 1040, Individual Income Tax Return (PDF 181K)
* Publication 17, Your Federal Income Tax
* Publication 17, Your Federal Income Tax (PDF 2.3MB)
* 1040 Central