Wednesday, August 29, 2012

Win some, lose some, and tax issues either way



If you are heading to Vegas, the race track or Atlantic City for the Labor Day weekend, here is some background from the IRS's latest Tax Tip on how to deal with your winnings, and your losses.  Paying taxes on lottery winnings - isn't this a problem we all wish we had!

Five Important Tips on Gambling Income and Losses

Whether you roll the dice, bet on the ponies, play cards or enjoy slot machines, you should know that as a casual gambler, your gambling winnings are fully taxable and must be reported on your income tax return.  You can also deduct your gambling losses…but only up to the extent of your winnings.  Here are five important tips about gambling and taxes:

          1. Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse races, and casinos. It includes cash winnings and the fair market value of prizes such as cars and trips.

          2. If you receive a certain amount of gambling winnings or if you have any winnings that are subject to federal tax withholding, the payer is required to issue you a Form W-2G, Certain Gambling Winnings. The payer must give you a W-2G if you receive:
  • $1,200 or more in gambling winnings from bingo or slot machines;
  • $1,500 or more in proceeds (the amount of winnings minus the amount of the wager) from keno;
  • More than $5,000 in winnings (reduced by the wager or buy-in) from a poker tournament;
  • $600 or more in gambling winnings (except winnings from bingo, keno, slot machines, and poker tournaments) and the payout is at least 300 times the amount of the wager; or
  • Any other gambling winnings subject to federal income tax withholding.
          3. Generally, you report all gambling winnings on the “Other income” line of Form 1040, U.S. Federal Income Tax Return.

          4. You can claim your gambling losses up to the amount of your winnings on Schedule A, Itemized Deductions, under ‘Other Miscellaneous Deductions.' You must report the full amount of your winnings as income and claim your allowable losses separately. You cannot reduce your gambling winnings by your gambling losses and report the difference. Your records should also show your winnings separately from your losses.

          5. Keep accurate records. If you are going to deduct gambling losses, you must have receipts, tickets, statements and documentation such as a diary or similar record of your losses and winnings. Refer to IRS Publication 529, Miscellaneous Deductions, for more details about the type of information you should write in your diary and what kinds of proof you should retain in your records.

For more information on gambling income and losses, see IRS Publication 529, Miscellaneous Deductions, or Publication 525, Taxable and Nontaxable Income, both available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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Wednesday, August 8, 2012

Moving this summer? What expenses can you deduct?

Here are ten tips on allowable expenses and deductions for those of you who are moving this summer.  Courtesy of our friends at the IRS!

Moving This Summer?  Here are 10 Helpful Tax Tips

School’s out for the summer, and summer is a popular time for people to move - especially families with children.  If you are moving to start a new job or even the same job at a new job location, the IRS offers 10 tax tips on expenses you may be able to deduct on your tax return.

1. Expenses must be close to the time you start work  Generally, you can consider moving expenses that you incurred within one year of the date you first report to work at a new job location. 

2. Distance Test  Your move meets the distance test if your new main job location is at least 50 miles farther from your former home than your previous main job location was from your former home.  For example, if your old main job location was three miles from your former home, your new main job location must be at least 53 miles from that former home.

3. Time Test  Upon arriving in the general area of your new job location, you must work full time for at least 39 weeks during the first year at your new job location. Self-employed individuals must meet this test, and they must also work full time for a total of at least 78 weeks during the first 24 months upon arriving in the general area of their new job location. If your income tax return is due before you have satisfied this requirement, you can still deduct your allowable moving expenses if you expect to meet the time test. There are some special rules and exceptions to these general rules, so see Publication 521, Moving Expenses for more information.

4. Travel  You can deduct lodging expenses (but not meals) for yourself and household members while moving from your former home to your new home. You can also deduct transportation expenses, including airfare, vehicle mileage, parking fees and tolls you pay, but you can only deduct one trip per person.

5. Household goods  You can deduct the cost of packing, crating and transporting your household goods and personal property, including the cost of shipping household pets. You may be able to include the cost of storing and insuring these items while in transit.

6. Utilities  You can deduct the costs of connecting or disconnecting utilities.

7. Nondeductible expenses  You cannot deduct as moving expenses: any part of the purchase price of your new home, car tags, a drivers license renewal, costs of buying or selling a home, expenses of entering into or breaking a lease, or security deposits and storage charges, except those incurred in transit and for foreign moves.

8. Form  You can deduct only those expenses that are reasonable for the circumstances of your move. To figure the amount of your deduction for moving expenses, use Form 3903, Moving Expenses.

9. Reimbursed expenses  If your employer reimburses you for the costs of a move for which you took a deduction, the reimbursement may have to be included as income on your tax return.

10. Update your address  When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive mail from the IRS. Use Form 8822, Change of Address, to notify the IRS.

More details are available in IRS Publication 521 and Form 3903. IRS publications and forms are available on IRS.gov or by calling 800-829-3676.
Links:
  • Publication 521, Moving Expenses (PDF)
  • Form 3903, Moving Expenses (PDF)
  • Form 8822, Change of Address (PDF)
  • Tax Topic 455 - Moving Expenses 
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Tuesday, June 26, 2012

Defending the Supreme Court Regarding Obamacare



The Pew Research Center recently reported that 52 percent of the American public have a favorable opinion of the United States Supreme Court, down from 64 percent in 2009, and 80 percent in 1994. I don't imagine many people can actually name more than a few of the justices, nor their ideological leanings, or even what the Supreme Court actually does.  But this week, all eyes will be on the Court, as they are expected to release one of the most widely awaited rulings in years—on the viability of the 2010 legislation widely known as Obamacare. 
I suspect that the reasons for the fall in favorability are tied to the polarization of the Reds and the Blues, and the notion that the Court simply votes on ideology rather than in some principled fashion. If they decide against Obamacare, then the Blues will scream in outrage. The Blue pundits actually are already screaming in anticipation of the ruling.  If the court decides to uphold the contested provisions of the law, then the Reds will proclaim the end of constitutional government. Before you go rushing to join the lynch mob of your choice, take the time to understand what the issue is before the court, and how the court actually decides on the cases before it.
On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act, more popularly known as Obamacare. The intent of the law was to make health care more widely available to a greater number of people; and to eliminate some insurance company practices that made health insurance coverage more difficult to find for certain groups—such as denying coverage for pre-existing conditions. 
It is difficult to argue with these worthy goals.  However, when you broaden the coverage, you are necessarily adding huge additional expenses to the system; and so the question becomes how to pay for the additional coverage that insurance companies must offer.
Insurance is a pool of money, intended to be held in reserve in case certain insured risks occur. The idea is that if enough of us pool our money, then when the risks occur and one of us is injured, then we draw from the pool to pay for our claim. 
If all of us were in the pool, and rates were set based on the probability of the risk, then there would be sufficient money available to pay claims that routinely occur.  One of the biggest problems that needed to be addressed with health care insurance is "free riders"—people who are not in the pool, because either they cannot afford to be, or choose not to purchase health care coverage. 
When they are sick or injured, and they show up at the hospital emergency room, the hospital is required to attend to them.  With no insurance to pick up the costs, these costs are passed on to all of us in the form of higher prices for services, and higher rates for insurance.  We are all subsidizing these costs.  If we force all of these people into the pool, and make them pay like the rest of us do, then in theory we have solved the problem: There is now sufficient money in the pool to pay claims.
How do we force people into the pool? We can either tax everyone to subsidize the groups that need to be subsidized; or we can require each person to carry certain minimum insurance coverage, and threaten to fine them if they don't.  We push them into the pool. 
The first choice, a tax, is politically untenable, and does nothing to control costs; and many fear that it would destroy the private insurance industry and replace it with a government administered one-size fits all insurance market, that does not reduce costs.  If everything is "free" then you can eat as much as you want—and this results in more demand for services than supply, leading to rationing of services. 
The second choice, pushing them into the pool, is the choice reflected in the Obamacare legislation. The "individual mandate," when it goes into effect, requires each person to carry insurance, and fines them if they do not.  The money is paid into the pool, and the pool in theory becomes big enough to pay for all claims. 
But finally we get to the nub of the legal case: can the federal government require people to purchase a product?  At our constitutional convention in Philadelphia in 1787, the 13 states sent representatives to sit and try to devise a national government of limited powers. The existing Articles of Confederation had been a failure. The national government could not levy taxes; it had to beg the states for money to conduct any of its affairs. 
The states were jealous of their powers and their independence, and yet recognized the need for a national government for certain limited purposes. The final product was our Constitution. Article I, Section 8, provided for specific powers that Congress could exercise.  To punctuate the fact that the federal government was one of limited powers, a bill of rights was added to the end of the Constitution.  The 10th Amendment provides that "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."  
The vast majority of governmental powers have rested with the states.  There is no question that a state government can require people to purchase a product—auto insurance, bike helmets, dog collars, health insurance, and anything a state or local municipality wants to require under its "police power". 
But Obamacare is the action of the federal government. They can only act if the Constitution authorized them to act in this particular field.
One of the powers specifically granted to Congress was the "Commerce Clause," which provides that Congress shall have power "To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes."  In the earliest case concerning this power, the Supreme Court ruled invalid New York's attempt to grant a steamboat monopoly to Robert Fulton—finding that the commerce clause "comprehends navigation, within the limits of every State in the Union; so far as that navigation may be, in any manner, connected with 'commerce with foreign nations, or among the several States.'" 
For the next 100 years, the Supreme Court cases on the Commerce Clause found that certain commercial activities such as "production," "manufacturing," and "mining" were within the province of state governments, and thus were beyond the power of Congress under the Commerce Clause. 
During the Great Depression in the 1930's, President Franklin Roosevelt introduced various government programs to try to deal with the economic crises at the time.  The Supreme Court struck down a host of those laws by a split vote.  Roosevelt proposed to expand the Court to up to 15 members—which would have permitted him to appoint six new members and so capture the majority of the court.  That bill was defeated, but one justice had an ideological change of heart in a 1937 case upholding a Washington state minimum wage law, and thereafter the Court did not strike down any more New Deal legislation as a violation of the Commerce Clause. 
In the 1960's, the Congress passed much Civil Rights legislation, using the commerce clause as its authority, and the Court backed it up to the extreme, ruling in 1969 that Congress could prohibit discrimination in the snack bar of the Lake Nixon Club in Little Rock, Arkansas, that denied membership to blacks.  The reasoning? The hot dog and hamburger buns. Their "principal ingredients going into the bread were produced and processed in other States".  Commerce between the states. Congress was straining to find a rationale to compel this result, and so the original conception of the Commerce Clause was pushed to its extreme limit. When the only tool in your toolbox is a hammer, every problem becomes a nail. This was the Commerce Clause at its highest water mark, the tool that could be used to force recalcitrant states into line on civil rights legislation.
In those cases, arguably Congress was regulating items and services that were put into the stream of commerce at the initiative of private individuals and businesses. But Congress had never taken the argument to the point where it required people to buy a product. The Obamacare law stands at that gate.  The argument is that the free riders affect commerce by not participating in the purchasing end of commerce. Because this inactivity is "commerce," it can be regulated.  Part of that regulation can include forcing people to buy a product that arguably they don't want or need. 
The problem here is one of outer limits. By that rationale, if you don't buy any product, you affect commerce, and so you can now be forced to buy any product if Congress so chooses. Auto industry in a slump? Everyone must buy a Chrysler.  Housing market in a downturn? Everyone must buy a house. Solyndra solar batteries not selling well?  Everyone must buy one for their home. Unions in decline? Everyone must buy only union products.
If once you pass through this gate—this reasoning that by not participating in commerce you are affecting commerce, then there are no longer any limits on what Congress can do.  And when Congress chooses to act, the individual states are foreclosed from acting in that area—they are pre-empted in that field. 
Our Constitution was set up as a check on government power by giving the federal government only certain enumerated powers. But when Congress can do virtually anything on the basis of the Commerce Clause, then we no longer have a government of limited powers, but one of all encompassing powers. The people who love well-meaning government intervention in their lives are willing to live in this brave new world. The people who are distrustful of government power are unwilling to believe this is in their best interests to let this horse out of the barn. 
Justice Marshal's staked out the Court's role in 1803, finding that "It is emphatically the province and duty of the judicial department to say what the law is."  That is where this case stands today.  The case before the Supreme Court is not about whether these nine men and women have a personal opinion about whether Obamacare is a good idea or a bad idea. 
They don't judge based on whether it is a good and worthy law that will actually do what it is intended to do, or whether it is a well meaning but poorly executed attempt to control health care costs. The issue is federalism—what are the limits of federal power? They will judge based on whether they believe that Congress has gone right to the edge or beyond it, by pushing the Commerce Clause interpretation to its limits and perhaps past those limits. 
We live with a system of constitutional checks and balances. This case has wound its way up to our highest court. They have heard extensive arguments from interested parties.  The decision had been made, and the opinions have been written.  The decision is expected to be announced this Thursday. 
These men and women on the Court have endured enormous scrutiny of their lives and their work prior to being appointed to the Court. They have lifetime appointments, and so don't need to be influenced by how this will play out in their next re-election bid.  They have the freedom to do what they think is right, and what they think is best for the country. They are playing the role that they are supposed to play in the system. 
Reasonable people can have honest differences in their views. The Court has heard and decided over 75 cases this term, and there are only a handful where they have lined up in the ideological lockstep that is attributed to them.  The diversity of thought in the opinions is surprising when you actually look at each case rather than reading the pundits. This case is likely to be a close call.
But even the Court's 5-4 decisions are a sign of a diversity of intellectual views in a functioning democracy. It would be frightening if every Supreme Court case was decided by a 9-0 vote.  So when viewing the results in this case, let's let the Court do its job, and then let us as citizens accept that decision without denigrating the people who have the very difficult task of making that decision. 
Our system has worked well for over 200 years, because after each case, and each election, the losers and the winner traditionally shake hands, accept the results, and we move forward.  We may have different political leanings and ideologies, and different conceptions about the role of government in our lives.  But in this age of the 24-hour news cycle, hyper-partisan news outlets, information overload, and a proclivity to jump to conclusions rather than reason your way there, we seem to be losing sight of the fact that we have a system that works well. 
It is built on compromise and on accepting the will of the majority, while protecting the rights of the minority. Our system has endured for a long time because our forefathers have played their part as citizens and accepted the results, and moved forward. 
If you disagree, you can work for change, you can urge others with the force of your logic, but do so by presenting better ideas, rather than simply berating those with whom you disagree and questioning their motives. Engage in civil discourse.
Do the hard work of being an educated and thoughtful citizen rather than simply chanting with the mob of your choice.  Mob rule is the antithesis of democracy. If you feed one you will starve the other. That should be an easy choice for those who value our democratic ideals.  

Monday, April 16, 2012

2016 Income Tax returns due by April 18, 2017. Need an extension?


2016 Federal income tax returns are due by April 18, 2017.  April 15th, the usual day, falls on a Saturday, so the deadline automatically extends till Monday.  Monday is a holiday in Washington DC, Emancipation Day, commemorating the freeing of slaves in the District of Columbia.  And so Tax Day moves to Tuesday, April 18th.  

If three days extra time is not enough for you to get your taxes done, then you are permitted to file for an automatic extension.  You estimate and pay what you think is due, and file a simple extension form, and then you have an additional six months, until October 15th, to get your final federal return done.  

Pennsylvania is following the federal lead, even though the DC holiday is not a Pennsylvania holiday.  Pennsylvania income tax returns for 2016 are due April 18th too.  

For more information and extensions for filing and paying, here are tips and links from the IRS:

If you need more time to file your return, you can get an automatic six-month extension of time to file from the IRS.  You must file for an extension by the April 18 deadline.  An extension will give you extra time to get your paperwork to the IRS, but it does not extend the time you have to pay any tax due. You will owe interest on any amount not paid by the deadline, plus you may owe penalties. To get an extension:

• IRS Free File - Traditional Free File and Free File Fillable Forms can both be used to file an extension for FREE.  Access the Free File page at www.irs.gov.

• IRS e-file - Use IRS e-file to request an extension by using tax preparation software on your own computer or by going to a tax preparer.

• Form to File - Mail in IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. It must be postmarked by April 17, 2012.

Taxpayers that are ready to file their returns and those that have already filed and need to pay a tax bill have payment options:

• E-file - File electronically and authorize an electronic funds withdrawal via tax preparation software or a tax professional.

• Phone - Pay by phone or online using a credit card.

• Mail - Pay by check or money order made payable to the “United States Treasury.” Be sure to include your name, address, Social Security number listed first on the tax form, daytime telephone number, tax year and form number. Complete and include Form 1040-V, Payment Voucher, when mailing your payment to the IRS.

If you owe tax with your federal tax return, but can’t afford to pay it all when you file, the IRS has options to help you keep interest and penalties to a minimum. File your return on time and pay as much as you can with the return, then:

• Request an installment agreement - Use the Online Payment Agreement application at www.irs.gov or by file Form 9465, Installment Agreement Request with your return. The IRS charges a user fee to set up your payment agreement.

• Additional time to pay - You may request a short additional time to pay your tax in full using the Online Payment Agreement application on www.irs.gov. Taxpayers who request and are granted an additional 120 days to pay the tax in full generally will pay less in penalties and interest than if the debt were repaid through an installment agreement over a greater period of time. There is no fee for this short extension of time to pay.

• Extension of time to pay - Qualifying individuals may request an extension of time to pay and have late payment penalties waived as part of the IRS Fresh Start initiative. To see if you qualify visit www.irs.gov and get Form 1127-A, Application for Extension of Time for Payment.  This application must be filed by April 18, 2017.

More information on filing for an extension and making tax payments can be found at www.irs.gov.

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Friday, March 23, 2012

IRS Tax Tip 2012-57: Deducting Charitable Contributions: Eight Essentials



Here are eight essential issues to know when dealing with charitable deductions on your income tax return, all courtesy of the IRS and its latest Tax Tips:

Donations made to qualified organizations may help reduce the amount of tax you pay.  The IRS has eight essential tips to help ensure your contributions pay off on your tax return.

1. If your goal is a legitimate tax deduction, then you must be giving to a qualified organization. Also, you cannot deduct contributions made to specific individuals, political organizations or candidates. See IRS Publication 526, Charitable Contributions, for rules on what constitutes a qualified organization.

2. To deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A. If your total deduction for all noncash contributions for the year is more than $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return.

3. If you receive a benefit because of your contribution such as merchandise, tickets to a ball game or other goods and services, then you can deduct only the amount that exceeds the fair market value of the benefit received.

4. Donations of stock or other non-cash property are usually valued at the fair market value of the property. Clothing and household items must generally be in good used condition or better to be deductible. Special rules apply to vehicle donations.

5. Fair market value is generally the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.

6. Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization and the date and amount of the contribution. For text message donations, a telephone bill meets the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution and the amount given.

7. To claim a deduction for contributions of cash or property equaling $250 or more, you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash, a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more.

8. Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which generally requires an appraisal by a qualified appraiser.

For more information on charitable contributions, refer to Form 8283 and its instructions, as well as Publication 526, Charitable Contributions. For information on determining the value of donations, refer to Publication 561, Determining the Value of Donated Property. All are available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

Wednesday, January 18, 2012

2011 Tax Returns: Everyone is Eligible to Free File!


Here is news straight from the horse's mouth - our friends at the IRS
(IRS Tax Tip 2012-11):
Everyone can prepare and e-file their federal tax returns for free using the IRS Free File Program. Free File is offered through a public-private partnership between the Internal Revenue Service and tax software companies. Free File can help you do your taxes fast; it’s safe and it doesn’t cost anything.
Free File offers two options: easy-to-use software or online fillable forms.
Free File software is for taxpayers who earn $57,000 or less
Nearly 100 million Americans – that’s 70 percent of the nation’s taxpayers – can use the free brand-name software and secure e-filing offered by private-sector companies. Software products also are available in Spanish. Each company sets its eligibility requirements, generally based on income, age or state residency. However, if your adjusted gross income was $57,000 or less in 2011, you will find at least one tax software product to use.
Here’s how it works: You must access Free File through the IRS website. At www.irs.gov/freefile, there’s an online tool which allows you to give a little information about yourself then guides you to the software for which you are eligible. Or, you can review a complete list of companies and their offerings and make a selection.
Once you select a software product, you will be directed away from the IRS website and onto that company’s website. There, the software will generally offer you a step-by-step guide through the tax preparation process.
Free File does all the hard work. You don’t need to be a tax expert; the software will help find tax breaks, such as the Earned Income Tax Credit, that you may be due. The software asks the questions; you supply the answers. It will find the right tax forms and do the math. Free File has a high satisfaction rate among its users, 98 percent recommend it to others. The IRS issues refunds to 98% of electronic filers by direct deposit within 14 days, if there are no problems, and some may be issued in as few as 10 days.
A word about security: All Free File companies use the latest in secure technology. The safety of taxpayer information is everyone’s priority. Thirty-six million taxpayers have safely and securely used Free File since it started in 2003.
Some companies provide state tax return software – sometimes for free and sometimes for a fee. Some states also have a relationship with the Free File Alliance; those states are listed on the companies’ websites.
Free File Fillable Forms Is Another Free Option
For people who make more than $57,000 or who are comfortable preparing their own tax return, the IRS offers Free File Fillable Forms. It also must be accessed through www.irs.gov/freefile. There is no software assistance with Free File Fillable Forms, but it does basic math calculations for you. It does not support state income tax returns, but it is perfect for the true do-it-yourself taxpayer who prefers paper tax returns. Free File Fillable Forms also offers free e-filing.

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