ARE YOU ELIGIBLE FOR A TAX CREDIT?

Issue Number:   TT-2007-43

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ARE YOU ELIGIBLE FOR A TAX CREDIT?

Taxpayers should consider claiming tax credits for which they might be eligible when completing their federal income tax returns.  A tax credit is a dollar-for-dollar reduction of taxes owed. Some credits are refundable – taxes could be reduced to the point that a taxpayer would receive a refund rather than owing any taxes. Taxpayers should consider their eligibility for the credits listed below: 

  • Telephone Excise Tax Refund is a one-time refund for anyone who paid federal excise taxes for long-distance telephone service billed after Feb 28, 2003 and before Aug 1, 2006.  A refund of previously collected telephone excise taxes may be requested on your 2006 federal income tax return. The refund request can be based on the actual tax paid or a standard refund amount ranging from $30 to $60.  For more information, go to the IRS website at IRS.gov and link to Telephone Excise Tax Refund.
  • The Earned Income Tax Credit is a refundable credit for low-income working individuals and families.  Income and family size determine the amount of the credit.  For more information, see IRS Publication 596, Earned Income Credit.
  • The Child and Dependent Care Credit is for expenses paid for the care of children under age 13, or for a disabled spouse or dependent, to enable the taxpayer to work or look for work. For more information, see IRS Publication 503, Child and Dependent Care Expenses.
  • The Child Tax Credit is for people who have a qualifying child. The maximum amount of the credit is $1,000 for each qualifying child. This credit can be claimed in addition to the credit for child and dependent care expenses. For more information on the Child Tax Credit, see IRS Publication 972, Child Tax Credit.
  • Adoption Credit: Adoptive parents may qualify for a tax credit of up to $10,960 for qualifying expenses paid to adopt an eligible child. The credit may be allowed for the adoption of a child with special needs even if you do not have any qualifying expenses. For more information, see the instructions for Form 8839, Qualified Adoption Expenses.
  • Credit for the Elderly or the Disabled: This credit is available to individuals who are either age 65 or older or are under age 65 and retired on permanent and total disability, and who are U.S. citizens or residents. There are income limitations. For more information, see IRS Publication 524, Credit for the Elderly or the Disabled.

There are other credits available to eligible taxpayers. Since many qualifications and limitations apply to the various tax credits, taxpayers should carefully check the instructions for Form 1040, the listed publications, and additional information that is available on the IRS Web site at IRS.gov. IRS forms and publications are also available by calling 800-TAX-FORM (800-829-3676).

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VOLUNTEER TAX RETURN PREPARATION

Issue Number:   TT-2007-42

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VOLUNTEER TAX RETURN PREPARATION

Are you puzzled by the tax law and which credits and deductions you can take? If so, then why not look into the free, IRS-sponsored, volunteer tax return preparation services? In addition to tax preparation, many also offer free electronic filing of tax returns.  

  • Volunteer Income Tax Assistance offers free tax help to people whose incomes are $39,000 or less. Volunteers sponsored by various organizations receive training to prepare basic tax returns in communities across the country. VITA sites are generally located at community and neighborhood centers, libraries, schools, shopping malls and other convenient locations.
  • Tax Counseling for the Elderly provides free tax help to people aged 60 and older. Trained volunteers from non-profit organizations provide free tax counseling and basic income tax return preparation for senior citizens. Volunteers who provide tax counseling are often retired individuals associated with non-profit organizations that receive grants from the IRS.  
  • AARP Tax-Aide counseling, part of the IRS-Sponsored TCE Program, operates nearly 9,000 sites nationwide during the filing season. Trained and certified AARP Tax-Aide volunteer counselors can help people of low-to-moderate income with special attention to those aged 60 and older. To locate the nearest AARP Tax-Aide site, call 888-227-7669 or visit AARP’s Web site at www.aarp.org

Filing your taxes can be easy and free. Take advantage of a volunteer assistance program in your area to receive free income tax preparation assistance. Locations and hours of operation are often available through city information hotlines and local community organizations. Local volunteer tax preparation site information is also available by calling the IRS volunteer site hotline at 800-906-9887. This hotline is available through April 30, 2007.

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FREE TAX HELP FOR THE MILITARY

Issue Number:   TT-2007-40

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FREE TAX HELP FOR THE MILITARY

If you, or your spouse, are a member of the military, you may be eligible to receive free assistance with the preparation and filing of your federal tax return. The U.S. Armed Forces participate in the Volunteer Income Tax Assistance Program. The Armed Forces Tax Council oversees the operation of the military tax programs worldwide, and serves as the main conduit for outreach by the IRS to military personnel and their families. The AFTC consists of tax program coordinators for the Marine Corps, Air Force, Army, Navy and Coast Guard.

Military-based VITA sites provide free tax advice, tax preparation, return filing and other tax assistance to military members and their families. The volunteer assistors are trained to address military-specific tax issues, such as combat zone tax benefits.

Military commanders support the program by detailing members of the military to prepare returns and by providing space and equipment for tax centers. The IRS supports these efforts by providing tax software and training.

To receive this free assistance, you should bring the following records to your military VITA site:

  • Valid photo identification
  • Social Security cards for you, your spouse and dependents or a social security number verification letter issued by the Social Security Administration
  • Birth dates for you, your spouse and dependents
  • Current year’s tax package, if you received one
  • Wage and earning statement(s) — Form W-2, W-2G, 1099-R
  • Interest and dividend statements (Forms 1099)
  • A copy of last year’s federal and state tax returns, if available
  • Bank routing numbers and account numbers for direct deposit
  • Total amount paid for day care
  • Day care provider’s identifying number
  • Other relevant information about income and expenses

If your filing status is Married Filing Jointly and you wish to file your tax return electronically, both you and your spouse should be present to sign the required forms. If it isn’t possible for both to be present, a valid power of attorney that allows tax preparation can be used to sign and file the return.

For more information, review IRS Publication 3, Armed Forces’ Tax Guide, available on the IRS Web site at IRS.gov or order a free copy by calling 800-TAX-FORM (800-829-3676).

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GIFT TAXES

Issue Number:   TT-2007-39

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GIFT TAXES

If you gave any one person gifts in 2006 that valued at more than $12,000, you must report the total gifts to the Internal Revenue Service and may have to pay tax on the gifts. 

The person who receives your gift does not have to report the gift to the IRS or pay gift or income tax on its value.

Gifts include money and property, including the use of property without expecting to receive something of equal value in return. If you sell something at less than its value or make an interest-free or reduced-interest loan, you may be making a gift.

There are some exceptions to the tax rules on gifts. The following gifts do not count against the annual limit:

  • Tuition or Medical Expenses that you pay directly to an educational or medical institution for someone’s benefit
  • Gifts to your Spouse
  • Gifts to a Political Organization for its use
  • Gifts to Charities

If you are married, both you and your spouse can give separate gifts of up to the annual limit to the same person without making a taxable gift.

For more information, get the IRS Publication 950, Introduction to Estate and Gift Taxes, IRS Form 709, United States Gift Tax Return, and Instructions for Form 709. They are available at the IRS Web site at IRS.gov in the Forms and Publications section or by calling 800-TAX-FORM (800-829-3676).

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IRS TOLL-FREE HELP

Issue Number:   IR-2007-38

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IRS TOLL-FREE HELP

Free tax help from the IRS is just a phone call away. The IRS provides various services through its toll-free telephone numbers.  Some of these services are available 24 hours a day.

  • Ask questions about your tax return. You can call the IRS Tax Help Line for Individuals at 800-829-1040, to get answers to your federal tax questions.
  • Order forms and publications. Call 800-TAX-FORM (800-829-3676). Copies of forms, publications and other helpful information are also available around-the-clock at the IRS Web site at www.irs.gov.
  • Check the status of your refund.  Call the Refund Hotline at 800-829-1954. You will need to know your social security number, filing status and the exact whole-dollar amount of your expected refund. TeleTax, the automated refund line, at 800-829-4477 is available around the clock and will also let you check the status of your income tax refund. Automated refund information is generally available four to five weeks after you have filed your tax return. You can also check the status of your refund at IRS.gov by clicking on Where’s My Refund? This service is available 24 hours a day, seven days a week. 
  • Recorded tax information:  The TeleTax line at 800-829-4477 has recorded messages covering more than 100 tax topics. Topics include items such as Who Must File?, Highlights of Tax Changes, Education Credits, Individual Retirement Accounts, Earned Income Tax Credit, What to Do if You Can’t Pay Your Tax and more.
  • Hearing-impaired individuals with access to TTY/TDD equipment.  Call 800-829-4059 to ask questions or to order forms and publications. This number is answered only by TTY/TDD equipment.

The IRS Tax Help Line, Refund Hotline, and the TTY/TDD numbers are available from 7:00 a.m. to 10:00 p.m. (local time) on weekdays. Alaska and Hawaii will follow Pacific Time.  

The services offered on the IRS toll-free lines are also available 24 hours a day 7 days a week on the Internet at IRS.gov.

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TAX RATES FOR A CHILD’S INVESTMENT INCOME

Issue Number:   TT-2007-37

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TAX RATES FOR A CHILD’S INVESTMENT INCOME

Part or all of a child’s investment income may be taxed at the parent’s rate rather than the child’s rate. Because a parent’s taxable income is usually higher than a child’s income, the parent’s top tax rate will often be higher as well.

This special method of figuring the federal income tax only applies to children who are under the age of 18. For 2006, it applies if the child’s total investment income for the year was more than $1,700. Investment income includes interest, dividends, capital gains, and other unearned income.

To figure the child’s tax using this method, fill out Form 8615, Tax for Children Under Age 18 With Investment Income of More Than $1,700, and attach it to the child’s federal income tax return. 

Alternatively, a parent can, in many cases, choose to report the child’s investment income on the parent’s own tax return. Generally speaking, this option is available if the child’s income consists entirely of interest and dividends (including capital gain distributions) and the amount received is less than $8,500.  However, choosing this option may reduce certain credits or deductions that parents may claim.

These special tax rules do not apply to investment income received by children who are age 14 and over. In addition, wages and other earned income received by a child of any age are taxed at the child’s normal rate.

More information can be found in IRS Publication 929, Tax Rules for Children and Dependents. This publication and Form 8615 are available on the IRS Web site at IRS.gov in the Forms and Publications section. You may also order them by calling the IRS at 800-TAX-FORM (800-829-3676).

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INCOME FROM FOREIGN SOURCES

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TAXES ON EARLY DISTRIBUTIONS FROM RETIREMENT PLANS

Issue Number:   TT-2007-35

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TAXES ON EARLY DISTRIBUTIONS FROM RETIREMENT PLANS

Payments that you receive from your IRA or qualified retirement plan before you reach age 59½ are normally called ‘early’ or ‘premature’ distributions. These funds are subject to an additional 10 percent tax and must be reported to the IRS.

There are a number of exceptions to the age 59½ rule if you make an early withdrawal. Some exceptions apply only to IRAs, some only to qualified retirement plans, and some to both.

In addition to the 10 percent tax on early distributions, you generally must include the distribution in your income. If you received a distribution from an IRA, other than a Roth IRA, to which you made any nondeductible contributions, the portion of the distribution attributable to those contributions is not taxed. If you received a qualified distribution from a Roth IRA, none of the distribution is taxed.  If you received a distribution from any other qualified retirement plan, the portion of the distribution attributable to your cost, not including pre-tax contributions, is not taxed.

A ‘rollover” is a way to avoid paying tax on early distributions. Generally, a rollover is a tax-free transfer of cash or other assets from an IRA or qualified retirement plan to another eligible retirement plan. An eligible retirement plan is a traditional IRA, a qualified retirement plan, or a qualified annuity plan. You must complete the rollover within 60 days after the day you received the distribution. The amount you roll over is generally taxed when the new plan pays you or your beneficiary.

For more information see IRS Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans), Publication 575, Pension and Annuity Income, or Publication 590, Individual Retirement Arrangements (IRAs), available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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TAX FACTS ABOUT CAPITAL GAINS AND LOSSES

Issue Number:   TT-2007-34

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TAX FACTS ABOUT CAPITAL GAINS AND LOSSES

Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. When you sell a capital asset, the difference between the amounts you sell it for and your basis, which is usually what you paid for it, is a capital gain or a capital loss. While you must report all capital gains, you may deduct only capital losses on investment property, not personal property.

Here are a few tax facts about capital gains and losses:

  • Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040.
  • Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.
  • Net capital gain is the amount by which your net long-term capital gain is more than your net short-term capital loss.
  • The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income and are called the maximum capital gains rates. For 2006, the maximum capital gains rates are 5%, 15%, 25% or 28%.
  • If your capital losses exceed your capital gains, the excess is subtracted from other income on your tax return, up to an annual limit of $3,000 ($1,500 if you are married filing separately).

For more information about reporting capital gains and losses, get Publication 17, Your Federal Income Tax, and Publication 550, Investment Income and Expenses, available on the IRS Web site at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

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GAMBLING INCOME AND LOSSES

Issue Number:   TT-2007-33

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GAMBLING INCOME AND LOSSES

Gambling winnings are fully taxable and must be reported on your tax return. Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse and dog races and casinos, as well as the fair market value of prizes such as cars, houses, trips or other noncash prizes.

Depending on the type and amount of your winnings, the payer might provide you with a Form W-2G and may have withheld federal income taxes from the payment.

Here are some general guidelines on gambling income and losses:

  • Reporting winnings: The full amount of your gambling winnings for the year must be reported on line 21, Form 1040. You may not use Form 1040A or 1040EZ.
  • Deducting losses:  If you itemize deductions, you can deduct your gambling losses for the year on line 27, Schedule A (Form 1040). You cannot deduct gambling losses that are more than your winnings.

It is important to keep an accurate diary or similar record of your gambling winnings and losses. To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses.

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

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