Ask the Expert
Ask the Expert
Click on a Topic below to view some of our most frequently asked questions.
1st Time Homebuyer Credit
Arizona Minimum Wage
Capital Gains
Charitable Donations
Church Tax Exemption
Claiming Dependents
Collectibles
Coverdell ESA
CP2000 Letter from IRS
Deductions - Attorney Fees
Deductions - Dependant Care
Deductions - Domestic Production Incentive Tax
Deductions - Medical
Deductions - Mortgage Insurance
Deductions - Nursing Expenses for parents
Deductions - School expenses
Deductions - Section 179
Dependent Deductions
Dividends
Employer Identification Number (EIN)
Employers - What information do I need
Estate Tax
Extension Deadlines
Federal Estimated Tax Payments
Federal Minimum Wage
Flat Rate Tax
Foreign Income
Fraud - Who is in trouble
Gift Tax
Holiday Gift Tax
How long to keep copies of returns
How much do people pay
I under-with-held what now
Incorrect W-2's
IRA Information
ITIN
Kiddie Tax
Lawsuit Settlements
Missing W-2s
Nanny Tax
Non-Profits Filing Requirements
Non-Profit - Obtaining Status
Offer in Compromise
Origin of Federal Taxes
Partnerships
Payment plan with the IRS
Payroll Tax Requirements
Sale of your Home
Scams
Standard Mileage Rates
Tax Filing Deadline
Tax Programs
Tax Stimulus Check
Veterans' CWT
Where's my Refund
1st Time Homebuyer Credit
Q: The new tax credit for 1st-time homebuyers applies to homes purchased when?
A: To qualify, the homes must be purchased between April 8, 2008 and before July 1, 2009.
Q: How much is the credit, and how is it calculated?
A: It is 10% of the purchase price of the home, up to a maximum credit of $7,500 for married, or $3,750 for single.
Q: Who qualifies as a 1st-time homebuyer for the new tax credit?
A: If you owned a home at any time during the last 3 years, you do not qualify. If you didn’t own a home within 3 years of your purchase, you may qualify.
Q: Are there income limits on this 1st time homebuyer credit?
A: You guessed it! The income phase-out range for married is $150,000 - $175,000; and it’s $75,000 - $90,000 for single. If over the $175,000 or $90,000 limit, you do not qualify.
Q: Does the 1st time homebuyer credit just reduce your taxes owed, or do you get money back?
A: It is a refundable credit. If you owed no tax, and are married, you may get the full $7,500 as a tax refund.
Q: Is the 1st time homebuyer credit really a credit, or is it just a loan that must be repaid?
A: While classified as a credit, it is actually an interest-free loan to be paid back over 15 years. If you get $7,500 on your 2008 return, your annual tax for 2010 - 2024 is increased by $500.
Q: Are there other limitations besides income to qualify for the 1st time homebuyer credit?
A: Absolutely. Before you buy a home, counting on this tax credit, please call us to make certain you do qualify for the credit.
Q: Is the 15-year payback on this credit/loan subject to any limitations!
A: Yes. If you sell the home, stop living in it or convert it to a rental, the entire balance of the payments are due with your tax return at the end of the year that any of these events occur.
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Q: What is the new Arizona minimum wage, and when does it take effect?
A: The new minimum wage is $6.75 per hour. It takes effect January 1, 2007. It became $6.90 on January 1, 2008.
Q: What is the minimum wage for employees who regularly receive tips or gratuities?
A: It is $3.75 per hour. However, if an employee's tips & wages do not equal the minimum wage of $6.75 per hour, the employer must make up the difference. It Became $3.90 on January 1, 2008.
Q: Are any employers exempted from paying the new Arizona minimum wage of $6.90?
A: Yes. The state of Arizona, the United States and small businesses with less than $500,000 gross income, who are not subject to the Federal Fair Labor Standards Act.
Q: Does the new minimum wage apply to part-time employees?
A: Yes, it applies to all employees, regardless of how many (or few) hours they work.
Q: Does the New Arizona minimum wage apply to babysitters in your home?
A: According to the law, a person who is employed performing babysitting services on a casual basis in your home in exempted.
Q: What about parents who employ their own children? Are they required to pay them the minimum wage?
A: A person who is employed by a parent or a sibling does not have to be paid the $6.90 minimum wage.
Q: What are the penalties for failing to pay the new Arizona minimum wage of $6.90?
A: Penalties = $250 - $1,000 per violation, and must pay employee the balance of wages owed, plus interest, plus double the underpaid wages.
Q: Will this new minimum wage be increased on any kind of a schedule?
A: Yes. Arizona's minimum wage will be raised on Jan. 1st of each year by the calculated increase in cost of living.
Q: Have the lower capital gain tax rates been extended?
A: Yes - through 2010. Non-corporate taxpayers' maximum capital gains rates remain at 15%
Q: Who qualifies for the 5% capital gains rate they keep mentioning?
A: Non-corporate taxpayers whose ordinary income is taxed at a 10% or 15% rate qualify for a 5% capital gains rate for 1007, and a 0% rate for tax years after 2007.
Q: What's the new rule about deductions for donated clothing & household items to a charity?
A: For donations made after 8-17-06, no deduction is allowed for clothing or household items not in good used condition or better.
Q: What if the donated item of furniture is very valuable, but needs some restoration
A: IRS will require to obtain a qualified appraisal to verify the value you have claimed as a charitable deduction for the item.
Q: Is there a new requirement regarding monetary charitable contributions?
A: Yes. Deductions for any cash, check or other monetary contributions will be disallowed without a bank record or a receipt from the donee charity.
Q: What minimum gift amount is exempted from this verification requirement?
A: None. There is now no de minimis exception to any gift of money, regardless of the amount.
Q: How will the new contributions law affect church goes who contribute cash each week?
A: Unless they contribute that cash in an envelope provided by the church, with their name or number on it, no tax deduction can be claimed.
Q: How must churches report these cash gifts to donors?
A: After the end of the year, churches must send a statement now to all contributors, identifying the date & amount of each contribution.
Q: How much in cash contributions to churches or charities can I now deduct without a receipt?
A: None. The IRS is now requiring receipts from qualifying charitable organizations for any size contribution.
Q: Will a cancelled check be accepted by the IRS?
A: Yes, a cancelled check or bank statement with the charity’s
name, the date and the amount will be accepted — as long as it
was a genuine donation, not a purchase of services or goods.
Q: Can churches & charities lose their tax-exempt status with political activity?
A: Yes. The IRS can revoke their tax-exempt status for engaging in prohibited political activity.
Q: How common of a problem is this?
A: According to the IRS, nearly 75% of the churches and tax-exempt charities they have reviewed so far engaged in prohibited political activity during the 2004 election season.
Q: What kinds of political activity can cost a church or charity its tax-exempt status?
A: 1. Distribution of printed materials encouraging members to vote for a particular candidate.
2. Ministers' use of their pulpits to endorse or oppose candidates.
3. Donations of cash contributions to candidates/ campaigns.
4. Giving of preferential treatment to some candidates by permitting them to speak at functions.
Q: If I pay all of the expenses for my girlfriend's children who live with me, can I file as Head of Household?
A: No, because those children are not related to you. You would have to adopt them - or get married, and then file as Married Filing Jointly.
Q: If I don't adopt them or get married, can I still claim them as my dependents?
A: Yes. If they lived with you all year and were supported by you, they don't have to be related to you to be your dependents.
Q: My girlfriend and her daughter live with me. She has no income. Can I claim them on my return?
A: If they lived with you the entire year, you can claim them as your dependents.
Q: Can I get Earned Income Credit with my girlfriend's daughter, since I supporter her?
A: No, the child would have to be your child, either by birth or marriage, in order for you to qualify for Earned Income Credit.
Q: Can a sibling claim a brother or sister as a dependent if the parents don't?
A: The elimination of the support test for claiming a dependency exemption can technically create a small loophole which we refuse to use.
Q: Why would you not allow a client to claim a dependent under this loophole?
A: We do not believe it in the intent of the law and that taking the deduction would ultimately result in fraudulent tax preparation.
Q: Collectibles are taxed at what rate when they are sold?
A: Brace Yourself! They are taxed at a special 28% rate - nearly double the current 15% rate for other long-term investments.
Q: Is it "like-kind exchange" permitted for collectibles?
A: Yes. Such 1031 exchanges, often used for real estate, can also be used to swap stamps, coins, gems and other collectibles.
Q: Are contributions to Education Saving Accounts deductible?
A: No. The tax benefit is on the other end. If used for qualified educational purposes, the earnings in the ESA are tax-free.
Q: How much can be contributed to a Coverdell ESA?
A: $2,000 per year can be contributed to a Coverdell Education Savings Account in a calendar year. More than that can be contributed to a 529 Plan, however.
Q: Up to what age can contributions be made to an Education Savings Account?
A: Contributions can be made to a Coverdell ESA only up to age 18.
Q: What happens in funds from a Coverdell ESA are with-drawn and not used for qualifying education expenses?
A: A Form 1099-Q is issued for withdrawals from an ESA, and the earnings on the principal become taxable income, reported on Line 21 of the Form 1040.
Q: If I received a CP2000 letter from the IRS and agree with it, do I have to amend my tax return?
A: No. A CP2000 letter is issued regarding income not reported on your return. If you agree with it, just check box "A", sign it and send them a check.
Q: If I disagree with a CP2000 letter I received, what should I do?
A: Respond in writing by the due date, include documentation to support your position and provide a contact number - or come see us for help.
Q: For taxable legal settlements, can you deduct the amount paid for attorneys?
A: Although a recent unanimous Supreme Court decision held that attorneys' fees must be included in the taxable income, Congress trumped that decision in October 2004.
Q: What did Congress do to provide relief?
A: The Tax Act of 2004 allows plaintiffs to net legal fees and court costs against the taxable portion of civil damages awards -- effective October 22, 2004.
Q: Does the cost of summer camp qualify for the dependent care tax credit?
A: Yes, in some cases. The IRS recently clarified this and said that specialized camps do qualify for the credit.
Q: What conditions must be met for summer camp tuition to qualify for the dependent care credit?
A: The child must be under 13, and the camp expenses must be incurred so the parents can work.
Q: Who is entitled to claim the new domestic production incentive tax deduction?
A: It is available to corporations, partnerships and LLCs, among other entities.
Q: What are the deductible percentages?
A: 6% for 2007 - of the lesser of (1) qualified production activities income (QPAI) for the tax year or (2) taxable income for the year, without regard to the deduction.
Q: Are there any limitations on the new domestic production incentive tax deduction?
A: Yes! The allowable deduction (6% in 2007) cannot exceed 50% of the taxpayer's Form W-2 wages for the year.
Q: What if you are paying everyone on 1099-MISC forms, instead of W-2s.
A: You would not get a production incentive deduction at all. Better consider switching to paying employees W-2 wages, and deal with the payroll taxes.
Q: Do I deduct on my 2007 or 2008 tax return my November hospital bill that I paid in January?
A: You would deduct the amount on your 2008 return. Medical expenses are deductible in the year paid, regardless of when they were incurred.
Q: What if I paid my hospital bill with a credit card? Does that change when I deduct the amount paid?
A: Yes it does. That is the exception. You deduct the amount for the year in which the bill was charged to your credit card - not when you paid your credit card charges.
Q: Is there a mortgage insurance deduction available for 2007 tax returns?
A: Yes, on Schedule A, line 13. However, the qualified premiums had to be paid in 2007, only for a contract issued in 2007 in association with home acquisition debt.
Q: Can I deduct the nursing home expenses I pay for my father?
A: Probably, assuming he is your dependent, and that he is there primarily for medical care.
Q: When are such expenses not deductible?
A: If the person is in the nursing home for personal reasons, cost of actual medical care is deductible, but the cost of meals and lodging is not deductible.
Q: Is there a new form this year for claiming the tuition & fees deduction?
A: Yes. The new Form 8917 has to be used in conjunction with an entry on line 34 of Form 1040.
Q: What is the limit on Section 179 deductions for equipment purchases for 2007?
A: The dollar limit on Section 179 deductions for businesses has increased to $150,000 for 2007.
Q: What was the previous Section 179 limit?
A: For 2006, businesses were able to deduct up to $112,000. So this represents a $13,000 increase this year in the limit.
Q: What is the Section 179 deduction for small businesses for 2008?
A: The 179 deduction took a 95% increase for 2008, from $128,000 to $250,000 — reduced only when a business acquires more than $800,000.
Q: Can a business take the 1-year 50% depreciation in
addition to the Section 179 deduction?
A: Yes. For a $450,000 qualifying purchase, they could use 179
on $250,000, take $100,000 as 50% special depreciation, and
then take regular depreciation on the remaining $100,000.
Q: Is a signed Form 8332 required for a non custodial
parent to claim a child as a dependent?
A: The courts have generally enforced the
requirement to have a Form 8332 or other similar
statement, signed by the custodial parent.
Q: If a child resides with both parents an equal amount of
time, which parent gets the deduction for the child?
A: The tie-breaker rule states the deduction goes to the parent with the larger income. NOTE: New regs now base the time calculation on number of nights spent with parent -- not days.
Q: Can a custodial parent release to a non-custodial
parent the right to claim a child as a dependent?
A: Yes. The release of the exemption must name
the non-custodial parent and identify the years it
is to be effective (Form 8332 is recommended.)
Q: Can a signed Form 8332 be revoked by the custodial
parent?
A: Yes. The revocation must be presented in writing to the non custodial parent. It is not effective earlier than the year
following year the revocation is presented to the other parent.
Q: On my 1099-DIV, what is the difference between "Ordinary" and "Qualified" Dividends?
A: To be qualified dividends, the stock must be held for more than 60 days during a 120 day period, starting 60 days before the ex-dividend date.
Q: What difference does that make on what I will pay in income tax on those dividends?
A: Quite a bit. Ordinary dividends should cost you as much as 20% more than the income tax you will pay on qualified dividends.
Q: Do I need an Employer Identification Number (EIN) for my business if I have no employees?
A: If you are a sole proprietor with no employees, and are not required to file and pay excise taxes, you do not need to apply for an EIN.
Q: If I do need an EIN, how can I obtain one?
A: You can apply for an EIN on line (www.irs.gov) call the IRS (1-800-829-4933) or mail in a completed Form SS-4.
Q: With crack-downs on hiring illegal aliens, what must I secure from a prospective employee?
A: You must secure a Social Security Number (SSN) from each employee (an ITIN is not acceptable) and have them complete I-9, W-4, and A-4 forms.
Q: If I am hiring a person to do contract work for me, rather than as an employee, what do I need from them?
A: You will need to have a completed W-9 form, with a valid SSN, for all contract workers.
Q: What is the federal Estate Tax exemption for 2007?
A: The Estate Tax exemption is currently $2 million. It will remain at $2 million for 2008.
Q: When will the Estate Tax exemption be going up next?
A: For 2009, the exemption increases to $3.5 million, becomes unlimited for 2010, and then drops back to $1 million in 2011 - unless Congress acts in the meantime to change that.
Q: If a person renounces U.S. citizenship and moves to a desert island, will he be taxed?
A: Yes. A new tax law taxes any unrealized gain on his assets on the way out of the country at current market values (a “mark to market” tax).
Q: What if such an ex-citizen dies and has U.S. citizen heirs?
Is the inheritance tax-free, like it would be from a citizen?
A: No. That same new law requires that such an inheritance left
by an ex-citizen be taxed at U.S. gift tax rates — which are
currently 45%.
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Q: Has the extension time to file partnership and trust returns changed?
A: Yes. Extensions are reduced from 6 months to 5
months for extensions requested for Forms 1065,
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