Some Items to Check Before Filing Your Return

Here's a quick and dirty list of things that are commonly missed or done incorrectly, and should be checked before filing your return:

1. If you are self-employed and pay Medicare premiums, be sure to include the costs in the calculation of your self-employed health insurance deduction.
2. Bonus Depreciation:
• Is allowed only on new purchases;
• Items purchased between January 1 and September 8, 2010, are eligible for 50% bonus depreciation;
• Items purchased between September 9 and December 31, 2010, are eligible for 100% bonus depreciation;
• You can elect out of the bonus depreciation. You need to assess your business tax situation and determine if taking the bonus deprecation will be a waste in the current year. You may need the depreciation more in future years.
3. Schedule A, State Taxes - I have often seen a deduction taken for vehicle tax renewals. This tax is only deductible on Schedule A if is based on the value of the vehicle. If you see "Ad Valorem", this is the portion that is deductible. This applies to your property taxes as well. Non Ad Valorem taxes are not deductible.
4. Mortgage interest deduction is limited to the interest on $1,000,000 of home aquisition debt ($500,000 for MFS). Home equity debt is limited to interest on $100,000 ($50,000 for MFS). 
5. Before taking losses related to S-Corporations or Partnerships, it is CRITICAL that you have the basis to take the losses.
6. There are many opportunities for errors with rental properties, as well as some rule changes. I'll cover rentla properties in the next blog.

Form 941 News and Highlights

You have no doubt heard of the changes to the Form 941 and the filing.  I've compiled a list of the highlights you may want to pay attention to before filing this year.

• One of the biggest changes - and hopefully you are already aware of this change - the EMPLOYEE tax rate for social security withholding is 4.2%.  The "matching" EMPLOYER tax rate remains the same at 6.2%.  Medicare remains at 1.45% for both.
• Also note that wages subject to social security maxes out at $106,800.
• Advance payment of earned income credit is no longer available - as of December 31, 2010. 
• I can't resist some editorial comment on this:  While I understand there has been some abuse of the EIC, I fail to see how requiring families to wait until after the end of the year and filing their tax return will do anyone much good. Many folks are struggling to survive - to keep a roof over their heads and feed their families - without this reduction in their monthly income. Decreasing the monthly income of families will do nothing to help our continued failing economy. And worse, while the US Treasury has made an effort to stop lower income families from getting large refunds when the file the taxes because they've found the refunds get spent on unneeded luxury items rather than needed to sustain a household, this change will do nothing to assist in alleviating this concern.
• Your payroll tax payment MUST, I repeat MUST, be made via the Electronic Federal Tax Payment System (EFTPS). You can no longer take a paper coupon (Form 8109) to your bank with a check.

To enroll in EFTPS

Are Payments to Financially Distressed Homeowners Taxable?

According to an IRS ruling yesterday, Federal payments are NOT taxable to homeowners. That's good news for many taxpayers. This ruling doesn't come as a big surprise. The IRS has consistently ruled that assistance payments for general welfare from the federal government are not taxable. However, this ruling specifically addresses the HFA Hardest Hit Fund and the Emergency Homeowners' Loan Programs (EHLP). 

The HFA Hardest Hit Fund provides funds to states to assist in preventing avoidable foreclosures and to stabilize housing markets.  It's available in states where unemployment meets or exceeds the national average, or where housing prices have declined more than 20% from peak prices. Florida and Georgia are two of the nineteen states eligible for funding.

Part of the Dodd-Frank Wall Street Reform and Consumer Protections Act, the EHLP provides assistance to homeowners that have experienced a substantial reduction in income as a result of involuntary unemployment or underemployment due to adverse economic or medical conditions, and are at risk of foreclosure.

Notice 2011-14 recognizes that both of these programs promote general welfare, and therefore the payments made to or on behalf of a homeowner are excludable from the taxpayer's gross income. However (and there's always a "however"), the homeowner's Form 1098, Mortgage Interest Statement, will reflect the total of all payments. Taxpayers need to be aware they cannot deduct any amounts on those statements that were not paid by their own funds, including interest, property taxes and mortgage insurance.

In the state of Florida, see Florida Hardest Hit for more information.

First Time Homebuyer Credit - Helpful Hints

If you're planning on claiming the First Time Homebuyer Credit when filing your 2010 tax return, there a few things to keep in mind:

• You must have purchased or entered into a contract to purchase your home by April 30, 2010.
• The definition of a first time homebuyer is you did not own a principal residence for three years prior to the date of purchase.
• The definition of a long term resident homebuyer is you must have lived in the same principal residence for five consecutive years during the eight year period prior the purchase date.
• The maximum credit for the first time homebuyer is $8,000, or $4,000 for individuals who are married filing separate.
• The maximum credit for the long term resident homebuyer is $6,500, or $3,250 for individuals who are married filing separate.
• Claiming the credits will require that you file a paper return, along with Form 5405 and supporting documents, such as properly executed settlement statement, copy of dated certificate of occupancy for new construction homes or retail sales contract for a mobile home purchase.
• In the case of the long term resident credit, it is suggested you attach copies of Form 1098, Mortgage Interest Statement and/or property tax records.

NOTE:  Members of the military have an extra year to purchase a qualifying residence.