TurboTax Blog

Summer Child Care Questions

During the school year, depending on their age, your children are in after-day care at the local center or spend a couple of hours at home alone in the afternoon.  You keep the monthly child care center’s bills in your tax files for the child care tax credit on your next year’s tax return.

Now it is summer and you can’t leave the kids home alone all day while you work. It’s a mixed calendar. The first few weeks the kids are attending the local summer camp, for a couple of weeks they’ll be at the overnight camp a few hours away from home, and then the rest of the summer, your neighbor will be the “baby” sitter at your home. Are these summer expenses eligible for your child care credit? 

The day camp expenses are eligible. If the camp costs include a fee for transporting your kid to and from the camp, that’s an eligible cost too.  Before the camp days are over, get the camp’s information (official name, address, and identification number) for your next year’s tax return. The overnight camp costs are not eligible for the child care credit. Sorry.

The dollars that you pay the neighbor can certainly be included in your child care costs.  Let the babysitter know that you will be listing her name, address, and social security on your tax return. And if you pay her more than $1,000, you may be a household employer.  If so, you may have to withhold and pay social security, Medicare, and federal/ state unemployment tax on your payments to the neighbor. Check out IRS Tax Topic 756 and IRS Pub 926 .

If any of your children turn 14 during the summer, you can still claim the child care costs up until the day they turn 14.  So if your son turns 14 on August 15th, you can still deduct his local camp costs through August 14th.

If you have your own business and your kids are old enough to do some work there, maybe you don’t need a sitter or camp this summer. You can employ your kids at a fair-market wage and deduct their wages as a business expense. If your business is a sole proprietorship or a partnership and your child is under age 18, the child’s wages are not subject to social security and Medicare taxes. You could also set up IRAs for them for $5,000 per year or up to their earned income, whichever is less and get their future savings started.

For more detailed information check out:
IRS- Child and Dependent Care Credit

IRS Pub 503 - Child & Dependent Care Expenses

IRS - Family Help in Your Business

 

First-Time Homebuyer's Credit: Check Out These Surprising, Little-Known Facts

You've probably heard of the First-Time Homebuyer's Credit, a popular tax break that's part of the 2009 economic stimulus paln.

If you buy a home between January 1, 2009 and November 30, 2009 -- and you qualify -- the government will give you up to $8,000. And you don't have to repay it, as long as you live in the home for at least three years.

This tax credit has some interesting twists that just might help you qualify:

• First off, you don't necessarily have to be a first-time homebuyer.
• The home you purchase doesn’t have to be a house.
• Someone else, such as a friend, relative or a parent, can help pay the mortgage, and you get the credit.
• If you want to rent out part of your main home, you can still qualify to receive the credit. 

To get the details, read more about the homebuyer's credit.   

Need To File an Extension?

The tax deadline is less than a week away.  Instead of using a bunch of clichés about lights at ends of tunnels and finish lines, I'll jump right to the point (after all, we need as much time as possible to finish our taxes).

There are millions of Americans each year that are not able to finish and file their taxes by April 15th.  Because of this, the IRS offers the option of filing an extension (Form 4868), which extends your filing date to October 15th.  Good news, right?  It is, and yes, TurboTax can help.  But first, there are a few things you need to know.

The most important piece of information to keep in mind is; if you think you're going to owe, you still need to pay by April 15th in order to avoid any late penalties.  Filling an extension with the IRS only allows you to postpone when you actually file your return, it doesn't mean you can pay later as well.  This is important, because the penalty could be up to 25% of your tax bill.  The actual late payment penalty is ½ of 1% of any tax due (not your total taxes due, just what you haven't paid by April 15).  This will be charged each month the tax remains unpaid, up to a maximum of 25%.

TurboTax has a couple of ways to help you file an extension.  You can file an extension from TurboTax itself.  Just open it up, type “Extend time to file” in the FIND box and it'll take you to the correct screen to fill out Form 4868 (Application for Automatic Extension of Time to File).  If you use TurboTax to file your extension, you'll need to print and mail the form.

If you want to file Form 4868 electronically, TurboTax offers Easy Extension for free!  Follow this link:
https://extension.intuit.com/extexp/ExtFiling.html?priorityCode=4558400000

It's got a slick design and makes the process as painless as possible.

So you're probably asking, what if I don't know if I'm going to need to pay or not?  We've got you covered there too.  Use TaxCaster that TurboTax provides for free to help you estimate your taxes.
http://turbotax.intuit.com/tax-tools/calculators/taxcaster/index.jsp?height=700&width=980

Remember, although extremely useful, TaxCaster is to help you estimate your taxes, it doesn't actually do them for you (you'll need TurboTax for that).

And finally, to be as accurate as you can be, you'll need to have some information with you when you fill out Form 4868.  Here's a quick list of the possible things you'll need:

* Your spouse's (if applicable) as well as your own SSN and Date of Birth

* Your address

* A copy of your 2007 tax return (for your AGI and tax liability from last year)

* How much money you have already paid in taxes for 2008

* Your 2008 tax liability (See below for a quick explanation of this)

* Your bank account and routing number (if you owe taxes)

* Your User ID and password for your account on TurboTax.com (if you have one)

Figuring Out Your 2008 Liability:

The Tax Caster will calculate your estimated taxes based on the following information:

* Taxes withheld by your employer(s) on your W-2(s) (Box 2 of your W-2)

* Estimated taxes you sent the IRS

* Income

* Deductions

* Various Credits

If your tax situation hasn't changed that much from last year, you may be able to use last year's return to help you estimate whether or not you owe.  If you owed, send in at least the amount you paid last year (don't worry, if it turns out that you actually owe less, the IRS will return the balance).  You can find what you owed last year on:

* Line 76 of the 1040

* Line 46 of the 1040A

* Line 12 of the 1040EZ

I know I've talked a lot about determining whether or not you owe.  For those of you fortunate enough to expect some money back, there really isn't a penalty for filing late.  Since the penalty is a percentage of what you would owe and, since you don't owe, there isn't a penalty.  But don't wait too long—the longer you wait, the longer you go without getting your money.  And, if you don't file your return within three years, you won't get a refund.

Finally, don't forget about your state return.  States often charge a similar penalty as federal for late filing.  Some states don't require you to file an extension as long as you complete a federal extension (but there is a voucher needed for each state).  TurboTax has all the state extension forms for you to file manually.  Easy Extension, however, does not, so keep that in mind.

For more detailed information about filing an extension, please see these following FAQs:

http://turbotax.intuit.com/support/kb/e-file/ef/7418.html

http://turbotax.intuit.com/support/kb/e-file/ef/7419.html

What if I Can’t Pay My Taxes?

There are several steps you can take.

But this should be the first one: File your tax return on time, even if you can’t pay all the taxes you owe.

Why file if you can’t pay?

Because the IRS can impose a penalty of 5% of the tax you owe for each month you don’t file a return, up to a maximum of 25% of the tax you owe. So if you’re already unable to pay your debt, you don’t want to pile penalties on top of it.

What the IRS advises (believe it or not) is that you not panic.

Instead, call the IRS at 1-800-829-1040 to discuss payment options. The agency could give you a short-term extension of time to pay or set up a payment installment agreement.

With a short-term extension, you are given up to 120 days to pay and there is no fee.

With an installment plan, you must owe less than $25,000 and agree to make regular monthly payments to pay off what you owe. The IRS charges a one-time fee of $105 for setting up the installment plan, or $52 if you have the payments debited directly from your bank account.

You don’t have to call to create a payment plan. You can set one up online. If the IRS grants online approval of your request for monthly installments, you will receive written confirmation within 10 days. Learn more at Payment Plans and Installment Options.

In recognition that “many people may be having difficult times financially,” the IRS has created a web page called The “What Ifs” of an Economic Downturn, It addresses the tax impacts of job loss, debt forgiveness and tapping a retirement fund. It also explains how, if your income decreases, you may be newly eligible for certain tax credits, such as the Earned Income Tax Credit.

When Your Investment Losses Really Aren’t (at Least in the Eyes of the IRS)

Your investments tanked in 2008. So does that mean you get a tax deduction?

 

Not necessarily.

 

There’s nothing to report on your tax return if your investment lives -- like most everyone’s does -- in a 401(k) or an IRA. These are special no-taxes zones, where you can buy and sell securities and mutual funds without having to report the capital gains and losses on your tax return. When you eventually take your money out, however, you’ll have to pay income taxes on some or all of it (unless it’s coming from a Roth IRA.)

 

But what about the investments you own outside of your retirement accounts?

 

Let’s say your 200 shares of the Bank of What Was I Thinking have fallen by 50 percent.

 

You can’t deduct your loss, however, if you haven’t sold those shares. Until you sell, you have what’s known as a “paper loss,” not an actual loss.

 

Now then, even if you sold your shares after watching them lose half their value, you still might not get to claim a loss. Let’s say you bought the shares at $50 each, they climbed to $140, then fell to $70 at which point you decided to sell them. However, you don’t have a loss. You have a gain of $20 per share. And you need to report that on your tax return.

 

Here’s another puzzler. You might have a taxable gain even if you didn’t sell any of your investments. How is that possible?

 

Because a mutual fund you own sold some stocks and bonds it had in its portfolio. Here’s what happens when the markets climb steeply then fall precipitously, as they did in recent months:

When the markets were booming, your mutual fund held stocks that had shot up value. And when the markets fell, some investors decided to bail. The managers of your mutual fund had to pay those investors, so the managers sold highly appreciated stocks to raise the cash. That generated capital gains for the mutual fund, which are passed on to you as capital gain distributions.

 

Unless, of course, your mutual fund is in your retirement account. You don't have to report your "gain" to the IRS.

For more information on about taxes and your investments, read Capital Gains and Losses.

Two Unmarried People Purchase a Home -- Who Gets the New $8,000 Homebuyer Credit?

It’s all over the news. If you buy a home between January 1, 2009 and December 1, 2009, you could qualify for a big tax credit.  It’s worth as much as $8,000 or 10 % of your home purchase price, whichever is less. 

To be eligible, you can’t have owned a principal residence during the three years prior to purchase date and your adjusted gross income or AGI can’t be more than $95,000 ($170,000 if filing married joint). AGI is basically your taxable income before you subtract your standard or itemized deduction and exemptions. 

In Live Community, we’re seeing lots of questions about who gets the credit if an unmarried couple (or siblings, fishing buddies, sorority sisters, etc.) buys a home in 2009. Let’s say the home’s price is $60,000. Since each person files a separate tax return, does each person get the $6,000 ($60,000 times 10%) credit? Nope!  There’s only one credit per home – but the buyers can divvy it up in many different ways.

The IRS says that the taxpayers can allocate the credit in any “reasonable” manner as long as they don’t give the credit to someone who is ineligible for the credit. Huh?
 
Let’s look at some of the possibilities.

Sam and Suzy have dated forever and decided it’s time to buy a $100,000 house.  It’ll be a first-time purchase for both of them.  The maximum credit for this home is $8,000.

Example 1:   Sam plans to pay $30,000 and Suzy to pay $10,000 toward the down payment. They will both be jointly liable for the remaining $60,000 mortgage and have one-half interest in the home as tenants in common. Sam’s adjusted gross income (AGI) is $60,000 and so is Suzy’s.

Option 1: Based on contributions to the purchase, Sam could get 60% of the $8,000 credit or $4,800. Here's how his 60% is figured:  $30,000 down payment + $30,000 mortgage share /$100,000 purchase price  = 60%.

Suzy could get 40% of the $8,000 credit  or $3,200. That's $10,000 down payment + $30,000 mortgage share / $100,000 purchase price = 40%.

Note:  Sam’s $4,800 credit plus Suzy’s $3,200 credit equals $8,000.  The total of the credits can’t be more than $8,000.

Option 2: Based on their ownership interests, they could each get 50% of the $8,000 credit, or $4,000.  

Option 3: 100% of the credit could go to either Sam or Suzy because both are eligible for the credit.

Example 2:  Same as example 1 however Sam’s AGI is $100,000 and Suzy’s AGI $50,000.

Option 1:Since Sam’s AGI is greater than $95,000, he is not eligible for the credit so Suzy takes all of the credit. 

Example 3: Same as example 1 however Sam owned a home from 2000 and sold it in 2007. 

Option 1: Since Sam owned a home in the 3 years prior to the new purchase, he isn’t eligible for the credit. Just like example 2, Suzy can get all of the $8,000 credit.

Example 4:Same as example 1 however Sam’s AGI is $85,000 and Suzy’s is $60,000. Note:  If the AGI is between $75,000 and $95,000, the amount of homebuyer credit allowed is “phased out” the closer the AGI gets to $95,000.

Option 1: Since Sam’s AGI is half way in the “phase out”, the amount of credit that is allocated to Sam will be reduced by 50%.  Let’s say the credit is split 50/50 with Sam and Suzy.  Suzy’s return will show her share of the credit - $4,000 and since her AGI is less than $85,000, she’ll get all of the $4,000 credit on her tax return.

When Sam files his tax return, he’ll show his share of the credit ($4,000) credit with an AGI of $85,000.  However, the phase-out calculation will limit the credit on his tax return to only $2,000 ($4,000 times 50%). 

In this case, only $6,000 of the $8,000 was available as a refund or to reduce taxes.

 Option 2:   Suzy could get all of the $8,000 credit. 

As you can see, the homebuyer credit could be a real boost for the housing industry and the economy – and be a great exercise in sharing the credit and handling relationships!

For more information on this great credit, check out Taking the First-Time Homebuyer Credit.

 

Home Office

Have a Home Office?  
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, home repairs, and depreciation. They may also include improvements you have made to your home. The home office deduction is available for homeowners and renters, and applies to all types of homes, from apartments to mobile homes. 
Home Office Use
The deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.
Day Care Use
If you use your entire home in your day care, then your square footage is 100%. However, from here, as you then must reduce this by the non-business hours that you did not work. There were 8,760 hours in 2008. Let's assume you had children in your home an average of 50 hours per week. You would have actually provided child care services for 2,600 hours. You then divide this by the total hours in a year. In this example, your net result is about 30%. Thus, square footage usage (100%) x time usage (30%) gives you 30% business use of home percentage for last year. If your square footage usage was only 75%, you would then take 75% x 30%, and you would have 22.5% business use of home allocation. So, unless you are open 24/7 365 days per year, your business usage of home can never be 100%
Determine The Business Use Percent
The IRS says you can use square feet or any other reasonable method if it accurately figures your business use percentage. While TurboTax asks for square feet of the home and the office to calculate your home office percent on the IRS form this info is only identified as the area of your home and home office so you can use any unit of measurement you prefer, as long as it meets the IRS requirement of accurately reflecting your business use percentage. Some people choose other methods that is fine as long as you follow the IRS requirements 
 
In Turbo Tax Home and Biz
In Home and Biz, the home office is under the screen your business then select Expenses.
Under enter your expenses select Home Office at the top of the screen.
The first screen will ask you if you have an office in home answer Yes. You then enter the home office.
The next screen will ask Tell Us More. If you own the home mark I owned the home.
Mark do all my business at home (if you have more than one office mark more than one office).
These questions help determine what screens to show. If you do not mark that you own the home then the mortgage screens will not show.
Continue to the next screen and enter the square footage of the entire home and the square footage of the office so the program can calculate your business use percent of your home. The next screen will ask what percent of the time you conduct business in the home. If you have another office outside the home then this will be less than 100%. You will then be asked to enter expenses for the entire home. You can enter the property tax, Mortgage interest, insurance and mortgage points and home office only. If you only had the home office for part of the year; enter the amount for part of the year as the total.
When you get to the end of the expenses there will be an expense summary screen. Continue past this screen if you are taking depreciation on your home. There will be a screen to enter the asset for depreciation including your home. This is also where you would add in any home improvements to depreciate. There will then be an asset summary screen where you can add another asset. The last screen is a Home Office Summary where you can add another Home office or Edit or delete the current one.
If you have two home offices, here's how to put in the home mortgage interest under each office. 
First home where the office was located: when it asks for the home mortgage, enter the two that you had for that home. Only enter the interest you paid for the months it was a home office and you were living in the home. The rest of the months of interest will be entered as a rental expense. (The amount of mortgage interest for the months that you lived in the home that is not used as a business expense, will flow automatically to the schedule A for itemized expenses.)

Second home office: when you enter this home office you will see that the first two lenders you entered are on the Mortgage Lender screen.  Do NOT edit these two lenders. Editing the lenders attaches them to the second home office paperwork. Select the Add button in the right hand corner to add the lender for the new home. If this is a new home purchase and you started the home office right away, enter the entire amount of interest paid. The rest of the interest will go automatically to the Schedule A for itemized deductions.
For additional information here is a link to the IRS site
http://www.irs.gov/businesses/small/article/0,,id=204169,00.html

These Aren't Your Parents' Taxes (Part 8--The Grand Finale)--Renter's Credit and Take Home Pay

The Top 10 Things for 18-25 Year-olds to Know About Taxes

9)  Renter's Credit
This one depends on the state where you live.  You can't claim this one on your federal return (this only applies to your state taxes), but, if you live in a participating state, it's worth looking into.  Here's a TurboTax article to help you figure what the situation is in your state (good luck, I’m crossing my fingers for you):
http://turbotax.intuit.com/support/kb/general-program-issues/entering-your-data/1274.html

10)  Take Home Pay
Here's a hypothetical—you take a job that promises $50,000 a year.  On a bi-weekly pay schedule, your check should be about $1900.  Yeah right.  If we didn’t have taxes and other withholdings, it would be.  But, depending on how much you elect to take out for federal, the check could be as low as $1400-1500.  So be prepared (yes, I'm implying that you shouldn't go out and buy that Bentley right away—at least wait a while).  Here's a very brief breakdown of what's being withheld from your checks:

Federal—Amount is based on the information you provided on your W-4 Form.

State—Varies from state to state, but is usually a certain percentage of your Federal withholding.  To view the withholding form for your state, go here:

http://www.statew4.com/content/taxforms.php

Medicare—A straight 1.45% of your gross pay.

Social Security—This is 6.2% of your wages, unless you make over $106, 800.  If you make that much, you don’t pay any Social Security taxes.

For help budgeting that money that you're actually able to take home after all of this stuff is taken out, you should check out some of the stuff Quicken Online offers (another shameless plug, but it's definitely worth the mouse click—and it's free to boot!):
http://quicken.intuit.com/online-banking-finances.jsp?lid=site_banner

There it is.  See, painless.  And hopefully a little enlightening.  When you go to fill out your returns, you should have a little more ammo to use.  Here's hoping your returns flow like wine and you're finally able to buy that 1080p HD flat screen.

These Aren't Your Parents' Taxes (Part 7)--Your W-4

The Top 10 Things for 18-25 Year-olds to Know About Taxes

8)  W-4
If you've ever worked a job (for a reputable business, that is) then you've filled out a W-4.  You may not have known what you were doing, but you filled it out.  Here’s some info that should help you figure out how to make it work better (or at least more efficiently) for you.

You fill this out so your employer can withhold the correct federal income tax from your pay.  You'll be asked if you are single or married and how many allowances you have.  If you're single and don't own a home, you'll probably enter 1or 2.  Keep this in mind—the higher the number you write down on your W-2, the less is withheld.  While this sounds like a good thing up front, it could lead to you owing taxes at the end of the year.  I'm not going to tell you what to do, but hopefully the form makes a little more sense.

We're hitting the home stretch.  Just two more--stay tuned tomorrow.  The last two are worth it!

How Much Money Can the New Stimulus Act Save One Family in 2009

After President Obama signed the new stimulus act into law Feb. 17, a long-time friend, Brian, called me.

He wanted to know, “What’s the maximum I can get out of those new tax breaks on my 2009 tax return?” (He’s always been a tad aggressive on his tax returns. I warn him that he needs to be careful if he ever hopes to get nominated for a presidential appointment).

Anyway, I thought it was an intriguing question.  Being a CPA, I can figure out tax law and add up the numbers. Here are the results. He can save $13,790 in taxes on his 2009 return! 

Now remember, this isn’t for everybody. Here’s Brian’s “ideal” situation. He’s married, has one child in college, and his adjusted gross income (taxable income prior to subtracting exemptions and standard or itemized deductions) is less than $150,000.  And here are the details broken down by credit and deduction.

1) Making Work Pay: This is a new $400 credit ($800 if married and filing jointly) that the taxpayer receives by reduced payroll withholding.  Since Brian will be filing joint for 2009, he’ll be getting $800 tax savings during the year through an increase in each paycheck for 2009.  So that’s $800 savings.

2) First-time Homebuyer’s credit:  Brian and his wife haven’t owned a home in more than 3 years.  Why? When they moved from the Midwest to San Diego, they couldn’t afford a house. Now with the drop in prices, they could buy that new home in 2009. Yeah! Since it’s in San Diego, the price will definitely be more than $80,000. Ka Ching… $8,000 credit. For more details see Taking First-Time Homebuyer Credit.

3) New car sales-tax deduction:  Since car sales are way down and so are car prices, Brian could decide it’s time to buy a new car.  Since he’s always wanted a luxury car, he’d use the excuse that he can get the maximum deduction for sales tax on a car priced up to $49,500.   That‘s a lot of money for a car but he does get a tax savings of $990.  (Price $49,500 times 7.775% (San Diego sales tax) = $3,836 deduction. Since his marginal tax rate is 25%, his tax saving is $990 (3,836 times 25%).   Let’s not talk about what his wife would say about that not so big tax savings for a very big car. 

4) Energy saving tax breaks: If Brian’s wife has been complaining about how chilly their family room and master bedrooms are (yes, it does get a tad chilly in San Diego!), now is the time to buy new energy-saving sliding-glass doors for those rooms. If the price of each door is $2,500, which would meet the maximum credit of $1,500 ($5,000 times 30%).

5) Bigger tax break on college costs: Their child is in her 4th year of college and her tuition is $10,000 and wouldn’t have qualified for the Hope credit under old law. Since the old HOPE credit has been extended and expanded (and now called American Opportunity credit), they’ll get the maximum credit of $2,500.

 Here’s the summary: 
 Making Work Pay Credit            $    800
 Homebuyer Credit                     $ 8,000
 New car deduction- tax savings  $    990 
Energy credit (new doors)           $ 1,500
College tuition credit                  $ 2,500 
 TOTAL                                     $13,790

For details on the new tax act, check out  2009 Stimulus Package: What's In It For You, and When.