Apr 05

Get tax credit for making your home energy efficient

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If you made your home more energy efficient last year, you may qualify for a tax credit on your 2012 federal income tax return. Here is some basic information about home energy credits that you should know.

Non-Business Energy Property Credit

  • You may claim a credit of 10 percent of the cost of certain energy saving property that you added to your main home. This includes the cost of qualified insulation, windows, doors and roofs.
  • In some cases, you may be able to claim the actual cost of certain qualified energy-efficient property. Each type of property has a different dollar limit. Examples include the cost of qualified water heaters and qualified heating and air conditioning systems.
  • This credit has a maximum lifetime limit of $500. You may only use $200 of this limit for windows.
  • Your main home must be located in the U.S. to qualify for the credit.
  • Not all energy-efficient improvements qualify, so be sure you have the manufacturer’s credit certification statement. It is usually available on the manufacturer’s website or with the product’s packaging.
  • The credit was to expire at the end of 2011. A recent law extended it for two years through the end of 2013.

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Residential Energy Efficient Property Credit

  • This tax credit is 30 percent of the cost of alternative energy equipment that you installed on or in your home.
  • Qualified equipment includes solar hot water heaters, solar electric equipment and wind turbines.
  • There is no limit on the amount of credit available for most types of property. If your credit is more than the tax you owe, you can carry forward the unused portion of this credit to next year’s tax return.
  • You must install qualifying equipment in connection with your home located in the United States. It does not have to be your main home.
  • The credit is available through 2016.

Apr 04

Top Six Tax Tips for the Self-Employed

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As we are almost at the filing date for tax returns, I am still working on getting tax tips out, in addition to estate planning and tax preparation for the citizens of Altus and southwest Oklahoma. Here is one of the latest releases from the IRS.

When you are self-employed, it typically means you work for yourself, as an independent contractor, or own your own business. Here are six key points the IRS would like you to know about self-employment and self-employment taxes:

1. Self-employment income can include pay that you receive for part-time work you do out of your home. This could include income you earn in addition to your regular job.

2. Self-employed individuals file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with their Form 1040.

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4. If you are self-employed you may have to make estimated tax payments. People typically make estimated tax payments to pay taxes on income that is not subject to withholding. If you do not make estimated tax payments, you may have to pay a penalty when you file your income tax return. The underpayment of estimated tax penalty applies if you do not pay enough taxes during the year.

5. When you file your tax return, you can deduct some business expenses for the costs you paid to run your trade or business. You can deduct most business expenses in full, but some costs must be ’capitalized.’ This means you can deduct a portion of the expense each year over a period of years.

6. You may deduct only the costs that are both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.

Apr 03

ATRA Income Tax Planning

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I received this from the OSU Tax Newsletter and thought I would share.

ATRA Income Tax Planning

    In the American Taxpayers Relief Act of 2012, there was very little “relief” for upper income taxpayers.  Many of those individuals with larger resources feel that they were a target of that tax act.  The Joint Committee on Taxation estimates that these upper-income taxpayers will pay approximately $620 billion of increased taxes over the next decade.
The tax amounts that are raised are the result of increasing the top income tax rate to 39.6% and the top capital gains rate to 23.8%.  There also are phase-outs of personal exemptions and a 3% floor on itemized deductions.  With the major changes in ATRA that increased taxes on taxpayers with higher incomes, there are compelling reasons for these individuals to reduce their adjusted gross income (AGI).

Single Persons

There are multiple levels of income that will lead to potential tax increases.  The 2013 alternative minimum tax exemption of $51,900 is gradually phased out for incomes over $115,400.  A single person with AGI over $200,000 is subject to the 3.8% Medicare tax on passive income.
With AGI over $250,000, the 3% floor on itemized deductions is applicable.  Excess income over that amount is multiplied by 3% and up to 80% of itemized deductions may be lost due to that floor.
Finally, single persons with taxable incomes over $400,000 are subject to the top 39.6% income tax rate and 23.8% capital gains tax rate.  These individuals who have passive income will also be subject to the Medicare tax for a total tax on passive income of 43.4%.

Married Persons

Married persons will also be subject to higher taxes as income increases.  The alternative minimum tax exemption of $80,800 for 2013 is phased out starting at incomes of $153,900 and above.  At $250,000 in AGI, the 3.8% Medicare tax applies to passive income.  Over $300,000 in AGI, the 3% floor on itemized deductions applies and the personal exemption is phased out.
Finally, with $450,000 of taxable income, a married couple pays 39.6% income tax and 23.8% capital gains tax.  In addition, a high income person with passive income will also pay the Medicare tax for a total 43.4% tax rate.

General Income Tax Planning

Upper-income persons will be discussing various planning strategies with their CPAs and other advisors.  First, the recommended strategy will be to fund retirement plans to the maximum levels.  Second, the capital gains tax rates are still much lower than ordinary income rates and therefore it is preferable if possible to receive income taxable as capital gain.
Finally, tax-free income through municipal bonds will continue to be an option.  However, with the current very low interest rates on bonds and the potential for inflation over the next decade to reduce bond principal values, this is not a highly attractive investment.

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Apr 02

Five Tax Credits to Lower Your Taxes

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As we have just reached April and taxes are due in less than two weeks, it is important to review a few items that could help you lower the amount you have to pay to the government. A tax credit reduces the amount of tax you must pay. A refundable tax credit not only reduces the federal tax you owe, but also could result in a refund.

Here are five credits the IRS wants you to consider before filing your 2012 federal income tax return:

1. The Earned Income Tax Credit is a refundable credit for people who work and don’t earn a lot of money. The maximum credit for 2012 returns is $5,891 for workers with three or more children. Eligibility is determined based on earnings, filing status and eligible children. Workers without children may be eligible for a smaller credit. If you worked and earned less than $50,270, use the EITC Assistant tool on IRS.gov to see if you qualify. For more information, see Publication 596, Earned Income Credit.

2. The Child and Dependent Care Credit is for expenses you paid for the care of your qualifying children under age 13, or for a disabled spouse or dependent. The care must enable you to work or look for work. For more information, see Publication 503, Child and Dependent Care Expenses.
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3. The Child Tax Credit may apply to you if you have a qualifying child under age 17. The credit may help reduce your federal income tax by up to $1,000 for each qualifying child you claim on your return. You may be required to file the new Schedule 8812, Child Tax Credit, with your tax return to claim the credit. See Publication 972, Child Tax Credit, for more information.

4. The Retirement Savings Contributions Credit (Saver’s Credit) helps low-to-moderate income workers save for retirement. You may qualify if your income is below a certain limit and you contribute to an IRA or a retirement plan at work. The credit is in addition to any other tax savings that apply to retirement plans. For more information, see Publication 590, Individual Retirement Arrangements (IRAs).

5. The American Opportunity Tax Credit helps offset some of the costs that you pay for higher education. The AOTC applies to the first four years of post-secondary education. The maximum credit is $2,500 per eligible student. Forty percent of the credit, up to $1,000, is refundable. You must file Form 8863, Education Credits, to claim it if you qualify. For more information, see Publication 970, Tax Benefits for Education.

Mar 31

Tax Rules on Early Withdrawal of Retirement Benefits

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Taking money out early from your retirement plan can cost you an extra 10 percent in taxes. Here are five things you should know about early withdrawals from retirement plans.

1. An early withdrawal normally means taking money from your plan, such as a 401(k), before you reach age 59½.

2. You must report the amount you withdrew from your retirement plan to the IRS. You may have to pay an additional 10 percent tax on your withdrawal.

3. The additional 10 percent tax normally does not apply to nontaxable withdrawals. Nontaxable withdrawals include withdrawals of your cost in participating in the plan. Your cost includes contributions that you paid tax on before you put them into the plan.
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4. If you transfer a withdrawal from one qualified retirement plan to another within 60 days, the transfer is a rollover. Rollovers are not subject to income tax. The added 10 percent tax also does not apply to a rollover.

5. There are several other exceptions to the additional 10 percent tax. These include withdrawals if you have certain medical expenses or if you are disabled. Some of the exceptions for retirement plans are different from the rules for IRAs.

For more information on early distributions from retirement plans, you should either contact your tax preparer, or if you do not have one, me. I am the only tax attorney in southwestern Oklahoma and would enjoy the opportunity to help you with your tax and estate planning. In addition to taxes, I also can help you plan creation of an Limited Liability Company (LLC), Family Limited Partnership, trust, will, power of attorney, or any other planning device. You can reach me at 580-318-8829.