Do You Know Which Tax Form To Use?

To file your 2009 individual tax return, you’ll have to decide which form to use…unless you e-file. If you file electronically, the software automatically selects the simplest and best form for you. Whether you use e-file or prepare on paper, using the simplest form will help avoid costly errors or processing delays. And remember, if you file electronically, it speeds up the processing of your tax return and the delivery of your refund.

Here are things to consider when deciding which IRS form to file.

Use the 1040EZ if:

• Your taxable income is below $100,000
• Your filing status is Single or Married Filing Jointly
• You and your spouse – if married — are under age 65 and not blind
• You are not claiming any dependents
• Your interest income is$1,500 or less
• You are not claiming the additional standard deduction for real estate taxes, taxes on the purchase of a new motor vehicle, or disaster losses

Use the 1040A if:

• Your taxable income is below $100,000
• You have capital gain distributions
• You claim certain tax credits
• You claim deductions for IRA contributions, student loan interest, educator expenses or higher education tuition and fees

If you cannot use the 1040EZ or the 1040A, you’ll probably need to file using the 1040. You must use the 1040 if:

• Your taxable income is $100,000 or more
• You claim itemized deductions
• You are reporting self-employment income
• You are reporting income from sale of property

For additional tax information contact Hewitt Business Consultants at (919) 341-1585 or email laurice@hewittbusinessconsultants.com.

President Obama Signs Bill to Extend Homebuyer Tax Credit & Unemployment!

President Barack Obama has approved the first-time home buyer tax credit extension, which will extend the tax credit until April 30, 2010.  It also extends unemployment benefits for 14 weeks. The 27 states with unemployment rates of 8.5 percent or higher would gain an extra six weeks on top of that, but all states would be eligible for the 14 weeks of extended benefits.

The extension is part of a $24 billion economic stimulus bill that will extend the $8,000 tax credit for home buyers who are purchasing their first home from the current November 30 deadline and expands the program to offer a credit of $6,500 to homeowners who have lived in their current home for at least five years and are seeking to relocate.

The following details apply to the home buyer tax credit expansion:

Who is Eligible

• -First-time home buyers are defined as:  by the law as buyers who have not owned a principal residence during the three-year period prior to the purchase, may be eligible for up to an $8,000 tax credit.
• -Existing homeowners who have been residing in their principal residence for five consecutive years out of the last eight and are purchasing a home to be their principal residence (“repeat buyer”), may be eligible for up to a $6,500 tax credit.
• -All U.S. citizens who file taxes are eligible to participate in the program.

Effective Dates

• -The eligibility period for the tax credit is for homes purchased after Nov. 6, 2009, and before May 1, 2010. However, home purchases subject to a binding sales contract signed by April 30, 2010, will qualify for the tax credit provided closing occurs prior to July 1, 2010.

Tax Credit is Refundable

• -A refundable credit means that if the amount of income taxes you owe is less than the credit amount you qualify for, the government will send you a check for the difference.

Payback Provisions

• The tax credit is a true credit. It does not have to be repaid unless the home owner sells or stops using the home as their principal residence within three years after the purchase.

For additional tax information contact Hewitt Business Consultants at (919) 341-1585 or email laurice@hewittbusinessconsultants.com.

Five Tax Scams to Avoid

Every year, The IRS releases its list of the top 12 tax scams and schemes. These scams – known annually as the Dirty Dozen – are illegal and can lead to problems for taxpayers who risk significant penalties, interest and possible criminal prosecution. Here are five scams from the 2009 Dirty Dozen list every taxpayers should be aware of this summer.

1. Phishing Phishing scams often take the form of an e-mail that appears to come from a legitimate source, including the IRS, that contain enticements for the recipient such as additional money back on their previous year’s tax return. Regardless of how official this e-mail may look and sound, the IRS never initiates unsolicited e-mail contact with taxpayers about their tax issues. The Internet-based scam artists use the personal information obtained through these e-mails and Web sites to steal the victim’s identity, access bank accounts, run up credit card charges or apply for loans in the victim’s name. If you receive an e-mail that you suspect is a phishing attempt or directs you to an imitation IRS Web site, please report them to the IRS at phishing@irs.gov. You can also visit the IRS Web site at IRS.gov and enter the keyword phishing for additional information.

2. Abuse of Charitable Organizations and Deductions The IRS continues to observe the misuse of tax-exempt organizations. This includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets. The IRS also continues to investigate various schemes where donations are highly overvalued or the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets.

3. Abusive Retirement Plans The IRS continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into IRAs or companies owned by their IRAs at less than fair market value to circumvent annual contribution limits.

4. Hiding Income Offshore Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks and brokerage accounts. Recently, the IRS provided guidance to auditors on how to deal with those hiding income offshore in undisclosed accounts. Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans.

5. Misuse of Trusts While there are many legitimate, valid uses of trusts in tax and estate planning, some promoted transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the promised tax benefits and are being used primarily as a means to avoid income tax liability and hide assets from creditors, including the IRS.

For more the full list of 2009 Dirty Dozen tax scams or to find out how to report suspected tax fraud, visit IRS.gov.

Link: Beware of IRS’ 2009 “Dirty Dozen” Tax Scams

For additional information contact Hewitt Business Consultants at (919) 341-1585 or email  laurice@hewittbusinessconsultants.com.

10 Great Reasons for Outsourcing Payroll Services

While peace of mind may be reason alone for outsourcing payroll, below are additional reasons why outsourcing payroll services may be a great solution for your small business:

1. Save time by letting payroll specialists do the work.

2. Save money by focusing your time on building your business.

3. Avoid penalties where errors in federal, state and local taxes and filing requirements may be avoided.

4. Reduce costs by comparing in-house processing wages to outsourced processing fees.

5. Avoid the hassle of needing to stay on top of payroll rules and regulations.

6. Add employee benefits such as direct deposit and 401(k) plan options.

7. Avoid payroll processing headaches having to upgrade in-house systems or software.

8. Leverage outside expertise on regulations, withholding rates and government forms.

9. Eliminate payroll disruption if your payroll person leaves.

10. Security,  most payroll services firms have technologies that can spot and alert clients to various types of payroll fraud, such as payment manipulation and “phantom workers.

For additional information contact Hewitt Business Consultants at (919) 341-1585 or email Ms. Hewitt directly at laurice@hewittbusinessconsultants.com.

Seven Tips for Students with a Summer Job

Many students get a summer job during their time off from school. Here are the top seven things the IRS wants everyone to know about income earned while working a summer job.

1. Taxpayers fill out a W-4 when starting a new job. This form is used by employers to determine the amount of tax that will be withheld from your paycheck. Taxpayers with multiple summer jobs will want to make sure all their employers are withholding an adequate amount of taxes to cover their total income tax liability. To make sure your withholding is correct, visit the Withholding Calculator on IRS.gov.

2. Whether you are working as a waiter or a camp counselor, you may receive tips as part of your summer income. All tip income you receive is taxable income and is therefore subject to federal income tax.

3. Many students do odd jobs over the summer to make extra cash. Earnings you received from self-employment are subject to income tax. These earnings include income from odd jobs like baby-sitting and lawn mowing.

4. If you have net earnings of $400 or more from self-employment, you will also have to pay self-employment tax. This tax pays for your benefits under the Social Security system. Social Security and Medicare benefits are available to individuals who are self-employed the same as they are to wage earners who have Social Security tax and Medicare tax withheld from their wages. The self-employment tax is figured on Form 1040, Schedule SE.

5. Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.

6. Special rules apply to services you perform as a newspaper carrier or distributor. You are a direct seller and treated as self-employed for federal tax purposes if you meet the following conditions:

• You are in the business of delivering newspapers.
• All your pay for these services directly relates to sales rather than to the number of hours worked.
• You perform the delivery services under a written contract which states that you will not be treated as an employee for federal tax purposes.

7. Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.

SUMMER HIRING RULES FOR 2009

Firms owned by parents that employ their children:

Owners’ children can work for the firm, regardless of age, number of hours worked or time of day—if the parent(s) own 100% of the business. Children under 16 cannot do hazardous work such as use lawn mowers, sewing machines, etc., work where food is cooked, or work near flammable or hazardous material.  Minimum wage: 100% of owners hiring only immediate family members need not pay the minimum wage. But if owners regularly employ non-family members, they must pay even family members the minimum wage.

• Owners’ children under 21: Wages are exempt from FUTA.
• Owners’ children under 18: Wages are exempt from FICA—if the parents are sole owners or sole partners—but FITW must be withheld on W-2s filed for the children.
• Other children under 18: Obtain an age certificate recognized by the U.S. Department of Labor (DOL) and your state Wage and Hour Division (WHD) and return it to the workers upon termination. DOL generally accepts a state age certificate, but ask your state WHD to be sure. These workers may not perform hazardous work.
• Other children aged 14-15 can work 8 hrs/day, 40 hrs/wk, June 1-Labor Day, between 7 a.m. and 9 p.m. if school is not in session. Exceptions: These limits do not apply to news carriers or children who are employed exclusively by a parent/sole-proprietor. For agricultural jobs, contact the DOL.
• Other children under 14 cannot be hired unless they work for a parent/sole owner.
• Paid holidays. Under federal law, paying part-time and summer help for holidays is optional any time of year.
• Paid vacation. No law requires paid vacation, but if you give paid vacation, some federal and state laws apply.
• Benefits. Providing health insurance or other benefits to temporary and part-time employees is optional; if not available, it should be so stated in a written benefits plan.
• Federal W-4 – Obtain from all summer employees, even students working part-time and foreign students.
• FITW –  Withhold from all summer employees unless their W-4 results in no withholding.
• FICA –  Withhold from all workers, even those receiving Social Security benefits and high school students, unless under 18 working for sole-owner parents.
• Overtime pay under federal law. Pay overtime for all hours physically worked over 40 hours in the workweek. When computing overtime, you need not include paid time-off (e.g., holidays or vacation days). Do not try to substitute paid nonork hours for work hours to make all hours straight time, thus avoiding overtime pay.
  

For additional information and a free consultation, contact Hewitt Business Consultants at (919) 341-1585 or email Laurice Hewitt directly at laurice@hewittbusinessconsultants.com

Special Tax Break Available for New Car Purchases This Year

WASHINGTON — The Internal Revenue Service announced that taxpayers who buy a new passenger vehicle this year may be entitled to deduct state and local sales and excise taxes paid on the purchase on their 2009 tax returns next year.

“For those thinking about buying a new car this year, this deduction may give them a little more drive to make their purchase this year,” said IRS Commissioner Doug Shulman. “This deduction enables taxpayers to buy now and get cash back later on their tax returns.”

The deduction is limited to the state and local sales and excise taxes paid on up to $49,500 of the purchase price of a qualified new car, light truck, motor home or motorcycle.

The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers.

IRS also alerted taxpayers that the vehicle must be purchased after Feb. 16, 2009, and before Jan. 1, 2010, to qualify for the deduction.

The special deduction is available regardless of whether a taxpayer itemizes deductions on their return. The IRS reminded taxpayers the deduction may not be taken on 2008 tax returns.

For additional information and a free consultation, contact Hewitt Business Consultants at (919) 341-1585 or email Laurice Hewitt directly at laurice@hewittbusinessconsultants.com

Keeping Accurate Financial Business Records

Take record keeping seriously. A perfectly adequate record keeping system for a small business

will include some or all of the following:

• Check register – preferably a separate bank account for your business. Make sure that when you receive your bank statement every month that you prepare bank reconciliation. This document will help you balance your checkbook.

• Summary of receipts of gross income – totaled daily, weekly or monthly. Keep track of where your money comes from, putting notes explaining the origin of all money received

• Monthly summary listings of expenses.

• Disbursements record (check register or expense journal) showing payments of bills. This could be a purchase journal or an expense journal where you record all the transactions in which you paid out cash or checks.

• Asset purchase listing (equipment, vehicles, real estate used in business)

• Employee compensation record (if you have employees)

For additional information and a free consultation, contact Hewitt Business Consultants at (919) 341-1585 or email Laurice Hewitt directly at laurice@hewittbusinessconsultants.com

Tax Savings for New Businesses

Many people form new businesses and spend money, but do not know what qualifies as a deduction and what does not.  It is important to know which deductions can be taken, and that most deductions must be sufficiently documented.

Some items can save you money once you are in business.  For example, a home office can be deducted.  If the space is devoted to your business, you can deduct your home office.  If only a portion of the space is used for the home office, then a portion can be deducted as well, so it does not have to be all or nothing.

In addition to the home office deduction, business supplies and furniture can serve as deductions. If you require pens, paper, printers, computers, etc., then you can deduct these items as well. This could also include furniture – desks and chairs, for example, assuming they are used exclusively for the business. For furniture, you can also depreciate it – deducting a portion of the expense over seven years.

If you travel for business, including mileage, you may be able to deduct it. Remember, you have to keep accurate records (including dates of travel and mileage) just in case. Also, consider deducting your car lease. In addition, hotel stays, air expenses (and all expenses while on travel, with the exception of meals) are tax deductible.

Retirement, Social Security and health premiums are also deductible if you own your own business. Remember, if you own a small business, you have to pay double the Social Security contributions you would as an employee. Federal law requires employers pay half and the employee pay half, and self-employed individuals qualify as both, but half of the contribution can be deducted.

For additional information related to tax preparation or to obtain a free tax organizer, contact Hewitt Business Consultants at (919) 341-1585 or email Laurice Hewitt directly at laurice@hewittbusinessconsultants.com.

Top Ten facts about the Tuition and Fees Deduction

Tuition and Fees Deduction

The Tuition and Fees deduction of up to $4,000 is available to help parents and students pay for post-secondary education. Below are ten important facts about this deduction every student and parent should know.

1. You do not have to itemize to take the Tuition and Fees deduction. You claim a tuition and fees deduction by completing Form 8917 and submitting it with your Form 1040 or Form 1040A.
2. You may be able to claim qualified tuition and fees expenses as either an adjustment to income, a Hope or Lifetime Learning credit, or – if applicable – as a business expense.
3. You cannot take the tuition and fees deduction on your income tax return if your filing status is married filing separately.
4. You cannot take the deduction if you are claimed, or can be claimed, as a dependent on someone else’s return.
5. The deduction is reduced or eliminated if your modified adjusted gross income exceeds certain limits, based on your filing status.
6. You cannot claim the tuition and fees deduction if you or anyone else claims the Hope or Lifetime Learning credit for the same student in the same year.
7. If the educational expenses are also allowable as a business expense, the tuition and fees deduction may be claimed in conjunction with a business expense deduction, but the same expenses cannot be deducted twice.
8. You cannot claim a deduction or credit based on expenses paid with tax-free scholarship, fellowship, grant, or education savings account funds such as a Coverdell education savings account, tax-free savings bond interest or employer-provided education assistance.
9. The same rule applies to expenses you pay with a tax-exempt distribution from a qualified tuition plan, except that you can deduct qualified expenses you pay only with that part of the distribution that is a return of your contribution to the plan.
10. IRS Publication 970, Tax Benefits for Education, can help eligible parents and students understand the special rules that apply and decide which tax break to claim.

Links:

• Form 8863, Education Credits (PDF 82K)
• Publication 970, Tax Benefits for Education (PDF 368K)

For additional information related to tax preparation or to obtain a free tax organizer, contact Hewitt Business Consultants at (919) 341-1585 or email Laurice Hewitt directly at laurice@hewittbusinessconsultants.com.