INCOME TAX Q&A

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Q. How many filing statuses are there?

A. Head of household B. Single C. Married Filing Joint D. Married Filing Separately

Q. Who is required to file a federal return?

A. Taxpayer is Over 65

Single, gross income is at least $10,750.00
Head of Household, gross income is at least $13,450.00
Married filing joint (Both spouses are), gross income is at least $20,900.00
Married filing joint (one spouse) gross income is at least $19,800.00
Married filing separate, gross income is at least $3,650.00
Qualifying widower, gross income is at least $16,150.00

B. Taxpayer is Under 65

Single, gross income is at least $9,350.00
Head of household, gross income is at least $12,050.00
Married filing Joint, gross income is at least $18,700.00
Married filing separate, gross income is at least $3,650.00
Qualified widower, gross income is at least $15,050.00

Q. How long do I have to file an amendment?
A. Generally, to claim a refund, Form 1040X must be filed within 3 years from the date of your original return or within 2 years from the date you paid the tax, whichever is later.

Q. How long can the IRS try to collect on a tax liability or debt?
A. Ten years after the date of the assessment (See 26 USCA 1502).

Q. Who is exempt from filing a federal return?
A. Generally all others who do not meet the above requirements
See For page 4 for North Carolina Tax Table and page 7 for North Carolina filing requirements.

Q. Should a tax married tax payer file joint or separately from their spouse?
A. Depends, but you can qualify for more deductions and credits if you file Joint.
B. On the other hand, you are liable for any debts, penalties, and fines arising from a joint return even if they are your spouses.

Q. Who qualifies to file as Qualifying Widow(er) With Dependent Child?
A. A taxpayer may qualify for a widower if all the following requirements are met:

Their spouse died within the last (2) two years;
Has not remarried;
Have a child or stepchild for whom you can claim an exemption. This does not include a foster child
You paid more than half the cost of keeping up a home (mortgage, insurance, taxes etc.) for the year.

Q. Some common examples of items that are not included in your income are:
A.

Adoption Expense Reimbursements for qualifying expenses
Child support payments
NOTE THAT ALIMONY IS INCOME
Gifts, bequests and inheritances
Workers' compensation benefits
Meals and Lodging for the convenience of your employer
Compensatory Damages awarded for physical injury or physical sickness
Welfare Benefits
Cash Rebates from a dealer or manufacturer
Tax Exempt Interest from municipal bonds and tax exempt bond mutual funds. Although this interest is not taxable it must be reported on line 8b of Form 1040 or 1040A.

Q. Examples of items that may or may not be included in your income are:
A.

Life Insurance If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price.
Scholarship or Fellowship Grant. If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.
Mortgage Interest--Tax payer must be legally obligated to pay (name on mortgage).
Note--refinanced loans do not qualify.
Energy Credits $1,500
Applies to tax years 2009 and 2010 combined;
& Tax Payers Principal Residence.
Type of improvements
Energy Efficient Exterior windows and doors
energy efficient heating/air condition

Q. Itemized Deductions

Home mortgage Interest (fully deductible for notes secured on or before 10/13/87) & insurance premiums
Charitable contributions (receipts are necessary)
NOTE—Certain 2010 Cash Contributions for Haiti Relief Can Be Deducted made after January 11, 2010, and before March 1, 2010.
Job expenses
Education credits
American Opp $2.5K
undergraduate or other recognized degree
AGI >80K but not more >90K (160K and 180K for married) credit reduced
student has no felony drug convictions
child* is under 24 years old full-time student
claimed for only four years
Lifetime Learning Credit $2K
All years of post-secondary education / job/skill training
AGI is btw 50K - 60K reduced (100k-120k if married)
NOTE CAN NOT CLAIM IF THE FOLLOWING
married filing separate OR;
Taxpayer is a dependent who can be claimed on someone's else return OR;
Taxpayer is a nonresident alien OR;
Tuition is refundable OR;
Expenses paid with proceeds from a loan.
student loan interest up to $2500
casualty/theft loss
medical expenses (IF not paid by employer > 7.5% of AGI)
child/dependent care expenses
claimed by custodial parent &;
If filing Married filing joint can be claimed without regard to the spouse paid
if filing separate then credit must have been paid to the person claiming exemption
if head of counsel then credit must have been paid to the person claiming exemption
children under the age of 13 OR;
disabled dependents & spouses with income less than $3,650
Elderly and Disabled
Filing status
Head of Household/or Qualified Widower with AGI is >17.5k
Married filing Joint (both spouses qualify) AGI is > 25K
Married filing joint (one spouse qualifies) AGI is >20K
Citizen or LPR
Is older than 65 years old OR
Disabled and received taxable disability benefits

Q. Standard deductions for 2010 (Different if blind or born before 1946)
A.

Single or Married/Separate $5700
Married filing joint/Widower $11400
Head of Household $8400

Q. Who claim not standard deductions A. If the taxpayer is

married filing separately OR;
has used of itemized deductions OR;
is a dual status alien or non-alien residents (student, work visas)

Q. Are contributions to retirement accounts deductible?
A. Yes Roth IRA in certain circumstances

If Employee covered plan by employer

If filing single AGI >56K --> Full deduction, but if AGI is < 56K & >66K partial deduction
If filing Head of household AGI >66k --> Full deduction, but if < 66K & >89K partial deduction
If filing Married filing joint or widower AGI >89K --> Full deduction, but if AGI < 89K & >109K partial deduction
If married file separately AGI > 10K partial deduction, But if AGI < 10K no deduction.

---note: > is less than, < is greater than, AGI (Adjusted gross income).

If it is Non-Employee plan

If filing single make > Full deduction no matter what your AGI is.
If filing HOH make > Full deduction no matter what your AGI is.
If filing MJ or widower AGI >167K --> Full deduction, but if < 167K & >177K partial deduction.
If married file separately AGI > 10K partial deduction, but if > 10K nothing.

***NOTE MAXIMUM CONTRIBUTION IS 5K PER YEAR for tax payers under the age of 50 and 6K for tax payers over the age of 50.

Q. When are retirement distributions non-taxable. A. IRA

Must be a Roth IRA &
Tax Payer must have had the account for 5 years &
The Tax Payer must be at least 59 years old OR
Be a Qualified first time home buyer (10K Limit on the distribution) OR
Be a Qualified Estate.

Q. Who may a tax payer claim as a dependent?
A. Children under the age of 18, Children over the age of 18 but under 24 years old who are full time students, certain relatives supported by the tax payer.

B. OR Spouses in certain circumstances.

Q. Which is taxable Income?
A. Generally, most income you receive is taxable. But there are some situations when certain types of income are partially taxed or not taxed at all. A complete list is available in IRS Publication 525, Taxable and Nontaxable Income.

These examples are not all-inclusive. For more information, visit the IRS Web site at IRS.gov

Q. Military income inclusions and exclusions chart

These items are includible in gross income, unless the pay is for service in a combat zone.

Basic pay	· Active duty
	· Attendance at a designated service
	school
	· Back wages
	· Drills
	· Reserve training
	· Training duty
Special pay	· Aviation career incentives
	· Diving duty
	· Foreign duty (outside the 48 contiguous
	states and the District of Columbia)
	· Hostile fire
	· Imminent danger
	· Medical and dental officers
	· Nuclear-qualified officers
	· Special duty assignment pay
Bonuses	· Enlistment
	· Reenlistment
Other	· Accrued leave
payments	· Personal money allowances paid to
	high-ranking officers
	· Student loan repayment from
	programs such as the Department
	of Defense Educational Loan
	Repayment Program when year's
	service (requirement) is not
	Attributable to a combat zone.

Excludable Items

These items are excludable from gross income. The exclusion applies whether the item is furnished in kind or is a reimbursement or allowance. There is no exclusion for the personal use of a government-provided vehicle.

Special Pay	· Compensation for active service while in
	a combat zone or a qualified
	Hazardous duty area.
	Note: Limited amount for officers.
Living	· BAH (Basic Allowance for Housing)
allowances	You can deduct mortgage interest and real estate taxes on your home even if you pay these expenses with your BAH.
	· BAS (Basic Allowance for Subsistence)
	· Housing and cost-of-living allowances
	Abroad whether paid by the U.S. Government or by a foreign government.
	· OHA (Overseas Housing Allowance)
Family	· Certain educational expenses for
allowances	dependents
	· Emergencies
	· Evacuation to a place of safety
	· Separation
Death	· Burial services
allowances	· Death gratuity payments (up to $3,000)
	to eligible survivors
	· Travel of dependents to burial site
Moving	· Dislocation
allowances	· Move-in housing
	· Moving household and personal items
	· Moving trailers or mobile homes
	· Storage
	· Temporary lodging and temporary lodging
	expenses
Travel	· Annual round trip for dependent students
allowances	· Leave between consecutive overseas
	tours
	· Reassignment in a dependent-restricted
	status
	· Transportation for you or your dependents
	during ship overhaul or inactivation
	· Per diem
Other	· Defense counseling
payments	· Disability
	· Group-term life insurance
	· Professional education
	· ROTC educational and subsistence
	allowances
	· Survivor and retirement protection plan
	premiums
	· Uniform allowances
	· Uniforms furnished to enlisted personnel
In-kind military	· Legal assistance
benefits	· Space-available travel on government
	aircraft
	· Medical/dental care
	· Commissary/exchange discounts

Foreign Source Income

If you are a U.S. citizen with income from sources outside the United States (foreign income), you must report all that income on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form W-2, Wage and Tax Statement, or 1099 statement from the foreign payor. This applies to earned income (such as wages and tips) as well as unearned income (such as interest, dividends, capital gains, pensions, rents, and royalties).

Certain taxpayers can exclude income earned in foreign countries. For 2000, this exclusion amount is $76,000. However, the foreign earned income exclusion does not apply to the wages and salaries of military and civilian employees of the U.S. Government. Employees of the U.S. Government include those who work at Armed Forces post exchanges, officers' and enlisted personnel clubs, and embassy commissaries, and similar personnel paid from nonappropriated funds. Other foreign income earned by military personnel or their spouses may be eligible for the foreign earned income exclusion. For more information on the exclusion, get Publication 54.

Residents of American Samoa may be able to exclude income from certain possessions. This possession exclusion does not apply to wages and salaries of military and civilian employees of the U.S. Government. If you need information on the possession exclusion, get Publication 570, Tax Guide for Individuals With Income From U.S. Possessions.

Community Property

The pay you earn as a member of the Armed Forces may be subject to community property laws depending on your marital status, your domicile, and the nature of the payment. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Marital status. Community property rules apply to married persons whose domicile during the tax year was in a community property state. The rules may affect your tax liability if you file separate returns or are divorced during the year.

Domicile. Your domicile is the permanent legal home you intend to use for an indefinite or unlimited period, and to which, when absent, you intend to return. It is not always where you presently live.

Nature of the payment. Active duty military pay is subject to community property laws. Armed Forces retired or retainer pay may be subject to community property laws.

For more information on community property laws, get Publication 555, Community Property.

Information Courtesy of Internal Revenue Service

Business Income Tax

Q. Can I deduct the cost of driving to the office?

A. Generally commuter expenses are not deductible, but expenses in incurred from traveling between worksites or to a temporary worksite are deductible.

Q. Can I deduct the cost of my health insurance?

A. Depends, most incorporated businesses and LLC can deduct the cost of health insurance as a business but for Sole proprietorships this deduction may be disallowed. The insurance plan must be established under your business.

Q. When are Legal fees deductible?

A. Legal and professional fees, such as fees charged by accountants, that are ordinary and necessary expenses directly related to operating your business are deductible on Schedule C or C-EZ. However, you usually cannot deduct legal fees you pay to acquire business assets. Add them to the basis of the property.

See http://www.irs.gov/publications/p334/ch08.html

Q. Do I need to provide all of my employees with a W-2?

A. Generally yes unless that employee has made less than $1,700.00 in one calendar year, because then they are exempt from Social Security and Medicaid tax.

Q. How long should payroll records be kept?
A. In general, payroll records should be kept for six years with a review of the file to see if any items relating to current employees should be retained with current records

Q. How long should the records related to a business or other long-term asset be kept?
A. In the case of an asset, records related to the asset should generally be kept for as long as you have the asset plus three years. If the asset was exchanged, the basis for the new asset may include the exchanged asset so the records for both assets will need to be retained until the new asset is disposed plus three years from the file date of the tax return for the year of disposition.

Q. How far back can the IRS go to audit my return?
A. Generally, the IRS can include returns filed within the last three (3) years in an audit. Additional years can be added if a substantial error is identified. Generally, if a substantial error is identified, the IRS will not go back more than the last six (6) years.

See http://www.irs.gov/businesses/small/article/0,,id=219636,00.html

Q. What is passive activity?

A. a rental activity; or, a business in which the taxpayer does not materially participate.

Q. How much of my passive losses can I use to offset my passive income per year?

A. Twenty-five (25) thousand dollars. The offset can only be from income from passive activities. Any amount above that must be carried over in following years for up to five (5) years.

See http://www.irs.gov/businesses/small/article/0,,id=146330,00.html

Returns / Schedules

Schedule A

Schedule B

Schedule C

Schedule C-EZ

Schedule D

Used for itemized deductions

Interest over $1,500. All other interested reported on line 9a or 9b on form 1040

Lists income and expenses related to self-employment (sole-proprietorship).

Business has less than 5K in expenses, no inventory, no passive losses, and

is used to describe capital gains and losses incurred during the tax year, and to calculate the tax amount due given the special reduced tax rates applied to capital gains and qualified (domestic) dividends.

-note up to 3K of losses can be claimed per year.

Schedule E

Schedule EIC

Schedule F

Schedule H

Is used to report income and expenses arising from the rental of real property, royalties, or from pass-through entities (like trusts, estates, partnerships, or S corporations). Where rental property is not the tax payer’s trade or business.

--passive losses and income

Earned income credit.

Profit or Loss from Farming.

Household Employment Taxes

Schedule I

Schedule K

Schedule R

Schedule SE

Alternative Minimum Tax

Used to report rental income where this is the tax payer’s trade or business.

Deductions: Ads, clean/maintenance, property mtg fees, repairs, utilities, ect.

Credit for the Elderly or the Disabled

Self-employment tax

Maxwell Law Firm, PLLC Assists clients with filing tax extensions, tax return preparation, amendments, tax collection defense, tax settlements, and other services. If you need assistance please feel free to call us at 704-461-1883 to schedule your appointment or save 25% by booking your appointment online.

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