Taxes Archives - Page 6 of 9

Child Tax Credit Of $1000 Extended Temporarily For 2011-2012

Yesterday we talked about one of the negative effects of the recent tax cut package that was passed, the fact that taxpayers who itemize must delay filing. If you're expecting a big refund and anticipate claiming quite a few deductions, you'll most likely need to wait to file taxes until mid to late February.

Today I want to touch on another tax credit that was extended that a lot of parents will be happy about, the $1000 child tax credit.

An Extension Of The $1000 Child Tax Credit

Congress and President Obama took action on the expiring Bush era tax cuts on December 17th last month. The passage of the bill lead to a lot of relieved sighs for many folks as a lot of popular tax breaks were set to expire, and the bill extended many of them, even if just temporarily. There was a smaller version of the home improvement tax credit, an extension of the current tax rates (instead of a huge tax hike), and a payroll tax holiday, meaning a cut of 2% in Social Security tax withholdings in 2011.

In addition to the measures mentioned above, under H.R.4853 the Child Tax Credit (CTC) of $1000 per child will be extended for 2011-2012 as well.

I've got a co-worker and friend who just had his 5th child this past year. In most instances having that many children leads to a ton of expenses, but this is one case where he comes out ahead. I think he was pretty happy that the $1000 child tax credit was passed as it will mean $5000 in tax credits for him – $2500 more than if it had expired and returned to the previous $500 per child level.

We'll be claiming the child tax credit for the first time this year as well as we just had our first child. Daddy thanks you, my little one!

Since this is a tax credit, it means that once you figure out how much you owe in taxes for the year, the amount of credit will reduce the amount of tax owed (as opposed to a deduction which reduces taxable income). For example, if we owed $3000, and claimed the child tax credit for our one child, we would then owe $2000.

Who Is Eligible For The Child Tax Credit?

The Child Tax Credit has eligibility requirements, and is subject to income limits and phaseouts.

Income limit of $75,000 for single parents.
Income limit of $110,000 for married couples.
Income limit of $55,000 for married filing separately.

After these income levels the credit is reduced by 5% of adjusted gross income.

Quick Facts From The IRS: The Child Tax Credit

The IRS recently put some guidance on their website about who is able to claim the Child Tax Credit. If you've already claimed the credit you probably already know these things, but I thought I’d share them here as a reminder.

1. Amount – With the Child Tax Credit, you may be able to reduce your federal income tax by up to $1,000 for each qualifying child under the age of 17.

2. Qualification – A qualifying child for this credit is someone who meets the qualifying criteria of six tests: age, relationship, support, dependent, citizenship, and residence.

3. Age Test – To qualify, a child must have been under age 17 – age 16 or younger – at the end of 2010.

4. Relationship Test – To claim a child for purposes of the Child Tax Credit, they must either be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister or a descendant of any of these individuals, which includes your grandchild, niece or nephew. An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption.

5. Support Test – In order to claim a child for this credit, the child must not have provided more than half of their own support.

6. Dependent Test – You must claim the child as a dependent on your federal tax return.

7. Citizenship Test – To meet the citizenship test, the child must be a U.S. citizen, U.S. national, or U.S. resident alien.

8. Residence Test – The child must have lived with you for more than half of 2009. There are some exceptions to the residence test, which can be found in IRS Publication 972, Child Tax Credit.

9. Limitations – The credit is limited if your modified adjusted gross income is above a certain amount. The amount at which this phase-out begins varies depending on your filing status. For married taxpayers filing a joint return, the phase-out begins at $110,000. For married taxpayers filing a separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000. In addition, the Child Tax Credit is generally limited by the amount of the income tax you owe as well as any alternative minimum tax you owe.

10. Additional Child tax Credit – If the amount of your Child Tax Credit is greater than the amount of income tax you owe, you may be able to claim the Additional Child Tax Credit.

Child Tax Credit Resources

IRS Publication 972: Child Tax Credit (PDF)

Are you claiming the child tax credit this year? How much will you save because the credit is extended at the current $1000 level?

If You Itemize Your Taxes You’ll Have To Wait A Month Or Two To File Your Returns

By Mr. Money 11 Comments

This past month the Congress and the Obama administration passed a stop-gap tax cut package that would allow the current tax rates to continue for 2 more years, in addition to passing a 2011 payroll tax holiday, extending $1000 child tax credit and the estate tax.

While many folks are glad that an extension of the current rates was passed – even if it is temporary – there are still going to be problems as a result of how late in the year the tax package was passed. Some people will now experience tax filing delays if they itemize. Expecting a hefty refund – and were counting on it early in the year? You may be out of luck.

Tax Filing Delays If You Itemize

Because of how late in the year the tax bill was passed (December 17th, 2010), the IRS has now announced that the estimated 50 million taxpayers who itemize their deductions will not be able to file taxes until the IRS has had a chance to update their software to account for the tax package. From CNN:

Itemize your tax deductions? Itching for a refund? You're going to have to wait.

The IRS said that it needs until mid- to late-February to reprogram its processing systems because Congress acted so late this year cleaning up the tax code. The bill, which includes deductions for state and local sales taxes, college tuition and teacher expenses, wasn't signed into law until Dec. 17.

The bill ensured that the federal income tax rates would not change, and itemized deductions will continue to be allowed in full for high-income taxpayers.

As a result, the 50 million taxpayers who itemize their deductions will have to hold off for a bit before they file. Of course, not everyone files early: only about 9 million of the 140 million U.S. tax filers filed in January or February of last year.

So those of us who itemize on our taxes, we won't be able to file until mid to late February.

UPDATE: The IRS has released a statement saying that February 14th is the day that itemizers can start filing their returns. Details here: Tax Filing Delays

On the bright side, while an estimated 50 million taxpayers itemize their taxes, of those only about 9 million usually file in January in February.

Who Does The Tax Filing Delay Affect?

The tax filing deadline basically affects anyone who will be itemizing on their taxes.

The delay affects both paper and electronic filers who itemize deductions on Form 1040 Schedule A. That includes those claiming the new Educator Expense Deduction, which credits grade school teachers for out-of-pocket expenses of up to $250.

It also includes those claiming deductions for college students, covering up to $4,000 of tuition, which is claimed on Form 8917, though the IRS said there will be no delays for those that claim other education tax credits.

If you file a form 1040 Schedule A, you'll be affected.

When Will Itemizers Be Able To File?

So while there will be a delay for itemizers in filing til mid to late February, is there an actual date that the IRS anticipates that they'll be ready to go? Not as of yet.

Though itemizers can work on their tax returns before the IRS is ready to accept them, the government said people should not send them in before it is ready to process the returns.

The IRS hasn't yet said exactly what day it will be able to begin processing the impacted tax returns, but it expects to announce that date “in the near future.”

So they don't have a date yet, but should be announcing one in the “near future”. So don't send your tax returns in yet.

Some Software Allows Itemizers To File Now

Many or most of the tax filing software are already up to date for the new tax law, and while you won't be able to get a refund until the IRS starts actually accepting returns, you can file your return with some companies already. For example, TurboTax will allow you to file your return starting January 6th.

don’t wait to start your return. TurboTax products are already up-to-date with all the latest forms and schedules. You can prepare your return with TurboTax and electronically file it beginning on Jan. 6.

TurboTax will securely hold your return until the IRS begins accepting returns impacted by the processing delays. TurboTax will send you an email confirmation that your return has been e-filed and accepted by the IRS.

Once the IRS gives the OK TurboTax will file the return, and send you an email confirmation once the return is e-filed and accepted by the IRS.

TurboTax is the software I used last year to file my taxes, and I highly recommend it. It has several different packages to choose from – I chose TurboTax Deluxe as it works nicely for my small business scenario – and Schedule C income. Check out all of your filing options at their site.

Are you itemizing your taxes this year, and were you planning on filing right away to get a refund? What are your thoughts on the delay?

2011 Home Improvement Tax Credits For Energy Efficient Products: Insulation, Windows, Heaters And More

By Mr. Money 24 Comments

In the past couple of years a lot of people have been enticed into purchasing new windows, doors or other energy efficient home improvements because of the $1500 in tax credits that are available on qualified energy efficient home improvements. I think this last week of 2010 may see a flurry of activity as thousands of people rush to home improvement stores and contractors to get improvements done before the end of the year, and the expiration of the $1500 tax credit. Why you ask? Because the 2011 home improvement tax credit has been reduced in the amount, in addition to what qualifies. From the latimes.com

provisions in the bill could be bad news for homeowners interested in remodeling projects to conserve energy next year. The legislation slashed the popular tax credits for energy-efficient remodeling from 30% of an improvement’s cost ($1,500 maximum per taxpayer) to just a 10% credit with a $500 maximum for expenditures on insulation materials, exterior windows and storm doors, skylights, and metal and asphalt roofs that resist heat gain.

Energy Efficient Home Improvement Tax Credit For 2011

The home improvement tax credit we've had for the past 2 years allowed homeowners to claim up to 30% of cost of the home improvement, up to $1,500. The amount of that credit is substantial enough that a lot of people were deciding to finally upgrade old windows or doors – $1500 was just too much to pass up.

That tax credit is expiring on December 31st, 2010 (so act this week if you want in!). The tax cut package passed last week passed a new version of the tax credit for 2011, but the amounts have been reduced. Here are the details.

Home improvement tax credit: 10% of cost of the home improvement, up to a maximum of $500.
Expiration: December 31, 2011
Eligibility: Must be on an existing home & your principal residence. New construction and rentals don’t qualify.
Reduced max credits: Some items have reduced maximum tax credits now as well. Details below.

So you can receive at most a home improvement tax credit of $500. If you've already received credits totaling $500 or more from 2005-2010, you aren't able to claim the credit in 2011.

What Products Are Eligible For The 2011 Home Improvement Tax Credit?

energystar

Most of the same products that were eligible for the 2010 home improvement tax credit are eligible for the 2011 version. The amounts on most have just been reduced and/or capped. Some of the eligible products include:

Energy efficient doors and windows. Installation costs are not eligible for the credit. Other restrictions apply. EnergyStar windows have a max of only $200 eligible for the credit

Water Heaters. Credit includes installation costs; some restrictions for energy efficiency apply. $300 max credit.

Insulation, whether spray foam, fiberglass, or blow-in cellulose, they’re all covered so long as they meet IECC requirements. Installation cost is NOT covered.

HVAC components, including advanced air handlers, air force heat pumps, central A/C units, boilers, propane, and gas furnaces. Tax credits include installation costs. $300 limit, and furnaces must now be 95% efficient.

Biomass Stoves. $300 credit limit.

Metal and asphalt roofs. Credit doesn’t include installation costs.

According to the government site, some of the tax credits allow you to claim installation costs, while other credits do not. To find out if your product is included, and whether you can include installation costs, check the government site here.

Applying For The 2011 Tax Credit?

To claim the energy efficient products tax credit, you’ll need to claim the credit on your 2011 taxes in 2012. There will be a form from the IRS to send in with your return. (I’ll update with a link once it becomes available). The product has to be placed in service in 2011.

2011 Federal Income Tax Brackets for your reference.

Willl People Still Take Advantage Of The Credit?

The tax credits have been greatly reduced for many products. For example, if you replaced your windows last year, you may have been able to claim the full $1500 credit. This year, you'd be maxed out at $200. That's quite a drop.

Will that mean that less people go out to buy these energy efficient home products? Most likely. To me that really reduced the effectiveness and the reason for the credit. Why even have it if it doesn't have a stimulus effect?

A lot of building industry folks aren’t happy about the reduction in the credit either.

The net effect of all this, say home building and remodeling experts, will be to severely diminish consumers’ interest in energy-efficient home improvements. Donna Shirey, chairwoman of the Remodelers Council of the National Assn. of Home Builders and president of a contracting firm in the Seattle area, said the gutting of energy-efficiency credits “is a big step backward. It’s bad for the environment, bad for consumers and, of course, bad for jobs in our industry. We’re heading the wrong way here, sending absolutely the wrong message.”

What are your thoughts about the reduction in the amount of the credit? Do you think it will have a negative effect on home remodelers, contractors and other building trades? Tell us your thoughts in the comments.

2011 Payroll Tax Holiday Will Mean A Cut Of 2% In Social Security And Medicare Payroll Taxes

By Mr. Money 14 Comments

This past week the Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The tax package was designed to extend the Bush era tax rates for another 2 years, in addition to extending unemployment benefits, lowering the estate tax and other smaller measures. This means that the 2011 federal income tax brackets will remain essentially unchanged.

A few new tax measures were created in addition to extending the current rates, however. Among them was the 2011 payroll tax holiday.

2011 Payroll Tax Holiday

One measure that President Obama wanted to pass as a replacement to the expiring Making Work Pay tax credit that was enacted in 2009 is the new 1 year 2011 payroll tax holiday. The payroll tax, or FICA portion of your paycheck tax withholding – which funds Social Security and Medicare, will be cut by 2% for 2011. The withholding rates for your Social Security taxes will go from 6.2% to 4.2% for the 2011 tax year. The other 1.45% of your FICA taxes go to Medicare funding, and will remain unchanged.

What does that mean for the average taxpayer? Around a $1000 tax savings. Since the Social Security tax is capped at $106,800, the maximum savings that could be seen by a higher income individual is around $2136. This as opposed to a $400 credit for singles and $800 credit for families under the “Making Work Pay” tax credit.

When Will I See The Extra 2% In My Paycheck?

Typically the payroll tax is taken care of by your employer or the company that processes your payroll. You as the employee shouldn't need to take any action – like filling out a W4 withholding form.

New withholding tables have been released by the IRS now, so most employers will begin updating their own tables soon. Since the legislation was passed so late in the year, employers will have until 1/31/2011 to put in place the new payroll tax rate of 4.2%, and make any adjustments or corrections by 3/31/2011. So you should starting seeing it shortly after the new year. If you haven't seen the changes in your paycheck byFebruary, you may want to ask your HR department when the change will be happening.

What are your thoughts on the new payroll tax holiday? Are you glad they enacted something to take the place of the “Making Work Pay” tax credit? What are your thoughts?

2011 Marginal Tax Rates: Will We Keep The Same Rates, Or Will Taxes Go Up?

By Mr. Money 1 Comment

The last few months we've had quite a bit of uncertainty when it comes to what will happen to our 2011 marginal tax rates. The Congress and President Obama have gone back and forth trying to work out a deal on extending the current tax rates. First there was no consensus on whether they would extend them for all taxpayers, or only some. Republicans wanted them extended for everyone, while the Democrats wanted them extended for everyone except high income individuals.

After the election at the beginning of November, however, President Obama took on a decidedly different tone when it came to the tax rate extensions. His party had lost power in the House, and he was now more open to a compromise to get something done. He doesn't want to risk having the rates go up on the middle class and poor, and admits that raising the rates while our economy is down like it is – wouldn't be the course he'd want to take.

Package To Extend Marginal Tax Rates For 2 Years

A couple of weeks ago President Obama met with Republicans and hammered out a tax cut package that would extend the current tax rates for another 2 years. Also included in the package would be a social security tax holiday, in addition to an extension for 13 more months of unemployment benefits for the long term unemployed – which lapsed last month. Details of what is included in the package:

Extend Bush tax cuts for everyone, for 2 years.
Reduce Social Security tax levied on a worker’s wages from 6.2% to 4.2% for one year.
Reinstatement of the estate tax at 35%
Extension of jobless benefits for long term unemployed for another 13 months.
Extend current tax rates on capital gains and dividends for two years, including for higher earners.
Extend business tax breaks, including credit for spending on research

Where Is The Tax Cut Package Now?

As of this week the tax cut package is still working it's way through Congress. Yesterday the Senate passed the package overwhelmingly, and it now moves on to the House.

The Senate approved a controversial $858 billion tax cut package Wednesday, overwhelmingly voting to extend the Bush-era tax reductions despite a series of objections from both the left and the right.

The measure passed 81-19 to advance to the House of Representatives, which will take it up on Thursday, according to Majority Leader Steny Hoyer, D-Maryland.

The package includes a two-year extension of the Bush-era tax cuts set to expire December 31. It also would extend unemployment benefits for 13 months, cut the payroll tax by 2 percentage points for a year, restore the estate tax at a lower level and continue a series of other tax breaks.

So one of the key hurdles, passage in the Senate, has now been cleared.The problem? In the House some of the Democrats have threatened to change certain provisions of the bill that they don't like, which could derail the compromise.

A number of House Democrats, including Speaker Nancy Pelosi, D-California, want to change the estate tax to levels previously approved in a separate House bill that would exempt inheritances up to $3.5 million and tax amounts above that at a 45% rate. Pelosi said Wednesday the change would bring in an additional $25 billion instead of providing tax protection to only 6,600 more families through the lower rate and higher exemption in the negotiated tax deal.

Some moderate Democrats have called for the House to pass the bill unchanged. So now we'll have to wait and see if the measure will be changed, and if so, what that means for hopes of it passing.

The House Rules Committee decided Wednesday night to allow a vote on changing the estate tax provision to the levels in the previously passed House bill. If approved, the changed bill would then go back to the Senate. If rejected, the House would then hold a separate vote on the Senate version, with approval sending the bill to Obama.

Republicans involved in the negotiations with the White House on the package have warned that any changes by the House could derail the entire proposal, causing tax rates to increase in 2011.

So now we wait and see what happens with the bill – if the House votes to change the estate tax provision, and if so, if the Senate will allow the changes. Some have said that such a change could derail the deal, and could mean that marginal tax rates go up on January 1st. We shall see!

UPDATE: Sounds like the House passed the bill now as well, 277-148. Both parties contributed almost an equal amount of votes to get it to pass – 139 Dems, 138 Republicans. All that remains now is for the president to sign the extension.

What do you think will happen? Will the compromise package be passed, or will changes be made to the package that sends it back to the Senate. Tell us what you think in the comments!

President Obama And GOP Reach Deal On Extending Bush Tax Cuts. Will Congressional Democrats Go Along?

By Mr. Money 3 Comments

We've been talking for months now about whether or not Congress and President Obama would be renewing the Bush tax cuts of 2001 and 2003. We've looked at what the 2011 tax rates would be if they weren't extended, and talked about what some of the problems of not extending the Bush tax cuts would be. In the end I wasn't sure that the Democrats and Republicans could find enough common ground on the issue to actually come up with a compromise solution. But last night President Obama and Congressional Republicans agreed in principle to a deal to extend the Bush tax cuts for all taxpayers, including high income earners. Not all Democrats are happy about the deal, so it still remains to be seen what they will do. Here is Obama announcing the deal.

In exchange for allowing an extension of the tax cuts, President Obama was able to get some concessions which are detailed below.

Deal On Extending The Bush Tax Cuts

Last night President Obama announced the deal (see the video to the right), and what it would entail.

President Barack Obama reached agreement Monday with Republican leaders in Congress on a broad tax package that would extend the Bush-era income tax cuts for two years, reduce worker payroll taxes for one year and give more favorable treatment to business investments.

Other elements of the deal include a temporary reinstatement of the estate tax at 35%—the level favored by most Republican lawmakers—as well as an extension of jobless benefits for the long-term unemployed.

“We have arrived at a framework for a bipartisan agreement,” Mr. Obama said on Monday night, capping weeks of negotiations with leaders in Congress.

The outcome of the negotiations is vital, because the current tax levels signed into law by President George W. Bush expire on Dec. 31. Unless Congress acts, tax rates on virtually all Americans who pay income taxes will rise on Jan. 1. That could affect economic growth and even holiday sales.

What Is In The Deal?

To recap, the following were agreed to by President Obama and Congressional Republicans. (No Democrat nod to this plan as of yet).

Extend Bush tax cuts for everyone, for 2 years.
Reduce Social Security tax levied on a worker's wages from 6.2% to 4.2% for one year.
Reinstatement of the estate tax at 35%
Extension of jobless benefits for another 13 months, beyond current 99 weeks.
Extend current tax rates on capital gains and dividends for two years, including for higher earners.
Extend a raft of business tax breaks, including credit for spending on research

Democrats Not On Board… Yet

So far the plan has been panned by Congressional Democrats and the liberal base, and Obama has admitted that there is a tough road to get this deal passed.

In reaching the deal, whose details still need to be worked out, Mr. Obama brushed past the demands of many in his own party to curb tax cuts for the wealthy. Some liberal lawmakers and activists were left seething, particularly over last-minute concessions to Republicans on the estate tax. Democratic leaders didn't agree to the deal during meetings on Monday with Mr. Obama and Vice President Joe Biden, according to a House aide.

“I can tell you with certainty that legislative blackmail of this kind by the Republicans will be vehemently opposed by many, if not most, Democrats,” said Rep. John Conyers (D., Mich.).

In the Senate, Tom Harkin (D., Iowa) called it “an understatement” to say he was disappointed.

So at this point liberal lawmakers and activists are “left seething” at the deal, and convincing them that his is a good idea isn't going to be easy. Obama may need to rely on Republicans to help get this passed.

White House officials will now try to persuade Democrats to back the agreement, but anger on the left suggests that Mr. Obama might need to rely heavily on Republican support to move legislation through Congress.

Republican leaders spoke highly of the agreement. In a statement, House Republican Whip Eric Cantor said, “No one gets everything they want in a deal, but our top priority is to restore certainty to the private sector so that businesses small and large can start hiring again.”

Senate Republican Leader Mitch McConnell also praised the deal and asked that Democrats in Congress now “show the same openness to preventing tax hikes the administration has already shown.”

The Republicans admit that they didn't want to extend unemployment insurance past the current 99 weeks or reinstate the estate tax, but that the political reality was that they would need to in order to come to a compromise.

If Tax Cuts Are Passed, Will It Lead To Growth And More Stability?

Many congressional leaders have stated that in order to get the economy moving again we need to pass something in order to restore a bit of stability for business. They need to know what's going to be happening next year so that they can adjust payroll, plan expenditures and move forward in their planning for 2011. Hopefully if this can get passed it will be a spark that we need to give business a boost.

What do you think about the deal that President Obama announced last night. Do you think it's a good thing, and will congressional Democrats get on board? Tell us your thoughts in the comments.

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