The Internal Revenue Service recognizes that many people may be having difficult times financially. There can be a tax impact to events such as job loss, debt forgiveness or tapping a retirement fund. If your income decreased, you may be newly eligible for certain tax credits, such as the Earned Income Tax Credit.
Most importantly, if you believe you may have trouble paying your tax bill contact the IRS immediately. There are steps we can take to help ease the burden. You also should file a tax return even if you are unable to pay so you can avoid additional penalties.
Here are some “What if” scenarios and the possible tax impact:
For a definition of the Midwestern Disaster Area for Various Provisions of the Tax Extenders and AMT Relief Act of 2008, see Notice 2008-109
The Housing and Economic Recovery Act of 2008 offers a new option to homeowners who previously claimed a casualty loss deduction resulting from hurricanes Katrina, Rita and Wilma. See the news release, notice and questions and answers for further details.
There is a variety of tax credits, deductions and savings plans available to taxpayers to assist with the expense of higher education.
A tax credit reduces the amount of income tax you may have to pay.
A deduction reduces the amount of your income that is subject to tax, thus generally reducing the amount of tax you may have to pay.
Certain savings plans allow the accumulated interest to grow tax-free until money is taken out (known as a distribution), or allow the distribution to be tax-free, or both.
An exclusion from income means that you won't have to pay income tax on the benefit you're receiving, but you also won't be able to use that same tax-free benefit for a deduction or credit.
American Opportunity Credit
Under the American Recovery and Reinvestment Act (ARRA), more parents and students will qualify over the next two years for a tax credit, the American opportunity credit, to pay for college expenses.
The American opportunity credit is not available on the 2008 returns taxpayers are filing during 2009. The new credit modifies the existing Hope credit for tax years 2009 and 2010, making it available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible will qualify for the maximum annual credit of $2,500 per student.
The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the existing Hope and lifetime learning credits.
Special rules apply to a student attending college in a Midwestern disaster area. For tax-year 2009, only, taxpayers can choose to claim either a special expanded Hope credit of up to $3,600 for the student or the regular American opportunity credit.
The Hope credit generally applies to 2008 and earlier tax years. It helps parents and students pay for post-secondary education. The Hope credit is a nonrefundable credit. This means that it can reduce your tax to zero, but if the credit is more than your tax the excess will not be refunded to you. The Hope credit you are allowed may be limited by the amount of your income and the amount of your tax.
The Hope credit is for the payment of the first two years of tuition and related expenses for an eligible student for whom the taxpayer claims an exemption on the tax return. Normally, you can claim tuition and required enrollment fees paid for your own, as well as your dependents’ college education. The Hope credit targets the first two years of post-secondary education, and an eligible student must be enrolled at least half time.
Generally, you can claim the Hope credit if all three of the following requirements are met:
You pay qualified education expenses of higher education.
You pay the education expenses for an eligible student.
The eligible student is either yourself, your spouse or a dependent for whom you claim an exemption on your tax return.
You cannot take both an education credit and a deduction for tuition and fees (see Deductions, below) for the same student in the same year. In some cases, you may do better by claiming the tuition and fees deduction instead of the Hope credit.
Education credits are claimed on Form 8863, Education Credits (Hope and Lifetime Learning Credits). For details on these and other education-related tax breaks, see IRS Publication 970, Tax Benefits of Education.
In 2009, the IRS launched a return preparer review to strengthen partnerships with tax return preparers and tax practitioners and ensure that all preparers and practitioners adhere to professional standards. On Jan. 4, 2010, the IRS released the results of its review, with proposals for the regulation of return preparers.
While most preparers provide excellent service to their clients, some unscrupulous return preparers file false and fraudulent tax returns and ultimately defraud their clients. When the IRS becomes aware of these, it works with the U.S. Department of Justice to obtain civil injunctions or to criminally prosecute such preparers. Find out more.
This revenue procedure identifies the relevant categories of tax returns and claims for refund for purposes of the tax return preparer penalty under section 6694 of the Internal Revenue Code (Code), and identifies the returns and claims for refund required to be signed by a tax return preparer.
Guidance for tax return preparer signature requirements
Standards of Practice
The IRS' Office of Professional Responsibility establishes and enforces consistent standards of competence, integrity and conduct for tax professionals (enrolled agents, attorneys, CPAs and other individuals and groups covered by Circular 230. For more information, see:
WASHINGTON — Following last week’s tax law changes, the Internal Revenue Service announced today the upcoming tax season will start on time for most people, but taxpayers affected by three recently reinstated deductions need to wait until mid- to late February to file their individual tax returns. In addition, taxpayers who itemize deductions on Form 1040 Schedule A will need to wait until mid- to late February to file as well.
The start of the 2011 filing season will begin in January for the majority of taxpayers. However, last week’s changes in the law mean that the IRS will need to reprogram its processing systems for three provisions that were extended in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that became law on Dec. 17.
People claiming any of these three items — involving the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction as well as those taxpayers who itemize deductions on Form 1040 Schedule A — will need to wait to file their tax returns until tax processing systems are ready, which the IRS estimates will be in mid- to late February.
“The majority of taxpayers will be able to fill out their tax returns and file them as they normally do,” said IRS Commissioner Doug Shulman. “We will do everything we can to minimize the impact of recent tax law changes on other taxpayers. The IRS will work through the holidays and into the New Year to get our systems reprogrammed and ensure taxpayers have a smooth tax season.”
The IRS will announce a specific date in the near future when it can start processing tax returns impacted by the late tax law changes. In the interim, people in the affected categories can start working on their tax returns, but they should not submit their returns until IRS systems are ready to process the new tax law changes.
The IRS urged taxpayers to use e-file instead of paper tax forms to minimize confusion over the recent tax changes and ensure accurate tax returns.
Taxpayers will need to wait to file if they are within any of the following three categories:
Taxpayers claiming itemized deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses as well as state and local taxes. In addition, itemized deductions include the state and local general sales tax deduction extended in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 enacted Dec. 17, which primarily benefits people living in areas without state and local income taxes and is claimed on Schedule A, Line 5. Because of late Congressional action to enact tax law changes, anyone who itemizes and files a Schedule A will need to wait to file until mid- to late February.
Taxpayers claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students — covering up to $4,000 of tuition and fees paid to a post-secondary institution — is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit and Lifetime Learning Credit.
Taxpayers claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. The educator expense deduction is claimed on Form 1040, Line 23, and Form 1040A, Line 16.
For those falling into any of these three categories, the delay affects both paper filers and electronic filers.
The IRS emphasized that e-file is the fastest, best way for those affected by the delay to get their refunds. Those who use tax-preparation software can easily download updates from their software provider. The IRS Free File program also will be updated.
As part of this effort, the IRS will be working closely with the tax software industry and tax professional community to minimize delays and ensure a smooth tax season.
Updated information will be posted on IRS.gov. This will include an updated copy of Schedule A as well as updated state and local sales tax tables. Several other forms used by relatively few taxpayers are also affected by the recent changes, and more details are available on IRS.gov.
In addition, the IRS reminds employers about the new withholding tables released Friday for 2011. Employers should implement the 2011 withholding tables as soon as possible, but not later than Jan. 31, 2011. The IRS also reminds employers that Publication 15, (Circular E), Employer’s Tax Guide, containing the extensive wage bracket tables that some employers use, will be available on IRS.gov before year’s end.