If you have too little federal tax withheld from your pay, you could end up owing a lot of money when you file your taxes. Conversely, if you withhold too much, you will get a large refund next year, but that means you gave up the use of your money for several months during the year. You might want to adjust your federal tax withholding with your employer so that your withholding will not be too little or too much. You also should evaluate your withholding if you have recently married or divorced, added a dependent, purchased a home, changed jobs or retired. The withholding calculator at IRS.gov (link below) can help you figure the correct amount of federal withholding and provide information you can use to complete a new IRS Form W-4, Employee’s Withholding Allowance Certificate.

Before you begin, you will need to have these items:

• Your most recent pay stubs.
• Your most recent federal income tax return.

Here are some tips for using the withholding calculator:

• Fill in all information that applies to your situation.
• Estimate when necessary. But remember, the results are only as accurate as the information you provide.
• Check the information links embedded in the program whenever you have a question.
• Print out the final screen that summarizes your entries and the results. Use it to complete a new Form W-4 (if necessary) and give the completed W-4 to your employer. Keep the print out of the final screen and a copy of your new W-4 with your tax records.

For many people, the withholding calculator is a great tool that can simplify the process of determining your withholding. However, if you are subject to the alternative minimum tax or self-employment tax, or if your current job will end before the end of the year, you probably can achieve more accurate withholding by following the instructions in IRS Publication 919, How Do I Adjust My Tax Withholding (link below), which also is available at www.IRS.gov or by calling 1-800-TAX-FORM (1-800-829-3676).

For further information, contact your professional tax advisor or tax prepaper, or by calling Hertsel Shadian, Attorney at Law, LLC at (503) 352-6985. Please also feel free to share this article with others that might find this information helpful.

Links:

• IRS Withholding Calculator
• IRS Publication 919, How Do I Adjust My Tax Withholding,
• IRS Form W-4, Employee’s Withholding Allowance Certificate

If you are a taxpayer that is adopting or did adopt a child in 2011, you should familiarize yourself with the Federal adoption tax credit. The Affordable Care Act increased the amount of the credit and made it refundable, which means it can increase the amount of your refund. Following are six things to know about this valuable tax credit:

1. The adoption tax credit—which can be as much as $13,170—offsets qualified adoption expenses, making adoption possible for some families who could not otherwise afford it. Taxpayers who adopted a child in 2010 or 2011 may qualify if they adopted or attempted to adopt a child and paid qualified expenses relating to the adoption.
2. Taxpayers with modified adjusted gross income of more than $182,520 in 2010 may not qualify for the full amount; the credit phases out completely for modified adjusted gross income at $222,520. However, the IRS might make inflation adjustments for 2011 to this phase-out amount as well as to the maximum credit amount.
3. You might be able to claim the credit even if the adoption does not become final. If you adopt a special needs child, you might qualify for the full amount of the adoption credit even if you paid few or no adoption-related expenses.
4. Qualified adoption expenses are those reasonable and necessary expenses directly related to the legal adoption of a child who is under 18 years old, or physically or mentally incapable of caring for himself or herself. These expenses may include adoption fees, court costs, attorney fees and travel expenses.
5. To claim the credit, a taxpayer must file a paper tax return and Form 8839, Qualified Adoption Expenses (see link below for form and instructions), and must attach documents supporting the adoption. Documents might include a final adoption decree, placement agreement from an authorized agency, court documents, and the state’s determination for special needs children. Taxpayers still can use IRS Free File to prepare their returns, but such returns must be printed and mailed to the IRS, along with all required documentation. Failure to include required documents will delay a taxpayer’s refund.
6. The IRS states that it is “committed to processing adoption credit claims quickly, but it also must safeguard against improper claims by ensuring the standards for this important credit are met.” Accordingly, if a taxpayer’s return is selected for review, please keep in mind that the IRS will want to ensure the legal criteria are met before the credit is paid. If you are owed a refund beyond the adoption credit, the IRS states that you still will receive that part of your refund while the review is being conducted.

For more information about this valuable tax credit, contact your professional tax advisor or tax preparer, or call Hertsel Shadian, Attorney at Law, LLC at (503) 352-6985. Further information also is available on the IRS’s Adoption Benefits FAQ page (see link below), which can be accessed on the official IRS website at www.IRS.gov, or in the instructions to IRS Form 8839, Qualified Adoption Expenses (link below), which also can be downloaded from the IRS website or ordered by calling 800-TAX-FORM (800-829-3676). Please also feel free to share this article or the link to this article with others that might benefit from this information.

Links:

• Adoption Benefits FAQs
• Form 8839, Qualified Adoption Expenses
• Instructions for Form 8839, Qualified Adoption Expenses

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If your mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you may be able to claim special tax relief and exclude the debt forgiven from your income. Here are 10 facts you should know about Mortgage Debt Forgiveness.

1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, a taxpayer may be able to exclude up to $2 million of debt forgiven on his or her principal residence.
2. The limit is $1 million for a married person filing a separate return.
3. A taxpayer may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
4. To qualify, the debt must have been used to buy, build or substantially improve the taxpayer’s principal residence and be secured by that residence.
5. Refinanced debt proceeds used for the purpose of substantially improving a taxpayer’s principal residence also qualify for the exclusion.
6. Proceeds of refinanced debt used for other purposes—for example, to pay off credit card debt—do NOT qualify for the exclusion.
7. If a taxpayer qualifies, he or she can claim the special exclusion by filling out IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (see link below), and attach it to the taxpayer’s federal income tax return for the tax year in which the qualified debt was forgiven.
8. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions—such as insolvency—may be applicable. IRS Form 982 provides more details about these provisions.
9. If a taxpayer’s debt is reduced or eliminated, the taxpayer normally will receive a year-end statement, Form 1099-C, Cancellation of Debt (see link below for a sample), from the lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
10. Taxpayers should examine the Form 1099-C carefully. Taxpayers should notify the lender immediately if any of the information shown is incorrect. A taxpayer also should pay particular attention to the amount of debt forgiven in Box 2, as well as the value listed for his or her home in Box 7.

For more information, taxpayers should consult their professional tax advisor or tax preparer, or call Hertsel Shadian, Attorney at Law, LLC at (503) 352-6985. For additional information about the Mortgage Forgiveness Debt Relief Act of 2007, visit the official IRS website at www.IRS.gov. Another good resource is IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments (see link below). Taxpayers also may obtain a copy of this publication and Form 982 by downloading them from the IRS website at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676). Please also feel free to share this article with others that might benefit from this information.

Links:

• IRS Form 982
• IRS Form 1099-C
• Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (For Individuals)

When school lets out each summer, many students start new summer jobs. The Internal Revenue Service recently sent out a helpful reminder for students that not all the money they earn might make it into their pockets. That is because their employer must withhold taxes. Following are some things students should know if they worked a summer job.

1. When you first start a new job you must fill out a Form W-4, Employee’s Withholding Allowance Certificate. This form is used by employers to determine the amount of tax that will be withheld from your paycheck. If you have multiple jobs, make sure all your employers are withholding an adequate amount of taxes to cover your total income tax liability. To make sure your withholding is correct, use the IRS Withholding Calculator (see link below), also available on the official IRS website at www.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 tips you receive are taxable income and are therefore subject to federal income tax.

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

4. If you have net earnings of $400 or more from self-employment, you also will 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. Food and lodging 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.

For more information, students should contact a tax advisor or professional tax preparer, or call Hertsel Shadian, Attorney at Law, LLC at (503) 352-6985. Additional information also is available on the official IRS website at www.IRS.gov. Please also feel free to share this article with others that might benefit from this information.

Links:

• IRS Withholding Calculator
• Form W-4, Employee’s Withholding Allowance Certificate

If you itemize deductions and are an employee, you may be able to deduct certain work-related expenses. The IRS has put together the following facts to help you determine which expenses may be deducted as an employee business expense.

Expenses that qualify for an itemized deduction include:

• Business travel away from home
• Business use of car
• Business meals and entertainment
• Travel
• Use of your home
• Education
• Supplies
• Tools
• Miscellaneous expenses

You must keep records to prove the business expenses you deduct. For general information on recordkeeping, see IRS Publication 552, Recordkeeping for Individuals (link below), also available on the IRS website at www.IRS.gov, or by calling 800-829-3676.

If your employer reimburses you under an accountable plan, you do not include the payments in your gross income, but you may not deduct any of the reimbursed amounts. An accountable plan must meet three requirements:

1. You must have paid or incurred expenses that are deductible while performing services as an employee.
2. You must adequately account to your employer for these expenses within a reasonable time period, and
3. You must return any excess reimbursement or allowance within a reasonable time period.

If the plan under which you are reimbursed by your employer is non-accountable, the payments you receive should be included in the wages shown on your Form W-2. You must report the income and itemize your deductions to deduct these expenses. Generally, report expenses on IRS Form 2106 or IRS Form 2106-EZ to figure the deduction for employee business expenses and attach the respective Form 2106 to your Form 1040. Deductible expenses are then reported on Form 1040, Schedule A, as a miscellaneous itemized deduction subject to the “2% of your adjusted gross income” rules. Under those rules, generally only employee business expenses that are in excess of 2% of your adjusted gross income can be deducted.

For more information, contact your professional tax advisor or tax preparer, or call Hertsel Shadian, Attorney at Law, LLC at (503) 352-6985. Also see IRS Publication 529, Miscellaneous Deductions (link below), also available on the IRS website, www.IRS.gov, or by calling 800-829-3676. Please also feel free to share this article with others that might benefit from this information.

Links:

• Publication 552, Recordkeeping for Individuals  (PDF)
• Publication 529, Miscellaneous Deductions  (PDF)

Released on September 30, 2011, Revenue Procedure 2011-47 provides rules for employees, volunteers, and partners who are reimbursed for lodging, meals, and incidental expenses, or meals and incidental expenses only, while traveling away from home, to substantiate the expenses by per diem allowance rather than actual expenses. Also, Notice 2011-81 provides the 2011-2012 special per diem rates for taxpayers to use in substantiating the amount of ordinary and necessary business expenses incurred while traveling away from home.

For more information, call your professional tax advisor or tax preparer, or contact Hertsel Shadian, Attorney at Law, LLC at (503) 352-6985. Additional information also is available on the official IRS website at www.IRS.gov.

Many small employers that pay at least half of the premiums for employee health insurance coverage under a qualifying arrangement may be eligible for the small business health care tax credit. This credit can enable small businesses and small tax-exempt organizations to offer health insurance coverage for the first time. It also helps those already offering health insurance coverage to maintain the coverage they already have. The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ 25 or fewer workers with average income of $50,000 or less. For tax years 2010 to 2013, the maximum credit for eligible small business employers is 35 percent of premiums paid and for eligible tax-exempt employers the maximum credit is 25 percent of premiums paid. Beginning in 2014, the maximum tax credit will go up to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible tax-exempt organizations.

Here is what small employers need to know so they don’t miss out on the credit for tax year 2010:

• Hurricane Irene, Tropical Storm Lee and other recent disaster-related tax relief postponed certain tax filing and payment deadlines to Oct. 31, 2011. Qualifying businesses affected by these natural disasters still have time to file and claim the small employer health care credit on Form 8941 and claim it as part of the general business credit on Form 3800, which they would include with their tax return. For more information on the disaster relief visit IRS.gov.
• Sole proprietors who file Form 1040, Partners and S-corporation shareholders who report their income on Form 1040 and had requested an extension have until Oct. 17 to complete their returns. They would also use Form 8941 to calculate the small employer health care credit and claim it as a general business credit on Form 3800, reflected on line 53 of Form 1040.
• Tax-exempt organizations that file on a calendar year basis and requested an extension to file to Nov. 15 can use Form 8941 and then claim the credit on Form 990-T, Line 44f.
• Businesses who have already filed can still claim the credit. For small businesses that have already filed and later determine they are eligible for the credit, they can always file an amended 2010 tax return. Corporations use Form 1120X and individual sole proprietors use Form 1040X.
• Businesses that couldn’t use the credit in 2010 may be eligible to claim it in future years. Some businesses that already locked into health insurance plan structures and contributions for 2010 may not have had the opportunity to make any needed adjustments to qualify for the credit for 2010. So these businesses may be eligible to claim the credit on 2011 returns or in years beyond. Small employers can claim the credit for 2010 through 2013 and for two additional years beginning in 2014.

For more information, please contact Hertsel Shadian, Attorney at Law, LLC at (503) 352-6985. Additional information about eligibility requirements and calculating the credit also can be found on the Small Business Health Care Tax Credit for Small Employers page (see link below) of www.IRS.gov. Please also share this article with others that might benefit from this information.

Links:

• Form 8941, Credit for Small Employer Health Insurance Premiums (PDF)
• Form 3800, General Business Credit (PDF)
• Small Business Health Care Tax Credit for Small Employers

Military personnel have some unique duties, expenses and transitions. Some special tax benefits may apply when moving to a new base, traveling to a duty station, returning from active duty and more. The following tips might put military members a bit more “at ease” when it comes to their taxes.

1. Moving Expenses. If you are a member of the Armed Forces on active duty and you move because of a permanent change of station, you can deduct the reasonable unreimbursed expenses of moving yourself and the members of your household.
2. Combat Pay. If you serve in a combat zone as an enlisted person or as a warrant officer for any part of a month, all your military pay received for military service that month is not taxable. For officers, the monthly exclusion is capped at the highest enlisted pay, plus any hostile fire or imminent danger pay received.
3. Extension of Deadlines. The time for taking care of certain tax matters can be postponed. The deadline for filing tax returns, paying taxes, filing claims for refund, and taking other actions with the IRS automatically is extended for qualifying members of the military.
4. Uniform Cost and Upkeep. If military regulations prohibit you from wearing certain uniforms when off duty, you can deduct the cost and upkeep of those uniforms, but you must reduce your expenses by any allowance or reimbursement you receive.
5. Joint Returns. Generally, joint returns must be signed by both spouses. However, when one spouse may not be available due to military duty, a power of attorney may be used to file a joint return.
6. Travel to Reserve Duty. If you are a member of the U.S. Armed Forces Reserves, you can deduct unreimbursed travel expenses for traveling more than 100 miles away from home to perform your reserve duties.
7. ROTC Students. 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.
8. Transitioning Back to Civilian Life. You may be able to deduct some costs you incur while looking for a new job. Expenses may include travel, resume preparation fees, and outplacement agency fees. Moving expenses may be deductible if your move is closely related to the start of work at a new job location, and you meet certain tests.
9. Tax Help. Most military installations offer free tax filing and preparation assistance during the filing season.

For more information, call Hertsel Shadian, Attorney at Law, LLC, at (503) 532-6985, or see IRS Publication 3, Armed Forces’ Tax Guide, which summarizes many important military-related tax topics. Publication 3 also can be downloaded from the official IRS website at www.IRS.gov or may be ordered by calling 1-800-TAX-FORM (800-829-3676). Other useful information for military personnel also can be found at the following IRS link, Tax Information for Members of the U.S. Armed Forces, which provides further tax information and helpful links. Please also feel free to forward this article to others you know that might benefit from this information.

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For parents with school-aged children, summertime probably also comes with some extra expenses, including summer day camp. However, there might be some good news for parents: those added expenses can help you qualify for a tax credit. Many parents who work or are looking for work must arrange for care of their children under 13 years of age during the school vacation. The Child and Dependent Care Credit is available for expenses incurred during the summer and throughout the rest of the year. Following are some facts to know about the tax credit available for child care expenses:

1. The cost of day camp may count as an expense towards the child and dependent care credit.
2. Expenses for overnight camps do not qualify.
3. Whether your childcare provider is a sitter at your home or a daycare facility outside the home, you’ll get some tax benefit if you qualify for the credit.
4. The credit can be up to 35 percent of your qualifying expenses, depending on your income.
5. You may use up to $3,000 of the unreimbursed expenses paid in a year for one qualifying individual or $6,000 for two or more qualifying individuals to figure the credit.

For more information about this credit, consult your professional tax advisor or tax preparer, or call Hertsel Shadian, Attorney at Law, LLC at (503) 352-6985. You also can check out IRS Publication 503, Child and Dependent Care Expenses, available at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676). See also the previously posted articles on these related topics, Important Tax Facts About the Child and Dependent Care Credit and Ten Important Facts about the Child Tax Credit. [Note that the applicable amounts set out in those articles might have changed since the time those articles first were posted.] Please also feel free to forward this article to others you know who might benefit from this information.

Whether you are self-employed or an employee, if you use a portion of your home for business, you may be able to take a home office deduction.  Here are some things to know about the Home Office deduction so you can account for these related expenses properly during the year to take the deduction on your next year’s return:

1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:

• as your principal place of business, or
• as a place to meet or deal with patients, clients or customers in the normal course of your business, or
• in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.

2. For certain storage use, rental use, or daycare-facility use, you are required to use the property regularly but not exclusively.

3. Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

4. There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

5. If you are self-employed, use IRS Form 8829, Expenses for Business Use of Your Home, to figure your home office deduction and report those deductions on line 30 of Form 1040 Schedule C, Profit or Loss From Business. Use the Instructions to IRS Form 8829 to help you complete the form.

6. If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.

For more information, contact Hertsel Shadian, Attorney at Law, LLC at (503) 352-6985, or see IRS Publication 587, Business Use of Your Home, available at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676). Please also share this article with others you know that might benefit from this information.

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