If you work or are looking for work, you may be able to claim the child and dependent care credit.  The credit is generally a percentage of the amount of work-related child and dependent care expenses you paid to a care provider. The percentage depends on your adjusted gross income.

Who Qualifies:

1. Your filing status is Single, Married Filing Jointly, Head of Household, or Qualifying Widow(er) with a dependent child.
2. You (and your spouse if Married Filing Jointly) earned income from employment or self-employment.*
3. You paid someone to provide care for a Qualifying Person, and the care provider was not someone you could claim as a dependent, the parent of your Qualifying Person, your spouse, or your child under the age of 19 (regardless of whether they are a dependent).
4. You had to pay for child or dependent care so that you (and your spouse if Married Filing Jointly) could work or seek employment.*

*If Married Filing Jointly, one spouse may be exempt from this requirement if they were a full-time student or were physically or mentally incapable of self-care.

A Qualifying Person for the Child and Dependent Care Credit can be one of the following:

• Any child who is your dependent and was under age 13 when the care was provided
• Your spouse or dependent age 13 or over, if physically or mentally incapable of caring for themselves
• Lived with you more than half the year (there are exceptions for death and divorced or separated parents)

Beginning on Jan. 1, 2012, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 55.5 cents per mile for business miles driven
• 23 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

The rate for business miles driven is unchanged from the mid-year adjustment that became effective on July 1, 2011. The medical and moving rate has been reduced by 0.5 cents per mile.

The IRS may require of proof of your log.   This includes the date of travel, name of person driving (if more than one user of the vehicle), destination and the odometer reading at the start and finish of the trip.  You should keep your logs for 3 years in case of an audit. Driving to your first customer and home from your last customer are NOT included in your log.

Here is a link to a free mileage log.

Mr. Glover took deductions on his income tax returns that would be considered acceptable if he was on a “temporary assignment”. Mariners have generally been characterized as such. Thus, their tax home has been considered to be their residence.

Mr. Glover’s attorney cited the now infamous Sailor Tax cases Johnson and Westling, stating that Glover’s tax home was in Missouri as per the decisions. Mr. Glover’s attorney did not introduce any statutory evidence (Jones Act Law) defining tax home for State tax liability purposes.

The attorney failed to meet substantiation requirements to shift burden of proof to the respondent. This means that the IRS’s position is considered to be correct and that Glover was required to meet the burden of proof.

The Tax Court has defined a Tax Home as the area surrounding a taxpayer’s principal place of business. If a taxpayer does not have a principal place of business, it can shift to their residence.

The Court concluded that all of Glover’s arguments were moot irrelevant, or without merit. This is a dangerous outcome that could cause global implications if not addressed. We’re talking coastwise and foreign.

We need someone to appeal this decision….

Standard deduction amounts -Your standard deduction is based on your filing status and is subject to inflation adjustments each year.

For 2011, the amounts are:
Single     $5,800
Married Filing Jointly   $11,600
Head of Household   $8,500
Married Filing Separately  $5,800
Qualifying Widow(er)  $11,600

So, what about if you live in one state (TN) and work as a merchant mariner in another state (HI), 45 days on/45 days off rotation? Do you pay HI state taxes, or does the payroll clerk change your home state to TN, which has no state income tax? This will be my fiance’s issue next year as we are moving from Hawaii to Tennessee, but he will be commuting for his pull. Also, would travel expenses to and from HI be a deductible expense? I’ve looked at IRS publication 463 and it was a bit confusing. I’m hoping for a little clarification.

It’s going to be impossible to figure this one out via IRS publications. The problem is that we’re dealing with State law and the applicability of Title 46. Section 11108 says the following.

(a) Withholding.— Wages due or accruing to a master or seaman on a vessel in the foreign, coastwise, intercoastal, interstate, or noncontiguous trade or an individual employed on a fishing vessel or any fish processing vessel may not be withheld under the tax laws of a State or a political subdivision of a State. However, this section does not prohibit withholding wages of a seaman on a vessel in the coastwise trade between ports in the same State if the withholding is under a voluntary agreement between the seaman and the employer of the seaman.

How many times have you read that mariners cannot E-File? How many websites have posted this. Year after year. And then all of a sudden preparers start proclaiming “mariners can now e-file”. But nothing had changed in the law. So why the scuttlebutt?

It’s no surprise that most preparers have come down from the bogus position that merchant mariners cannot electronically file their tax returns. The justifications used over the years have been flimsy and the supporting documentation has been lacking. I actually remember a citation of the IRM (Internal Revenue Manual) to a specific line that stated mariners would have to mail in supporting documentation. I guess they figured no one would ever read the heading that stated these were the procedures for AUDIT AND AMENDMENT and had nothing to do with regular filing.

E-Filing Signature Documents

It’s difficult, I know. You have to get a signed form back to your preparer for them to electronically file you. But it isn’t optional. There could be serious issues with returns being filed without the proper signature documents.

Do not give a preparer signing power

It is a conflict and poor practice. Unless you are physically entering your pin you need to be providing a signature form. These are the rules.

We saw a great calculator from Kiplinger’s that figures your tax savings under the new Tax Relief Act signed into law this past December. This law is going to put cash back in the pockets of many taxpayers.

For instance – A single taxpayer who is 24 and earns $120,000 a year will get back $2,400

What are the additional benefits for teachers in Massachusetts?

Our legislators certainly understand the financial sacrifice required by all educators. They have designed the tax relief act to help alleviate the sacrifices made by our teachers.

Other Calculators have failed to account for the additional provisions for Massachusetts teachers. We have developed this calculator to give you a low ball quick estimate of how much our government respects you…

1. Enter your annual salary:

2. How much of your salary is subject to Social Security

Of the nearly 19 million taxpayers who filed a Schedule C (showing profit or loss from a business) between January and July of 2010, 25% reported a net loss on the form and 65% reported a net profit of less than $25,000. Another 6% reported profit of between $25,001 and $50,000, leaving just 4% with net earnings above $50,000. (A Schedule C listing revenues and expenses is supposed to be attached to the 1040 of taxpayers who operate businesses as unincorporated sole proprietors, including those who are paid by companies as independent contractors and those who sell online through eBay, Amazon.com and other Internet sites.) The big question is are you a hobby?

Uncle Sam Says

The following factors, although not all inclusive, may help you to determine whether your activity is an activity engaged in for profit or a hobby:

• Does the time and effort put into the activity indicate an intention to make a profit?
• Do you depend on income from the activity?
• If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
• Have you changed methods of operation to improve profitability?
• Do you have the knowledge needed to carry on the activity as a successful business?
• Have you made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Do you expect to make a profit in the future from the appreciation of assets used in the activity?

Point being – those extreme losses you’re incurring year after year may be a big indication of your business being a hobby. Keep an eye out for future legislation that may be more aggressive in shifting the burden of “for profit” proof back to the taxpayer.

In 2011 there are a few changes to the EITC. Due to the Education Jobs and Medicaid Assistance Act of 2010 the Advance EITC is no longer available. This provision previously allowed workers who expected to qualify for the EITC to receive part of the credit in their paycheck by filing a form with their employer.

Also this year the maximum EITC has increased slightly to $5,666, and the maximum income limit rises to $49,078. The maximum credit goes to families with three or more children. Another change this year, due to the American Recovery and Reinvestment Acct, increased the EITC by 5% for families with 3 or more children. The provision is set to expire at the end of 2012.

My uncle passed away and
left me a $50,000 inheritance. What will I have to claim on my
income taxes this year?

Most likely nothing.
When we inherit assets the tax is generally to the Estate and not
the beneficiary if at all. Although the Estate Tax has phased back
and forth through the years, it is still alive and well within many
states. A $2,000,000 estate may not have a Federal Estate
Tax due for 2010, but Massachusetts will still want a piece.
Massachusetts is one state that still baselines it’s tax with a
unified credit offsetting $1,000,000. Normally million dollar
estates have other planning strategies in effect that help to
offset estate taxes. An estate under $1,000,000 would not have any
taxes due. It would pass on to the next generation estate tax free.

Any catches? – aren’t there always

• You inherit
  an IRA – This is income that HAS NOT yet been taxed. As such you’ll
  have to show it as income on your 1040 (no penalty) when you cash
  it in

I was executor of a
$600,000 estate and had to pay estate taxes. I thought you said no
estate tax?

Aha – an estate tax it was not…
You were paying an estate INCOME tax. What’s the difference?

• When someone passes away they cease to be able
  to receive income. Income earned after they pass away, called
  income in respect of a decedent (IRD) is taxable to the
  Estate

This means if there are a ton of
stocks or accounts earning money, collecting dividends, receiving
rent, or making money in other ways the estate will have to file a
1041 and claim this income.

Isn’t the tax rate 35% at
$10,000 in income

Yup… It’s very aggressive on 1041′s.
If you are administering an estate you may want to investigate
reporting the estate income as passive income to the beneficiaries.
One catch is the beneficiaries have to have actually received the
equivalent amount of income via distributions during the year.
Individual taxpayers are generally below the 35% bracket and
usually don’t have an issue with this as they generally receive the
tax savings as additional distributions.

Things to
remember -

• Are there any charities
  as beneficiaries? If so see if the estate will allow you to
  distribute the IRA’s/401 (k)’s to them. Non-profits don’t pay taxes
  on income used for charitable purposes. Accordingly, they won’t get
  hit with the distribution taxes
• Stocks???
  Remember that the cost basis is the fair market value on the date
  of death of the decedent. (keep in mind that this is not the exact
  case for 2010 due to the estate tax repeal) So many people inherit
  GE stock that was purchased in the 70′s and think the cost basis is
  what the decedent purchased it for. It’s the FMV on the date of
  death or 6 month valuation (if elected on an estate tax
  return)
• Stock gains and losses??? Determine
  which beneficiaries will benefit most from a built in loss or
  gain

As always, your specific circumstances
may vary. Feel free to post a comment or thread with specific
circumstances.