Eight Tips to Determine if Your Gift is Taxable

If you gave money or property to someone as a gift, you may owe federal gift tax. Many gifts are not subject to the gift tax, but the IRS offers the following eight tips about gifts and the gift tax.

1. Most gifts are not subject to the gift tax. For example, there is usually no tax if you make a gift to your spouse or to a charity. If you make a gift to someone else, the gift tax usually does not apply until the value of the gifts you give that person exceeds the annual exclusion for the year. For 2011 and 2012, the annual exclusion is $13,000.

2. Gift tax returns do not need to be filed unless you give someone, other than your spouse, money or property worth more than the annual exclusion for that year.

3. Generally, the person who receives your gift will not have to pay any federal gift tax because of it. Also, that person will not have to pay income tax on the value of the gift received.

4. Making a gift does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than deductible charitable contributions).

5. The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. The following gifts are not taxable gifts:
• Gifts that are do not exceed the annual exclusion for the calendar year,
• Tuition or medical expenses you pay directly to a medical or educational
institution for someone,
• Gifts to your spouse,
• Gifts to a political organization for its use, and
• Gifts to charities.

6. You and your spouse can make a gift up to $26,000 to a third party without making a taxable gift. The gift can be considered as made one-half by you and one-half by your spouse. If you split a gift you made, you must file a gift tax return to show that you and your spouse agree to use gift splitting. You must file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, even if half of the split gift is less than the annual exclusion.

7. You must file a gift tax return on Form 709, if any of the following apply:
• You gave gifts to at least one person (other than your spouse) that are more than the annual exclusion for the year.
• You and your spouse are splitting a gift.
• You gave someone (other than your spouse) a gift of a future interest that he or she cannot actually possess, enjoy, or receive income from until some time in the future.
• You gave your spouse an interest in property that will terminate due to a future event.
8. You do not have to file a gift tax return to report gifts to political organizations and gifts made by paying someone’s tuition or medical expenses.

For more information see Publication 950, Introduction to Estate and Gift Taxes. Both Form 709 and Publication 950 are available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

Deducting Charitable Contributions: Eight Essentials

Donations made to qualified organizations may help reduce the amount of tax you pay.

The IRS has eight essential tips to help ensure your contributions pay off on your tax return.

1. If your goal is a legitimate tax deduction, then you must be giving to a qualified organization. Also, you cannot deduct contributions made to specific individuals, political organizations or candidates. See IRS Publication 526, Charitable Contributions, for rules on what constitutes a qualified organization.

2. To deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A. If your total deduction for all noncash contributions for the year is more than $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return.

3. If you receive a benefit because of your contribution such as merchandise, tickets to a ball game or other goods and services, then you can deduct only the amount that exceeds the fair market value of the benefit received.

4. Donations of stock or other non-cash property are usually valued at the fair market value of the property. Clothing and household items must generally be in good used condition or better to be deductible. Special rules apply to vehicle donations.

5. Fair market value is generally the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.

6. Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization and the date and amount of the contribution. For text message donations, a telephone bill meets the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution and the
amount given.

7. To claim a deduction for contributions of cash or property equaling $250 or more, you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash, a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift. One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more.

8. Taxpayers donating an item or a group of similar items valued at more than $5,000 must also complete Section B of Form 8283, which generally requires an appraisal by a qualified appraiser.

For more information on charitable contributions, refer to Form 8283 and its instructions, as well as Publication 526, Charitable Contributions. For information on determining the value of donations, refer to Publication 561, Determining the Value of Donated Property. All are available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).

IRS Tax Tip 2012-54 -- Employee Business Expenses

Some employees may be able to deduct certain work-related expenses. The following facts from the IRS can help you determine which expenses are deductible as an employee business expense. You must be itemizing deductions on IRS Schedule A to qualify.

Expenses that qualify for an itemized deduction generally include:

• Business travel away from home
• Business use of your 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 available on the IRS website at www.irs.gov, or by calling 1-800-TAX-FORM (800-829-3676).

If your employer reimburses you under an accountable plan, you should not include the payments in your gross income, and 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.
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, you report unreimbursed expenses on IRS Form 2106 or IRS Form 2106-EZ and attach it to Form 1040. Deductible expenses are then reported on IRS Schedule A, as a miscellaneous itemized deduction subject to a rule that limits your employee business expenses deduction to the amount that exceeds 2 percent of your adjusted gross income.
For more information see IRS Publication 529, Miscellaneous Deductions, which is available on the IRS website at www.irs.gov, or by calling 1-800-TAX-FORM (800-829-3676).

Work at Home? You May Qualify for the Home Office Deduction

If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The IRS has the following six requirements to help you determine if you qualify for the home office deduction.

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 Form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on Form 1040 Schedule C, Profit or Loss From Business.

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 see IRS Publication 587, Business Use of Your Home, available at www.IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Six Facts About the Alternative Minimum Tax

The Alternative Minimum Tax attempts to ensure that anyone who benefits from certain tax advantages pays at least a minimum amount of tax. The AMT provides an alternative set of rules for calculating your income tax. In general, these rules should determine the minimum amount of tax that someone with your income should be required to pay. If your regular tax falls below this minimum, you have to make up the difference by paying alternative minimum tax.

Here are six facts the Internal Revenue Service wants you to know about the AMT and changes for 2011.

1. Tax laws provide tax benefits for certain kinds of income and allow special deductions and credits for certain expenses. These benefits can drastically reduce some taxpayers’ tax obligations. Congress created the AMT in 1969, targeting higher-income taxpayers who could claim so many deductions they owed little or no income tax.

2. Because the AMT is not indexed for inflation, a growing number of middle-income taxpayers are discovering they are subject to the AMT.

3. You may have to pay the AMT if your taxable income for regular tax purposes, plus any adjustments and preference items that apply to you, are more than the AMT exemption amount.

4. The AMT exemption amounts are set by law for each filing status.

5. For tax year 2011, Congress raised the AMT exemption amounts to the following levels

$74,450 for a married couple filing a joint return and qualifying widows and widowers;
$48,450 for singles and heads of household;
$37,225 for a married person filing separately.

6. The minimum AMT exemption amount for a child whose unearned income is taxed at the parents' tax rate has increased to $6,800 for 2011.

Use the AMT Assistant at www.irs.gov to determine whether you may be subject to the AMT. You can find more information about the Alternative Minimum Tax and how it affects you by
accessing IRS Form 6251, Alternative Minimum Tax —Individuals, and its instructions
at www.irs.gov. You can also order the form by calling 800-TAX-FORM (800-829-3676).

Tax Credits Available for Certain Energy-Efficient Home Improvements

The IRS would like you to get some credit for qualified home energy improvements this year. Perhaps you installed solar equipment or recently insulated your home? Here are two tax credits that may be available to you:

1. The Non-business Energy Property Credit Homeowners who install energy-efficient improvements may qualify for this credit. The 2011 credit is 10 percent of the cost of qualified energy-efficient improvements, up to $500. Qualifying improvements includeadding insulation, energy-efficient exterior windows and doors and certain roofs. The cost of installing these items does not count. You can also claim a credit including installation costs, for certain high-efficiency heating and air conditioning systems, water heaters and stoves that burn biomass fuel. The credit has a lifetime limit of $500, of which only $200 may be used for windows. If you've claimed more than $500 of non-business energy property credits since 2005, you can not claim the credit
for 2011. Qualifying improvements must have been placed into service in the taxpayer’s principal residence located in the United States before Jan. 1, 2012.

2. Residential Energy Efficient Property Credit This tax credit helps individual taxpayers pay for qualified residential alternative energy equipment, such as solar hot water heaters, solar electricity equipment and wind turbines. The credit, which runs through 2016, is 30 percent of the cost of qualified property. There is no cap on the amount of credit available, except for fuel cell property. Generally, you may include labor costs when figuring the credit and you can carry forward any unused portions of this credit. Qualifying equipment must have been installed on or in connection with your home located in the United States; geothermal heat pumps qualify only when installed on or in connection with your main home located in the United States. Not all energy-efficient improvements qualify so be sure you have the manufacturer’s tax credit certification statement, which can usually be found on the manufacturer’s website or with the product packaging.

If you're eligible, you can claim both of these credits on Form 5695, Residential Energy Credits when you file your 2011 federal income tax return. Also, note these are tax credits and not deductions, so they will generally reduce the amount of tax owed dollar for dollar. Finally, you may claim these credits regardless of whether you itemize deductions on IRS Schedule A.

You can find Form 5695 at IRS.gov or order it by calling 1-800-TAX-FORM (800-829-3676).

Standard Deduction vs. Itemizing: Seven Facts to Help You Choose

Each year, millions of taxpayers choose whether to take the standard deduction or to itemize their deductions. The following seven facts from the IRS can help you choose the method that gives you the lowest tax.

1. Qualifying expenses - Whether to itemize deductions on your tax return depends on how much you spent on certain expenses last year. If the total amount you spent on qualifying medical care, mortgage interest, taxes, charitable contributions, casualty losses and miscellaneous deductions
is more than your standard deduction, you can usually benefit by itemizing.

2. 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

3. Some taxpayers have different standard deductions - The standard deduction amount depends on your filing status, whether you are 65 or older or blind and whether another taxpayer can claim an exemption for you. If any of these apply, use the Standard Deduction Worksheet on the back of Form 1040EZ, or in the 1040A or 1040 instructions.

4. Limited itemized deductions - Your itemized deductions are no longer limited because of your adjusted gross income.

5. Married filing separately - When a married couple files separate returns and one spouse itemizes deductions, the other spouse cannot claim the standard deduction and therefore must itemize to claim their allowable deductions.

6. Some taxpayers are not eligible for the standard deduction - They include nonresident aliens, dual-status aliens and individuals who file returns for periods of less than 12 months due to a change in accounting periods.

7. Forms to use - The standard deduction can be taken on Forms 1040, 1040A or 1040EZ. To itemize your deductions, use Form 1040, U.S. Individual Income Tax Return, and Schedule A, Itemized Deductions.

These forms and instructions may be downloaded from the IRS website at www.irs.gov
or ordered by calling 800-TAX-FORM (800-829-3676).

Tax Scam Warning: Beware of Phony Refund Scheme Abusing Popular College Tax Credit; Senior Citizens, Working Families and Church Members Are Targets

WASHINGTON – The Internal Revenue Service today warned senior citizens and other taxpayers to beware of an emerging scheme tempting them to file tax returns claiming fraudulent refunds.

The scheme carries a common theme of promising refunds to people who have little or no income and normally don’t have a tax filing requirement. Under the scheme, promoters claim they can obtain for their victims, often senior citizens, a tax refund or nonexistent stimulus payment based on the American Opportunity Tax Credit, even if the victim was not enrolled in or paying for college.

In recent weeks, the IRS has identified and stopped an upsurge of these bogus refund claims coming in from across the United States. The IRS is actively investigating the sources of the scheme, and its promoters may be subject to criminal prosecution.

“This is a disgraceful effort by scam artists to take advantage of people by giving them false hopes of a nonexistent refund,” said IRS Commissioner Doug Shulman. “We want to warn innocent taxpayers about this new scheme before more people get trapped.”

Typically, con artists falsely claim that refunds are available even if the victim went to school decades ago. In many cases, scammers are targeting seniors, people with very low incomes and members of church congregations with bogus promises of free money.

The IRS has also seen a variation of this scheme that incorrectly claims the college credit is available to compensate people for paying taxes on groceries.

The IRS has already detected and stopped thousands of these fraudulent claims. Nevertheless, the scheme can still be quite costly for victims. Promoters may charge exorbitant upfront fees to file these claims and are often long gone when victims discover they’ve been scammed.

The IRS is reminding people to be careful because all taxpayers, including those who use paid tax preparers, are legally responsible for the accuracy of their returns, and must repay any refunds received in error.

To get the facts on tax benefits related to education, go to the Tax Benefits for Education Information Center on IRS.gov.

To avoid becoming ensnared in this scheme, the IRS says taxpayers should beware of any of the following:
-Fictitious claims for refunds or rebates based on false statements of entitlement to tax credits.
-Unfamiliar for-profit tax services selling refund and credit schemes to the membership of local churches.
-Internet solicitations that direct individuals to toll-free numbers and then solicit social security numbers.
-Homemade flyers and brochures implying credits or refunds are available without proof of eligibility.
-Offers of free money with no documentation required.
-Promises of refunds for “Low Income – No Documents Tax Returns.”
-Claims for the expired Economic Recovery Credit Program or for economic stimulus payments.
-Unsolicited offers to prepare a return and split the refund.
-Unfamiliar return preparation firms soliciting business from cities outside of the normal business or commuting area.

This refund scheme features many of the warning signs IRS cautions taxpayers to watch for when choosing a tax preparer. For advice on choosing a competent tax professional, see Tips
for Choosing a Tax Return Preparer on IRS.gov.

For additional information on tax scams, see the 2012 Dirty Dozen list.

Six Facts for Adoptive Parents

If you paid expenses to adopt an eligible child in 2011, you may be able to claim a tax credit of up to $13,360.

Here are six things the IRS wants you to know about the expanded adoption credit.

1. The Affordable Care Act increased the amount of the credit and made it refundable, which means you can get the credit as a tax refund even after your tax liability has been reduced to zero.

2. For tax year 2011, you must file a paper tax return, Form 8839, Qualified Adoption Expenses, and attach documents supporting the adoption. Taxpayers claiming the credit will still be able to use IRS Free File or other software to prepare their returns, but the returns must be printed and mailed to the IRS, along with all required documentation.

3. Documents may include a final adoption decree, placement agreement from an authorized agency, court documents and/or the state’s determination for special needs children.

4. Qualified adoption expenses are reasonable and necessary expenses directly related to the legal adoption of the child. These expenses may include adoption fees, court costs, attorney fees and travel expenses.

5. An eligible child must be under 18 years old, or physically or mentally incapable of caring for himself or herself.

6. If your modified adjusted gross income is more than $185,210, your credit is reduced. If your modified AGI is $225,210 or more, you cannot take the credit.

For more information see the Adoption Credit FAQ page available at www.irs.gov or the instructions to IRS Form 8839, which can be downloaded from the website or ordered by calling 800-TAX-FORM (800-829-3676).

Links:
Form 8839 (PDF)
Instructions for Form 8839 (PDF)
Adoption Benefits FAQs
Publication 4903, Affordable Care Act Expands Adoption Tax Credit Flyer (PDF)

Video:
Claiming the Adoption Credit