How to choose a tax preparer

Choose your preparer wisely. Ultimately the taxpayer is responsible for what's on their tax return even if it was prepared by someone else. Here are some helpful hints to finding a preparer.

Reputation - Ask family or friends. Compile a list of recommended preparers and contact them.

Guidance - Your professional should not only have communication skills to explain different parts of the tax code but should also teach you a little as well. What new changes in the tax law will affect you? Ask their opinions on tax strategies and financial planning.

Integrity - Your preparer should stand behind their work by signing their name to the tax return and providing you a copy. Reputable preparers will request to see your receipts and ask probing questions. They have your best interests in mind and are working with you to avoid penalties, additional taxes, and IRS examinations. A paid preparer is now required by law to sign the return and include their PTIN. The preparer should also give you a copy of the return.

Receive an email from the IRS? Delete it

Under most circumstances, I would never recommend to ignore communications from the Internal Revenue Service (IRS) – except when it comes to emails. Understand this: the IRS will never reach out to taxpayers via email.

In fact, the IRS receives thousands of reports from taxpayers who report receiving suspicious emails, phone calls, faxes from the IRS. Some of them even contain the IRS logo. These goals of these scams – known as phishing – is to trick taxpayers into providing personal information like Social Security numbers and bank accounts in order to commit identity theft.

We're selling our house. What taxes do we owe?

Taxpayers can exclude gains from the sale of your personal residence up to $250,000 ($500,000 married filing jointly) if all the following are true:

• You meet the ownership test – owned the home for at least 2 years
• You meet the use test - lived in the home as your main home for at least 2 years
• During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.

Report the gain from the sale on line 8 of Schedule D (use Form 1099-S if you received one). Then on line 9 of Schedule D, write "Section 121 exclusion" in column (a) of that line and show the amount of the exclusion in column (f) as a loss in parentheses.
For more information please see IRS Publication 523, Selling Your Home (.pdf).

You could owe the IRS this year

Taxpayers could have a surprise when they file their taxes this year. It's the result of the Making Work Pay credit.

The credit began in 2009 and is also available to taxpayers in 2010 as part of the American Recovery and Reinvestment Act (ARRA). It consists of two components:

1. the new form Schedule M which includes a $400 credit for most taxpayers ($800 for married couples filing together) and
2. a change in employer withholding.

Starting April 1, 2009 employers began withholding less federal income tax so most workers may have noticed an increase in their take-home pay. The idea is this decrease in withholding will be offset by the Making Work Pay Credit when taxpayers include the Schedule M as part of their income tax return.

Need Prior Year Tax Information from the IRS?

Taxpayers who need certain prior year tax return information can obtain it from the IRS. In fact, you can order the current year transcript and the past three years for free.

The tax return transcript shows most line items from the tax return as it was originally filed, including any accompanying forms and schedules. However, any changes made after the return was filed will not be reflected on this type of transcript.

The tax account transcript is designed to show the adjustments you or the IRS made after your tax return was filed. This transcript shows basic data; including marital status, type of return filed, adjusted gross income and taxable income.

Still haven't received your W-2? Here's what to do

Employers have until January 31, 2011 to deliver your 2010 Form W-2. If you haven't received it, take these steps

1. Contact your employer. Inquire if the W-2 has been mailed and confirm the address it was mailed to. Allow a reasonable amount of time to re-issue or re-send.
2. Contact the IRS. Contact the IRS for assistance at 800-829-1040. Provide your name, address, city and state, including zip code, Social Security number, phone number and have the following information:
   
   • Employer's name, address, city and state, including zip code and phone number
   • Dates of employment
   • An estimate of the wages you earned, the federal income tax withheld, and when you worked for that employer during 2010. The estimate should be based on year-to-date information from your final pay stub.
3. File your return You still must file your tax return or request an extension to file by April 18, even if you do not receive your Form W-2. If you have not received your Form W-2 by April 18th, and have completed steps 1 and 2, you may attach Form 4852 to the return, estimating income and withholding taxes as accurately as possible. You may be unable to e-file the tax return so be prepared to file your taxes using the old fashioned paper method. There may be a delay in any refund due while the information is verified.

Lovely RITA

I attended a seminar that was not about a female parking attendant in a Beatles song but it was an income tax seminar. RITA stands for Regional Income Tax Agency who have been collecting income taxes since 1971 and currently has 185 municipalities in the state of Ohio. Here are the highlights:

Some local Cleveland area changes:

• Mayfield Village: Tax rate increases to 2% with a tax credit of 100% up to 2%, effective 7/1/2010.
• Beachwood: Tax rate increases to 2% with a tax credit of 100% up to 2%, effective 1/1/2011.
• Cleveland Heights: Joins RITA on 7/1/2011.
• 2010-2011 Tax Table

Taxpayers who Itemize can file their returns today

Taxpayers who had to wait to claim certain deductions can now complete their 2010 tax returns. Starting today, the IRS will begin processing both paper and e-file returns claiming itemized deductions on Schedule A, the higher education tuition and fees deduction on Form 8917 and the educator expenses deduction claimed on Form 1040, Line 23, and Form 1040A, Line 16.

The IRS needed the extra time to update its systems to accommodate the changes in the tax law from the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 which was made official on December 17, 2010.

My employer paid moving expenses. Can I deduct them?

If you moved to a new home because you changed job locations or started a new job, you can deduct your moving expenses on Form 3903.  There are three requirements:

• Relationship test - must move within one year from the date you first report to your new location
  
• Distance test - move must decrease your commute by 50 miles or more. In other words, your new job has to more than 50 miles farther away from your hold home than the distance from your old home to the old work location.
  
• Time test - must work full time in the new location for at least 39 weeks during the 12 months after the move. If you're self-employed you must also work in the new job for 78 weeks during the 24 months following the move. (There are exceptions for disability, layoff, transfers, and other situations.)
  

If moving expenses were not reimbursed by your employer, you can deduct all allowable expenses. If moving expenses were reimbursed by the employer under a(an):

• non accountable plan, the reimbursement is included in your W-2 box 1.
• accountable plan, the reimbursement is excluded from the W-2 box 1. This amount excluded from income and is reported in box 12 of the W-2 with a code P. This amount is reported on line 4 of the Form 3903.

The easiest solution is to complete Form 3903 and if there is a deduction available it will carry over to Form 1040 line 26.

Why e-file?

In 2010, 99 million taxpayers e-filed their return last year. That's an increase of 10% from a year ago and represents 70% of all individual taxpayers. Here's why people e-file:

• Faster Refunds – with direct deposit, you can receive your refund in as little as 8 days.
• Greater Accuracy – error rate for paper returns is 20%; 1% for e-filed returns.
• Secure and confidential submission – there has never been an IRS e-file security breach
• File now, pay later – e-file does not mean you have to pay a balance due. You can postpone that until April 15
• Quick confirmation – receipt of your e-filed tax return is within 24 hours
• Convenience - accessible 24 hours a day, 7 days a week
• Most importantly, no paper return to mail

Starting January 1, 2011 most tax return preparers must be authorized IRS e-file providers so they can transmit tax returns electronically.

For more information, refer to the IRS e-file resource.

Refund too high?

Big refund this year? You're not alone. Taxpayers received an average refund of $3,003 last year - up 5% from the average refund of $2,859 taxpayers received in 2009.

The jump was the biggest in years thanks to several tax benefits as part of the American Recovery and Reinvestment Act.

• First-Time Homebuyer
• American Opportunity Credit
• Earned Income Tax Credit increases
• Increase in eligibility for the Child Tax Credit

Take steps now to receive some of that money throughout the year. Submit a new Form W-4 to your employer or a Form W-4P to your pension administrator. If you're eligible for Earned Income Credit, submitting a Form W-5 to your employer will allow to receive the credit throughout the year.

You can use IRS Pub. 919 and IRS Withholding Calculator for additional assistance in calculating your tax withholding.

Don't forget to take the Making Work Pay Credit

In 2009 and 2010, the Making Work Pay Credit has been added to the tax code under the American Recovery and Reinvestment Act (ARRA). It's a refundable credit of 6.2 percent of earned income with a maximum of $400 per individual and up to $800 for married filing joint tax returns.

The credit phases out for taxpayers with modified adjusted gross incomes over $75,000 and $150,000 for married couples filing together.

A Reward for Saving

Taxpayers may be eligible for a Retirement Savers Credit of up to $1,000 ($2,000 for married couples filing together) for making eligible contributions to an:

• Employer-sponsored retirement plan such elective deferrals to a 401(k), 403(b), 457, SEP or SIMPLE plans
• Voluntary contributions to qualified retirement plans
• IRA

Back to School = Big Rewards

Higher education expenses can be a huge benefit come tax time. There are several options available.

American Opportunity Credit tax years 2009 through 2010

• The maximum credit is $2,500 (same as 2009) per student (100% of the first $2,000 of expenses, 25% of the next $2,000 of expenses)
• The credit can be claimed for first four years of post-secondary education.
• Credit can reduce your tax liability dollar for dollar (Form 1040 line 49) and provide up to $1,000 additional refund (Form 1040 line 66).

It's not too late to take the First-Time Homebuyer's Credit

Taxpayers can still take advantage of the first-time homebuyer credit if an eligible buyer purchased a home as their primary resident in 2008, 2009, or 2010. Eligibility depends on the date of purchase. Those rules are listed below.

The IRS has been notifying taxpayers via mail who claimed the first-time homebuyer credit of repayment requirements. For example, those who purchased their homes between April 9, 2008 and Dec. 31, 2008 are required to repay the credit starting in 2010 by completing Part IV of Form 5405. If the home was purchased in 2009 or 2010, the letter from the IRS reminds the taxpayer that the credit must be repaid if the home is sold within three years or is no longer the main home.