People who sell their home may be able to exclude the gain from their income. Here are seven things every homeowner should know if they sold, or plan to sell their house.

1. Amount of exclusion. When you have gain from the sale of your home, you may be able to exclude up to $250,000 of the gain from your income. For most taxpayers filing a joint return, the exclusion amount is $500,000.
2. Ownership test. To claim the exclusion you must have owned the home for at least two years during the five year period ending on the date of the sale.
3. Use test. You also must have lived in the house and used it as your main home for at least two years during the five year period ending on the date of the sale.
4. When not to report. If you are able to exclude all of the gain from the sale of your home, you do not need to report the sale on your federal income tax return.
5. Reporting taxable gain. If you have gain which cannot be excluded, it is taxable and must be reported on your tax return using Schedule D.
6. Deducting a loss. You cannot deduct a loss from the sale of your home.
7. Rules for multiple homes. If you have more than one home, you may only exclude gain from the sale of your main home and must pay tax on the gain resulting from the sale of any other home. Your main home is generally the one you live in most of the time.

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WASHINGTON — Taxpayers are e-filing their Federal income tax returns from their home computers in record numbers this year the IRS announced today. As of March 6, more than 18 million income tax returns were filed from home computers, up 20 percent compared to the same time last year.

So far this year, almost 52 million tax returns have been e-filed, up 6 percent compared to the same time last year. However, the number of people using IRS Free File has fallen from almost 3 million last year to just under 2 million for the same time this year, a reduction of about 30 percent. A number of factors could be causing the decrease in Free File volumes, including national advertising of other free online tax preparation offers and the elimination of electronic filing fees by some software providers.

As of March 6, about 91 percent of tax returns resulted in a refund. This percentage however is usually at its highest at the start of the filing season because taxpayers expecting refunds usually file earlier than taxpayer who must make a payment.

The IRS cautioned that year-to-year analysis of total returns file will be an anomaly this year because last year’s results include those returns filed for the economic stimulus payment. As the year progresses, the IRS expects to receive and process more individual income tax returns during 2009 than in 2007 but fewer than in 2008.

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Are you looking for ways to avoid the last-minute rush for doing your taxes? Here are some stress-relieving tips to help you.

1.     Don’t Procrastinate – Resist the temptation to put off your taxes until the very last minute. Your haste to meet the filing deadline may cause you to overlook potential sources of tax savings and will likely increase your risk of making an error.

2.     Visit the IRS Online – In 2008, there were more than 330 million visits to IRS.gov. Anyone with Internet access can find tax law information and answers to frequently asked tax questions.

3.     File Your Return Electronically – Nearly 90 million taxpayers filed their returns electronically in 2008. Aside from ease of filing, IRS e-file is the fastest and most accurate way to file a tax return. If you’re due a refund, the waiting time for e-filers is half that of paper filers.

4.     Don’t Panic if You Can’t Pay – If you cannot pay the full amount of taxes you owe by the April deadline, you should still file your return by the deadline and pay as much as you can to avoid penalties and interest. You also should contact the IRS to discuss your payment options at 1-800-829-1040. The agency may be able to provide some relief such as a short-term extension to pay, an installment agreement or an offer in compromise. More than 75 percent of taxpayers eligible for an Installment Agreement can apply using the Web-based Online Payment Agreement application available on IRS.gov.  To find out more about this simple and convenient process type “Online Payment Agreement” in the search box on the IRS.gov homepage.

5.     Request an Extension of Time to File – But Pay on Time If the clock runs out, you can get an automatic six month extension of time to file to October 15. However, this extension of time to file does not give you more time to pay any taxes due. You will owe interest on any amount not paid by the April deadline, plus a late payment penalty if you have not paid at least 90 percent of your total tax by that date. See IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return for a variety of easy ways to apply for an extension. Form 4868 is available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).  Taxpayers needing Form 4868 should act soon to be sure they have the item in time to meet the April deadline.

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WASHINGTON – The Internal Revenue Service today announced that interest rates for the calendar quarter beginning April 1, 2009, will drop by one percentage point.  The new rates will be:  

• four (4) percent for overpayments [three (3) percent in the case of a corporation];
• four (4) percent for underpayments;
• six (6) percent for large corporate underpayments; and
• one and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis.  For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.  Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points.  The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points.  The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

The interest rates announced today are computed from the federal short-term rate during January 2009 to take effect February 1, 2009, based on daily compounding.

The rate for determining the addition to tax for failure to pay estimated tax for the first 15 days in April 2009 is the 5 percent rate that applied to underpayments of tax during the first calendar quarter in 2009.

For the entire IRS document, see here. (pdf)

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If you make eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement, you may be able to take a tax credit.

The Savers Credit, formally known as the Retirement Savings Contributions Credit, applies to individuals with a filing status and income of:

• Single with income up to $26,500
• Head of Household with income up to $39,750
• Married Filing Jointly, with incomes up to $53,000

To be eligible for the credit you must be at least age 18, not a full-time student, and cannot be claimed as a dependent on another person’s return.

If you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans, you may be able to take a credit of up to $1,000 or up to $2,000 if filing jointly. The credit is a percentage of the qualifying contribution amount, with the highest rate for taxpayers with the least income.

When figuring this credit, you generally must subtract the amount of distributions you have received from your retirement plans from the contributions you have made. This rule applies for distributions starting two years before the year the credit is claimed and ending with the filing deadline for that tax return.

The Retirement Savings Contributions Credit is in addition to other tax benefits which may result from the retirement contributions. For example, most workers at these income levels may deduct all or part of their contributions to a traditional IRA. Contributions to a regular 401(k) plan are not subject to income tax until withdrawn from the plan.

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There is an additional standard deduction for those who don’t qualify to itemize their tax deductions, but who do pay state or local real estate taxes. This deduction is available for the 2008 and 2009 tax years.

Here are six things you need to know about the additional standard deduction for real estate taxes:

1.     The additional deduction amount is equal to the amount of real estate taxes paid. The amount can be up to $500 for single filers or up to $1,000 for joint filers.

2.     The taxes must be imposed on you.

3.     You must have paid the taxes during your tax year.

4.     The taxes must be charged uniformly against all property in the jurisdiction and must be based on the assessed value. Many states and counties also impose local benefit taxes for improvements to property, such as assessments for streets, sidewalks and sewer lines. These taxes usually cannot be deducted.

5.     Real estate taxes paid on foreign or business property do not qualify for the increased standard deduction.

6.     You must file a Form 1040 or 1040A to claim the additional deduction. When claiming the additional standard deduction for real estate taxes, be sure to check the box on line 39c of Form 1040 or line 23c of Form 1040A.

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How to Tell If You Are Likely to Be Audit Target
Source: El Paso Times
Publication date: 2009-03-02

By Carolyn Mora, El Paso Times, Texas

Mar. 2–Few things are more unnerving than having your tax return selected for an IRS audit. The Treasury Department has a sharpened focus on generating additional tax revenues.

The IRS evaluates tax returns based on their “DIF” scores, a set of IRS formulas known as the “Discriminate Function System.” About three-quarters of all audits are selected by the DIF computer, which compares deductions, credits and exemptions with norms for taxpayers in each income bracket.

While these formulas are kept secret, you can count on having a higher audit probability if you fall into certain categories or report certain things on your tax return.

Some higher risk areas include the following: –Tax protests. Both the IRS and tax courts are getting fed up with what they consider frivolous tax protests. If you file a return stating that you owe no tax because the dollar is worthless or make some other such protest, you’ll probably be audited.

–High income. Auditing higher-income taxpayers is likely to produce more additional tax revenue than auditing lower-income taxpayers.

–Certain occupations. Taxpayers whose occupations produce cash income, such as taxi drivers and waiters, run a higher risk of being audited. Self-employed individuals, particularly independent contractors, are IRS targets for the same reason.

–No preparer. If you have a complex return and prepared it yourself, or if your return was prepared by someone on the IRS’ problem-preparer list, you are more likely to be audited.

–Certain deductions. The IRS has found it profitable to audit returns that claim office-in-the-home deductions, travel and entertainment deductions and certain other write-offs.

–Related party transactions. Paying wages to your children, lending money to relatives, splitting income among family members or running a family business will arouse IRS attention.

–Abusive tax shelters and offshore accounts. In the past few years the Internal Revenue Service has detected a proliferation of abusive trust tax evasion schemes. It also believes some people are using offshore credit cards to evade paying U.S. income taxes. It intends to expand its efforts to crack down on abuses in these areas.

Unless there is suspicion of fraud or substantial understatement of income, the IRS has three years from the due date of your tax return to initiate an audit. Typically, most returns are selected within two years of their filing date.

The best defense is a two-part strategy: (1) Have supporting documentation for all deductions and credits, and (2) see your accountant immediately upon notification that you are being audited.

A professional can put your mind at ease, can find the information that the IRS wants more quickly than you can, and very likely will save you money in the long run by getting a faster and more favorable conclusion to the audit.

Carolyn Mora is a certified public accountant and financial consultant in El Paso. She may be reached at 577-0926 or by e-mail at carolyn@elpasocpa.com

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To see more of the El Paso Times, or to subscribe to the newspaper, go to http://www.elpasotimes.com.

Copyright (c) 2009, El Paso Times, Texas

Distributed by McClatchy-Tribune Information Services.

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A service of YellowBrix, Inc. Publication date: 2009-03-02

© 2009, YellowBrix, Inc.

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Don’t wait around for a paper check. Have your federal tax refund deposited directly into your bank account. Choosing Direct Deposit is a secure and convenient way to get your money in your pocket faster.

Here are the main reasons 66 million taxpayers chose Direct Deposit in 2008:

1. Direct Deposit is secure. There is no chance for a check to get lost in the mail. Thousands of checks are returned to the IRS by the US Post Office every year as undeliverable mail. Direct Deposit eliminates the possibility you won’t receive your check and prevents your refund from being stolen.

2. Direct Deposit is convenient. The money goes directly into your bank account. You won’t have to make a special trip to the bank to deposit the money yourself.

3. Direct Deposit is easy. When you’re preparing your return, simply follow the instructions for “refund” on your return. Just make sure you entered the correct bank account and bank routing numbers on your tax form and you’ll receive your refund quicker than ever.

4. Direct Deposit offers options. You can also electronically direct your refund to multiple accounts. With the “split refund” option, taxpayers can divide their refunds among as many as three checking or savings accounts and three different U.S. financial institutions. A word of caution — some financial institutions do not allow a joint refund to be deposited into an individual account. Check with your bank or other financial institution to make sure your direct deposit will be accepted.

If you’ve never filed your tax return electronically, you should definitely consider trying it in 2009. Join the millions of taxpayers who are saving time and money to file their tax returns without the many headaches often associated with filing a paper return.

Here are the top eight reasons close to 90 million people filed their tax returns electronically in 2008:

1. It’s easy. You can usually file a state tax return at the same time you electronically file your federal tax return.

2. It’s accurate. No more human errors because e-file checks for math errors and necessary information. This not only increases the accuracy of your return, but it also reduces the need for correspondence with the IRS to clarify errors or omissions.

3. No more second-guessing yourself. When you file electronically, the computer software or online program guides you through the process step-by-step.

4. You’ll get your refund faster. When you use e-file, you can get your refund in as little as ten days.

5. There are more payment options. With e-file, you can file your return early, but wait to pay any balance due by the April deadline. You can also pay electronically using a credit card, electronic funds withdrawal or in some cases the Electronic Federal Tax Payment System.

6. It’s fast. You don’t have to make a trip to the post office. In fact, you won’t even need to walk to the mailbox to send your return. Just click the appropriate ‘Send’ button.

7. You’ll know the IRS received your return. The IRS will send you an electronic notification acknowledging receipt of your return.

8. You’ll have peace of mind. After clicking ‘send’ and receiving your notification from the IRS that they received your return…kick back and relax – you’re done!

While most income you receive is generally considered taxable, there are some situations when certain types of income are partially taxed or not taxed at all.

Some common examples of items that are not included in your income are:

• Adoption Expense Reimbursements for qualifying expenses
• Child support payments
• Gifts, bequests and inheritances
• Workers’ compensation benefits
• Meals and Lodging for the convenience of your employer
• Compensatory Damages awarded for physical injury or physical sickness
• Welfare Benefits
• Cash Rebates from a dealer or manufacturer
• Economic Stimulus Payment received in 2008

Some income may be taxable under certain circumstance, but not taxable in other situations. Examples of items that may or may not be included in your income are:

• Life Insurance. If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price.
• Scholarship or Fellowship Grant. If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.
  All other items—including income such as wages, salaries and tips—must be included in your income, unless it is specifically excluded by law.
  Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.

For a full listing, see IRS pub 525