TurboTax Support Blog

Signed, Sealed, But Undeliverable

That's the fate of tax rebate checks totaling $163 million. They were sent to 279,000 recipients, but were delivered to the wrong addresses.

So the IRS is holding onto the money and hoping to unite the checks, which average $583, with their proper owners.

The agency asks taxpayers who moved or missed their rebate checks to update their addresses by Nov. 28, so the checks can be delivered by the end of the year. To date, the IRS has delivered rebates to some 116 million people.

Anyone whose rebate check has gone AWOL can visit the IRS website’s "Where’s My Stimulus Payment?" page, to get instructions on how to provide the correct address.

For more information on this and on missing 2007 tax refunds, read The TurboTax article, "IRS Seeks Owners of Undeliverable Tax Rebates and 2007 Refunds."

Unemployed Doesn't Mean Untaxed

As the economy sinks and unemployment rises, there’s been talk in Washington about temporarily suspending income taxes on unemployment benefits.

What, you say? If by misfortune I’m unemployed, I still might have to pay taxes?

Yes, you might. At the end of the year you’ve taking unemployment benefits, you’ll get a Form 1099-G (and so will the IRS) reporting what you’ve been paid.

It’s good to know this up front, however, because you need to set aside enough money to pay any income taxes you might owe.

Depending on your circumstances, you might even be required to make quarterly estimated income tax payments because you’re no longer having taxes withheld by your employer.

(Estimated taxes are what the IRS expects people to pay when their income is not subject to withholding, such as investment or self-employment income.)

If you want to play it safe, though, the IRS gives you a way.

Fill out Form W-4V to have 10 percent of your benefits withheld for federal income taxes. You can do this online, but then you need to make a copy and sign it. Send it to your state unemployment office.

Your Tax Breaks Have Been “Sweetened” By 2008 Economic Bailout Legislation

You might not realize it, but the big bailout bill for the U.S. financial system also contained some goodies for the average taxpayer.

Congress added them as “sweeteners” to help the legislation go down smoothly with disgruntled constituents.

Taxpayers can be forgiven, however, if they don’t seem particularly knowledgeable or grateful about the tax sugarcoating. Most of the changes simply extended existing tax breaks that were about to expire.

These include deductions for teachers and for families with college students, as well as a credit for making energy efficient home improvements.

To learn more about the tax implications, see Emergency Economic Bailout Bill Extends Tax Breaks for Individuals.

In this rough-and-tumble economy, this passes as good news: You’ve still got something that you didn’t know you were in danger of losing.

Giving Alert! Thrift Stores, Charities Need Your (Tax Deductible) Donations

With economic times being tough, your local thrift store is probably doing a brisk business selling clothing to shoppers who want to save money.

Unfortunately, it could also be running short of merchandise. 

That’s because some people accustomed to donating are holding on to clothes in their closet longer or selling them on eBay, to save money themselves.

At the Salvation Army, sales nationwide increased during the summer while donations declined, according to a Sept. 10, 2008 report in The New York Times. Some individual shop managers even said they feared running out of goods by year’s end.

So if you’ve been meaning to donate stuff in the back of your closet or the corner of your garage, that news should give you some motivation.

Need more reasons to conquer your closet-cleaning procrastination?

Remember that your donations are tax deductible, as long as you itemize deductions when you file your income taxes. And keep in mind, that TurboTax makes it easy for you through It’sDeductible.

It’sDeductible is a nifty online service provided free to TurboTax customers. It lets you track your donations year-round, helps you determine their value, then imports the information into TurboTax when you prepare your income tax return.

The IRS requires that you list the “fair market value” of all your donations (yes, each and every outgrown t-shirt and stuffed animal). That value is what the items would fetch in thrift stores, resale shops and online auctions.

It’sDeductible continuously gathers pricing information from online and store surveys.

Even though market values are typically far less than items cost when new, you might be surprised at how quickly your castoffs can add up to several hundred dollars. 

A pair of men’s khaki pants, depending on the condition, could be worth $6 to $8 each. A full-sized Bratz doll would snag you a $6 to $10 deduction.

To meet IRS requirements, your donations must be in good condition. They also must be fully itemized and valued, given to a legitimate charity and the charity must provide you a receipt every time you donate.

So take your mind off the economy: De-clutter, do good and get a tax deduction all in one.

Oct. 15 Deadline Not Just for Late Tax Filers, Also Applies to 2008 Rebates

Each year some 10 million taxpayers request an extension of time to file their tax returns, by the deadline Oct. 15.

This year, however, the deadline carries added significance. It’s the last day for Americans to file a return and receive a tax rebate in 2008.

The IRS is hoping that 4.3 million retirees and disabled veterans, who normally wouldn’t be required to file a tax return, will also file by Oct. 15 to get a rebate, or economic stimulus payment.

“Don’t let the economic stimulus payment pass you by,” said IRS Commissioner Doug Shulman. “If you want the payment this year, you should file by Oct. 15.

“We recognize that there may be older Americans and disabled veterans who still have not filed for their stimulus payment. If you know of a friend, neighbor or family members who may be in that situation, please give them a hand if they need it.”

The rebates are worth as much as $600 per individual, $1,200 for married couple and $300 for each qualifying child. The only way to get a rebate is to file a tax return.

The IRS said on Sept. 23 that it had received returns from 80 percent of the Social Security and Veterans Affairs beneficiaries deemed eligible.

The remaining 20 percent have a variety of ways to file a return at no charge. They can file a simple 1040A by mail or seek help at a local IRS office.

TurboTax also offers free online tax preparation software for these filers. For more information read this article: 2007 Rebates for Social Security, Railroad Retirement and Veterans' Beneficiaries.

By the end of August, the IRS had distributed rebate checks worth $93 billion to nearly 115 million individuals and families. Those who miss out on getting a rebate this year will have a second chance when they file their 2008 tax returns – they just won’t get their money until 2009.

As for the 10 million taxpayers who requested an extension until Oct. 15, they too could be eligible for the rebate.

Taxpayers who request an extension must still pay any taxes they owe by April 15. The extension gives them until Oct. 15 to file their returns and avoid late penalties. With the rebates, some of them have additional incentive to hit the deadline.

A New Baby and Tax Breaks

When a family has a new baby, their priorities are not taxes. Trying to figure out how to get more sleep – yes; taxes – no.

But when it comes to tax time, it’s good for them to know that not only has the baby brought goodness into the world but also tax breaks!

We thought we would put together a list of what new parents need to know about taxes.

·       Child’s Social Security Number (SSN)

o         At the top of the list for tax breaks, be sure to get a social security number for your child prior to filing your return.  You must include your child’s SSN on your tax return in order to claim the child as a dependent and take any deductions or credits related to that child. For the steps in applying for your child’s SSN, see How to Get a Social Security Number.

o         Tax return note:  when entering your child’s name on your tax return, be sure it matches exactly the name on the child’s SSN card. If you file electronically and the name doesn’t match the card, the IRS may make you go stand in line at the post office and mail your return.

·       Exemption

o         On a typical return, a child listed as a dependent, will reduce the family’s income by $3,500 for 2008. This is known as a dependency exemption.

o         This $3,500 will start being reduced when your adjusted gross income (see Form 1040, page one, last line) is $239,950 or greater when filing married filing jointly.

o         TurboTax will calculate the exemptions for your return. If you have more questions on dependents and exemptions, see IRS Tax Topic 354

·       Day Care expenses

o         If both you and your spouse work, your day care expenses can reduce your tax to some degree. It’s the Credit for Child and Dependent Care Expenses. The credit is a percentage (20%- 35%) of your child care expenses based (again) on your adjusted gross income. 

o         When you choose your child care providers, be sure that you write down their social security numbers (SSN) or employer identification numbers (EIN). In order to claim this credit, you will report their name, address, and identification number on Form 2441 with your tax return.   

o         If you pay someone to look after your child in your home, you may have to file Schedule H- Household Employment Taxes.  TurboTax will help you determine if you need to file this form and if so, how much the additional taxes will be. For further questions, see IRS Topic 756.

o         If you receive dependent care benefits from your employer, or have any other questions about this credit, be sure to read IRS Tax Topic 602 .

·       Child tax credit

o         This is another credit that reduces your tax.  The most you can claim for this credit is $1,000 for each child and once more, if you have a high adjusted gross income (if married filing jointly, over $110,000), the credit starts being reduced.

o         Yes, this credit lowers your tax but with the typical return, it can’t be more than your tax.  So if you have two children and your tax is $1,700, you will only get a credit for $1,700, not $2,000.

o         There are exceptions to this rule and you may receive an additional child tax credit that is refundable over and above your tax. TurboTax will ask you the right questions and determine your total child tax credit.

o         For more information, see IRS Publication 972.

·       Earned Income credit

o         Depending on the income that you and your spouse earned and the number of children listed on your tax return, you may be eligible for an earned income credit. The maximum amount of credit if you have one child is $2,747and $4,824 if you have two or more children.

o         If you’re filing married filed jointly, you won’t receive any credit if your earned income is much more than $41,000 and you have two or more children. If you have additional questions, see IRS Tax Topic 601

·       Adoption expenses

o         If you adopted your child, you might also receive a reduction in taxes for those adoption expenses, including lawyer fees and travel expenses, up to a maximum credit $11,650 for 2008. See IRS Tax Topic 607.

o         Note: If filing married filing jointly and your adjusted gross income is more than $174,730, the credit will start being phased-out.

o         Also check and see if your employer has an Adoption Assistance Plan that helps pay for some or all of your adoption expenses.

·       Child’s investment income

o         If your child has investment income, beware that if that investment income is greater than $900 in 2008, you may have to file a tax return for the child.

o         If the child’s investment income is over $18700, the income will be taxed at parents’ tax rate.  To save time filing that child’s return, you can elect to include that income on your tax return. 

o         For more information, see IRS Tax Topic 553

·       Future College Expenses

o         The two best ways to save for your child’s college expenses are college savings plans and prepaid tuition plans. These programs are known as Section 529 plans and are established and maintained by states.

o         Some states have both types and some have one type or the other but every state has at least one type.

o         The prepaid tuition plans let you lock in the college’s current price to pay for your child’s future college expenses.  College savings plans don’t have this guarantee.

o         Anyone, not just the parents, can contribute to these plans.

o         There is no federal deduction when a contribution is made to a plan but you may get a deduction on your state return if you investment in that state’s 529 plan.

o         The earnings on these plans are tax-deferred. You don’t pay taxes on the yearly earnings.

o         If the money from the plan is used for the child’s college expenses, the distribution is tax free.

o         If you start a 529 plan, be sure that you plan to leave the money in the plan until your child is ready for college. If you cancel the plan, you will have to pay tax on the earnings and a possible 10 % penalty.

o         Here are some good websites for a better understanding of these college plans

Saving for College

College Savings Plan Network

Disaster victims get tax-time relief

If disaster strikes where you live, filing your taxes on time is probably the least of your concerns.

That’s why the IRS tries to ease the burden of disaster victims by routinely giving them extra time to file tax documents.

In recent weeks, the IRS has announced tax-filing extensions for residents of regions hit by three storms and declared presidential disaster areas: parts of Florida where Tropical Storm Fay struck, parts of Louisiana that were battered by Hurricane Gustav and sections of the Gulf Coast where Hurricane Ike landed.

The type of relief and the length of extended deadlines vary by disaster. Residents who need information about a particular disaster should read the IRS article, Tax Relief in Disaster Situations, which offers detailed information about each.

In the case of Fay, residents have until Nov. 17 to file taxes and make payments that would otherwise by due between Aug. 18 and Nov. 17, 2008. This includes individuals who had requested an extension and had planned to file their 2007 tax returns by Oct. 15, 2008.

Victims of the more recent Hurricane Gustav have until Jan. 5 to meet tax deadlines normally occurring between Sept. 1 and Jan. 5, 2009. These include:

• Individual estimated tax payments due Sept. 15, 2008
• Individual extended 1040 tax returns due Oct. 15, 2008
• Corporate extended 1120 tax returns due Sept. 15, 2008

Taxpayers and tax preparers affected by Hurricane Ike have been given an extra seven days, until Sept. 22, to file corporate tax returns and third-quarter estimated taxes otherwise due on Monday, Sept. 15, 2008. Other tax extensions could be announced later.

Some residents who have lost or damaged property and are uninsured or underinsured could qualify for a tax break. For more information, read Casualty Loss Deduction.

Get Educated on College Savings Tax Breaks

As colleges welcome students back for the fall, many parents can attest that paying for higher education is a challenge.

Fortunately, both federal and state governments offer tax breaks to families who save for college, using what are known as 529 savings plans. The plans are named after Section 529 of the Internal Revenue Code and are sponsored by state agencies.

Every state has one or more 529 plans, offering various mutual-fund-like investments, and any family can invest in any one of the more than 100 state plans.

So what do these plans offer that you wouldn’t get with regular mutual funds?

Money-saving tax advantages:

• While you can’t deduct your contributions on your federal taxes, the earnings can be withdrawn tax free if used for eligible college expenses. These include tuition, and room and board.

• Many states do allow you to deduct your contributions or receive a credit on your state taxes, if you contribute to that state’s plan. If you’re a New York resident, for example, you can deduct up to $5,000 of a contribution to a New York 529 plan ($10,000 if filing married jointly) on your state tax return. To check out your state’s plans and tax benefits, see http://www.collegesavings.org/viewState.aspx.

• Even better, some states will let you deduct your contribution even if it was made to another state’s 529 plan.  Kansas, for example, allows its residents to deduct up to $3,000 ($6,000 for joint filers) per student per year for contributions to its or any state’s plan.

• And finally, some states, like the federal government, let you withdraw earnings tax free. Again, check http://www.collegesavings.org/viewState.aspx.

If your state doesn’t yet allow a deduction or credit for your 529 plan contribution, keep your eye on your state tax website.  More states are moving in that direction.

For more information on 529 plans, check out:
http://www.sec.gov/investor/pubs/intro529.htm
http://www.collegesavings.org/index.aspx
http://www.savingforcollege.com/
http://www.savingforcollege.com/kiplinger/plan_details.php

Raiding Your 401(k) Can Be Taxing

If you’re finding it hard to pay your mortgage or reduce your credit card debt, you could be tempted to tap your 401(k) retirement savings.

Many 401(k) plans allow workers to borrow against their savings and, in effect, pay themselves back with interest within five years. A study by the nonprofit Transamerica Center for Retirement Studies found that employees taking loans from their plans jumped to 18 percent in 2007, from 11 percent in 2006.

Unfortunately, raiding your 401(k) will not only put a big dent in your retirement savings for the long term, it could cause you considerable tax pain in the short run.

Here’s why.

Say you have some pressing bills, so you take out a $10,000 loan from your $20,000 401(k). True, you won’t be adding to your retirement savings, but at least you’ve got some breathing room, and you’ll replenish your account within five years. At least that’s the plan.

Now let’s say that because the economy is slowing, you get laid off from your job. Most company plans require you to repay your 401(k) loan, typically within 60 days from your layoff – or your loan will become a “distribution.”

In tax parlance, that means that the IRS now considers your loan to be income, like your wages, and you have to pay taxes on it. So, even though you’ve probably spent the loan and you have no job, you owe taxes. If you’re in the 28 percent tax bracket, you could owe $2,800. And if you’re under age 59 1/2, you’ll also get dinged with a 10 percent penalty, or another $1,000.

For more information on the tax downsides of 401(k) loans, read Tax Consequences When You Have a 401(k) Loan and Lose Your Job.

Many 401(k) plans also permit participants to take what are known as “hardship distributions,” for such immediate financial needs as preventing a home foreclosure or paying for a burial. The money is withdrawn and not repaid.

You might expect from the description that taking money from your 401(k) in this manner would involve some financial mercy.

Nope. The same income taxes and penalty apply. You’re facing a big tax bill and the likelihood that it could take years to replenish your retirement savings.

For more information on hardship withdrawals, read Withdrawing Money From Your 401(k) Plan As a Hardship Distribution.

Why do retirement plans let workers sabotage their savings this way? Financial experts theorize that if the plans didn’t allow for some kind of withdrawals, not many people would use them. Let’s hope that despite current tough times, few are tempted.

A Pleasant Tax Surprise for Long-Time Homeowners

Lots of political and legislative attention is focused on the troubled housing market and how to revive it.

Tax laws passed since 2006 when the mortgage market suffered a meltdown have, understandably, offered aid to taxpayers at risk of losing their homes and to those who would like to be homeowners.

But the latest tax act, The Housing Assistance Tax Act of 2008, also contains a little surprise, or reward, if you will for long-time homeowners. It’s a decrease in their federal tax bills, worth $75 and up for single homeowners and $150 and up for married homeowners.

If you’ve owned your home awhile, paid your mortgage year in and year out, or even paid your mortgage off altogether, you are probably what’s known in the tax world as a “non-itemizer.”

That means, because you don’t have enough deductions to itemize (such as hefty mortgage interest payments), you’ll pay less tax by taking the standard deduction. Those who don’t itemize don’t get a tax deduction for their property taxes.

The new tax act, however, gives non-itemizers a federal deduction for state and local property taxes, for the year 2008 only. If you’ve been a responsible mortgage holder, your reward should be waiting when you file your taxes in 2009. For more information, read 2008 Property Tax Deduction for Taxpayers Who Don't Itemize.