TaxMamas TaxQuips

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.

To ensure taxpayers are familiar with the difference between taxable and non-taxable income, the Internal Revenue Service offers these common examples of items that are not included in your income:

• 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

Some income may be taxable under certain circumstances, 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, which were paid to you because of the insured person’s death, 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.
• Non-cash Income 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.

All other items—including income such as wages, salaries and tips—must be included in your income unless it is specifically excluded by law.

These examples are not all-inclusive. For more information, see Publication 525, Taxable and Nontaxable Income, which can be obtained at IRS.gov or by calling the IRS at 800-TAX-FORM (800-829-3676).

 

Ask TaxMama

Where taxes are fun and answers are free

www.TaxQuips.com

The number ONE free tax podcast online

IRS Publication 525

Taxable and Nontaxable Income

Taxpayers with disabilities may qualify for a number of IRS tax credits and benefits. Parents of children with disabilities may also qualify. Listed below are seven tax credits and other benefits that are available if you or someone else listed on your federal tax return is disabled.

1. Standard Deduction Taxpayers who are legally blind may be entitled to a higher standard deduction on their tax return.

2. Gross Income Certain disability-related payments, Veterans Administration disability benefits, and Supplemental Security Income are excluded from gross income.

3. Impairment-Related Work Expenses Employees, who have a physical or mental disability limiting their employment, may be able to claim business expenses in connection with their workplace. The expenses must be necessary for the taxpayer to work.

4. Credit for the Elderly or Disabled This credit is generally available to certain taxpayers who are 65 and older as well as to certain disabled taxpayers who are younger than 65 and are retired on permanent and total disability.

5. Medical Expenses If you itemize your deductions using Form 1040 Schedule A, you may be able to deduct medical expenses. See IRS Publication 502, Medical and Dental Expenses.

6. Earned Income Tax Credit EITC is available to disabled taxpayers as well as to the parents of a child with a disability. If you retired on disability, taxable benefits you receive under your employer’s disability retirement plan are considered earned income until you reach minimum retirement age. The EITC is a tax credit that not only reduces a taxpayer’s tax liability but may also result in a refund. Many working individuals with a disability who have no qualifying children, but are older than 25 and younger than 65 do—in fact—qualify for EITC. Additionally, if the taxpayer’s child is disabled, the age limitation for the EITC is waived. The EITC has no effect on certain public benefits. Any refund you receive because of the EITC will not be considered income when determining whether you are eligible for benefit programs such as Supplemental Security Income and Medicaid.

7. Child or Dependent Care Credit Taxpayers who pay someone to come to their home and care for their dependent or spouse may be entitled to claim this credit. There is no age limit if the taxpayer’s spouse or dependent is unable to care for themselves.

For more information on tax credits and benefits available to disabled taxpayers, see Publication 3966, Living and Working with Disabilities or Publication 907, Tax Highlights for Persons with Disabilitiesavailable on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Ask TaxMama

Where taxes are fun and answers are free

www.TaxQuips.com

The number ONE free tax podcast online

IRS Publication 3966

Living and Working with Disabilities

IRS Publication 907

Tax Highlights for Persons with Disabilities

[TaxMama note: ALWAYS file tax return, whether you need to or not. Once you file, you start the clock ticking on the 3 year statute of limitations for audit. If you never file, IRS or the state can come back and ask for a tax return for that year, forever.]

You must file a tax return if your income is above a certain level. The amount varies depending on filing status, age and the type of income you receive.

Check the Individuals section of IRS.gov or consult the instructions for Form 1040, 1040A, or 1040EZ for specific details that may affect your need to file a tax return with the IRS this year.

Even if you don’t have to file, here are eight reasons why you may want to file:

more->

1. Federal Income Tax Withheld If you are not required to file, you should file to get money back if Federal Income Tax was withheld from your pay, you made estimated tax payments, or had a prior year overpayment applied to this year’s tax.


2. Making Work Pay Credit You may be able to take this credit if you have earned income from work. The maximum credit for a married couple filing a joint return is $800 and $400 for other taxpayers.


3. Government Retiree Credit You may be eligible for this credit if you received a government pension or annuity payment in 2009. However, the amount of this credit reduces any making work pay credit you receive.


4. Earned Income Tax Credit You may qualify for EITC if you worked, but did not earn a lot of money. EITC is a refundable tax credit; which means you could qualify for a tax refund.


5. Additional Child Tax Credit This credit may be available to you if you have at least one qualifying child and you did not get the full amount of the Child Tax Credit.


6. Refundable American Opportunity Credit This education tax credit is available for 2009 and 2010. The maximum credit per student is $2,500 and the first four years of postsecondary education qualify.


7. First-Time Homebuyer Credit The credit is a maximum of $8,000 or $4,000 if your filing status is married filing separately. The credit applies to homes bought anytime in 2009 and on or before April 30, 2010. However, you have until on or before June 30, 2010, if you entered into a written binding contract before May 1, 2010. If you bought a home after November 6, 2009, you may be able to qualify and claim the credit even if you already owned a home. In this case, the maximum credit for long-time residents is $6,500, or $3,250 if your filing status is married filing separately.


8. Health Coverage Tax Credit Certain individuals, who are receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, or pension benefit payments from the Pension Benefit Guaranty Corporation, may be eligible for a Health Coverage Tax Credit worth 80 percent of monthly health insurance premiums when you file your 2009 tax return.

For more information about filing requirements and your eligibility to receive tax credits, visit IRS.gov.
Links:

• Forms and Publications


• Earned Income Tax Credit


• First-Time Homebuyer Credit Information Center


• Health Coverage Tax Credit


• 1040 Central

Ask TaxMama

Where taxes are fun and answers are free

www.TaxQuips.com

The number ONE free tax podcast online

Today TaxMama reads an article from Al Tompkins at Poynter.org who ponders “Is earthquake insurance worth the cost?”

Well my friends, that’s an excellent question.

And I am expecting, and welcome, rebuttals from insurance agents!

Back before the Northridge earthquake in California, I was of the firm belief that anyone in California who owned property and did not carry earthquake insurance was flat out irresponsible. We all know earthquakes are coming; take responsibility.

Since the Northridge Quake, though, earthquake coverage has gotten bizarre. The primary exclusion from coverage is 10% – 15% of the value of your home. It used to be more like $5,000 – $10,000. Now, that means your coverage will not pay a dime until you sustain over about $20,000 in damages. (Note: Median home price in California is over $300,000 – assume 1/3 for value of land – http://www.svdaily.com/realestateprices.html ).

Most homes don’t sustain that much damage. For instance, the home we bought only lost a chimney. It cost about $5,000 for the previous owners to replace it. For most people, except those right near the epicenter – or specifically along a fault line, damage to the physical property was under $10,000.

Reimbursements for personal property damage, living expenses for temporary housing, and a variety of other reimbursements have dropped dramatically to a few thousand dollars. You used to be able to get coverage that would pay for housing for at least one year; personal property for the limits you set, etc.

The cost for the coverage tends to be on the high side – close to $1,200 for that median priced home.

Since really powerful quakes don’t seem to hit the same area more often than every 20 years or so, consider banking your premium for those 20 years, instead of paying it to an insurance company. Even if you earn as little as 2% a year after taxes, compounded annually, you’d have well over $30,000 waiting for you when that earthquake hits. Naturally, over 20 years, interest rates will rise, so the balance will be much higher. http://www.dinkytown.net/java/CompoundSavings.html

The only trick is to remember to pay yourself each year!

Naturally, if you are near a major fault line or in a particularly active earthquake area – do both. Pay yourself each year, so you have the money to cover the deductible AND carry the coverage!

You can apply this same logic to other kinds of insurance coverage whose benefits have diminished while costs have risen, like flood coverage.

And remember, you can find answers to all kinds of questions about what if decisions and other tax issues, free. Where? Where else? At TaxMama.com.

[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the subscribe link and join us.]

Download the MP3 (0:00min, 0MB) or listen now...

Ask TaxMama

Where taxes are fun and answers are free

www.TaxQuips.com

The number ONE free tax podcast online

Al Tompkins

Morning Meeting for Journalists

Silicon Valley Daily

California Median Home Prices

DinkyTown.net

Investment Calculator

The American Recovery and Reinvestment Act was passed in early 2009 and created the American Opportunity Credit. This educational tax credit – which expanded the existing Hope credit – helps parents and students pay for college and college-related expenses.

Here are the top nine things the Internal Revenue Service wants you to know about this valuable credit and how you can benefit from it when you file your 2009 taxes.

1. The credit can be claimed for tuition and certain fees paid for higher education in 2009 and 2010.

2. The American Opportunity Credit can be claimed for expenses paid for any of the first four years of post-secondary education.

3. The credit is worth up to $2,500 and is based on a percentage of the cost of qualified tuition and related expenses paid during the taxable year for each eligible student. This is a $700 increase from the Hope Credit.

4. The term “qualified tuition and related expenses” has been expanded to include expenditures for required course materials. For this purpose, the term “course materials” means books, supplies and equipment required for a course of study.

5. Taxpayers will receive a tax credit based on 100 percent of the first $2,000 of tuition, fees and course materials paid during the taxable year, plus 25 percent of the next $2,000 of tuition, fees and course materials paid during the taxable year.

6. Forty percent of the credit is refundable, so even those who owe no tax can get up to $1,000 of the credit for each eligible student as cash back.

7. To be eligible for the full credit, your modified adjusted gross income must be $80,000 or less—$160,000 or less for joint filers.

8. The credit begins to decrease for individuals with incomes above $80,000 or $160,000 for joint filers and is not available for individuals who make more than $90,000 or $180,000 for joint filers.

9. The credit is claimed using Form 8863, Education Credits, (American Opportunity, Hope, and Lifetime Learning Credits), and is attached to Form 1040 or 1040A.

For more information about the American Opportunity Tax Credit visit the IRS Web site at IRS.gov/recovery.

Ask TaxMama

Where taxes are fun and answers are free

www.TaxQuips.com

The number ONE free tax podcast online

IRS Information Center

about the American Opportunity Tax Credit

IRS Podcast

American Opportunity Credit - Education Benefits

IRS Form 8863

Education Credits