Last Minute Tax Tips: Federal Tax Credits for Energy Efficiency

2010 is almost over but you still have time to take advantage of the Federal Tax credits for energy efficiency.  Here’s the quick and dirty on it:

You can get a 30% tax break on the cost of adding insulation, energy efficient exetrior windows, doors or skylights, or a heating and cooling system.  The maximum amount you can get is $1,500.  If you received $1,500 for this credit last year, you can’t get it again this year.  If you only got part of the credit (say $800) then you can receive up the the remaining $1,500 (in this case, $700) this year.   This is the most common energy tax credit that people are claiming on their tax returns.  Anything you buy must be installed in your principal residence by December 31, 2010.  Principal residence, it means you have to live in the house also.  It can’t be a second home or a rental unit.

If you’re really into alternative energy, there’s a different energy credit that also gives you a 30% tax break with no dollar limit.  This is for stuff like solar water heaters, geothermal heat pumps and small wind turbines.  You must also install these items by December 31st, but you can put them on a second home as well as your principal residence.

Know what you’re getting before you buy though.  Crazy as it may seem, not every energy efficient item is included in the tax credits.  The best way to figure out if you’ll qualify for the tax credit is through the Energy Star website:

  http://www.energystar.gov/index.cfm?c=tax_credits.tx_index 

Lets say you want to buy a water heater.  Go to the site, scroll down to where it lists items you can purchase for the tax credit and click on “water heater (non-solar)” .  The site will tell you what qualifications your new water heater needs to have in order to qualify for the tax credit.  The web site has all sorts of information, including frequently asked questions.  Best of all, it’s in plain English.

How to Get an EIN Number for your Business for Free

Free EIN number

You can get an Employer Identification Number for your small business for free at the IRS website.

If your business needs an EIN (that’s an employer identification number), it takes about 5 minutes on the IRS website and you can get one for free.  I mention this because I found a company online that will do it for you for $75.  For an extra $75, they’ll put a rush on it.   So you can pay $150 for the rush job, or you can do it yourself for free in less time than it takes to fill out their online payment agreement.

The first step is to go to the IRS website. This link will take you right to the EIN page.

IRS EIN link

This page has links to a lot of information so it’s pretty useful.  It also has the link to go to the EIN application.  The online application has limited working hours, you’re not going to be able to file the application at 3 in the morning.  They’re basically open from 6 am until a little after midnight Monday through Friday with limited weekend service.

Before you actually apply for an EIN, think–do you really need one?  If you’re a corporation or a partnership, the answer is yes.  If you are an LLC, that means you are a limited liability company-that does not make you a corporation, so just because you are an LLC doesn’t mean you need to have an EIN.   Other reasons for needing an EIN include if you have employees, need to pay excise taxes, are a non-profit organization,  trust or estate.

You might not need an EIN per IRS standards, but it may be beneficial to your business anyway.  For example:  if you work as an independent contractor and do not want to give your social security number out or you are setting up a bank account in your business name.  Some vendors won’t give you business discount rates unless you have an EIN number, and I had one client who needed one because a vendor wouldn’t work with her at all because she didn’t have an EIN and she really needed the account.

Generally,iIf you are working as a contract laborer and filing your return as a sole proprietor, it’s most likely that you do not need to have an EIN number.

Applying for the actual EIN:  I recommend using the online application.  The application is presented in an interview style format.  It asks questions, you answer them and when you get to the end. voila’ you have an EIN number.  It sort of has a dummy proof mode too that let’s you tab back if you’ve answered a question incorrectly.  I recommend having access to a printer when you do it so that you can print out your new EIN when you’re done.  You don’t want to lose that number once you’ve got it.

Before you do the online application, you might want to check out the written application form so that you have all of your information handy before you apply:  http://www.irs.gov/pub/irs-pdf/fss4.pdf

To go straight to the online application, click this link:

https://sa2.www4.irs.gov/modiein/individual/system-unavailable.jsp

On little glicth, for some reason, if you  need an EIN because you receive home health care services, you can’t apply for your EIN online, you have to use another application method.  I suggest calling on the toll free number:  1 (800) 829-4933.  That’s the toll free number for the tax and business specialty hot line.    You will have to wait on hold for awhile, but it’s still faster than using the mail.

How to get a Copy of your Tax Return

tax return transcriptMany people need a copy of their federal income tax return in order to get a mortgage or file for financial aid.  You can order a copy of your return from the IRS for $57, but most people can get everything they need with a tax return transcript.

I was just looking at another website that offered to get your transcript for you, for a fee of $99.  But you can get that transcript directly from the IRS for free and it’s easy to do.   Here’s how:

Call the IRS main phone number:  1 (800) 829-1040

You’re going to hear a computerized woman’s voice asking you questions.  You will select “2” for information on your personal taxes.

Next, you will select “1” for information about your tax history.

Next you’ll enter “2” to get a transcript.

[Just so you know, you can call the IRS at 1 800 829-1040, type in 2, then 1, then 2 and it will take you to this next part.  You don’t have to listen to the whole computerized menu offerings.]

After that, you’ll be asked for your social security number.  If you’re married, use the social security number of the spouse listed first on the return.  They’ll be questions to verify your address.  They’ll ask what year you need the transcript for, but it’s all computer automated and you respond with your telephone keypad.  You can order up to 10 transcripts if you need them.

See how easy that is?  It will take 5 to 10 days for your transcripts to arrive at your address.   And you won’t have wasted any money! 

If you must have a photo copy of your tax return, you’ll need to file form 4506.  It will cost you $57 and can take up to 60 days to receive.  Before you spend the money, be sure to check with the bank and see if a transcript won’t be acceptable.  Here’s a link to the form if you need it.   Form 4506

Small Business Basics

 

Deduct all of your legitimate business expenses

 

I’ve done a lot of posts about unusual small business deductions, but I haven’t done anything about the basics.  If you’re new to the small business world, that’s what you really need to know.  These are some of the basic, core facts that you need to know to prepare your small business taxes.

 

First, if you’re just starting out, and you haven’t filed any papers like articles of incorporation, and you don’t have any partners, then you’re considered to be a sole proprietor.  Your business tax return goes on a form called a Schedule C, and that’s part of your regular 1040 form.  Don’t file your personal taxes and then try to file your business return later, they’re one and the same thing.

 

What if I’m an LLC?  An LLC is a limited liability company, it’s not a corporation.  Most LLC’s will file as sole proprietors unless they have filed documents to be taxed as an S or C corporation.  (Then they file corporated tax form 1120S or 1120.)  LLCs that have partners will file partnership returns, form 1065.  This post is about sole proprietors who file Schedule C with their 1040 return.

 

A popular question I hear is, “How much money do I have to make to file a return?”  According to the IRS, if you make over $400 of self employment income, you are required to file a federal tax return.  This is very different from the minimum filing requirements of regular returns.  Once you’ve made over $400, that income is subject to self employment tax and the IRS is very keen on collecting your self employment tax.

 

Another common question is, “How will the IRS know that I’ve made over $400?”   The easiest way for the IRS to find out your income, assuming that you haven’t reported it yourself, is from forms 1099MISC.  Many companies hire people as contract labor and don’t withhold payroll taxes.  If you make over $600 from them, they are required by law to give you a form 1099MISC, showing how much they paid you.  A copy of that form also goes to the IRS.  That’s the most common way small businesses can get in trouble for underreporting their income.

 

Another way the IRS can find out that you’re not reporting your income is through your bank records.  Let’s say for example that all of your business transactions are for cash and you never receive a 1099MISC.  Although you wouldn’t get caught as quickly, let’s say you had an annual income of $20,000 from your all cash business.  Your spending would be out of line with your income and could trigger an audit.  A quick look at your bank statements would prove you weren’t reporting your income.  If you’re serious about starting a real business, do it right and have a plan for handling your taxes.  It will save you a lot of trouble in the future.

 

Small business income, unlike wage income, has one big disadvantage–it get’s taxed twice.  First, it’s taxed at your normal tax rate and then again at the self employment tax rate (15.3%.)  Let’s say you’re already in the 25% tax bracket for another job you have, your self employment income would then be taxed at 40% (the 25% plus the 15%.)

 

Small business income also has one big advantage–you can reduce your self employment income by any expenses you had acquiring that income.  You may even have more business expenses than you have income, in that case, you can use your business losses to reduce your regular income, that lowers your overall income tax bill.  Now you don’t want your business to be losing money every year (that’s not really good business practice.)  But when you’re starting up, being able to deduct your losses is very helpful.

 

So what kinds of expenses can you deduct?  The key phrase that the IRS uses is anything that is “regular and necessary” for the business.  A good guideline is right on the Schedule C form.  Here’s a link to it right here:  Schedule C.  Advertising, legal and professional fees, auto expenses, insurance, rent, repairs and maintenance, supplies, and office expenses.   Meals and entertainment are deducted at 50% of what you spend (since the idea is that you’d have to eat anyway.)

 

If this is your first time filing taxes for your small business.  I recommend getting a professional to help you.  Even if you have a knack for the paperwork, it really helps to have someone else go over the possibilities of what you can deduct and make sure that the big things like depreciation (if you have that) are handled correctly.  If you get started on the right track, it’s easier to stay that way.

 

St Louis County Property Tax Increase

Timing is everything, isn’t it?  The new St Louis County property tax increases just got posted on the county website yesterday.  My taxes went up $235.  Although I hate having to pay more, it’s still less than my 2008 tax rate.  So I guess I shouldn’t complain too much. 

But I’m in the Parkway school district, our school district taxes only went up 4.61%.  People living in the Pattonville district, which happens to be a few streets over from my house,  had an 11.5% increase.  Other districts with double digit percentage increases are Brentwood, Maplewood-Richmond Heights, University City and Webster Groves.

If you want to check out your new tax bill, click on this link.  It will take you to the real estate tax information for St Louis County.

http://revenue.stlouisco.com/ias/

You can find your property by typing in your name or your address.  That will take you to the page that tells about your property, it has assessment values, legal description, and things like that.  In the light blue column on the left hand side, there is a link that says “Tax Amounts Due.”  It’s close to the bottom of the page.  Click on that.  Scroll down towards the bottom of the page and it will show you your 2010 tax amount. 

It’s really not that hard to navigate.  You just have to remember that the “finder” portion of the page is always at the very bottom.  You need to be in the top half of the screen and scroll to find some of the things I’m talking about.  It’s not always intuitive.  A wrong click can make you start over.

The St Louis Post Dispatch did a good article on the subject in today’s paper.  Here’s a link to the full story.  Post Dispatch article

How to Report Tax Fraud

photo by S.E.B.

As an enrolled agent, I have something called client privilege. Basically it means that I can’t tell the IRS what I’ve discussed with a client and I don’t have to share any written information that is not already on the tax return. While it’s illegal for me to file a false tax return, I’m not allowed to tattle either.

But people seem to want me to. I often get calls from people telling me they know someone is cheating on their taxes and they want me to report them. First and foremost, I am not the IRS. If you truly believe that someone is cheating on their taxes and you really want to report it, you have to report it directly to the IRS.

I think the main reason that people call me is they’ve called the IRS first and “nothing happened.” That’s quite possible, and here’s why.  For one thing, if you really are reporting tax fraud, you need to fill out form 3949 and mail it to: Internal Revenue Service, Fresno, CA 93888.

Here’s a link to get the form on the IRS website.
http://www.irs.gov/pub/irs-pdf/f3949a.pdf

A phone call won’t do the trick. The IRS wants its paperwork. It has to be the right paperwork and it has to go to the right place.

Second, when completing the form, only answer the questions asked–see the second page of the form for a more detailed explanation of what they’re looking for. Don’t send the IRS anything not specifically asked for. If the IRS is going to build a successful case, they will have to do the work themselves. They have access to an amazing amount of information plus they have the power of subpoena. If they want your evidence, they will ask you for it (but don’t hold your breath.)

Unless you are a crucial witness to the case, you will hear nothing about the audit from the IRS. They won’t even tell you if they perform one. You cannot call them to learn about the audit because the IRS will not be able to tell you anything, it would be a violation of privacy laws. Once you’ve mailed in that form– you’re done.  There will never be a phone call thanking you for your assistance.  You won’t see the police come and cart the person away.  If you’re seeking revenge, you’ll never know if you got it or not.

Here’s another tip: look closely at your motives for reporting the fraud. Are you genuinely trying to report a real tax crime or are you mad at your ex-husband for not paying the child support while buying his new girlfriend a diamond ring? The IRS really does not want to be involved in personal domestic squabbles.

If you are reporting a former spouse, look long and hard at what you’re doing. It’s quite possible that an audit could come back at you. Let’s say you’ve only been divorced for a few months and the IRS performs an audit. If they find that your ex-husband was under-reporting income, they are likely to investigate prior years. If they find that he owes taxes for years that you were married to him, you could be held liable for paying those taxes. Stop and think before you act.

One final thing, if your complaint is that someone claimed your children on his or her return and shouldn’t have, don’t file a 3949 form. Just prepare your return correctly, listing your children as dependents, and mail it in. The IRS will take it from there.