It is not uncommon for enrolled agents to encounter taxpayers, particularly from the corporate sector, who are tempted to give up their bonus pay because they think this extra money actually hurts them. In fact, there is a widely-held belief that the "extra" income earned from a bonus -- which is not really extra, just a varying aspect of compensation --supposedly catapults them into a noticeably higher tax bracket. The implicit assumption here is that this is bad because it would mean that they owe the government a higher tax rate on all of their income. But as any registered tax return preparer knows from years of enrolling in tax CPE courses, this assumption is incorrect and stems from confusion over marginal tax rates. These misconceptions and complaints are compounded when the bonus check indicates the net payment amount representing only a fraction of the gross income listed on the pay stub.
Qualifying for the home buyer tax credit Contrary to popular opinion, both first-time homebuyers and long-time owners are able to apply for a credit. If the house was purchased on November 30, 2009, to qualify taxpayers must not have owned their homes since December 1, 2006. The earliest date to qualify for this credit is January 1, 2009. To qualify for the credit as long-time homeowners, taxpayers must have owned their existing home for any five-year period during the eight-year period ending on the date of purchase of the new home. The earliest date of purchase to qualify for this credit is November 8, 2009. For either credit, if the date of purchase is in May or June 2010, taxpayers are required to verify that they entered into a contract to buy the house before May 2010. Below is a summation of the required documentation.
Restrictions Even when taxpayers qualify as first-time homebuyers, or as long-time homeowners, and you have purchased a home within the permitted time frame, they still may not qualify for the credit. Taxpayers will not qualify if any of the following scenarios apply: Purchased the house after November 6, 2009, and the price of the house is more than $800,000. Modified adjusted gross income is $95,000 or more ($170,000 if married filing jointly) and the home was purchased before November 7, 2009. A phase-out of the credit begins with a MAGI of $75,000 (or $150,000). Modified adjusted gross income is $145,00 or more ($245,000 if married filing jointly) and the home was purchased after November 6, 2009. A phase-out of the credit begins with a MAGI of $125,000 (or $225,000). Another individual claims the applicant as a dependent on their tax return. Purchased the house after November 6, 2009, and the buyer was under the age of 18 on the date of purchase. Is a nonresident alien. The house is located outside the US. The house is sold or ceases to be the main residence before the end of the year in which it was purchased. The house is a gift or is acquired through inheritance. The house is acquired from a relative or a related corporation or partnership.
Tack-On Option One of the most popular methods involves the employer (1) combining the bonus and regular income payments, (2) figuring the standard withholding total on this combined sum, (3) subtracting the amount withheld from the recent regular income payment, and (4) withholding the remainder from the bonus.
Claiming the credit Since the IRS requires a slew of documentation, taxpayers hoping to claim the homebuyer tax credit must file federal tax returns on paper through the mail need to print the paperwork and send it in. Below is a step-by-step guide for claiming the credit for clients: Complete the revised Form 5405. First confirm the taxpayer qualifies for the credit, and determine the amount of the credit. Collect required documentation. Gather Form HUD-1 Settlement Statement or other settlement statement outlining the names and signatures of all parties to the sale, the property address, the price, and the date of purchase. If the taxpayer does not have a settlement statement (as in the case of a newly-constructed home), collect the certificate of occupancy and attach it.
If a taxpayer is under contract but has not taken occupancy of the house by the time their taxes are filed, include pages from the signed contract, including the signatures and names of all parties, the property price, the address, and the contract date. If a taxpayer qualifies as a long-time homeowner, include Form 1098 (Mortgage Interest Statement), property tax records, or the homeowners' insurance records. Remember, the forms must cover a full consecutive five-year period within the eight years ending on the date of the purchase.
There are several scenarios or considerations that complicate this strategy, of course. For example, could the taxpayer use outside funds to pay the tax on conversion, or will money be deducted from the IRA to cover the tax? What will the retirement income look like, and what is the taxpayer's projected tax rate down the road? Then there is the issue of inflation and the forecast for the future? What return could the taxpayer have obtained with the cash used to pay taxes on the conversion if it didn't happen? Questions abound, but this is where enrolled agents can step up and provide sound advice.
IRS Circular 230 Disclosure Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
Qualifying for the home buyer tax credit Contrary to popular opinion, both first-time homebuyers and long-time owners are able to apply for a credit. If the house was purchased on November 30, 2009, to qualify taxpayers must not have owned their homes since December 1, 2006. The earliest date to qualify for this credit is January 1, 2009. To qualify for the credit as long-time homeowners, taxpayers must have owned their existing home for any five-year period during the eight-year period ending on the date of purchase of the new home. The earliest date of purchase to qualify for this credit is November 8, 2009. For either credit, if the date of purchase is in May or June 2010, taxpayers are required to verify that they entered into a contract to buy the house before May 2010. Below is a summation of the required documentation.
Restrictions Even when taxpayers qualify as first-time homebuyers, or as long-time homeowners, and you have purchased a home within the permitted time frame, they still may not qualify for the credit. Taxpayers will not qualify if any of the following scenarios apply: Purchased the house after November 6, 2009, and the price of the house is more than $800,000. Modified adjusted gross income is $95,000 or more ($170,000 if married filing jointly) and the home was purchased before November 7, 2009. A phase-out of the credit begins with a MAGI of $75,000 (or $150,000). Modified adjusted gross income is $145,00 or more ($245,000 if married filing jointly) and the home was purchased after November 6, 2009. A phase-out of the credit begins with a MAGI of $125,000 (or $225,000). Another individual claims the applicant as a dependent on their tax return. Purchased the house after November 6, 2009, and the buyer was under the age of 18 on the date of purchase. Is a nonresident alien. The house is located outside the US. The house is sold or ceases to be the main residence before the end of the year in which it was purchased. The house is a gift or is acquired through inheritance. The house is acquired from a relative or a related corporation or partnership.
Tack-On Option One of the most popular methods involves the employer (1) combining the bonus and regular income payments, (2) figuring the standard withholding total on this combined sum, (3) subtracting the amount withheld from the recent regular income payment, and (4) withholding the remainder from the bonus.
Claiming the credit Since the IRS requires a slew of documentation, taxpayers hoping to claim the homebuyer tax credit must file federal tax returns on paper through the mail need to print the paperwork and send it in. Below is a step-by-step guide for claiming the credit for clients: Complete the revised Form 5405. First confirm the taxpayer qualifies for the credit, and determine the amount of the credit. Collect required documentation. Gather Form HUD-1 Settlement Statement or other settlement statement outlining the names and signatures of all parties to the sale, the property address, the price, and the date of purchase. If the taxpayer does not have a settlement statement (as in the case of a newly-constructed home), collect the certificate of occupancy and attach it.
If a taxpayer is under contract but has not taken occupancy of the house by the time their taxes are filed, include pages from the signed contract, including the signatures and names of all parties, the property price, the address, and the contract date. If a taxpayer qualifies as a long-time homeowner, include Form 1098 (Mortgage Interest Statement), property tax records, or the homeowners' insurance records. Remember, the forms must cover a full consecutive five-year period within the eight years ending on the date of the purchase.
There are several scenarios or considerations that complicate this strategy, of course. For example, could the taxpayer use outside funds to pay the tax on conversion, or will money be deducted from the IRA to cover the tax? What will the retirement income look like, and what is the taxpayer's projected tax rate down the road? Then there is the issue of inflation and the forecast for the future? What return could the taxpayer have obtained with the cash used to pay taxes on the conversion if it didn't happen? Questions abound, but this is where enrolled agents can step up and provide sound advice.
IRS Circular 230 Disclosure Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
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